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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
Team R. 50
i
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?
Team R. 50
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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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viii
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
Team R. 50
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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]
Team R. 50
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]