Team P5

No. 17-412

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

______________________________

On Writ of Certiorari to the United States

Supreme Court from the District Court of Moot

______________________________________________________________________________

BRIEF FOR PETITIONER

______________________________________________________________________________

Team P5

Counsel for Petitioner

Oral Argument Requested

__________________________________________________________________

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QUESTIONS PRESENTED

I. Section 363(f) of the Bankruptcy Code authorizes a trustee to sell property of a

bankrupt's estate “free and clear of any interest in such property.” In contrast, Section

365(h) provides that if the trustee rejects a lease of a debtor—lessor, “the lessee may

retain its rights under such lease,” including its possessory interest right in real property.

Does Section 365(h) protection extend to the lessee's rights if they would otherwise be

eliminated in a Section 363(f) sale?

II. The Bankruptcy Code requires that Chapter 7 liquidations and Chapter 11 plans follow

the statutory priority scheme. The United States Supreme Court recently held that

structured settlements must also follow the statutory priority system and no “rare case”

exceptions exist. Should 4th Street’s “gift” of funds exclusively for unsecured creditor’s

legal claims, culminating in the termination of a lessee’s property rights be affirmed,

despite contrasting the Supreme Courts affirmation of the statutory priority scheme?

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TABLE OF CONTENTS

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

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

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

STATEMENT OF JURISDICTION………………………………………………………......vii

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

A. Nature of the Case……………………………………………………………………1

B. Course of Proceeding and Disposition in Court Below……………………………2

C. Statement of Facts……………………………………………………………………3

SUMMARY OF THE ARGUMENT……………………………………………………………7

STANDARD OF REVIEW……………………………………………………………………...8

ARGUMUNT……………………………………………………………………………………..9

I. THE BANKRUPTCY COURT ERRED IN HOLDING THAT SECTION 363(F)

TRUMPED THE PROTECTION AFFORED HIGHWAY UNDER 365(H)………12

A. The “majority view” interpretation that Section 365(h) is not trumped by

Section363(f) is the proper standard to apply in this case…………………………..13

1. Under the “specific governs the general” canon of statutory construction, section

365(h) is not trumped by Section 363(f)…………………………………………...14

2. Congress intended Section 365(h) to protect lessees in Section 363(f)

bankruptcy………………………………………………………………………….16

B. The “minority view” interpretation that Section 365(h) only applies when a lease is

rejected by a debtor who possesses the property is not the appropriate standard to

apply in this case………………………………………………………………………..17

1. If Section 363(f) could be used to sell property free and clear of leasehold

interests, the protections afforded in Section 365(h) would be eliminated……..17

2. The “minority view” relies on faulty case law…………………………………...17

3. The “minority view” fails to account for situations where Section 365(h) is

alleged…………………………………………………………………………….18

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II. The Settlement should not be approved because it constitutes property of the estate

which is subject to the statutory priority scheme and does not meet the

qualifications for the “rare case” exception…………………………………………..19

A. Under Jevic, courts do not have the authority to approve structured

settlements that violate the statutory priority

scheme…………………………………………………………………………...21

B. Even if this Court allows the possibility of a “rare case” exception for

intermediate settlements, the Settlement in this case is not an intermediate

settlement and does not serve a significant fundamental bankruptcy

policy…………………………………………………………………………….26

1. The Settlement does not meet the “rare case” exception requirements

because it is not an intermediate settlement………………………………...27

2. The Settlement does not serve a Bankruptcy Code purpose………………..28

C. The Court erred in determining that the money paid by 4th Street constitutes

a “gift” because it is estate property with the sole purpose of circumventing

the statutory priority scheme…………………………………………………..31

CONCLUSION…………………………………………………………………………………33

APPENDIX……………………………………………………………………………………...a1

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TABLE OF AUTHORITIES

United States Supreme Court Cases

Alyeska Pipeline Service Co. v. Wilderness Society,

421 U.S. 1612 (1975)…………………………………………………………………20,21

Begier v. IRS,

496 U.S. 53 (1990)……………………………………………………………………….26

Crawford Fitting Co. v. J.T. Gibbons, Inc.,

482 U.S. 437 (1987)……………………………………………………………………...21

Czyzewski v. Jevic Holding Corp.,

137 S. Ct. 973 (2017)……………………………………………………………...26,27,28

International Paper Co. v. Ouellette,

479 U.S. 481 (1987)…………………………………………………………………..20

Morales v. Trans World Airlines, Inc., 504 U.S. 374 (1992)……………………………………………………………….19,20

Protective Comm. For Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson,

379 U.S. 594 (1965)……………………………………………………………………...28

SEC v. American Trailer Rentals Co.,

323 U.S. 134 (1944)……………………………………………………………………...28

United Sav. Assn. of Tex. v. Timbers of Inwood Forest Associates, Ltd.,

484 U.S. 365 (1998)……………………………………………………………………...30

United States Court of Appeals Cases

In re AWECO,

725 F.2d 293 (5th Cir. 1984)……………………………………………………………...29

In re Braniff Airways, Inc.,

760 F.2d 935 (5th Cir. 1983)………………………………………………………27,29,35

In re Chrysler LLC,

951 F.2d 1235 (11th Cir. 1992)…………………………………………………………27

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In re Iridium Operating LLC,

478 F. 3d 452 (3d Cir. 2007)……………………………………………………….33,34,35

In re Lionel Corp.,

722 F.2d 1063 (2d Cir. 1983)………………………………………………………….27,29

In re Sadler,

935 F.2d 918 (7th Cir. 1991)……………………………………………………………...31

Mediofactoring v. Mcdermott (In re Connolly N. Am., LLC),

802 F.3d 810, 814 (6th Cir.2015)

Precision Indus. Inc. v. Qualitech Steel SBQ, LLC,

327 F.3d 537 (7th Cir. 2003)……………………………………………………………...18

Razavi v. Commissioner of Internal Revenue,

74 F.3d 125, 127 (6th Cir. 1996)

United States District Court Cases

In re Downtown Athletic Club of New York City, Inc.,

2000 WL 744126, *4 (S.D.N.Y. 1976)………………………………………...………9,16

Precision Indus. Inc. v. Qualitech Steel SBQ, LLC,

2001 WL 699881, *14 (S.D. Ind. 2001)…………………………………………………17

United States Bankruptcy Court Cases

In re Churchill Props. III, L.P., 197 B.R. 283 (Bankr. N.D. Ill. 1996)……………………………………….17,19,24

In re Crumbs Bake Shop, Inc., 522 B.R. 766 (Bankr. D.N.J. 2014)……………………………………18,21,22,23

In re Fryar,

570 B.R. 602 (Bankr. E.D. Tenn. 2017)…………………………………………………33

In re On-Site Sourcing, Inc.,

412 B.R. 817 (Bankr. E.D. Va. 2009)…………………………………………………….39

In re Haskell L.P.,

321 B.R. 1 (Bankr. D.Mass. 2005)………………………………………………19,22

In re Hill, 307 B.R. 821 (Bankr. W.D.Pa. 2004)………………………………………………26

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In re LHD Realty Corp.,

20 B.R. 717 (Bankr. S.D. Ind. 1982)……………………………………………….19

In re MMH Auto. Grp. LLC,

385 B.R. 347 (Bankr. S.D. Fla. 2008)…………………………………………..24,25

In re Taylor,

198 B.R. 142 (Bankr. D.S.C. 1996)……………………………………17,18,19,22

In re Zota Petroleums, LLC,

482 B.R. 154 (Bankr. E.D. Va. 2012)………………………………………….10,15

Legislative History Materials

S. Rep. 95-989 (1994),

reprinted in 1978 U.S.C.C.A.N. 5787…………………………………………………...21

H. R. Rep. No. 95-595, (1977)……………………………………………………………………23

H. R. Rep. No. 103-185, (1994)…………………………………………………………………..25

Bankruptcy Reform Act of 1994, Section–by–Section Analysis,

140 Cong. Rec. H10752–01 (1994)……………………………………………………...15

Secondary Materials

Christopher C. Genovese, “Precision Industries v. Qualitech Steel: Easing the Tension Between

Sections 363 and 365 of the Bankruptcy Code?”

39 Real Prop. Prob. & Tr. J. 627 (2004)…………………………………………………..9

Michael St. Patrick Baxter, “Section 363 Sales Free and Clear of Interests: Why the Seventh

Circuit Erred in Precision Industries v. Qualitech Steel.”

59 Bus. L. 475 (2004)………………………………………………………………….9,18

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, 106 (2004)……………………………………………..12,13,15

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STATEMENT OF JURISDICTION

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

1

STATEMENT OF THE CASE

A. Nature of the Case

Highway 61, Inc. (“Highway”), agreed to a 30-year multi-purpose lease with High Rocks,

Inc. (“Debtor”), prior to the commencement of construction on Debtor’s casino-resort. Over two

years after the commencement of the lease and construction, Debtor filed for chapter 11

bankruptcy due to under-performing general contractors, and mounting pressure from an

aggressive “loan to own” strategy by the note owner, 4th Street Partners, Inc. (“4th Street”).

As part of its chapter 11 bankruptcy plan, Debtor filed a motion requesting permission to sell

substantially all assets under section 363(f) of the Bankruptcy code. Prior to the sale hearing,

Debtor, the Committee, and 4th Street, approved a “Committee Settlement” in which Highway’s

leasehold possessory interests would be terminated at the execution of the agreement. Highway

objected the settlement, claiming: (1)-Highway’s leasehold interest would be improperly

terminated under the settlement, violating its rights under section 365(h) of the bankruptcy code,

and (2)-the settlement agreement could not be approved because the monetary proceeds from the

settlement conflicted with the absolute priory scheme embodied in bankruptcy law; which

prioritizes the rights of secured creditors over the rights of unsecured creditors.

This Court must now consider two issues. First, whether a “free and clear” sale of real

property under 363(f) of the Bankruptcy code violates the protection afforded to lessees under

365(h) of the bankruptcy code. Secondly, whether a “gift” as part of the settlement agreement

between Debtors, the Committee, and 4th Street violates the distribution plan embodied in the

absolute priority rule.

Therefore, Highway requests that this Court reverse and remand the District Court of Moot’s

holding that lessees’ rights were not afforded protection under section 365(h) of the bankruptcy

code. Further, Highway contends the “gift” as part of the settlement between Debtor and 4th

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Street violates the absolute priority scheme’s deference to the rights of secured creditors and

lessee’s.

B. Course of Proceedings and Disposition of the Court below

As part of its “loan to own strategy,” 4th Street Partners, Inc., (“4th Street”) commenced a

foreclosure action against High Rocks, Inc. (“Debtor”), in June of 2016. (R. at 5.) To prevent

foreclosure, Debtor voluntarily filed chapter 11 bankruptcy in the United States Bankruptcy

Court in July of 2016. (R. at 6). Further construction delays forced Debtor to halt all construction

in December of 2016. (R. at 6). Debtor then filed a motion to sell substantially all assets by

auction, under section 363(f) of the bankruptcy code; with the motion providing an express

stipulation that the new property owner would receive the property “free and clear” of

Highway’s leasehold rights. (R. at 7).

The auction took place on January 11, 2017, with 4th Street being the lone bidder. (R. at 7).

4th Street’s intention to operate the theatre itself, coupled with alleged claims against one of the

former general contractors, resulted in the Committee filing an objection to the sale. (R. at 7).

The Committee’s opposition alleged the sale was a symbolic foreclosure which would leave no

money left in the estate for unsecured creditors to pursue remedies. Highway also objected to the

sale, stating it was entitled to possession of the amphitheater pursuant to the protection afforded

to lessees under 365(h) of the Bankruptcy code. (R. at 8).

Prior to the sale hearing, Debtor, the Committee, and 4th Street agreed to a settlement in

which the Committee would drop its objection to the sale in exchange for 4th Street “gifting” $2

million of its own money to a trust exclusively for unsecured creditors to pursue remedies

against a former general contractor, Skyline Construction, Inc., (“Skyline”) (R. at 8).

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During the sale hearing, Highway objected to the sale alleging: (1)-its possessory rights in

the amphitheater were being improperly terminated in violation of section 365(h) of the

bankruptcy code, and (2)-the Committee Settlement could not be approved because the $2

million “gift” violated the principles of the absolute priority scheme, which regulates the claims

of secured creditors over unsecured creditors. (R. at 8).

Despite objections, the bankruptcy court approved the sale holding: (1)- section 363(f) of the

Bankruptcy code trumped Highway’s possessory rights under 365(h), and (2)- the “gift”

proceeding of the settlement did not conflict the absolute priority scheme because “it was in the

best interests of all parties.” (R. at 9). This appeal is the result of the district court affirming the

bankruptcy court’s decision after Highway’s initial appeal. (R. at 9).

C. Statement of the Facts

Prior to commencement of construction on its casino-resort, High Rocks, Inc. (“Debtor”)

entered into a 30-year lease agreement with Highway 61, Inc. (“Highway”). (R. at 5). The lease

stipulated that upon completion of the amphitheater, Highway would conduct management,

marketing, and operation of the building for the duration of the lease. (R. at 5).

Despite no experience constructing a project of this magnitude, Debtor chose Skyline

Construction, Inc. (“Skyline”) to serve as general contractor for the development. (R. at 4).

Obstacles in construction started almost immediately, with Debtor alleging Skyline attempted to

cut costs by using cheap materials, and causing insufficient water pressure in the hotel; resulting

in replacing most of the pipes. (R. at 4). Despite inconsistencies in other aspects of development,

the construction of the amphitheater’s stage, concession stands, restrooms, ticket office, and VIP

lounge were completed timely. (R. at 4). The installation of seating, sound equipment, and sound

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panels were unfinished when Debtor elected to terminate the contract with Skyline in December

of 2015. (R. at 4).

Debtor hired a replacement general contractor in January of 2016. (R. at 5). The company

had experience building casino-hotels, but no expertise in constructing amphitheaters. (R. at 5).

The parties agreed Debtor would find a subcontractor to finish the amphitheater. (R. at 5).

The delay in finishing the resort-casino culminated in the original financer of the project,

North Country Bank (“North Country”), selling the note in February 2016. (R. at 5). The new

note holder, 4th Street Partners, Inc. (“4th Street”), is the owner and operator of numerous casino

and resort properties, and acknowledged using a “loan to own strategy” when buying the

property in furtherance of its enterprise. (R. at 5).

4th Street commenced foreclosure action against Debtor in June of 2016. (R. at 5). To stall

foreclosure, Debtor filed this chapter 11 bankruptcy case in United States Bankruptcy Court in

the District of Moot in July of 2016. (R. at 5).

Debtor claimed the casino-resort was completion, and in the hope of expediting opening day,

Highway offered to use its expertise to finish the installation of necessary materials in the

amphitheater. (R. at 6). The bankruptcy court approved, and the parties entered into a post-

petition contract in which Highway started installation in September of 2016, and finished in

November of 2016. (R. at 6). Despite Highway’s performance, delays constructing the resort-

casino meant the $2 million compensation for installation would be given in the form of an

administrative expense, pursuant to 503(b)(1) of the Bankruptcy Code. (R. at 6).

Continued delays in construction resulted in Debtor halting all construction in December of

2016. (R. at 6). After halting development, Debtor filed a motion under section 363(f) of the

Bankruptcy code to sell its assets “free and clear of all liens, claims, encumbrances, and

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interests.” (R. at 6). The motion provided express language regarding the “free and clear”

provision regarding Highway’s leasehold interest. (R. at 7).

Prior to auction, the Committee informally alleged various claims against 4th Street, as well

as former general contract Skyline. (R. at 7). The Committee stated that a lack of resources

prevented pursuit of the claims against Skyline, and they were assigned as a litigation trust

exclusively for unsecured creditors. (R. at 7). The Committee believes that if the claims against

Skyline are proven, it will result in successful distribution to unsecured creditors. (R. at 7).

Highway’s leasehold interest was not assumed or rejected by the Debtor prior to the proposed

sale. (R. at 11).

The auction took place on January 11, 2017, with 4th Street as the sole entity present, and

credit bidding the full amount of its secured debt. (R. at 7). Post-auction, 4th Street announced it

would be the sole owner and operator of the amphitheater, and that its winning bid entitled

ownership “free and clear” of Highway’s leasehold interest. (R. at 7).

The Committee and Highway objected to the sale, questioning the ethical and legal

legitimacy of the sale. (R. at 7). The Committee alleged the sale was a veiled foreclosure and the

empty estate would prevent unsecured creditors from pursuing claims. Highway’s objection

stated the “free and clear” sale violates the protections afforded to lessees under 365(h) of the

Bankruptcy code. (R. at 8).

Prior to the sale hearing Debtor, the Committee, and 4th Street agreed to a settlement in

which the Committee would remove its objection. (R. at 8). In exchange for dropping the

objection to the sale and releasing 4th Street from all claims, 4th Street would in turn “gift” $2

million into a trust exclusively for funding unsecured creditor’s claims against Skyline. (R. at 8).

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At the sale hearing Highway objected to the legality of the agreement, stating that its

leasehold interest was being improperly terminated, and that the termination was in violation of

protection afforded to lessees under section 365(h) of the Bankruptcy code. (R. at 8). Further,

Highway voiced its concern regarding the legality of 4th Street’s “gift” as part of the agreement.

(R. at 8). Highway alleges that the agreement could not be approved because the distribution of

proceeds from the agreement is in direct conflict with the absolute priority scheme, which places

rights of secured creditors over those of unsecured creditors. (R. at 8).

Despite Highway’s objection’s as a protected lessee and secured creditor, the bankruptcy

court approved the Committee settlement, ruling that section 363(f) outweighed any rights

Highway had under section 365(h) of the Bankruptcy code. (R. at 9). Further, the bankruptcy

could held the $2 million “gift” by 4th Street was in the “best interest of the parties,” because the

funds would allow unsecured creditors to bring claims against Skyline. (R. at 9). The bankruptcy

court’s decision terminated Highway’s leasehold rights in the property. (R. at 9).

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SUMMARY OF THE ARGUMENT

Highway 61, Inc. entered into a lease agreement with Debtor. After filing chapter 11

reorganization in Bankruptcy court, Debtor then proceeded to sell assets “free and clear” under

section 363(f) of the Bankruptcy code. Post-auction, Highway objected to the sale, claiming its

rights as a lessee under 365(h) of the Bankruptcy code prevented the sale of the asset free and

clear of Highways interest. Highway also claims that the Settlement agreement allowing the sale

deviates from the absolute priority scheme, removing Highways right to compensation as a

secured creditor.

Highway also objects on the grounds that the “gift” as part of the structured settlement is in

direct conflict with statutory intent and Supreme Court precedent concerning Settlements that

attempt to circumvent the priority scheme. In the alternative, if it is decided that there is a “rare

case” exception to the Supreme Court’s ruling in Jevic, that the gift in this case does not meet the

factors necessary.

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STANDARD OF REVIEW

In reviewing cases where there is a question of correct application of law, the court reviews

the decision de novo. Razavi v. Commissioner of Internal Revenue, 74 F.3d 125, 127 (6th Cir.

1996) (holding de novo standard of review is exercised when determining if the law was applied

correctly). Within application of bankruptcy law, the decision of the bankruptcy court is

examined directly; as opposed to the ruling on appeal from the district court. (Mediofactoring v.

McDermott (In re Connolly N. Am., LLC), 802 F.3d 810, 814 (6th Cir. 2015).

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ARGUMENT

I. THE BANKRUPTCY COURT ERRED IN HOLDING THAT SECTION 363(F)

TRUMPED THE PROTECTION AFFORDED HIGHWAY UNDER 365(H).

The principles promoted by Section 365(h) and Section 363(f) of the Bankruptcy Code

are vital to the ultimate goals of the Bankruptcy Code. They provide the framework from which

parties engage in regulated, efficient, and fair bankruptcy process. Section 363(f) permits the sale

of property free and clear of an interest held an entity other than the estate where “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)(5). The Bankruptcy Code does not provide a definition of “such

interest” but many courts have interpreted the term broadly to include possessory interests of

tenants under leases. See, e.g., In re Downtown Athletic Club of New York City, Inc., No. M—47,

2000 WL 744126, *4 (S.D.N.Y. June 9, 2000). Through Section 365(h), Congress has explicitly

provided lessees of debtor’s special protections in the event a debtor, as a lessor, rejects a lease.

11 U.S.C. § 365(h). Section 365 provides the trustee and debtor with the right to reject executory

contracts and unexpired leases. Id. Options for lessees are limited upon termination, and the non-

breaching party is given two choices: treat the lease as terminated and sue for damages, or

continue in possession and pay rent. Id.

When read and applied separately, these distinct statutory provisions are unassuming and

straightforward. Discrepancies arise when the two statutes are applied in unison, because each

statute provides an exclusive right that circumvents the protections afforded to Debtors and

lessees. This statutory conflict has created ambiguity in the application and interpretation in

opinions, resulting in a split of case law. See generally Michael St. Patrick Baxter, “Section 363

Sales Free and Clear of Interests: Why the Seventh Circuit Erred in Precision Industries v.

Qualitech Steel,” 59 Bus. L. 475 (2004); Christopher C. Genovese, “Precision Industries v.

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Qualitech Steel: Easing the Tension Between Sections 363 and 365 of the Bankruptcy Code?” 39

Real Prop. Prob. & Tr. J. 627 (2004). In the present case, there was no separate assumption nor

rejection of the lease in the planning and execution of the sale, and here, “the Highway Lease

was neither assumed nor rejected by the debtor prior to the proposed sale.” (R. at 11). Thus, the

lease was de facto rejected. See also, Precision Indus. Inc., v. Qualitech Steel SBQ, LLC, No.

IP00–0247–C–H/G, 2001 WL 699881, at *14 (S.D.Ind.2001) (holding failure to negotiate

assumption of a lease resulted in de facto rejection).1

With holdings reflective of lessee’s protections in bankruptcy proceedings, courts have

held that the provisions of Section 365(h) are the exclusive remedies of a lessee, and the debtor

cannot avail itself of the provisions of Section 363(f) to sell property with disregard to a lessee's

leasehold protections. See, e.g., In re Churchill Props. III, L.P., 197 B.R. 283

(Bankr.N.D.Ill.1996); and In re Taylor, 198 B.R. 142 (Bankr.D.S.C.1996). When in unison,

statutory provisions offer an efficient model of procedure with which parties can resolve

disputes. In contrast, when the statutes in this case are read together, the contradiction

compromises the protection of parties. In light of this conflict, the application of Section

365(h) is better suited because of the specifics of agreement between the Debtor, the Committee,

and 4th Street; and the failure of those parties to respect the remedies afforded to Highway.

Applying a de novo standard of review, the Thirteenth Circuit incorrectly affirmed the

findings of the District Court and Bankruptcy Court that High Rocks, Inc. (the “Debtor”) can sell

1 The debtor Qualitech granted to lessee Precision a ground lease for $1 a year for a period of ten years. During

those ten years, Precision would construct and operate a supply warehouse to provide supply services for Qualitech.

At the end of the ten-year period, Qualitech had the right to purchase the warehouse for $1. The year after the

execution of the lease, Qualitech filed a chapter 11 bankruptcy petition, and substantially all of its assets were sold at

auction. The court held that there no separate assumption and assignment of the Precision lease in connection with

the sale, and despite negotiations, the lease was de facto rejected because the parties never agreed upon an

assumption of the lease. See also, In re Zota Petroleums, LLC, 482 B.R. 154 (Bankr.E.D.Va. 2012).

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real property “free and clear” of Highway 61, Inc.’s (“Highway”) possessory leasehold interest

over Highway’s objection.

When confronted with similar circumstances, a majority of courts have held that Section

365(h) protections are not trumped by Section 363(f) rights. These courts have noted that the

“specific governs the general” canon of statutory construction as well as exhaustively

documented congressional conduct point to the supremacy of Section 365(h) over Section 363(f)

in this particular case. See, e.g., In re Crumbs Bake Shop, Inc., 522 B.R. 766, 778 (Bankr.D.N.J

2014); and In re Taylor, 198 B.R. at 167.

While the Respondent argues the minority approach that “statutory terms must be

construed according to their common meaning, and § 363(f) plainly authorizes the sale of

property free and clear of any interest if its conditions are satisfied”, this is an incorrect

interpretation of the statute. Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537,

544–46 (7th Cir.2003). This “broad strokes” version of interpretation fails to yield results in

contrast to the legal rights and remedies afforded to lessees in cases like this.

Further, the ramifications of affirming this holding allow an opening in which insecurity

and overly cautious action will dictate relations between commercial lessors and lessee’s. Future

Debtors will have the perfect roadmap for cloaking leasehold rejections as “free and clear” sales.

Sales of this caliber would result in the lessee still being accountable to those who contracted

with them in reliance of stability; but without the protections afforded to them under Section

365(h). Lastly, businesses that seek chapter 11 reorganization as a source of revival in stagnant

business will face even more leasehold hardship, tainted with the uncertainty surrounding a

prospective lessee’s rights and protections in the event of a “free and clear” sale.

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A. The “majority view” interpretation that Section 365(h) is protected when viewed

against Section 363(f) is the proper standard to apply in this case.

As noted above, Section 365(h) and Section 363(f) work in harmonious isolation, but

when a Debtor seeks to sell property free and clear of a leasehold interest, the two sections are

caught in the mire of contractual leasehold rights and relationships of the parties. As a result of

this conflict, a majority of courts have determined that in situations like the present case, the two

sections are indeed irreconcilable; and that Section 365(h) trumps Section 363(f) by providing

the “exclusive remedy available to the debtor in an executory lease situation.” In re LHD Realty

Corp., 20 B.R. 717, 719 (Bankr.S.D.Ind.1982); see also Qualitech Steel SBQ, LLC, 2001 WL

699881, at *14 (S.D.Ind. Apr. 24, 2001); In re Haskell L.P., 321 B.R. 1, 9 (Bankr.D.Mass.2005).

Supporters of this “majority view” consistently make three claims. They first argue that “it is a

commonplace of statutory construction that the specific governs the general.” Morales v. Trans

World Airlines, Inc., 504 U.S. 374, 384 (1992). Thus, considering Section 365(h) is specifically

directed at the rights and privileges of lessees in a bankruptcy sale, it should govern the general

provisions of Section 363(f). See, e.g., In re Churchill Props., 197 B.R. at 288. Bolstering this

position of specificity over the general, courts argue that the legislative history of Section

365(h) demonstrates a clear congressional intent to protect lessees from lessors in bankruptcy

sales. See, e.g., In re Taylor, 198 B.R. at 165–66; see also In re LHD, 20 B.R. at 719.2 Finally,

the majority of courts have held that if Section 363(f) could be used to sell property free and

clear of leasehold interests, the protections of Section 365(h)“would be nugatory.” In re

Churchill Props., 197 B.R. at 288; see also In re Haskell, 321 B.R. at 9; and Robert M.

Zinman, Precision in Statutory Drafting: The Qualitech Quagmire and the Sad History of §

2 In In re LHD, the court commented that through Section 365(h), Congress “afford[ed] the debtor the benefit of

rejecting an undesirable lease while at the same time protecting the property rights of the lessee”.

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365(h) of the Bankruptcy Code, 38 J. Marshall L.Rev. 97, 106–18 (2004).3 These arguments

demonstrate the necessity that this Court find that Section 365(h) is not trumped by Section

363(f) in the present case. Lastly, the specificity of the statute governing lessee’s rights when a

lessor Debtor is in financial strife only furthers the majority position of courts when lessees are

left to suffer the uncertainty of remedy when a lessor seeks to reject the agreement between the

parties.

1. Under the “specific governs the general” canon of statutory construction, section

365(h) is not trumped by section 363(f).

This Court has repeatedly held that more specific statutory provisions prevail over

contrary general statutory provisions. In Morales, this Court discussed this principle in detail

regarding the ERISA pre-emption scheme. In the ruling handed down by this Court, rationale

determining that “a general ‘remedies’ saving clause [from the pre-ADA/no pre-emption era]

cannot be allowed to supersede the specific substantive pre-emption provision.” Morales, 504

U.S. at 385. This Court further likened this situation to the holding in Ouellette, noting that they

“do not believe Congress intended to undermine this carefully drawn statute through a general

saving clause.” International Paper Co. v. Ouellette, 479 U.S. 481, 494 (1987). However,

ERISA provisions are not the only area in which this Court has is Court has touched on the

importance of the “specific governs the general” statutory construction. As the highest judicial

authority in the United States, this Courts previous rulings reflect principles of individual

protection when faced with potential loss resulting from the actions of another.

In Alyeska Pipeline, this Court considered the general role of the 1853 Fee Act in federal

courts, noting that the Act “specif[ied] in detail the nature and amount of the taxable items of

3 Robert Zinman argues that Congress has consistently reaffirmed the rights of lessees under Section 365(h) and

arguing that such acts are “inconsistent with the notion that Congress intended that the landlord could easily avoid

these protections by employing Section 363 in lieu of Section 365”

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cost in the federal courts.” Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 1612,

1619 (1975). Twelve years later, this decision helped this Court find in Crawford that the

“comprehensive scope of the [Fee] Act and the particularity with which it was drafted

demonstrated to us that Congress meant to impose rigid controls on cost-shifting in federal

courts.” Crawford Fitting Co. v. J. T. Gibbons, Inc., 482 U.S. 437, 445 (1987).

In broadening the position maintained by this court concerning statutory interpretation,

this analysis has not been limited to legal realms outside of bankruptcy law. Indeed, many courts

have adopted the same reasoning regarding the Bankruptcy Code. In Crumbs Bake Shop, the

court discussed the importance of the specific wording of Section 365(n) in relation to the very

similar specific wording of subsection (h). “Like § 365(h), subsection (n) is specific in granting

certain rights to licensees of rejected intellectual property licenses. The specific language in §

365(n) should not be overcome by the broad text of § 363(f).” In re Crumbs Bake Shop, 522 B.R.

at 778. Accordingly, this Court should hold that the specific language of section 365(h), like in

subsection (n), should not “be overcome by the broad text of [section] 363(f). By formulating a

ruling similar to the precedented scope of “specific governs the general” statutory interpretation,

this Court would be reaffirming the principles of thorough statutory analysis protecting parties,

as opposed to the broad strokes of law that diminish protections parties rely on when making

decisions.

2. Congress intended Section 365(h) to protect lessees in Section 363(f) bankruptcy.

Adherence to Section 365(h) is necessary in this sale of real property because there is a

clear congressional mandate that lessees receive certain protections from lessors. Legislative

history demonstrates that discussions about the nature of protection in Section 365(h) maintains a

consistent theme for decades and conclusions on the subject are unanimous: protection for

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lessees. A Senate Report from 1978 commented that under the terms of § 365(h), “the tenant will

not be deprived of his estate for the term for which he bargained.” S.Rep. No. 95–989, at

60 (1978). Lessee protection in the clear legislative mandate does not end there. The exhaustive,

section–by–section analysis of the 1994 amendments to the Bankruptcy Code reflect a continued

desire by Congress to protect the rights of lessees. “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 . . . by the lessee, the right to use, possess, quiet enjoyment, sublet and assign.”

140 Cong.Rec. H.10752–1 (daily ed. Oct. 4, 1994).

Moreover, in his comprehensive review of the history of Section 365(h), Robert Zinman

notes that “the legislative history suggests that Congress, “again and again, from the drafting of

the Code to the amendments that followed over the years, expressed in concrete statutory

provisions its intention to protect the tenant's estate and the rights of those with interests in that

estate when the lease is disaffirmed in the landlord's bankruptcy.” 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, 106–18 (2004).

With the legislative history clear, opinions borne with this intent maintain lessee

protection, and go as far as to and comment on section 365(h)’s importance in securing lessee’s

rights. In Taylor, Bankruptcy Judge John E. Waites noted that “[i]n order to recognize the

apparent intentions of drafters of the Bankruptcy Code as expressed so specifically in § 365(h),

this Court agrees that § 365 is the necessary avenue which this Debtor must follow before this

Court could authorize [such a sale].” In re Taylor, 198 B.R. at 167. Other bankruptcy courts have

faced similar cases, and voiced similar opinions. See generally, In re Zota Petroleums, 482 B.R.

at 161–62; and In re Haskell, 321 B.R. at 9. Accordingly, as the Crumbs Bake Shop court held,

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“the general provision of § 363(f) does not wipe away the [specific] rights granted to [parties]

by § 365. In re Crumbs Bake Shop, at 778. By approving this sale at such an early stage, this

Court would be subverting section 365(h), circumventing the opportunity of Highway utilizing

section 365 protections relied on by other lessee’s face with the dilemma of a Debtor lessor. A

ruling violating those remedies afforded to Highway would be inconsistent with the intentions of

Congress, and the goals of the Bankruptcy Code to promote protection to parties affected by the

financial duress of a Debtor.

C. The “minority view” interpretation that Section 365(h) only applies when a lease is

rejected by a debtor who possesses the property is not the appropriate standard to

apply in this case.

The “minority view” argues that section 365(h) applies only when a debtor remains in

possession of its property and rejects a lease—not when the debtor sells property (such as a

lease) free and clear of any interest pursuant to Section 363. Consequently, when the debtor sells

property subject to a lease free and clear of that lease pursuant to Section 363(f), a court

following the minority view will not apply Section 365(h). See, In re Downtown Athletic Club of

New York City, 2000 WL 744126 at *4–5. This, however, is not the suitable standard to judge the

relevance of Section 365(h) protections for lessees from bankrupt lessors. Rights to property

maintain their position despite the sale of that property. The sale of the car, home, or business is

built upon the premise that if the party breaches its duty the aggrieved will have recourse. By

selecting the minority approach to the case at hand, this Court would make the already limited

rights of lessees and make them nonexistent.

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1. If Section 363(f) could be used to sell property free and clear of leasehold interests, the

protections afforded in Section 365(h) would be eliminated.

Many courts have noted a major flaw in the “minority view”— that if Section 363(f)

were to be applied as the minority view calls for, it would effectively lead to the dissolution of

the rights and protections provided in 365(h). The court in Churchill discussed this very issue.

There, lessee C & H Enterprises sought to remain in possession of a leasehold interest in a

laundry service at an apartment complex that filed for Chapter 11 bankruptcy. In re

Churchill, 197 B.R. at 284. C & H argued that Section 365(h)(1)(A)(ii) applied and they

attempted to use it to enforce the lease provision against the Bank as the Debtor's successor. Id.

The bankruptcy court held that C & H’s right to invoke section 365(h) was “consistent with the

plain language of Section 365(h) and the underlying intent of Congress.” Id. at 287-88. Their

reasoning stemmed from the idea that if they were “to adopt the Bank's application of Section

363(f) [the minority view], the application of Section 365(h)(1)(A)(ii) as it relates to non-debtor

lessees would be nugatory.” Id. at 288. At present, if this Court were to apply the “minority

view”, it would result in Highway being unable to exercise their legally afforded protection

provided in 365(h).

2. The “minority view” relies on faulty case law.

In their claim that the protections of Section 363(f) govern, proponents of the “minority

view” argue that the order approving the final sale and assumption provide that the sale of

debtor's assets be free and clear of liens, claims, encumbrances and interests. Further, the

minority view relies largely on the holding in Qualitech; that a sale of assets free and clear of the

interests of any other party may include the sale of a lease. A fundamental premise of

the Qualitech decision is the Seventh Circuit's statement that there is nothing in Section

363(f) that suggests its provisions are subject to those of Section 365(h). See, In re MMH Auto.

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Grp. LLC, 385 B.R. 347, 365–66 (Bankr.S.D.Fla.2008). The Seventh Circuit declared that

“[N]owhere in either Section 363(f) or Section 356(h) is there a cross-reference indicating that

the broad right to sell estate property free of “any interest” is subordinate to . . . Section

365(h)[.]” Qualitech, 327 F.3d at 547. The court points to this omission as evidence that

Congress “did not intend for the latter section to limit the former.” Id. This statement has been

fraught with controversy.

In an article highly critical of the Qualitech decision, Michael St. Patrick Baxter writes

that the court's analysis is defective. Michael St. Patrick Baxter, “Section 363 Sales Free and

Clear of Interests: Why the Seventh Circuit Erred in Precision Industries v. Qualitech Steel,” 59

Bus. L. 475 (2004). To support the position, Baxter noted that pursuant to 11 U.S.C. § 363(l), all

sales under Section 363 are subject to Section 365. Id. at 477. The MMA Auto Group court

commented that “Baxter argues, all sales outside the ordinary course of business are subject to all

the provisions of Section 365, including Section 365(h).” In re MMH Auto., 385 B.R. at 365–66.

3. The “minority view” fails to account for situations where Section 365(h) is alleged.

Another flaw in the “minority view” rationale surfaces when attempting to conclude what

happens when Section 365(h) is expressly implicated. The minority view relies heavily on the

holdings of Cheslock-Bakker and Qualitech—both of which involved situations where a free and

clear sale occurred without any assumption or rejection of the lease taking place. Qualitech, 327

F.3d at 5474; Cheslock–Bakker, 2000 WL 744126, *4.5 Furthering this inconsistency, almost all

courts adopting the minority interpretation have held that a Section 363(f) sale made without any

4 The Qualitech court ironically construes the trustee’s failure to timely assume the lease as a “repudiation” rather

than a rejection (that would have triggered § 365(h)). 5 The Cheslock-Bakker court attempts to distinguish a prior, arguably conflicting, case on the basis that there “the

court was addressing whether property could be sold free and clear after the rejection of unexpired leases by a

trustee or debtor-in-possession in the context of Section 365(h), not whether property can be sold free and clear

under Section 363”. Id.

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assumption or rejection of the lease extinguishes the lessee's rights under Section 365(h). See,

e.g., In re Hill, 307 B.R. 821, 825–26 (Bankr.W.D.Pa.2004).

This position regarding the statutory conflict is effectively just skirting the underlying

issue—culminating in the minority view to failing to offer a functional solution when Section

365(h) is exercised at the start of bankruptcy by the protected party. This is precisely the issue at

hand (both Sections 365(h) and 363(f) are implicated) and why the “minority view” is not the

appropriate standard to apply when the circumstances of the case involve a lessee who is no

longer afforded the options granted under the statute.

In conclusion, the “minority view” falls short, and cannot be appropriately applied in the

present case. Additionally, at no place in any of the legislative history or, in the language of the

statute itself, did Congress mention or refer to any limitations on the supreme rights afforded to

lessees in Section 365(h). This lack of rationale in the minority approach implies the lines of

bankruptcy procedure becoming blurred at the harm of lessees; and strongly supports the clear

majority precedent in favor of preserving and defending a lessee's 365(h) rights.

II. The Settlement should not be approved because it constitutes property of the estate

which is subject to the statutory priority scheme and does not meet the

qualifications for the “rare case” exception.

The Bankruptcy Code’s statutory priority scheme is a “central policy” of the Code, and

one of the foundational underpinnings of business bankruptcy law. Begier v. IRS, 496 U.S. 53,

58 (1990). The priority scheme is also one of the most important safeguards of creditor’s rights

in bankruptcy proceedings. Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973, 984 (2017). The

Legislature and courts have long maintained that the Bankruptcy Code’s priority system is

fundamental to the Code’s operation. Id. at 983 (citing H. R. Rep. No. 103-835, p. 33 (1994)).

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In normal business bankruptcy proceedings, there are three ways for a bankruptcy

proceeding to end: Chapter 7 liquidations, Chapter 11 reorganization plans, or a dismissal. Id. at

983-84. Chapter 7 liquidations are governed by priority which has absolute command, meaning

“lower priority creditors cannot receive anything until higher priority creditors have been paid in

full.” Id. at 983; See 11 U.S.C. § 725, 726. Chapter 11 plans provide a degree of flexibility with

regards to the priority scheme, but does not allow complete abandonment of the priority scheme

without consent of all impaired creditors. 11 U.S.C. § 1129(b). Dismissals seek to restore

property rights and financial status to the respective parties as much as possible prepetition. 11

U.S.C. § 349(b). Parties will often agree to a structured settlement where the parties consent to

have the bankruptcy estate’s property distributed pending the court’s approval. 11 U.S.C. §

1112(b), 9019. Structured settlements cannot be used to circumvent the priority structure of the

Bankruptcy Code, evidenced by the recent United States Supreme Court case, Czyzewski v. Jevic

Holding Company. Jevic, 137 S. Ct. at 983. These types of agreements violating the statutory

priority scheme, termed sub rosa plans, have never been permitted by the courts. Pension Benefit

Guar. Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935, 940 (5th

Cir.1983); In re Lionel Corp., 722 F.2d 1063, 1071 (2d Cir.1983); In re Biolitech, Inc., 528 B.R.

261, 269 (Bkrtcy. Ct. NJ 2014); In re Chrysler LLC, 576 F.3d 108, 118 (2d Cir. 2009).

In Jevic, the parties attempted to have the courts approve a structured settlement that was

intended to violate the priority system at the expense of one of the secured creditors. Jevic at

986. The Supreme Court did not approve the settlement because of its’ violation of the priority

scheme. Id. at 987. The immediate case is analogous to Jevic with the Debtor, the Committee,

and 4th Street scheming to benefit themselves by violating the priority scheme at the expense of

Highway 61, Inc. The Respondents have calculatedly attempted to distinguish this case from

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Jevic by making a litany of excuses, with the most notable attempt being to invoke a “rare case”

exception, arguing that this Settlement is a “gift” and not part of the estate’s property. These

arguments attempt to limit the protection Highway’s lessee status invokes, and amount to a sub

rosa plan in avoidance of the priority scheme. This Court should not approve this settlement and

protect Highway, and other future lessees; from losing their lawful rights.

A. Under Jevic, courts do not have the authority to approve structured settlements that

violate the statutory priority scheme.

In the recent landmark case, Czyzewski v. Jevic, the US Supreme Court definitively ruled

that structured settlements violating the statutory priority scheme could not be authorized by the

courts. Id. The Court recognized that the statutory priority scheme is one of the most

fundamental provisions of the Bankruptcy Code. Id. at 984. The Bankruptcy Code itself allows

for settlements to be approved based on whether it is “fair and equitable.” 11 U.S.C. § 1129(b).

The Supreme Court defined “fair and equitable” as meaning “senior interests are entitled to full

priority over junior [interests].” Protective Comm. For Indep. Stockholders of TMT Trailer

Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968); SEC v. American Trailer Rentals Co., 379

U.S. 594, 611 (1965). The Supreme Court ruled in Jevic that the priority scheme was too integral

to the Bankruptcy Code to create a “rare case” exception that permitting violation of the statutory

priority scheme. Jevic at 987. In short, the Supreme Court’s decision in Jevic emphatically

denies allowance to 4th Street, the Debtor, and the Committee to collude in a way that directly

violates the priority scheme to benefit themselves at the expense of Highway.

The facts of Jevic are akin to the facts in the immediate case. Sun Capital Partners

(“Sun”) acquired Jevic Transportation Corporation (“Jevic”) with a loan from CIT Group

(“CIT”). Id. at 980. Two years later, Jevic filed for Chapter 11 bankruptcy. Id. At the time of the

filing, Jevic owed money to Sun and CIT, as they were senior secured creditors, but also owed

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money to tax and general secured creditors. Id. Ultimately a group of former Jevic employees

brought a cause of action against Jevic and Sun for violating state and federal Worker

Adjustment and Retraining Notification Acts (“WARN”). Id. There was also a “fraudulent-

conveyance” lawsuit, authorized by the Bankruptcy Court, from a committee representing

Jevic’s unsecured creditors, Sun and CIT. Id. at 981.

Sun, CIT, Jevic, and the committee negotiated a settlement that included: (1) the

dismissal of the “fraudulent-conveyance” lawsuit, (2) CIT would give $2 million to pay the

committee’s legal fees and administrative expenses, (3) Sun would assign its lien on Jevic’s

remaining funds to a trust which would be used to pay, on a pro rata basis, general unsecured

creditors (but not the petitioners who had the WARN claim), and (4) the Chapter 11 bankruptcy

case would be dismissed. Id. at 981. The petitioner’s objected, claiming the settlement violated

the priority scheme. Id. The Supreme Court agreed with the petitioner’s, and did not approve the

settlement on the grounds that it violated the statutory priority system. Id. at 987.

The Supreme Court’s reasoning for the decision was three-fold; with the rationale

applicable to the case at hand. First, the Court recognized that the settlement in Jevic resembled

settlements that the courts have always denied because they seek to circumvent the priority

scheme. Id. at 986. Plans deemed sub rosa plans have always been denied by the Courts because

they violate the Bankruptcy code. In re Braniff Airways, Inc., 700 F. 2d at 940; In re Lionel

Corp., 722 F. 2d at 1069. The Fifth Circuit Court Appeals ruled that the priority scheme must be

followed in all structured settlements, even those that not explicitly part of a “plan”. In re

AWECO, Inc., 725 F. 2d 293, 300 (5th Cir. 1984). In conclusion, the Supreme Court, and all

lower courts are in agreement that any settlement that seeks to violate the statutory priority

scheme in a sub rosa plan must not be approved. Jevic at 985.

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Second, there is no language from the Bankruptcy Code, nor any legislative history, that

indicates that a “rare case” exception should exist allowing a deviation from the priority system.

Id. at 984. As previously mentioned, the Court reiterated the stance in Jevic; holding that the

statutory priority scheme has long been one of the most imperative foundational principles of the

operation of the Bankruptcy Code. Id.

The foundational role the priority scheme plays in the Bankruptcy Code led the Supreme

Court to believe that if the Legislature intended a “rare case” exception that allowed deviations

from the priority system, it would be explicitly stated. Id. at 984. All indications from the plain

language of the Bankruptcy Code are that the priority scheme should be followed, and Congress

would have provided “more than statutory silence” if a deviation from the statutory priority

scheme were permitted. Id. The Court reasoned that if such a stark deviation from the priority

from Chapter 7 liquidations and Chapter 11 plans, then the Code would contain some

“affirmative indication of intent,” and that the priority system could be violated in certain “rare

cases.” Id.

The Supreme Court also noted that § 349(b), which involves dismissals of bankruptcy

cases, includes the language, “for cause, order[r] otherwise.” Id.; 11 U.S.C. § 349(b). This statute

pertains to dismissals where the court seeks to restore property rights and financial status to the

rightful owners as they were prepetition. Id. The language of § 349(b) means that courts may, on

occasion, authorize orders that protect parties’ interests and property rights, keeping them intact

through bankruptcy proceedings. Jevic at 984; H. R. Rep. No. 95-595, at 338. Several courts,

including the court in Jevic, refuse to read “so weighty a power” into the word “cause” to grant

courts the power to authorize settlements that deviate from the Code’s priority system. Id. at 985;

United Sav. Assn. of Tex. v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 371

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(1988). Taking this rationale to its most literal interpretation, the Seventh Circuit stated,

“‘Cause’ under § 349(b) means an acceptable reason. Desire to make an end run around a statute

is not an adequate reason.” In re Sadler, 935 F. 2d 918, 921 (7th Cir. 1991).

The Bankruptcy Code bequeaths the statutory priority scheme as the guiding principle of

bankruptcy proceedings, commanding Chapter 7 liquidations and Chapter 11 plans. Jevic at 984-

85. There is no language in the Code that indicates straying from the priority scheme is allowed

in dismissals or structured settlements. Id. As the Supreme Court reasoned, there should be some

affirmative language in the Code if it is permissible to violate the boundaries of the priority

scheme when those same deviations are explicitly prohibited in normal bankruptcy proceedings.

Id.

Lastly, the Supreme Court avoided the undesirable precedent Jevic would create if the

Court allowed a “rare case” exception. Id. at 986. The Supreme Court feared that the “rare case”

exception would devolve general rule of bankruptcy. Id. The respondents in Jevic argued that,

while their settlement violated the priority scheme, it was the “best option” to offer the efficient

distribution of remedies to the majority of creditors. Id. The Supreme Court found that the

respondents arguments were built on “dubious predictions.” Id. Allowing a “rare case” exception

in Jevic, or allowing one in this case, would create serious consequences. Id. Parties involved in

bankruptcy proceedings would be incentivized to commit acts of fraud, abuse, and collusion in

attempts to situate themselves ahead of secured creditors, with complete disregard to the priority

scheme. Id. at 986-87. For these reasons, the Supreme Court declined to extend plan deviation

into the realm of allowing plans confliction with the absolute priority scheme, stating “Congress

did not authorize a “rare case” exception.” Id. at 987.

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The facts in the immediate case are analogous to Jevic, and the Settlement must not be

approved for the same reasons and rationales as that recent Supreme Court holding. 4th Street’s

distribution of cash to the Committee’s trust is in exchange for the release of liability against it,

similar to the suits the settlement in Jevic desired to be released from. It is evident that this “gift”

is a disingenuous tactic, designed to circumvent the Bankruptcy Code’s priority scheme. It

benefits the other parties involved in the Settlement agreement, and less secured creditors; while

involuntarily terminating Highway’s right to exercise options; or pursue remedies. Traditionally

in bankruptcy proceedings Highway would be notified of a rejection of their interest in the

property well before the court permitted Debtor to auction the property Highway has a

possessory interest in. Highway would also have had the opportunity to reject to such

termination. Unfortunately, the rules governing these proceedings were abandoned, with 4th

Street now claiming to be the owner of the property “free and clear,” because of the irregularities

concerning the sale in question.

This “gift” presents itself as an unauthentic sub rosa plan, intending to deviate from the

priority scheme. The Supreme Court in Jevic explicitly declined to extend plans deviating from

the absolute priority scheme for the very circumstances of cases like the one before this Court.

Structured settlements cannot deviate from the priority scheme, and Congress did not authorize

any “rare case” exception. Id. The ruling and reasoning in Jevic provides the Court with enough

reason and precedent to reverse the lower court’s ruling, and hold this Settlement agreement in

conflict with absolute priority scheme

.

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B. Even if this Court allows the possibility of a “rare case” exception for intermediate

settlements, the Settlement in this case is not an intermediate settlement and does

not serve a significant fundamental bankruptcy policy.

The argument made before the Supreme Court concerning end of proceedings

settlements, and answered the question explicitly. The Supreme Court analyzed the Iridium case,

analogizing to the Third Circuit ruling that intermediate structured settlements could violate the

priority scheme in minor respects, so long as it furthered some Bankruptcy Code purpose. Id. at

985 (citing In re Iridium Operating LLC, 478 F. 3d 452, 464 (3d Cir. 2007). The Court also cites

other examples of intermediate settlements that violate the priority scheme that lower courts

approved. Jevic at 985.

These cases cited by the Jevic Court were used by Respondent to further the argument

that the Court did create a “rare case” exception for intermediate settlements. (R. at 15-16).

However, the language from the Jevic opinion discussing these cases that approved the priority

violating intermediate settlements is dicta. In re Fryar, 570 B.R. 602, 608-09 (Bankr. E.D. Tenn.

2017). The Supreme Court never affirmed that a “rare case” exception for intermediate

settlements exists, and the explicit language from the Court is, “Congress did not authorize a

“rare case” exception.” Jevic at 987.

In the alternative, if the ruling in Jevic does allow for courts to carve out a “rare case”

exception for priority violating intermediate settlement plans, the lower courts that have

approved such plans have place certain requirements on such settlements. Iridium, 478 F. 3d at

464-65. These “rare cases” when compared to the circumstances to this case bear little

resemblance; as opposed to the ruling handed down in Jevic.

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1. The Settlement does not meet the “rare case” exception requirements because it is

not an intermediate settlement.

Jevic does not provide a “rare case” exception for structured settlements that constitute an

end of proceedings in the bankruptcy case. Jevic at 987. If a rare case exception exists, it must

specifically pertain to an intermediate settlement. The structure of that settlement precludes it

from malicious intent to circumvent statutory requirements in bankruptcy proceedings. Iridium at

464.

The Settlement proposed by 4th Street, the Debtor, and the Committee is not an

intermediate settlement because it effectively ends the proceedings. The Settlement ends the

proceedings concerning Highway by involuntary terminating rights as a lessee and secured

creditor. The Settlement does not “end” proceedings technically, but all that would remain of the

proceedings is the claims against Skyline. Upon the Committee liquidating those claims it is that

the case will be dismissed; with Highway’s rights and legal remedies discarded.

The Settlement proposed by the Respondents, though it does not occur simultaneously

with ending proceeds; still constitutes a dismissal plan because all bankruptcy proceeding issues

handled and claims settled. The Debtor’s estate will transfer to 4th Street “free and clear,” and all

claims against it will be dismissed. The money paid by 4th Street will go to the Committee’s trust

to pursue the Debtor’s claims against Skyline. The Debtor will be relieved of all debts. All that

will remain is the Skyline claims, which would be pursued by the Committee; funded by the 4th

Street’s “gift” as part of the same transaction that relieves them of liability.

This Settlement’s execution puts a “plan” into effect that will end the bankruptcy

proceedings without adherence to statutory priority scheme. Judge Petty from the Thirteenth

Circuit dissented, voicing his concern that the Settlement is an intermediate settlement is a

“distinction without a difference.” (R. at 27).

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this Settlement merely amounts to a sub rosa plan to end the proceedings with the sole intention

of circumventing the priority system which the law strictly prohibits. In re Braniff Airways, Inc.

at 940.

Courts have maintained when deciding legitimacy of an intermediate settlement plan,

adherence to the statutory priority scheme is by far the most important factor. In re Biolitech,

Inc., 528 B.R. at 269; Iridium at 464. The Third Circuit approved the intermediate settlement in

Iridium because it was a pre-plan settlement displaying final distribution would adhere to the

statutory priority scheme, and ensuring creditors would receive compensation as prescribed by

law. Iridium at 466-67. The Settlement agreement of this case fails to offer the same assurances.

Upon liquidation of the claims against Skyline, it is likely that the bankruptcy proceedings will

be dismissed, leaving Highway with little legal remedies to pursue justice; and unsecured

creditors receiving proceeds in violation of the absolute priority scheme

2. The Settlement does not serve a Bankruptcy Code purpose.

In the alternative, if a “rare case” exception for intermediate settlements is derived from

the Jevic holding, the standard for invoking that exception must come from the Jevic opinion.

The Supreme Court found cases that approving intermediate settlements violating the priority

scheme served a furtherance of some significant Bankruptcy Code purpose. Jevic at 985. The

Court cited case law as examples of intermediate settlements that were approved, and then

distinguished Jevic by listing five factors demonstrating why that settlement did not meet the

acceptable threshold to violate the statutory priority scheme. Id. at 985-86. Jevic serves as the

most recent Supreme Court decision on the issue, thus demanding those five factors should be

weighed in the immediate case.

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The Supreme Court rejected the proposed structured settlement in Jevic after a five-

factor analysis, holding that the proposed structured settlement did not (1) preserve the debtor as

a going concern, (2) make the disfavored creditors better off, (3) promote the possibility of a

confirmable plan, (4) help to restore the status quo ante, and (5) protect reliance interests. Id. at

986. After listing these five reasons the Court determined that the Settlement did not serve a

significant Bankruptcy Code purpose; that the Jevic settlement resembled sub rosa plans courts

have previously rejected. Id.

In comparing this case to Jevic, the similarities dictate a similar rejection of the

Settlement. (1) The Debtor, High Rocks, is not being preserved as a going concern, as it is being

liquidated and no longer exist. The only remaining asset of the Debtor will be claims against

Skyline, which the Committee preordained for exclusive use by unsecured creditors. Similarly,

the Debtor in Jevic would also be liquidated in its settlement had the court not rejected the plan.

Id. at 986. (2) The Settlement does not make the disfavored creditor, Highway, better off because

there will be little, if any, legal recourse upon execution of the Settlement. The Committee of

unsecured creditors will be financed to pursue the litigation in the Skyline claims, the Debtor will

be liquidated relieved of debt; and 4th. Highway will not only have rights and remedies as a

lessee extinguished, it is likely they will not receive the administrative fee they are entitled to.

(3) The Settlement does not promote the possibility of a confirmable plan. In contrast to

Iridium, where the intermediate settlement was approved with the understanding that a final

distribution would occur at a later date that would comply with the priority scheme; this

Settlement effectively ends the proceeding, thus bypassing Highway. The parties that created the

Settlement agreement are the lone beneficiaries of its approval, resulting in no reason for any of

the parties to agree to a plan under Chapter 11. The Settlement does not enhance the probability

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of a confirmable plan, because its sub rosa nature foreshadows the end of any meaningful

proceedings.

Examination of the fourth factor reveals that the Settlement does not help to restore the

status quo ante of the parties. None of the parties would be in the same position they were prior

to Debtor filing the bankruptcy petitioner. The Settlement would liquidate the Debtor, the

Skyline claims would be at the Committee’s disposal; and 4th Street would obtain the Debtor’s

estate “free and clear.” Highway would lose the rights they had prepetition, rights possessed at

the beginning of bankruptcy proceedings; and rights they are still entitled to now, including its

leasehold interest in the property and administrative expenses. The proposed Settlement would,

as the Thirteenth Circuit Court of Appeals states in its dissent, “the status quo (i.e., the priority

scheme) is being disrupted. (R. at 27).

(5) The Settlement does not protect reliance interests. Highway entered into an agreement

with the Debtor well before there was potential for financial uncertainty. Even after the Debtor

filed the petition, Highway approached the Debtor to form a post-petition contract where they

would aid in the completion of the project. Highway is entitled to $2 million administrative fee,

which they deferred the payment of in the hopes of easing the financial plight of the Debtor.

From the beginning of the lease agreement, to the post-petitioner contract with Debtor;

demonstrates a higher standard of ethical conduct and equitable practice than other

circumstances. Instead of receiving what it is entitled to, Highway’s conduct and support would

be returned with lost rights and lost profits.

Finally, in Iridium, the Third Circuit Court stated that any intermediate settlement plan

that deviates from the statutory priority scheme must deviate from the priority structure in

“minor” respects the parties must justify; and the court must clearly articulate the purpose for the

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deviation. Iridium at 464-65. The Settlement proposed in the immediate case deviates from the

statutory priority scheme in more than just a “minor” way by placing the rights of junior

unsecured creditors above Highway, the only party that is both lessee and secured creditor.

Debtors justification for the Settlement is its convenience in avoiding complex litigation. In

response to this efficiency, the Supreme Court has held in previous ruling that “The need for

expedition, however is not a justification for abandoning proper standards.” TMT Trailer Ferry,

390 U.S. at 450.

Jevic declined to create the “rare case” exception crux that the bulk of Debtor’s argument

relies on. Jevic at 897. The “rare case” exception, derived from dicta, potentially allows for

intermediate settlements that deviate from the priority scheme in “minor” respects. However, this

Settlement is not an intermediate, and grossly deviates from the priority scheme. Further, the

Settlement does not justify advancement in a meaningful way, thus barring its violation of the

Bankruptcy Code.

C. The Court erred in determining that the money paid by 4th Street constitutes a

“gift” because it is estate property with the sole purpose of circumventing the

statutory priority scheme.

Lastly, Debtor seeks to distinguish the Settlement from the one in Jevic by arguing that

the $2 million paid to fund the Committee’s pursuit of the Skyline claims constitutes a “gift,”

and is not estate property subject to the statutory priority scheme. By calling the money “gifted”

by 4th Street gift, Debtors argument attempts to abuse the rules governing bankruptcy, intending

to circumvent the statutory priority scheme. The monies “gifted” are an asset of the Debtor’s

estate, which makes them subject to the priority system. 11 U.S.C. § 541. 4th Street paying the $2

million for the Committee to release them from liability, constitutes estate property because the

purpose is to settle estate claims. The proceeds paid by 4th Street also constitute part of the

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purchase price for the Debtor’s estate “free and clear.” 4th Street currently has a right to the

Debtor’s estate, but with the claims and leasehold interests attached to it. By paying this “gift,”

4th Street is attempting to obtain the estate property “free and clear” under the guise of a

Settlement in which the sole entity besides 4th Street has a valid possessory right to the property.

Therefore, the proceeds do not constitute a “gift.” Rather, it is estate property, and should be

subject to the statutory priority scheme.

Moreover, 4th Street does not intend for this “gift” to be a one- sided transaction, as it is

contingent on approval of the plan that release the asset “free and clear.” Courts have looked

through falsely labeled “gifts,” and denied them in settlements that violated the priority scheme.

In re On-Site Sourcing, Inc., 412 B.R. 817, 826 (Bankr. E.D. Va. 2009). This “gift” contingent

on performance by other parties, constitutes exactly the type of action that the Supreme Court

and the legislature sought to limit through protections explicitly provided to lessees.

Since it purchased the note on the property, 4th Street’s actions imply acting in bad faith,

and trying to benefit themselves at the expense of those legally entitled to remedy. 4th Street

bought the note at a sizable discount, with the intent of using a “loan to own” strategy. Shortly

thereafter, 4th Street commenced the foreclosure action against the Debtor, now seeks to avoid

the priority scheme through deceitful arguments and positioning itself in a plan that benefits

itself to great degree. The $2 million dollar “gift” culminates in 4th Street taking ownership of a

property that they paid an extremely low value for. In contrast, the initial loan for the property

was $800 million. For these reasons, the Highway asks that this Court reject this Settlement,

force 4th Street to operate with the fair and equitable bankruptcy principles in these proceedings,

protect Highway’s interest as both lessees and secured creditors; reverse the lower courts

holding.

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CONCLUSION

This Court should reverse the bankruptcy court’s decision to approve of the sale of

Debtor’s “free and clear sale” under section 363(f) of the Bankruptcy code because it violates

lessee’s rights under 365(h) providing options and remedies for the lessee to exercise at its

discretion. Further, the sale of the property “free and clear” violates legislation intent, majority

statutory interpretation, and Supreme Court precedent which mandates that the “specific governs

the general” in matters concerning conflict with statutory provisions.

Consistent with denying the sale under the protections afforded to lessees under 365(h) of

the Bankruptcy code, petitioner also asks this Court to reverse the bankruptcy court’s decision to

approve of the “gift” Settlement comprised between Debtor, the Committee, and 4th Street. This

“gift” is in direct contrast to the recent authority handed down in Jevic, which calls for structured

settlements to not deviate from the absolute priority scheme. In the alternative, if this Court

elects do adopt the approach discussed in dicta from Jevic, Petitioner requests that this Court find

that the Settlement agreement reached between parties is not in furtherance of the Bankruptcy

code; and that the “gift” contingent upon performance by other parties meets sub rosa standards

of settlement agreements.

a1

APPENDIX

11 U.S.C.A. § 365(h)

(h)(1)(A) If the trustee rejects an unexpired lease of real property under which the debtor is the

lessor and—

(i) if the rejection by the trustee amounts to such a breach as would entitle the lessee to

treat such lease as terminated by virtue of its terms, applicable nonbankruptcy law, or

any agreement made by the lessee, then the lessee under such lease may treat such

lease as terminated by the rejection; or

(ii) if the term of such lease has commenced, the lessee may retain its rights under such

lease (including rights such as those relating to the amount and timing of payment of

rent and other amounts payable by the lessee and any right of use, possession, quiet

enjoyment, subletting, assignment, or hypothecation) that are in or appurtenant to the

real property for the balance of the term of such lease and for any renewal or

extension of such rights to the extent that such rights are enforceable under applicable

nonbankruptcy law.

H. R. Rep. No. 95-595 at 6036 (1977)

THE JUDGE BY THE COURT OF APPEALS, EITHER FOR CAUSE OR

OTHERWISE. NOR WOULD THERE BE A NECESSITY FOR PROVISION

FOR THE TAKING OF NEW EVIDENCE. SO MUCH IS CLEAR FROM THE

PRESENT OPERATION OF THE TAX COURT, AND INDEED FROM THE

OPERATION OF MANY ADMINISTRATIVE AGENCIES, AND SEEMS TO

BE SQUARELY WITHIN THE DECISION IN CROWELL V. BENSON, 284

US 22, EXCEPT TO THE EXTENT THAT THE JURISDICTIONAL FACTS

DOCTRINE OF THE CROWELL CASE MAY HAVE ANY PRESENT DAY

LIFE.