Team P7
IN THE
THE SUPREME COURT
OF THE UNITED STATES
OCTOBER 2018 TERM
No. 17-412
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 PETITIONER
Oral Argument Requested
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Counsel for Petitioner
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QUESTIONS PRESENTED
I. Whether under 11 U.S.C. §363(f) a bankruptcy court may approve the motion for Respondent
to sell its property “free and clear” of Petitioner’s property interest, when 11 U.S.C. §
365(h)(1)(A)(ii) grants Petitioner the right to retain its valid leasehold interest in the case of a
rejection of the leasehold contract, and when Respondent’s attempted sale under § 363(f) would
accomplish the same result as a technical rejection of the lease under § 365(h).
II. Whether a bankruptcy court may approve a settlement of funds from a Chapter 11 § 363
purchaser based on the theory that the funds are a “gift” placed into a trust account for junior,
unsecured creditors, and thus would allow those creditors to be paid ahead of Petitioner, in clear
violation of the Absolute Priority Rule.
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TABLE OF CONTENTS
QUESTIONS PRESENTED............................................................................................................i
TABLE OF CONTENTS............................................................................................................ii-iii
TABLE OF AUTHORITIES....................................................................................................iv-vii
OPINIONS BELOW....................................................................................................................viii
STATEMENT OF JURISDICTION............................................................................................viii
CONSTITUTIONAL AND STATUTORY PROVISIONS...........................................................ix
STATEMENT OF THE CASE AND FACTS................................................................................1
SUMMARY OF THE ARGUMENT..............................................................................................6
ARGUMENT...................................................................................................................................7
I. THE BANKRUPTCY COURT MAY NOT APPROVE A SALE FREE AND CLEAR
UNDER SECTION 363(f) WHEN A LESSEE HOLDS A LEASEHOLD INTEREST
PROTECTED UNDER 365(h)(1)(A)(ii), WHICH WOULD BE EFFECTIVELY
REJECTED BY SUCH A SALE………………………………………………………………...7
A. Respondent’s failure to expressly accept or reject Petitioner’s leasehold interest
amounts to a true and practical rejection of the leasehold executory contract;
because the executory leasehold has been rejected, Petitioner holds the right under
11 U.S.C. § 365(h)(1)(A)(ii) to retain the lease for the agreed-upon
period…………………………………………………………………………………8
B. The canons of statutory construction, and the clear Congressional intent behind
11 U.S.C. § 365(h), both dictate that the specific provisions of 11 U.S.C. § 365(h)
must prevail over the general provisions of 11 U.S.C. § 363(f). .............................13
C. Petitioner has a vested property interest in the leasehold contract, recognized
by state law under the Fourteenth Amendment, and the Bankruptcy Code; for the
Court to sell Petitioner’s property interest in violation of the protections of 11
U.S.C. § 365(h), which petitioner has properly elected to exercise, would be a
violation of Petitioner’s substantive due process rights under the Fifth
Amendment................................................................................................................16
D. As a matter of policy, eliminating the leasehold protection by allowing sales
“free and clear” under 11 U.S.C. § 363(f) to trump the leasehold protection of 11
U.S.C. § 365(h) would present many social and economic harms by creating
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uncertainties about leasehold interests, and would create uncertainties about the
canons of statutory construction...............................................................................18
II. RESPONDENT’S DISTRIBUTION TO THE UNSECURED CREDITORS’ FUND FOR
THE PURPOSE OF FUNDING CLAIMS AGAINST SKYLINE CONSTITUTES
PROPERTY OF THE ESTATE AND THUS VIOLATES THE ABSOLUTE PRIORITY
RULE……………………………………………………………………………………………20
A. Respondent’s proposed distribution to the unsecured creditors’ trust would
be estate property and must adhere to the absolute priority
rule…………………………………………………………………………….....20
B. The Bankruptcy Code does not permit deviations from the absolute priority
rule in the context of Chapter 11 cases. ……………………………………….22
C. Even if the Court finds there are exceptions to the absolute priority rule,
Respondent’s distribution to the unsecured creditors’ fund does not promote
any significant Bankruptcy Code related objective and thus cannot be
approved………………………………………………………………………...25
D. Allowing Respondent to evade the absolute priority rule by gifting funds
to unsecured creditors in order to bypass priority creditors’ claims would
create a dangerous precedent contrary to the foundations of the Bankruptcy
Code……………………………………………………………………………...27
CONCLUSION..............................................................................................................................29
CERTIFICATE OF
SERVICE.......................................................................................................................................32
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TABLE OF AUTHORITIES
I. CASES PAGE(S)
UNITED STATES SUPREME COURT
Board of Regents v. Roth,
408 U.S. 564 (1972) ...........................................................................................................17
Butner v. United States,
440 U.S. 48 (1979) .............................................................................................................16
Celotex Corp. v. Edwards,
514 U.S. 300 (1995) .............................................................................................................8
Connecticut Nat’l Bank v. Germain,
503 U.S. 249 (1992) ...........................................................................................................23
Czyzewski v. Jevic Holding Corp.,
137 S. Ct. 973 (2017) ....................................................................................... 23, 25-27, 29
D. Ginsberg & Sons, Inc. v. Popkin,
285 U.S. 204 (1932) .................................................................................... 13, 15-16, 19-20
Kontrick v. Ryan,
540 U.S. 443 (2004) .............................................................................................................8
Logan v. Zimmerman Brush Co.,
455 U.S. 422 (1982) .....................................................................................................17, 18
Morton v. Mancari,
417 U.S. 535 (1974) ...............................................................................................13, 19, 20
Perry v. Sindermann,
408 U.S. 593 (1972) .....................................................................................................17, 18
Toibb v. Radloff,
501 S. Ct. 157 (1991) .........................................................................................................25
U.S. v. Whiting Pools, Inc.,
103 S. Ct. 2309 (1983) .................................................................................................20, 22
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UNITED STATES CIRCUIT COURT OF APPEALS
Dish Network Corp. v. DBSD North America, Inc.,
634 F.3d 79 (2d Cir. 2011)...........................................................................................23, 24
In re Alvarez,
224 F.3d 1273 (11th Cir. 2000) ................................................................................... 21-22
In re Armstrong World Industries, Inc.,
432 F.3d 507 (3d Cir. 2005)...............................................................................................24
In re Babcock and Wilcox Co.,
250 F.3d 955 (5th Cir. 2001) ....................................................................................... 25-29
In re Continental Air Lines, Inc.,
780 F.2d 1123 (5th Cir. 1986) ...........................................................................................28
In re Murel Holding Corp.,
75 F.2d 94 (2d Cir. 1935).............................................................................................12, 16
In re SPM Manufacturing Corp. v. Stern,
984 F.2d 1305 (1st Cir. 1993) ............................................................................................24
Landmark Land Co. v. Office of Thrift Supervision,
948 F.2d 910 (5th Cir. 1991) ....................................................................................... 14-16
Marin v. King,
2018 U.S. App. Lexis 100, 42 (10th Cir. 2018) ...........................................................17, 18
Matter of Nobelman,
968 F.2d 483, 488 (5th Cir. 1992), aff'd, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d
228 (1993) .................................................................................................................... 14-16
Motorola, Inc. v. Official Comm. Of Unsecured Creditors (In Re Iridium Operating LLC),
478 F.3d 463 (2d Cir. 2007).............................................................................23, 25, 27, 29
Pinnacle Rest. at Big Sky, LLC v. CH SP Acquisitions (In re Spanish Peaks Holdings II, LLC),
872 F.3d 892 (9th Cir. 2017) .............................................................................. 9-12, 14-16
Precision Indus. v. Qualitech Steel SBQ, LLC,
327 F.3d 537 (7th Cir. 2003) .........................................................................................9, 17
Texas v. Soileau.,
488 F.3d 302 (5th Cir. 2007) ...............................................................................................8
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UNITED STATES BANKRUPTCY COURTS
Armstrong v. Rushton (In re Armstrong),
292 B.R. 678 (B.A.P. 10th Cir. 2003)................................................................................16
Dishi & Sons v. Bay Condos LLC,
510 B.R. 696 (Bankr. S.D.N.Y. 2014) ..................................................................... 9-12, 16
Goldstein v. Stahl (In re Goldstein),
526 B.R. 13 (B.A.P 9th Cir. 2015).....................................................................................21
IDEA Boardwalk, LLC v. Revel Entm't Grp. (In re Revel AC, Inc.),
532 B.R. 216 (Bankr. N.J. 2015) ................................................................................. 19-20
In re Allison,
39 B.R. 300 (Bankr. D.N.M. 1984) ...................................................................................28
In re Biolitic, Inc.,
528 B.R. 268 (Bankr. D.N.J. 2015) ............................................................................. 25-27
In re CGE Shattuck, LLC,
254 B.R. 5 (Bankr. D.N.H. 2000) ................................................................................27, 29
In re Churchill Props. III, Ltd. Pshp.,
197 B.R. 283 (Bankr. N.D. Ill. 1996) ......................................................9-11, 13-16, 18-20
In re Crumbs Bake Shop, Inc.,
522 B.R. 766 (Bankr. N.J. 2014) ................................................................................. 19-20
In re C.W. Mining Company v. Rushton,
489 B.R. 431 (Bankr. D. Utah 2013) ...........................................................................21, 22
In Re Fryar,
570 B.R. 602 (Bankr. E.D. Tenn. 2017) .......................................................... 22, 25-27, 29
In re Haskell L.P.,
321 B.R. 1 (Bankr. D. Mass. 2005) .................................................................... 8-11, 13,16
In re LHD Realty Corp.,
20 B.R. 717 (Bankr. S.D. Ind. 1982) ........................................................................... 18-20
In re On-Site Sourcing, Inc.,
412 B.R. 817 (Bankr. E.D. Va. 2009) .......................................................................... 25-27
In re Samaritan Alliance, LLC,
2007 Bankr. LEXIS 3896, 11-12 (Bankr. E.D. Ky. 2007) ................................. 8-11, 13, 16
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In re Sentry Operating Co. of Texas, Inc,
264 B.R. 850 (Bankr. S.D. Tex. 2001) ..............................................................................24
In re Strada Design Associates, Inc.,
326 B.R. 229 (Bankr. S.D.N.Y. 2005) ......................................................................... 21-22
In re Taylor,
198 B.R. 142 (Bankr. S.C. 1996) ................................................................................. 14-16
In Re Watkins,
298 B.R. 342 (Bankr. N.D. Ill. 2003) ..........................................................................20, 22
Jones v. Hyatt Legal Servs. (In re Dow),
132 B.R. 853 (Bankr. S.D. Ohio 1991) ..............................................................................21
Rodriguez v. Naihomy (In re Rodriguez),
334 B.R. 754 (B.A.P. 1st Cir. 2005) ..................................................................................21
CONSTITUTIONAL PROVISIONS
U.S. Const. amend. V.....................................................................................................................17
U.S. Const. amend. XIV................................................................................................................17
STATUTORY PROVISIONS
11 U.S.C. § 363(e) (2018)........................................................................................................11-12
11 U.S.C. § 363(f) (2018) ......................................................................................................passim
11 U.S.C. § 365(h) (2018)......................................................................................................passim
LEGISLATIVE RECORDS
140 Cong. Rec. H10752-01 (Oct. 4, 1994)..............................................................................14, 15
S. Rep. No. 95-989, 95th Cong., 2d Sess. (1978)....................................................................14, 15
H. R. Rep. No. 95-595, 95th Cong., 2d Sess. (1977)...............................................................14, 15
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OPINION BELOW
Petitioner filed the original action in the United States Bankruptcy Court for the District of
Moot. Petitioner filed the action against Respondent alleging that Respondent’s motion to sell “free
and clear” under 11 U.S.C. § 363(f) was a violation of Petitioner’s right to retain its lease pursuant
to §365(h), and also violated Petitioner’s rights as a priority creditor. The bankruptcy court held
that section 363(f) trumped Petitioner’s rights and that the proposed settlement did not implicate
the absolute priority rule, as detailed on page 8-9 of the record.
The United States District Court for the District of Moot affirmed the decision of the
bankruptcy court on both issues.
The United States Court of Appeals for the Thirteenth Circuit reported its decision as
Highway 61, Inc. v. High Rocks, Inc. (In Re High Rocks, Inc.), and is found on pages 2-20 of the
Record on Appeal. The Thirteenth Circuit affirmed the lower court’s decision on both issues,
ruling in favor of Respondent. The court held that a debtor can sell real property “free and clear”
of Petitioner’s possessory leasehold interest over Petitioner’s objection. The court also held that
the settlement entered into by Respondent as part of the same sales transaction can be approved
over Petitioner’s objection that the settlement is in violation of the Bankruptcy Code’s priority
scheme, known as the “absolute priority rule”.
In October of 2017, this Court granted certiorari. A copy of the writ can be found on page
1 of the Record on Appeal.
STATEMENT OF JURISDICTION
The formal statement of jurisdiction is waived pursuant to Competition Rule VIII.
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CONSTITUTIONAL AND STATUTORY PROVISIONS
A. Constitutional Provisions
The Fifth Amendment to the United States Constitution provides, in relevant part:
No person shall be . . . deprived of life, liberty, or property, without due process of
law . . .
U.S. Const. amend. V.
The Fourteenth Amendment to the United States Constitution provides, in relevant part:
. . . nor shall any State deprive any person of life, liberty, or property, without due
process of law . . .
U.S. Const. amend. XIV.
B. Statutory Provisions
11 U.S.C. §541(a) provides:
The commencement of a case under section 301, 302, or 303 of this title creates and
estate. Such estate is comprised of all the following property, wherever located, 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
(A) under sole, equal, or joint management and control of the debtor; or
(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 so ordered transferred to the
estate under section 510(c) or 551 of this title.
(5) Any interest in property that would have been property of the estate if such interest
had been an interest of the debtor on the date of the filing of the petition, and that the
debtor acquires or becomes entitled to acquire within 180 days after such date
(A) by bequest, devise, or inheritance;
(B) as a result of a property settlement agreement with the debtor’s spouse, or of an
interlocutory or final divorce decree; or
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(C) as a beneficiary of a life insurance policy or of a death benefit plan.
(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.
11 U.S.C. § 363(e) provides:
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 [11 USCS § 362]).
11 U.S.C. § 363(f) provides:
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—
(1) applicable nonbankruptcy law permits sale of such property free and clear of
such interest;
(2) such entity consents;
(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;
(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.
11 U.S.C. § 365(h) provides, in relevant part:
(1)(A)
If the trustee rejects an unexpired lease of real property under which the debtor is
the lessor and—
(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,
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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. . .
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STATEMENT OF THE CASE AND FACTS
High Rocks, Inc. (“High Rocks”) is an unfinished development consisting of a resort,
casino, 400-room hotel tower, conference facilities, restaurants and a 7,000-seat amphitheater. (R.
at 4). As debtor, High Rocks (Respondent) acquired financing for the majority of the project
through an $800,000,000 secured loan from North Country Bank (Respondent). (R. at 4).
Prior to the ground breaking of High Rocks, Debtor entered into an agreement to lease the
amphitheater to Highway 61, Inc. (“Highway”), a group of local investors with experience in the
live music industry. (R. at 5). The lease agreement (“Highway Lease”) bound High Rocks (as the
lessor) and Highway (as the lessee) for a term of 30 years, with the lease term commencing on the
day the amphitheater was completed. (R. at 5). The terms of the Highway Lease granted Petitioner
the right to manage, market, and operate the amphitheater. (R. at 5). Petitioner agreed to pay High
Rocks $400,000 per year plus a portion of ticket and concession sales in rent. (R. at 5)
Debtor chose Skyline Construction, Inc. (“Skyline”) to lead the development as the general
contractor. (R. at 5). While Skyline had experience in building commercial properties such as
hotels and concert venues, it had never before taken on a project of High Rocks’ size. (R. at 5).
Skyline broke ground on the High Rocks development in May of 2014. (R. at 5).
Unfortunately, Skyline encountered problems early on with the construction of the hotel tower,
such as low water pressure due to faulty plumbing materials. (R. at 5). However, construction of
the amphitheater went off without a hitch. (R. at 5). Skyline completed construction of the
amphitheater, which includes a covered stage, concession stands, restrooms, a ticket office, and a
VIP lounge. (R. at 5). Skyline also agreed to install the seating, sound equipment, and specialized
panels that would provide optimum acoustics in the amphitheater. (R. at 5).
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In December of 2015, before Skyline had the opportunity to complete the job it contracted
for, Debtor terminated its contract. (R. at 5). Significant portions of the development were left
unfinished, such as the hotel tower, casino building, and the seats, sound equipment, and acoustic
panels for the amphitheater. (R. at 5).
In January of 2016, Debtor selected a new general contractor, Shelter From the Storm
Builders, Inc. (“Shelter”) to complete the hotel tower and casino building. (R. at 5). Debtor and
Shelter agreed to find another contractor to complete the amphitheater, as Shelter did not have the
necessary experience. (R. at 5).
Meanwhile, due to the repeated delays with the development, North Country made the
decision to sell its loan at a substantial discount to 4th Street (Respondent). (R. at 5). 4th Street
acquired the North Country debt in February of 2016 as part of a “loan to own” strategy, with the
intention of eventually acquiring the assets of Debtor through a foreclosure sale or a section 363
sale. (R. at 5).
Subsequently, in June of 2016, 4th Street commenced a foreclosure action against Debtor.
(R. at 5). In July of 2016, Debtor commenced this voluntary Chapter 11 bankruptcy case in the
United States Bankruptcy Court for the District of Moot to halt the foreclosure action. (R. at 5).
During the first day of hearings, Debtor stated that construction of the hotel tower and casino
building were nearing completion and its intention was to open the casino and resort within “a
matter of months”. (R. at 6).
Petitioner approached Debtor shortly after the petition date and offered to complete the
installation of the seats, sound equipment, and acoustic panels in the amphitheater. (R. at 6). With
approval from the bankruptcy court, Debtor and Petitioner entered into a post-petition contract.
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(R. at 6). Petitioner agreed to finish the amphitheater in exchange for a deferred payment of
$2,000,000, to be due upon the opening of High Rocks. (R. at 6).
Petitioner began work on the amphitheater in September of 2016 and completed the job by
November of 2017. (R. at 6). Despite Debtor’s announcement that the hotel tower and casinos
would be done “in a matter of months”, the development still remained unfinished 5 months later.
(R. at 6). Due to the delay in development, Debtor, the Official Committee of Unsecured Creditors
(“Committee”) and Petitioner determined that Petitioner was entitled to a $2,000,000
administrative expense under section 503(b)(1) for the completion of the amphitheater post-
petition. (R. at 6). The administrative expense was allowed pursuant to a final order of the
bankruptcy court. (R. at 6).
In December of 2016, Debtor was forced to end construction of High Rocks. (R. at 6).
Debtor lacked the necessary capital to finish the hotel tower and casino and subsequently could
not afford to fund a chapter 11 reorganization plan. (R. at 6). Debtor succumbed to pressure from
4th Street and filed a motion to sell “substantially all of its assets ‘free and clear of all liens, claims,
encumbrances and interests’ pursuant to section 363(f) of the Bankruptcy Code.” (R. at 6). The
sale motion expression stated that “at the election of the winning bidder, the sale would be ‘free
and clear’ of Petitioner’s leasehold interest.” (R. at 7).
Before the auction sale, the Committee informally alleged lender liability claims against
4th Street, challenged the validity and extent of 4th Street’s claims and liens, and also took the lead
in investigating possible claims against Skyline. (R. at 7). The claims were assigned to a litigation
trust in which the sole beneficiaries are unsecured creditors. (R. at 7).
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The auction was held on January 11, 2017 and 4th Street was declared the winning bidder.
(R. at 7). 4th Street reiterated that it was acquiring the development “free and clear” of Petitioner’s
leasehold interest. (R. at 7). Unsurprisingly, two objections to the proposed sale were filed:
First, the Committee objected, noting that it had informally alleged certain claims
against 4th Street. The Committee also argued that the sale was a veiled foreclosure
that would leave no money whatsoever in the estate for unsecured creditors or the
pursuit of the claims against Skyline. Highway also objected, asserting that it was
entitled to remain in possession of the amphitheater under its lease, notwithstanding
the ‘free and clear’ nature of the sale, pursuant to section 365(h) of the Bankruptcy
Code. Contemporaneously with the filing of its sale objection, Highway transmitted
a letter to the Debtor electing to retain its possessory rights in the property under
section 365(h), stating that a sale of the amphitheater ‘free and clear’ of the
Highway Lease was the functional equivalent of a rejection of such lease.
(R. at 7-8).
Prior to the sale hearing, in response to the aforementioned objections, the Debtor, the
Committee, and 4th Street established a settlement agreement (“Committee Settlement”). (R. at
8). The Committee Settlement provided that:
[I]n exchange for the withdrawal of the Committee’s objection to the sale and the
granting to 4th Street of a release of any and all claims against it, 4th Street would
‘gift’ $2,000,000 . . . to the trust for the express purpose of funding the unsecured
creditors’ trust’s claims against Skyline.
(R. at 8)
At the sale hearing, Petitioner renewed it prior objection and also asserted a new objection.
(R. at 8). Therefore, the bankruptcy court considered whether:
(1) the Debtor can sell real property “free and clear” of Petitioner’s possessory
leasehold interest over Petitioner’s objection and (2) whether a settlement entered
into by the Debtor, the Committee and 4th Street as part of the same sale transaction,
whereby 4th Street paid cash in the amount of $2,000,000 directly to a trust that was
previously created in favor of unsecured creditors, can be approved over
Petitioner’s objections.
(R. at 3).
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In a bench opinion, the bankruptcy court approved the Committee Settlement and the sale
to 4th Street. (R. at 8). The court found that Petitioner’s objections raised “difficult and novel
issues” and stayed closing of the sale to allow Petitioner to file an appeal. (R. at 8). The court
held that section 363(f) “trumped” Petitioner’s rights under section 365(h). (R. at 8-9). The court
also held that the absolute priority rule was not implicated by the Committee Settlement and that
it was in the “best interests of all parties in that the $2,000,000 in settlement funds would allow
the unsecured creditors’ trust to pursue potentially very valuable claims against Skyline.” (R. at
9).
Petitioner appealed to the district court, which affirmed the ruling of the bankruptcy court.
(R. at 9). Petitioner then appealed the district court’s decision. (R. at 9). The Thirteenth Circuit
affirmed the decision of the lower courts on both issues. (R. at 3). Writing for the majority, Judge
Harrison reasoned that the Supreme Court has not determined whether a gift of non-estate assets
implicates the same concerns as estate property in regard to the priority scheme and declined to
extend the Court’s ruling. (R. at 19). Harrison further found that the Supreme Court has never
held that a court can never approve a priority-skipping distribution. (R. at 19-20).
Writing for the dissent, Judge Petty determined that the Committee Settlement is property
of the estate and does not fall within the limited exceptions, “if there even are,” contemplated by
the Supreme Court and is therefore subject to the absolute priority rule. (R. at 30). Petty also
determined that the Committee Settlement does not serve a legitimate bankruptcy purpose. (R. at
30).
In October of 2017, the court issued a Writ of Certiorari to consider whether a bankruptcy
court may approve a sale of real property “free and clear” of a leasehold interest in such property
held by an objecting lessee pursuant to section 363(f) of the Bankruptcy Code notwithstanding the
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protection that exists for lessees in section 365(h) of the Bankruptcy Code, and whether a
bankruptcy court may approve a contest “gift” settlement involving a payment by a section 363
purchaser in connection with the acquisition of the debtor’s assets when the settlement proceeds
are not distributed in accordance with the Bankruptcy Code’s priority scheme. (R. at 1).
SUMMARY OF ARGUMENT
This case presents this Honorable Court with the opportunity to properly resolve the
statutory conflict between 11 U.S.C. § 363(f) and § 365(h), and to uphold the importance of the
Bankruptcy Code’s distribution scheme.
Petitioner must retain its leasehold interest pursuant to 11 U.S.C. § 365(h). As a practical
matter, Respondent’s election under § 363(f) to sell a property that is encumbered by Petitioner’s
lease amounts to a true and effective rejection of the leasehold interest. This means that the
protection of § 365(h), which allows the lessee to retain its leasehold interest in the case of a
rejection by the debtor, must be honored. The canons of statutory construction dictate that as a
more specific, enumerated protection, § 365(h) must prevail over §363(f). The majority of courts
to address this issue find that § 365(h) must prevail.
Petitioner has a vested property interest in the lease. For the Court to sanction the sale of
this property interest when the Bankruptcy Code clearly protects it would be a Fifth Amendment
substantive due process violation.
Additionally, practical policy considerations dictate that § 365(h) must prevail over §
363(f). If debtors could override the leasehold protection that Congress intended for lessees by
simply hiding all leasehold rejections as sales, it would destabilize the real estate market and could
create other unforeseen economic harms. It would also call into question this Court’s established
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canon of statutory construction that more specific statutory provisions must prevail over general
ones, both in the bankruptcy context and in general.
As to creditor priority, Respondent’s $2 million distribution to the unsecured creditors’
trust is property of the estate subject to the absolute priority rule. The definition of estate property
is broad; it includes all interests of the debtor, creditors, and even funds or assets that are material
to the initiation of the proceedings.
Respondent has an interest in the unsecured creditors’ claims here; Respondent in fact
provided funds for the unsecured creditors that allowed the initiation of bankruptcy proceedings.
As a result, the funds provided to the unsecured creditors trust are property of the estate and must
adhere to the absolute priority rule. Nothing in the Bankruptcy Code allows for deviations from
the absolute priority rule under Chapter 11, or under an attempted § 363 sale.
Although exceptions to creditor priority have been made in the Chapter 7 context, any
exception to the absolute priority rule in Chapter 11 must promote a Bankruptcy Code-related
objective. Such an exception must be based in equity for creditors of the estate. Allowing
Respondent to violate the absolute priority rule, paying unsecured creditors first and bypassing
Petitioner as a creditor, would be contrary to the foundational principles of the Bankruptcy Code
which seek to protect the equitable interest of creditors. It would also create potential future
concerns of creditor equity by sanctioning exceptions in cases that they are not warranted.
ARGUMENT
I. THE BANKRUPTCY COURT MAY NOT APPROVE A SALE FREE
AND CLEAR UNDER SECTION 363(f) WHEN A LESSEE HOLDS A
LEASEHOLD INTEREST PROTECTED UNDER 365(h)(1)(A)(ii), WHICH
WOULD BE EFFECTIVELY REJECTED BY SUCH A SALE.
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The issues of law in this bankruptcy appeal are to be reviewed de novo. Kontrick v. Ryan,
540 U.S. 443, 453 (2004); Celotex Corp. v. Edwards, 514 U.S. 300, 332 (1995); Texas v. Soileau,
488 F.3d 302, 305 (5th Cir. 2007).
A. Respondent’s failure to expressly accept or reject Petitioner’s leasehold
interest amounts to a true and practical rejection of the leasehold executory
contract; because the executory leasehold has been rejected, Petitioner holds
the right under 11 U.S.C. § 365(h)(1)(A)(ii) to retain the lease for the agreed-
upon period.
The majority of bankruptcy courts have found that a debtor cannot elect to sell property
encumbered by a leasehold interest “free and clear” under 11 U.S.C. § 363(f) without also
effectively rejecting the executory leasehold contract, which triggers the lessee’s leasehold
retention protection under 11 U.S.C. § 365(h)(1)(A)(ii) (“11 U.S.C. § 365(h)”):
Read and applied in isolation, §§ 363(f) and 365(h) are relatively straightforward.
But when a trustee seeks to sell property free and clear of a leasehold interest, the
two sections appear to require inconsistent results. Section 363(f) grants the trustee
an unqualified right to sell property unencumbered by the leasehold interest,
provided its conditions are met, while § 365(h) grants the lessee an unqualified right
to stay in possession if the lease is rejected. Most courts have concluded that the
two sections are indeed irreconcilable and that § 365(h) trumps § 363(f), providing
the "exclusive remedy available to the debtor in an executory lease situation."
Dishi & Sons v. Bay Condos LLC, 510 B.R. 696, 702 (Bankr. S.D.N.Y. 2014) (emphasis added);
In re Samaritan Alliance, LLC, 2007 Bankr. LEXIS 3896, 11-12 (Bankr. E.D. Ky. 2007) (“The
court finds the reasoning in Haskell instructive, and agrees with its conclusion that section 365(h)
is applicable in the context of a section 363(f) sale.”); In re Haskell L.P., 321 B.R. 1, 9 (Bankr. D.
Mass. 2005) (“If the Court were to grant the Debtor's Sale Motion, the provisions of § 365(h)
would be eviscerated. In other words, the Debtor would be doing indirectly what it could not do
directly, namely, dispossessing NEBH.”) (emphasis added); In re Churchill Props. III, Ltd. Pshp.,
197 B.R. 283, 288 (Bankr. N.D. Ill. 1996) (“The [Bankruptcy] Code is not intended to be read in
a vacuum. Here, if the Court were to adopt the Bank's application of Section 363(f), the application
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of Section 365(h) as it relates to non-debtor lessees would be nugatory.”). The majority view
clearly sees that when 11 U.S.C. § 363(f) conflicts with § 365(h), §365(h) must prevail or the
leasehold protection provision of § 365(h) would be rendered completely useless. See Dishi &
Sons, 510 B.R. at 702; In re Samaritan Alliance, 2007 Bankr. LEXIS 3896 at 11-12; In re Haskell,
321 B.R. at 9; In re Churchill, 197 B.R. at 288.
Other Courts have taken the minority approach, finding that protection of a leasehold
interest under 11 U.S.C. § 365(h) can only apply when an express rejection of the executory
leasehold occurs, even if the sale without express rejection is a rejection in effect. The Seventh
Circuit expressly acknowledged that allowing the § 363(f) sale would be an effective rejection of
the leasehold interest. Precision Indus. v. Qualitech Steel SBQ, LLC, 327 F.3d 537, 547 (7th Cir.
2003) (“Here what occurred in the first instance was a sale of the property that Precision was
leasing rather than a rejection of its lease. Granted, if the Sale Order operated to extinguish
Precision's right to possess the property—as we conclude it did—then the effect of the sale might
be understood as the equivalent of a repudiation of Precision's lease.”) (emphasis added).
Similarly, the Ninth Circuit acknowledged that a § 363(f) sale amounts to a practical and
effective rejection of the leasehold interest.
Although undefined in the Code, a “rejection” is universally understood as an
affirmative declaration by the trustee that the estate will not take on the obligations
of a lease or contract made by the debtor. A sale of property free and clear of a lease
may be an effective rejection of the lease in some everyday sense, but it is not the
same thing as the “rejection” contemplated by section 365 . . . In sum, section 363
governs the sale of estate property, while section 365 governs the formal rejection
of a lease. Where there is a sale, but no rejection (or a rejection, but no sale), there
is no conflict.
Pinnacle Rest. at Big Sky, LLC v. CH SP Acquisitions (In re Spanish Peaks Holdings II, LLC), 872
F.3d 892, 899 (9th Cir. 2017). The minority view thus bases its analysis on the idea that a leasehold
rejection must be an affirmative, technical rejection, even if a sale under § 363(f) is a true and
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effective rejection of the leasehold interest. See Qualitech, 327 F.3d at 547; Pinnacle, 872 F.3d at
899.
This Court should adopt the majority view of the law, espoused by many bankruptcy courts.
The majority view aptly identifies that as a practical matter, rejection of an executory lease occurs
when the leasehold property is sold, because the tenant still does not retain the right of use,
possession, or enjoyment for which it contracted. See In re Samaritan Alliance, 2007 Bankr.
LEXIS 3896 at 11-12; In re Haskell L.P., 321 B.R. at 9; In re Churchill Props., 197 B.R. at 288.
To hold otherwise would officially sanction a method for debtors to de facto reject leasehold
interests by choosing to sell the leasehold property under the authority 11 U.S.C. § 363(f), without
allowing lessees the ability to retain their leasehold interests after rejection as required under 11
U.S.C. § 365(h). See 11 U.S.C. §§ 363(f), 365(h) (2018); Qualitech, 327 F.3d at 547; Pinnacle,
872 F.3d at 899; Dishi & Sons, 510 B.R. at 702; In re Samaritan Alliance, 2007 Bankr. LEXIS
3896 at 11-12; In re Haskell L.P., 321 B.R. at 9; In re Churchill Props., 197 B.R. at 288. This
would render the protections afforded by 11 U.S.C. § 365(h) completely ineffective; even the
circuit courts in the minority view acknowledge that the practical effect of their holding is an
effective rejection-by-sale of the leasehold executory contracts. See 11 U.S.C. §§ 363(f), 365(h)
(2018); Qualitech, 327 F.3d at 547; Pinnacle, 872 F.3d at 899; Dishi & Sons, 510 B.R. at 702; In
re Samaritan Alliance, 2007 Bankr. LEXIS 3896 at 11-12; In re Haskell L.P., 321 B.R. at 9; In re
Churchill Props., 197 B.R. at 288.
In the instant case, Respondent cannot elect to sell the amphitheater free and clear of
petitioner’s leasehold interest pursuant to 11 U.S.C. § 363(f) without also rejecting the executory
leasehold contract; because the contract has been de facto rejected, it is improper to deny Petitioner
the right to retain the lease for the duration of the agreed-upon leasehold period pursuant to 11
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U.S.C. § 365(h). See 11 U.S.C. §§ 363(f), 365(h); Qualitech, 327 F.3d at 547; Pinnacle, 872 F.3d
at 899; Dishi & Sons, 510 B.R. at 702; In re Samaritan Alliance, 2007 Bankr. LEXIS 3896 at 11-
12; In re Haskell L.P., 321 B.R. at 9; In re Churchill Props., 197 B.R. at 288. In this situation 11
U.S.C. § 365(h) controls; Petitioner must be guaranteed the right to retain its property interest for
the remainder of the leasehold.
Further, Petitioner undertook the work of completing the construction of the amphitheater
upon which it has the leasehold interest. (R. at 6). Petitioner expected to be paid $2 million for
this service, entering into a post-petition contract, and detrimentally relying upon this payment for
the completion of its already contracted-for leasehold. See (R. at 6.). For Respondent to attempt
to reject that lease through an attempted sale under 11 U.S.C. § 363(f), while circumventing the
leasehold protection of § 365(h), would be even more improper in this circumstance because
Petitioner detrimentally relied upon future payment for its services in the hopes of securing its
already-valid leasehold interest. See (R. at 6); 11 U.S.C. §§ 363(f), 365(h); Qualitech, 327 F.3d at
547; Pinnacle, 872 F.3d at 899; Dishi & Sons, 510 B.R. at 702; In re Samaritan Alliance, 2007
Bankr. LEXIS 3896 at 11-12; In re Haskell L.P., 321 B.R. at 9; In re Churchill Props., 197 B.R. at
288.
Respondent contends, and the Thirteenth Circuit found below, that Petitioner should have
sought the protections of 11 U.S.C. § 363(e) to safeguard its leasehold interest, and that it failed to
do so. (R. at 14). However, § 363(e) is not the proper section of the code that would apply to this
situation:
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
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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 [11 USCS § 362]).
11 U.S.C. § 363(e) (2018). While § 363(e) is similar to § 365(h) in its protective function, it differs
in two aspects. First it applies to more than just leasehold interests and includes any property
interest being sold which is held by any interested entity at the bankruptcy proceeding. Second, it
does not guarantee a leaseholder the ability to retain its lease throughout the leasehold period; it
merely allows the judge to prohibit the sale of the property interest or condition it upon “adequate
compensation.” See 11 U.S.C. §§ 363(e), 365(h) (2018); In re Murel Holding Corp., 75 F.2d 941,
942 (2d Cir. 1935) (“it merely gives power generally to the judge ‘equitably and fairly’ to ‘provide
such protection,’ that is, adequate protection,’ . . . It is plain that ‘adequate protection’ must be
completely compensatory.”).
The difference between the guaranteed leasehold retention protection of 11 U.S.C. § 365(h)
in the case of a rejection of the leasehold interest, and the more general ability to seek “adequate
protection” under § 363(e) is that the bankruptcy court under §363(e) need not estop the sale; the
court in these cases can simply order that adequate compensation be paid, or that some other
equitable provision be made that would offer “adequate protection.” See 11 U.S.C. §§ 363(e),
365(h) (2018); In re Murel Holding Corp., 75 F.2d at 942. Given Respondent’s de facto rejection
of Petitioner’s leasehold interest, which was a 30-year contract in the amphitheater which
Petitioner itself finished constructing, Petitioner was more than entitled to seek the guaranteed
right of protection of 11 U.S.C. § 365(h), electing the guarantee of retaining its leasehold interest
throughout the bankruptcy process. See 11 U.S.C. §§ 363(e), 365(h) (2018); Qualitech, 327 F.3d
at 547; Pinnacle, 872 F.3d at 899; In re Murel Holding Corp., 75 F.2d at 942; Dishi & Sons, 510
B.R. at 702; In re Samaritan Alliance, 2007 Bankr. LEXIS 3896 at 11-12; In re Haskell L.P., 321
B.R. at 9; In re Churchill Props., 197 B.R. at 288.
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Further, as a technical matter under 11 U.S.C. § 365(h), the requirement that the leasehold
interest have begun was met; the 30-year leasehold contract between the debtor and petitioner was
to begin “upon completion of the amphitheater.” (R. at 5). It is clear that Petitioner substantially
completed the construction of the amphitheater prior to Respondent’s sale motion, and the lease
was therefore in effect at the time. See (R. at 6). Additionally, Respondent never raised the issue
of substantial completion of the amphitheater or initiation of the leasehold interest; any challenges
Respondent has on this account must be waived.
B. The canons of statutory construction, and the clear Congressional intent
behind 11 U.S.C. § 365(h), both dictate that the specific provisions of 11 U.S.C.
§ 365(h) must prevail over the general provisions of 11 U.S.C. § 363(f).
This Court has found the canons of statutory construction dictate that specific statutory
provisions take priority over general ones. Morton v. Mancari, 417 U.S. 535, 550-51 (1974)
(“Where there is no clear intention otherwise, a specific statute will not be controlled or nullified
by a general one, regardless of the priority of enactment”); Bulova Watch Co. v. United States, 365
U.S. 753, 758 (1961) (“it is familiar law that a specific statute controls over a general one ‘without
regard to priority of enactment.’”).
More importantly, this Court and other federal courts have also found the same canon of
construction, that the specific prevails over the general, also applies in the context of the
Bankruptcy Code. D. Ginsberg & Sons, Inc. v. Popkin, 285 U.S. 204, 208 (1932) (“In view of the
general exemption of bankrupts from arrest under § 9a and the carefully guarded exception made
by § 9b as to those about to leave the district to avoid examination, there is no support for
petitioner's contention that the general language of § 2 (15) is a limitation upon § 9 (b) or grants
additional authority in respect of arrests of bankrupts.”); Landmark Land Co. v. Office of Thrift
Supervision, 948 F.2d 910, 912 (5th Cir. 1991) (“Obviously, section 1818(i)(1) is the more specific
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provision, dealing with a narrow category of administrative supervision, while section 1334(b)
encompasses bankruptcy proceedings in general. By this analysis, section 1818(i)(1) trumps
section 1334(b).”); Matter of Nobelman, 968 F.2d 483, 488 (5th Cir. 1992), aff'd, 508 U.S. 324,
113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993) ("general language of a statute does not prevail over
matters specifically dealt with in another part of the same enactment").
A majority of bankruptcy courts have held the that § 365(h) takes priority over § 363(f)
pursuant to the canon of statutory construction, and pursuant to Congress’ clear intent. Pinnacle,
872 F.3d at 898 (“Those courts—which constitute a majority of the courts to have addressed the
issue—hold that section 365 trumps section 363 under the canon of statutory construction that ‘the
specific prevails over the general.’”); In re Taylor, 198 B.R. 142, 165 (Bankr. S.C. 1996)
(“Initially, § 365(h) specifically references the situation where the debtor is the lessor and with
great particularity sets forth the rights and duties of the lessor and lessee while § 363 does not.
Additionally, the legislative history regarding § 365 evinces a clear intent on the part of Congress
to protect a tenant's estate when the landlord files bankruptcy.”); In re Churchill, 197 B.R. at 28
(“Section 365(h) is clear and specific in providing for certain rights and remedies available to the
lessee after rejection of its lease. Since Congress decided that lessees have the option to remain in
possession, it would make little sense to permit a general provision, such as Section 363(f), to
override its purpose.”).
It is clear from the legislative history of § 365(h) that Congress intended for the special
protection afforded in § 365(h) to ensure that tenants not be deprived of their property leasehold
interest as a result of the bankruptcy process. S. Rep. No. 95-989, 95th Cong., 2d Sess. (1978), H.
R. Rep. No. 95-595, 95th Cong., 2d Sess. (1977) (“thus, the tenant will not be deprived of his estate
for the term for which he bargained.”) (emphasis added). Further, a detailed reading of the
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Section-by-Section analysis of the 1994 amendments to the Bankruptcy Code shows Congress’
intent to protect tenants in various circumstances from losing their leasehold interests as a result
of the lessor declaring bankruptcy:
This section clarifies section 365 of the Bankruptcy Code to mandate that lessees
cannot have their rights stripped away if a debtor rejects its obligation as a lessor in
bankruptcy. This section expressly provides guidance in the interpretation of the
term "possession" in the context of the statute. The term has been interpreted by
some courts in recent cases to be only a right of possession. This section will enable
the lessee to retain its rights that appurtenant to its leasehold. These rights include
the amount and timing of payment of rent or other amounts payable by the lessee,
the right to use, possess, quiet enjoyment, sublet and assign.
Bankruptcy Reform Act of 1994, Section-by-Section Analysis, 140 Cong. Rec. H10752-01 (Oct.
4, 1994) (emphasis added).
Petitioner’s leasehold interest under 11 U.S.C. § 365(h), being one specifically enumerated
and expressly protected by congressional intent, must prevail over Respondent’s more general
right to sell “free and clear” under 11 U.S.C. § 363(f); for this Court to hold otherwise would be a
violation of the long-held canon of statutory construction that specific provisions prevail over
general ones, and would also completely destroy the Congressional intent behind § 365(h), leaving
Petitioner with no recourse to protect its leasehold interest. See Morton, 417 U.S. at 550-51;
Bulova Watch Co, 365 U.S. at 758; D. Ginsberg & Sons, Inc., 285 U.S. at 208; Landmark Land
Co, 948 F.2d at 912; Matter of Nobelman, 968 F.2d at 488; Pinnacle, 872 F.3d at 898; In re Taylor,
198 B.R. at 165; In re Churchill, 197 B.R. at 28; S. Report No. 95-989, 95th Cong., 2d Sess.
(1978); H. R. Rep. No. 95-595, 95th Cong., 2d Sess. (1977).
Respondent contends, and the Thirteenth Circuit below found, that 11 U.S.C. § 363(f) and
§ 365(h) address completely different events therefore the statutes are not in conflict, and no canon
of statutory construction is necessary. (R. at 12). This is based on the idea that § 365(h) is only
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triggered when there is an affirmative rejection of the leasehold interest. See Qualitech, 327 F.3d
at 547; Pinnacle, 872 F.3d at 899.
However, the statutes are clearly in conflict, because a sale under § 363(f) effectively
rejects leasehold interests under the meaning of § 365(h). In re Murel Holding Corp., 75 F.2d at
942; Dishi & Sons, 510 B.R. at 702; In re Samaritan Alliance, 2007 Bankr. LEXIS 3896 at 11-12;
In re Haskell L.P., 321 B.R. at 9; In re Churchill Props., 197 B.R. at 288. Although this Court has
found that statutes should be harmonized whenever possible, statutes that conflict in practice, even
though they may not contradict one another the way they are written, cannot be harmonized; one
must prevail over the other, and the way to decide this is based on the canon of construction of
specificity prevailing over general provisions. See Morton, 417 U.S. at 550-51; Bulova Watch Co,
365 U.S. at 758; D. Ginsberg & Sons, Inc., 285 U.S. at 208; Landmark Land Co, 948 F.2d at 912;
Matter of Nobelman, 968 F.2d at 488; Pinnacle, 872 F.3d at 898; In re Taylor, 198 B.R. at 165; In
re Churchill, 197 B.R. at 28; S. Report No. 95-989, 95th Cong., 2d Sess. (1978); H. R. Rep. No.
95-595, 95th Cong., 2d Sess. (1977).
C. Petitioner has a vested property interest in its leasehold contract,
recognized by state law under the Fourteenth Amendment, and the
Bankruptcy Code; for the Court to sell Petitioner’s property interest in
violation of the protections of 11 U.S.C. § 365(h), which petitioner has properly
elected to exercise, would be a violation of Petitioner’s substantive due process
rights under the Fifth Amendment.
Petitioner has a valid property interest in its lease, recognized under state law. See (R. at
3); Armstrong v. Rushton (In re Armstrong), 292 B.R. 678, 698 (B.A.P. 10th Cir. 2003) (“Property
interests of parties in bankruptcy proceedings are ‘created and defined by state law.’”) (citing
Butner v. United States, 440 U.S. 48, 55, (1979)). Further, it is clear that the Bankruptcy Code
also recognizes Petitioner’s lease as a property interest. See 11 U.S.C. §§ 363(f), 365(h) (2018);
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Precision Indus., 327 F.3d at 545. (“Here, we likewise conclude that the term ‘any interest’ as used
in section 363(f) is sufficiently broad to include Precision's possessory interest as a lessee.”).
This Court has long recognized that where property interests created by state law exist, the
Fourteenth Amendment protects those interests from being infringed upon without due process of
law. See U.S. Const. amend. XIV; Logan v. Zimmerman Brush Co., 455 U.S. 422, 430 (1982)
(“The hallmark of property, the Court has emphasized, is an individual entitlement grounded in
state law, which cannot be removed except ‘for cause.’”); Board of Regents v. Roth, 408 U.S. 564,
577 (1972) (“Property interests, of course, are not created by the Constitution. Rather, they are
created and their dimensions are defined by existing rules or understandings that stem from an
independent source such as state law.”); Perry v. Sindermann, 408 U.S. 593, 601 (1972) (“A
person's interest in a benefit is a ‘property’ interest for due process purposes if there are such rules
or mutually explicit understandings that support his claim of entitlement to the benefit and that he
may invoke at a hearing.”).
Similarly, the Fifth Amendment also protects citizens from governmental infringement of
their property interests without due process of law. U.S. Const. amend. V; Marin v. King, 2018
U.S. App. LEXIS 100, 42 (10th Cir. 2018) (“Under the Fifth and Fourteenth Amendments, the
government may not deprive a person of his property without due process of law.”).
For the Court to authorize sale of the amphitheater when 11 U.S.C. § 365(h) plainly estops
the sale of the property and allows Petitioner to maintain its leasehold interest would be a
substantive due process violation. See U.S. Const. amend. V; Marin v. King, 2018 U.S. App.
LEXIS 100 at 42; Zimmerman, 455 U.S. at 430; Roth, 408 U.S. 564 at 577; Perry, 408 U.S. at 601.
Petitioner has a vested property interest at state law, and has a guaranteed bankruptcy protection
vested in 11 U.S.C. § 365(h). Improperly stripping Petitioner of its property interest in the
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amphitheater is a violation of Petitioner’s fundamental substantive due property process right. See
Marin v. King, 2018 U.S. App. LEXIS 100 at 42; Zimmerman, 455 U.S. at 430; Roth, 408 U.S.
564 at 577; Perry, 408 U.S. at 601.
D. As a matter of policy, eliminating the leasehold protection of by allowing
sales “free and clear” under 11 U.S.C. § 363(f) to trump the leasehold
protection of 11 U.S.C. § 365(h) would present many social and economic
harms by creating uncertainties about leasehold interests, and would create
uncertainties about the canon of statutory construction.
Effectively destroying the ability of leasehold interest holders to retain their property
interests by allowing debtors to circumvent the protection of 11 U.S.C. § 365(h) through § 363(f)
“free and clear sales” would destroy the market for leasehold interests. Courts have found that
Congress’s intent in § 365 was to balance the interests of both the debtor and the leaseholder:
The legislative history to Section 365(h), the predecessor to Section
365(h)(1)(A)(ii), is illustrative of Congress' intent. Congress sought to protect both
the rights of the lessor and the lessee so as to preserve expectations in real estate
transactions. Thus, rejection of a lease does not divest the lessee of its interest in
the lease. The lessee's interest in a leasehold cannot be modified or changed because
of a pending bankruptcy. (citing In re Wood Comm Fund I, Inc., 116 Bankr. 817,
818 (Bankr. N.D. Okla. 1990).).
In re Churchill, 197 B.R. at 288;
It is clear that Congress' intent was to afford the debtor the benefit of rejecting an
undesirable lease while at the same time protecting the property rights of the lessee.
Thus, “rejection of the lease results merely in the cancellation of covenants
requiring performance in the future [e.g. the providing of utilities, repair and
maintenance, janitorial services, etc., which LHD maintains are burdensome] by
the debtor; rejection does not terminate the lease completely so as to divest the
lessee of his estate in the property.”
In re LHD Realty Corp., 20 B.R. 717, 719 (Bankr. S.D. Ind. 1982) (citing 2 COLLIER ON
BANKRUPTCY, para. 365.09 at pg. 354-43 (15th ed. 1979)).
Allowing the debtor to reject the leasehold interest through a sale under 11 U.S.C. 363(f),
while not allowing the leaseholder to claim the protection of retaining its leasehold interest under
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11 U.S.C. § 365(h) would create a drastic asymmetry in power that was never intended by
Congress, and that has the potential to destabilize real estate markets create unforeseen economic
uncertainties. See In re Churchill, 197 B.R. at 288; In re LHD Realty Corp., 20 B.R. at 719.
Other bankruptcy courts have relied upon the majority view that 11 U.S.C. § 365(h) trumps
§ 363(f) to find that the more specific protection guaranteed to licensees of intellectual property
guaranteed by § 365(n) also prevail over the debtor’s right to sell “free and clear” under § 363(f).
See IDEA Boardwalk, LLC v. Revel Entm't Grp. (In re Revel AC, Inc.), 532 B.R. 216, 227-28
(Bankr. N.J. 2015) (“This Court previously has addressed the interplay between §§ 363 and 365 .
. . this Court held that nothing in § 363(f) trumps, supersedes, or otherwise overrides the rights of
licensees under § 365(n).”);
Since there has been little discussion on the interplay between § 363 and § 365(n),
the Court is guided by cases that have interpreted the relationship between § 363
and § 365(h), as there are notable similarities between §§ 365(n) and 365(h). The
Court holds that in the absence of consent, nothing in § 363(f) trumps, supersedes,
or otherwise overrides the rights granted to Licensees under § 365(n). This
conclusion is based on two factors: the principle of statutory construction that the
specific governs the general; and the legislative history of § 365.
In re Crumbs Bake Shop, Inc., 522 B.R. 766, 777 (Bankr. N.J. 2014).
If this Court were to find that the general provisions of 11 U.S.C. § 363(f) trump the specific
leasehold protections inherent in § 365(h), it would create uncertainties concerning the canon of
statutory construction that specific statutory provisions must take priority over general ones. See
Morton v. Mancari, 417 U.S. at 550-51; Bulova Watch Co. v. United States, 365 U.S. at 758; D.
Ginsberg & Sons, Inc., 285 U.S. at 208. Further, this problem would be specifically pronounced
in the field of bankruptcy, where multiple code sections may apply at the same time in many
varying situations. See D. Ginsberg & Sons, Inc., 285 U.S. at 208; See IDEA Boardwalk, 532 B.R.
at 227-28; In re Crumbs Bake Shop, 522 B.R. at 777.
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As a matter of public policy and practical consideration concerning the canon of statutory
construction, this Court should find that 11 U.S.C. § 365(h) takes priority over § 363(f). If this
Court does otherwise, it will be sanctioning great economic uncertainties and potentially unseen
ramifications in the realm of real estate transactions. See In re Churchill, 197 B.R. at 288; In re
LHD Realty Corp., 20 B.R. at 719. It will also be creating great uncertainties concerning the long-
held canon of statutory construction that more specific provisions must be construed over general
ones, particularly in the realm of bankruptcy law. Morton v. Mancari, 417 U.S. at 550-51; Bulova
Watch Co. v. United States, 365 U.S. at 758; D. Ginsberg & Sons, Inc., 285 U.S. at 208; See IDEA
Boardwalk, 532 B.R. at 227-28; In re Crumbs Bake Shop, 522 B.R. at 777. This Court should
therefore, from a policy, legal, and economic perspective, find that the protections of 11 U.S.C. §
365(h) must prevail over the general provisions of §363(f).
II. RESPONDENT’S DISTRIBUTION TO THE UNSECURED
CREDITORS’ FUND FOR THE PURPOSE OF FUNDING CLAIMS
AGAINST SKYLINE CONSTITUTES PROPERTY OF THE ESTATE AND
THUS VIOLATES THE ABSOLUTE PRIORITY RULE.
A. Respondent’s proposed distribution to the unsecured creditors’ trust would
be estate property and must adhere to the absolute priority rule.
The Bankruptcy Code intentionally defines “property of the estate” broadly to ensure all
interests of the debtor are included in the estate:
Thus, to facilitate the rehabilitation of the debtor’s business, all the debtor’s
property must be included in the reorganization estate. This authorization extends
to even property of the estate in which a creditor has a secured interest. Although
Congress might have safeguarded the interests of secured creditors outright by
excluding from the estate any property subject to a secured interest, it chose instead
to include such property in the estate and to provide secured creditors with adequate
protection.
U.S. v. Whiting Pools, Inc., 103 S.Ct. 2309, 2313 (1983); In Re Watkins, 298 B.R. 342 (Bankr.
N.D. Ill. 2003) (“Whenever a debtor has more than a minimal equitable interest in a piece of
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property, such property in its entirety becomes property of the estate under §541(a) even if it is
also subject to the interest of others”); In re C.W. Mining Company v. Rushton, 489 B.R. 431, 439
(Bankr. D. Utah 2013) (“The Tenth Circuit has held that ‘the scope of §541 is broad and should
be generously construed, and that an interest may be property of the estate even if it is ‘novel or
contingent’.”).
Bankruptcy courts look to property rights defined under state law to determine an estate’s
interest in property and then look to federal law to determine if such interest is property of the
estate. Rodriguez v. Naihomy (In re Rodriguez), 334 B.R. 754, 757 (B.A.P 1st Cir. 2005)
(“Whether and to what extent the debtor has in interest in property is a matter of state law, and
whether such interest is property of the bankruptcy estate is determined according to federal law.”)
Whenever a cause of action accrues as a result of a bankruptcy petition, that claim is
included as property of the estate. In re Strada Design Associates, Inc., 326 B.R. 229, 235 (Bankr.
S.D.N.Y. 2005) (“….causes of action that accrue as a result of the filing are ‘property of the
estate’.”); In re Alvarez 224 F.3d 1273, 1278 (11th Cir. 2000) (“...this interest in property arising
simultaneously with the filing of Alvarez’s bankruptcy petition was an interest of Alvarez in
property ‘as of’ the commencement of the case, and thus, property of the estate under §541.”);
Goldstein v. Stahl (In re Goldstein), 526 B.R. 13, 21 (B.A.P. 9th Cir. 2015) (“Section 541(a)(1) of
the Bankruptcy Code defines ‘property of the estate’ to include ‘all legal or equitable interests of
the debtor in property as of the commencement of the case.’ Legal causes of action are included
within the broad scope of § 541.”); Jones v. Hyatt Legal Servs. (In re Dow), 132 B.R. 853, 860
(Bankr. S.D. Ohio 1991) (“The plaintiff’s cause of action is property of the estate . . .”).
In the instant case, Respondent’s proposed distribution of funds to the unsecured creditors
trust for the purpose of seeking their cooperation in the bankruptcy proceeding is material in
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initiating the bankruptcy proceeding, and those funds are thus property of the estate. See In re
Alvarez 224 F.3d at 1278; In re Strada Design Associates, Inc., 326 B.R. at 235. When a creditor
uses its own funds to coerce other unsecured creditors into a bankruptcy proceeding, those funds
must be considered part of the bankruptcy estate because without them the claims could not be
initiated. See In re Alvarez 224 F.3d at 1278; In re Strada Design Associates, Inc., 326 B.R. at
235.
Furthermore, the claim that would be pursued with Respondent’s monies would result in a
benefit for the estate which would be distributed in accordance to the Bankruptcy Code’s priority
scheme. Thus, Respondent has a substantial interest in the claim, clearly placing the funds under
the broad scope of estate property. See Whiting Pools, Inc., 103 S.Ct. at 2313; See In Re Watkins,
298 B.R. at 342; See In re C.W. Mining Company, 489 B.R. at 439.
B. The Bankruptcy Code does not permit deviations from the absolute priority
rule in the context of Chapter 11 cases.
This Court explained that the foundational purpose behind Chapter 11 bankruptcy
proceedings is effective reorganization of troubled businesses:
In proceedings under the reorganization provisions of the Bankruptcy Code, a
troubled enterprise may be restructured to enable it to operate successfully in the
future…. By permitting reorganization, Congress anticipated that the business
would continue to provide jobs, to satisfy creditors’ claims, and to produce a return
for its owners. Congress presumed that the assets of the debtor would be more
valuable if used in a rehabilitated business than if “sold for scrap”. The
reorganization effort would have small chance of success, however, if property
essential to running the business were excluded from the estate.
Whiting Pools, Inc., 103 S.Ct. at 2313.
The absolute priority rule is a foundational protection device for creditors in Chapter 11
cases. This Court, and multiple circuit and district courts, have recognized the need to protect
creditors in a Chapter 11 context. In Re Fryar, 570 B.R. 602, 610 (Bankr. E.D. Tenn. 2017) (“The
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need for this safeguard is obvious. Any settlement between the debtor and one of his individual
creditors necessarily affects the rights of other creditors by reducing the assets of the estate
available to satisfy other creditors’ claims.”)
The 2nd Circuit emphasized that Congress was “well aware of both the advantages and
disadvantages” of the absolute priority rule when it was adopted into the Bankruptcy Code. Dish
Network Corp. v. DBSD North America, Inc., (In re DBSD North America, Inc.), 634 F.3d 79, 98
(2d Cir. 2011). The absolute priority rule was designed to prevent senior creditors from
distributing proceeds to a junior class “unless every intermediate class consents, is paid in full, or
is unimpaired.” Id. at 101 (citing H.R. Rep. 95-595, 1978 U.S.C.C.A.N. 5963, 6372 (1977)). See
Motorola, Inc. v. Official Comm. Of Unsecured Creditors (In Re Iridium Operating LLC), 478
F.3d 463 (2nd Cir. 2007) (“Whether a particular settlement’s distribution scheme complies with
the Code’s priority scheme must be the most important factor for the bankruptcy court to consider
when determining whether a settlement is “fair and equitable” . . . In the Chapter 11 context,
whether a settlement’s distribution plan complies with the Bankruptcy Code’s priority scheme will
often be the dispositive factor. “).
This Court has recognized “…When the words of a statute are unambiguous, then this first
canon of construction is also the last: ‘judicial inquiry is complete.’ Connecticut Nat’l Bank v.
Germain, 503 U.S. 249, 253 (1992). This Court has also found:
Given the importance of the priority system, this Court looks for an affirmative
indication of intent before concluding that Congress means to make a major
departure. Nothing in the statute evinces such intent. Insofar as the dismissal
sections of Chapter 11 foresee any transfer of assets, they seek a restoration for the
prepetition financial status quo.
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Jevic, 137 S.Ct. at 977. Courts have found that allowing a secured creditor to decide which other
creditors get paid first is a violation of the foundational principles of the priority distribution
system:
“[t]o accept [the] argument that a secured lender can, without any reference to
fairness, decide which creditors get paid and how much those creditors get paid, is
to reject the historical foundation of equity receiverships and to read §1129(b) out
of the Code… To accept that argument is simply to start down a slippery slope that
does great violence to history and to positive law.”
See In re Sentry Operating Co. of Texas, Inc., 264 B.R. 850, 865 (Bankr. S.D. Tex. 2001).
Although deviations from the creditor priority have been permitted in Chapter 7 cases,
deviations from the absolute priority rule in a Chapter 7 context are not applicable in Chapter 11
cases:
Chapter 7 does not include the rigid absolute priority rule of § 1129(b)(2)(B). As
the First Circuit noted, ‘the distribution scheme’ of Chapter 7 ‘does not come into
play until all valid liens on the property are satisfied.’… repeatedly emphasized the
‘lack of statutory support’ for the argument against gifting in the Chapter 7 context.
Under Chapter 11, in contrast, §1129(b)(2)(B) provides clear statutory support to
reject gifting in this case, and the distribution scheme of Chapter 11 ordinarily
distributes all property in the estate (as it does here), including property subject to
security interests.
In re DBSD, 634 F.3d at 98; See In re Armstrong World Industries, Inc., 432 F.3d 507, 514 (3d
Cir. 2005); In re SPM Manufacturing Corp. v. Stern, 984 F.2d 1305, 1312 (1st Cir. 1993) (“…the
distribution scheme of section 726 does not come into play until all valid liens on the property are
satisfied.”); In re Armstrong World Industries, Inc., 432 F.3d at 514 (“… [This does] not stand for
the unconditional proposition that creditors are generally free to do whatever they wish with the
bankruptcy proceeds they receive. Creditors must also be guided by the statutory prohibitions of
the absolute priority rule.”).
In the instant case, the initial proceeding was brought under a section 363(f) sale which
falls under Chapter 11 of the Bankruptcy Code: therefore, the Respondent’s distribution to the
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unsecured creditors trust must adhere to the absolute priority rule. See Dish Network Corp., 634
F.3d at 98; See In re Armstrong World Industries, Inc., 432 F.3d at 514. Petitioner has a right
under the absolute priority rule to receive the $2,000,000 in administrative expense before the
unsecured creditors receive any funds.
C. Even if the Court finds there are exceptions to the absolute priority rule,
Respondent’s distribution to the unsecured creditors’ fund does not promote
any significant Bankruptcy Code related objective and thus cannot be
approved.
Neither this Court, nor the Bankruptcy Code, provide any explicit indication that payment
schemes may deviate from the absolute priority rule:
We turn to the basic question presented: Can a bankruptcy court approve a
structured dismissal that provides for distributions that do not follow ordinary
priority rules without the affected creditors’ consent? Our simple answer to this
question is “no’ . . . a priority-violating plan still cannot be confirmed over the
objection of an impaired classed of creditors.
Jevic, 137 S. Ct. at 983 (emphasis added).
Some courts have incorrectly interpreted this language to permit “rare case” exceptions to
the absolute priority rule. See In re Iridium Operating, LLC, 478 F.3d at 452; See Toibb v. Radloff,
501 S. Ct. 157, 164 (1991). In response, this Court found:
… in such instances one can generally find significant Code-related objectives that
the priority-violating distributions serve . . . In a structured dismissal . . . the
priority-violating distribution is attached to a final disposition; it does not preserve
the debtor as a going concern; it does not make the disfavored creditors better off;
it does not promote the possibility of a confirmable plan; it does not help the status
quo ante; and it does not protect reliance interests. In short, we cannot find in the
violation of ordinary priority rules here any significant offsetting bankruptcy-
related justification.
Jevic, 137 S. Ct. 973 at 985-986; In re Fryar, 570 B.R. 602 at 610 (Bankr. E.D. Tenn. 2017) (“The
proposed settlement should state that objective, such as enabling a successful reorganization or
permitting a business debtor to reorganize and restructure its debt in order to revive the business
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and maximize the value of the estate. “); In re Babcock and Wilcox Co., 250 F.3d 955, 960 (5th
Cir. 2001); In re On-Site Sourcing, Inc., 412 B.R. 817 (Bankr. E.D. Va. 2009); In re Biolitic, Inc.,
528 B.R. 268, 271 (2015); In re Chrysler LLC, 576 F.3d 108, 118 (2d Cir. 2009). Thus, any
exception to the absolute priority rule must be grounded in some conditions that further the purpose
of the underlying objectives of Chapter 11. See Jevic, 137 S. Ct. 973 at 985-986; In re Fryar, 570
B.R. 602 at 610; In re Babcock, 250 F.3d at 960; In re On-Site Sourcing, 412 B.R. at 817; In re
Biolitic, 528 B.R. at 271; In re Chrysler, 576 F.3d at 118.
While this Court never explicitly stated that there are exceptions to the absolute priority
rule, if it finds that there are in fact exceptions, Respondent’s distribution to the unsecured
creditor’s fund does not qualify. See Jevic, 137 S. Ct. 973 at 985-986. Considering the factors
this Court weighed in Jevic, Respondent’s distribution does not promote a Bankruptcy Code
related objective. See Id.
Respondent’s distribution to the unsecured creditors trust is not an interim distribution.
Once the funds from the unsecured creditors’ trust have been liquidated, it is likely that the case
will ultimately be dismissed, as there have been no plans for reorganization contemplated. See In
re Babcock, 250 F.3d at 960; See In re On-Site Sourcing, 412 B.R. at 817; See In re Biolitic, 528
B.R. at 27. It is clear that Petitioner is not being considered as a “going concern” and is certainly
not being made “better off” by Respondent’s Distribution. See Jevic, 137 S. Ct. at 985-986. Once
the funds distributed to the unsecured creditors’ fund are liquidated, it is likely there are no funds
left to pay the administrative expense Petitioner so rightfully deserves.
Respondent’s distribution also does not promote the possibility of a confirmable plan.
Respondent alleges that its reasoning for not funding a plan of reorganization is a lack of cash
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flow, yet it is passionate about distributing millions of dollars to unsecured creditors’ claims that
may result in no benefit whatsoever for the estate. (R. at 6).
Additionally, there is no question that Respondent’s distribution does not preserve the
status quo ante of the absolute priority rule, as it is purposely evading it to avoid Petitioner’s rights
as a senior creditor. See In re Biolitic, 528 B.R. at 271. Respondent’s distribution completely
undermines Petitioner’s reliance interests. Petitioner entered into a post-petition agreement with
Respondent despite Respondent’s inability to hold up its end of the deal to complete the
development “within months” of the first sale hearing. (R. at 6). Respondent’s distribution runs
afoul to the trust priority creditors have in senior creditors. Therefore, it is clear that Respondent’s
distribution does not serve a code-related objective and should not be approved. See Jevic, 137 S.
Ct. at 985-986; In re Fryar, 570 B.R. 602 at 610; In re Babcock, 250 F.3d at 960; In re On-Site
Sourcing, 412 B.R. at 817; In re Biolitic, 528 B.R. at 271; In re Chrysler, 576 F.3d at 118.
D. Allowing Respondent to evade the absolute priority rule by gifting funds
to unsecured creditors in order to bypass priority creditors’ claims would
create a dangerous precedent contrary to the foundations of the Bankruptcy
Code.
This Court has recognized the dangers that would come with allowing senior creditors to
evade the absolute priority rule. See Jevic, 137 S. Ct. at 986 (“The consequences are potentially
serious. They include departure from the protections Congress granted particular classes of
creditors . . . Once the floodgates are opened, debtors and favored creditors can be expected to
make every case that ‘rare case’.”)
Allowing deviations from the absolute priority rule may leave open the opportunity for
senior creditors to intentionally avoid the priority scheme. See In Re Iridium Operating LLC, 478
F.3d at 464 (“Rejection of a per se rule has an unfortunate side effect, however: a heightened risk
that parties to a settlement may engage in improper collusion.”); See also In Re Fryar, 570 B.R.
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602 at 608; See also In re CGE Shattuck, LLC, 254 B.R. 5, 9 (Bankr. D. N.H. 2000) (“This Court
will not allow opponents and proponents of a plan of reorganization to use creative drafting to
circumvent the requirements of Chapter 11 of the Bankruptcy Code or controlling case law within
this circuit.”).
Furthermore, Courts have specifically emphasized the importance of not allowing debtors
who have filed Chapter 11 cases to utilize a §363 sale to bypass creditor protections:
… we recognized that a debtor in Chapter 11 cannot use a §363(b) to sidestep the
protection creditors have when it comes time to confirm a plan of reorganization…
If a debtor were allowed to reorganize the estate in some fundamental fashion
pursuant to §363(b), creditors rights under, for example 11 U.S.C §§ 1125, 1126,
1129(a)(7), and 1129(b)(2) might become meaningless. Undertaking
reorganization piecemeal pursuant to §363(b) should not deny creditors the
protection they would receive if the proposals were first raised in the
reorganization plan.
In re Continental Air Lines, Inc. 780 F.2d 1123, 1127-28 (5th Cir. 1986) (emphasis added); See In
re Allison, 39 B.R. 300, 303 (Bankr. D. N.M. 1984). See In re Babcock, 250 F.3d at 960 (“…
provisions of §363 permitting a trustee to use, sell, or lease the assets do not allow a debtor to gut
the bankruptcy estate before reorganization or to change the fundamental nature of the estate’s
assets in such a way that limits a future reorganization plan.”)
In the instant case, it is clear that Respondent’s Committee Settlement runs afoul to the
foundational principles of the Bankruptcy Code, intentionally utilizing the section 363 sale to
evade the absolute priority rule. See In re Continental Air Lines 780 F.2d at 1127; See In re
Allison, 39 B.R. at 303. See In re Babcock, 250 F.3d at 960. It would be unreasonable to presume
that that the Committee Settlement funds are incidentally the exact amount of Petitioner’s full
administrative expense of $2,000,000. (R. at 6). It is not happenstance that Respondent’s
Committee Settlement would go straight to the unsecured creditors’ trust and completely bypass
Petitioner’s administrative expense. Approving Respondent’s distribution would create explicit
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precedent allowing senior creditors to use the Bankruptcy Code to avoid priority creditors rights
and distribute funds in ways that most beneficial to it, not the estate. This Court should not allow
senior creditors to utilize a Section 363 sale to “gut” the bankruptcy estate before reorganization
to change the estate’s assets in such a way that deny priority creditors their rights and prevent
future reorganization. See In re Babcock, 250 F.3d at 960; See In Re Iridium, 478 F.3d at 464; See
also In Re Fryar, 570 B.R. 602 at 608; See also In re CGE Shattuck, 254 B.R. at 9; See Jevic, 137
S. Ct. at 986.
CONCLUSION
The courts below erred in finding that 11 U.S.C. § 363(f) allows for a sale free and clear
of Petitioner’s right to retain its leasehold interest pursuant to 11 U.S.C. § 365(h).
As the majority of bankruptcy courts have found, Respondent’s attempted sale of the
property under § 363(f) is a de facto and effective rejection of Petitioner’s leasehold interest. The
protections afforded to lessees by § 365(h) allow Petitioner to retain its leasehold interest for the
duration of the agreed-upon period. The canons of statutory construction dictate that the more
specific protections enumerated by § 365(h) must control over the general right of a debtor to sell
pursuant to §363(f).
Petitioner has a vested property interest in its leasehold, recognized under both state law
and the Bankruptcy Code. 11 U.S.C. § 365(h) plainly guarantees Petitioner the right to retain its
property interest under federal law; for the court to sanction the sale motion would be a violation
of Petitioner’s Fifth Amendment right. Petitioner cannot be deprived of its property interest by a
federal court without due process of law; taking Petitioner’s property when the Bankruptcy Code
allows for that property to be retained is a substantive due process violation under the Fifth
Amendment.
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If this Court were to hold that the general language of § 363(f) trumps the specific
protections afforded to lessees under § 365(h), it would create economic uncertainties in the real
estate market due to debtors having the ability to evict lessees by rejecting leasehold interests
without triggering Congress’ intent to allow lessees to maintain their leaseholds in the face of the
bankruptcy process. Furthermore, it would cast doubt on the long-held canon of statutory
construction that more specific statutory provisions must prevail over general ones when they
conflict. This would be an issue of law in general, and would be specifically problematic in the
bankruptcy code where conflicts often arise between statutory provisions.
Respondent’s $2 million distribution to the unsecured creditors’ trust for the express
purpose of funding claims against Skyline is property of the estate and must adhere to the absolute
priority rule. The definition of estate property is broad, encompassing all interests of the debtor
and even some interests of senior creditors. Respondent undoubtedly has an interest in the
unsecured creditors’ claims against Skyline, as its money is in the only reason the claims are
pursuable and the possible settlement from said claims would be distributed back into the estate.
Furthermore, the Bankruptcy Code does not allow deviations from the absolute priority rule in the
context of Section 363 sales under Chapter 11.
Even if this Court were to determine that deviations from the absolute priority rule are
permissible, Respondent does not qualify for such an exception because the distribution does not
promote a code-related objective. Permitting senior creditors to utilize Section 363 sales to bypass
the absolute priority rule would undermine one of the foundational principles the Bankruptcy Code
seeks to promote: equitable protection of creditors. Petitioner asks this Court to protect this vital
equality.
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For these reasons, Petitioner respectfully requests this Honorable Court to find that: (1)
Petitioner may retain its leasehold interest pursuant to § 365(h), notwithstanding Respondent’s
general ability to sell under § 363(f), and (2) The bankruptcy court may not approve a settlement
that violates the absolute priority scheme of Chapter 11; Petitioner must be paid before the
creditors behind it in the priority scheme.
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CERTIFICATE OF SERVICE
PETETIONER HEREBY CERTIFIES that a true copy hereof has been furnished by U.S.
Mail to Respondent’s counsel on this 22nd day of January 2018.
___/S _________________________
Counsel for Petitioner
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