Supreme Court of the United States

Transcription

1 No In The Supreme Court of the United States OCTOBER TERM 2017 IN RE HIGH ROCKS, INC., DEBTOR, HIGHWAY 61, INC., PETITIONER v. HIGH ROCKS, INC., RESPONDENT P29 Counsel for Petitioner

2 QUESTIONS PRESENTED 1. Whether a bankruptcy court can approve the sale of property free and clear of a leasehold interest in violation of section 365(h). 2. Whether a bankruptcy court can approve a chapter 11 settlement agreement that violates the Bankruptcy Code s absolute priority rule. i

3 TABLE OF CONTENTS QUESTIONS PRESENTED... i TABLE OF AUTHORITIES... iv STATEMENT OF JURISDICTION....vi STATEMENT OF THE FACTS...1 SUMMARY OF THE ARGUMENT...4 ARGUMENT...8 I. THIS COURT SHOULD REVERSE THE DECISION OF THE THIRTEENTH CIRCUIT TO SELL THE AMPHITHEATER FREE AND CLEAR OF ALL LEASEHOLD INTERESTS PURSUANT TO 363(F) BECAUSE 365(H) IS A MORE SPECIFIC PROVISION THAT SHOULD BE TREATED AS THE EXCEPTION TO 363(F) AND THERE WAS A REJECTION OF THE HIGHWAY LEASE....8 A. Section 365(h) of the Bankruptcy Code is the Exception to Section 363(f) Because it is the More Specific Provision and Legislative History has Demonstrated Congress Intent to Protect Lessees who Fall Victim to Bankruptcy Proceedings....9 B. A Valid Rejection of the Lease Occurred when Debtor Failed to Assume the Lease and Instead Chose to Sell the Property Free and Clear of any Interests Giving Rise to the Application of Section 365(h) of the Bankruptcy Code II. THIS COURT SHOULD REVERSE THE DECISION OF THE THIRTEENTH CIRCUIT TO APPROVE THE COMMITTEE S SETTLEMENT AGREEMENT AND GRANT HIGHWAY THE $2 MILLION IN ESTATE FUNDS BECAUSE THE COMMITTEE S SETTLEMENT AGREEMENT VIOLATES THE ABSOLUTE PRIORITY RULE A. The Committee s Settlement Agreement is Not a Planned Interim Settlement Dismissal ii

4 B. The Committee s Settlement Agreement Does Not Serve a Significant Bankruptcy Code Objective and Makes Highway Worse Off C. Policy Implications Disfavor Upholding the Committee s Settlement Agreement CONCLUSION iii

5 TABLE OF AUTHORITIES Cases Bank of Am. Nat l Tr. & Sav. Ass n v. 203 N. Lasalle St. P ship, 526 U.S. 434 (1999) Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017)...5,6,16,17,20,21,22,23,24,25,26,27 Eastover Bank for Sav. v. Sowashee Venture (In re Austin Dev. Co.), 19 F.3d 1077 (5th Cir. 1994)...12,13,14 In re AWECO, Inc., 725 F.2d 293 (5th Cir. 1984)....16,23,24 In re Biolitec, Inc., 528 B.R. 261 (Bankr. D.N.J. 2014)...24,25 In re Fryar, 570 B.R. 602 (Bankr. E.D. Tenn. 2017)...21,22,23,26 In re Kmart Corp., 359 F.3d 866 (7th Cir. 2004)...17,21,22,25,26 In re LCI Holding Co., 802 F.3d 547 (3rd Cir. 2015)...19,20,26 In re Pioneer Health Servs., 570 B.R. 228 (Bankr. S.D. Miss. 2017)...17 In re Zota Petroleums, LLC, 482 B.R. 154 (Bankr. E.D. Va. 2012) Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452 (2d Cir. 2007)...17,18,19,23,25,26 Myers v. Martin (In re Martin), 91 F.3d 389 (3d Cir. 1996)...16 Official, Unsecured Creditors Comm. v. Stern (In re SPM Mfg. Corp.), 984 F.2d 1305 (1st Cir. 1993)...19,20,21 Pinnacle Rest. at Big Sky, LLC v. CH SP Acquisitions (In Re Spanish Peaks Holding II, LLC), 872 F.3d 892 (9th Cir. 2017)...10,15 iv

6 Precision Indus. v. Qualitech Steel BBQ, LLC, 327 F.3d 537 (11th Cir. 2003)...12 Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414 (1968)...16 RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012)...9,12 Stoltz v. Brattleboro Hous. Auth. (in Re Stoltz), 315 F.3d 80 (2nd Cir. 2002)...12,13,14 Yates v. U.S., 135 S. Ct (2015)...9 Bankruptcy Code 11 U.S.C. 363(f)...2,3,4,8,9,10,11,12,27 11 U.S.C. 365(h)...2,3,4,5,8,9,10,11,12,13,14,15,27 11 U.S.C. 525(a) U.S.C Other Authorities Bouvier Law Dictionary (Desk ed. 2012)...9 Robert M. Zinman, Precision in Statutory Drafting: The Qualitech Quagmire and the Sad History of 365(h) of the Bankruptcy Code, 38 J. MARSHALL L. REV. 97 (2004)...11 Fed. R. Bankr. P. 9019(a)...15 Rudzik, A Priority Is a Priority Is a Priority Except When It Isn t, 34 Am. Bankr. Inst. J. 16,79 (2015)...25 v

7 STATEMENT OF JURISDICTION The formal statement of jurisdiction is waived pursuant to Competition Rule VIII. vi

8 STATEMENT OF THE FACTS Respondent, High Rocks Inc. ( Debtor ), a developer in the State of Moot who has constructed a nearly completed casino and resort that includes a 30-story 400 room hotel, conference facilities, restaurants, and a 7,000 seat outdoor amphitheater, has filed for chapter 11 bankruptcy. R. at 3-4. Debtor financed the property through a secured loan from North Country Bank and hired Skyline Construction Inc. ( Skyline ), to serve as general contractor. R. at 4. Prior to construction and the date of filing the chapter 11 petition, Petitioner, Highway 61, Inc. ( Highway ), a group of local investors, entered into a lease agreement ( Highway Lease ) with Debtor where Debtor agreed to lease the amphitheater post construction to Highway for a term of 30 years. R. at 5. The Highway Lease provided that Highway, as lessee, would manage, market, and operate the amphitheater and pay Debtor $400,000 per year including royalties from ticket sales. R. at 5. In May 2014, Skyline began construction, but from the start Debtor faced issues due to Skyline s use of cheap construction materials and improper installation of plumbing. R. at 4. The only project Skyline correctly completed was the exterior construction of the amphitheater. R. at 4. In December 2015, Debtor was forced to terminate its contract with Skyline and replaced it with Shelter from the Storm Builders, Inc. ( Shelter ). R. at 4-5. The construction on the casino, hotel tower, and installation of seating and sound equipment in the amphitheater was yet to be completed. R. at 4-5. Over the months, delays in development and missed payments encouraged North Country Bank to sell its promissory note to 4th Street, an entity that owns resorts and entertainment properties and pursues a loan to own strategy. R. at 5. In June 2016, 4th Street commenced a foreclosure action against Debtor, and Debtor filed for chapter 11 bankruptcy to stay the 1

9 foreclosure. R. at 5. Highway, out of good faith, approached the Debtor and offered to expedite the construction process of the amphitheater by installing the seats and sound equipment in exchange for $2 million. R. at 6. The Debtor agreed to Highway s proposal and after receiving approval by the bankruptcy court Debtor entered into a post-petition contractual agreement with Highway. R. at 6. Highway completed the amphitheater s installation of seats and sound equipment in November 2016 and graciously allowed the Debtor to defer payment of the $2 million until the construction of the casino and hotel was complete. R. at 6. Because the casino and hotel were still under construction, the Official Committee of Unsecured Creditors ( Unsecured Creditors ), Debtor, and Highway agreed that Highway would be entitled to its $2 million as an administrative expense. R. at 6. Unfortunately, Debtor soon ran out of cash and halted construction in December 2016 filing a motion with the bankruptcy court to sell all of its assets free and clear of liens and encumbrances pursuant to section 363(f) of the Bankruptcy Code. R. at th Street purchased the property on January 11, 2017 with a credit bid and informed all parties that it was acquiring the amphitheater free and clear of the Highway Lease. R. at 7. Both the Unsecured Creditors and Highway objected. R. at 7. The Unsecured Creditors objected to the sale arguing that there would be no money left in the estate to compensate them. R. at 7. Highway objected arguing that it was entitled to its leasehold possessory interest in the amphitheater under section 365(h) of the Bankruptcy Code. R. at 7. Despite these objections, Debtor, the Unsecured Creditors and 4th Street entered into a settlement agreement ( Committee s Settlement Agreement), where 4th Street agreed to deposit $2 million into an estate fund for the benefit of the Unsecured Creditors lawsuit against Skyline, in which the Unsecured Creditors sought to pursue claims against Skyline for its earlier mismanagement of the construction project. R. at

10 Highway renewed its earlier objection and further argued that the Committee s Settlement Agreement was in violation of the Bankruptcy Code s absolute priority rule and Highway was entitled to the $2 million deposit into the estate trust fund because it is higher in priority as an administrative expense claim. R. at 8. The bankruptcy court dismissed both of Highways objections holding that section 363(f) of the Code terminated Highway s leasehold interest in the amphitheater notwithstanding section 365(h), and that the Committee s Settlement Agreement did not violate the Code s absolute priority rule and was in the best interest of all parties regardless of the exclusion of Highway. R. at 8-9. The United States Thirteenth Circuit Court of Appeals affirmed the ruling of the bankruptcy court. R. at 9. This case is now before this Court on a writ of certiorari. 3

11 SUMMARY OF THE ARGUMENT The Bankruptcy Code provides a uniform and comprehensive scheme of rules broken down into individual provisions directed at targeting specific problems with specific solutions for issues that may arise during a bankruptcy proceeding. Occasionally, one or more of these provisions may conflict with other provisions in the Code when the conduct at issue falls within the scope of two or more conflicting provisions. In such a scenario, this Court has set the standard to eliminate contradictions by treating the more specific provision as the exception to the general provision. Such a standard is known as the specific over general canon of statutory construction and is the crux of Issue I of Highway s argument. In the case at bar, the conduct at issue revolves around the Debtor attempting to sell property of the estate free and clear of any interests even though Highway has a leasehold interest in such property. This conduct falls within the scope of section 363(f) which allows the sale of property free and clear of any interests, but section 365(h) protects the rights of lessees when a lease has been rejected. Here, section 365(h) is the exception to section 363(f) because 365(h) is more specific in nature while 363(f) is general. In addition to the specific over general canon of statutory construction, legislative history favors application of 365(h) as the exception to 363(f) because Congress expressed intentions of protecting the interests of lessees who have fallen victim to a bankruptcy proceeding. Moreover, a lease is deemed rejected as a matter of law in a chapter 11 bankruptcy when the trustee or debtor in possession fails to assume the lease. A rejection is the equivalent of a breach, not a termination, so the non-debtor party s leasehold interests are preserved and protected from the consequences of a terminated lease. Once a rejection has occurred, the party with the 4

12 leasehold interest is at liberty to choose whether to terminate the lease and file a claim or to maintain its lease interests for the term pursuant to section 365(h) of the Bankruptcy Code. Here, Highway s lease should be deemed rejected as a matter of law. Highway is thus entitled to the options provided under 365(h) and has rightfully elected option (ii) in which Highway will maintain its leasehold interests. If Highway s interest is not preserved pursuant to 365(h), then a violation of the provision has occurred. The Bankruptcy Code also provides a system of priority distribution that bankruptcy courts must follow when dispersing estate funds pursuant to chapter 11 dismissals. In dispersing estate funds, bankruptcy courts must abide by the absolute priority rule to ensure senior priority creditors are paid before lessor junior priority creditors. In the recent Jevic opinion, this Court explained only in the rare case exception may bankruptcy courts deviate from the absolute priority rule. This Court presented two instances when the rare case exception could warrant deviation from the absolute priority rule: when a settlement agreement is reached early on in the case, i.e. a planned interim settlement dismissal, or when the settlement agreement serves a significant bankruptcy related purpose that makes disfavored creditors better off (emphasis added). The Committee s Settlement Agreement is not a planned interim settlement dismissal. The settlement agreement was reached days before the sales hearing and was not carefully planned or negotiated. The Committee s Settlement Agreement was a last minute move to compensate the Unsecured Creditors and protect 4th Street from litigation. This agreement was reached despite the fact that it was to the detriment of Highway, the secured creditor. Finally, the argument that the Committee s Settlement Agreement was an interim gift settlement that is not property of the estate and allows deviation from the absolute priority rule is without merit. The settlement agreement here is not a gift settlement because the settlement agreement was between 4th Street, 5

13 the acquisitioning entity, and the Unsecured Creditors. The settlement agreement was not between Highway, the secured creditor, and the Unsecured Creditors. 4th Streets $2 million deposit into a litigation estate trust for the sole benefit of the Unsecured Creditors is property of the estate and subject to absolute priority rule. Moreover, the Committee s Settlement Agreement does not serve a significant Bankruptcy Code-related purpose that makes the disfavored creditors better off. This settlement agreement is not crucial to the reorganization or survival of the company and will make Highway, a disfavored creditor, precipitously worse off because Highway will have little chance to collect. Overall, the Committee s Settlement Agreement does not fit within either rare case exception contemplated in Jevic and is a structured dismissal that violates absolute priority rule. The Thirteen Circuit did not abide by the structural dismissal requirement of distributing estate funds in compliance with the absolute priority rule. The Thirteen Circuit s holding, therefore, abuses the Code s requirement of strict abidance of the absolute priority rule. Policy implications also go against the Committee s Settlement Agreement. If the Committee s Settlement Agreement is upheld, then over time skillful attorneys will turn the absolute priority rule into a generalized rule by molding each case to fit within the rare case exception and create a windfall of exceptions within exceptions. The facts from the case at bar are not analogous to the rare case exception contemplated in Jevic; there was no planned interim settlement dismissal, and the Committee s Settlement Agreement did not serve a significant Bankruptcy Code-related objective that makes Highland, the disfavored creditor, better off. Affirming the Thirteenth Circuit s opinion will affectively expand the rare case exception rule which is not what this Court intended in Jevic. The Committee s Settlement Agreement will further encourage collusion between creditors to oust disfavored creditors from collection. If the 6

14 Thirteenth Circuit s holding is upheld, bankruptcy courts will be pressured to abide by party s settlement agreement terms regardless of the priority status of the creditors. This will encourage creditors to collude during settlement discussions to determine which creditors will be first in line for collection. 7

15 ARGUMENT I. THIS COURT SHOULD REVERSE THE DECISION OF THE THIRTEENTH CIRCUIT TO SELL THE AMPHITHEATER FREE AND CLEAR OF ALL LEASEHOLD INTERESTS PURSUANT TO 363(F) BECAUSE 365(H) IS A MORE SPECIFIC PROVISION THAT SHOULD BE TREATED AS THE EXCEPTION TO 363(F) AND THERE WAS A REJECTION OF THE HIGHWAY LEASE. A motion for sale of property of an estate that is within the ordinary course of business in a chapter 11 bankruptcy proceeding shall be granted pursuant to section 363(f) only if the movant shows that one of the five requirements are met: (1) that applicable non-bankruptcy 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. 363(f). Since Debtor and Highway stipulated that one or more of these requirements have been satisfied, the validity of 363(f) in this case will not be at issue. However, section 365(h) of the Bankruptcy Code seeks to protect lessees in bankruptcy proceedings and states that if a trustee or debtor in possession rejects an unexpired lease in which the debtor is the lessor, the lessee is entitled to two options: (i) if the rejection amounts to a breach of the lease, that would allow the lessee to terminate the lease; or (ii) if the term of the lease has already commenced, the lessee may retain its rights under the lease for the balance of the term. 11 U.S.C. 365(h). It has already been established that the lease concerns real property, that Debtor is the lessor of the Highway Lease, that the term of the lease has already commenced, and that the lease is unexpired. The language in the two provisions seems plain and unambiguous individually, but when used in the specific context and referenced to the Bankruptcy Code as a whole, the two provisions conflict. Although a sale of this nature is common in most chapter 11 cases, the case at bar is unique because it calls 8

16 into question two provisions that are in direct conflict. Section 365(h), however, is the exception to 363(f), and 365(h) prevails because the lease was rejected as a matter of law. A. Section 365(h) of the Bankruptcy Code is the Exception to Section 363(f) Because it is the More Specific Provision and Legislative History has Demonstrated Congress Intent to Protect Lessees who Fall Victim to Bankruptcy Proceedings. Language in a statute is ambiguous when it could potentially have more than one interpretation and produce different results. Bouvier Law Dictionary (Desk ed. 2012). In determining whether the words in a statute are plain or ambiguous, this Court established that reference to the language itself should be examined in accordance with the specific context in which the language is used and the broader context of the statute as a whole. Yates v. U.S., 135 S. Ct. 1074, (2015). When a statute is deemed ambiguous, statutory interpretation and its legislative history are essential in determining how the statute should be applied to the facts of a case. Id. In cases that require statutory interpretation, this Court set the standard that when a contradiction exists between two statutes that are part of one comprehensive scheme of rules the more specific statute is construed as the exception to the more general statute. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 645 (2012). This Court holds that applying the specific governs general canon is more appropriate than allowing the general provision to swallow the specific because every part of the statute should be given affect. Id. The presumption that specific governs general is deeply rooted and used in cases where the conduct at issue falls within the scope of both general and specific contradicting statutory provisions. Id. at 648. If two different provisions within the same statutory scheme are found to produce one result when read separately, then the provisions are ambiguous and in direct conflict. In Pinnacle, the debtor signed a lease agreement with the appellant lessee; the debtor then auctioned off its property 9

17 during its bankruptcy proceeding to its largest creditor free and clear of any leasehold interests. Pinnacle Rest. at Big Sky, LLC v. CH SP Acquisitions (In Re Spanish Peaks Holding II, LLC), 872 F.3d 892, 895 (9th Cir. 2017). The court acknowledged the divide many courts have on this issue but held that section 365(h) is the exception to section 363(f) due to the canon of statutory construction that the specific provisions govern general ones. Id. at 898. The court established the use of specific over general canons because provisions 363(f) and 365(h) are ambiguous and in direct conflict when the issue applies to both. Id. at In approving the auction off the amphitheater free and clear of the Highway Lease, the Thirteen Circuit violated the specific over general canon of statutory construction by erroneously giving more deference to 363(f), the more general provision, instead of treating 365(h), the more specific provision, as the exception to the general. The language in 363(f) discusses the sale of property of an estate free and clear of any interest while the language in 365(h) discusses the protections available to lessees who have their leasehold interest destroyed in a bankruptcy proceeding. 11 U.S.C. 363(f); 11 U.S.C. 365(h). Read in isolation, the two provisions seem clear and unambiguous, however, read in reference to each other and within the comprehensive scheme of the Bankruptcy Code the two provisions contradict. Furthermore, the conduct at issue, the sale of property of the estate free and clear of any interest while there is an existing leasehold interest, falls into the scope of both provisions and gives emphasis to the need for the specific over general canon of statutory construction. Section 363(f) is general in nature in about every way. First, sell property speaks generally because it neither specifies the type of sale nor the type of property. 11 U.S.C. 363(f). Here, the provision seems to allow any kind of sale, which could include private sale, public auction, etc. The provision also does not specify what kind of property (real or personal), only that 10

18 it must be property of the estate. Id. Moreover, any interest is immensely broad since it can include a wide variety of interests like creditor interests, leasehold interests, legal interests, equitable interests, etc. Id. Section 365(h) is also far more specific in nature. 11 U.S.C. 365(h). First, the provision only relates to leases that are specifically rejected, unexpired, and for real property. Id. Second, the debtor must be the lessor for this provision to apply. Id. Third, Section 365(h)(ii) specifically delineates the rights a lessee may retain, which include possession, as long as the term of lease had already commenced and the lease is appurtenant to the real property. Id. Therefore, in this case 365(h) would be treated as the exception to 363(f) because 365(h) is a more specific provision than 363(f). In addition to this statutory construction principle, legislative history further shows that Congress purpose in enacting section 365(h) was to protect lessees whose lessors had rejected their leases in bankruptcy. 1 It is clear that Congress intended to include this explicit provision to prevent a debtor-lessor from dispossessing a lessee of its leasehold interest when the term of the lease had already commenced. When Congress amended the Bankruptcy Code in 1994, section 365(h) survived the changes made because Congress intended to protect innocent lessees like Highway. 2 The Thirteenth Circuit reasons that because Congress expressly mentions that section 363(l) is subject to 365 that the same reference can be made for 363(f). By that logic, one could argue that Congress could have also expressed that section 363(f) is notwithstanding 365(h) if it is meant to exclude lessees from retaining leasehold interests in a free and clear sale. This legislative history, therefore, undercuts the authority Debtor relies on. 1 See, Robert M. Zinman, Precision in Statutory Drafting: The Qualitech Quagmire and the Sad History of 365(h) of the Bankruptcy Code, 38 J. MARSHALL L. REV. 97 (2004). 2 See In re Zota Petroleums, LLC, 482 B.R. 154, (Bankr. E.D. Va. 2012) (citing Banruptcy Reform Act of 1994, Section by Section Analysis, 140 Cong. Rec. H (Oct. 4, 1994)). 11

19 Debtor further relies on the holding in Qualitech 3 for its reasoning that the two statutes are unambiguous and compatible. R. at What the Thirteenth Circuit fails to consider is that the decision in Qualitech occurred in 2003, nearly a decade before this Court ruled in RadLAX that a specific provision should be treated as the exception to a conflicting general provision when the conduct at issue falls within the scope of both provisions. See RadLAX, 566 U.S. 639, 645; contra Qualitech 327 F.3d 537, 544. By relying on this outdated opinion, the Thirteenth Circuit has erroneously avoided use of the specific over general canon of statutory construction and has ignored the legislative history supporting Highway s position. Highway urges this Court to adhere to the recent decision in RadLAX. Under an analysis of specific over general canon of statutory construction and with a thorough examination of legislative history, section 365(h) should be treated as the exception to section 363(f). B. A Valid Rejection of the Lease Occurred when Debtor Failed to Assume the Lease and Instead Chose to Sell the Property Free and Clear of any Interests Giving Rise to the Application of Section 365(h) of the Bankruptcy Code. Rejection of a lease occurs in a chapter 11 bankruptcy when the trustee or debtor in possession chooses not to assume an unexpired lease that is burdensome to the estate. Eastover Bank for Sav. v. Sowashee Venture (In re Austin Dev. Co.), 19 F.3d 1077, 1083 (5th Cir. 1994). Because the trustee or debtor in possessions only option for an unexpired lease is to assume or reject, failing to assume the lease is deemed rejected as a matter of law. Stoltz v. Brattleboro Hous. Auth. (in Re Stoltz), 315 F.3d 80, 86 (2nd Cir. 2002). But under the rejection-as-breach doctrine, rejection of a lease acts as a pre-petition breach, not a termination, to preserve the rights of the 3 The 7th Circuit ruled that section 363(f) precludes section 365(h) because the two provisions are compatible and unambiguous, making use of the specific over general canon unnecessary. Precision Indus. v. Qualitech Steel BBQ, LLC, 327 F.3d 537, 544 (11th Cir. 2003). 12

20 lessee whose lease has been rejected because only the other party in privity to the lease has the option to terminate. Eastover 19 F.3d 1077, In chapter 11 bankruptcy cases where the trustee or debtor fails to assume an unexpired lease the lease will be deemed rejected as a matter of law. See Eastover 19 F.3d 1077, 1080 In Eastover, both the debtor and trustee failed to timely decide whether to assume or reject a lease of nonresidential property. Id. The court ruled in favor of the lessee holding that its leasehold rights would be retained under section 365(h) of the Bankruptcy Code and that the debtor s inaction to assume the lease was sufficient to deem the lease rejected as a matter of law. Id. at The court also held that while the lease was deemed rejected, rejection did not amount to termination, but rather rejection would be treated as a breach and permit the lessee to retain its leasehold rights under section 365(h). Id. at The court in Stoltz found that in a chapter 11 bankruptcy for the trustee or debtor to have the option to assume a lease the trustee or debtor would have to cure defaults, compensate for losses, and provide adequate assurance to protect the creditor s interests before requiring the creditor to continue a contractual relationship with the debtor. Stoltz 315 F.3d 80, 94. Although the court in Stoltz held that the lessee would retain its possessory rights under section 525(a), 4 the court established that the lessee could not assume the lease because he was in default, so the lease would be deemed rejected as a matter of law. Id. at In the case at bar, Debtor neither affirmatively assumed nor rejected the Highway Lease; Debtor simply halted all construction and filed a motion to sell all of its assets. R. at 6. 4th Street declared that it was acquiring the amphitheater free and clear of Highway s leasehold interest, 4 Section 525(a) of the Bankruptcy Code is the anti-discrimination provision which provides that governmental units may not discriminate a person with respect to certain grants solely because that person is a debtor in bankruptcy. 11 U.S.C. 525(a). 13

21 which was an act 4th Street did not have the authority to declare. R. at 6. Because 4th Street does not have the power to assume or reject Highway s leasehold interests, 4th Street s declaration and choice in the matter is inoperative. Debtor, in failing to decide whether to assume or reject the Highway Lease prior to the sale, therefore, rejected the lease as a matter of law because Debtor did not affirmatively assume the lease. See Eastover 19 F.3d 1077, 1083 (debtor s inaction to assume or reject the lease was deemed rejected as a matter of law). Since Debtor is unable to terminate the lease due to Highway s opposition, Debtor is not at liberty to sell the lease free and clear of the Highway Lease. Highway has clearly chosen not to terminate the lease through its multiple objections to the sale of the amphitheater. R. at 7-8. The rejection of the lease should be treated as a pre-petition breach, not a termination. Because the lease has not been terminated, Highway still retains the opportunity to select between the two options laid out in section 365(h) of the Bankruptcy Code. 5 Highway has elected (ii) of section 365(h), the scenario in which Highway may retain its leasehold possessory interests as well as all other interests agreed upon in the lease for the remainder of the term of the lease. 11 U.S.C. 365(h). Additionally, the court in Stoltz held that the only way a debtor could assume a lease without defaults under a lease agreement would be to cure such defaults prior to assumption. Stoltz 315 F.3d 80, 94. Here, as part of the original pre-petition lease agreement, Highway generously offered to install the seats and sound equipment needed for completion of the amphitheater to expedite the construction and prevent further default on the lease. R. at 6. In exchange for Highway s labor, Debtor agreed to pay Highway $2 million, an agreement that Debtor quickly defaulted on. R. at 6. Although Highway agreed to allow Debtor to defer payments until the 5 These options include (i) termination of the lease or (ii) retaining its leasehold possessory rights for the balance of the term. 14

22 development opened to the public, no reasonable court, however, would believe that deferment of payment would result in a scenario in which Highway s leasehold interest would be terminated and result in forfeiture of payment. In choosing to sell the amphitheater free and clear of Highway s leasehold interests, Debtor defaulted on the Highway Lease agreement because such sale will deprive Highway of ever receiving the $2 million or any return on its investment. Finally, the Thirteenth Circuit court relies on Pinnacle for its reasoning that the sale of property free and clear of any interests did not amount to rejection of the lease. R. at The Thirteenth Circuit, however, failed to recognize that Pinnacle differs from the case at bar because in Pinnacle the parties stipulated that no such rejection of the lease had occurred. Pinnacle 872 F.3d 892, 899. Here, no such stipulation occurred, in fact, Highway objected and then renewed its objection again prior to the sale. R. at 7-8. Highway entered the pre-petition lease agreement in good faith and has since been a cooperative lessee despite Debtor s defaults. It would be an improper and disastrous decision to uphold the Thirteenth Circuit s conclusion and deprive Highway of its leasehold interest in the amphitheater. Highway should, therefore, be entitled to maintain its leasehold interests in the Highway Lease pursuant to section 365(h) of the Bankruptcy Code because the lease was rejected as a matter of law. II. THIS COURT SHOULD REVERSE THE DECISION OF THE THIRTEENTH CIRCUIT TO APPROVE THE COMMITTEE S SETTLEMENT AGREEMENT AND GRANT HIGHWAY THE $2 MILLION IN ESTATE FUNDS BECAUSE THE COMMITTEE S SETTLEMENT AGREEMENT VIOLATES THE ABSOLUTE PRIORITY RULE. Bankruptcy courts have the authority to approve or deny compromise or settlement agreements. Fed. R. Bankr. P. 9019(a). The Bankruptcy Code mandates a system of priority distribution that bankruptcy courts must follow in chapter 11 bankruptcy dismissals. 11 U.S.C Secured creditors are of the highest priority, then special classes of creditors such as 15

23 creditors holding administrative expense claims, lien claims, and salary and wages claims then lower priority unsecured creditors. Id. A debtor wishing to pursue a settlement agreement with its creditors can only settle upon a bankruptcy court s determination that the settlement agreement is fair and equitable and in the best interest of all the creditors and the estate. See Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968); Myers v. Martin (In re Martin), 91 F.3d 389, 395 (3d Cir. 1996)(evaluating these factors to determine if a settlement is fair and equitable : (1) the probability of success in litigation; (2) the difficulties of collection; (3) the inconvenience or delay of litigation; and (4) the interest of all the creditors). This Court has a strict view of the fair and equitableness standard holding that a bankruptcy court cannot approve a settlement agreement that violates the absolute priority rule upon the objection of an impaired senior creditor class. Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973, 979 (2017); see also In re AWECO, Inc., 725 F.2d 293, 298 (5th Cir. 1984)( the words fair and equitable are terms of art they mean that senior interest are entitled to full priority over junior ones ). In Jevic, this Court reversed the Third Circuit s grant of a priority skipping settlement agreement which provided that lower priority unsecured creditors would have their claim addressed before mid-level priority judgment lien holders. Id. at 982. This Court held that the Bankruptcy Code does not grant courts the ability to approve nonconsensual priority-violating distributions; and that nothing in the Code gives courts the power to make end-of-case distributions that violate the absolute priority rule. Id. at 984. In the case at bar, the Thirteenth Circuit violated the absolute priority rule by allowing the Unsecured Creditors to receive a $2 million distribution over Highway s higher priority administrative expense claim. R. at 7-9. The Thirteenth Circuit majority opinion rationalized the priority violating distribution concluding that Jevic left open a rare case exception when a 16

24 settlement is entered early on in the case, i.e. an interim settlement, or when the settlement serves a Bankruptcy Code-related purpose. R. at 16. Indeed, Jevic acknowledges that interim dismissals differ from structured dismissals in chapter 11 cases because in an interim dismissal the nature and extent of the Estate and the claims against it are not yet resolved. Jevic Holding Corp., 137 S. Ct. 973, 985 (citing Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452, 464 (2d Cir. 2007)). Jevic, however, recognized that interim dismissals are rare, and deviation from the absolute priority rule usually requires a significant Code-related objective to be met that makes the disfavored creditors better off (emphasis added). Jevic Holding Corp., 137 S. Ct. 973, 985 (identifying critical vendor payments as an example of a significant Bankruptcy Code-related objective); see also In re Kmart Corp., 359 F.3d 866, 872 (7th Cir. 2004)(same); In re Pioneer Health Servs., 570 B.R. 228, (Bankr. S.D. Miss. 2017)(same). But even with Jevic s rare case exception to the absolute priority rule, the majority s evaluation of it is faulty. Neither an interim settlement occurred in this case nor was there a significant Bankruptcy Code-related objective that made the disfavored creditors better off. See Jevic Holding Corp., 137 S. Ct. 973, A. The Committee s Settlement Agreement is Not a Planned Interim Settlement Dismissal. This Court interprets an interim dismissal as an early in the case planned settlement agreement reached between the creditors and debtor. Jevic Holding Corp., 137 S. Ct. 973, 985. In this instance, a bankruptcy court may permit deviation from the absolute priority rule. Id. This Court adopted this narrow view of a planned interim dismissal from the Second Circuit s opinion in Iridium. 17

25 In Iridium, Iridium ( the Company ) executed contracts with Motorola to design the construction of the Iridium System which sought to provide the first network voice and data wireless device communication system. In re Iridium Operating LLC, 478 F.3d 452, Soon after, the Company was pressed for cash and borrowed $1.55 billion from secured creditors and took out an additional Senior Credit Agreement loan for $800 million from unsecured creditors. Id. at 457. The Senior Credit Agreement attached liens to the Company s property and included any possible litigation claims that may arise against Motorola. 6 Id. The Company eventually filed for bankruptcy and divided up the remaining estate assets into three separate cash funds to induce a settlement with its secured and unsecured creditors. Id. at Fund number one split money between the secured creditors and a newly created entity, the Iridium Litigation, LLC ( the Litigation Fund) established for the purpose of funding litigation claims against Motorola; fund number two provided for expense payments for fees; and fund number three distributed the Company s remaining accounts receivables between the secured creditors and the Litigation Fund Id. at 459. Motorola, however, was still a high priority creditor of the Company due to its executed contracts for the construction of the Iridium System. Id. at 465. Motorola objected to the settlement agreement arguing that it was entitled to priority status over the lower priority unsecured creditors; hence, Motorola was arguing it was entitled to priority status over the Litigation Fund. Id. The Second Circuit rejected Motorola s argument concluding that if the Litigation Fund did not receive priority status over Motorola, then the unsecured creditors would not have sufficient funds to pursue its claim against Motorola. Id. at 467. In other 6 It was believed that causes of action of breach of contract, breach of fiduciary duty, and avoidance of fraudulent conveyance were reliable claims against Motorola from their business dealings with the Company. Over time, the unsecured creditors initiated litigation proceedings against Motorola. Id. at

26 words, abiding by the absolute priority rule would immunize Motorola from litigation and make the unsecured creditors worse off. Id. In the case at bar, the Committee s Settlement Agreement was not planned and was not disputed by Skyline, the construction company the Unsecured Creditors are suing. R. at 7-8. In Iridium, the settlement agreement between the Company and its secured and unsecured creditors was a diligent six-month long negotiation that was carefully arranged for multiple funds to be dispersed between the secured and unsecured creditors, which excluded Motorola. Id. at 459. On the contrary, the settlement agreement between Debtor, 4th Street, and the Unsecured Creditors was reached days before the sales hearing and contained only one distribution, a $2 million distribution to the Unsecured Creditors to pursue litigation claims against Skyline; the settlement agreement completely ignored Highway s priority interest. R. at 6, 8. Furthermore, in Iridium the entity contesting the priority skipping distribution was Motorola, and Motorola was only contesting the distribution to protect itself against litigation by the unsecured creditors. In re Iridium Operating LLC, 478 F.3d 452, 467. Here, Highway is contesting the priority skipping distribution, not Skyline. R. at 8. Highway is, therefore, not attempting to halt litigation action against Skyline Highway simply wants to be paid. Id. The Thirteenth s Circuit majority opinion also erroneously quotes Iridium for the proposition that interim gift settlements permit deviations from the absolute priority rule. R. at 18. The Iridium opinion briefly mentions gift settlements in the context of chapter 7 liquidations, not chapter 11 dismissals, stating that gift settlements are permitted only when secured creditors gift proceeds to junior unsecured creditors. In re Iridium Operating LLC, 478 F.3d 452, 460 (interpreting Official, Unsecured Creditors Comm. v. Stern (In re SPM Mfg. Corp.), 984 F.2d 1305 (1st Cir. 1993)); see also In re LCI Holding Co., 802 F.3d 547 (3rd Cir. 2015). This settlement 19

27 gifting process between senior secured creditors and junior unsecured creditors is precisely what occurred in the Third Circuit case LCI. 7 In re LCI Holding Co., 802 F.3d 547. In LCI, the debtor s hospital was destroyed by Hurricane Katrina. Id. at 550. The lender acquired the property with a credit bid of $320 million (the aggregate debt on the property was $350 million). Id. To encourage the junior unsecured creditors to agree to the sale, the senior secured creditors deposited $3.5 million into a trust account for the benefit of the junior unsecured creditors. Id. at 551. The government, holding a property tax lien, objected to the settlement agreement arguing that it was entitled to the $3.5 million trust account due to its priority status. Id. at 555. The Third Circuit held that the settlement between the senior secured creditors and junior unsecured creditors was not property of the debtor s estate and did not alter the governments priority status. Id.; see In re SPM Mfg. Corp., 984 F.2d Here, 4th Street is no longer a senior secured creditor of the debtor, but rather 4th Street is the acquisitioning entity of the debtor s estate who is depositing $2 million into a litigation estate trust fund for the benefit of the junior Unsecured Creditors. R. at 8-9. The Thirteen Circuit s argument that the $2 million deposit is not property of the estate is misplaced. See In re On-Site Sourcing, Inc., 412 B.R. 817, 826 (Bankr. E.D. Va. 2009)(acquisitioning entity s settlement deposit into a trust for the benefit of the unsecured creditors was property of the estate and subject to absolute priority rule); contra In re LCI Holding Co., 802 F.3d 547, 555 (settlement gift was not property of the estate and not subject to the absolute priority rule because gift was between senior secured creditors and junior unsecured creditors). Highway, as the only remaining secured creditor, is not gifting anything to the junior Unsecured Creditors to encourage a settlement. R. 7 The Thirteenth Circuit mistakenly relies on LCI even though LCI was decided years before Jevic. R. at LCI does not consider Jevic s rare case exception of a planned interim settlement or a settlement that serves a significant Bankruptcy Code-related objective that makes the disfavored creditors better off. In re LCI Holding Co., 802 F.3d

28 at 8-9; see In re SPM Mfg. Corp., 984 F.2d 1305 ( gift settlements may priority skip only among senior secured creditors gifts to junior unsecured creditors). If anything, 4th Street s $2-million deposit into the Unsecured Creditors litigation estate trust fund functions more as a protective investment of 4th Street to protect itself against future litigation, not a gift to the Unsecured Creditors. R. at 29 (dissenting, Petty, J.)(4th Street s $2 million dollar payment is either (i) funds paid to settle estate claims and causes of action against 4th Street, or (ii) part of the purchase price for the purchase of substantially all of the Debtor s assets ). B. The Committee s Settlement Agreement Does Not Serve a Significant Bankruptcy Code Objective and Makes Highway Worse Off. This Court stated in Jevic that a significant Bankruptcy Code-related objective must be served and must make the disfavored creditor better off to justify deviating from the absolute priority rule (emphasis added). Jevic Holding Corp., 137 S. Ct. 973, 985. The Court identified first-day wage employee orders and critical vendor as permissible significant Code-related objectives that make the disfavored creditor better off. Id. This Court, however, left the door open for lower courts to consider business reorganization plans as permissible significant Code-related objectives so long as a successful reorganization plan would make all the disfavored creditors better off. Jevic Holding Corp., 137 S. Ct. 973, 985 (quoting In re Kmart Corp., 359 F.3d 866); see In re Fryar, 570 B.R. 602, 610 (Bankr. E.D. Tenn. 2017)(proposed settlement plan must state how it furthers the businesses reorganization goals and demonstrate how disfavored creditors are better off). To begin, the Committee s Settlement Agreement does not serve a significant Code-related objective. See In re Kmart Corp., 359 F.3d 866, In Kmart, the Seventh Circuit allowed payments to Kmart s critical vendors, the vendors that distributed $70 to a $100 million worth of groceries to Kmart weekly, ahead of Kmart s other senior secured creditors. Id. The Seventh 21

29 Circuit justified skipping the senior secured creditors priority interest because without payment to the critical vendors first, Kmart s business operations would cease. Id. Payment to the critical vendors was, therefore, in the best interest of the disfavored creditors because the disfavored creditors would not get paid if the critical vendors were not paid first. Id. Unlike Kmart, however, payment to the junior Unsecured Creditors over Highway s seniority interest does not serve a significant Code-related objective. Payment to the Unsecured Creditors is not essential to keeping the business alive or essential to the debtor s reorganization plan. 8 See In re Kmart Corp., 359 F.3d 866, Payment to Unsecured Creditors also does not make Highway, the disfavored creditor, better off. R. at In the recent Fryar opinion interpreting Jevic the proposed settlement plan was not approved solely because it failed to make the disfavored creditors better off. In re Fryar, 570 B.R. 602, 610. The debtor in Fryar owned a 50 percent interest in two properties with liens and creditor debts attached to the properties. 9 Id. at 605. Pending foreclosure, the debtor filed for chapter 11 bankruptcy and initiated settlement proceedings with the bank and his partner in the properties. Id. at 606. The settlement agreement provided that debtor s partner would pay into the estate to buy out the debtor s 50 percent share, and that the bank would sale one of the properties to pay off the IRS lien ahead of the mid-level unsecured creditors. Id. The unsecured creditors objected, and the Court held that approving the bank s payment distributions would violate the absolute priority rule and make the unsecured creditors worse off. Id. at In fact, there was no reorganization plan contemplated. R. at 17 ( the Debtor could not afford to pursue the Skyline litigation itself, much less confirm a plan of reorganization ). 9 The City had a property tax claim, the Bank had a mortgage claim, various other unsecured creditors had mid-level priority claims, and the IRS had a lien. Id. at

30 As in Fryar, the Committee s Settlement Agreement is not an anticipated reorganization plan and fails to make Highway, the disfavored creditor, better off. 10 In re Fryar, 570 B.R. 602, 610; contra In re Iridium Operating LLC, 478 F.3d 452. In fact, this settlement agreement makes Highway tremendously worse off since no funds will be left for Highway s distribution. R. at 26. If anything, paying the junior Unsecured Creditors ahead of Highway s senior priority status unjustly protects 4th Street. See Id. at (dissenting, Petty, J.)(the Committee Settlement Agreement protects 4th Street from litigation since the Unsecured Creditors will likely not pursue 4th Street if litigation against Skyline is successful). Overall, the Committee s Settlement Agreement does not fit within either category of Jevic s rare case exception because the settlement agreement is not a planned interim settlement dismissal and does not serve a significant Code-related purpose that makes the disfavored creditors better off. The Committee s Settlement Agreement is, therefore, a structured dismissal that violates the absolute priority rule of the Bankruptcy Code. See Jevic Holding Corp., 137 S. Ct. 973, 979. A structured dismissal occurs when a court considers the party s settlement agreement and rightfully distributes the estate funds in compliance with the absolute priority rule. In re AWECO, Inc., 725 F.2d 293 (a structured dismissal that priority skips senior creditors violates the absolute priority rule); In re Fryar, 570 B.R. 602 (same). In AWECO, the debtor initiated a settlement 10 Fryar did recognize a difference in an anticipated reorganization plan under a planned interim settlement dismissal. In re Fryar, 570 B.R. 602, 610 (discussing In re Iridium Operating LLC, 478 F.3d 452, 459). In an interim dismissal, a reorganization plan may make some creditors worse off but will be upheld so long as the majority of creditors are made better off. See In re Iridium Operating LLC, 478 F.3d 452, 459. The reorganization plan in Iridium was carefully planned to make the junior unsecured creditors better off at Motorola s expense. Id. This was only permitted because of the unsecured creditors lawsuit was against Motorola. Id. If Motorola would have received priority status over the junior unsecured creditors, then Motorola would have prevented litigation claims against itself; hence, Motorola would have been better off and the junior unsecured creditors worse off. Id. at 467. This is not the case at bar. Highway receiving the $2 million settlement fund does not prevent the junior Unsecured Creditors from pursuing litigation claims against Skyline. Nor does the Committee s Settlement Agreement make Skyline better off at the junior Unsecured Creditors expense. 23