The Second Circuit held that no one aside from the counterparty to a contract can force the debtor to cure in conjunction with the assumption of an executory contract, upholding decisions by retired Bankruptcy Judge Shelley C. Chapman of New York and District Judge Jed S. Rakoff.
The appeal to the Second Circuit arose from the refurbishment of the bus terminal at the foot of the George Washington Bridge in northern Manhattan. The Port Authority of New York and New Jersey, the owner of the terminal, granted a 99-year ground lease to a developer in return for the developer’s agreement to pay most construction costs.
The developer hired a general contractor. The ground lease explicitly said that the Port Authority had no obligation to pay the contractor.
In chapter 11, the developer arranged to assume and assign the assets, principally the ground lease. Claiming it was owed $113 million by the developer, the general contractor objected to assumption and assignment of the lease unless the $113 million default was “cured” under Section 365(b)(1)(A).
Indeed, the general contractor had a point. The $113 million claim was a default under the developer’s ground lease with the owner. So, the Port Authority waived the cure claim. The general contractor continued to object and claimed that it too had a right to demand cure.
Bankruptcy Judge Chapman overruled the general contractor’s objection and approved the sale. District Judge Rakoff affirmed on appeal. Tutor Perini Building Corp. v. New York City Regional Center George Washington Bridge Bus Station & Infrastructure Development Fund LLC (In re George Washington Bridge Bus Station Development Venture LLC), 20-7422, 2021 WL 3403590 (S.D.N.Y. Aug. 4, 2021). To read ABI’s report on Judge Rakoff’s affirmance, click here.
Priority Claims Not Given Liberally
The general contractor appealed once more but was rebuffed in an April 10 opinion by Circuit Judge Eunice C. Lee. She framed the question as “whether [Section 365(b)(1)(A)] allows a creditor in [the general contractor’s] position to assert a ‘cure claim, which entitles a creditor to the highest priority of payment under the Bankruptcy Code, even if the creditor has no contractual rights in the contract or lease being assumed.”
The general contractor argued that the language of Section 365(b)(1)(A) does not limit who may have a cure claim. Judge Lee agreed, saying that the section “does not spell out which parties may raise a default in an assumed contract or lease to seek priority on their claims.”
Explaining that the general contractor would jump ahead of other unsecured creditors if it had a cure claim, Judge Lee cited authorities for the principle that statutory priorities are narrowly construed.
Judge Lee could “not see how it furthers any statutory purpose to read § 365(b) as granting administrative priority to someone whose claims against the debtor do not arise from a contract assumed under § 365(a).” Granting priority status as a consequence of a cure claim, she said, would allow the general contractor to “cut the line and stand in front of even secured creditors in exchange for nothing.”
Regarding the principal issue on appeal, Judge Lee held that a “creditor asserting a default must have some right to pursue a breach of contract claim under the executory contract” being assumed.
The contractor fared no better with an alternative argument that it was a third-party beneficiary under the ground lease. Judge Lee said that New York law generally requires express language in the contract stating that it was intended to benefit a third party.
There was no such language in the contract. Indeed, others were named as third-party beneficiaries, but not the general contractor. Judge Lee rejected the third-party beneficiary argument and affirmed the district court’s judgment.
The Second Circuit held that no one aside from the counterparty to a contract can force the debtor to cure in conjunction with the assumption of an executory contract, upholding decisions by retired Bankruptcy Judge Shelley C. Chapman of New York and District Judge Jed S. Rakoff.
The appeal to the Second Circuit arose from the refurbishment of the bus terminal at the foot of the George Washington Bridge in northern Manhattan. The Port Authority of New York and New Jersey, the owner of the terminal, granted a 99-year ground lease to a developer in return for the developer’s agreement to pay most construction costs.
The developer hired a general contractor. The ground lease explicitly said that the Port Authority had no obligation to pay the contractor.
In chapter 11, the developer arranged to assume and assign the assets, principally the ground lease. Claiming it was owed $113 million by the developer, the general contractor objected to assumption and assignment of the lease unless the $113 million default was “cured” under Section 365(b)(1)(A).