No one aside from the counterparty to a contract can force the debtor to cure in conjunction with assumption, for reasons explained by District Judge Jed S. Rakoff in the course of upholding the “well reasoned opinion” of Bankruptcy Judge Shelley C. Chapman of New York.
The appeal arose from the chapter 11 reorganization of the developer who refurbished the mammoth bus terminal at the foot of the George Washington Bridge in northern Manhattan.
The Port Authority of New York and New Jersey is the owner of the bus terminal. With the aged terminal badly in need of improvement, the Port Authority granted a 99-year ground lease to the developer. In return for being allowed to operate the retail space in the terminal, the developer undertook the obligation of paying for necessary construction.
The developer hired a general contractor. The ground lease explicitly said that the Port Authority had no obligation to pay the contractor.
The project did not go well, sparking disputes between the developer and the general contractor, who claimed to be owed $113 million.
The chapter 11 case culminated in a sale of the developer’s assets. The principal asset was the ground lease. To “sell” the ground lease, the developer-debtor was obligated to assume and assign the ground lease under Section 365(a). Section 365(b) would require the debtor-developer to cure defaults under the ground lease.
The principal default on the ground lease was the debtor’s failure to pay the $113 owing to the general contractor. If the cure was not paid and the lease not assumed, the sale wasn’t going to happen.
So, the Port Authority agreed to waive the cure claim. The general contractor objected and claimed that it too had a right to demand cure.
The contractor argued that Section 363(b)(1)(A) does not say who may claim the right to a cure. Given its economic interest in the project and the lease, the contractor claimed a right alongside the Port Authority to assert a cure claim.
Bankruptcy Judge Chapman overruled the general contractor’s objection and approved the sale. The contractor appealed but got nowhere with Judge Rakoff in his August 4 opinion.
For starters, the contractor claimed to be a third-party beneficiary of the ground lease, allowing it to force a cure. As a matter of state law, Judge Rakoff upheld Judge Chapman’s factual and legal conclusions that the contractor was not a third-party beneficiary.
For the main event, the contractor claimed the right to require a cure because Section 365(b)(1)(A) has no express limitation on who may bring a cure claim.
Judge Rakoff explained that the law around assumption and assignment is an exception to the general rules of priority in bankruptcy. Unlike an ordinary unsecured creditor, a counterparty is entitled to cure because the debtor has decided to realize the benefit of the contract. If the law would force the counterparty to continue performance despite the debtor’s default, Judge Rakoff said the result “would enrich the debtor at that counterparty’s expense.”
Judge Rakoff said that the contractor was not a party to the ground lease, “so the debtor’s assumption of the ground lease will not lock [the contractor] into marginally more future performance.”
If the law were otherwise, Judge Rakoff said, it would “allow virtually any unsecured creditor to assert a cure claim. And that would indeed be an absurd result, one that the statute cannot possibly have countenanced.”
Judge Rakoff affirmed Judge Chapman and held that the contractor had no right to assert a cure claim.
No one aside from the counterparty to a contract can force the debtor to cure in conjunction with assumption, for reasons explained by District Judge Jed S. Rakoff in the course of upholding the “well reasoned opinion” of Bankruptcy Judge Shelley C. Chapman of New York.
The appeal arose from the chapter 11 reorganization of the developer who refurbished the mammoth bus terminal at the foot of the George Washington Bridge in northern Manhattan.
The Port Authority of New York and New Jersey is the owner of the bus terminal. With the aged terminal badly in need of improvement, the Port Authority granted a 99-year ground lease to the developer. In return for being allowed to operate the retail space in the terminal, the developer undertook the obligation of paying for necessary construction.