Old Mkt. Grp. Holdings Corp. v. 400 Walnut Ave. (In re Old Mkt. Grp. Holdings Corp.)

In re OLD MARKET GROUP HOLDINGS CORP., et al

OLD MARKET GROUP HOLDINGS CORP. Appellant, v. 400 WALNUT AVENUE, LLC, Appellee.

Nos. 20-10161 (PB), 22-CV-10934 PKC

United States District Court, S.D. New York

February 24, 2023

OPINION AND ORDER

P KEVIN CASTEL, UNITED STATES DISTRICT JUDGE

Fairway Group Holdings Corp, and its affiliates filed for chapter 11 bankruptcy and reorganized as Old Market Group Holdings Corp. (“Debtors”). As part of these chapter 11 proceedings, Debtors transferred their leasehold interest in a warehouse to Village Supermarkets by means of an assumption and assignment of the lease.^[1] Under Bankruptcy Code section 365(b)(1), Debtors were required to cure any existing defaults under the lease at the time of assumption. In anticipation of the transaction, Debtors served a cure notice on the warehouse's landlord, 400 Walnut Avenue LLC (“Landlord”), that proposed to pay $86,000. The Landlord objected and asserted approximately $2.01 million in cure costs.

The Bankruptcy Court heard argument on the Debtors' assertion that section 365 incorporated the lease definition of “default” and that under the terms of the lease there was no default. Thus, according to the Debtors, there was no default for Debtors to cure under the code. Tn a written decision, the Bankruptcy Court rejected this argument on two grounds: The Court found that (1) even if section 365 incorporated the lease language, the requirements for a default under the terms of the lease had been met. But the Court further held that (2) the term “default” in the Bankruptcy Code was used in its ordinary sense rather than incorporating the definition used in the lease. Because the Bankruptcy Court was dealing with the threshold issue of the grounds for default, the amount necessary to cure any default was left to subsequent proceedings.

Debtors move for leave to appeal this interlocutory order. Consistent with the high bar' to hear such appeals, the Court will deny the motion.

I. BACKGROUND

A. Factual Background

The Court assumes familiarity with the background of the bankruptcy proceedings in this case. The facts summarized below are taken from and more fully described in the decision from which Debtors seek to appeal. See In re Old Mkt. Grp. Holdings Corp., 647 B.R. 104 (Bankr. S.D.N.Y. 2022) (Dkt. 1, Ex. A) (“Order”)^[2]

Fairway operated a chain of supermarkets in the New York City area and in January 2020 filed for chapter 11 protection. (Order at 3) Most of Fairway's assets were sold off by Debtors during the bankruptcy proceedings. (Id.) In one such arrangement, Debtors agreed to sell five stores and a product distribution center warehouse (“PDC”) to Village Supermarkets. (Id. at 4) The “sale” was completed by assumption and assignment of the leases on these properties to Village. (Id.)

The sale of these assets generated the following documents: (1) an asset purchase agreement dated March 25, 2020; (2) an order from the Bankruptcy Court approving the sale issued April 20, 2020 (“Sale Order”), and (3) an agreement of May 6, 2020 whereby Debtors assumed the leases and assigned them to Village. (Id.) The asset purchase agreement stated that Village would acquire the assets “free and clear all Liens and Claims.” Id. at 5. The Sale Order also included “extensive free-and-clear provisions.” Id. Village's responsibility for any cure costs associated with the sale would be limited to one month's rent, an amount it paid at the closing. (Id.) The Sale Order “specifically shielded Village from any liability to counterparties, including the [PDC] Landlord, for cure claims or pre-sale defaults of any sort.” Id. at 6.

In anticipation of the transaction, Debtors filed a February 2020 notice proposing to pay the Landlord $86,000 to cure defaults associated with the PDC lease. (Id.) The Landlord filed an objection on March 4, 2020-amended five days later-which asserted that the actual cure costs were approximately $2.01 million. (Id.)

To possibly avoid discovery and a trial over this cure dispute, the Bankruptcy Court held a hearing on two threshold legal issues. At the argument, Debtors asserted (1) that the Landlord had suffered no actual or hypothetical damages-and therefore could recover no cure costs-because under the lease Village could be compelled to make any needed repairs; and (2) that there was no default requiring cure under section 365(b)(1) because no defaults existed under the terms of the PDC Lease. (Id. at 7) The Bankruptcy Court reserved decision, and on December 13, 2022, it issued a decision rejecting both arguments.

B. Bankruptcy Court Order

1. Village's repair obligation for pre-sale conditions

Debtors argued that they were not required to cure any defaults because under the terms of the assigned lease Village would still be responsible for any ongoing required repairs; this included any conditions that arose prior to the sale. (Id. at 9) Debtors argued that Village had agreed to take assignment of the PDC lease on an “as is” basis and was aware at the time of the transaction that the property needed repair; consequently, there was no pecuniary harm to Landlord for Debtors to cure. (Id. at 10)

The Bankruptcy Court rejected this argument on multiple grounds. The Court acknowledged that the purchase and assignment agreements included “as is” language, but given the extensive and unambiguous “free and clear” provisions in both agreements, it determined that this provision must be read narrowly to only “bar Village from asserting any claim against the Debtors for pre-sale defects, but not to impose any affirmative repair obligation on Village.” Id. at 11. Additionally, the Court pointed out that the Sale Order included no “as is” provision, but it did include the “customary” and “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.” Id. at 4.

At argument, Debtors argued that the claims raised by the Landlord in its cure objection were not “claims” within the meaning of the Sale Order's free-and-clear provisions because they had not ripened into defaults under the lease. They argued that the lease required 30 days' notice before any failure to perform an obligation under the lease would ripen into a default. (Id. at 12) Debtors argued that the Landlord had never given notice demanding repairs, and therefore there had been no default before the assignment. If there was no default, there was no “claim.” (Id.)

The Court rejected this argument as well. It determined that the Landlord's cure objection itself served as notice of needed repairs as required under the lease. As the objection was filed over 30 days before the date of the transaction, even under Debtors' own theory the repair obligations would have ripened and been their responsibility, not Village's. (Id.)

Additionally, the Court rejected Debtor's theory of interpretation outright. The lease terms did not govern: The ffee-and-clear provisions of the Sale Order used the definition of “claim” from the Bankruptcy code, not the lease. This sense of “claim” was broad and covered any repair obligations regardless of demand or notice from the Landlord. (Id. at 12-13) The Court held that “to the extent repairs were needed at the time of the Village sale,” the ffee-and-clear provisions “shield Village from any liability on account of that claim.” Id. at 13. Therefore, “the Landlord's only recourse for any defective conditions that existed at the time of the sale is to recover on its cure claim against the Debtors.” Id.

The Court alternately held that even if there were no free-and-clear provisions- which would potentially mean the Landlord could pursue repair costs as against Village-• Debtors' would nevertheless still have had an obligation to cure all defaults that existed at the time of sale. Bankruptcy Code section 365(b)(1) requires cure, compensation, or adequate assurance of compensation or compliance as a prerequisite to assuming a lease or contract. It was thus a condition of the transaction-which took the form of assumption and assignment- that any existing defaulted repair obligations be cured by Debtors. (Id., at 13-15)

2. Default under the terms of the lease

Debtor's second argument was that the term “default” as used in section 365 referred to a default under the terms of the relevant lease, and the default provisions of the lease had not been satisfied for any of the alleged repair obligations. Therefore, there was no default to cure. (Id. at 15) This argument relied on the same theory as Debtors' argument about “claims” under the Iree-and-clcar provisions: The lease required 30 days' notice before a default would ripen, but the Landlord had never given notice by demanding repairs. (Id.)

The Bankruptcy Court rejected this argument on similar grounds as before. The cure objection served as “notice” under the lease and more than 30 days elapsed between that notice and the assumption and assignment of the lease. Even under the terms of the lease, Debtors had defaulted. (Id. at 16) And regardless, the Court held that the definition in the lease did not control the statutory meaning of term “default.” The Court concluded that “a default exists under [section 365(b)(1)] whenever the debtor has failed to perform its obligations under its contract or lease, regardless of whether that failure amounted to a default as defined by the contract or lease.” (Id.) The Court relied on persuasive authority from the Ninth Circuit and this district for the proposition that, “‘default,' as used in Section 365, does not incorporate the definition of default in the contract at issue, but instead must be given its ‘plain and ordinary meaning'-namely ‘the failure to perform or...