In re Old Mkt. Grp. Holdings Corp.

647 B.R. 104

IN RE OLD MARKET GROUP HOLDINGS CORP., et al., Debtors.¹

Case No. 20-10161 (PB) (Jointly Administered)

United States Bankruptcy Court, S.D. New York.

Signed December 13, 2022

WEIL, GOTSHAL & MANGES LLP, Counsel for the Plan Administrator, 767 Fifth Avenue, New York, New York 10153, By: Sunny Singh, Jared R. Friedmann.

ANSELL GRIMM & AARON, PC, Counsel for 400 Walnut Avenue, LLC, 365 Rifle Camp Road, Woodland Park, NJ 07424, By: Joshua S. Bauchner, Anthony J. D'Artiglio.

WOLLMUTH MAHER & DEUTSCH LLP, Counsel for VSM NY Holdings LLC, VSM NY Distribution LLC and Village Super Market, Inc., 500 Fifth Avenue, New York, New York 10110, By: Paul R. DeFilippo.

Memorandum Decision and Order on Threshold Legal Issues With Respect to 400 Walnut Avenue LLC'S Cure Claim

Hon. Philip Bentley, U.S. Bankruptcy Judge

INTRODUCTION

Fairway Group Holdings Corp. and a number of its affiliates (collectively, "Fairway" or the "Debtors") operated a chain of supermarkets in the New York City area. In January 2020, Fairway filed for chapter 11 protection. In the bankruptcy, Fairway sold most of its assets through a series of sales pursuant to Bankruptcy Code § 363 and then confirmed a chapter 11 plan of reorganization in October 2020.² The largest of these asset sales, and the one at issue here, was Fairway's sale to Village Supermarkets ("Village") of five stores, a product distribution center located at 400 Walnut Avenue in the Bronx (the "PDC" or "PDC warehouse"), and certain ancillary assets. Fairway's sale of the stores and the PDC warehouse took the form of an assignment to Village of the leases for those properties.

The present dispute concerns Fairway's responsibility, under Bankruptcy Code § 365(b), to cure defaults that existed under its lease for the PDC warehouse — specifically, its failure to make required repairs — at the time it assigned that lease to Village. Before the Court are two threshold legal issues, which the Debtors claim will obviate the need for a trial. The Debtors argue, first, that any repairs they may have been required to make are now the responsibility of Village, the new tenant under the lease. According to the Debtors, the Landlord can compel Village to make all such repairs, and therefore the Landlord has suffered no pecuniary harm and has no cure claim under Bankruptcy Code § 365(b). Second, the Debtors contend that none of their repair obligations ripened into defaults under the lease, and therefore none are defaults requiring cure under Section 365(b), because the Landlord supposedly failed to serve the Debtors with a demand or notice of the need to make these repairs prior to the filing of its cure claim. For these reasons, the Debtors ask this Court to conclude that their cure obligation is zero, regardless of the extent of the repairs required at the PDC warehouse at the time of the sale.

The Court finds the Debtors’ threshold arguments to be without merit. Most fundamentally, the contention that Village is liable to the Landlord for repairs required prior to the sale is contrary to a central premise of asset sales under Bankruptcy Code § 363 : that the buyer takes the assets free and clear of all pre-sale claims against the Debtors. The free-and-clear provisions contained in the sale order insulate Village from liability for all claims for pre-sale defects, and this protection is not contingent on the Landlord having demanded repairs prior to the filing of its cure claim. Nor does the lack of any prior demand make the required repairs any less a default that must be cured under Section 365. Both the text and the purposes of that section compel the conclusion that the statutory term "default" means any failure to perform under the assumed contract or lease, regardless of the definition of default contained in that contract or lease.

FACTUAL BACKGROUND

Fairway filed these chapter 11 cases in January 2020, following an unsuccessful attempt to sell its business — 14 grocery stores in the New York City area — outside of bankruptcy. Fairway proceeded to sell most of its assets through a series of sales pursuant to Bankruptcy Code § 363, which the Bankruptcy Court approved. The Court confirmed the Debtors’ plan of reorganization in October 2020.³

The largest of the Debtors’ asset sales was the one relevant to the present dispute: the sale to Village of five of the Debtors’ stores, together with the PDC warehouse and ancillary assets such as the right to use the Fairway name. The sale of these stores and the PDC was effectuated by the Debtors’ assignment to Village of the leases they held for these properties. The lease for the PDC (the "Lease" [ECF No. 947-5]) has a 25-year term, running from 2013 to 2038. According to the Debtors, the PDC warehouse needed extensive repairs at the time they took occupancy of it in 2013 (Debtors’ Br. [ECF No. 1046] ¶ 14); they subsequently invested more than $30 million to improve the property (id. ¶ 15); and at the time of the sale, Village knew that further repairs were needed despite these improvements (id. ¶ 16).

Most relevant to the threshold issues now before the Court are three documents that governed the Village asset sale: the March 25, 2020 asset purchase agreement (the "Asset Purchase Agreement" or "APA" [ECF No. 449-1]), the April 20, 2020 Bankruptcy Court order approving the Village sale (the "Sale Order" [ECF No. 449]), and the May 6, 2020 agreement by which the Debtors assumed the Lease and assigned it to Village (the "Assumption and Assignment Agreement" or "A&A Agreement" [ECF No. 449-2]).

As is customary for asset sales pursuant to Section 363 of the Bankruptcy Code, the parties agreed that the Bankruptcy Court's order approving the sale would contain standard "free and clear" provisions, shielding Village from all liabilities that arose prior to the sale and related in any way to the acquired assets. The Asset Purchase Agreement provided:

[A]t the Closing, Buyer will purchase from Sellers, and Sellers will sell, transfer, assign, convey, and deliver to Buyer, all of the Acquired Assets free and clear of Liens or Claims to the maximum extent permitted under applicable bankruptcy law , except for Permitted Liens.

(Asset Purchase Agreement § 2.1; emphasis added.) The Agreement was conditioned on the Bankruptcy Court's entry of the Sale Order, which the Agreement defined as an order approving the asset sale "free and clear of all Liens and Claims." (Id. §§ 1.1, 7.1(c).)

Consistent with this agreement, the Sale Order contained extensive free-and-clear provisions. For example:

Pursuant to sections 105(a), 363(b), 363(f), 365(b), and 365(f) of the Bankruptcy Code, upon the Closing Date and pursuant to and except as otherwise set forth in the Purchase Agreement, the Acquired Assets shall be transferred to Buyer free and clear of all encumbrances, claims (as defined in section 101(5) of the Bankruptcy Code ), ... whether known or unknown, choate or inchoate, filed or unfiled, scheduled or unscheduled, noticed or unnoticed, recorded or unrecorded, perfected or unperfected, allowed or disallowed, contingent or non-contingent, liquidated or unliquidated, matured or unmatured, ... with all such Interests or Claims to attach to the cash proceeds of the Sale Transaction in the order of their priority, with the same validity, force, and effect that they now have as against the Acquired Assets, subject to any claims and defenses the Debtors may possess with respect thereto. (Sale Order ¶ 13.)

....

[A]ll persons and entities ..., including all ... parties to ... unexpired leases, ... hereby are forever barred, estopped, and permanently enjoined from asserting any Interests or Claims relating to the Acquired Assets or the transfer of the Acquired Assets against Buyer .... (Id. ¶ 15.)

....

[T]he Buyer ... shall have no liability for any ... Claim ... whether known or unknown as of the Closing Date ... whether fixed or contingent .... (Id. ¶ 20.)

The Asset Purchase Agreement and the Sale Order also specifically addressed cure costs for the assigned leases, including the Lease. The APA and the Sale Order provided that, for each assigned lease, Village's responsibility for cure costs would be limited to one month's rent, a sum that Village paid at closing. (See APA at 6, defining Cure Costs; see also Sale Order ¶ 25.) Consistent with this limitation, the Sale Order specifically shielded Village from any liability to counterparties, including the Landlord, for cure claims or pre-sale defaults of any sort:

Counterparties to Transferred Contracts .... are hereby enjoined from taking any action against ... the Buyer ... with respect to any Claim for cure .... (Sale Order ¶¶ 27–28; see also id. ¶ D (defining "Counterparties" as any counterparties to "Transferred Contracts"); and see id. at 1 n.2, Motion to Sell Property Free and Clear of Liens Under Section 363(f) [ECF No. 21] ¶ 18, and Bidding Procedures Order [ECF No. 202] at 2, together defining "Transferred Contracts" to include the assigned leases.)

....

Pursuant to sections 105(a), 363, and 365 of the Bankruptcy Code, all Counterparties are forever barred and permanently enjoined from raising or asserting against ... the Buyer any defaults ... existing as of the date of assumption of the Transferred Contracts .... (Sale Order ¶ 30.)

Subsequent to entry of the Sale Order, the Debtors and Village executed a separate assumption and assignment agreement for each of the various assigned leases, including the Assumption and Assignment Agreement that governed the Lease.

PROCEDURAL BACKGROUND

In February 2020, the Debtors filed a notice setting forth the cure costs they proposed to pay for each of the leases they assigned to Village. For the PDC warehouse lease, the Debtors proposed to pay approximately $86,000. The Landlord filed an initial objection on March 4, 2020, followed by an amended objection five days later (the "Cure Objection" [ECF No. 262]), which asserted a claim for approximately $2.01 million in cure costs.⁴

After...