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Team P. 3
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
Court of Appeals for the Thirteenth Circuit
BRIEF FOR PETITIONER
Team P. 3
Counsel for Petitioner
Oral Argument Requested
Team P. 3
i
QUESTIONS PRESENTED
1. May, under § 363(f), a debtor-lessor sell its property “free and clear” of a leasehold interest
that effectively evades the fundamental protections for lessees that Congress cemented in
§ 365(h) of the Bankruptcy Code when the lessee timely objected to the sale and the debtor-
lessor did not assume or reject the lease prior to the sale?
2. In light of this Court’s decision in Czyzewski v. Jevic, __ U.S. __, 137 S. Ct. 973, 983
(2017), may a court approve a contested “gift” settlement in conjunction with a § 363 sale
that circumvents the Bankruptcy Code’s mandated priority scheme and strips creditors of
fundamental, congressionally-crafted protections?
Team P. 3
ii
TABLE OF CONTENTS
Questions Presented ......................................................................................................................... i
Table of Authorities ....................................................................................................................... iv
Opinions Below .............................................................................................................................. x
Statement of Jurisdiction................................................................................................................. x
Constitutional and Statutory Provisions Involved .......................................................................... x
Statement of the Case...................................................................................................................... 1
Summary of the Argument.............................................................................................................. 3
Arguments and Authorities ............................................................................................................. 5
I. THE DEBTOR CANNOT SELL ITS REAL PROPERTY UNDER § 363
FREE AND CLEAR OF HIGHWAY’S LEASE. ................................................................ 5
A. The Scope of “Interest” Under § 363(f) Does Not Include Highway’s Lease. ................... 6
B. Even if “Interest” Under § 363(f) Includes Leases, § 365(h) Restricts the
Debtor’s Ability to Sell the Property “Free and Clear” of Highway’s Lease. .................... 9
1. Sections 363(f) and 365(h) of the Bankruptcy Code conflict and
§ 365(h) overrides § 363(f). .......................................................................................... 9
2. The rules of statutory construction demand that § 365(h) override § 363(f). ............ 11
3. The legislative history of § 365 demands a heightened protection
for lessees’ rights that limits § 363(f)’s purpose. ....................................................... 12
4. Yet, if § 363(f) applies, § 363(e) obligates the Debtor to provide adequate
protection in the form of continued possession to safeguard Highway’s lease. ......... 14
C. Alternatively, the Court Cannot Approve the Sale Because the Debtor Failed
to First Either Assume or Reject Highway’s Lease. ......................................................... 16
D. The Thirteenth Circuit’s Holding Encourages Mischief—Enabling Debtors to
Mask Rejections as Free and Clear Sales. ........................................................................ 17
II. THE COMMITTEE SETTLEMENT VIOLATES THE CODE’S PRIORITY
SCHEME AND FAILS THE “FAIR AND EQUITABLE” STANDARD. ...................... 19
A. 4th Street Cannot Use Rule 9019 to Circumvent the Code’s Priority Scheme. ................ 22
B. This Court’s Holding in Czyzewski v. Jevic Prohibits the Committee Settlement............ 26
Team P. 3
iii
1. Jevic summarily prohibits priority-deviating settlements. ............................................ 27
2. Even if Jevic allows priority-deviating settlements in some circumstances,
the Committee Settlement does not qualify for any exception. ................................... 28
3. Instead, 4th Street and the Debtor crafted an impermissible sub rosa plan. ................ 30
C. To the Extent Jevic Only Applies to “Gifts” of Estate Property, the
Committee Settlement Distributes Estate Funds and Cannot Stand. ................................ 31
Conclusion .................................................................................................................................... 35
Appendix A: Selected Provisions from the U.S. Constitution .................................................... A-1
Appendix B: Selected Sections from Title 11 of the U.S. Code ................................................. B-1
Appendix C: Selected Provisions from Title 28 of the u.S. Code .............................................. C-1
Appendix D: Selected Federal Rules of Bankruptcy Procedure ................................................. D-1
Appendix E: Selected Sections of Legislative History of Title 11 of the U.S. Code ................. E-1
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TABLE OF AUTHORITIES
CONSTITUTION, STATUTES & RULES
11 U.S.C. § 103 (2012) ........................................................................................................... 20, 23
11 U.S.C. § 1112 (2012) ............................................................................................................... 25
11 U.S.C. § 1129 (2012) ........................................................................................................ passim
11 U.S.C. § 361 (2012) ................................................................................................................. 14
11 U.S.C. § 363 (2012) .......................................................................................................... passim
11 U.S.C. § 365 (2012) .......................................................................................................... passim
11 U.S.C. § 507 (2012) .......................................................................................................... passim
11 U.S.C. § 541 (2012) ............................................................................................... 25, 32, 33, 34
11 U.S.C. § 726 (2012) ............................................................................................... 20, 23, 26, 31
11U.S.C. § 541 (2012) ................................................................................................ 25, 32, 33, 34
28 U.S.C. § 2075 (2012) ............................................................................................................... 24
Bankruptcy Act of 1898, ch. 541, 70(b), 30 Stat. 544 ............................................................ 12, 14
Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549 .......................................... 13
Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, 108 Stat. 4106. ..................................... 13
Bankruptcy Reform Act of 1994, Section-by-Section Analysis,
140 Cong. Rec. HI0,752-0I (daily ed. Oct. 4, 1994). ................................................................ 14
Fed. R. Bankr. P. 9019. .......................................................................................................... passim
U.S. Const. amend. V. ................................................................................................................... 15
U.S. Const. art. I, § 8, cl. 4. ............................................................................................................. 5
U.S. SUPREME COURT
Bank of Am. Nat’l Tr. & Sav. Ass’n v. 203 N. Lasalle St. P’ship,
526 U.S. 434 (1991). ................................................................................................................. 27
Begier v. IRS,
496 U.S. 53 (1990) .................................................................................................................... 20
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Consumer Prod. Safety Comm’n v. GTE Sylvania, Inc.,
447 U.S. 102 (1980) .................................................................................................................. 12
Czyzewski v. Jevic Holding Corp.,
__ U.S. __, 137 S. Ct. 973 (2017) ...................................................................................... passim
Kungys v. United States,
485 U.S. 759 (1988) .................................................................................................................. 10
Mich. Emp’t Sec. Comm’n v. Wolverine Radio Co. (In re Wolverine Radio Co.),
930 F.2d 1132 (6th Cir. 1991) .................................................................................................... 7
Morales v. Trans World Airlines, Inc.,
504 U.S. 374 (1992). ................................................................................................................. 11
Motorola, Inc. v. Official Comm. of Unsecured Creditors
(In re Iridium Operating LLC),
478 F.3d 452 (2d Cir. 2007)............................................................................................... passim
N. Pac. Ry. Co. v. Boyd,
228 U.S. 482 (1913). ................................................................................................................. 23
Norwest Bank Worthington v. Ahlers,
485 U.S. 197 (1988). ................................................................................................................. 22
Protective Comm. for Indep. Stockholders of TMT Trailer
Ferry, Inc. v. Anderson,
390 U.S. 414 (1968) ............................................................................................................ 20, 22
RadLAX Gateway Hotel, LLC v. Amalgamated Bank,
556 U.S. 639 (2012) .................................................................................................................. 10
Toibb v. Radloff,
501 U.S. 157 (1991) .................................................................................................................. 11
United States v. Noland,
517 U.S. 535 (1996) .................................................................................................................. 23
United States v. Whiting Pools, Inc.,
462 U.S. 198 (1983) ...................................................................................................... 32, 33, 34
Whitman v. Am. Trucking Assns., Inc.,
531 U.S. 457 (2001) .................................................................................................................. 23
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U.S. COURTS OF APPEAL
Armstrong v. Capshaw, Goss & Bowers, LLP,
404 F.3d 933 (5th Cir. 2005) .................................................................................................... 16
Cadle Co. v. Mims (In re Moore),
608 F.3d 253 (5th Cir. 2010) .................................................................................................... 34
Comm. of Equity Security Holders v. The Lionel Corp. (In re Lionel Corp.),
722 F.2d 1063 (2d Cir. 1983).............................................................................................. 24, 25
Dish Network Corp. v. DBSD N. Am., Inc.
(In re DBSD N. Am., Inc.),
634 F.3d 79 (2d Cir. 2011)........................................................................................................ 23
FutureSource LLC v. Reuters Ltd.,
312 F.3d 281 (7th Cir. 2002) .................................................................................................... 19
In re Cochise College Park, Inc.,
703 F.2d 1339 (9th Cir. 1983) .................................................................................................. 17
In re Frazin,
183 F.3d 28 (2d Cir. 1910)........................................................................................................ 16
In re ICL Holding Co.,
802 F.3d 547 (3d Cir. 2015)...................................................................................................... 34
In re Lovitt,
757 F.2d 1035 (9th Cir. 1985) .................................................................................................. 17
In re PCH Assocs.,
804 F.2d 193 (2d Cir. 1986)........................................................................................................ 8
In re SPM Mfg. Corp.,
984 F.2d 1305 (1st Cir. 1993) ................................................................................................... 22
In re Tonry,
724 F.2d 467 (5th Cir. 1984) .................................................................................................... 17
In re TWA,
322 F.3d 283 (3d Cir. 2003)........................................................................................................ 7
Kane v. Nat’l Union Fire Ins. Co.,
535 F.3d 380 (5th Cir. 2008) .................................................................................................... 33
Official Comm. of Unsecured Creditors v. CIT Grp./Bus.
Credit Inc. (In re Jevic Holding Corp.),
787 F.3d 173 (3d Cir. 2015)...................................................................................................... 26
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PBGC v. Braniff Airways, Inc. (In re Braniff Airways, Inc.),
700 F.2d 935 (5th Cir. 1983) .............................................................................................. 24, 30
Pinnacle Rest. at Big Sky, LLC v. CH SP Acquisitions
(In re Spanish Peaks Holdings II, LLC),
872 F.3d 892 (9th Cir. 2017) ...................................................................................... 6, 9, 10, 11
Precision Indus. v. Qualitech Steel SBQ, LLC,
327 F.3d 537 (7th Cir. 2003) ............................................................................................. passim
Prudential Real Estate Affiliates, Inc. v. PPR Realty, Inc.,
204 F.3d 867 (9th Cir. 2000) .................................................................................................... 16
Texas v. Soileau (In re Soileau),
488 F.3d 302 (5th Cir. 2007) ...................................................................................................... 5
United States v. AWECO, Inc. (In re AWECO, Inc.),
725 F.2d 293 (5th Cir. 1984) ........................................................................................ 21, 22, 23
U.S. DISTRICT COURTS
Cheslock-Bakker & Assocs, Inc. v. Kremer
(In re Downtown Ath. Club of N.Y. City),
No. M-47, 2000 U.S. Dist. LEXIS 7917 (S.D.N.Y. June 9, 2000) ........................................... 10
Dishi & Sons v. Bay Condos LLC,
510 B.R. 696 (S.D.N.Y. 2014) ........................................................................................ 6, 11, 12
IDEA Boardwalk, LLC v. Polo N. Country Club, Inc.,
No. 16-8683, 2017 WL 4927667 (D. N.J. Oct. 31, 2017) .......................................................... 9
Ultimate Sportsbar, Inc. v. United States,
48 Fed. Cl. 540 (Fed. Cl. 2001) ................................................................................................ 16
United States v. Neiwirth,
370 F. Supp. 929 (D.N.J. 1974) ................................................................................................ 17
U.S. BANKRUPTCY COURTS
Fairchild Aircraft Corp. v. Fairchild Aircraft Inc. (In re Fairchild Aircraft),
184 B.R. 910 (Bankr. W.D. Tex. 1995) ...................................................................................... 7
Hill v. MKBS Holdings, LLC (In re Hill),
307 B.R. 821 (Bankr. W.D. Pa. 2004) ........................................................................................ 7
IDEA Boardwalk, LLC v. Revel Entm’t Grp. (In re Revel AC, Inc.),
532 B.R. 216 (Bankr. D.N.J. 2015) ........................................................................................ 6, 9
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viii
In re ADPT DFW Holdings, LLC,
No. 17-31432 (Bankr. N.D. Tex. Sept. 27, 2017) ............................................................... 28, 30
In re Churchill Props. III, Ltd. P’ship.,
197 B.R. 283 (Bankr. N.D. Ill. 1996) ................................................................................ passim
In re Constellation Enters. LLC,
No. 16-11213 (Bankr. D. Del. May 16, 2017) .................................................................... 29, 31
In re Crumbs Bake Shop, Inc.,
522 B.R. 766 (Bankr. D.N.J. 2014) ...................................................................................... 9, 19
In re Dewey Ranch Hockey, LLC,
414 B.R. 577 (Bankr. D. Ariz. 2009) ........................................................................................ 15
In re Energy Future Holding Corp.,
527 B.R. 157 (Bankr. D. Del. 2015) ......................................................................................... 31
In re Fleishman, 138 B.R. 641
(Bankr. D. Mass. 1992) ............................................................................................................... 7
In re Fryar, 570 B.R. 602
(Bankr. E.D. Tenn. 2017)........................................................................................ 27, 28, 29, 30
In re Haskell L.P.,
321 B.R. 1 (Bankr. D. Mass. 2005) ................................................................................... passim
In re Lee Road Partners, Ltd.,
155 B.R. 55 (Bankr. E.D.N.Y. 1993) ........................................................................................ 13
In re LHD,
20 B.R. 717 (Bankr. S.D. Ind. 1982) .......................................................................................... 6
In re On-Site Sourcing, Inc.,
412 B.R. 817 (Bankr. E.D. Va. 2009) ..................................................................... 24, 25, 32, 33
In re Short Bark Indus., Inc.,
No. 17-11502 (Bankr. D. Del. Sept. 11, 2017) ................................................................... 28, 30
In re Taylor,
198 B.R. 142 (Bankr. D.S.C. 1996) ................................................................................... passim
In re World Health Alternatives, Inc.,
344 B.R. 291 (Bankr. D. Del. 2006) ......................................................................................... 26
In re Zota Petroleums, LLC,
482 B.R. 154 (Bankr. E.D. Va. 2012). ............................................................................ 6, 12, 15
Team P. 3
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OTHER AUTHORITIES
3 Collier on Bankruptcy (Alan Resnick & Henry J. Sommer eds., 16th ed. rev. 2017) ............... 15
5 Collier on Bankruptcy (Alan N. Resnick & Henry J. Sommer eds., 16th ed. rev. 2017) .......... 33
ABI Commission to Study the Reform of Chapter 11 2012-2014 Final Report and
Recommendations, available at commission.abi.org/full-report .............................................. 17
App. D Collier on Bankruptcy (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2017) ....... 23
Charles W. Mooney, Jr., Illinois ABI Symposium on Chapter 11 Reform:
The (Il)legitimacy of Bankruptcies for the Benefit of Secured Creditors,
2015 U. Ill. L. Rev. 735 (2015)................................................................................................. 18
Frederick F. Rudzik, A Priority is a Priority is a Priority—Except When It Isn’t,
34 Am. Bankr. Inst. J. 16 (2015)............................................................................................... 27
George W. Kuney, Misinterpreting Bankruptcy Code Section 363(f)
and Undermining the Chapter 11 Process,
76 Am. Bankr. L.J. 235 (2002).................................................................................................. 15
H.R. Rep. No. 95-595 (1977), reprinted in 1978 U.S.C.C.A.N. 5963. ........................................ 13
Joshua Stein, Did the Sky Fall on Leasehold Mortgagees? Ground Lease Financing
After Qualitech the Fallout Has Not Been As Bad As Most People Expected,
25 Prac. Real Est. Law. 7 (2009). ................................................................................................ 8
Michael St. Patrick Baxter, Section 363 Sales Free and Clear of Interests: Why the Seventh
Circuit Erred in Precision Industries v. Qualitech Steel, 59 Bus. Law. 475 (2004). ......... 10, 15
Michelle M. Harner, Trends in Distressed Debt Investing: An Empirical Study of Investors’
Objectives, 16 Am. Bankr. Inst. L. Rev. 69 (2008). ................................................................. 19
Repudiate, BLACK’S LAW DICTIONARY 1496 (10th ed. 2014). ..................................................... 11
Robert J. Keach & Andrew C. Helman, Life After Jevic: An End to Priority-Skipping
Distributions?, 39-9 ABIJ 12 (2017). ....................................................................................... 27
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). ................ 13, 18
S. Rep. No. 95-1106 (1978). ......................................................................................................... 24
S. Rep. No. 95-989 (1978). ........................................................................................................... 13
Thomas C. Homburger, Conflict Resolved: Bankruptcy Code § 365(h)
and the Contradictory Case Requiring Its Amendment,
29 Real Prop. Prob. & Tr. J. 869 (1995). .................................................................................. 12
Team P. 3
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OPINIONS BELOW
The decision of the U.S. Bankruptcy Court for the District of Moot is unreported and
therefore unavailable. The decision for the U.S. Court of Appeals for the Thirteenth Circuit is also
unreported. The opinion for the Thirteenth Circuit is set forth in Case No. 16-315, dated July 14,
2017, and is incorporated in the record on appeal (hereinafter, “R.”).
STATEMENT OF JURISDICTION
The formal statement of jurisdiction is waived pursuant to Competition Rule VIII.
CONSTITUTIONAL AND STATUTORY PROVISIONS INVOLVED
The relevant statutory provisions involved in this case are listed below and reproduced in
Appendices A through E.
U.S. Const. art. I, §8 cl. 4; amend. V;
11 U.S.C. §§ 103, 361, 363, 365, 507, 541, 726, 1112, 1129;
28 U.S.C. § 2075;
Fed. R. Bankr. P. 9019.; and
Bankruptcy Reform Acts of 1898, 1978, 1994.
i
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
Court of Appeals for the Thirteenth Circuit
BRIEF FOR PETITIONER
TO THE SUPREME COURT OF THE UNITED STATES:
Petitioner, Highway 61, Inc., appellant in Case No. 16-315 before the United States Court
of Appeals for the Thirteenth Circuit, respectfully submits this brief on the merits and asks this
Court to reverse the decision of the Thirteenth Circuit Court of Appeals.
Team P. 3
1
STATEMENT OF THE CASE
This case is about preserving the Bankruptcy Code’s fundamental creditor protections from
dilution by convenient, results-oriented decisions. Twenty-five miles outside Rainier, in the State
of Moot, rests a nearly completed casino resort featuring a 30-story tower, and most importantly,
a 7,000-seat, outdoor amphitheater. R. at 3–4. Over two years ago, High Rocks, Inc. (the “Debtor”)
began to develop this resort, after it obtained an $800 million secured loan from North Country
Bank (“N.C. Bank”) to finance its project. R. at 4.
Highway’s Lease. Before construction began, the Debtor agreed to lease the future
amphitheater to Highway 61, Inc. (“Highway”), who planned to operate, manage, and market the
music venue for a thirty-year term. R. at 5. In exchange, Highway agreed to pay $400,000 per year
in rent plus a cut of ticket and concession sales. R. at 5.
Construction Begins. The Debtor contracted with Skyline Construction, Inc. (“Skyline”)
to build the resort, and in May 2014, Skyline broke ground—but the breaking never stopped. R. at
4. Skyline mismanaged the project, which caused many issues with the tower and casino
construction, and, after eighteen months, the Debtor terminated Skyline’s contract. R. at 4.
The Bankruptcy Filing. Left with an amphitheater in need of seats and sound equipment
and an unfinished tower and casino, the Debtor hired a new contractor to finish the tower and
casino. R. at 4–5. But not the amphitheater. R. at 4–5. N.C. Bank, frustrated and antsy, sold its
secured note to 4th Street Partners, Inc. (“4th Street”) at a sizable discount. R. at 5. And, as the
next part of its “loan to own” strategy, 4th Street initiated a foreclosure against the Debtor, forcing
it to file for chapter 11 bankruptcy in July 2016. R. at 5.
Highway’s Administrative Expense. Highway came to the rescue, pumped in $2 million
to finish the amphitheater, and completed it in two months. R. at 6. Accordingly, the parties
allowed Highway a $2 million post-petition, administrative expense claim, and the bankruptcy
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court approved. R. at 6. Meanwhile, the hotel and tower kept facing issues, and the Debtor
hemorrhaged money. R. at 6. By December 2016, construction halted. R. at 6.
The Claims. With depleted coffers, the Debtor assigned all the claims against Skyline for
mismanagement to a litigation trust benefitting only the Official Committee of Unsecured
Creditors (the “Committee”), and no party objected. R. at 7. The Committee also informally
alleged lender liability claims that challenged 4th Street’s claims and liens. R. at 7.
The Proposed Sale and Objections. The Debtor filed a motion to sell substantially all its
assets “free and clear” of interests under § 363(f), including Highway’s lease. R. at 6–7. In early
January, 4th Street, as the only bidder, successfully credit bid its entire secured debt. R. at 7.
Claiming to have acquired the property “free and clear” of Highway’s lease, 4th Street notified all
parties that it, and not Highway, would operate the amphitheater. R. at 7. But Highway wanted to
retain possession of its lease, so it did two things: (1) it objected to the sale, asserting its § 365(h)
rights entitled it to remain in possession of the amphitheater under its lease; and (2) sent a letter to
the Debtor, notifying it that Highway was electing to retain its § 365(h) right to possession. R. at
7–8. The Committee also objected and alleged the sale was a “veiled foreclosure” since it would
leave the estate penniless and unable to pursue the Skyline claims. R. at 7.
The “Committee Settlement.” 4th Street, determined to buy out the Debtor, scrambled to
negotiate a settlement with the Committee (the “Committee Settlement”). R. at 8. 4th Street agreed
to distribute $2 million into a trust account for the Committee to pursue the Skyline ligation. R. at
8. In exchange, the Committee agreed to withdraw its sale objection and release its lender liability
claims against 4th Street. R. at 8. Excluded from the Committee Settlement, Highway objected
(again) at the sale hearing on two grounds: (1) that the sale violated its § 365(h) rights and entitled
it to continue possession of the amphitheater; and (2) the Committee Settlement violated the
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Code’s priority scheme when it distributed $2 million to creditors with junior claims to Highway’s
priority administrative expense claim. R. at 8.
The Subsequent Appeals. Nevertheless, the bankruptcy court approved the Debtor’s sale
conditioned on the Committee Settlement. R. at 8. It held that § 363(f) trumped Highway’s rights
under § 365(h), the Committee Settlement did not have to comply with the Code’s priority scheme,
and the settlement was in all parties’ best interests. R. at 8–9. But, recognizing the divisive state
of the issues, the court stayed the closing of the sale pending appeal. R. at 8. The District Court
and the Thirteenth Circuit both affirmed the bankruptcy court’s holding. R. at 3, 9. This appeal
follows.
SUMMARY OF THE ARGUMENT
The Thirteenth Circuit erred when it allowed the Debtor to vitiate Highway’s rights under
the Bankruptcy Code (the “Code”) that left Highway empty-handed. First, the Debtor cannot sell
the amphitheater “free and clear” of Highway’s lease under § 363(f) because it conflicts with the
protections Congress afforded lessees in § 365(h). Second, the Committee Settlement
impermissibly deviates from the Code’s priority scheme and violates this Court’s mandate in
Czyzewski v. Jevic. Therefore, the Thirteenth Circuit’s holding cannot stand.
The Court should not allow the Debtor to sell its property “free and clear” of Highway’s
lease. First, Highway’s lease is not an “interest” within the scope of § 363(f). But even if it is, this
Court should follow the majority of courts and still reverse. The specific protections in § 365(h)
for lessees override § 363(f)’s purported general effect on lessees. Alternatively, the protections
embodied in § 365(h) should require that the Debtor must first either assume or reject Highway’s
lease before the sale. Last, ruling in the Debtor’s favor would discourage real estate investments
and allow parties to manipulate the Code.
In addition, the Court cannot approve the Rule 9019 Committee Settlement as “fair and
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equitable” because it deviates from the Code’s priority scheme. This Court’s decision in Jevic
clarifies that distributions—even those outside a plan or liquidation—must comply with the
priority scheme. Arguably, this Court forbade even a “rare case” exception. If, however, Jevic
allows priority-skipping in exceptional circumstances, the Committee Settlement does not meet
that exception because: (1) it acts as a final distribution of assets, and (2) serves no offsetting
bankruptcy-related purpose. Here, the Committee Settlement impermissibly leapfrogs Highway in
its distribution. The Committee, a junior creditor, received $2 million while Highway, a senior
creditor, received nothing. The proposed sale amounts to a final distribution because it disposes
virtually all the Debtor’s assets, leaving no hope that any party could propose plan, much less
confirm one. And the Committee Settlement serves no significant bankruptcy-related purpose.
Moreover, the Thirteenth Circuit invents an even more settlement-friendly exception to
Jevic. Namely, it mandates Jevic only apply when settlements distribute estate property. But no
such exception exists. Yet, even if this Court applies this most gratuitous exception, the Committee
Settlement still fails because the $2 million distribution belonged to the estate, not 4th Street. Thus,
both the Code and this Court’s holdings forbid 4th Street’s priority-skipping “gift.”
Parties cannot use § 363(f) or a 9019 settlement to circumvent the Code’s priorities scheme.
Therefore, this Court should reverse the Thirteenth Circuit and remand with instructions to either:
(1) deny the sale, or (2) allow the sale, but only if it (a) allows Highway to remain possession of
its lease under § 365(h), and (b) pays Highway’s administrative expense claim in full before the
Committee receives any funds. Therefore, this Court should reverse.
Team P. 3
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ARGUMENTS AND AUTHORITIES
The Thirteenth Circuit diluted fundamental procedural safeguards in the Bankruptcy Code
(the “Code”) when it approved the Committee Settlement that leaves Highway dispossessed and
penniless. The Constitution empowers Congress to create “uniform Laws on the subject of
Bankruptcies throughout the United States.” U.S. Const. art. I, § 8, cl. 4. This Court is tasked with
interpreting the Code according to congressional intent so as to ensure uniformity and to prevent
cracks from forming in these fundamental safeguards. On appeal, bankruptcy court decisions are
subject to de novo review for conclusions of law and clear error for findings of fact. Texas v.
Soileau (In re Soileau), 488 F.3d 302, 305 (5th Cir. 2007). Both issues in this case involve
questions of law, and the parties do not dispute the facts. R. at 3, 9. Thus, this Court should review
de novo.
I. THE DEBTOR CANNOT SELL ITS REAL PROPERTY UNDER § 363 FREE AND
CLEAR OF HIGHWAY’S LEASE.
The Thirteenth Circuit erred when it held the Debtor could sell its property to 4th Street
“free and clear” of Highway’s lease in light of § 365(h)—which affords lessees heightened
protections over other types of contracts and leases. Under § 363(f), a debtor may sell property
“free and clear of any interest in such property” where it satisfies at least one of the five statutory
requirements in subsection (f).1 See 11 U.S.C. § 363(f) (2012) (incorporated in Appendix A).
Section 365 permits a debtor to assume unexpired leases that benefit the estate or reject
burdensome ones. See § 365. Where a debtor rejects a lease, the lessee can either: “(i) . . . treat
such lease as terminated . . . or (ii) . . . retain the rights under such lease . . . .” § 365(h)(1). Congress
intended § 365(h) to safeguard lessees when a lessor files bankruptcy. See Dishi & Sons v. Bay
1 The parties in this case stipulate the sale meets at least one of those requirements. R. at 13.
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Condos LLC, 510 B.R. 696, 702–03 (S.D.N.Y. 2014) (citing In re LHD, 20 B.R. 717, 719 (Bankr.
S.D. Ind. 1982)).
The present case questions the Debtor’s ability to dodge lessees’ protections in § 365(h)
and sell the property “free and clear” of Highway’s lease under § 363(f). When courts address this
clash between §§ 363(f) and 365(h), the majority holds that § 365(h) restricts a debtor’s ability to
sell assets free and clear of the lessee’s protected possessory interest. See, e.g., IDEA Boardwalk,
LLC v. Revel Entm’t Grp. (In re Revel AC, Inc.), 532 B.R. 216, 227 (Bankr. D.N.J. 2015); In re
Zota Petroleums, LLC, 482 B.R. 154, 156 (Bankr. E.D. Va. 2012); In re Haskell L.P., 321 B.R. 1,
10 (Bankr. D. Mass. 2005); In re Churchill Props. III, Ltd. P’ship., 197 B.R. 283, 287 (Bankr.
N.D. Ill. 1996); In re Taylor, 198 B.R. 142, 167 (Bankr. D.S.C. 1996). The minority of courts,
however, apply these sections narrowly and incorrectly hold that a debtor can sell property free
and clear of a lease. See, e.g., Pinnacle Rest. at Big Sky, LLC v. CH SP Acquisitions (In re Spanish
Peaks Holdings II, LLC), 872 F.3d 892, 899 (9th Cir. 2017); Precision Indus. v. Qualitech Steel
SBQ, LLC, 327 F.3d 537, 548 (7th Cir. 2003).
This Court should align with the majority and reverse the decision of the Thirteenth Circuit
because: (1) “interest” under a § 363(f) sale does not include Highway’s lease, and (2) even if it
does, § 365(h) prevents the Debtor from selling its property “free and clear” of Highway’s lease
under § 363(f); (3) additionally, the bankruptcy court cannot approve the sale until the Debtor first
either assumes or rejects the lease, and (4) holding otherwise would dilute core Code protections
and incite parties’ mischief.
A. The Scope of “Interest” Under § 363(f) Does Not Include Highway’s Lease.
A lease does not constitute an “interest” under § 363(f); therefore, § 363(f) cannot eliminate
Highway’s lease. A debtor may sell its assets “free and clear of any interest in such property.”
§ 363(f) (emphasis added). But the Code does not define the term “interest.” Early courts relied on
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the plain language of § 363(f), holding that “interests” were limited to in rem property rights. See,
e.g., Mich. Emp’t Sec. Comm’n v. Wolverine Radio Co. (In re Wolverine Radio Co.), 930 F.2d
1132, 1147 (6th Cir. 1991), cert. dismissed, 503 U.S. 978 (1992) (holding “interest” in § 363(f)
does not include a debtor’s experience rating); In re Fleishman, 138 B.R. 641, 647 (Bankr. D.
Mass. 1992) (classifying the right of first refusal a contract right and not an “interest” under
§ 363(f)).
The Debtor’s § 363(f) sale cannot extinguish Highway’s lease because leases, like
successor liability claims, arise in personam not in rem. See Fairchild Aircraft Corp. v. Fairchild
Aircraft Inc. (In re Fairchild Aircraft), 184 B.R. 910, 919 (Bankr. W.D. Tex. 1995), vacated on
other grounds, 220 B.R. 909 (Bankr. W.D. Tex. 1998). When formed, leases spawn a new personal
property interest—the “leasehold interest.” In Fairchild, Judge Leif Clark reasoned that “any
interest” read in isolation ignores the words that follow—”in such property”—and rejected that
“any interest” in § 363(f) included successor liability claims. 184 B.R. at 917. Judge Clark properly
limited “any interest” to in rem interests attached to the property. Id. at 917–18.
Indeed, construing “interest” to include in personam interests renders “in such property” a
nullity. Id. at 918. Yet, some courts erroneously expand “interest” to include in personam interests,
including leaseholds. See, e.g., Qualitech, 327 F.3d at 545; In re TWA, 322 F.3d 283, 289 (3d Cir.
2003). For example, in Qualitech, the Seventh Circuit erred when it glossed over the phrase “in
such property” in § 363(f), and hypnotized by the word “any,” interpreted “interest” broadly to
include leases. 327 F.3d at 545. As a result, the court held the Debtor could sell the property free
and clear of the lease, but the lessee never objected to the Sale Order, nor appealed it. Qualitech,
327 F.3d at 543; see Hill v. MKBS Holdings, LLC (In re Hill), 307 B.R. 821, 826 (Bankr. W.D.
Pa. 2004); see also Joshua Stein, Did the Sky Fall on Leasehold Mortgagees? Ground Lease
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Financing After Qualitech the Fallout Has Not Been As Bad As Most People Expected, 25 Prac.
Real Est. Law. 7, 9 (2009) (“[The lessee in Qualitech] lost primarily because it ‘sat on its rights’
under [§] 363(f)”). Qualitech made classifying leaseholds as “interests” the standard. 327 F.3d at
545. But, this Court should not follow Qualitech because it selectively read § 363(f), incorrectly
expanded “interest,” and arguably the “lease” was not a true lease.2
The present case illustrates the need for this Court to clarify § 363(f)’s plain meaning and
hold “interest” does not include leases. In this case, Highway’s amphitheater lease requires it to
pay $400,000 per year in rent plus a portion of ticket and concession sales, which plainly makes it
a true lease. See R. at 5; contra Qualitech, 327 F.3d at 540. Highway’s leasehold interest is in
personam, thus the Debtor’s sale may not extinguish it. See Bartell, supra, at 508. Additionally,
unlike Qualitech, Highway objected to the Debtor’s “free and clear” sale, elected to retain its
possessory rights under § 365(h), renewed its objection at the sale hearing, and appealed the Sale
Order. R. at 7–8; see 327 F.3d at 543; see also Stein, supra, at 12 (“[A]ll a tenant must do to protect
its interests [under § 363(f)] is object . . . .”). Therefore, the Thirteenth Circuit erred when it
included Highway’s lease as an “interest” and held that § 363(f) eliminated the lease. See R. at 10.
Expanding the scope of “interest” in § 363(f) to include leases contravenes the Code’s plain
meaning and text. Accordingly, this Court should reverse the Thirteenth Circuit and hold the
Debtor’s sale cannot vaporize Highway’s lease.
2 The Qualitech lease was arguably not a true lease because the rent and purchase price was nominal—$ 1 per year.
See 327 F.3d at 545; Cf. In re PCH Assocs., 804 F.2d 193, 200 (2d Cir. 1986) (noting, “[a] large inequality or
discrepancy in values has been characterized as a “strong circumstance” tending to show that a transaction was a
disguised financing scheme.” And holding there was no true lease where rent was calculated solely to ensure a return
on investment, and not calculated for the use of the property).
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B. Even if “Interest” Under § 363(f) Includes Leases, § 365(h) Restricts the Debtor’s
Ability to Sell the Property “Free and Clear” of Highway’s Lease.
If, however, § 363(f)’s “interest” applies to Highway’s lease, the Debtor still cannot sell
the amphitheater free and clear because the lessee protections in § 365(h) limit § 363(f). A majority
of courts agree that § 365(h) and § 363(f) conflict, and a lessee’s § 365(h) rights trump a debtor’s
right to sell assets free and clear. See supra Section I.A (listing cases). In contrast, the minority of
courts hold §§ 363(f) and 365(h) do not clash because § 363(f) applies to sales and § 365(h) applies
to rejections. See, e.g., Spanish Peaks, 872 F.3d at 899; Qualitech, 327 F.3d at 548. But this is
incorrect. When a property with a lease is sold, a de facto rejection occurs because the debtor can
no longer perform under the lease, even if it intended to. So, in this case, the Debtor’s sale
establishes a de facto rejection of Highway’s lease, which triggers § 365(h). R. at 22 (Petty, J.,
dissenting). This prohibits the Debtor from selling the amphitheater free and clear of Highway’s
lease because §§ 363(f) and 365(h) conflict, and the statutory construction and legislative history
demand § 365(h) overrides § 363(f).
1. Sections 363(f) and 365(h) of the Bankruptcy Code conflict and § 365(h)
overrides § 363(f).
Sections 363(f) and 365(h) conflict because both apply when a debtor-lessor attempts to
sell property free and clear of a lessee’s interests. See In re Churchill, 197 B.R. at 286 (“Each
provision seems to provide an exclusive right that when invoked would override the interest of the
other.”). True, when read in a vacuum, § 363(f) appears to apply to a distinct event from § 365(h).
See id. at 288; R. at 21; In re Crumbs Bake Shop, Inc., 522 B.R. 766, 778 (Bankr. D.N.J. 2014).
But they inherently conflict—for example, when a court faces both a motion to sell and a motion
to reject. See, e.g., In re Revel AC, Inc., 532 B.R. at 227–28; IDEA Boardwalk, LLC v. Polo N.
Country Club, Inc., No. 16-8683, 2017 WL 4927667, at *6 (D. N.J. Oct. 31, 2017). Plus, when
§ 363 is read in its entirety, § 363(f) is subject to § 365(h). See Michael St. Patrick Baxter, Section
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363 Sales Free and Clear of Interests: Why the Seventh Circuit Erred in Precision Industries v.
Qualitech Steel, 59 Bus. Law. 475, 495–99 (2004).
The Code’s text shows §§ 365(h) and 363(f) relate and § 365(h) limits § 363(f). Namely,
§ 363(l)’s cross-reference to § 365 applies with equal force to § 363(f). See §§ 363(f), (l), 365(h).
Section 363 permits two sales types: those outside the ordinary course of business—§ 363(b)—
and sales within the ordinary course of business—§ 363(c). See §§ 363(b), (c). Meanwhile, § 363(f)
more specifically describes the nature—“free and clear”—of §§ 363(b) and (c) sales. Accordingly,
any limit on §§ 363(b) or (c) also limits § 363(f). Baxter, supra at 483. Sections 363(d), (e), and
(l) limit §§ 363(b) and (c), so they also limit sales under § 363(f). Section 363(l) makes sales in or
outside the ordinary course of business “[s]ubject to the provisions of [§] 365 . . . . ” § 363(l)
(emphasis added). Nevertheless, the Thirteenth Circuit argued “[i]f Congress wanted to make a
debtor’s ability to sell real property in a [§] 363(f) sale subject to [§] 365(h), it could have said so.”
R. at 13 (majority opinion). But it did. See § 363(l). Courts must interpret the Code as a
“comprehensive scheme.” RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 556 U.S. 639, 645
(2012). The cross-reference in § 363(l) makes an additional cross-reference superfluous. See, e.g.,
Kungys v. United States, 485 U.S. 759, 778 (1988) (Scalia, J.) (plurality opinion) (explaining
statutory construction’s cardinal rule is to construe “no provision . . . to be entirely redundant”).
The minority courts fail to interpret the Code as a “comprehensive scheme,” erroneously
hold §§ 363(f) and 365(h) do not conflict, and thus allow a debtor to sell property free and clear
of a lease. Spanish Peaks, 872 F.3d at 899; Qualitech, 327 F.3d at 548; Cheslock-Bakker & Assocs,
Inc. v. Kremer (In re Downtown Ath. Club of N.Y. City), No. M-47, 2000 U.S. Dist. LEXIS 7917,
at *3–4, 6–8 (S.D.N.Y. June 9, 2000). The minority view sows confusion because it is unclear
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what a court should do if the debtor formally rejects or assumes a lease before a sale, or if the sale
itself is a de facto rejection. See Dishi & Sons, 510 B.R. at 704.
This Court should hold that the Debtor’s sale was a de facto rejection of Highway’s lease.
In fact, the Seventh Circuit conceded a sale could operate as a “repudiation” of a lease. See
Qualitech, 327 F.3d at 547. While the Code does not define “repudiate,” Black’s Law Dictionary
defines it: “to reject.” R. at 22 (Petty, J., dissenting); Repudiate, BLACK’S LAW DICTIONARY 1496
(10th ed. 2014). Similarly, the Ninth Circuit admitted that a free and clear sale “may be an effective
rejection of the lease.” Spanish Peaks, 872 F.3d at 899. But it refused to hold the statutes conflicted,
amorphously stating that rejection “is not the same thing as the “rejection” contemplated by [§]
365.” Id. But rejection is rejection. The minority view cannot stand because it “fail[s] to
demonstrate any difference between the effect of a ‘free and clear’ sale and a rejection.” R. at 22
(Petty, J., dissenting). Thus, §§ 363(f) and 365(h) inherently conflict, and the Debtor’s sale is
subject to Highway’s § 365(h) rights—specifically its rights to elect to continue possession.
2. The rules of statutory construction demand that § 365(h) override § 363(f).
Because §§ 363(f) and 365(h) conflict, this Court must hold the specific lessee protections
under § 365(h) govern over the general provisions in § 363(f). When conflict or ambiguity exists
between statutes, courts clarify with the rules of statutory construction. Toibb v. Radloff, 501 U.S.
157, 162 (1991). A common rule is that “the specific governs the general.” Morales v. Trans World
Airlines, Inc., 504 U.S. 374, 384 (1992) (citation omitted). Section 365(h) is a specific exception
to § 363(f)’s general rule. R. at 22; see In re Haskell, 321 B.R. at 7.
Courts agree § 365 overrides § 363(f) because “the Code [cannot] be read in a vacuum.”
See In re Churchill, 197 B.R. at 288; In re Taylor, 198 B.R. at 165. In Churchill, the court
explained how § 365(h) “clear[ly] and specific[ally]” affords certain rights and remedies to lessees.
197 B.R. at 288; see In re Taylor, 198 B.R. at 164–65 (noting “§ 365(h) . . . with great particularity
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sets forth the rights and duties of the lessor and lessee while § 363 does not”). Congress, through
§ 365(h), allows lessees to remain in possession of their lease, so it is illogical “to permit a general
provision, such as [§] 363(f), to override [the] purpose[] of § 365(h).” Id.
Last, if this Court adopts the Debtor’s position that § 363(f) avoids conflict with § 365(h),
and allows sales frees and clear of leases, then the application of § 365(h) “would be nugatory.”
See In re Churchill, 197 B.R. at 288; In re Zota, 482 B.R. at 161; In re Haskell, 321 at 9.
Accordingly, canons of statutory construction demand that § 365(h) govern over § 363(f).
3. The legislative history of § 365 demands a heightened protection for lessees’
rights that limits § 363(f)’s purpose.
Even if this Court finds §§ 365(h) and 363(f) do not conflict, the Debtor cannot sell its
property free and clear of Highway’s lease because it clashes with congressional intent. Ordinarily,
statutory “language must be . . . regarded as conclusive,” but that is “[a]bsent a clearly expressed
legislative intention to the contrary.” Consumer Prod. Safety Comm’n v. GTE Sylvania, Inc., 447
U.S. 102, 108 (1980) (emphasis added). Section 365(h) still trumps § 363(f) because the legislative
history of § 365(h) evinces Congress’s intent to shelter lessees when a lessor files bankruptcy. See
Dishi & Sons, 510 B.R. at 702–03.
Congressional protection for lessees dates back to 1938 when Congress codified the
Bankruptcy Act of 1898 ch. 541, § 70(b), 30 Stat. 544, 565–66 (codified as amended at 11 U.S.C.
§ 110(b) (1976) (repealed 1978)) (the “Act”). It provided that a bankrupt landlord “shall not
deprive the tenant of his estate.” Id. This came to mean a rejection did not terminate a lease, but
protected an innocent lessee who relied on the stated lease term. In re Taylor, 198 B.R. at 166;
Thomas C. Homburger, Conflict Resolved: Bankruptcy Code § 365(h) and the Contradictory Case
Requiring Its Amendment, 29 Real Prop. Prob. & Tr. J. 869, 872 (1995).
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But Congress did not stop advocating for lessee protections with the Act and further
championed them when it codified § 365(h) in the Bankruptcy Code in 1978. Bankruptcy Reform
Act of 1978, Pub. L. No. 95-598, § 365, 92 Stat. 2549, 2574 (codified as amended at 11 U.S.C.
§ 365(h) (2012)). The 1978 Code clarified that lessees in corporate reorganizations were also
protected. See id.; In re Taylor, 198 B.R. at 165–66. Moreover, Congress also granted lessees the
additional right to “renewal or extension.” Bankruptcy Reform Act of 1978 § 365.
Like Congress’s intention with § 70(b) of the Act, Congress intended that § 365(h) keep a
debtor-lessor from “depriv[ing] the tenant of his estate for the term for which he bargained.” S.
Rep. No. 95-989 at 60 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5846; H.R. Rep. No. 95-595
at 349 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6306; see also 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, 100 (2004) (emphasizing “that all the proposals and suggestions
for redrafting 70(b) of the Bankruptcy Act were aimed at protecting the tenant’s rights under the
lease.”). Essentially, Congress intended to prevent forcible evictions when the debtor-lessor rejects
a lease. Taylor, 198 B.R. at 165–66. At its core, Congress sought to “codify a delicate balance
between the rights of a debtor-lessor and the right of its tenants” by preserving the parties’
expectations in a real estate transaction. In re Lee Road Partners, Ltd., 155 B.R. 55, 60 (Bankr.
E.D.N.Y. 1993).
In 1994, Congress reacted to courts’ alarmingly narrow interpretations of § 365(h), and
again amended the statute. It further defined a lessee’s rights as “those relating to . . . rent and . . .
any right of use [or] possession . . . or appurtenant to the real property.” Bankruptcy Reform Act
of 1994, Pub. L. No. 103-394, § 205, 108 Stat. 4106, 4122 (codified at 11 U.S.C. § 365(h)); see
also Bankruptcy Reform Act of 1994, Section-by-Section Analysis, 140 Cong. Rec. H10,752-0I,
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H10767 (daily ed. Oct. 4, 1994). And it clarified that § 365 “mandates that lessees cannot have
[those] rights stripped away.” Id.
Here, the Debtor cannot deprive Highway of its leasehold estate. Nowhere in the legislative
history, comments, or language itself, did Congress restrict a lessee’s rights in the event of a
§ 363(f) sale. See id.; see also Bankruptcy Reform Act of 1978 § 365. Rather, the evolution of §
365(h) portrays congressional intent to earnestly protect lessees’ rights. See id.; In re Taylor, 198
B.R. at 166. Therefore, this Court, guided by the legislative history of § 365(h), should hold §
365(h) overrides § 363(f).
4. Yet, if § 363(f) applies, § 363(e) obligates the Debtor to provide adequate
protection in the form of continued possession to safeguard Highway’s
lease.
Even if the Debtor could sell the amphitheater “free and clear” of Highway’s lease, § 363(e)
entitles Highway to continue possession because it is the only way for Highway to receive
“adequate protection.” Section 363(e) requires a court (upon request) to “prohibit or condition . .
.[a] sale . . . to provide adequate protection of such interest.” § 363(e). Section 361(3) defines
“adequate protection,” as the “relief . . . [that] will result in . . . the indubitable equivalent of such
entity’s interest.” § 361(3) (emphasis added). Its “purpose . . . is to ensure that the secured creditor
receives in value essentially what he bargained for.” H.R. Rep. No. 95-595, at 339. But lessees’
rights and interests differ from those of secured creditors. For that reason, Congress added § 365(h)
to protect the lessees’ unique interests. See The Bankruptcy Reform Act of 1978 § 365; S. Rep.
No. 95-989 at 60.
Contrary to the Thirteenth Circuit’s belief that § 363(e) “accomplishes purposes that are
similar to those embodied in [§] 365(h),” adequate protection fails to safeguard lessees to the extent
Congress intended with § 365(h). See R. at 14 (majority opinion). It is a miscarriage of justice for
“[t]he statutory rights of lessees [to] be sacrificed on the altar of reorganization.” Baxter, supra, at
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494. Therefore, the bankruptcy court erred when it approved the sale to 4th Street dispossessing
Highway in the face of (1) Highway’s objection requesting to “remain in possession of the
amphitheater” and (2) the Debtor’s failure to provide this “indubitable equivalent.” R. at 7.
Courts that allow sales free of § 365(h) rights typically do so only if either: (1) the debtor
provides the lessee with adequate protection of its possessory interest, or (2) the lessee fails to
timely object to the sale. See, e.g., Qualitech, 327 F.3d at 547–48. The compulsory language courts
have used when a debtor has attempted to sell property free and clear of a lease, proves “adequate
protection in [§] 363(e) is mandatory.” In re Dewey Ranch Hockey, LLC, 414 B.R. 577, 592
(Bankr. D. Ariz. 2009) (emphasis added); see Qualitech, 327 F.3d at 548 (noting a debtor is
obligated to provide adequate protection); In re Haskell, L.P., 321 B.R. at 23 (stating the debtor
“ha[d] not offered or provided adequate protection”) (emphasis added); In re Zota Petroleums,
LLC, 482 B.R. at 163 (explaining that “no adequate protection [was] proposed.”) (emphasis
added); 3 Collier on Bankruptcy ¶ 363.05[2] (Alan Resnick & Henry J. Sommer eds., 16th ed. rev.
2017). Moreover, a “[debtor-in-possession] has the burden of proof on the adequate protection
issue.” § 363(p)(1) (emphasis added). Plus, adequate protection generally prevents a free and clear
sale from amounting to an uncompensated Fifth Amendment “taking.” See U.S. Const. amend. V.;
George W. Kuney, Misinterpreting Bankruptcy Code Section 363(f) and Undermining the Chapter
11 Process, 76 Am. Bankr. L.J. 235, 287 (2002). To fulfill Congress’s intention and protect Fifth
Amendment rights, the debtor must offer adequate protection when a § 363(f) sale strips a lessee
of its lease.
If, however, this Court requires Highway request protection, Highway did so when it
objected to the sale. R. at 7. Courts should “determine the true nature of a pleading by its substance,
not its label.” Armstrong v. Capshaw, Goss & Bowers, LLP, 404 F.3d 933, 936 (5th Cir. 2005)
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(emphasis added); Prudential Real Estate Affiliates, Inc. v. PPR Realty, Inc., 204 F.3d 867, 880
(9th Cir. 2000). When Highway objected, it stated that its lease “entitled [it] to remain in
possession of the amphitheater.” R. at 7. Courts recognize the “indubitable equivalent” of a lessee’s
interest, “can only be achieved through continued possession of the leased premises.” In re
Haskell, 321 B.R. at 23 (holding that the difficulties in calculating the value of a leasehold interest
makes continued possession necessary to adequately protect a lessee); Dishi & Sons, 2014 WL
2199819, at *14; Ultimate Sportsbar, Inc. v. United States, 48 Fed. Cl. 540, 548 (Fed. Cl. 2001).
Thus, even if Highway labeled the sale objection a request for adequate protection, the
substance—requesting continued possession—would have remained the same.
Therefore, the Thirteenth Circuit erred when it held that Highway abandoned its right to
adequate protection because it did not expressly request it. See R. at 14. The court should have
required the Debtor to offer adequate protection for Highway’s lease without a request. What is
more, unlike the lessee in Qualitech, Highway did not fail to timely object to the sale. R. at 7; see
327 F.3d at 547–48. Therefore, this Court should reverse the Thirteenth Circuit and hold that at a
minimum, the Debtor was required to offer Highway adequate protection of its leasehold estate.
C. Alternatively, the Court Cannot Approve the Sale Because the Debtor Failed to
First Either Assume or Reject Highway’s Lease.
Before it approved the Debtor’s sale, the court should have required the Debtor to assume
or reject Highway’s lease. This prevents debtors from selling non-estate property. Unlike other
assets, leases involve future liabilities and rights; they do not vest in the estate when the debtor
files for bankruptcy. In re Frazin, 183 F.3d 28, 32 (2d Cir. 1910) (explaining how this ensures the
debtor is not subject to liabilities without due deliberation). But once the debtor assumes the lease,
it vests. In re Taylor, 198 B.R. at 167. Bankruptcy courts have no jurisdiction over assets outside
of the debtor’s estate. United States v. Neiwirth, 370 F. Supp. 929, 934 (D.N.J. 1974). Thus they
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have no authority to approve the debtor’s sale or transfer. Id. Therefore, “[§] 365 is a necessary
avenue which the Debtor must follow before [a court can] authorize a transfer of real property.”
Id. (emphasis added); see In re Lovitt, 757 F.2d 1035, 1041 (9th Cir. 1985) (requiring a lease’s
assumption before considering estate property); In re Tonry, 724 F.2d 467, 469 (5th Cir. 1984); In
re Cochise College Park, Inc., 703 F.2d 1339, 1352 (9th Cir. 1983).
Furthermore, the American Bankruptcy Institute Commission’s recommendation for
interpreting the interaction between §§ 363(f) and 365(h) agrees that a debtor must assume or reject
a lease prior to a sale. ABI Commission to Study the Reform of Chapter 11 2012-2014 Final Report
and Recommendations, p. 142, available at commission.abi.org/full-report. The Commission
suggested a debtor:
be permitted to sell the debtor’s assets free and clear of . . . unexpired leases only
to the extent such . . . leases are rejected in accordance with [§] 365. . . and the
[debtor] is permitted by [§] 365 to recover the property free and clear of the
nondebtor counterparty’s rights to use or possess such property.
Id. The Commission also endorses that § 363(f) is subject to § 365(h). Id.
Accordingly, the Debtor in this case did not assume or reject the lease prior to the attempted
sale, thus Highway’s rights had not vested in the Debtor’s estate at the time of the sale. See In re
Taylor, 198 B.R. at 167. And the Debtor could not sell the amphitheater free and clear of
Highway’s right to possession—the Debtor cannot dispose of an interest it does not have.
Therefore, this Court should reverse the lower court because the Debtor should have assumed or
rejected the lease prior before it attempted to sell the property.
D. The Thirteenth Circuit’s Holding Encourages Mischief—Enabling Debtors to
Mask Rejections as Free and Clear Sales.
The Thirteenth Circuit’s holding has disastrous policy implications for tenants like
Highway, who are current on all lease obligations but can still have their possessory rights stripped
away. It would enable debtor-lessors to easily dodge § 365(h) and sell property free and clear of a
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lessee’s interests without a formal rejection, let alone a lease termination. In re Churchill, 197 B.R.
at 288; see R. at 24 (Petty, J., dissenting) (“[D]ebtor-lessors will be incentivized to manipulate the
Bankruptcy Code by cloaking rejections as ‘free and clear’ sales.”). It would make forcible eviction
possible, essentially repealing § 365(h). In re Churchill, 197 B.R. at 288.
Moreover, debtors in chapter 11 could use § 363(f) sales to sell substantially all of their
assets—essentially initiating a chapter 7 without the restrictions the Code places on chapter 7. For
instance, the Code deems a lease rejected after sixty days under chapter 7. See § 365(d)(1). Asset
sales have increasingly become a substitute for chapter 11 plan; a substitute that avoids over the
hurdles placed in plan confirmation to protect creditors. Ultimately, it “ha[s] the potential to work
great mischief by removing (in large part) various adversarial aspects of the Chapter 11 process.”
Charles W. Mooney, Jr., Illinois ABI Symposium on Chapter 11 Reform: The (Il)legitimacy of
Bankruptcies for the Benefit of Secured Creditors, 2015 U. Ill. L. Rev. 735, 764 (2015).
Allowing § 363(f) to overcome the protections afforded to lessees in § 365(h) would
drastically affect the real estate market by disrupting leasehold investments. See Zinman, supra, at
167 (2004). Leasehold mortgages are closely tied to lease investments. Id. Mortgage lenders will
lose funds if courts allow debtors to mask rejections under the guise of free and clear sales,
dissuading lenders and lessees from using long-term leases to develop land. Id. at 99.
In addition, “the majority’s holding is by no means confined to § 365(h) and is instead
destined to creep into other sections of the Bankruptcy Code.” R. at 24. Section 365(n) protects
intellectual property licensees like § 365(h) protects lessees. See § 365(n)(1)(B). If this Court
concludes § 363(f) sales extinguish leases notwithstanding § 365(h) protections, there is nothing
to stop courts from holding the same with regard to a licensee’s rights under 365(n). Cf. Crumbs
Bake Shop, 522 B.R. at 777 (relying on the majority of courts’ reasoning that § 363(f) cannot
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extinguish lessees’ § 365(h) rights, to hold nothing in § 363(f) “trumps, supersedes, or otherwise
overrides the rights granted to [l]icensees under § 365(n).”). Nearly every company uses
intellectual property and it is often an entity’s most valuable asset. See FutureSource LLC v.
Reuters Ltd., 312 F.3d 281, 284 (7th Cir. 2002). Thus, a company’s loss of its intellectual property
license arguably produces greater consequences for a business than the loss of a lease. See id.
Affirming the Thirteenth Circuit will dilute not only lessee protections but also intellectual
property licensees’ protections, damaging economic implications throughout the United States.
The recent increase in “loan to own” strategy3 investors makes a stronger application of
fundamental Code protections—such as the priority scheme and § 365 protections—even more
essential. Michelle M. Harner, Trends in Distressed Debt Investing: An Empirical Study of
Investors’ Objectives, 16 Am. Bankr. Inst. L. Rev. 69, 101–02 (2008) (explaining that these
strategies may “worsen the plight of junior creditors,” because “[a]n activist investor maximizes
either its return on the debt or its ownership interest in a reorganized company by reducing or even
eliminating distributions to junior creditors and shareholders”). But the Thirteenth Circuit’s
holding dilutes the fundamental protections of the Code. Therefore, this Court should reverse and
hold the Debtor may not use § 363(f) to circumvent not only § 365(h)’s protections, but also the
limitations of chapter 7 and chapter 11 plan confirmation.
II. THE COMMITTEE SETTLEMENT VIOLATES THE CODE’S PRIORITY
SCHEME AND FAILS THE “FAIR AND EQUITABLE” STANDARD.
The Thirteenth Circuit erred because it allowed the Committee Settlement to deviate from
the priority scheme that lies at the heart of the Code. The Code’s priority scheme is a “basic
underpinning of” bankruptcy law, “fundamental to the Bankruptcy Code’s operation.” Czyzewski
3 A “loan to own” investor, purchases secured debt at a discounted rate with the specific intent of ultimately owning
the collateral with the hopes that it will increase in value.
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v. Jevic Holding Corp., __ U.S. __, 137 S. Ct. 973, 983 (2017); see 11 U.S.C. § 507(a) (2012); Cf.
Begier v. IRS, 496 U.S. 53, 58 (1990) (describing equality of intra-class creditor distribution as a
“central policy” of bankruptcy). The priority scheme prohibits distributions where: (1) a junior
creditor receives value on account of its claim while a senior creditor remains impaired (inter-
class protection), or (2) a creditor receives greater value than other creditors of equal priority
(intra-class protection). See § 507(a) (codifying the priority scheme); § 103(a) (making § 507(a)
applicable to chapter 11); § 1129(b)(2) (requiring compliance with priority scheme in the plan
context); § 726(a) (requiring compliance in liquidation context). But in some cases—like this
case—parties attempt to manipulate the Code’s waterfall by camouflaging priority-violating
distributions as “settlements” under Federal Rule of Bankruptcy Procedure 9019. Fed. R. Bankr.
P. 9019(a) (authorizing courts to “approve a compromise or settlement”).
A court may only approve a “fair and equitable” Rule 9019 settlement. See Motorola, Inc.
v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452, 462 (2d
Cir. 2007) (applying Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v.
Anderson, 390 U.S. 414, 424 (1968) to 9019 settlements). Under the TMT Trailer Ferry “fair and
equitable” standard for 9019 settlements, courts consider: the probability of success if the claim is
litigated, the litigation’s complexities, the likely expense and duration of the litigation, how
difficult it would be to collect any ultimate judgment, and “all other factors relevant to a full and
fair assessment of the wisdom of the compromise.” 390 U.S. at 424. And this “[fair and equitable]
standard incorporates the absolute priority doctrine.” Id. at 441; see In re Iridium, 478 F.3d at 463
n.18. Although Highway does not dispute that many TMT Trailer Ferry factors favor the
Committee Settlement, the Thirteenth Circuit erred because it failed to examine the “most
important factor” in a Rule 9019 fair and equitable analysis: “whether a particular settlement[]. .
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. complies with the Code’s priority scheme.” In re Iridium, 478 F.3d at 455 (emphasis added); see
R. at 25 (criticizing majority’s half-baked approach) (citing United States v. AWECO, Inc. (In re
AWECO, Inc.), 725 F.2d 293, 298 (5th Cir. 1984)).
Because the Committee Settlement distributes property in a way that violates the Code’s
priority scheme, it fails the “fair and equitable” test. See § 507(a); In re AWECO, Inc., 725 F.2d at
298. And it cannot stand. The Debtor’s three creditor groups, in order of priority, are: (1) secured
creditors, (2) Highway, with an unsecured administrative expense claim, and (3) the Committee,
representing the remainder of unsecured creditors. R. at 7 (majority opinion). The Committee
Settlement squeezes group (2)—Highway—out of the bankruptcy. R. at 7. 4th Street purchased
substantially all the Debtor’s assets for a price that satisfied only “the full amount of its secured
claims,” which paid group (1) in full. R. at 7. Both Highway and the Committee objected because
they would have received nothing. But the bankruptcy court likely would not have approved the
sale in the “best interests of all parties” with both objections. R. at 9. So, in exchange for the
Committee to drop its objection, 4th Street “gifted” $2 million to the Committee (group (3)) to
pursue the estate’s Skyline claims. The court then approved the Committee Settlement without
Highway’s consent. R. at 8.
But this Committee Settlement—with its low purchase price and direct distribution to
junior creditors—leapfrogs Highway and leaves it empty-handed. R. at 7. “[I]t is undisputed that
the Committee Settlement does not adhere to the priority scheme,” and the bankruptcy court should
have denied the Committee Settlement. R. at 25 (Petty, J., dissenting).
Nevertheless, the Thirteenth Circuit improperly characterizes the funds 4th Street placed
in the trust as a “gift” of 4th Street’s own money rather than a distribution, in an attempt to
circumvent the priority scheme. R. at 17 (majority opinion). A controversial “gift” occurs when a
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senior creditor relinquishes part of its recovery to a junior class that would not otherwise receive
money. See, e.g., In re SPM Mfg. Corp., 984 F.2d 1305, 1313 (1st Cir. 1993); In re Armstrong
World Indus., Inc., 432 F.3d 507, 514 (3d Cir. 2005). Despite this seemingly benign label, a “gift”
that skips intermediate classes in a plan violates § 1129(b)(2)(B)(ii) (the “Absolute Priority Rule”).
See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206–07 (1988) (holding “fair and
equitable” requires a plan comply with § 1129(b)). Likewise, a class-skipping “gift” in a Rule 9019
settlement violates the priority scheme in § 507(a). R. at 8. This Court addressed a strikingly
similar issue in Jevic, rejecting priority-skipping distributions in a chapter 11 structured dismissal
as violating the Code. 137 S. Ct. at 978. Accordingly, Jevic should guide the Court’s analysis here.
This Court should reverse because a proper reading of the Code and Jevic prohibits
priority-skipping in all pre-plan settlements. Even if Jevic allows priority-skipping in some,
narrow circumstances—for instance, when the distribution is “interim” rather than “final,” and the
distribution serves a Code-related objective—the Committee Settlement still fails. Finally, even if
Jevic only prohibits distributions of estate property, the Committee Settlement still cannot stand.
A. 4th Street Cannot Use Rule 9019 to Circumvent the Code’s Priority Scheme.
The Code’s language and purpose prohibits the Committee Settlement. Despite the
Thirteenth Circuit’s truncated 9019 analysis, the proper “fair and equitable” standard embodies the
principle that “senior interests are entitled to full priority over junior interests.” In re AWECO,
Inc., 725 F.2d at 298 (emphasis added). Therefore, when a 9019 settlement violates the Code’s
priority scheme in §§ 507(a) and 1129(a), it also violates the TMT Trailer Ferry standard set by
this Court. See In re Iridium, 478 F.3d at 455. Here, the $2 million distribution skips a more senior
creditor (i.e., Highway). Pays a more junior creditor (i.e., the Committee). Violates the priority
scheme. See §§ 507(a), 1129(a). Thus, 4th Street misuses the 9019 Committee Settlement to
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circumvent the Code’s priority scheme. It is not “fair and equitable.” See In re AWECO, Inc., 725
F.2d at 298.
Recognizing the protective value in a predetermined waterfall, Congress codified the
general priority scheme in § 507(a). See § 507(a); App. D Collier on Bankruptcy pt. 4(e)[4](ii)
(Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2017) (explaining that § 507 priorities denote
the “special social importance” of certain claims). Section 103(a) makes this priority scheme
applicable to all chapter 11 cases. See § 103(a). In the chapter 11 plan context, a court can only
confirm a plan as “fair and equitable” if it provides a full return to “senior” debts before it provides
any return to more junior debts. See § 1129(b)(2)(B)(ii). Section 726(a) mandates the same
waterfall in chapter 7 liquidation. See § 726(a). And, in Jevic, this Court makes clear that creditors
retain chapter 11’s priority protections even when no plan is proposed. See Jevic, 137 S. Ct. at 987.
To that end, Congress has not authorized courts to modify the priority scheme in 9019
settlements. See United States v. Noland, 517 U.S. 535, 540 (1996) (warning bankruptcy courts
not to takeover legislative roles or revise statutes). Nor may parties use a § 363 sale to evade this
scheme to effectively liquidate or reorganize a debtor in a manner inconsistent with the Code. See
Jevic, 137 S. Ct. at 984. If Congress wanted such a gaping loophole torn into its carefully-woven
priority scheme, it certainly knew how to draft one. Whitman v. Am. Trucking Assns., Inc., 531
U.S. 457, 468 (2001) (“Congress . . . does not . . . hide elephants in mouseholes.”).
Fairness and equity demand that pre-plan settlements, especially those involving sales,
conform to the Code’s priority rules. See Dish Network Corp. v. DBSD N. Am., Inc. (In re DBSD
N. Am., Inc.), 634 F.3d 79, 94–98 (2d Cir. 2011) (citing N. Pac. Ry. Co. v. Boyd, 228 U.S. 482,
507–08 (1913)) (outlining the priority scheme’s equitable roots). Sales that effectively distribute
all of a debtor’s assets inequitably “short circuit[s] the requirements of [c]hapter 11 for
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confirmation of a reorganization plan.” In re Iridium Operating LLC, 478 F.3d at 466 (quoting
PBGC v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935, 940 (5th Cir. 1983)). In
contrast, “rigid application” of the absolute priority rule enhances predictability and facilitates
efficient yet fair negotiations. See S. Rep. No. 95-1106, at 1 (1978).
If it allows parties to employ Rule 9019 to sidestep the Code’s priority scheme, this Court
would weaken fundamental creditor protections and encourage mischief. See Jevic, 137 S. Ct. at
987. Without predetermined payment priorities, “collusion, i.e., senior secured creditors and
general unsecured creditors teaming up to squeeze out priority unsecured creditors” would
swallow the equitable goals of chapter 11. Id. When a court refuses to apply the priority scheme
to settlements, it enables parties to bootstrap Rule 9019 (a procedural rule) to § 363 and strip
priority rights from creditors. See Comm. of Equity Sec. Holders v. The Lionel Corp. (In re Lionel
Corp.), 722 F.2d 1063, 1069 (2d Cir. 1983) (reversing a bankruptcy court’s sale approval because
§ 363 does not “gran[t] the bankruptcy judge carte blanche” to “swallo[w] up Chapter 11’s
safeguards”). Such a result abridges creditors’ substantive rights in violation of 28 U.S.C. § 2075
(2012). In short, pre-plan settlements, like the Committee Settlement, must comply with the
strictures of the priority scheme.
The Committee Settlement implicates and violates the priority scheme under a proper
reading of the Code. See In re On-Site Sourcing, Inc., 412 B.R. 817, 828 (Bankr. E.D. Va. 2009).
This case closely mirrors On-Site Sourcing, where the court lambasted and rejected the parties’
attempt to use § 363 to reconstruct the Code’s waterfall in favor of their desired distribution
scheme. 412 B.R. at 830. The scheme created a de facto plan of reorganization in which the
purchaser, rather than the Code or the court, determined which creditors got paid and how much.
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Id. at 827 (characterizing the sneaky proposition a sub rosa “plan”). But this “plan” did not comply
with the Code’s requirements. See id. at 829 (citing In re Lionel Corp., 722 F.2d at 1071).
Similarly, 4th Street impermissibly serves as both purchaser of the Debtor’s assets and
arbiter of its estate. See R. at 8; §§ 507(a), 1129(b). As in On-Site, 4th Street crafted its own
waterfall scheme that distributed funds to the Committee, a junior class, and left Highway, a senior
class, impaired. See 412 B.R. at 830. Indeed, the Committee Settlement summons the very evil
Congress sought to banish with the priority scheme—agreements where powerful parties may
manipulate the bankruptcy process to exploit those with less leverage. See Jevic, 137 S. Ct. at 987
(citations omitted).
The Committee Settlement also deprives senior creditors, like Highway, of the chance to
benefit from a different case resolution that might respect the priority scheme. Cf. Jevic, 137 S. Ct.
at 983. If the Committee Settlement had failed, the Debtor would have had two options: (1) propose
a chapter 11 plan; or (2) convert the case to chapter 7. R. or 17; See §§ 1112(a) (allowing for
conversion to chapter 7 upon debtor’s request), 1112(b)(1) (mandating conversion or dismissal for
“cause”). Both options would have allowed Highway to retain its claim. If a party had proposed a
plan, the court could not have confirmed it until the plan covered Highway’s administrative
expense claim in full or Highway consented. See § 1129(a)(9) (requiring full payment of
administrative expense claims for plan confirmation) (b)(1) (requiring compliance with (a)(9)
when a plan is involuntarily “crammed down”). If the case had converted to chapter 7, the
Committee would not have released the lender liability claims. R. at 8. Then, the Trustee could
have pursued litigation against 4th Street. R. at 8. If the claims generated proceeds, the property
would come into the estate. See § 541(a)(6) (including “proceeds” from estate claims as estate
property). And any distribution of these proceeds would have been required to comply with the
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priority scheme. See § 726(a). Thus, although the Thirteenth Circuit touts the Committee
Settlement as a prophylactic against liquidation, at least chapter 7 would have provided Highway
with priority safeguards in any distribution. See R at 17; § 726(a).
Despite this, those courts that approve priority-skipping distributions rely on legal fiction
and cling to a hyper-narrow view of the priority scheme as only applying to plans and liquidations.
See, e.g., Official Comm. of Unsecured Creditors v. CIT Grp./Bus. Credit Inc. (In re Jevic Holding
Corp.), 787 F.3d 173, 182 n.7 (3d Cir. 2015), rev’d sub nom, Czyzewski v. Jevic Holding Corp.,
137 S. Ct. 973, 983 (2017) (“If § 103(a) meant that all distributions in Chapter 11 cases must
comply with the priorities of § 507(a), there would have been no need for . . . the absolute priority
rule specifically in the plan confirmation context.”); In re World Health Alts, Inc., 344 B.R. 291,
298 (Bankr. D. Del. 2006). Now defunct by Jevic, priority-deviating settlements do not even
implicate priority rules. See In re World Health Alts., 344 B.R. at 298. But, to the extent that the
Code left unanswered when its priority scheme applies, Jevic clarified that even non-plan
distributions in chapter 11 must follow its mandate. 137 S. Ct. at 983.
B. This Court’s Holding in Czyzewski v. Jevic Prohibits the Committee
Settlement.
This Court’s holding in Jevic solidifies the applicability of § 507(a) to 9019 settlements
and forbids the Committee Settlement. In Jevic, this Court held a “distribution scheme [in] the
dismissal of a Chapter 11 case cannot, without consent of the affected parties, deviate from the
basic priority rules . . . for final distributions of estate value . . . . ” 137 S. Ct. at 978. Although the
Court addressed a structured dismissal, its reasoning applies whenever a distribution violates the
priority scheme. See id. at 985. And this Court intended to severely limit exceptions to the priority
scheme. See id. at 986 (“[O]nce the floodgates are opened, debtors and favored creditors can be
expected to make every case that ‘rare case’”) (quoting Frederick F. Rudzik, A Priority is a Priority
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is a Priority—Except When It Isn’t, 34 Am. Bankr. Inst. J. 16, 79 (2015)). But even if the Court
left open an exception to Jevic, the Committee Settlement does not pass muster.
1. Jevic summarily prohibits priority-deviating settlements.
Broadly, Jevic prevents any distributions outside the Code’s priority scheme without the
consent of impaired, senior parties. Id. at 984. The Court explained:
[I]f, and when, Congress were to intend a major departure[,] . . . we would expect
to see some affirmative indication of intent [that] Congress actually meant to make
[such a distribution] a backdoor means to achieve the exact kind of non-consensual
priority-violating final distribution that the Code prohibits in Chapter 7 liquidations
and Chapter 11 plans.
Id. This Court also eschewed a “rare case” exception, fearing an exception would swallow the rule.
Id. Any exception would become “commonplace” and yield “potentially serious” consequences,
including: (1) court-ordered stripping of creditor protections; (2) a shift in bargaining power
between creditor classes, and (3) mischief, like improper collusion and “squeeze-outs.” Id. Thus,
Jevic seems to bar all priority-deviating settlements like the Committee Settlement. See id.; In re
Fryar, 570 B.R. 602, 608 (Bankr. E.D. Tenn. 2017).
This case falls within Jevic’s prohibition because it allows “a few insiders . . . [to] use the
reorganization process to gain an unfair advantage.” 137 S. Ct. at 986–87 (emphasis added);
Bank of Am. Nat’l Tr. & Sav. Ass’n v. 203 N. Lasalle St. P’ship, 526 U.S. 434, 444 (1991). Two
powerful players—4th Street and the Committee—schemed to pillage the estate, divide the spoils,
and exploit Highway. See R. at 8; Jevic, 137 S. Ct. at 986–87. And both parties received an unfair
advantage. The Committee received $2 million in its litigation trust and agreed to drop its sale
objection. R. at 8. 4th Street received (1) a release of the estate’s claims4 against it, and (2) approval
of its purchase of the Debtor’s assets. R. at 8. But Highway, left out of the Committee Settlement
4 See infra Section II.C.2.
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and skipped in priority, “received” an unpaid $2 million administrative expense, had no hope of
payout, and was evicted from the amphitheater. R. at 8–9. The Committee Settlement dodges the
Code’s protective mechanisms. See §§ 507(a), 1129(a). It cannot stand.
2. Even if Jevic allows priority-deviating settlements in some circumstances,
the Committee Settlement does not qualify for any exception.
If, however, Jevic allows priority violations in exceptional cases, the Committee Settlement
still fails. The Thirteenth Circuit reads an exception into Jevic that allows a settlement when it:
(1) consists of interim—as opposed to final—distributions, like “first day” and “critical vendor”
orders, and (2) “serve[s] a[] significant offsetting bankruptcy-related justification” that
“enable[s] a successful reorganization and make even disfavored creditors better off.” Jevic, 137
S. Ct. at 986 (emphasis added) (citation omitted); see R at 16; Fryar, 570 B.R. at 985. Assuming
this exception to Jevic even exists, the Committee Settlement fails both elements.
Courts that approve priority-skipping post-Jevic do so because the “gift” preserves the
possibility of a plan or furthers the case in some meaningful way. See Hr’g Tr. at 108, In re Short
Bark Indus., Inc., No. 17-11502 (Bankr. D. Del. Sept. 11, 2017), ECF No. 209; Hr’g Tr. at 204, In
re ADPT DFW Holdings, LLC, No. 17-31432 (Bankr. N.D. Tex. Sept. 27, 2017), ECF No. 844. In
Short Bark, the court approved a 9019 settlement that provided DIP financing (i.e., interim
distribution), which paid general unsecured creditors but left administrative expense or priority
claims unpaid. See Hr’g Tr. at 107, In re Short Bark, No. 17-11502. Because the settlement helped
the debtors continue business, saved 500 plus jobs, and preserved the creditors’ committee’s right
to bring actions against insiders, the court excused the interim distribution’s priority violation. Id.
Likewise, in ADPT DFW, the court approved a priority-skipping settlement within a chapter 11
plan because the settlement promoted the possibility of plan confirmation, which avoided an
impending chapter 7 conversion. See Hr’g Tr. at 204, In re ADPT DFW, No. 17-31432.
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Even pre-Jevic decisions often focused on whether the distribution promoted plan
confirmation. See In re Iridium Operating, 478 F.3d at 466. In Iridium, the bankruptcy court only
approved a pre-plan settlement because its interim distribution to a litigation trust was “a step
towards possible confirmation of a plan . . . not an evasion” of § 1129(b)(2)(B)(ii). Id. Any
successful pursuit of the claims by the trust would have increased value for the estate, ultimately
helping all creditors rather than one class. See In re Iridium Operating, 478 F.3d at 466.
By contrast, any exception Jevic may contain prohibits gifts that drain the estate and
effectively end the case. See In re Fryar, 570 B.R. at 606. In Fryar, the court relied on Jevic to
deny a priority-deviating 9019 settlement that would have whittled the estate down to a few assets
for unsecured creditors not benefiting from a “gift.” Id. “[H]ard pressed to determine what business
remain[ed] to be revived or reorganized,” the court held the settlement amounted to a “sub rosa
plan,” which is “a precursor for conversion or dismissal in which the Code’s priority scheme is
ignored.” Id.; see Hr’g Tr. at 246, In re Constellation Enters. LLC, No. 16-11213 (Bankr. D. Del.
May 16, 2017), ECF No. 967 (relying on Jevic to reject a settlement, proposed at the end of the
case, that would have depleted available assets and skipped senior creditors).
Like a structured dismissal in Jevic, the Committee Settlement acts as a “final distribution”
with no significant offsetting “bankruptcy-related purpose.” 137 S. Ct. at 984; see In re Fryar, 570
B.R. at 610. Instead, the Committee Settlement exhausts the estate and ends the case. See R. at 26
(Petty, J., dissenting). The bankruptcy court will likely dismiss the case once the trust liquidates
its claims against Skyline. See R. at 17. The only remaining “work to be done” is “pursuit of the
Skyline litigation.” R. at 16. So, although the Thirteenth Circuit praises the Committee Settlement
as liquidation antidote, it acts as poison—one that keeps the estate alive just long enough to pursue
possible claims before its inevitable dismissal. See R. at 16–17. Thus, the Thirteenth Circuit’s
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attempt to distinguish Jevic’s structured dismissal from the Committee Settlement is “nothing
more than an exercise in temporal semantics.” R. at 27 (Petty, J., dissenting).
The Committee Settlement disrupts “the status quo (i.e., the priority scheme)” and serves
no bankruptcy-related purpose. Id.; see In re Fryar, 570 B.R. at 606. Unlike the approved
settlement in Short Bark, the Committee Settlement saves no jobs, leaves the Debtor with no assets
to continue business, and will not “preserve the debtor as a going concern.” R. at 26; Jevic, 137 S.
Ct. at 986; see Hr’g Tr. at 107, In re Short Bark, No. 17-11502. Unlike ADPT DFW and Iridium,
this case “has no prospect of a confirmable plan.” R. at 26; see Hr’g Tr. at 204, In re ADPT DFW,
No. 17-31432; Iridium, 478 F.3d at 466; see also § 1129(a)(9) (requiring full payment of
administrative expenses before a court may confirm a plan). Instead, as the settlement in Fryar,
the Committee Settlement hollows the Debtor and all but ends the case. See 570 B.R. at 606.
Nevertheless, the Thirteenth Circuit justifies Highway’s “admittedly less than ideal”
outcome because without the “gift,” the Committee could not pursue Skyline claims. R. at 16. But
any proceeds from these claims will distribute to general, unsecured creditors as the “sole
beneficiaries” unlike the trust that benefitted the entire estate in Iridium. R. at 17; 478 F.3d at 464.
Thus, the Committee Settlement benefits only the Committee and 4th Street. See R. at 8. It does
not enable a successful reorganization. See Jevic, 137 S. Ct. at 986. It does not make disfavored
creditors like Highway “better off.” R. at 26; see Jevic, 137 S. Ct. at 986. It does not protect
Highway’s reliance interest in the administrative expense claim following its “willingness to
support the Debtor.” R. at 27. It cannot stand.
3. Instead, 4th Street and the Debtor crafted an impermissible sub rosa plan.
Parties cannot use Rule 9019 with § 363(b) to create a sub rosa plan that “short circuit[s]”
creditor’s substantive chapter 11 protections. Jevic, 137 S. Ct. at 986 (quoting In re Braniff
Airways, Inc., 700 F.2d at 935). Courts uniformly disallow the “sub rosa plan”—a “de facto plan
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of reorganization”—that allows a debtor “to restructure its debt while bypassing . . . fundamental
creditor protections.” In re Energy Future Holding Corp., 527 B.R. 157, 168 (Bankr. D. Del. 2015)
(internal quotation omitted). Thus, the Thirteenth Circuit erred when it allowed 4th Street—rather
than the Code—to dictate terms of restructuring. See R. at 17.
The de facto, sub rosa plan here divvies out assets, like a plan, without any attendant
protections, like the absolute priority rule. See R. at 18; §§ 507(a), 1129(b)(2)(B)(ii), (a)(9). In this
case, since 4th Street took control, it has held hostage the estate’s entire value. See R. at 8–9. It
then commandeered sale approval by crafting its own priority waterfall that placed the Committee
above Highway. See R. at 8–9. Rather than use Rule 9019 to animate the Code, the parties have
used chapter 11’s debtor protections and chapter 7’s liquidation tools to avoid the inevitable
consequences of both. See §§ 726(a), 1129(a)–(b).
C. To the Extent Jevic Only Applies to “Gifts” of Estate Property, the Committee
Settlement Distributes Estate Funds and Cannot Stand.
Even if the Code’s priority scheme only applies when a settlement distributes “estate
property,” the Thirteenth Circuit’s last-ditch effort to save the Committee Settlement does not pass
muster for two reasons: (1) the Thirteenth Circuit searches for a lifeboat in Jevic that does not
exist, and (2) even if this Court reads Jevic narrowly to require compliance with the priority scheme
only when a settlement distributes estate property, the Committee Settlement still fails.
Since Jevic, at least one bankruptcy court has held the Code’s priority scheme applies to
settlements, regardless of whether the “gifted” funds belong to the estate or a third party. Hr’g Tr.
at 249, In re Constellation, No. 16-11213 (Sontchi, J.). As Judge Sontchi noted, the Court in Jevic
proscribed a distribution that involved both estate and non-estate property and “really didn’t delve
into [this issue] one way or another.” Id. Accordingly, “a distinction that simply says Jevic doesn’t
apply” to distributions of non-estate property “ . . . goes too far.” Id.
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If, however, Jevic contains this caveat, the $2 million that funds the Committee Settlement
does distribute estate property. Section 541(a)(1) defines property of the estate as “all legal and
equitable interest” the debtor holds at the “commencement of the case.” Congress broadly framed
“estate” to “include[] all kinds of property, including tangible or intangible property [and] causes
of action . . . . ” United States v. Whiting Pools, Inc., 462 U.S. 198, 205 n.9 (1983) (quoting H.R.
Rep No. 95-595, at 367). As this Court has held, Ҥ 541(a)(1) . . . is intended to include in the
estate any property made available to the estate by other provisions of the Bankruptcy Code,”
including § 363(f). Id. (citing H. R. Rep. No. 95-595, at 367). Further, § 541(a)(6) brings into the
estate “[p]roceeds . . . or profits of or from property of the estate.” Congress also intended
“proceeds” to sweep broadly. H.R. Rep. No. 95-595, at 368 (“‘proceeds’ . . . encompass[es] all
proceeds of property of the estate.”).
Therefore, the Thirteenth Circuit erred when it mischaracterized that the Committee
Settlement funds belonged to 4th Street and not the estate. See R. at 19. Indeed, the disputed funds
do belong to the estate, either as (1) part of the purchase price of the Debtor’s assets, or (2) proceeds
of the estate’s settlement of lender liability claims against 4th Street. See R. at 8. Either way, the
$2 million that funded the Committee Settlement belonged to the estate.
First, “proceeds from the sale of property of the estate are property of the estate.”5 In re
On-Site Sourcing, Inc., 412 B.R. at 825; See §§ 363(b)(1), (f), 541(a)(1), (6). In the denied
distribution in On-Site Sourcing, the committee argued the funds “gifted” to a litigation trust
belonged to the purchaser (i.e., non-estate property). 412 B.R. at 825. The court, however,
determined the funds—earmarked by the purchaser to buy the committee’s approval—were
actually “consideration” and part of the sale purchase price. Id. at 827. Thus, the court rejected the
5 No exception to the general, broad standard apply when disputed funds flow from a 363 sale. See 11 U.S.C.
§ 541(b), (c)(2) (outlining exceptions to § 541(a))
Team P. 3
33
“gift” as a “sub rosa plan” because it sought to evade plan confirmation requirements in
§ 1129(a)(7)–(9) by “redirecting part of the purchase price” (i.e., estate property) to the committee
and skipping administrative expense and priority claimants. Id. (emphasis added).
Likewise, because the $2 million bought approval in this case, it was “part of the purchase
price” and estate property. See R. at 8; In re On-Site Sourcing, Inc., 412 B.R. at 825. Without the
$2 million “gift,” the Committee likely would have renewed its objection. See R at 8. With two
objections and only secured creditors fully satisfied, the bankruptcy court likely would have denied
the sale because it would have no longer been in “best interests of all parties” Contra R. at 9.
Without approval, 4th Street could not have purchased the assets. See R. at 8–9. Thus, the
Committee Settlement distributed $2 million of estate property. See § 541(a).
Second, even if this Court accepts that the “gifted” funds originally belonged to 4th Street
rather than the estate, the funds still belong to the estate as “proceeds” used to settle the estate’s
lender liability claims. See R. at 8; See § 541(a)(1) & (6); Whiting Pools, 462 U.S. at 203–05.
“[V]irtually all of a debtor’s assets, including causes of action belonging to the debtor at the
commencement of the bankruptcy case” come into the estate, such as lender liability claims. Kane
v. Nat’l Union Fire Ins. Co., 535 F.3d 380, 385 (5th Cir. 2008) (citing § 541(a)(1)) (emphasis
added) (citations omitted); see Whiting Pools, 462 U.S. at 203–05; 5 Collier on Bankruptcy
¶ 541.08 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. rev. 2017). And “conversion in form
of property of the estate does not change its character as property of the estate.” H.R. Rep. No. 95-
595, at 368. In Jevic, this Court affirmed that when a creditors’ committee brings a derivative
action on the estate’s behalf, “any proceeds from such a suit would belong not to the unsecured
creditors, but to the bankruptcy estate.” 137 S. Ct. at 981 (citation omitted). Correspondingly,
Team P. 3
34
property gained in exchange for settling estate causes of action also belong to the estate. See Cadle
Co. v. Mims (In re Moore), 608 F.3d 253, 264 (5th Cir. 2010) (citation omitted)).
Thus, funds given as consideration for the release of lender liability claims against 4th
Street were “proceeds” gained by settling estate claims and became estate property. See Jevic, 137
S. Ct. at 981. In this case, the Committee received $2 million as consideration: (1) to release lender
liability claims against 4th Street, and (2) to drop its sale objection. See R. at 8. Under § 541(a)(1),
the released lender liability causes of action belonged to the Debtor’s estate. See Whiting Pools,
462 U.S. at 203–05. So, when the Committee settled lender liability claims against 4th Street, it
released estate property. See R. at 8. So, any settlement “proceeds” also belonged to the estate. See
§ 541(a)(6); Jevic, 137 S. Ct. at 981. So, the disputed funds—given by 4th Street in exchange for
these liability releases—belong to the estate. So, while the property changed form, it never changed
ownership. See R. at 8–9; H.R. Rep. No. 95-595, at 368. So, any distribution of the disputed funds
required compliance with the Code’s priority scheme. See § 507(a); Jevic, 137 S. Ct. at 981.
Despite this, the Thirteenth Circuit attempted to undercut the Code’s broad estate concept
by misapplying In re ICL Holding Co., 802 F.3d 547, 555 (3d Cir. 2015). See R. at 18–19. Even
assuming ICL Holding remains good law after Jevic, that case does not apply here. See 802 F.3d
at 555. Ultimately, ICL Holding boils down to an exchange of third-party funds for votes. Id.
There, a purchaser traded money solely for a dropped objection “to secure a successful bid.” Id.
As such, the Third Circuit accepted the bankruptcy court’s determination that “settlement monies
were . . . not given in exchange for any estate property.” Id. at 557. In contrast, this case involves
third-party funds in exchange for a dropped objection and a release of estate claims. R. at 7.
Therefore, ICL Holding may have authorized the Committee Settlement if 4th Street had paid
consideration solely for the Committee’s dropped objection to the sale. See R at 8; 802 F.3d at 555.
Team P. 3
35
But a release of the lender liability claims also effectuated a release of Highway’s
administrative expense claim. Had the Committee not released the lender liability claims, they may
have been litigated or settled. And any resulting funds would have entered the estate—subject to
§ 507(a) and Highway’s first-in-line priority. Nevertheless, the Thirteenth Circuit seemingly
ignored the 4th Street lender liability claims. See R. at 19. The court instead focused exclusively
on the Skyline litigation, which it praised for its potential to “provide a substantial benefit to the
Debtor’s unsecured creditors . . . even if Highway receives no benefit.” R. at 16–18. Yet the record
lacks any indication that the Skyline claims are actually stronger than those against 4th Street. See
R. at 7, 15–18. In fact, the bankruptcy court allowed the quick sale and 4th Street claim release
without any true investigation into the 4th Street claims’ viability. See id. at 7. Instead, 4th Street
constructed a Potemkin settlement—a “gift” on the outside, a sham in reality.
CONCLUSION
If this Court allows the Debtor to sell its property “free and clear” of Highway’s lease,
this tips the scales of equity in favor of manipulation of the Bankruptcy Code. If this Court
allows the priority-skipping Committee Settlement that distributes $2 million in estate funds to
the Committee, dodging Highway’s administrative claim, this tips the scales of equity in favor of
collusion. If this Court allows both, this breaks the scales of equity. This Court should reverse to
prevent this gross injustice against Highway.
WHEREFORE, PREMISES CONSIDERED, Petitioner respectfully requests that this
Court reverse the decision of the Thirteenth Circuit.
Respectfully submitted,
Team P. 3
COUNSEL FOR PETITIONER
Team P. 3
Appx. A–1
APPENDIX A: SELECTED PROVISIONS FROM THE U.S. CONSTITUTION
U.S. Const. art. I, § 8
The Congress shall have power . . . [t]o establish . . . uniform Laws on the subject of
Bankruptcies throughout the United States . . .
U.S. Const. amend. V
No person shall be held to answer for a capital, or otherwise infamous crime, unless on a
presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or
in the Militia, when in actual service in time of War or public danger; nor shall any person be
subject for the same offence to be twice put in jeopardy of life or limb; nor shall be compelled in
any criminal case to be a witness against himself, nor be deprived of life, liberty, or property,
without due process of law; nor shall private property be taken for public use, without just
compensation.
Team P. 3
Appx. B–1
APPENDIX B: SELECTED SECTIONS FROM TITLE 11 OF THE U.S. CODE
§ 103 Applicability of Chapters.
(a) Except as provided in Except as provided in section 1161 of this title, chapters 1, 3, and 5
of this title apply in a case under chapter 7, 11, 12, or 13 of this title, and this chapter,
sections 307, 362(o), 555 through 557, and 559 through 562 apply in a case under chapter
15.
. . .
§ 361 Adequate Protection.
When adequate protection is required under section 362, 363, or 364 of this title of an interest of
an entity in property, such adequate protection may be provided by—
(1) requiring the trustee to make a cash payment or periodic cash payments to such entity, to
the extent that the stay under section 362 of this title, use, sale, or lease under section 363
of this title, or any grant of a lien under section 364 of this title results in a decrease in the
value of such entity’s interest in such property;
(2) providing to such entity an additional or replacement lien to the extent that such stay, use,
sale, lease, or grant results in a decrease in the value of such entity’s interest in such
property; or
(3) granting such other relief, other than entitling such entity to compensation allowable under
section 503(b)(1) of this title as an administrative expense, as will result in the realization
by such entity of the indubitable equivalent of such entity’s interest in such property.
§ 363 Use, Sale, or Lease of Property.
(a) [omitted]
(b) (1) The trustee, after notice and a hearing, may use, sell or lease, other than in the ordinary
course of business, property of the estate, except that if the debtor in connection with
offering a product or service discloses to an individual a policy prohibiting the transfer
of personally identifiable information about individuals to persons that are not affiliated
with the debtor and if such policy is in effect on the date of the commencement of the
case, then the trustee may not sell or lease personally identifiable information to any
person unless—
(A) such sale or such lease is consistent with such policy; or
(B) after appointment of a consumer privacy ombudsman in accordance with section
332, and after notice and a hearing, the court approves such sale or such lease —
(i) giving due consideration to the facts, circumstances, and conditions of such
sale or such lease; and
(ii) finding that no showing was made that such sale or such lease would violate
applicable nonbankruptcy law.
(2) If notification is required under subsection (a) of section 7A of the Clayton Act in the
Team P. 3
Appx. B–2
case of a transaction under this subsection, then—
(A) notwithstanding subsection (a) of such section, the notification required by such
subsection to be given by the debtor shall be given by the trustee; and
(B) notwithstanding subsection (b) of such section, the required waiting period shall
end on the 15th day after the date of the receipt, by the Federal Trade Commission
and the Assistant Attorney General in charge of the Antitrust Division of the
Department of Justice, of the notification required under such subsection (a), unless
such waiting period is extended—
(i) pursuant to subsection (e)(2) of such section, in the same manner as such
subsection (e)(2) applies to a cash tender offer;
(ii) pursuant to subsection (g)(2) of such section; or
(iii) by the court after notice and a hearing.
(c)
(1) If the business of the debtor is authorized to be operated under section 721, 1108, 1203,
1204, or 1304 of this title and unless the court orders otherwise, the trustee may enter
into transactions, including the sale or lease of the property of the estate, in the ordinary
course of business, without notice or a hearing, and may use property of the estate in
the ordinary course of business without notice or a hearing.
(2) The trustee may not use, sell, or lease cash collateral under paragraph (1) of this
subsection unless—
(A) each entity that has an interest in such cash collateral consents; or
(B) the court, after notice and a hearing, authorizes such use, sale, or lease in
accordance with the provisions of this section.
(3) Any hearing under paragraph (2)(B) of this subsection may be a preliminary hearing or
may be consolidated with a hearing under subsection (e) of this section, but shall be
scheduled in accordance with the needs of the debtor. If the hearing under paragraph
(2)(B) of this subsection is a preliminary hearing, the court may authorize such use,
sale, or lease only if there is a reasonable likelihood that the trustee will prevail at the
final hearing under subsection (e) of this section. The court shall act promptly on any
request for authorization under paragraph (2)(B) of this subsection.
(4) Except as provided in paragraph (2) of this subsection, the trustee shall segregate and
account for any cash collateral in the trustee’s possession, custody, or control.
(d) The trustee may use, sell, or lease property under subsection (b) or (c) of this section—
(1) in the case of a debtor that is a corporation or trust that is not a moneyed business,
commercial corporation, or trust, only in accordance with nonbankruptcy law
applicable to the transfer of property by a debtor that is such a corporation or trust; and
(2) only to the extent not inconsistent with any relief granted under subsection (c), (d), (e),
or (f) of section 362.
(e) Notwithstanding any other provision of this section, at any time, on request of an entity
that has an interest in property used, sold, or leased, or proposed to be used, sold, or leased,
by the trustee, the court, with or without a hearing, shall prohibit or condition such use,
sale, or lease as is necessary to provide adequate protection of such interest. This subsection
also applies to property that is subject to any unexpired lease of personal property (to the
exclusion of such property being subject to an order to grant relief from the stay under
section 362).
Team P. 3
Appx. B–3
(f) The trustee may sell property under subsection (b) or (c) of this section free and clear of
any interest in such property of an entity other than the estate, only if—
(1) applicable nonbankruptcy law permits sale of such property free and clear of such
interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than
the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money
satisfaction of such interest.
(g) [omitted]
(h) [omitted]
(i) [omitted]
(j) [omitted]
(k) [omitted]
(l) Subject to the provisions of section 365, the trustee may use, sell, or lease property under
subsection (b) or (c) of this section, or a plan under chapter 11, 12, or 13 of this title may
provide for the use, sale, or lease of property, notwithstanding any provision in a contract,
a lease, or applicable law that is conditioned on the insolvency or financial condition of the
debtor, on the commencement of a case under this title concerning the debtor, or on the
appointment of or the taking possession by a trustee in a case under this title or a custodian,
and that effects, or gives an option to effect, a forfeiture, modification, or termination of
the debtor’s interest in such property.
(m) [omitted]
(n) [omitted]
(o) [omitted]
(p) In any hearing under this section—
(1) the trustee has the burden of proof on the issue of adequate protection; and
(2) the entity asserting an interest in property has the burden of proof on the issue of the
validity, priority, or extent of such interest.
§ 365 Executory Contracts and Unexpired Leases.
(a) Except as provided in sections 765 and 766 of this title and in subsections (b), (c), and (d)
of this section, the trustee, subject to the court’s approval, may assume or reject any
executory contract or unexpired lease of the debtor.
(b) (1) If there has been a default in an executory contract or unexpired lease of the debtor, the
trustee may not assume such contract or lease unless, at the time of assumption of such
contract or lease, the trustee—
(A) cures, or provides adequate assurance that the trustee will promptly cure, such
default other than a default that is a breach of a provision relating to the satisfaction
of any provision (other than a penalty rate or penalty provision) relating to a default
arising from any failure to perform nonmonetary obligations under an unexpired
lease of real property, if it is impossible for the trustee to cure such default by
performing nonmonetary acts at and after the time of assumption, except that if
Team P. 3
Appx. B–4
such default arises from a failure to operate in accordance with a nonresidential real
property lease, then such default shall be cured by performance at and after the time
of assumption in accordance with such lease, and pecuniary losses resulting from
such default shall be compensated in accordance with the provisions of this
paragraph;
(B) compensates, or provides adequate assurance that the trustee will promptly
compensate, a party other than the debtor to such contract or lease, for any actual
pecuniary loss to such party resulting from such default; and
(C) provides adequate assurance of future performance under such contract or lease.
(2) Paragraph (1) of this subsection does not apply to a default that is a breach of a
provision relating to—
(A) the insolvency or financial condition of the debtor at any time before the closing of
the case;
(B) the commencement of a case under this title;
(C) the appointment of or taking possession by a trustee in a case under this title or a
custodian before such commencement; or
(D) the satisfaction of any penalty rate or penalty provision relating to a default arising
from any failure by the debtor to perform nonmonetary obligations under the
executory contract or unexpired lease.
(3) For the purposes of paragraph (1) of this subsection and paragraph (2)(B) of subsection
(f), adequate assurance of future performance of a lease of real property in a shopping
center includes adequate assurance—
(A) of the source of rent and other consideration due under such lease, and in the case
of an assignment, that the financial condition and operating performance of the
proposed assignee and its guarantors, if any, shall be similar to the financial
condition and operating performance of the debtor and its guarantors, if any, as of
the time the debtor became the lessee under the lease;
(B) that any percentage rent due under such lease will not decline substantially;
(C) that assumption or assignment of such lease is subject to all the provisions thereof,
including (but not limited to) provisions such as a radius, location, use, or
exclusivity provision, and will not breach any such provision contained in any other
lease, financing agreement, or master agreement relating to such shopping center;
and
(D) that assumption or assignment of such lease will not disrupt any tenant mix or
balance in such shopping center.
(4) Notwithstanding any other provision of this section, if there has been a default in an
unexpired lease of the debtor, other than a default of a kind specified in paragraph (2)
of this subsection, the trustee may not require a lessor to provide services or supplies
incidental to such lease before assumption of such lease unless the lessor is
compensated under the terms of such lease for any services and supplies provided under
such lease before assumption of such lease.
(c) The trustee may not assume or assign any executory contract or unexpired lease of the
debtor, whether or not such contract or lease prohibits or restricts assignment of rights or
delegation of duties, if—
(1) (A) applicable law excuses a party, other than the debtor, to such contract or lease from
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Appx. B–5
accepting performance from or rendering performance to an entity other than the
debtor or the debtor in possession, whether or not such contract or lease prohibits
or restricts assignment of rights or delegation of duties; and
(B) such party does not consent to such assumption or assignment; or
(2) such contract is a contract to make a loan, or extend other debt financing or financial
accommodations, to or for the benefit of the debtor, or to issue a security of the debtor;
or
(3) such lease is of nonresidential real property and has been terminated under applicable
nonbankruptcy law prior to the order for relief.
(d) (1) In a case under chapter 7 of this title, if the trustee does not assume or reject an
executory contract or unexpired lease of residential real property or of personal
property of the debtor within 60 days after the order for relief, or within such additional
time as the court, for cause, within such 60-day period, fixes, then such contract or
lease is deemed rejected.
(2) In a case under chapter 9, 11, 12, or 13 of this title, the trustee may assume or reject an
executory contract or unexpired lease of residential real property or of personal
property of the debtor at any time before the confirmation of a plan but the court, on
the request of any party to such contract or lease, may order the trustee to determine
within a specified period of time whether to assume or reject such contract or lease.
(3) The trustee shall timely perform all the obligations of the debtor, except those specified
in section 365(b)(2), arising from and after the order for relief under any unexpired
lease of nonresidential real property, until such lease is assumed or rejected,
notwithstanding section 503(b)(1) of this title. The court may extend, for cause, the
time for performance of any such obligation that arises within 60 days after the date of
the order for relief, but the time for performance shall not be extended beyond such 60-
day period. This subsection shall not be deemed to affect the trustee’s obligations under
the provisions of subsection (b) or (f) of this section. Acceptance of any such
performance does not constitute waiver or relinquishment of the lessor’s rights under
such lease or under this title.
(4) (A) Subject to subparagraph (B), an unexpired lease of nonresidential real property
under which the debtor is the lessee shall be deemed rejected, and the trustee shall
immediately surrender that nonresidential real property to the lessor, if the trustee
does not assume or reject the unexpired lease by the earlier of—
(i) the date that is 120 days after the date of the order for relief; or
(ii) the date of the entry of an order confirming a plan.
(B) (i) The court may extend the period determined under subparagraph (A), prior
to the expiration of the 120-day period, for 90 days on the motion of the
trustee or lessor for cause.
(ii) If the court grants an extension under clause (i), the court may grant a
subsequent extension only upon prior written consent of the lessor in each
instance.
(5) The trustee shall timely perform all of the obligations of the debtor, except those
specified in section 365(b)(2), first arising from or after 60 days after the order for relief
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Appx. B–6
in a case under chapter 11 of this title under an unexpired lease of personal property
(other than personal property leased to an individual primarily for personal, family, or
household purposes), until such lease is assumed or rejected notwithstanding section
503(b)(1) of this title, unless the court, after notice and a hearing and based on the
equities of the case, orders otherwise with respect to the obligations or timely
performance thereof. This subsection shall not be deemed to affect the trustee’s
obligations under the provisions of subsection (b) or (f). Acceptance of any such
performance does not constitute waiver or relinquishment of the lessor’s rights under
such lease or under this title.
(e)
(1) Notwithstanding a provision in an executory contract or unexpired lease, or in
applicable law, an executory contract or unexpired lease of the debtor may not be
terminated or modified, and any right or obligation under such contract or lease may
not be terminated or modified, at any time after the commencement of the case solely
because of a provision in such contract or lease that is conditioned on—
(A) the insolvency or financial condition of the debtor at any time before the closing of
the case;
(B) the commencement of a case under this title; or
(C) the appointment of or taking possession by a trustee in a case under this title or a
custodian before such commencement.
(2) Paragraph (1) of this subsection does not apply to an executory contract or unexpired
lease of the debtor, whether or not such contract or lease prohibits or restricts
assignment of rights or delegation of duties, if—
(A) (i) applicable law excuses a party, other than the debtor, to such contract or
lease from accepting performance from or rendering performance to the
trustee or to an assignee of such contract or lease, whether or not such
contract or lease prohibits or restricts assignment of rights or delegation of
duties; and
(ii) such party does not consent to such assumption or assignment; or
(B) such contract is a contract to make a loan, or extend other debt financing or financial
accommodations, to or for the benefit of the debtor, or to issue a security of the
debtor.
(f)
(1) Except as provided in subsections (b) and (c) of this section, notwithstanding a
provision in an executory contract or unexpired lease of the debtor, or in applicable
law, that prohibits, restricts, or conditions the assignment of such contract or lease, the
trustee may assign such contract or lease under paragraph (2) of this subsection.
(2) The trustee may assign an executory contract or unexpired lease of the debtor only if—
(A) the trustee assumes such contract or lease in accordance with the provisions of this
section; and
(B) adequate assurance of future performance by the assignee of such contract or lease
is provided, whether or not there has been a default in such contract or lease.
(3) Notwithstanding a provision in an executory contract or unexpired lease of the debtor,
or in applicable law that terminates or modifies, or permits a party other than the debtor
to terminate or modify, such contract or lease or a right or obligation under such
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Appx. B–7
contract or lease on account of an assignment of such contract or lease, such contract,
lease, right, or obligation may not be terminated or modified under such provision
because of the assumption or assignment of such contract or lease by the trustee.
(g) Except as provided in subsections (h)(2) and (i)(2) of this section, the rejection of an
executory contract or unexpired lease of the debtor constitutes a breach of such contract or
lease—
(1) if such contract or lease has not been assumed under this section or under a plan
confirmed under chapter 9, 11, 12, or 13 of this title, immediately before the date of the
filing of the petition; or
(2) if such contract or lease has been assumed under this section or under a plan confirmed
under chapter 9, 11, 12, or 13 of this title—
(A) if before such rejection the case has not been converted under section 1112, 1208,
or 1307 of this title, at the time of such rejection; or
(B) if before such rejection the case has been converted under section 1112, 1208, or
1307 of this title—
(i) immediately before the date of such conversion, if such contract or lease was
assumed before such conversion; or
(ii) at the time of such rejection, if such contract or lease was assumed after such
conversion.
(h) (1)
(A) If the trustee rejects an unexpired lease of real property under which the debtor is
the lessor and—
(i) if the rejection by the trustee amounts to such a breach as would entitle the
lessee to treat such lease as terminated by virtue of its terms, applicable
nonbankruptcy law, or any agreement made by the lessee, then the lessee under
such lease may treat such lease as terminated by the rejection; or
(ii) if the term of such lease has commenced, the lessee may retain its rights under
such lease (including rights such as those relating to the amount and timing of
payment of rent and other amounts payable by the lessee and any right of use,
possession, quiet enjoyment, subletting, assignment, or hypothecation) that are in
or appurtenant to the real property for the balance of the term of such lease and for
any renewal or extension of such rights to the extent that such rights are enforceable
under applicable nonbankruptcy law.
(B) If the lessee retains its rights under subparagraph (A)(ii), the lessee may offset
against the rent reserved under such lease for the balance of the term after the date
of the rejection of such lease and for the term of any renewal or extension of such
lease, the value of any damage caused by the nonperformance after the date of such
rejection, of any obligation of the debtor under such lease, but the lessee shall not
have any other right against the estate or the debtor on account of any damage
occurring after such date caused by such nonperformance.
(C) The rejection of a lease of real property in a shopping center with respect to which
the lessee elects to retain its rights under subparagraph (A)(ii) does not affect the
enforceability under applicable nonbankruptcy law of any provision in the lease
pertaining to radius, location, use, exclusivity, or tenant mix or balance.
(D) In this paragraph, “lessee” includes any successor, assign, or mortgagee permitted
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under the terms of such lease.
(2) (A) If the trustee rejects a timeshare interest under a timeshare plan under which the
debtor is the timeshare interest seller and—
(i) if the rejection amounts to such a breach as would entitle the timeshare interest
purchaser to treat the timeshare plan as terminated under its terms, applicable
nonbankruptcy law, or any agreement made by timeshare interest purchaser, the
timeshare interest purchaser under the timeshare plan may treat the timeshare plan
as terminated by such rejection; or
(ii) if the term of such timeshare interest has commenced, then the timeshare
interest purchaser may retain its rights in such timeshare interest for the balance of
such term and for any term of renewal or extension of such timeshare interest to the
extent that such rights are enforceable under applicable nonbankruptcy law.
(B) If the timeshare interest purchaser retains its rights under subparagraph (A), such
timeshare interest purchaser may offset against the moneys due for such timeshare
interest for the balance of the term after the date of the rejection of such timeshare
interest, and the term of any renewal or extension of such timeshare interest, the
value of any damage caused by the nonperformance after the date of such rejection,
of any obligation of the debtor under such timeshare plan, but the timeshare interest
purchaser shall not have any right against the estate or the debtor on account of any
damage occurring after such date caused by such nonperformance.
(i)
(1) If the trustee rejects an executory contract of the debtor for the sale of real property or
for the sale of a timeshare interest under a timeshare plan, under which the purchaser
is in possession, such purchaser may treat such contract as terminated, or, in the
alternative, may remain in possession of such real property or timeshare interest.
(2) If such purchaser remains in possession—
(A) such purchaser shall continue to make all payments due under such contract, but
may, offset against such payments any damages occurring after the date of the
rejection of such contract caused by the nonperformance of any obligation of the
debtor after such date, but such purchaser does not have any rights against the estate
on account of any damages arising after such date from such rejection, other than
such offset; and
(B) the trustee shall deliver title to such purchaser in accordance with the provisions of
such contract, but is relieved of all other obligations to perform under such contract.
(j) A purchaser that treats an executory contract as terminated under subsection (i) of this
section, or a party whose executory contract to purchase real property from the debtor is
rejected and under which such party is not in possession, has a lien on the interest of the
debtor in such property for the recovery of any portion of the purchase price that such
purchaser or party has paid.
(k) Assignment by the trustee to an entity of a contract or lease assumed under this section
relieves the trustee and the estate from any liability for any breach of such contract or lease
occurring after such assignment.
(l) If an unexpired lease under which the debtor is the lessee is assigned pursuant to this
section, the lessor of the property may require a deposit or other security for the
performance of the debtor’s obligations under the lease substantially the same as would
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have been required by the landlord upon the initial leasing to a similar tenant.
(m) For purposes of this section 365 and sections 541(b)(2) and 362(b)(10), leases of real
property shall include any rental agreement to use real property.
(n) (1) If the trustee rejects an executory contract under which the debtor is a licensor of a right
to intellectual property, the licensee under such contract may elect—
(A) to treat such contract as terminated by such rejection if such rejection by the trustee
amounts to such a breach as would entitle the licensee to treat such contract as
terminated by virtue of its own terms, applicable nonbankruptcy law, or an
agreement made by the licensee with another entity; or
(B) to retain its rights (including a right to enforce any exclusivity provision of such
contract, but excluding any other right under applicable nonbankruptcy law to
specific performance of such contract) under such contract and under any
agreement supplementary to such contract, to such intellectual property (including
any embodiment of such intellectual property to the extent protected by applicable
nonbankruptcy law), as such rights existed immediately before the case
commenced, for—
(i) the duration of such contract; and
(ii) any period for which such contract may be extended by the licensee as of
right under applicable nonbankruptcy law.
(2) If the licensee elects to retain its rights, as described in paragraph (1)(B) of this
subsection, under such contract—
(A) the trustee shall allow the licensee to exercise such rights;
(B) the licensee shall make all royalty payments due under such contract for the
duration of such contract and for any period described in paragraph (1)(B) of this
subsection for which the licensee extends such contract; and
(C) the licensee shall be deemed to waive—
(i) any right of setoff it may have with respect to such contract under this title
or applicable nonbankruptcy law; and
(ii) any claim allowable under section 503(b) of this title arising from the
performance of such contract.
(3) If the licensee elects to retain its rights, as described in paragraph (1)(B) of this
subsection, then on the written request of the licensee the trustee shall—
(A) to the extent provided in such contract, or any agreement supplementary to such
contract, provide to the licensee any intellectual property (including such
embodiment) held by the trustee; and
(B) not interfere with the rights of the licensee as provided in such contract, or any
agreement supplementary to such contract, to such intellectual property (including
such embodiment) including any right to obtain such intellectual property (or such
embodiment) from another entity.
(4) Unless and until the trustee rejects such contract, on the written request of the licensee
the trustee shall—
(A) to the extent provided in such contract or any agreement supplementary to such
contract—
(i) perform such contract; or
(ii) provide to the licensee such intellectual property (including any
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embodiment of such intellectual property to the extent protected by
applicable nonbankruptcy law) held by the trustee; and
(B) not interfere with the rights of the licensee as provided in such contract, or any
agreement supplementary to such contract, to such intellectual property (including
such embodiment), including any right to obtain such intellectual property (or such
embodiment) from another entity.
(o) In a case under chapter 11 of this title, the trustee shall be deemed to have assumed
(consistent with the debtor’s other obligations under section 507), and shall immediately
cure any deficit under, any commitment by the debtor to a Federal depository institutions
regulatory agency (or predecessor to such agency) to maintain the capital of an insured
depository institution, and any claim for a subsequent breach of the obligations thereunder
shall be entitled to priority under section 507. This subsection shall not extend any
commitment that would otherwise be terminated by any act of such an agency.
(p) (1) If a lease of personal property is rejected or not timely assumed by the trustee under
subsection (d), the leased property is no longer property of the estate and the stay under
section 362(a) is automatically terminated.
(2) (A) If the debtor in a case under chapter 7 is an individual, the debtor may notify the
creditor in writing that the debtor desires to assume the lease. Upon being so
notified, the creditor may, at its option, notify the debtor that it is willing to have
the lease assumed by the debtor and may condition such assumption on cure of any
outstanding default on terms set by the contract.
(B) If, not later than 30 days after notice is provided under subparagraph (A), the debtor
notifies the lessor in writing that the lease is assumed, the liability under the lease
will be assumed by the debtor and not by the estate.
(C) The stay under section 362 and the injunction under section 524(a)(2) shall not be
violated by notification of the debtor and negotiation of cure under this subsection.
(3) In a case under chapter 11 in which the debtor is an individual and in a case under
chapter 13, if the debtor is the lessee with respect to personal property and the lease is
not assumed in the plan confirmed by the court, the lease is deemed rejected as of the
conclusion of the hearing on confirmation. If the lease is rejected, the stay under section
362 and any stay under section 1301 is automatically terminated with respect to the
property subject to the lease.
§ 507 Priorities.
(a) The following expenses and claims have priority in the following order:
(1) First:
(A) Allowed unsecured claims for domestic support obligations that, as of the date of
the filing of the petition in a case under this title, are owed to or recoverable by a
spouse, former spouse, or child of the debtor, or such child’s parent, legal guardian,
or responsible relative, without regard to whether the claim is filed by such person
or is filed by a governmental unit on behalf of such person, on the condition that
funds received under this paragraph by a governmental unit under this title after
the date of the filing of the petition shall be applied and distributed in accordance
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with applicable nonbankruptcy law.
(B) Subject to claims under subparagraph (A), allowed unsecured claims for domestic
support obligations that, as of the date of the filing of the petition, are assigned by
a spouse, former spouse, child of the debtor, or such child’s parent, legal guardian,
or responsible relative to a governmental unit (unless such obligation is assigned
voluntarily by the spouse, former spouse, child, parent, legal guardian, or
responsible relative of the child for the purpose of collecting the debt) or are owed
directly to or recoverable by a governmental unit under applicable nonbankruptcy
law, on the condition that funds received under this paragraph by a governmental
unit under this title after the date of the filing of the petition be applied and
distributed in accordance with applicable nonbankruptcy law.
(C) If a trustee is appointed or elected under section 701, 702, 703, 1104, 1202, or
1302, the administrative expenses of the trustee allowed under paragraphs (1)(A),
(2), and (6) of section 503(b) shall be paid before payment of claims under
subparagraphs (A) and (B), to the extent that the trustee administers assets that are
otherwise available for the payment of such claims.
(2) Second, administrative expenses allowed under section 503(b) of this title, unsecured
claims of any Federal reserve bank related to loans made through programs or facilities
authorized under section 13(3) of the Federal Reserve Act (12 U.S.C. 343), and any
fees and charges assessed against the estate under chapter 123 of title 28.
(3) Third, unsecured claims allowed under section 502(f) of this title.
(4) Fourth, allowed unsecured claims, but only to the extent of $10,000 for each individual
or corporation, as the case may be, earned within 180 days before the date of the filing
of the petition or the date of the cessation of the debtor’s business, whichever occurs
first, for—
(A) wages, salaries, or commissions, including vacation, severance, and sick leave pay
earned by an individual; or
(B) sales commissions earned by an individual or by a corporation with only 1
employee, acting as an independent contractor in the sale of goods or services for
the debtor in the ordinary course of the debtor’s business if, and only if, during the
12 months preceding that date, at least 75 percent of the amount that the individual
or corporation earned by acting as an independent contractor in the sale of goods or
services was earned from the debtor.
(5) Fifth, allowed unsecured claims for contributions to an employee benefit plan—
(A) arising from services rendered within 180 days before the date of the filing of the
petition or the date of the cessation of the debtor’s business, whichever occurs first;
but only
(B) for each such plan, to the extent of—
(i) the number of employees covered by each such plan multiplied by $10,000;
less
(ii) the aggregate amount paid to such employees under paragraph (4) of this
subsection, plus the aggregate amount paid by the estate on behalf of such
employees to any other employee benefit plan.
(6) Sixth, allowed unsecured claims of persons—
(A) engaged in the production or raising of grain, as defined in section 557(b) of this
title, against a debtor who owns or operates a grain storage facility, as defined in
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section 557(b) of this title, for grain or the proceeds of grain, or
(B) engaged as a United States fisherman against a debtor who has acquired fish or fish
produce from a fisherman through a sale or conversion, and who is engaged in
operating a fish produce storage or processing facility—but only to the extent of
$4,000 for each such individual.
(7) Seventh, allowed unsecured claims of individuals, to the extent of $1,800 for each such
individual, arising from the deposit, before the commencement of the case, of money
in connection with the purchase, lease, or rental of property, or the purchase of services,
for the personal, family, or household use of such individuals, that were not delivered
or provided.
(8) Eighth, allowed unsecured claims of governmental units, only to the extent that such
claims are for—
(A) a tax on or measured by income or gross receipts for a taxable year ending on or
before the date of the filing of the petition—
(i) for which a return, if required, is last due, including extensions, after three
years before the date of the filing of the petition;
(ii) assessed within 240 days before the date of the filing of the petition,
exclusive of—
(I) any time during which an offer in compromise with respect to that
tax was pending or in effect during that 240-day period, plus 30
days; and
(II) any time during which a stay of proceedings against collections was
in effect in a prior case under this title during that 240-day period,
plus 90 days; or
(iii) other than a tax of a kind specified in section 523(a)(1)(B) or 523(a)(1)(C)
of this title, not assessed before, but assessable, under applicable law or by
agreement, after, the commencement of the case;
(B) a property tax incurred before the commencement of the case and last payable
without penalty after one year before the date of the filing of the petition;
(C) a tax required to be collected or withheld and for which the debtor is liable in
whatever capacity;
(D) an employment tax on a wage, salary, or commission of a kind specified in
paragraph (4) of this subsection earned from the debtor before the date of the filing
of the petition, whether or not actually paid before such date, for which a return is
last due, under applicable law or under any extension, after three years before the
date of the filing of the petition;
(E) an excise tax on—
(i) a transaction occurring before the date of the filing of the petition for which
a return, if required, is last due, under applicable law or under any extension,
after three years before the date of the filing of the petition; or
(ii) if a return is not required, a transaction occurring during the three years
immediately preceding the date of the filing of the petition;
(F) a customs duty arising out of the importation of merchandise—
(i) entered for consumption within one year before the date of the filing of the
petition;
(ii) covered by an entry liquidated or reliquidated within one year before the
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date of the filing of the petition; or
(iii) entered for consumption within four years before the date of the filing of
the petition but unliquidated on such date, if the Secretary of the Treasury
certifies that failure to liquidate such entry was due to an investigation
pending on such date into assessment of antidumping or countervailing
duties or fraud, or if information needed for the proper appraisement or
classification of such merchandise was not available to the appropriate
customs officer before such date; or
(G) a penalty related to a claim of a kind specified in this paragraph and in
compensation for actual pecuniary loss. An otherwise applicable time period
specified in this paragraph shall be suspended for any period during which a
governmental unit is prohibited under applicable nonbankruptcy law from
collecting a tax as a result of a request by the debtor for a hearing and an appeal of
any collection action taken or proposed against the debtor, plus 90 days; plus any
time during which the stay of proceedings was in effect in a prior case under this
title or during which collection was precluded by the existence of 1 or more
confirmed plans under this title, plus 90 days.
(9) Ninth, allowed unsecured claims based upon any commitment by the debtor to a
Federal depository institutions regulatory agency (or predecessor to such agency) to
maintain the capital of an insured depository institution.
(10) Tenth, allowed claims for death or personal injury resulting from the operation of
a motor vehicle or vessel if such operation was unlawful because the debtor was
intoxicated from using alcohol, a drug, or another substance.
§ 541 Property of the Estate.
(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate.
Such estate is comprised of all the following property, wherever located and by whomever
held:
(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable
interests of the debtor in property as of the commencement of the case.
(2) All interests of the debtor and the debtor’s spouse in community property as of the
commencement of the case that is—
(A) under the sole, equal, or joint management and control of the debtor; or
(B) liable for an allowable claim against the debtor, or for both an allowable claim
against the debtor and an allowable claim against the debtor’s spouse, to the extent
that such interest is so liable.
(3) Any interest in property that the trustee recovers under section 329(b), 363(n), 543,
550, 553, or 723 of this title.
(4) Any interest in property preserved for the benefit of or ordered transferred to the estate
under section 510(c) or 551 of this title.
(5) Any interest in property that would have been property of the estate if such interest had
been an interest of the debtor on the date of the filing of the petition, and that the debtor
acquires or becomes entitled to acquire within 180 days after such date—
(A) by bequest, devise, or inheritance;
(B) as a result of a property settlement agreement with the debtor’s spouse, or of an
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interlocutory or final divorce decree; or
(C) as a beneficiary of a life insurance policy or of a death benefit plan.
(6) Proceeds, product, offspring, rents, or profits of or from property of the estate, except
such as are earnings from services performed by an individual debtor after the
commencement of the case.
(7) Any interest in property that the estate acquires after the commencement of the case
§ 726 Distribution of Property of the Estate.
(a) Except as provided in section 510 of this title, property of the estate shall be distributed—
(1) first, in payment of claims of the kind specified in, and in the order specified in, section
507 of this title, proof of which is timely filed under section 501 of this title or tardily
filed on or before the earlier of—
(A) the date that is 10 days after the mailing to creditors of the summary of the trustee’s
final report; or
(B) the date on which the trustee commences final distribution under this section;
(2) second, in payment of any allowed unsecured claim, other than a claim of a kind
specified in paragraph (1), (3), or (4) of this subsection, proof of which is—
(A) timely filed under section 501(a) of this title;
(B) timely filed under section 501(b) or 501(c) of this title; or
(C) tardily filed under section 501(a) of this title, if—
(i) the creditor that holds such claim did not have notice or actual knowledge
of the case in time for timely filing of a proof of such claim under section
501(a) of this title; and
(ii) proof of such claim is filed in time to permit payment of such claim;
(3) third, in payment of any allowed unsecured claim proof of which is tardily filed under
section 501(a) of this title, other than a claim of the kind specified in paragraph (2)(C)
of this subsection;
(4) fourth, in payment of any allowed claim, whether secured or unsecured, for any fine,
penalty, or forfeiture, or for multiple, exemplary, or punitive damages, arising before
the earlier of the order for relief or the appointment of a trustee, to the extent that such
fine, penalty, forfeiture, or damages are not compensation for actual pecuniary loss
suffered by the holder of such claim;
(5) fifth, in payment of interest at the legal rate from the date of the filing of the petition,
on any claim paid under paragraph (1), (2), (3), or (4) of this subsection; and
(6) sixth, to the debtor.
§ 1112 Conversion or Dismissal.
(a) The debtor may convert a case under this chapter to a case under chapter 7 of this title
unless—
(1) the debtor is not a debtor in possession;
(2) the case originally was commenced as an involuntary case under this chapter; or
(3) the case was converted to a case under this chapter other than on the debtor’s request.
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(b) (1) Except as provided in paragraph (2) and subsection (c), on request of a party in
interest, and after notice and a hearing, the court shall convert a case under this
chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in
the best interests of creditors and the estate, for cause unless the court determines that
the appointment under section 1104(a) of a trustee or an examiner is in the best
interests of creditors and the estate.
(2) The court may not convert a case under this chapter to a case under chapter 7 or
dismiss a case under this chapter if the court finds and specifically identifies unusual
circumstances establishing that converting or dismissing the case is not in the best
interests of creditors and the estate, and the debtor or any other party in interest
establishes that—
(A) there is a reasonable likelihood that a plan will be confirmed within the
timeframes established in sections 1121(e) and 1129(e) of this title, or if such
sections do not apply, within a reasonable period of time; and
(B) the grounds for converting or dismissing the case include an act or omission of the
debtor other than under paragraph (4)(A)—
(i) for which there exists a reasonable justification for the act or omission;
and
(ii) that will be cured within a reasonable period of time fixed by the court.
(3) The court shall commence the hearing on a motion under this subsection not later
than 30 days after filing of the motion, and shall decide the motion not later than 15
days after commencement of such hearing, unless the movant expressly consents to a
continuance for a specific period of time or compelling circumstances prevent the
court from meeting the time limits established by this paragraph.
(4) For purposes of this subsection, the term “cause” includes—
(A) substantial or continuing loss to or diminution of the estate and the absence of a
reasonable likelihood of rehabilitation;
(B) gross mismanagement of the estate;
(C) failure to maintain appropriate insurance that poses a risk to the estate or to the
public;
(D) unauthorized use of cash collateral substantially harmful to 1 or more creditors;
(E) failure to comply with an order of the court;
(F) unexcused failure to satisfy timely any filing or reporting requirement established
by this title or by any rule applicable to a case under this chapter;
(G) failure to attend the meeting of creditors convened under section 341(a) or an
examination ordered under rule 2004 of the Federal Rules of Bankruptcy
Procedure without good cause shown by the debtor;
(H) failure timely to provide information or attend meetings reasonably requested by
the United States trustee (or the bankruptcy administrator, if any);
(I) failure timely to pay taxes owed after the date of the order for relief or to file tax
returns due after the date of the order for relief;
(J) failure to file a disclosure statement, or to file or confirm a plan, within the time
fixed by this title or by order of the court;
(K) failure to pay any fees or charges required under chapter 123 of title 28;
(L) revocation of an order of confirmation under section 1144;
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(M) inability to effectuate substantial consummation of a confirmed plan;
(N) material default by the debtor with respect to a confirmed plan;
(O) termination of a confirmed plan by reason of the occurrence of a condition
specified in the plan; and
(P) failure of the debtor to pay any domestic support obligation that first becomes
payable after the date of the filing of the petition
. . .
§ 1129 Confirmation of Plan.
(a) The court shall confirm a plan only if all of the following requirements are met:
(1) The plan complies with the applicable provisions of this title.
(2) The proponent of the plan complies with the applicable provision of this title.
(3) The plan has been proposed in good faith and not by any means forbidden by
law.
(4) Any payment made or to be made by the proponent, by the debtor, or by a
person issuing securities or acquiring property under the plan, for services or
for costs and expenses in or in connection with the case, or in connection with
the plan and incident to the case, has been approved by, or is subject to the
approval of, the court as reasonable.
(5) (A)
(i) The proponent of the plan has disclosed the identity and affiliations
of any individual proposed to serve, after confirmation of the plan,
as a director, officer, or voting trustee of the debtor, an affiliate of
the debtor participating in a joint plan with the debtor, or a
successor to the debtor under the plan; and
(ii) the appointment to, or continuance in, such office of such
individual, is consistent with the interests of creditors and equity
security holders and with public policy; and
(B) The proponent of the plan has disclosed the identity of any insider that
will be employed or retained by the reorganized debtor, and
(6) Any governmental regulatory commission with jurisdiction, after confirmation
of the plan, over the rates of the debtor has approved any rate change provided
for in the plan, or such rate change is expressly conditioned on such approval.
(7) With respect to each impaired class of claims or interests—
(A) each holder of a claim or interest of such class—
(i) has accepted the plan; or
(ii) will receive or retain under the plan on account of such claim or
interest property of a value, as of the effective date of the plan, that
is not less than the amount that such holder would so receive or
retain if the debtor were liquidated under chapter 7 of this title on
such date; or
(B) if section 1111(b)(2) of this title applies to the claims of such class, each
holder of a claim of such class will receive or retain under the plan on
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account of such claim property of a value, as of the effective date of the
plan, that is not less than the value of such holder’s interest in the estate’s
interest in the property that secures such claims.
(8) With respect to each class of claims or interests—
(A) such class has accepted the plan; or
(B) such class is not impaired under the plan.
(9) Except to the extent that the holder of a particular claim has agreed to a
different treatment of such claim, the plan provides that—
(A) with respect to a claim of a kind specified in
section 507(a)(2) or 507(a)(3) of this title, on the effective date of the plan,
the holder of such claim will receive on account of such claim cash equal
to the allowed amount of such claim;
(B) with respect to a class of claims of a kind specified in
section 507(a)(1), 507(a)(4), 507(a)(5), 507(a)(6), or 507(a)(7) of this title,
each holder of a claim of such class will receive—
(i) if such class has accepted the plan, deferred cash payments of a
value, as of the effective date of the plan, equal to the allowed
amount of such claim; or
(ii) if such class has not accepted the plan, cash on the effective date of
the plan equal to the allowed amount of such claim;
(C) with respect to a claim of a kind specified in section 507(a)(8) of this title,
the holder of such claim will receive on account of such claim regular
installment payments in cash—
(i) of a total value, as of the effective date of the plan, equal to the
allowed amount of such claim;
(ii) over a period ending not later than 5 years after the date of
the order for relief under section 301, 302, or 303; and
(iii) in a manner not less favorable than the most favored nonpriority
unsecured claim provided for by the plan (other than cash
payments made to a class of creditors under section 1122(b)); and
(D) with respect to a secured claim which would otherwise meet the
description of an unsecured claimof a governmental unit under section
507(a)(8), but for the secured status of that claim, the holder of
that claim will receive on account of that claim, cash payments, in the
same manner and over the same period, as prescribed in subparagraph (C).
(10) If a class of claims is impaired under the plan, at least one class
of claims that is impaired under the plan has accepted the plan, determined
without including any acceptance of the plan by any insider.
(11) Confirmation of the plan is not likely to be followed by the liquidation, or
the need for further financial reorganization, of the debtor or any successor to
the debtor under the plan, unless such liquidation or reorganization is
proposed in the plan.
(12) All fees payable under section 1930 of title 28, as determined by the court
at the hearing on confirmation of the plan, have been paid or the plan provides
for the payment of all such fees on the effective date of the plan.
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(13) The plan provides for the continuation after its effective date of payment
of all retiree benefits, as that term is defined in section 1114 of this title, at the
level established pursuant to subsection (e)(1)(B) or (g) of section 1114 of this
title, at any time prior to confirmation of the plan, for the duration of the
period the debtor has obligated itself to provide such benefits.
(14) If the debtor is required by a judicial or administrative order, or by statute,
to pay a domestic support obligation, the debtor has paid all amounts payable
under such order or such statute for such obligation that first become payable
after the date of the filing of the petition.
(15) In a case in which the debtor is an individual and in which the holder of an
allowed unsecured claim objects to the confirmation of the plan—
(A) the value, as of the effective date of the plan, of the property to be
distributed under the plan on account of such claim is not less than the
amount of such claim; or
(B) the value of the property to be distributed under the plan is not less
than the projected disposable income of the debtor (as defined in section
1325(b)(2)) to be received during the 5-year period beginning on the date
that the first payment is due under the plan, or during the period for which
the plan provides payments, whichever is longer.
(16) All transfers of property under the plan shall be made in accordance with
any applicable provisions of nonbankruptcy law that govern the transfer of
property by a corporation or trust that is not a moneyed, business, or
commercial corporation or trust.
(b) (1) Notwithstanding section 510(a) of this title, if all of the applicable requirements of
subsection (a) of this section other than paragraph (8) are met with respect to a plan,
the court, on request of the proponent of the plan, shall confirm the plan
notwithstanding the requirements of such paragraph if the plan does not discriminate
unfairly, and is fair and equitable, with respect to each class of claims or interests that
is impaired under, and has not accepted, the plan.
(2) For the purpose of this subsection, the condition that a plan be fair and equitable with
respect to a class includes the following requirements:
(A) With respect to a class of secured claims, the plan provides—
(i)
(I) that the holders of such claims retain the liens securing such claims,
whether the property subject to such liens is retained by the debtor or
transferred to another entity, to the extent of the allowed amount of such
claims; and
(II) that each holder of a claim of such class receive on account of such
claim deferred cash payments totaling at least the allowed amount of such
claim, of a value, as of the effective date of the plan, of at least the value of
such holder’s interest in the estate’s interest in such property;
(ii) for the sale, subject to section 363(k) of this title, of any property that is
subject to the liens securing such claims, free and clear of such liens, with
such liens to attach to the proceeds of such sale, and the treatment of such
liens on proceeds under clause (i) or (iii) of this subparagraph; or
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(iii) for the realization by such holders of the indubitable equivalent of such
claims.
(B) With respect to a class of unsecured claims—
(i) the plan provides that each holder of a claim of such class receive or retain
on account of such claim property of a value, as of the effective date of the
plan, equal to the allowed amount of such claim; or
(ii) the holder of any claim or interest that is junior to the claims of such class
will not receive or retain under the plan on account of such junior claim or
interest any property, except that in a case in which the debtor is an
individual, the debtor may retain property included in the estate under
section 1115, subject to the requirements of subsection (a)(14) of this
section.
(C) With respect to a class of interests—
(i) the plan provides that each holder of an interest of such class receive or
retain on account of such interest property of a value, as of the effective date
of the plan, equal to the greatest of the allowed amount of any fixed
liquidation preference to which such holder is entitled, any fixed
redemption price to which such holder is entitled, or the value of such
interest; or
(ii) the holder of any interest that is junior to the interests of such class will not
receive or retain under the plan on account of such junior interest any
property
. . .
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APPENDIX C: SELECTED PROVISIONS FROM TITLE 28 OF THE U.S. CODE
§ 2075 Bankruptcy Rules.
The Supreme Court shall have the power to prescribe by general rules, the forms of process, writs,
pleadings, and motions, and the practice and procedure in cases under title 11.
Such rules shall not abridge, enlarge, or modify any substantive right.
The Supreme Court shall transmit to Congress not later than May 1 of the year in which a rule
prescribed under this section is to become effective a copy of the proposed rule. The rule shall take
effect no earlier than December 1 of the year in which it is transmitted to Congress unless otherwise
provided by law.
The bankruptcy rules promulgated under this section shall prescribe a form for the statement
required under section 707(b)(2)(C) of title 11 and may provide general rules on the content of
such statement.
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APPENDIX D: SELECTED FEDERAL RULES OF BANKRUPTCY PROCEDURE
Rule 9019. Compromise and Arbitration.
(a) COMPROMISE. On motion by the trustee and after notice and a hearing, the court may
approve a compromise or settlement. Notice shall be given to creditors, the United States
trustee, the debtor, and indenture trustees as provided in Rule 2002 and to any other entity
as the court may direct.
(b) AUTHORITY TO COMPROMISE OR SETTLE CONTROVERSIES WITHIN CLASSES. After a
hearing on such notice as the court may direct, the court may fix a class or classes of
controversies and authorize the trustee to compromise or settle controversies within such
class or classes without further hearing or notice.
(c) ARBITRATION. On stipulation of the parties to any controversy affecting the estate the court
may authorize the matter to be submitted to final and binding arbitration.
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APPENDIX E: SELECTED SECTIONS OF
LEGISLATIVE HISTORY OF TITLE 11 OF THE U.S. CODE
Bankruptcy Act of 1898 ch. 541, § 70(b), 30 Stat. 544, 565–66 (codified as amended at 11
U.S.C. § 110(b) (1976) (repealed 1978)).
§ 110 Title to Property
(b) The trustee shall assume or reject an executory contract, including an unexpired lease or real
property, within sixty days after the adjudication or within thirty days after the qualification of
the trustee, whichever is later, but the court may for cause shown extend or reduce the time.
Any such contract or lease not assumed or rejected within that time shall be deemed to be
rejected. If a trustee is not appointed, any such contract or lease shall be deemed to be rejected
within thirty days after the date of the order directing that a trustee be not appointed. A trustee
shall file, within sixty days after adjudication or within thirty days after he has qualified,
whichever is later, unless the court for cause shown extends or reduces the time, a statement
under oath showing which, if any, of the contracts of the bankrupt are executory in whole or
in part, including unexpired leases of real property, and which, if any, have been rejected by
the trustee. Unless a lease of real property expressly otherwise provides, a rejection of the lease
or of any covenant therein by the trustee of the lessor does not deprive the lessee of his estate.
A general covenant or condition in a lease that it shall not be assigned shall not be construed
to prevent the trustee from assuming the same at his election and subsequently assigning the
same; but an express covenant that an assignment by operation of law or the bankruptcy of a
specified party thereto or of either party shall terminate the lease or give the other party an
election to terminate the same is enforceable. A trustee who elects to assume a contract or lease
of the bankrupt and who subsequently, with the approval of the court and upon such terms and
conditions as the court may fix after hearing upon notice to the other party to the contract or
lease, assigns the contract or lease to a third person, is not liable for breaches occurring after
the assignment.
Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, § 365, 92 Stat. 2549, 2574 (codified as
amended at 11 U.S.C. § 365(h) (2012)).
§ 365 Executory contract and unexpired leases.
(a) Except as provided in sections 765 and 766 of this title and in subsections (b), (c), and (d)
of this section, this section, subject to the court’s approval, may assume or reject any
executory contract or unexpired lease of the debtor.
(b) (1) If there has been a default in an executory contract or unexpired lease of the debtor, the
trustee may not assume such contract or lease unless, at the time of assumption of such
contract or lease, the trustee—
(A) cures, or provides adequate assurance that the trustee will promptly cure, such
default;
(B) compensates, or provides adequate assurance that the trustee will promptly
compensate, a party other than the debtor to such contract or lease, for any actual
pecuniary loss to such party resulting from such default; and
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(C) provides adequate assurance of future performance under such contract or lease.
(2) Paragraph (1) of this subsection does not apply to a default that is a breach of a
provision relating too—
(A) the insolvency or financial condition of the debtor at any time before the closing
of the case;
(B) the commencement of a case under this title; or
(C) the appointment of or taking possession by a trustee in a case under this title or a
custodian before such commencement.
(3) For the purposes of paragraph (1) of this section, adequate assurance of future
performance of a lease of real property in a shopping center includes adequate
assurance—
(A) of the source of rent and other consideration due under such lease;
(B) that any percentage rent due under such lease will not decline substantially;
(C) that assumption or assignment of such lease will not breach substantially any
provision, such as a radius, location, use, or exclusivity provision, in any other
lease, financing agreement, or master agreement relating to such shopping center;
and
(D) that assumption or assignment of such lease will not disrupt substantially any tenant
mix or balance in such shopping center.
(4) Notwithstanding any other provision of this section, if there has been a default in an
unexpired lease of the debtor, other than a default of a kind specified in paragraph (2)
of this subsection, the trustee may not require a lessor to provide services or supplies
incidental to such lease before assumption of such lease unless the lessor is
compensated under the terms of such lease for any services and supplies provided under
such lease before assumption of such lease.
(c) The trustee may not assume or assign an executory contract or unexpired lease of the
debtor, whether or not such contract or lease prohibits or restricts assignment of rights or
delegation of duties, if—
(1)
(A) applicable law excuses a party, other than the debtor, to such contract or lease from
accepting performance from or rendering performance to the trustee or an assignee
of such contract or lease, whether or not such contract or lease prohibits or restricts
assignment of rights or delegation of duties; and
(B) such party does not consent to such assumption or assignment; or
(2) such contract is a contract to make a loan, or extend other debt financing or financial
accommodations, to or for the benefit of the debtor, or to issue a security of the debtor.
(d) (1) In a case under chapter 7 of this title, if the trustee does not assume or reject an
executory contract or unexpired lease of the debtor within 60 days after the order for
relief, or within such additional time as the court, for cause, within such 60-day period,
fixes, then such contract or lease is deemed rejected.
(2) In a case under chapter 9, 11, or 13 of this title, the trustee may assume or reject an
executory contract or unexpired lease of the debtor at any time before the confirmation
of a plan, but the court, on request of any party to such contract or lease, may order the
trustee to determine within a specified period of time whether to assume or reject such
contract or lease.
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(e)
(1) Notwithstanding a provision in an executory contract or unexpired lease, or in
applicable law, an executory contract or unexpired lease of the debtor may not be
terminated or modified, and any right or obligation under such contract or lease may
not be terminated or modified, at any time after the commencement of the case solely
because of a provision in such contract or lease that is conditioned on—,
(A) the insolvency or financial condition of the debtor at any time before the closing of
the case;
(B) the commencement of a case under this title; or
(C) the appointment of or taking possession by a trustee in a case under this title or a
custodian before such commencement.
(2) Paragraph (1) of this subsection does not apply to an executory contract or unexpired
lease of the debtor, whether or not such contract or lease prohibits or restricts
assignment of rights or delegation of duties, if—,
(A) (i) applicable law excuses a party, other than the debtor, to such contract or lease
from accepting performance from or rendering performance to the trustee or to
an assignee of such contract or lease, whether or not such contract or lease
prohibits or restricts assignment of rights or delegation of duties; and
(ii) such party does not consent to such assumption or assignment; or
(B) such contract is a contract to make a loan, or extend other debt financing or financial
accommodations, to or for the benefit of the debtor, or to issue a security of the
debtor.
(f)
(1) Except as provided in subsection (c) of this section, notwithstanding a provision in an
executory contract or unexpired lease of the debtor, or in applicable law, that prohibits,
restricts, or conditions the assignment of such contract or lease, the trustee may assign
such contract or lease under paragraph (2) of this subsection.
(2) The trustee may assign an executory contract or unexpired lease of the debtor only if—
(A) the trustee assumes such contract or lease in accordance with the provisions of this
section; and
(B) adequate assurance of future performance by the assignee of such contract or lease
is provided, whether or not there has been a default in such contract or lease.
(3) Notwithstanding a provision in an executory contract or unexpired lease of the debtor,
or in applicable law that terminates or modifies, or permits a party other than the debtor
to terminate or modify, such contract or lease or a right or obligation under such
contract or lease on account of an assignment of such contract or lease, such contract,
lease, right, or obligation may not be terminated or modified under such provision
because of the assumption or assignment of such contract or lease by the trustee.
(g) Except as provided in subsections (h)(2) and (i)(2) of this section, the rejection of an
executory contract or unexpired lease of the debtor constitutes a breach of such contract or
lease—,
(1) if such contract or lease has not been assumed under this section or under a plan
confirmed under chapter 9, 11, or 13 of this title, immediately before the date of the
filing of the petition; or
(2) if such contract or lease has been assumed under this section or under a plan confirmed
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under chapter 9, 11, or 13 of this title—,
(A) if before such rejection the case has not been converted under section 1112 or 1307
of this title, at the time of such rejection; or
(B) if before such rejection the case has been converted under section 1112 or 1307 of
this title—,
(i) immediately before the date of such conversion, if such contract or lease was
assumed before such conversion; or
(ii) at the time of such rejection, if such contract or lease was assumed after
such conversion.
(h) (1) If the trustee rejects an unexpired lease of real property of the debtor under which the
debtor is the lessor, the lessee under such lease may treat the lease as terminated by
such rejection, or, in the alternative, may remain in possession for the balance of the
term of such lease and any renewal or extension of such term that is enforceable by
such lessee under applicable nonbankruptcy law.
(2) If such lessee remains in possession, such lessee may offset against the rent reserved
under such lease for the balance of the term after the date of the rejection of such lease,
and any such renewal or extension, any damages occurring after such date caused by
the non–performance of any obligation of the debtor after such date, but such lessee
does not have any rights against the estate on account of any damages arising after such
date from such rejection, other than such offset.
(i)
(1) If the trustee rejects an executory contract of the debtor for the sale of real property
under which the purchaser is in possession, such purchaser may treat such contract as
terminated, or, in the alternative, may remain in possession of such real property.
(2) If such purchaser remains in possession—,
(A) such purchaser shall continue to make all payments due under such contract, but
may, offset against such payments any damages occurring after the date of the
rejection of such contract caused by the nonperformance of any obligation of the
debtor after such date, but such purchaser does not have any rights against the estate
on account of any damages arising after such date from such rejection, other than
such offset; and
(B) the trustee shall deliver title to such purchaser in accordance with the provisions of
such contract, but is relieved of all other obligations to perform under such contract.
(j) A purchaser that treats an executory contract as terminated under subsection (i) of this
section, or a party whose executory contract to purchase real property from the debtor is
rejected and under which such party is not in possession, has a lien on the interest of the
debtor in such property for the recovery of any portion of the purchase price that such
purchaser or party has paid.
(k) Assignment by the trustee to an entity of a contract or lease assumed under this section
relieves the trustee and the estate from any liability for any breach of such contract or lease
occurring after such assignment.
Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 205, 108 Stat. 4106, 4122 (codified
at 11 U.S.C. § 365(h)).
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§ 205 Rejection of Unexpired Leases of Real Property or Timeshare Interests.
(a) AMENDMENT TO SECTION 365.—Section 365(h) of title 11, United States Code, is amended to
read as follows:
“(h)(1)(A) If the trustee rejects an unexpired lease of real property under which the debtor
is the lessor and—
“(i) if the rejection by the trustee amounts to such a breach as would entitle the
lessee to treat such lease as terminated by virtue of its terms, applicable nonbankruptcy
law, or any agreement made by the lessee, then the lessee under such lease may treat such
lease as terminated by the rejection; or
“(ii) if the term of such lease has commenced, the lessee may retain its rights under
such lease (including rights such as those relating to the amount and timing of payment of
rent and other amounts payable by the lessee and any right of use, possession, quiet
enjoyment, subletting, assignment, or hypothecation) that are in or appurtenant to the real
property for the balance of the term of such lease and for any renewal or extension of such
rights to the extent that such rights are enforceable under applicable nonbankruptcy
law.”(B) If the lessee retains its rights under subparagraph (A)(ii), the lessee may offset
against the rent reserved under such lease for the balance of the term after the date of the
rejection of such lease and for the term of any renewal or extension of such lease, the value
of any damage caused by the nonperformance after the date of such rejection, of any
obligation of the debtor under such lease, but the lessee shall not have any other right
against the estate or the debtor on account of any damage occurring after such date caused
by such nonperformance.
. . .
