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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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