No. 17-412 · no. 17-412 in the october term, 2017 in re high rocks, inc., debtor, highway 61,...

No. 17-412

IN THE

OCTOBER TERM, 2017

IN RE HIGH ROCKS, INC.,

DEBTOR,

HIGHWAY 61, INC.,

PETITIONER

V.��

HIGH ROCKS, INC.,

RESPONDENT.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE THIRTEENTH CIRCUIT

BRIEF FOR RESPONDENT

Team Number R. 50 Counsel for Respondent

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QUESTIONS PRESENTED

1.! Whether a lessee may invoke the protection of section 365(h) of the Bankruptcy Code to

frustrate an otherwise valid sale of real property free and clear of its lease under section

363(f), even when the debtor-lessor never rejected the lease?

2.! Whether the Bankruptcy Code prohibits an interim settlement agreement where

unsecured creditors receive payment, not derived from property of the estate, outside of

the bankruptcy priority scheme?

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TABLE OF CONTENTS

QUESTIONS PRESENTED…………………………… …………………………………………i

TABLE OF CONTENTS…………………………………………………………………………ii

TABLE OF AUTHORITIES……………………………………………………………………..iv

OPINIONS BELOW………………………………………………………………..…………..viii

STATEMENT OF JURISDICTION……………………………………………………………viii

STATUTORY PROVISIONS…………………………………………………………………..viii

STATEMENT OF THE CASE……………………………………………………………………1

SUMMARY OF THE ARGUMENT……………………………………………………………..5

ARGUMENT……………………………………………………………………………………...7

I.! THE BANKRUPTCY COURT CORRECTLY DECIDED THAT HIGH ROCKS MAY SELL THE BUSINESS FREE OF THE AMPHITHEATER LEASE……………………………………………………………….7 A.! High Rocks May Sell the Amphitheater Free of the Lease Because Sections

363(f) and 365(h) Apply to Distinct Events and Rejection Has Not Occurred…...8

B.! Authorized Asset Sales Under Section 363(f) Are Beyond the Scope of Section 365(h) Protection, Even if Rejection is Deemed to Occur…………...13

1.! Sections 363(f)(1)-(5) Describe Situations Where Applicable

State Law Allows High Rocks to Dispossess Highway………………………...14

2.! Adequate Protection Allows Lessees to Retain Possession or Receive !the Indubitable Equivalent When a 363(f) Sale is Authorized………………….19!

II.! THE BANKRUPTCY COURT’S APPROVAL OF THE SECTION 363 SALE AND COMMITTEE SETTLEMENT WAS PROPER……………………...21

A.! 4th Street’s Gift to the Committee is Not Subject to The Absolute Priority

Rule Because the Rule Only Applies to Property of the Estate………………….22

1.! 4th Street’s Gift to the Committee is Not Subject to The Absolute Priority Rule Because the $2 Million is 4th Street’s Own Money……………...23

2.! The $2 Million Gift Was Not Given in Consideration for Settling Estate Causes of Action Nor Was it Part of the Purchase Price of the Assets…………24

i.! The Committee released its right to bring a derivative action on behalf of the estate, but did not release estate causes of action……….24

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ii.! 4th Street exchanged separate considerations between 4th Street and the Committee and between 4th Street and High Rocks…………….25

B.! This Gift Settlement is Permissible Because it is an Interim Distribution That Serves Significant Code-related Objectives…………………..28

1.! 4th Street’s Gift is an Interim Distribution, Not a Final Distribution…………..29

2.! This Interim Committee Settlement Serves Significant Code-related Objectives…………………………………………….32

CONCLUSION…………………………………………………………………………………..35

APPENDIX A……………………………………………………………………………………..I

APPENDIX B…………………………………………………………………………………….II

APPENDIX C……………………………………………………………………………………III

APPENDIX D…………………………………………………………………………………....IV

APPENDIX E…………………………………………………………………………………….V

APPENDIX F……………………………………………………………………………………..X

APPENDIX G……………………………………………………………………………..........XII

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TABLE OF AUTHORITIES

U.S. SUPREME COURT CASES Conn. Nat’l Bank v. Germain, 503 U.S. 249 (1992)…………………………………………10, 12

Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017)……………………………..........passim

Hughes Aircraft Co. v. Jacobson, 525 U.S. 432 (1999)…………………………………………10

Morales v. Trans World Airlines, Inc., 504 U.S. 374 (1992)…………………………………….11

Protective Comm. for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414 (1968)………………………………………………………….33, 34

Rubin v. United States, 449 U.S. 424 (1981)…………………………………………………….10

United States v. Whiting Pools, Inc., 462 U.S. 198 (1983)………………………………………24

Walters v. Metropolitan Educ. Enters., Inc., 519 U.S. 202 (1997)………………………………10

Young v. United States, 535 U.S. 43 (2002)……………………………………………………..33

U.S. COURTS OF APPEALS CASES

Commodore Int’l Ltd. v. Gould (In re Commodore Int'l Ltd.), 262 F.3d 96 (2d Cir. 2001)…………………………………...25

Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d Cir. 2003)………………………………...24, 34

DeMassa v. MacIntyre (In re MacIntyre), 74 F.3d 186 (9th Cir. 1996)…………………………..7

FutureSource LLC v. Reuters Ltd., 312 F.3d 281 (7th Cir. 2002)……………………………….16

In re Chrysler LLC, 576 F.3d 108 (2nd Cir. 2009)…………………………………………..33, 34

In re ICL Holding Co., Inc., 802 F.3d 547 (3d Cir. 2015)……………………………….22, 23, 24

Megafoods Stores, Inc. v. Flagstaff Realty Assocs. (In re Flagstaff Realty Assocs.), 60 F.3d 1031 (3d Cir. 1995)………………………………...9

Motorola, Inc. v. Official Comm. of Unsecured Creditors

(In re Iridium Operating LLC), 478 F.3d 452 (2d Cir. 2007)………………………..30, 31, 33 Myers v. Martin (In re Martin), 91 F.3d 389 (3d Cir. 1996)…………………………………….33

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Offcial Comm. of Unsecured Creditors v. CIT Grp./Bus. Credit Line, Inc.

(In re Jevic Holding Corp.), 787 F.3d 173 (3d Cir. 2015)…………………………………...29 Official Unsecured Creditor’s Comm. v. Stern

(In re SPM Mfg. Corp.), 984 F.2d 1305 (1st Cir. 1993)……………………………………..23 Pinnacle Rest. At Big Sky, LLC v.

CH SP Acquisitions, LLC (In re Spanish Peaks Holdings II, LLC), 872 F.3d 892 (9th Cir. 2014)………...………passim

Precision Indus., Inc. v.

Qualitech Steel SBQ, LLC (In re Qualitech Steel SBQ, LLC), 327 F.3d 537 (7th Cir. 2003)……………………..9, 10, 11

Smart World Techs., LLC v. Juno Online Servs., Inc.

(In re Smart World Techs., LLC), 423 F.3d 166 (2d Cir. 2005)……………………………..24 Texas v. Soileau (In re Soileau), 488 F.3d 302 (5th Cir. 2007)…………………………………..7

United States v. AWECO, Inc., 725 F.2d 293 (5th Cir. 1984)…………………………...30, 31, 33

U.S. DISTRICT COURT CASES

Cheslock-Bakker & Assocs., Inc. v. Kremer (In re Downtown Athletic Club of New York City), 2000 WL744126 (S.D.N.Y. June 9, 2000)…………………………………………………..10

Dishi & Sons v. Bay Condos LLC, 510 B.R. 696, 701, 703 (S.D.N.Y. 2014)………………passim

Forlini v. Ne. Sav., F.A., 200 B.R. 9 (D.R.I. 1996)……………………………………………...12

Green v. Unaatuq, LLC (In re Catholic Bishop of N. Alaska), 525 B.R. 723 (D. Alaska 2015)………………………16

In re Fryar, 570 B.R. 602 (E.D. Tenn. 2017)……………………………………………………31 In re Hassen Import P’ship, 502 B.R. 851 (C.D. Cal. 2013)…………………………………….17

U.S. BANKRUPTCY COURT CASES

In re Dewey & LeBoeuf LLP, 478 B.R. 627 (Bankr. S.D.N.Y. 2012)……………………….33, 34

In re Jaussi, 488 B.R. 456 (Bankr. D. Colo. 2013)……………………………………………...15

In re Haskell LP, 321 B.R. 1 (Bankr. D. Mass. 2005)………………………………………11, 17

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In re Pugsley, 569 B.R. 704 (Bankr. N.D. Ohio 2017)…………………………………………..33

In re Roberts, 249 B.R. 152 (Bankr. W.D. Mich. 2000)…………………………………………16

In re Smith, 2014 WL 738784 (Bankr. D. Ore. Feb. 26, 2014)………………………………….17

In re S. Mfg. Grp., LLC, No. CV 15-00931-HB, 2016 WL 3344787 (Bankr. D.S.C. June 7, 2016)……………………………………………15

In re TSIC, Inc., 393 B.R. 71 (Bankr. D. Del. 2008)………………………………………...22, 23

In re World Health Alts., Inc., 344 B.R. 291 (Bankr. D. Del. 2006)…………………….25, 26, 27

Metro. Life Ins. Co. v. LHD Realty Corp. (In re LHD Realty Corp.), 20 B.R. 717 (Bankr. S.D. Ind. 1982)…………………………….11

Musso v. OTR Media Grp., Inc.

(In re Ladder 3 Corp.), 571 B.R. 525 (Bankr. E.D.N.Y. 2017)……………………………...33

Remes v. Robison (In re Van Houten), 56 B. R. 891 (Bankr. W.D. Mich. 1986)………………..17

S. Motor Co. of Dade Cty. v. Carter-Pritchett-Hodges, Inc. (In re MMH Auto. Grp., LLC), 385 B.R. 347 (Bankr. S.D. Fla. 2008)……...………….…8, 12

STATUTES & RULES

11 U.S.C. § 363(e) (2012)…………………………………………………………………..8, 9, 19

11 U.S.C. § 363(f) (2012)………………………………………………………………..….passim

11 U.S.C. § 363(l) (2012)………………………………………………………………………..12

11 U.S.C. § 365(h)(1) (2012)…………………………………………………………..……passim

11 U.S.C. § 507 (2012)…………………………………………………………………………..21

11 U.S.C. § 541(a) (2012)……………………………………………………………………22, 27

11 U.S.C. § 1129 (2012)…………………………………………………………………………21

Fed. R. Bankr. P. 2002(a)(2)…………………………………………………………………16, 17

Fed. R. Bankr. P. 9019……………………………………………………………………….32, 33

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SECONDARY SOURCES

Jonathan C. Henes, Guidelines for Director Decision Making in chapter 11, Kirkland (January 12, 2003), https://www.kirkland.com/sitecontent.cfm?contentID=223&itemId=2445………….33 Michael St. Patrick Baxter, Section 363 Sales Free And Clear of Interests: Why the Seventh Circuit Erred in Precision Industries v. Qualitech Steel, 59 Bus. Law. 475 (2004)……………..12 Robert M. Zinman, Precision in Statutory Drafting: The Qualitech Quagmire and the Sad History of S 365(h) of the Bankruptcy Code 38 J. Marshall L. Rev. 97 (2004)……………...14, 16

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OPINIONS BELOW

The Bankruptcy Court for the District of Moot approved High Rocks, Inc.’s motion to

sell substantially all of its assets under section 363(f) of the Bankruptcy Code in December 2016.

R. at 6. 4th Street Partners, Inc., High Rocks’ sole secured creditor, purchased the assets on

January 11, 2017. R. at 7. Prior to the sale hearing, 4th Street reached an agreement with the

objecting Committee of unsecured creditors, whereby 4th Street would gift $2 million of its own

funds to the Committee in exchange for the Committee withdrawing its objection and releasing

its right to bring claims against 4th Street. R. at 8. The bankruptcy court approved of both the

asset sale and settlement. R. at 8. However, on account of objections raised by Highway 61, Inc.,

an interest holder in High Rocks’ real property and a holder of an administrative expense, the

bankruptcy court stayed closing of the sale to permit an appeal. R. at 8. Both the District Court

for the District of Moot and the Court of Appeals for the Thirteenth Circuit affirmed the

bankruptcy court’s decision. R. at 3, 9.

STATEMENT OF JURISDICTION

The formal statement of jurisdiction is waived pursuant to Competition Rule VIII.

STATUTORY PROVISIONS

The relevant statutory provisions involved in this case are listed below and are set out in

Appendices A through G.

11 U.S.C. § 363(e)

11 U.S.C. § 363(f)

11 U.S.C. § 363(l)

11 U.S.C. § 365(h)(1)

11 U.S.C. § 507

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11 U.S.C. § 541(a)

11 U.S.C. § 1129

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STATEMENT OF THE CASE

Bankruptcy is a collective remedy meant to satisfy numerous creditors with a debtor’s

meager resources. When a general contractor sabotaged its development project, High Rocks,

Inc. (“High Rocks”) found itself without sufficient capital to repair the damage or continue its

business. Unable to satisfy its creditors due to the lack of funds, High Rocks sought bankruptcy

protection. High Rocks sold its assets under the Bankruptcy Code (“the Code”) to the satisfaction

of its pre-petition creditors. However, Highway 61, Inc. (“Highway”), an interest-holder

dissatisfied with the Code’s proscribed results, now asks this Court to discard the sale and place

Highway’s sole interest above the collective interests of creditors.

Skyline mismanaged and delayed construction. In May 2014, High Rocks broke ground

on a resort and casino in the mountains outside of Rainier, in the State of Moot. R. at 3-4.

Among other amenities, High Rocks’ plan called for a thirty-story hotel and a 7,000-seat outdoor

amphitheater (together with the resort and casino, the “Business”). R. at 4. High Rocks

understood that selection of a responsible general contractor would be crucial to completing the

project up to its standards. As such, High Rocks oversaw a highly competitive bidding process.

R. at 4. The bid submitted by Skyline Construction, Inc. (“Skyline”) proved exceptional. R. at 4.

Skyline boasted experience handling smaller scale hotel, resort, and entertainment venue

construction projects. Skyline’s purported experience, along with an economical approach to

construction, convinced High Rocks to trust Skyline to oversee the project. R. at 4.

Skyline’s impressive bid proved to be a mirage, as the contractor undermined

construction—using substandard materials and cutting corners on construction quality. R. at 4.

High Rocks had no choice but to reconstruct large segments of the development, which delayed

the project and increased its expenses. R. at 4. So, in December 2015, High Rocks rightfully

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terminated Skyline and, in January 2016, hired Shelter From the Storm Builders, Inc. (“Shelter”)

to complete the hotel and casino. R. at 5. By that time, the planned amphitheater had zero seats

installed, and it lacked the world-class paneling and acoustic equipment Skyline had agreed to

provide. R. at 4. However, Shelter did not possess the necessary experience to complete the

amphitheater, so it did not agree to continue construction for that part of the Business. R. at 5.

North Country sold its note to 4th Street. Construction of the Business was financed by

an $800 million secured loan from North Country Bank (“North Country”). R. at 4. In February

2016, frustrated by development delays, North Country negotiated its note to 4th Street Partners,

Inc. (“4th Street”)—an owner and operator of resort and entertainment properties similar to High

Rocks. R. at 5. Nine months later, with High Rocks’ development stalled, 4th Street commenced

a foreclosure action against the property to recover on its note. R. at 5.

High Rocks filed for Ch. 11 Protection. In July 2016, High Rocks filed a chapter 11

petition in the United States Bankruptcy Court for the District of Moot to halt the foreclosure. R.

at 5. High Rocks announced at the first-day hearing that it intended to open the Business in a

“matter of months,” but this later became unviable due to further construction delays. R. at 6.

High Rocks assigned Skyline Claims to the Committee. High Rocks lacked funding to

pursue its various contract claims arising from Skyline’s bad faith (the “Skyline Claims”). R. at

7. High Rocks assigned its “very valuable” claims as part of an unrelated settlement to a

litigation trust, benefitting the Committee of unsecured creditors (“the Committee”) R. at 7.

Highway’s lease and administrative claim. Prior to bankruptcy, High Rocks entered into

a thirty-year lease of the amphitheater with Highway, beginning upon its completion. R. at 5.

With High Rocks in bankruptcy, Highway was anxious to expedite construction so that it could

begin its lease. R. at 6. As such, Highway undertook the installation of the seats, sound

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equipment, and acoustic panels in the amphitheater for $2 million—to be paid when the Business

opened. R. at 6. Highway opted to involve itself in construction despite knowledge of High

Rocks’ financial difficulties and presumptive knowledge of 4th Streets’ $800-million secured

claim. See R. at 6. The bankruptcy court allowed Highway a $2 million administrative expense

under section 503(b)(1) of the Code. R. at 6. Amphitheater construction was completed in

November 2016, but construction of the main parts of the Business remain incomplete. R. at 6.

High Rocks’ administrative insolvency and 363 sale. By late December 2016, completion

of the Business was again delayed. High Rocks’ funds were exhausted. R. at 6. With no cash to

fund a reorganization plan, High Rocks halted construction and filed a motion pursuant to

section 363(f) to sell substantially all of its assets “free and clear of all . . . interests,” including

Highway’s leasehold in the amphitheater. R. at 6. Both High Rocks and Highway acknowledge

that a prerequisite of a section 363(f) sale was satisfied, and Highway did not ask the bankruptcy

court for adequate protection of its interest. R. at 13, 14.

4th Street declared winning bidder. On January 11, 2017, no qualified bidders other than

4th Street appeared at the auction sale, and 4th Street submitted the winning bid. R. at 6. 4th

Street credit bid the full amount of its $800-million secured claim to satisfy the purchase price of

the Business pursuant to section 363(k), and 4th Street declared that it intended to operate the

Business as a going concern upon completion of construction. R. at 6.

Committee and Highway objected. Both the Committee and Highway objected to the sale.

R. at 7. The Committee asserted that the sale left no recovery for the unsecured creditors to

pursue the Skyline Claims. R. at 7. The Committee also “informally alleged” various claims

against 4th Street and challenged its liens. 1 Highway asserted that it has a right to remain in

1 However, the Committee had not sought the approval of the bankruptcy court to bring any actions on behalf of the estate—and it has not sought such standing to date.

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possession of the amphitheater under its lease with High Rocks, despite the free and clear asset

sale. R. at 7. Highway sent a letter to High Rocks “electing to retain its possessory rights in the

property under section 365(h), stating that the ‘free and clear sale’ was the functional equivalent

of a rejection of such lease.” R. at 7-8.

The Committee settled with 4th Street. Before the sale approval hearing, High Rocks, 4th

Street, and the Committee reached a settlement, amicably resolving the Committee’s objection.

R. at 8. In exchange for the Committee’s support for the sale, and a release of its right to bring

claims, 4th Street agreed to “gift” $2 million of its own funds to the Committee—specifically

earmarked for pursuing the Skyline Claims. R. at 8.

Highway objected again. At the sale hearing, Highway objected, asserting again that its

leasehold was improperly terminated in violation of section 365(h). R. at 8. Additionally,

Highway argued that the $2 million gift that the Committee received in exchange for dropping its

objection was property of the estate, and that Highway’s senior-in-priority administrative claim

must be satisfied using the Committee’s gift under the Code’s “absolute priority rule.” R. at 8.

The bankruptcy court approved the sale. Notwithstanding Highway’s objection, the

bankruptcy court reasoned that section 363(f), not section 365(h), determined Highway’s rights

under the free and clear sale, and that Highway was not entitled to retain possession of the

amphitheater. R. at 8. The court further observed that 4th Street’s gift to the Committee was of

its own funds and not given in exchange for estate property. Therefore, the court found that the

gift was not subject to the absolute priority rule. R. at 8. The court also noted that the gift was in

the “best interest of all parties” and it would help pursue the valuable Skyline Claims. R. at 8.

Highway appealed. Highway appealed to the District Court for the District of Moot and

then to the Court of Appeals for the Thirteenth Circuit. Both courts affirmed. R. at 8.

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SUMMARY OF THE ARGUMENT

High Rocks comes before this Court having adhered to the letter of the Code, to the

benefit of its secured and unsecured creditors alike. Highway, on the other hand, attempts to

undermine the bankruptcy system by seeking results that are neither consistent with the Code nor

economically practical. Consequently, it failed to persuade any lower court on either of the issues

presented. Highway is not entitled to retain its leasehold interest in the amphitheater following

the free and clear sale to 4th Street. Further, Highway is incorrect in asserting that 4th Street’s $2

million gift to the Committee is property of the estate and subject to the Code’s priority scheme.

Section 363(f) of the Code permits High Rocks to sell its property free and clear of the

amphitheater lease. While, section 365(h) allows a lessee to retain possession of leased property,

this protection is contingent on a debtor’s rejection of the lease. High Rocks never rejected the

amphitheater lease. Every appellate court to tackle the interaction between sections 363(f) and

365(h) allows free and clear sales of unrejected leases. Because High Rocks never rejected the

lease, Highway is not entitled to frustrate the free and clear sale by invoking section 365(h).

Moreover, because the section 363(f) sale is properly authorized, section 365(h) does not

protect Highway’s possessory interest because applicable state law permits dispossession.

Section 363(f) sales are only available in narrow circumstances which reflect state law situations

where a lessor may dispossess a lessee. Section 365(h) only protects a lessee’s possessory rights

to the extent of state law. Thus, that provision provides no protection to lessees when a section

363(f) sale is authorized. However, the Code granted Highway the right to ask for adequate

protection of its lease. For reasons that are unclear, Highway neglected to do so. Having failed to

protect its own lease, this Court should not contradict the Code in order to grant Highway an

unfettered possessory interest.

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The Court should also reject Highway’s second contention that 4th Street’s gift to the

Committee is estate property subject to the absolute priority rule. In Czyzewski v. Jevic Holding

Corp., 137 S. Ct. 973 (2017), this Court held that the absolute priority rule applies to all final

distributions of estate property, but it did not preclude interim distributions that serve “significant

Code-related objectives.” Id. at 985. Accordingly, for two reasons, the Court should find that the

bankruptcy court’s approval of the section 363 sale and Committee Settlement was proper.

First, 4th Street’s gift to the Committee as part of the Committee Settlement was not

“property of the estate” and, therefore, not subject to the absolute priority rule. The $2 million

gift came from 4th Street’s own funds. High Rocks had no interest in these funds. Thus, it was

not property of the estate.

Second, even if the $2 million gift could be considered property of the estate, this was an

interim distribution that served significant Code-related objectives. The Committee Settlement

merely allowed High Rocks’ asset sale to proceed by settling a dispute between 4th Street and

the Committee. By amicably resolving a dispute and maximizing creditor recovery, the

Committee Settlement advanced multiple objectives that lie at the heart of the Code. Further, the

Settlement is not the final distribution of the case. The Committee is still pursuing the very

valuable Skyline Claims, which may yield a substantial recovery to the creditors. Highway could

petition the bankruptcy court to allow it to share the proceeds of the Skyline Claims with the

Committee because the claims are estate property and Highway’s administrative expense is

senior in priority. If successful, Highway might recover the amount of its administrative expense.

Therefore, this Court should recognize that the Committee Settlement is a permissible interim

distribution.

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If Highway succeeds in retaining its leasehold interest or undoing the Committee

Settlement, creditors suffer. The Code does not authorize such suffering. The estate is currently

insolvent. There is no prospect for reorganization, and there are no funds to support trustee’s fees

if converted to a liquidation. Not only are the section 363(f) sale and Committee Settlement

consistent with the Code, they maximized creditor payment. Thus, the Court should affirm.

ARGUMENT

Appellate courts evaluate bankruptcy court decisions of law under a de novo standard of

review. E.g., DeMassa v. MacIntyre (In re MacIntyre), 74 F.3d 186, 186-87 (9th Cir. 1996).

Here, the first question presented, whether section 365(h) gives a lessee a superman right to

block section 363(f) sales absent rejection, turns on a question of law. R. at 9. The second

question, whether 4th Street’s gift settlement violates the absolute priority rule, is a question of

law as well. R. at 9. Thus, a de novo standard of review applies to both issues. Texas v. Soileau

(In re Soileau), 488 F.3d 302, 305 (5th Cir. 2007).

I.! THE BANKRUPTCY COURT CORRECTLY DECIDED THAT HIGH ROCKS MAY SELL THE BUSINESS FREE OF THE AMPHITHEATER LEASE.

A lessee holds the key to its own fate when its interest is threatened under section 363(f)

of the Bankruptcy Code. By stipulating that a precondition of a section 363(f) sale was met and

then failing to ask for adequate protection, Highway sat idly as its interest waned.

Notwithstanding the decisions it made, Highway now asks this Court to rescind a valid sale. The

Code unambiguously permits High Rocks to sell its property free and clear of the amphitheater

lease. Every appellate court to tackle the interaction between sections 363(f) and 365(h) approves

of such sales. Because High Rocks never rejected the lease, Highway is not entitled to the

protection provided by section 365(h). Moreover, when a section 363(f) sale is authorized, the

scope of section 365(h) does not protect a lessee’s possessory interest. This is true even if section

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363(f) sales are deemed to trigger a lessee’s rights under section 365(h). Accordingly, this Court

should respect High Rocks’ right to sell the amphitheater under section 363(f) and affirm the

reasoned decisions of the courts below.

A.! High Rocks May Sell the Amphitheater Free of the Lease Because Sections 363(f) and 365(h) Apply to Distinct Events and Rejection Has Not Occurred.

The Code draws a distinction between debtors who dispose of real property under a

section 363 sale and debtors who retain ownership but reject leases under section 365. Both

sections contain separate but substantial protections for lessees. The Thirteenth Circuit,

following the persuasive guidance of the Seventh and Ninth Circuits, recognized that section

365(h) protection only applies when a lease is rejected. High Rocks never rejected the

amphitheater lease. Instead, it elected to dispose of its property free and clear of interests under

section 363(f). The Code expressly allows such sales. Failing to protect itself under section 363,

Highway now asks this Court to bail out its mistake by validating a legal fiction known as de

facto rejection.

Section 363(f) permits High Rocks to sell property outside of the ordinary course of

business, “free and clear of any interest in such property.” 11 U.S.C. § 363(f) (2012). Leases are

interests within the meaning of section 363(f). S. Motor Co. of Dade Cty. v. Carter-Pritchett-

Hodges, Inc. (In re MMH Auto. Grp., LLC), 385 B.R. 347, 361 (Bankr. S.D. Fla. 2008). While

this power appears expansive, High Rocks could only carry out a section 363(f) sale in one of

five narrow circumstances where:

(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest; (2) such entity consents; (3) such interest is in a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; (4) such interest is in bona fide dispute; or (5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

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11 U.S.C. § 363(f)(1)-(5). It is undisputed that at least one circumstance is satisfied here. R. at 9,

n.6. Once the bankruptcy court approved the sale, section 363 permitted Highway to ask for, and

commanded the court to provide, adequate protection. 11 U.S.C. § 363(e).

The Code also gives High Rocks the option to assume or reject unexpired leases. Id. §

365(a). Rejection is the functional equivalent of a breach of the lease, and it allows the debtor to

rid itself of obligations under the lease. See, e.g., Megafoods Stores, Inc. v. Flagstaff Realty

Assocs. (In re Flagstaff Realty Assoc.), 60 F.3d 1031 (3d Cir. 1995). Rejection is an affirmative

decision of the debtor not to assume an unexpired lease. Dishi & Sons v. Bay Condos LLC, 510

B.R. 696, 701, 703 (S.D.N.Y. 2014). Upon rejection of an unexpired lease, a lessee may treat the

lease as terminated. See 11 U.S.C. § 365(h)(1)(A)(i). Conversely, the lessee may elect to retain

possession of the premises as well as its “rights under such lease.” Id. § 365(h)(1)(A)(ii). A

lessee’s right to retain possession is restricted to the extent “enforceable under applicable

nonbankruptcy law.” Id.

The Thirteenth Circuit recognized that when High Rocks sold its assets free and clear of

an unrejected lease under section 363(f), section 365(h) was not implicated. R. at 9-10. Citing

Pinnacle Restaurant at Big Sky, LLC v. CH SP Acquisitions, LLC (In re Spanish Peaks Holdings

II, LLC), 872 F.3d 892 (9th Cir. 2014), and Precision Indus., Inc. v. Qualitech Steel SBQ, LLC

(In re Qualitech Steel SBQ, LLC), 327 F.3d 537 (7th Cir. 2003), the court declined to employ the

canon of statutory interpretation that specific provisions govern general ones because a plain

reading revealed no conflict between the the Code provisions. See generally R. at 11-13. The two

sections apply to distinct events: free and clear sales and rejections. R. at 12. As such, Highway

could only look to section 365(h) for protection if its lease was rejected. R. at 12 (“Nothing in

section 365(h) of the Bankruptcy Code suggests that it applies to any and all matters that threaten

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a lessee’s rights.”). Thus, the Thirteenth Circuit interpreted the Code to give full effect to both

provisions. R. at 12. The court noted that section 363 protects lessees in two vital ways: (1)

sections 363(f)(1)-(5) constrain the instances when a free and clear sale may be used, and (2)

section 363(e) allows adversely effected lessees to ask for adequate protection. R. at 13-14.

Because Highway failed to avail itself of these appropriate protections, “no remedy [could] be

provided under the statute.” R. at 14.

As the Thirteenth Circuit correctly noted, statutory interpretation begins by looking to the

language of the Code. R. at 10; see Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 438 (1999).

“Statutory terms or words will be construed according to their ordinary, common meaning unless

they are specifically defined by the statute.” Qualitech, 327 F.3d at 543-44 (citing Walters v.

Metro. Educ. Enters., Inc., 519 U.S. 202, 207 (1997)). If the statutory language proves to be

unambiguous, the inquiry is complete. Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253-54

(1992) (quoting Rubin v. United States, 449 U.S. 424, 430 (1981)). Finally, courts should take

reasonable steps to construe conflicting provisions in a manner that avoids conflict. See

Qualitech, 327 F.3d at 543-44.

The Code unambiguously allows section 363(f) asset sales free and clear of a lease. Each

circuit faced with the question views section 363 asset sales and section 365 rejections as

separate and distinct events. E.g., id. at 547. When a lease is not formally rejected, a lessee is not

protected by section 365(h). E.g., Spanish Peaks, 872 F.3d at 899 (“[A] rejection is universally

understood as an affirmative declaration by the trustee that the estate will not take on the

obligations of a lease.”) (quotations omitted). Therefore, a debtor may eliminate a lease when it

elects to sell real property, but a lessee may retain possession when the debtor holds onto the

property. See Dishi & Sons, 510 B.R. at 703 (quoting Cheslock-Bakker & Assocs., Inc. v. Kremer

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(In re Downtown Athletic Club of New York City), No. M-47 (JSM), 2000 WL744126, at *4

(S.D.N.Y. June 9, 2000)).

The Ninth Circuit acknowledged that section 363(f) sales constitute “an effective

rejection of the lease,” but held that section 365(h) only applies following actual rejection.

Spanish Peaks, 872 F.3d at 899. Like the Thirteenth Circuit, that court went on to explain that

when a debtor utilizes a section 363(f) sale, lessee interests are protected by the limits of sections

363(f)(1)-(5) and adequate protection under section 363(e). Id. The court also recognized that it

is “contrary to the goal of ‘maximizing creditor recovery,’” to grant supremacy to lessees. Id. at

900-01 (quoting Qualitech, 327 F.3d at 548).

Contrary to the circuit courts, some bankruptcy courts mistakenly hold that, on account of

its specificity, a lessee’s rights under section 365(h) must prevail when a debtor attempts a free

and clear sale. E.g., In re Haskell LP, 321 B.R. at 1, 9 (Bankr. D. Mass. 2005). These courts see

the Code in black and white: because section 363(f) allows debtors like High Rocks to sell free

of interests, and section 365(h) allows a lessee to retain its interest, there is conflict. See, e.g.,

Metro. Life Ins. Co. v. LHD Realty Corp. (In re LHD Realty Corp.), 20 B.R. 717, 719 (Bankr.

S.D. Ind. 1982). Like Judge Petty’s dissent, these courts twist the Code so as to employ the

canon that specific sections must prevail over general ones. R. at 22 (Petty, J., dissenting) (citing

Morales v. Trans World Airlines, Inc., 504 U.S. 374, 384 (1992)). In their view, the specificity of

section 365(h) gives rejected lessees a “superman” right to block section 363(f) sales. Dishi &

Sons, 510 B.R. at 708; R. at 23 (Petty, J., dissenting) (stating that “a debtor-lessor cannot

circumvent those special [section 363(h)] protections through section 363(f)”). Somehow, these

courts grant lessees this superman right even when rejection, the event triggering section 365(h)

protection, never occurs.

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This approach illustrates a haphazard reading of the Code and it applies to the detriment

of debtors and creditors alike. These courts ignore the plain text of the Code and craft the legal

fiction of de facto rejection. R. at 22. After creating this fiction, they allow it to trump the lessee

protections which section 363 expressly includes. The approach circumvents the Code and

allows judges to pick and choose the situations where a lessee’s interest frustrates a debtor’s

rights. Because of these flaws, it would be ill conceived policy for this Court to disturb the sale

of the amphitheater to 4th Street.

When bankruptcy courts stray from the circuit approach, they must abandon the text of

the Code to create the legal fiction of de facto rejection.2 Section 365(h) is contingent upon

rejection of an unexpired lease. 11 U.S.C. § 365(h)(1)(A) (“If the trustee rejects an unexpired

lease of real property . . . .”). If rejection has not occurred, section 365(h) does not apply. See id.

As Connecticut National Bank teaches, application of the canons of construction is inappropriate

when the statutory text itself can relieve the tension. 503 U.S at 253. However, proponents of this

approach drum up ambiguity by implying that rejection must occur before a section 363(f) sale.

See Dishi & Sons, 510 B.R. at 703. This de facto rejection is a judicial gloss with no basis in the

text of the Code.

Despite this, courts claim that de facto rejection protects lessees who, they believe,

should be afforded section 365(h) rights. However, as this brief goes on to show, sections

2 Another mistaken statutory argument levied by proponents of section 365(h) is that section 363(l) applies

the protections of section 365(h) to all free and clear sales. Michael St. Patrick Baxter, Section 363 Sales Free And Clear of Interests: Why the Seventh Circuit Erred in Precision Industries v. Qualitech Steel, 59 Bus. Law. 475, 482-83 (2004). While section 363(l) could be read to make all asset sales “[s]ubject to the provisions of section 365,” the section is designed to invalidate ipso facto clauses triggered by filing for bankruptcy. 11 U.S.C. § 363(l); see also Forlini v. Ne. Sav., F.A., 200 B.R. 9 (D.R.I. 1996). “All courts that have considered section 363(l) view this statute as one of a series of Bankruptcy Code provisions . . . that either invalidate, or strictly limit the enforceability of, bankruptcy forfeiture provisions.” MMH Auto. Grp., 385 B.R. at 365; see e.g., Forlini, 200 B.R. at 9. Read consistently with judicial precedent, section 363(l) provides no guidance on the case at hand because the provision is limited to ipso facto clauses.

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363(f)(1)-(5) and 363(e) contain separate and substantial lessee protections. Supra, Part I.B.1. De

facto rejection is a choice to clumsily apply section 365(h) to asset sales, in lieu of the specific

protections Congress granted lessees in section 363. The Code does not grant judges the

discretion to make that choice. Further, the decision inequitably burdens a debtor’s right to sell

property by granting lessees an unconstrained right to possession.

This Court should follow the text of the Code and limit section 365(h) to cases of actual

rejection. Sections 363(f) and 365(h) relate to distinct events in bankruptcy. Applying section

365(h) to High Rocks’ sale of the amphitheater fits a square peg into a round hole. High Rocks

did not reject the amphitheater lease. Instead, High Rocks followed the procedure laid out in

section 363 and sold the amphitheater free and clear of the lease. Section 363 contains powerful

mechanisms to protect lessees like Highway. Highway could have protected its interest by

challenging the sale under sections 363(f)(1)-(5). It chose not to do so. Once the bankruptcy

court approved the sale, Highway was entitled to adequate protection had it chosen to ask for it.

It chose not to ask. This Court should not distort the Bankruptcy Code solely for Highway’s

benefit after Highway failed to take basic steps to protect itself.

B.! Authorized Asset Sales Under Section 363(f) Are Beyond the Scope of Section 365(h) Protection, Even if Rejection is Deemed to Occur.

Even if Highway is afforded the protection of section 365(h), despite the absence of

rejection, High Rocks may still sell the amphitheater free and clear of the lease. Section 365(h)

only protects a rejected lessee’s possessory rights “to the extent that such rights are enforceable

under applicable nonbankruptcy law.” 11 U.S.C. § 365(h)(1)(A)(ii). Thus, the scope of

possessory rights that section 365(h) maintains is necessarily restricted by state law. A lessee’s

possessory right is not enforceable under applicable nonbankruptcy law if state law permits a

landlord to dispossess the lessee. See id. The applicable section 363(f) prerequisites are

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analogous to situations where a lessor could lawfully dispossess a lessee. On its face, section

365(h) does not protect the lessee’s possessory right when a section 363(f) prerequisite is

satisfied. See id. The rights under state law a debtor must show to authorize a section 363(f) sale

render section 365(h) inapplicable. This answer holds true even if rejection is deemed to occur

upon a sale of assets.

Understanding the Code in this way allows a lessee to aggressively defend its own

interest. Congressional intent is furthered because a lessee’s appurtenant rights are protected in

bankruptcy to the same extent as under state law. Beyond that protection, a close look at sections

363(f)(1)-(5) reveals that in virtually all cases an objecting lessee may prevent a section 363(f)

sale. In the rare event that a section 363(f) sale is allowed over a lessee’s objection, section

363(e) requires the bankruptcy court to provide adequate protection upon the lessee’s request.

While these protections differ from those of section 365(h), they ensure that vigilant lessees’

interests are secure. Here, for reasons only it knows, Highway displayed no such vigilance in

protecting its interest.

1.! Sections 363(f)(1)-(5) Describe Situations Where Applicable State Law Allows High Rocks to Dispossess Highway.

Section 363(f) is not a blanket right provided to all debtors. It is available in only five

narrow circumstances set out in sections 363(f)(1)-(5).3 An inspection of the three circumstances

applicable to leases shows that each permits free and clear sales only in situations where the

lessor could sell free of the interest under state law. Section 363(f)(1), when properly limited to

sales by the debtor itself, states this explicitly. Section 363(f)(2) requires the consent of the

3 Of the five circumstances, 363(f)(3) (lien interests) and 363(f)(4) (interests in bona fide dispute) are

inapplicable to cases where the interest is a lease. Robert M. Zinman, Precision in Statutory Drafting: The Qualitech Quagmire and the Sad History of S 365(h) of the Bankruptcy Code, 38 J. Marshall L. Rev. 97, 139 (2004).

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lessee. Of course, if the lessee consents, a sale free of the leasehold is a nonissue. The final

prerequisite describes cases where the interest holder could be compelled to accept cash in

exchange for the interest. 11 U.S.C. § 363(f)(5). Similar to (f)(1), if this provision is limited to

powers held by the debtor, it describes situations where High Rocks could pay cash in exchange

for the interest.

Section 363(f)(1) allows “the trustee” to sell free and clear if “applicable nonbankruptcy

law permits the sale . . . free and clear of such interest.” 11 U.S.C. § 363(f)(1). This places a

sizable restraint on a debtor’s ability to perform a section 363(f) sale because rarely is a lessor

entitled to sell property free and clear of a leasehold interest outside of bankruptcy.

While section 363(f)(1) is not limited to voluntary sales, the inclusion of “the trustee”

appears to limit the paragraph’s application to situations where the debtor itself could sell the

property free and clear. Dishi & Sons, 510 B.R. at 709. An appropriately narrow reading of the

paragraph would limit the section as such. Conversely, a broad reading might include sales

forced by other parties, such as foreclosure proceedings by lien creditors. Id. Courts frequently

give weight to the narrow view and restrict application of paragraph (1) to scenarios where the

debtor itself could have sold free and clear of the interest. In re S. Mfg. Grp., LLC, No. CV 15-

00931-HB, 2016 WL 3344787, at *3 (Bankr. D.S.C. June 7, 2016); Dishi & Sons, 510 B.R. at

710 (“[T]he Court holds that paragraph (1) refers not to foreclosure sales, but rather only to

situations where the owner of the asset may, under nonbankruptcy law, sell an asset free and

clear of an interest in such asset.”); In re Jaussi, 488 B.R. 456, 458 (Bankr. D. Colo. 2013). But

see Spanish Peaks, 872 F.3d at 900 (holding hypothetical foreclosure sale satisfies 363(f)(1)).

Consistent with Congressional intent, courts should protect lessees by reading section

363(f)(1) narrowly. Construing the provision broadly effectively repeals section 365(h) when a

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debtor wishes to sell the property. See Dishi & Sons, 510 B.R. at 710. The real property of an

insolvent debtor is frequently subject to a security interest. The secured creditor is generally

entitled to foreclose free of leases upon default. Id. Read broadly, section 363(f)(1) is always

satisfied in such cases. Meanwhile, the narrow view protects lessees in the vast majority of

situations, while permitting sales when a debtor can point to a right to sell free of the interest

under applicable nonbankruptcy law.

In a case where the lessee consents, the second paragraph of section 363(f) authorizes a

free and clear sale. 11 U.S.C. § 363(f)(2). If the lessee consents to a sale free of its interest

outside of bankruptcy, the lessor would of course be permitted to sell free of such interest. Like

section 363(f)(1), this provision explicitly covers instances where a lessor may sell free of the

leasehold. As such, when section 363(f)(2) is satisfied, section 365(h) does not grant lessees a

right to retain possession.

Jurisdictions vary regarding whether express consent or implied consent by silence

satisfies section 363(f)(2). Compare In re Roberts, 249 B.R. 152, 155 (Bankr. W.D. Mich. 2000)

(“[C]onsent” does not equal “fails to object.”), with FutureSource LLC v. Reuters Ltd., 312 F.3d

281, 285 (7th Cir. 2002) (lack of objection by lessee satisfies consent requirement). The former

stance provides superior protection to lessees, but both approaches further Congressional intent

by allowing lessees to retain possessory rights. Either way, a lessee holds unfettered power to

frustrate a section 363(f) sale by objecting to the proposal. Robert M. Zinman, Precision in

Statutory Drafting: The Qualitech Quagmire and the Sad History of S 365(h) of the Bankruptcy

Code, 38 J. Marshall L. Rev. at 130.

In jurisdictions permitting implied consent, debtors must provide actual notice to interest

holders. Green v. Unaatuq, LLC (In re Catholic Bishop of N. Alaska), 525 B.R. 723, 730 (D.

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Alaska 2015) (requiring actual notice be given to squatters on debtor’s land before section 363(f)

sale even when squatters had no leasehold interest). Rule 2002(a)(2) of the Federal Rules of

Bankruptcy Procedure requires all parties in interest be given twenty days notice before a

proposed sale. Fed. R. Bankr. P. 2002(a)(2). Mandatory notice eliminates the risk of debtors

abusing section 363(f) sales by ensuring full disclosure to lessees.

The final circumstance permitting a section 363(f) sale occurs when a lessee could be

compelled to accept a monetary satisfaction for its interest. 11 U.S.C. § 363(f)(5). Normally, a

lessor cannot compel a lessee to surrender possession in exchange for a monetary settlement. See

In re Hassen Import P’ship, 502 B.R. 851, 862 (C.D. Cal. 2013). However, one could improperly

read paragraph (5) as permitting a section 363(f) sale in any case where the lessee “could be

compelled” to accept cash. Dishi & Sons, 510 B.R. at 710. Under this expansive reading,

procedures such as eminent domain or tax lien foreclosures assure that paragraph (5) is satisfied

in every case. Id. (citing In re Smith, 2014 WL 738784, at *2 (Bankr. D. Ore. Feb. 26, 2014)).

Such a reading renders sections 363(f)(1)-(4) superfluous. Id. Thus, section 363(f)(5) should only

be satisfied when the debtor itself could compel the lessee to accept a cash payment outside of

bankruptcy. In re Haskell, 321 B.R. at 9 (“[T]he only logical interpretation . . . is that the statute

requires that . . . the debtor be the party able to compel monetary satisfaction for the interest.”).

As in section 363(f)(1), a foreclosure by a third party mortgagee should not satisfy

section 363(f)(5) because the right to foreclosure rests with the third party and not with the

debtor. Dishi & Sons, 510 B.R. at 711. Courts applying the correct reading seldom find instances

where paragraph (5) is met. See Remes v. Robison (In re Van Houten), 56 B.R. 891, 898 (Bankr.

W.D. Mich. 1986) (holding that Michigan law permitting the sale of property subject to a life

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tenancy did not satisfy (f)(5) because the law required a showing that the sale was in the best

interest of all parties and tenant objected).

Based on the text of section 363(f)(1)-(5), it is neither necessary nor appropriate for

courts to claim that the specific protections of section 365(h) trump a debtor’s right to sell free

and clear. The section 363(f) prerequisites substantially protect lessees and are rarely satisfied

against a lessee’s will. Section 363(f)(2) gives the lessee control to veto an asset sale. Paragraphs

(f)(1) and (f)(5) are seldom met when courts interpret them appropriately. Further, when (f)(1) or

(f)(5) is satisfied, applicable state law allows the debtor to dispossess the lessee. In those rare

cases, section 365(h) cannot protect a lessee because the debtor holds the right to dispossess the

lessee under applicable nonbankruptcy law.

This result does not depend upon a distinction between actual and effective rejection. To

illustrate this, assume (as critics of the circuit court approach would) that a section 363(f) sale

constitutes de facto rejection of the lease, triggering lessee protection under section 365(h). See

R. at 22. The lessee would be entitled to possession to the extent state law allows. However, as

explained above, when a section 363(f) prerequisite is met, applicable state law does not protect

the lessee’s possessory right. Therefore, the debtor may proceed with the sale even after

triggering section 365(h).

Advocates favoring section 365(h) rely upon its legislative history as evidence that

lessees must retain possession in the face of a section 363(f) sale. From the Congressional

record, they glean that Congress passed and amended section 365(h) to protect lessees from

being terminated in bankruptcy. E.g., R. at 23. However, Congress actually sought to rectify a

more specific concern: debtor’s using rights in the Code, unavailable outside of bankruptcy, to

terminate leaseholds. Dishi & Sons, 510 B.R. at 707 (citing 126 Cong. Rec. 31,917 (1980)

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(statement of Congressman Edwards)). Congress did not intend for section 365(h) to expand

upon a lessee’s rights, only to maintain such rights to the same extent as state law. Id.

This distinction highlights the flaw in the argument that Congress intended for lessees to

prevail over prospective free and clear sales: sections 363(f)(1)-(5), if satisfied, constitute

situations where applicable nonbankruptcy law does not protect Highway’s possessory rights.

Thus, the elimination of the leasehold interest in a section 363(f) sale is, in fact, consistent with

Congressional intent. Otherwise, a lessee would be protected by “superman” section 365(h)

rights that exceed the limits of applicable state law. Dishi & Sons, 510 B.R. at 708.

Highway’s rights under section 365(h), if rejection is deemed to have occurred, must

yield to High Rocks’ right to sell under section 363(f). The criteria triggering a free and clear

sale reflect instances where Highway’s possessory right would be unenforceable under

nonbankruptcy law. It is undisputed that at least one of the criteria is fulfilled in the instant case.

R. at 9, n.6. Thus, High Rocks must have possessed a right under state law to dispossess

Highway. Section 365(h) does not grant Highway a superman right to retain possession in such a

case. Dishi & Sons, 510 B.R. at 708. As such, the bankruptcy, district, and circuit courts

correctly upheld High Rocks right to sell the amphitheater under section 363(f).

2.! Adequate Protection Allows Lessees to Retain Possession or Receive the Indubitable Equivalent When a 363(f) Sale is Authorized.!

The five prerequisites are not the only mechanisms in section 363 that protect the rights

of a lessee. In the rare event where a debtor shows it is entitled to sell real property free and clear

of a leasehold interest, section 363(e) allows a lessee to ask the bankruptcy court for adequate

protection. When a lessee asks, the court must give adequate protection in the form of the

indubitable equivalent of the interest. See 11 U.S.C. § 363(e); Dishi & Sons, 510 B.R. at 711.

Judges have flexibility to craft adequate protection in different forms, be it a monetary claim or

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continued possession. Permitting the lessee to continue possession may be fitting when the estate

has insufficient funds, making repayment of the lessee unlikely. Dishi & Sons, 510 B.R. at 711-

12 (“Where it is improbable that the lessee will receive any compensation for its interest from the

proceeds of the sale, and it is difficult to value the lessee’s unique property interest . . . adequate

protection can be achieved only through continued possession.”).

As the Ninth Circuit stated, “we think it worth mentioning that the broad definition of

adequate protection makes it a powerful check on potential abuses of free and clear sales.”

Spanish Peaks, 872 F.3d at 899-900. Should the lessee protections in 365(h) and 363(f)(1)-(5)

prove insufficient to satisfy Congresses’ intent to protect tenants, threatened lessees need only

ask and bankruptcy judges shall look to equitable principles to craft adequate protection. This

establishes a final failsafe to prevent abuse of section 363(f) by debtor-lessors.

Here, despite explicit notice that the section 363(f) sale would eliminate its leasehold

interest, Highway declined to request adequate protection. R. at 14. Having failed to avail itself

of this remedy, this Court must not grant Highway a do-over by rescinding the sale to 4th Street.

This Court should affirm the courts below and recognize High Rocks’ right to sell its

amphitheater free and clear of interests. The Bankruptcy Code offered High Rocks a choice:

retain possession of the amphitheater and reject the lease, or sell the property. High Rocks chose

the latter and conducted a valid section 363(f) sale free and clear of the lease. On notice of the

threat the sale posed to its interest, Highway took no steps to protect itself. Now, Highway asks

this Court to construe section 365(h) to grant it a superman right of possession. However, section

365(h) does not even apply because the lease was not rejected. Further, even if section 365(h)

applies, it provides no protection when state law permits High Rocks to dispossess a lessee. High

Rocks may do so here. As such, this Court should affirm.

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II.! THE BANKRUPTCY COURT’S APPROVAL OF THE SECTION 363 SALE AND COMMITTEE SETTLEMENT WAS PROPER. The bankruptcy court’s approval of the section 363 sale and Committee Settlement was

proper and not in violation of the Code’s priority scheme. Final distributions of estate property to

creditors pursuant to a plan must abide by the section 507 priority scheme. See 11 U.S.C. §§ 507,

1129(a)(9), (b)(2)(B)(ii). A chapter 11 plan may seek to alter the priority of distribution to

creditors, but it may not distribute estate property to a creditor over the objection of a senior-in-

priority creditor whose claim is not being paid in full. This fundamental principle is known as the

“absolute priority rule,” codified in 11 U.S.C. § 1129(b)(2)(B)(ii). The rule only applies to

distributions of estate property.

Moreover, in Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017), this Court held

that the absolute priority rule applies not only to final distributions pursuant to a plan, but to all

“final” distributions of estate property, such as through a court-approved settlement that is part of

a case-ending structured dismissal. But Jevic expressly does not preclude an “interim”

distribution that serves “significant Code-related objectives.” Id. at 985. Thus, a final distribution

of estate property in violation of the absolute priority rule is necessarily prohibited under Jevic,

whereas an interim distribution that serves a significant Code-related objective is not. Id.

Accordingly, this Court should find that the bankruptcy court’s approval of the section

363 sale and Committee Settlement was proper. First, 4th Street’s “gift” to the Committee as

part of the Committee Settlement is not “property of the estate” and, therefore, not subject to the

absolute priority rule—a scenario that is distinguishable from Jevic. Second, assuming arguendo

that the $2-million gift is property of the estate, this is an interim distribution that serves

significant Code-related objectives—a scenario expressly allowed under Jevic.

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A.! 4th Street’s Gift to the Committee is Not Subject to The Absolute Priority Rule Because the Rule Only Applies to Property of the Estate.

4th Street’s gift is not property of the estate and, therefore, not subject to the absolute

priority rule. Upon filing a chapter 11 petition, an “estate” is created comprising all of the

debtor’s property. 11 U.S.C. § 541(a); Jevic, 137 S. Ct. at 978 (discussing several consequences

of filing a chapter 11 case). Section 541(a)(1) defines “property of the estate” as “all legal or

equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C.

§ 541(a)(1). Proceeds of estate property are also property of the estate. Id. § 541(a)(6).

Property of the estate does not include a creditor’s own funds in which a debtor has no

legal or equitable interest. Id. § 541(a)(1); e.g., In re ICL Holding Co., Inc., 802 F.3d 547, 555

(3d Cir. 2015); In re TSIC, Inc., 393 B.R. 71, 77 (Bankr. D. Del. 2008).

The common practice of “gifting” involves one creditor (“A”) voluntarily giving its own

property to another creditor (“B”) in order to gain B’s approval of A’s asset purchase in a

proposed section 363 sale or, alternatively, B’s vote in favor of a chapter 11 plan. As the

Thirteenth Circuit correctly noted, “most courts have found that the practice of a secured creditor

gifting its own money to a lower-priority creditor as part of a litigation settlement and, in doing

so, bypassing a non-consenting senior creditor, does not necessarily implicate the absolute

priority rule and can be approved.” R. at 17 (emphasis added).

Thus, a gift is subject to the absolute priority rule only if the gift is property of the estate.

The gift here is not subject to the absolute priority rule because it is not property of the estate. 4th

Street’s gift was its own property, not estate property, and the gift was neither part of the

purchase price of the assets nor consideration for settling estate causes of action.

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1.! 4th Street’s Gift to the Committee is Not Subject to The Absolute Priority Rule Because the $2 Million is 4th Street’s Own Money.

4th Street’s gift of its own money to the Committee is not subject to the absolute priority

rule because the rule is only implicated where there is a distribution of estate property. Where a

creditor seeks to distribute its own property to another creditor, no estate property is involved,

and thus the distribution is not subject to the absolute priority rule. See ICL Holding Co., 802

F.3d at 547 (holding that a creditor’s own money paid to a junior creditor as part of a settlement

was not estate property and, therefore, not subject to absolute priority); Official Unsecured

Creditor’s Comm. v. Stern (In re SPM Mfg. Corp.), 984 F.2d 1305, 1313 (1st Cir. 1993) (holding

that once the automatic stay was lifted and lender received its collateral, the collateral was no

longer estate property and not subject to priority constraints); see also TSIC, 393 B.R. at 77.

In ICL Holding, a substantially similar case, the court approved a secured creditor’s

proposal to purchase the estate’s assets by way of a credit-bid. The creditors committee objected,

stating that the sale was a “veiled foreclosure,” and that it left no recovery for the unsecured

creditors. 802 F.3d at 551. Thereafter, the secured creditor settled with the committee. In

exchange for the committee’s support for the section 363 sale, the secured creditor would deposit

$3.5 million into a trust for the benefit of the unsecured creditors. Id. The Third Circuit held that

the $3.5 million was not property of the estate because the secured creditor had paid its “own

funds” directly to the committee in exchange for the committee’s support. Id. at 556. No property

of the estate was exchanged in the settlement and the funds were not “otherwise intended for the

[d]ebtor's estate.” Id. Thus, the gift did not implicate the absolute priority rule. Id.

The same is true here. In resolving the Committee’s objection to the sale and buying

peace, 4th Street gifted its own money to the Committee. R. at 18. Thus, this Court should affirm

the bankruptcy court’s finding that 4th Street’s gift to the Committee was not property of the

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estate, not “otherwise intended for the Debtor’s estate” and, therefore, not subject to the absolute

priority rule. ICL Holding, at 802 F.3d at 551.

2.! The $2 Million Gift Was Not Given in Consideration for Settling Estate Causes of Action Nor Was it Part of the Purchase Price of the Assets.

The bankruptcy court properly found that the $2-million gift was not given in

consideration to High Rocks for settling estates causes of action, and that it was not part of the

purchase price of the assets. The Committee did not settle estate causes of action. Rather, it

settled only its own right to bring claims against 4th Street on behalf of the estate. Moreover,

under the Committee Settlement, 4th Street exchanged separate consideration between 4th Street

and the Committee, on the one hand, and between 4th Street and High Rocks on the other hand.

i.! The Committee released its right to bring a derivative action on behalf of the estate, but did not release estate causes of action.

It is true that a debtor’s causes of action are considered “legal or equitable interests” and

are, therefore, property of the estate. Smart World Techs., LLC v. Juno Online Servs., Inc. (In re

Smart World Techs., LLC), 423 F.3d 166, 175 (2d Cir. 2005) (citing United States v. Whiting

Pools, Inc., 462 U.S. 198 (1983)). But it is primarily the right of the debtor-in-possession or

trustee to bring estate causes of action if an action is in the interest of the estate. Cybergenics

Corp. v. Chinery, 330 F.3d 548, 566 (3d Cir. 2003) (describing a creditor’s right to bring

derivative actions). A creditors committee may seek to derivatively bring an action on behalf of

the estate, but it must adhere to procedures in the bankruptcy court for attaining such right to

“derivative standing.” Id. Indeed, “a creditors' committee may sue on behalf of the debtors, with

the approval and supervision of a bankruptcy court, not only where the debtor in possession

unreasonably fails to bring suit on its claims, but also where the trustee or the debtor in

possession consents.” Commodore Int’l Ltd. v. Gould (In re Commodore Int'l Ltd.), 262 F.3d 96,

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100 (2d Cir. 2001). Regardless of whether the bankruptcy court approves of such derivative

standing, however, a creditor’s mere “right” to bring causes of action on behalf of the estate is

not itself estate property. Id. Rather, only the causes of action themselves belong to the estate.

Here, not only has High Rocks not filed any action against 4th Street, it has not even

alleged a cause of action against 4th Street. While the Committee “unofficially alleged” lender

liability claims at the sale hearing, the Committee never sought standing and approval from the

bankruptcy court to pursue such claims on behalf of the estate. R. at 7; Commodore, 262 F.3d at

100. If the Committee so desired, it could have sought the bankruptcy court’s approval and filed

an action against 4th Street. It did not, despite having plenty of time to do so. R. at 7. Instead, it

is clear that the Committee does not possess the standing and court approval to bring actions

against 4th Street. So, if anything, the Committee merely released its right to pursue derivative

actions on behalf of the estate against 4th Street, but not the causes of action themselves.

Therefore, this Court should affirm lower courts in finding that the Committee

Settlement was made to achieve High Rocks’ and 4th Street’s mutual goal of “buying peace”

with the Committee and gaining its support of the sale. R. at 19.

ii.! 4th Street exchanged separate consideration between 4th Street and the Committee and between 4th Street and High Rocks.

Even if High Rocks itself, not the Committee, released estate causes of action as part of

the Committee Settlement, the $2-million gift to the Committee was not given in consideration

for High Rocks’ release. Where a debtor and various parties reach a settlement involving

multiple issues and multiple settlement proceeds, a particular proceed of the settlement is only

property of the estate to the extent that the proceed was given as consideration to the debtor. In

re World Health Alts., Inc., 344 B.R. 291, 299 (Bankr. D. Del. 2006). The proceeds of a settling

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non-debtor party do not become property of the estate merely because the debtor was one of the

parties to the settlement. Id.

The case of World Health Alternatives directly illustrates this point. In a similar

settlement, the debtor, the creditors’ committee, and a secured creditor reached a settlement

whereby the creditors’ committee would support the proposed sale and release its right to bring

claims against the secured creditor. Id. In exchange, the committee would receive a sum of cash

from the secured creditor. Id. at 299. In discussing whether the settlement proceeds were

property of the estate, the court found that they were not because the proceeds were the secured

creditor’s own property, which it paid directly to the creditors committee as consideration under

their settlement. Id.

Addressing objections that the money paid to the creditors committee constituted

proceeds of estate causes of action, the court stated that the secured creditor’s payment to the

committee was not “in exchange for the release of estate causes of action against [the secured

creditor], but for the removal of the only serious challenge (by the [c]ommittee) to the [d]ebtors'

and [secured creditor's] joint goal at the outset of the case to effect a quick sale . . .” Id. at 300.

The court further reasoned that even if the causes of action belonged to the estate, the money

paid to the committee was not the secured creditor’s consideration to the debtor for releasing the

estate’s causes of action, nor was it in satisfaction of the purchase price of the assets. Id.

Rather, the settlement contained two separate considerations: (1) between the secured

creditor and the debtor, and (2) between the secured creditor and the committee. Id. at 301. First,

the consideration to the debtor was the secured creditor’s offer to purchase the estate’s assets

from the debtor, who desperately needed to sell its depreciating property. Id. The purchase price

for the debtor’s assets was satisfied via the secured creditor’s credit-bid. Second, the creditors

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committee received money in exchange for its support of the sale and release of its right to bring

estate causes of action against the secured creditor. Id. Thus, both the debtor and the committee

received separate consideration for their exchanges with the secured creditor. The court

appropriately found that the debtor was entitled only to the consideration that it specifically

bargained for: the secured creditor’s agreement to purchase the assets, and the value it would

receive for the assets by way of the secured creditors credit-bid. Id. The debtor was not entitled

to the separate monetary consideration paid to the committee. Id.

Here, High Rocks and the Committee received two separate considerations in their

settlement with 4th Street. The first consideration was the $2 million gift that 4th Street paid

directly to the Committee in exchange for the Committee’s support of the 363 sale and the

release of its right to bring claims against 4th Street. R. at 18. Separately, High Rocks’

consideration under the Settlement was 4th Street’s offer to purchase its assets and 4th Street’s

credit-bid to satisfy the purchase price. In exchange, High Rocks released 4th Street from any

and all claims. R. at 18.

Thus, even assuming High Rocks released the estate’s causes of action against 4th Street

under the settlement, the $2 million gift that 4th Street paid to the Committee was only meant to

attain the Committee’s approval of the sale and to release the Committee’s right to bring any

claims against 4th Street. R. at 7. On the other hand, High Rocks’ consideration under the

Committee Settlement was 4th Street’s offer to purchase the assets, and the purchase price for

the assets was satisfied by way of a credit-bid. Accordingly, the funds that 4th Street gifted to the

Committee are neither property of the estate nor proceeds arising from property of the estate

under section 541(a)(6). There is no basis to take the Committee’s gift and make it property of

the estate.

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In summary, the bankruptcy court correctly found that the $2 Million gift was not in

consideration for settling estate causes of action and that it was not part of the purchase price of

the assets. The Court should affirm.

B.! This Gift Settlement is Permissible Because it is an Interim Distribution That Serves Significant Code-related Objectives.

Assuming arguendo that 4th Street’s gift to the Committee constitutes property of the

estate, the Committee Settlement is consistent with Jevic, which expressly allows non-

consensual priority-skipping interim distributions that serve a significant Code-related objective.

In Jevic the creditors committee, the secured lender, and the debtor reached a settlement,

providing that: (1) the committee’s fraudulent transfer case on behalf of the estate would be

dismissed; (2) the lender would pay $2 million for the committee’s legal and administrative

expenses; (3) the lender would assign its lien on the estate’s remaining $1.7 million cash to pay

off taxes and, then, other lower priority unsecured creditors; and, finally (4) the bankruptcy court

would approve the settlement and dismiss the case with prejudice (i.e., a structured dismissal).

137 S. Ct. at 973. The case-ending settlement excluded the debtor’s employees, who held

valuable wage claims against the debtor, and whose claims were senior to the other general

unsecured creditors. The employees refused to settle their claims, so the debtor reasoned that it

would be imprudent to provide them with a distribution because they would then use it to fund

litigation against the debtor. Id. at 976. Thus, the settlement called for a priority-skipping

structured dismissal of the case, leaving the employees with no future prospect of a recovery. Id.

The factual circumstances in Jevic were “dire.” 787 F.3d at 178. Without the settlement,

no class of creditor would have recovered besides the secured lenders. Id. There was no viable

prospect for a reorganization plan and the estate was administratively insolvent, so it could not

even fund a chapter 7 liquidation Id.

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Nonetheless, the Supreme Court reasoned that the dire circumstances of the case could

not outweigh the strict mandate of the Code: final distributions must abide by the absolute

priority rule. In the words of the U.S. Trustee, discarding the settlement in Jevic would lead to “a

really ugly result,” but the Court had to “accept the fact that we are sometimes going to get a

really ugly result, an economically ugly result, but it's an economically ugly result that is dictated

by the provisions of the [C]ode.” Jevic, 787 F.3d at 185. Accordingly, the Supreme Court ended

its inquiry when it found that the settlement distribution was final and, therefore, in violation of

the absolute priority rule.

The dire economic circumstances here are strikingly similar to those in Jevic, but the

Settlement here is not a final distribution. Therefore, the Court here need not rescind the

Settlement, avoiding an “economically ugly result.” Instead, this Court should find that the

bankruptcy court’s approval of the section 363 sale and Committee Settlement was proper

because the gift was not a final distribution of estate assets and it serves significant Code-related

objectives.

1.! 4th Street’s Gift is an Interim Distribution, Not a Final Distribution.

4th Street’s Gift to the Committee was an interim distribution, not a final, case-ending,

distribution. To understand the significance of this distinction, it is important to review the Fifth

and Second Circuits’ respective decisions in United States v. AWECO, Inc., 725 F.2d 293(5th

Cir. 1984) and Motorola, Inc. v. Official Committee of Unsecured Creditors (In re Iridium

Operating LLC), 478 F.3d 452 (2d Cir. 2007), and how those cases served as the basis for the

Court’s decision in Jevic. While neither AWECO nor Iridium involved priority-skipping

dismissals like in Jevic, their conflicting standards for approving priority-skipping settlements

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laid the framework for this Court’s decision in Jevic that all final, but not necessarily interim,

distributions must respect the absolute priority rule.

In AWECO, the Fifth Circuit held that “all” settlements in bankruptcy must abide by the

absolute priority rule, regardless of being plan or pre-plan distributions. AWECO, 725 F.2d at

298. In contrast, the Second Circuit held in Iridium that the absolute priority rule “is not

necessarily implicated” when “a settlement is presented for court approval apart from a

reorganization plan.” Iridium, 478 F.3d at 453. The court reasoned that a strict application of the

absolute priority rule in an interim settlement, pre-plan settlement is “too rigid” and not required

by the Code. Id. Thus, the Second Circuit rejected the Fifth Circuit’s holding in AWECO that

absolute priority applies to all settlements even if not by way of a plan.

This distinction between plan versus all distributions informed this Court’s discussion in

Jevic. The Jevic Court acknowledged that “[t]he Code does not explicitly state what priority

rules—if any—apply to the distribution of assets in a structured dismissal.” Jevic, 137 S. Ct. at

976. However, the Court then presented what it deemed to be the crux of the case: may a

bankruptcy court provide for final distributions that deviate from the priority rules that ordinarily

apply to a chapter 7 liquidation or a chapter 11 plan confirmation? Id. Answering this question in

the negative, the Court reasoned that “we would expect to see some affirmative indication of

intent if Congress actually meant to make structured dismissals a backdoor means to achieve the

exact kind of nonconsensual priority-violating final distributions that the Code prohibits in

chapter 7 liquidations and chapter 11 plans.” Id. at 980 (emphasis added). Indeed, the Court’s

opinion was replete with references to “final” distributions rather than “all” distributions. Id.

Accordingly, the Court held that priority-skipping final distributions were prohibited under the

Code. Id.

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However, the Court also distinguished the priority-skipping final distribution in Jevic

from the priority-skipping “interim” distribution in Iridium that served a “significant Code-

related objective.” Id. at 981. As such, Jevic bridged the gap between AWECO and Iridium. The

proper distinction for the Court was not between plan distributions and all distributions, but

between final and interim distributions. The appropriate inquiry, therefore, is whether a

distribution is final, regardless of its technical form. Jevic only prohibited non-consensual

priority skipping “final” distributions, not “interim” distributions that serve a significant “Code-

related objective.” Id. at 985; In re Fryar, 570 B.R. 602, 608-09 (E.D. Tenn. 2017) (finding that

Jevic left the door open for priority-deviating interim distributions that serve Code-related

objectives).

Here, 4th Street’s gift to the Committee was an interim distribution in both form and

substance. Formally, the settlement here was “entered into early in the case and not, as in Jevic,

as part of a final disposition of the case.” R. at 16; Jevic, 137 S. Ct. at 976. Judge Petty’s

characterization of this distinction as “temporal semantics,” undermines Jevic’s reasoned

distinction between final and interim distributions. R. at 17 (Petty, J., dissenting).

Substantively, much is left to accomplish in this case. The Committee will pursue the

“very valuable” Skyline Claims, and, Highway may still recover its administrative expense if it is

proactive. R. at 7. Instead of struggling to prove that the Committee Settlement violated absolute

priority, Highway should seek to include itself in recovering from the separate the Skyline

Claims. R. at 7. The Skyline Claims were, undisputedly, property of the estate. R. at 7. Thus,

their proceeds are subject to the absolute priority. That the Skyline Claims appear meritorious

means that all the creditors, including Highway, might recover if the claims are pursued.

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While High Rocks assigned the Skyline Claims to the Committee early in the case for the

sole benefit of the unsecured creditors, and the propriety of the assignment is not at issue here,

there is no reason why Highway cannot challenge that assignment in the bankruptcy court. R. at

7 (footnote 3). Highway’s administrative expense is senior to the Committee’s claims, so

Highway could challenge its exclusion from the assignment of the Skyline Claims in the

bankruptcy court. Therefore, unlike the Jevic employees who were left with no prospect of

distributions on their claims after the case-ending structured dismissal, Highway may still

receive a distribution on account of its administrative expense claim. Jevic, 137 S. Ct. at 976. 4th

Street’s interim gift distribution to the Committee is not a final distribution, and it does not

preclude Highway from recovering from a final distribution down the line.

This Court should recognize the distinction between the permissible interim distribution

in this case, which leaves room for a subsequent priority-respecting distribution to Highway, and

the prohibited final distribution in Jevic, which precluded any recovery following the case-

ending structured dismissal. Thus, the decisions of the courts below should be affirmed.

2.! This Interim Committee Settlement Serves Significant Code-related Objectives.

In addition to being a permissible interim distribution, the Committee Settlement satisfies

Jevic because it furthers “significant Code-related objectives.” Specifically, the Committee

Settlement is fair and equitable, it maximizes the value of the estate, it promotes the policy of

settling disputes, and, it preserves the Business as a going concern.

Federal Rule of Bankruptcy Procedure Rule 9019 provides that “[o]n motion by the

trustee and after notice and a hearing, the bankruptcy court may approve a compromise or

settlement.” Fed. R. Bankr. P. 9019. Neither the Code nor the Rules provide specific criteria for

evaluating settlements, but the seminal case on settlement approval standards is Protective

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Committee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414

(1968). There, the Court stated that settlements must be “fair and equitable.” Id. Various courts

have deduced a number of factors from TMT Trailer Ferry that determine whether a settlement is

fair and equitable. Common factors include the (1) complexity of the issues being settled, (2)

expense, (3) likely duration of litigation, (4) the possible difficulties of collecting on any

potential judgment, and (5) all other factors relevant to a “full and fair assessment of the wisdom

of the proposed compromise.” Iridium, 478 F.3d at 462; Myers v. Martin (In re Martin), 91 F.3d

389, 393 (3d Cir. 1996); AWECO, 725 F.2d at 298; Musso v. OTR Media Grp., Inc. (In re Ladder

3 Corp.), 571 B.R. 525, 530 (Bankr. E.D.N.Y. 2017); In re Pugsley, 569 B.R. 704, 707 (Bankr.

N.D. Ohio 2017).

Moreover, beyond TMT Ferry Trailer, three of the main Code objectives that courts

recognize are: promoting equitable settlements between parties, maximizing the value of the

estate, and preserving a business as a going concern. Young v. United States, 535 U.S. 43, 50

(2002) (“[B]ankruptcy courts are courts of equity and apply the principles and rules of equity

jurisprudence.”); In re Chrysler LLC, 576 F.3d 108, 115 (2nd Cir. 2009) (“Resort to § 363(b) has

been driven by efficiency, from the perspectives of sellers and buyers alike. The speed of the

process can maximize asset value by sale of the debtor's business as a going concern.”); In re

Dewey & LeBoeuf LLP, 478 B.R. 627, 640 (Bankr. S.D.N.Y. 2012) (“Settlement and

compromises are favored in bankruptcy.”).4 As courts of equity, bankruptcy courts endeavor to

4 Indeed, “chapter 11 is designed to enable a company in financial distress to preserve its business as a going concern and maximize the distributable value to creditors. This may be accomplished through...the sale of [the debtor’s] assets or businesses pursuant to section 363 of the Bankruptcy Code (or a chapter 11 plan).” Jonathan C. Henes, Guidelines for Director Decision Making in chapter 11, Kirkland (January 12, 2003), https://www.kirkland.com/sitecontent.cfm?contentID=223&itemId=2445.

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uphold these objectives in resolving matters, to the extent that a particular resolution is not

prohibited by the Code. Cybergenics, 330 F.3d at 566.

Here, the Petitioners do not dispute that the TMT Trailer Ferry factors favor the

Committee Settlement, and this interim gift settlement serves significant Code-related objectives.

R. at 15. As recognized by the Thirteenth Circuit, “the Committee Settlement provides a

substantial benefit to the estate in that it will avoid costly, time-consuming, complex and

uncertain litigation with 4th Street and allows the Committee, through the unsecured creditors’

trust, to pursue its allegedly ‘very valuable’ claims against Skyline.” R. at 15; TMT Trailer

Ferry, 390 U.S. at 416; Dewey, 478 B.R. at 640.

Moreover, like the debtor in Jevic, High Rocks’ estate is administratively insolvent and

cannot even afford trustees fees if converted to a chapter 7 case. R. at 17. Before the Committee

Settlement, none of the unsecured creditors would have recovered. R. at 17. With the $2 million

gift, however, the Committee will be able to pursue the “very valuable” Skyline Claims and

thereby maximize the value of the estate. R. at 17. The estate has no resources to pursue these

claims on its own. And, as previously discussed, even Highway may recover from the Skyline

Claims if it pursues such claims in the bankruptcy court. Therefore, the Settlement resolves all

disputes between the Committee and 4th Street, and maximizes the value of the estate.

Unlike Jevic, the business here is not finished after the gift settlement distribution. The

Committee Settlement allows the Business to continue as a going concern, as 4th street intends to

operate the business itself after completing construction. R. at 7; Jevic, 137 S. Ct. at 976;

Chrysler, 576 F.3d at 118. 4th Street is the only viable purchaser of the estate assets. R. at 17. No

other qualified purchasers attempted to purchase the Business. R. at 17. Therefore, if the

settlement is not approved, and if 4th Street does not purchase the assets, the Bankruptcy Court

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will have no choice but to dismiss the case, and the Business assets will be laid to waste. No

party benefits from such a wasteful outcome.

In summary, both Jevic and the objectives of the Code favor this interim distribution.

Therefore, contrary to Highway’s request, this Court should not reach a conclusion that is

contrary to the Code and creates an economically ugly outcome. This Court should recognize

that this is an interim distribution, and that it serves significant Code-related objectives.

Accordingly, this Court should affirm.

CONCLUSION

Highway asks this Court to place its own interest on a pedestal. However, neither the

Code nor principles of equity support Highway’s requested outcome. In fact, that outcome harms

all other interested parties. All three lower courts saw the folly of Highway’s position and upheld

High Rocks’ section 363(f) sale and the Committee Settlement. High Rocks adhered to the

procedure laid out in section 363(f) and sold its amphitheater free of interests, while Highway

stood idly by. In the Committee Settlement, 4th Street paid the Committee with its own money

not property of the estate. Further, the Settlement is a permissible interim distribution and serves

significant Code-related objectives. For the aforementioned reasons, the judgment of the Court of

Appeals for the Thirteenth Circuit should be affirmed.

Team R. 50 Counsel of Record

Team R. 50

I

APPENDIX A

11 U.S.C. § 363(e) (2012). Use, sale, or lease of property. Notwithstanding any other provision of this section, at any time, on request of an entity that has

an interest in property used, sold, or leased, or proposed to be used, sold, or leased, by the

trustee, the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as

is necessary to provide adequate protection of such interest. This subsection also applies to

property that is subject to any unexpired lease of personal property (to the exclusion of such

property being subject to an order to grant relief from the stay under section 362).

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II

APPENDIX B

11 U.S.C. § 363(f) (2012).

Use, sale, or lease of property. (f) The trustee may sell property under subsection (b) or (c) of this section free and clear of any

interest in such property of an entity other than the estate, only if—

(f)(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;

(f)(2) such entity consents;

(f)(3) such interest is a lien and the price at which such property is to be sold is greater than the

aggregate value of all liens on such property;

(f)(4) such interest is in bona fide dispute; or

(f)(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money

satisfaction of such interest.

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III

APPENDIX C

11 U.S.C. § 363(l) (2012).

Use, sale, or lease of property. (l) Subject to the provisions of section 365, the trustee may use, sell, or lease property under

subsection (b) or (c) of this section, or a plan under chapter 11, 12, or 13 of this title may provide

for the use, sale, or lease of property, notwithstanding any provision in a contract, a lease, or

applicable law that is conditioned on the insolvency or financial condition of the debtor, on the

commencement of a case under this title concerning the debtor, or on the appointment of or the

taking possession by a trustee in a case under this title or a custodian, and that effects, or gives an

option to effect, a forfeiture, modification, or termination of the debtor’s interest in such

property.

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IV

APPENDIX D

11 U.S.C. § 365(h)(1) (2012).

Executory contracts and unexpired leases.

(h)(1)(A) If the trustee rejects an unexpired lease of real property under which the debtor is the

lessor and—

(i) if the rejection by the trustee amounts to such a breach as would entitle the lessee to treat such

lease as terminated by virtue of its terms, applicable nonbankruptcy law, or any agreement made

by the lessee, then the lessee under such lease may treat such lease as terminated by the rejection;

or

(ii) if the term of such lease has commenced, the lessee may retain its rights under such lease

(including rights such as those relating to the amount and timing of payment of rent and other

amounts payable by the lessee and any right of use, possession, quiet enjoyment, subletting,

assignment, or hypothecation) that are in or appurtenant to the real property for the balance of

the term of such lease and for any renewal or extension of such rights to the extent that such

rights are enforceable under applicable nonbankruptcy law.

(B) [omitted]

(C) [omitted]

(D) [omitted]

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V

APPENDIX E

11 U.S.C. § 507 (2012).

Priorities.

(a) The following expenses and claims have priority in the following order:

(a)(1) First:

(a)(1)(A) Allowed unsecured claims for domestic support obligations that, as of the date of the

filing of the petition in a case under this title, are owed to or recoverable by a spouse, former

spouse, or child of the debtor, or such child's parent, legal guardian, or responsible relative,

without regard to whether the claim is filed by such person or is filed by a governmental unit on

behalf of such person, on the condition that funds received under this paragraph by a

governmental unit under this title after the date of the filing of the petition shall be applied and

distributed in accordance with applicable nonbankruptcy law.

(a)(1)(B) Subject to claims under subparagraph (A), allowed unsecured claims for domestic

support obligations that, as of the date of the filing of the petition, are assigned by a spouse,

former spouse, child of the debtor, or such child's parent, legal guardian, or responsible relative

to a governmental unit (unless such obligation is assigned voluntarily by the spouse, former

spouse, child, parent, legal guardian, or responsible relative of the child for the purpose of

collecting the debt) or are owed directly to or recoverable by a governmental unit under

applicable nonbankruptcy law, on the condition that funds received under this paragraph by a

governmental unit under this title after the date of the filing of the petition be applied and

distributed in accordance with applicable nonbankruptcy law.

(a)(1)(C) If a trustee is appointed or elected under section 701, 702, 703, 1104, 1202, or 1302,

the administrative expenses of the trustee allowed under paragraphs (1)(A), (2), and (6) of

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VI

section 503(b) shall be paid before payment of claims under subparagraphs (A) and (B), to the

extent that the trustee administers assets that are otherwise available for the payment of such

claims.

(a)(2) Second, administrative expenses allowed under section 503(b) of this title, unsecured

claims of any Federal reserve bank related to loans made through programs or facilities

authorized under section 13(3) of the Federal Reserve Act (12 U.S.C. 343), and any fees and

charges assessed against the estate under chapter 123 of title 28.

(a)(3) Third, unsecured claims allowed under section 502(f) of this title.

(a)(4) Fourth, allowed unsecured claims, but only to the extent of $12,8501 for each individual or

corporation, as the case may be, earned within 180 days before the date of the filing of the

petition or the date of the cessation of the debtor's business, whichever occurs first, for--

(a)(4)(A) wages, salaries, or commissions, including vacation, severance, and sick leave pay

earned by an individual; or

(a)(4)(B) sales commissions earned by an individual or by a corporation with only 1 employee,

acting as an independent contractor in the sale of goods or services for the debtor in the ordinary

course of the debtor's business if, and only if, during the 12 months preceding that date, at least

75 percent of the amount that the individual or corporation earned by acting as an independent

contractor in the sale of goods or services was earned from the debtor.

(a)(5) Fifth, allowed unsecured claims for contributions to an employee benefit plan--

(a)(5)(A) arising from services rendered within 180 days before the date of the filing of the

petition or the date of the cessation of the debtor's business, whichever occurs first; but only

(a)(5)(B) for each such plan, to the extent of--

(a)(5)(B)(i) the number of employees covered by each such plan multiplied by $12,850; less

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VII

(a)(5)(B)(ii) the aggregate amount paid to such employees under paragraph (4) of this

subsection, plus the aggregate amount paid by the estate on behalf of such employees to any

other employee benefit plan.

(a)(6) Sixth, allowed unsecured claims of persons--

(a)(6)(A) engaged in the production or raising of grain, as defined in section 557(b) of this title,

against a debtor who owns or operates a grain storage facility, as defined in section 557(b) of this

title, for grain or the proceeds of grain, or

(a)(6)(B) engaged as a United States fisherman against a debtor who has acquired fish or fish

produce from a fisherman through a sale or conversion, and who is engaged in operating a fish

produce storage or processing facility--

but only to the extent of $6,3251 for each such individual.

(a)(7) Seventh, allowed unsecured claims of individuals, to the extent of $2,8501 for each such

individual, arising from the deposit, before the commencement of the case, of money in

connection with the purchase, lease, or rental of property, or the purchase of services, for the

personal, family, or household use of such individuals, that were not delivered or provided.

(a)(8) Eighth, allowed unsecured claims of governmental units, only to the extent that such

claims are for--

(a)(8)(A) a tax on or measured by income or gross receipts for a taxable year ending on or before

the date of the filing of the petition--

(a)(8)(A)(i) for which a return, if required, is last due, including extensions, after three years

before the date of the filing of the petition;

(a)(8)(A)(ii) assessed within 240 days before the date of the filing of the petition, exclusive of--

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(a)(8)(A)(ii)(I) any time during which an offer in compromise with respect to that tax was

pending or in effect during that 240-day period, plus 30 days; and

(a)(8)(A)(ii)(II) any time during which a stay of proceedings against collections was in effect in

a prior case under this title during that 240-day period, plus 90 days; or

(a)(8)(A)(ii)(iii) other than a tax of a kind specified in section 523(a)(1)(B) or 523(a)(1)(C) of

this title, not assessed before, but assessable, under applicable law or by agreement, after, the

commencement of the case;

(a)(8)(B) a property tax incurred before the commencement of the case and last payable without

penalty after one year before the date of the filing of the petition;

(a)(8)(C) a tax required to be collected or withheld and for which the debtor is liable in whatever

capacity;

(a)(8)(D) an employment tax on a wage, salary, or commission of a kind specified in paragraph

(4) of this subsection earned from the debtor before the date of the filing of the petition, whether

or not actually paid before such date, for which a return is last due, under applicable law or under

any extension, after three years before the date of the filing of the petition;

(a)(8)(E) an excise tax on--

(a)(8)(E)(i) a transaction occurring before the date of the filing of the petition for which a return,

if required, is last due, under applicable law or under any extension, after three years before the

date of the filing of the petition; or

(a)(8)(E)(ii) if a return is not required, a transaction occurring during the three years immediately

preceding the date of the filing of the petition;

(a)(8)(F) a customs duty arising out of the importation of merchandise--

(a)(8)(F)(i) entered for consumption within one year before the date of the filing of the petition;

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(a)(8)(F)(ii) covered by an entry liquidated or reliquidated within one year before the date of the

filing of the petition; or

(a)(8)(F)(iii) entered for consumption within four years before the date of the filing of the

petition but unliquidated on such date, if the Secretary of the Treasury certifies that failure to

liquidate such entry was due to an investigation pending on such date into assessment of

antidumping or countervailing duties or fraud, or if information needed for the proper

appraisement or classification of such merchandise was not available to the appropriate customs

officer before such date; or

(a)(8)(G) a penalty related to a claim of a kind specified in this paragraph and in compensation

for actual pecuniary loss.

An otherwise applicable time period specified in this paragraph shall be suspended for any

period during which a governmental unit is prohibited under applicable nonbankruptcy law from

collecting a tax as a result of a request by the debtor for a hearing and an appeal of any collection

action taken or proposed against the debtor, plus 90 days; plus any time during which the stay of

proceedings was in effect in a prior case under this title or during which collection was precluded

by the existence of 1 or more confirmed plans under this title, plus 90 days.

(a)(9) Ninth, allowed unsecured claims based upon any commitment by the debtor to a Federal

depository institutions regulatory agency (or predecessor to such agency) to maintain the capital

of an insured depository institution.

(a)(10) [omitted]

(b) [omitted]

(c) [omitted]

(d) [omitted]

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APPENDIX F

11 U.S.C. § 541(a) (2012).

Property of the estate.

(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate.

Such estate is comprised of all the following property, wherever located and by whomever held:

(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests

of the debtor in property as of the commencement of the case.

(2) All interests of the debtor and the debtor’s spouse in community property as of the

commencement of the case that is—

(2)(A) under the sole, equal, or joint management and control of the debtor; or

(2)(B) liable for an allowable claim against the debtor, or for both an allowable claim against the

debtor and an allowable claim against the debtor’s spouse, to the extent that such interest is so

liable.

(3) Any interest in property that the trustee recovers under section 329(b), 363(n), 543, 550, 553,

or 723 of this title.

(4) Any interest in property preserved for the benefit of or ordered transferred to the estate under

section 510(c) or 551 of this title.

(5) [omitted]

(5)(A) [omitted]

(5)(B) [omitted]

(5)(C) [omitted]

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(6) Proceeds, product, offspring, rents, or profits of or from property of the estate, except such as

are earnings from services performed by an individual debtor after the commencement of the

case.

(7) Any interest in property that the estate acquires after the commencement of the case.

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APPENDIX G

11 U.S.C. § 1129 (2012).

Confirmation of a plan.

(a) The court shall confirm a plan only if all of the following requirements are met: (a)(1) The plan complies with the applicable provisions of this title. (a)(2) The proponent of the plan complies with the applicable provisions of this title. (a)(3) The plan has been proposed in good faith and not by any means forbidden by law. (a)(4) Any payment made or to be made by the proponent, by the debtor, or by a person issuing

securities or acquiring property under the plan, for services or for costs and expenses in or in

connection with the case, or in connection with the plan and incident to the case, has been

approved by, or is subject to the approval of, the court as reasonable.

(a)(5) [omitted] (a)(6) [omitted] (a)(7) With respect to each impaired class of claims or interests— (a)(7)(A) each holder of a claim or interest of such class— (a)(7)(A)(i) has accepted the plan; or (a)(7)(A)(ii) will receive or retain under the plan on account of such claim or interest property of

a value, as of the effective date of the plan, that is not less than the amount that such holder

would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date;

or

(a)(7)(B) [omitted] (a)(8) With respect to each class of claims or interests— (a)(8)(A) such class has accepted the plan; or

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(a)(8)(B) such class is not impaired under the plan. (a)(9) Except to the extent that the holder of a particular claim has agreed to a different treatment

of such claim, the plan provides that--

(a)(9)(A) with respect to a claim of a kind specified in section 507(a)(2) or 507(a)(3) of this title,

on the effective date of the plan, the holder of such claim will receive on account of such claim

cash equal to the allowed amount of such claim;

(a)(9)(B) with respect to a class of claims of a kind specified in section

507(a)(1), 507(a)(4), 507(a)(5), 507(a)(6), or 507(a)(7) of this title, each holder of a claim of

such class will receive—

(a)(9)(B)(i) if such class has accepted the plan, deferred cash payments of a value, as of the

effective date of the plan, equal to the allowed amount of such claim; or

(ii) if such class has not accepted the plan, cash on the effective date of the plan equal to the

allowed amount of such claim;

(a)(9)(C) [omitted] (a)(9)(D) [omitted] (a)(10) [omitted] (a)(11) [omitted] (a)(12) [omitted] (a)(13) [omitted] (a)(14) [omitted] (a)(15) [omitted] (a)(16) [omitted]

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(b)(1) Notwithstanding section 510(a) of this title, if all of the applicable requirements of

subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on

request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of

such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect

to each class of claims or interests that is impaired under, and has not accepted, the plan.

(b)(2) For the purpose of this subsection, the condition that a plan be fair and equitable with

respect to a class includes the following requirements:

(b)(2)(A) [omitted] (b)(2)(B) With respect to a class of unsecured claims— (b)(2)(B)(i) the plan provides that each holder of a claim of such class receive or retain on

account of such claim property of a value, as of the effective date of the plan, equal to the

allowed amount of such claim; or

(b)(2)(B)(ii) the holder of any claim or interest that is junior to the claims of such class will not

receive or retain under the plan on account of such junior claim or interest any property, except

that in a case in which the debtor is an individual, the debtor may retain property included in the

estate under section 1115, subject to the requirements of subsection (a)(14) of this section.

(b)(2)(C) [omitted] (c) [omitted] (d) [omitted] (e) [omitted]

No. 17-412 · no. 17-412 in the october term, 2017 in re high rocks, inc., debtor, highway 61,...

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Transcript of No. 17-412 · no. 17-412 in the october term, 2017 in re high rocks, inc., debtor, highway 61,...