Old Market Group Holdings Corp.

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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) 	FOR PUBLICATION
In re 	)
) 	Chapter 11
OLD MARKET GROUP HOLDINGS 	)
CORP., et al., 	) 	Case No. 20-10161 (PB)
)
Debtors.1 	) 	(Jointly Administered)
)
)
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Memorandum Decision and Order on Threshold Legal Issues With Respect to 400 Walnut
Avenue LLC’S Cure Claim
A P P E A R A N C E S :
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
1 	The Debtors in these chapter 11 cases, along with the last four digits of each of their federal tax identification
number, are as follows: Old Market Bakery LLC (4129); Old Market Broadway LLC (8591); Old Market Chelsea
LLC (0288); Old Market Construction Group, LLC (2741); Old Market Douglaston LLC (2650); Old Market East
86th Street LLC (3822); Old Market eCommerce LLC (3081); Old Market Georgetowne LLC (9609); Old Market
Greenwich Street LLC (6422); Old Market Group Central Services LLC (7843); Old Market Group Plainview LLC
(8643); Old Market Hudson Yards LLC (9331); Old Market Kips Bay LLC (0791); Old Market Store LLC (9240);
Old Market Pelham LLC (3119); Old Market Pelham Wines & Spirits LLC (3141); Old Market Red Hook LLC
(8813); Old Market Stamford LLC (0738); Old Market Stamford Wines & Spirits LLC (3021); Old Market Staten
Island LLC (1732); Old Market Uptown LLC (8719); and Old Market Westbury LLC (6240).
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Distribution LLC and Village Super Market, Inc.
500 Fifth Avenue
New York, New York 10110
By: 	Paul R. DeFilippo
Hon. Philip Bentley
U.S. Bankruptcy Judge
I NTRODUCTION
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
2 Following the asset sales, Fairway Group Holdings Corp. changed its name to Old Market Group Holdings Corp.,
and its affiliates similarly substituted Old Market for Fairway in their names. For simplicity’s sake, the Court refers
to the Debtors collectively as Fairway, rather than Old Market. Pursuant to its confirmed plan of reorganization,
Fairway is now being managed by a Plan Administrator.
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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 B ACKGROUND
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,
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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
3 Judge James L. Garrity, Jr., presided over these chapter 11 cases until September 2022, at which time these cases
were reassigned to me.
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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.)
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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 briefing and discovery had commenced, and the parties had attempted but failed to
achieve a mediated resolution of the cure dispute, the Debtors proposed that the Court consider a
4 In July 2020, the Landlord filed a second amended objection, which increased its asserted cure costs to more than
$3.8 million. The Court struck that amended objection as untimely, limiting the Landlord’s cure claim to the $2.01
million sought in its Cure Objection. (Order Granting Debtors’ Motion to Strike the Second Amended Objection [ECF
No. 902].) The Cure Objection also demanded payment of approximately $229,000 in past-due rent, but that overdue
rent is no longer at issue, because the Debtors subsequently paid it.
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threshold legal issue that could potentially obviate the need for further discovery and a trial. The
Landlord and Village agreed to this approach, and on July 1, 2022, the Court entered a scheduling
order providing for the parties, including Village, to brief and the Court to rule on a single threshold
issue, defined as the “Damages Issue”: whether “the Landlord could demonstrate that it suffered
any actual or hypothetical damages . . . entitling it to recover cure costs” as a result of repairs it
claims were necessary at the PDC warehouse at the time the Debtors assigned the Lease to Village.
(July 1, 2022 Scheduling Order [ECF No. 1247] at 3.)
A subsequent brief filed by the Debtors raised a second threshold argument: that no defaults
existed under the Lease, and therefore the Debtors have no defaults under Bankruptcy Code § 365
(and consequently no cure obligations), because the Landlord failed to demand repairs or to
provide notice of default at any time prior to the filing of the Cure Objection. (Debtors’ Reply
Regarding the Threshold Damages Issue [ECF No. 1268] ¶¶ 16–18.)
The parties asked the Court to hear both of these issues on a threshold basis, in advance of
further discovery or an evidentiary hearing.5 In addition, the parties agreed it was appropriate for
Village to participate in the argument of these threshold issues as if it were a party, because
resolution of these issues may directly affect Village’s rights and obligations vis-à-vis the Debtors
and the Landlord. Village, in turn, has agreed to be bound by the Court’s ruling on these threshold
issues.
After the parties briefed the threshold issues, the Court heard argument on these issues on
November 9, 2022. The parties presented no evidence at the hearing other than the exhibits
5 The Debtors initially appeared to advance a third threshold argument as well: that the Landlord waived its right to
demand cure by failing to demand any repairs of the property prior to filing the Cure Objection. [ECF No. 1268 ¶¶ 19–
20.] At the November 9, 2022 hearing on the threshold issues, the Debtors confirmed that, to the extent this waiver
argument goes beyond their second threshold argument, concerning lack of notice, they are no longer advancing a
waiver argument. (Transcript of November 9, 2022 hearing [ECF No. 1311] at 16, 39–40.)
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annexed to their motion papers, which included the documents on which the Court has relied in
this decision — in particular, the Sale Order, the Asset Purchase Agreement, the Assumption and
Assignment Agreement, and the Lease. At the conclusion of the November 9 hearing, the Court
reserved decision.
JURISDICTION
The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157(a)–
(b) and 1334(b), as well as the Amended General Order of Reference from the United States
District Court for the Southern District of New York, dated January 31, 2012. Under 28 U.S.C.
§ 157(b)(2)(B), the claim objection is a core proceeding, which the Court may determine by final
order.
DISCUSSION
Section 365 of the Bankruptcy Code permits a debtor that is a lessee under an unexpired
lease to assume that lease if the debtor believes, in its reasonable business judgment, that
assumption is in the estate’s best interest. 11 U.S.C. § 365(a); see generally Orion Pictures Corp.
v. Showtime Networks (In re Orion Pictures Corp.), 4 F.3d 1095, 1098–99 (2d Cir. 1993). In most
cases, a debtor can assign an assumed lease, as the Debtors have done here. Even a defaulted lease
may be assumed and assigned, but in the event of a default, Section 365(b)(1) imposes three
conditions to assumption: The debtor must (i) cure all existing defaults, (ii) provide compensation
for any actual pecuniary loss resulting from the defaults, and (iii) provide adequate assurance of
future performance. See 11 U.S.C. § 365(b)(1)(A), (B), & (C).
Despite Section 365’s explicit cure requirement, the Debtors contend they are entitled to
assume the Lease and assign it to Village without paying any cure costs or making any provision
for repairs, regardless of the extent of the repairs that were needed at the time of the sale. They
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argue that cure is not required, first, because the Landlord supposedly can compel Village to make
any needed repairs and therefore has suffered no actual pecuniary loss, and second, because the
Landlord failed to give notice prior to filing the Cure Objection and therefore no default
supposedly has occurred under either the Lease or Section 365. The Court concludes that these
arguments lack merit for the reasons discussed below.
I. 	Village’s Responsibility to Make Ongoing Repairs Does Not Relieve the Debtors of
Their Cure Obligations
According to the Debtors, the Asset Purchase Agreement, the Assumption and Assignment
Agreement and the Lease require Village, as the new tenant, to undertake any needed repairs,
including for conditions that arose prior to the sale. Because the Landlord can compel Village to
make these repairs, the Debtors argue, the defective condition of the PDC warehouse has caused
and will cause the Landlord no actual pecuniary loss, and the Debtors therefore have no cure
obligations.
This argument fails for two independent reasons. First, the Sale Order’s “free and clear”
provisions expressly shield Village from liability for any claims that existed at the time of the sale,
including these repair claims. Thus, the Landlord cannot compel Village to make these repairs;
instead, its only recourse is to recover cure costs from the Debtors. Second, even if that were not
the case, the Debtors would still be required to cure all defaults that existed at the time of the sale,
regardless of any concurrent repair obligations Village might have. A debtor’s obligation under
Section 365(b) is absolute, not contingent on a showing that its counterparty has suffered actual
pecuniary loss.
A. The Sale Order’s “Free and Clear” Provisions Shield Village from Liability for Pre-
Sale Conditions, Notwithstanding Any Contrary Provisions of the APA, the A&A
Agreement or the Lease.
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The Debtors contend that, by agreeing to take assignment of the PDC warehouse lease on
an “as is” basis, knowing the property was in significant need of repair, Village took on an ongoing
responsibility as tenant under the Lease to make all needed repairs, including for pre-sale defects.
The Debtors base this argument on two related sets of provisions in the governing
documents. First, both the APA and the A&A Agreement provide that Village took assignment of
the property “in its ‘AS IS, WHERE-IS, WITH ALL FAULTS’ condition and without any
representation or warranty, orally or in writing, by Sellers.” (A&A Agreement ¶ 3; see also APA
§ 4.8.) Second, paragraph 6(a) of the Lease makes the tenant — now Village — responsible for
ongoing maintenance and repair:
Tenant’s Repair Obligation. . . . Tenant shall, at all times during the term, and at its
own costs and expense, put, keep, replace and maintain in thorough repair and in
good and substantial order and condition . . . all non-structural portions [and certain
structural portions] of the building . . . .
(Lease ¶ 6(a).) According to the Debtors, the combined effect of the “as is” provisions and the
Lease’s ongoing-repair obligation is to make Village responsible to remedy all defective
conditions, regardless of whether they arose before or after the sale.
This conclusion, however, cannot be squared with the “free and clear” provisions of the
Asset Purchase Agreement and the Sale Order. As set forth in detail above, those provisions
expressly shield Village, as the buyer, from all claims and liabilities that arose prior to the sale and
that related in any way to the acquired assets. In addition, the Asset Purchase Agreement and the
Sale Order specifically limit Village’s liability for cure costs to one month’s rent (which it paid to
the Debtors at closing), and the Sale Order provides that Village is not liable to the Landlord for
any cure claims or defaults that existed at the time of the sale.
In light of these free-and-clear provisions, the “as is” provisions of the APA and the A&A
Agreement cannot be read to make Village responsible for defective conditions that arose before
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the sale. Instead, these provisions must be given a more limited construction — to bar Village from
asserting any claim against the Debtors for pre-sale defects, but not to impose any affirmative
repair obligation on Village. In the first place, this narrower construction is the most natural
reading of the “as is” provisions. At least as important, this interpretation harmonizes these
provisions 	with 	the 	APA’s 	unambiguous 	free-and-clear 	provisions, 	as 	settled 	contract
interpretation principles require. See, e.g., Spinelli v. Nat’l Football League, 903 F.3d 185, 200
(2d Cir. 2018) (court should “strive ‘to harmonize all of [a contract’s] terms’”) (internal citation
omitted).
Moreover, any possible doubt as to whether the “as is” provisions should be read this way
is overcome by the Sale Order, which expressly states that its provisions take precedence over
those of the other sale documents. Paragraph 38 of the Sale Order provides:
Conflicts; Precedence. In the event that there is a direct conflict between the terms
of this Sale Order, the Purchase Agreement, or any documents executed in
connection therewith, the provisions contained in this Sale Order, the Purchase
Agreement, and any documents executed in connection therewith shall govern, in
that order.
(Sale Order ¶ 38; emphasis added.) The Sale Order itself contains no “as is” provisions. Thus, any
conflict between the Sale Order’s free-and-clear provisions and the “as is” provisions of the APA
and the A&A Agreement must be resolved in favor of the Sale Order’s provisions.
Similarly, the provisions of the Lease, including its ongoing-repair provision, are trumped
by the Asset Purchase Agreement.6 This is mandated by the A&A Agreement, which provides the
APA’s terms take precedence over those of both the A&A Agreement and the Lease:
The assignment and assumption of the Lease (and the obligations thereunder) made
hereunder are made in accordance with and subject to all terms and conditions of
the [Asset] Purchase Agreement . . . . In the event of a conflict between the terms
6 The Sale Order itself does not directly trump the Lease’s provisions, since the Debtors executed the Lease in 2013,
long before the Village sale. See Sale Order ¶ 38 (addressing conflicts between Sale Order and other “documents
executed in connection therewith”).
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and conditions of this Agreement and the terms and conditions of the Purchase
Agreement, the terms and conditions of the Purchase Agreement shall govern,
supersede, and prevail.
(A&A Agreement ¶ 4; emphasis added.) Thus, any conflict between the Lease’s ongoing-repair
provision and the free-and-clear provisions of the APA (and by extension, the Sale Order) must be
resolved in favor of the latter.
At the November 9 hearing, the Debtors argued, for the first time, that the Landlord’s repair
claims are not “claims” within the meaning of the Sale Order’s free-and-clear provisions — and
therefore those provisions do not shield Village from the repair claims — because at the time of
the sale such claims had not ripened into defaults under the Lease. (See Debtors’ Presentation for
Hearing on Threshold Issue [ECF No. 1307] at 1.) The Debtors base this argument on paragraph
19(a)(4) of the Lease, which provides that the tenant’s failure to perform its obligations under the
Lease does not become a “default” or an “Event of Default” (the paragraph uses these terms
interchangeably) unless the Landlord provides notice of those breaches and the tenant then fails to
cure the breaches within 30 days. (Lease ¶ 19(a)(4).) According to the Debtors, the Landlord did
not give notice demanding repairs, and as a result, no default and therefore no “claim” for repairs
existed at the time of the sale. (Debtors’ Presentation for Hearing on Threshold Issue at 1.)
This argument lacks merit for at least two reasons. In the first place, the Landlord did give
the Debtors a comprehensive notice demanding repairs: the March 9, 2020 Cure Objection. This
notice was given more than 30 days before the Bankruptcy Court entered the April 20, 2020 Sale
Order, and the Debtors do not claim to have made any of the demanded repairs. Thus, both of the
elements required for an Event of Default to arise under the Lease appear to have been satisfied at
the time of the sale.
More to the point, however, whether a default or Event of Default occurred under the Lease
has no bearing on whether a “claim” existed within the meaning of the Sale Order’s free-and-clear
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provisions. As noted above, the Sale Order (at ¶ 13) incorporates the Bankruptcy Code’s definition
of claim: “[any] right to payment, whether or not such right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable,
secured, or unsecured.” 11 U.S.C. § 101(5). As has frequently been observed, this definition is
extremely broad. See Johnson v. Home State Bank, 501 U.S. 78, 83 (1991) (“Congress
intended . . . to adopt the broadest available definition of ‘claim.’”); see also Elliot v. GM LLC (In
re Motors Liquidation Co.), 829 F.3d 135, 156 (2d Cir. 2016), cert denied, 137 S. Ct. 1813 (Even
a right to payment contingent on future events is a claim under Section 101(5) if it “result[s] from
pre‐petition conduct fairly giving rise to that contingent claim.”) (internal citation omitted).
Here, the Landlord’s right to demand repairs would fall within this broad definition even
if the Landlord had not given notice of its repair demands by filing the Cure Objection. As Debtors’
counsel admitted at the November 9 hearing, the Debtors’ repair obligations under the Lease arose
whenever repairs were needed, regardless of whether the Landlord gave notice of the defects or
demanded that repairs be made. (Transcript of November 9, 2022 hearing [ECF No. 1311] at 80–
81, 83.) This conclusion is compelled by paragraph 6(a) of the Lease, which imposes an ongoing
repair obligation on the tenant, without any requirement of notice or demand by the Landlord.
(Lease [ECF No. 947-5] ¶ 6(a).)
For these reasons, the Court finds that, to the extent repairs were needed at the time of the
Village sale, a claim for those repairs existed under the Sale Order’s free and clear provisions, and
those provisions shield Village from any liability on account of that claim. Thus, contrary to the
Debtors’ contention, 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.
B. Section § 365 Requires Cure of All Defaults, Regardless of Whether the Counterparty
Has Suffered Pecuniary Harm.
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Even if the Sale Order did not shield Village from liability for pre-sale repair claims —
and as a result, the Landlord had potential recourse against Village — the Debtors still would be
required to cure all defaults that existed at the time of the sale.
The Debtors contend that Section 365 requires the Landlord to show that it has suffered
“pecuniary harm” to be entitled to recover cure costs. (See Debtors’ Br. [ECF No. 1046] ¶ 2 (“It is
a fundamental principle that an entity seeking cure costs must prove that it has been damaged in
some way and is therefore entitled to some recovery.”)) In fact, both the plain language of Code
§ 365(b)(1) and the case law compel the opposite conclusion.
Subsection 365(b)(1) expressly provides that, if there has been a default in an executory
contract or unexpired lease, the trustee may not assume that contract or lease unless it satisfies
three requirements: The debtor must (A) cure the default, (B) compensate, or provide adequate
assurance that it will promptly compensate, the counterparty for any actual pecuniary loss caused
by the default, and (C) provide adequate assurance of future performance. 11 U.S.C. § 365(b)(1).
These are not alternate remedies. Rather, the statute requires that all three be provided, as is clear
from the fact that subsections (A), (B) and (C) are connected by the word “and,” not “or.”
Thus, the requirement that a debtor cure all defaults under a contract or lease that it seeks
to assume is not, as the Debtors argue, contingent on the counterparty’s proving that it otherwise
would suffer pecuniary harm. Rather, the Debtor must always cure each default — and in addition,
it must compensate the counterparty for any pecuniary harm remaining after cure. Accord 3 Collier
on Bankruptcy ¶ 365.06 (under Bankruptcy Code § 365(b), “[f]irst, there must be a cure. This
means that the contract or lease must be brought back into compliance with its terms. Second, there
must be compensation for pecuniary loss to the other party.”).
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The case law is consistent with this plain-meaning reading of the statute. When debtors
seek to assume leases or contracts under which they have failed to make required repairs, courts
routinely require the debtor to make those repairs — that is, to cure the defaults — as a condition
to assumption. See, e.g., In re Nw. Territorial Mint LLC, No. 16-11767 (CMA), 2017 WL 3841750
(Bankr. W.D. Wash. Sept. 1, 2017); see also Condal Distribs., Inc. v. 2300 Xtra Wholesalers, Inc.
(In re 2300 Xtra Wholesalers, Inc.), 445 B.R. 113, 121–24 (S.D.N.Y. 2011); In re Bourbon Saloon,
Inc., No. 14-398 (NJV), 2015 WL 1245566 (E.D. La. Mar. 18, 2015), aff’d in part, appeal
dismissed in part, 647 F. App’x 342 (5th Cir. 2016); In re Prime Motor Inns, 166 B.R. 993, 994
(Bankr. S.D. Fla. 1994). In none of these cases, or any other case of which the Court is aware, did
the court require a showing of pecuniary harm as a prerequisite to requiring cure.
For this reason as well, the Debtors are required to cure all defaults that existed under the
Lease at the time of the Village sale.
II. 	The Debtors’ Unperformed Repair Obligations Are Defaults Requiring Cure,
Notwithstanding the Lease’s Notice Provisions
In addition to arguing that they are not required to cure any defaults, the Debtors argue that
none of the repair obligations they owed at the time of the sale constituted defaults under the Lease
and, consequently, none should be considered defaults requiring cure under Bankruptcy Code
§ 365.
The Debtors base this argument on paragraph 19(a)(4) of the Lease, the same provision on
which they rely for their argument (discussed in part I.A, above) that no claim for repairs existed
under the Sale Order’s free-and-clear provisions. As noted, the Debtors contend that the Landlord
did not give notice demanding repairs as required by paragraph 19(a)(4), and that as a result, no
default arose under the Lease. Absent a default under the Lease, the Debtors argue, there is no
default under Bankruptcy Code § 365.
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This argument, like the Debtors’ argument that no claim for repairs existed under the Sale
Order, fails for two independent reasons. First, as discussed in part I.A, the elements required for
a default or Event of Default to arise under paragraph 19(a)(4) of the Lease appear to have been
satisfied. The Landlord gave the Debtors notice of the required repairs, in the form of their March
9, 2020 Cure Objection, and the Debtors failed to make the demanded repairs within 30 days or at
any subsequent time.
Second, even if no default had occurred under the Lease, this still would have no bearing
on whether a default exists under Bankruptcy Code § 365. As several courts have held, the text of
Section 365(b)(1) compels the conclusion that a default exists under that section 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.
The Ninth Circuit Court of Appeals’ recent decision in Smart Capital. Invs. I, LLC v.
Hawkeye Ent., LLC (In re Hawkeye Ent., LLC), 49 F.4th 1232 (9th Cir. 2022), is particularly
instructive. There, the bankruptcy court had found no defaults existed for Section 365(b) purposes,
because the only defaults under the lease the debtor sought to assume were immaterial. The Ninth
Circuit rejected this interpretation, holding that default, as used in Section 365(b), refers to all
defaults under a contract or lease, not just material defaults. In reasoning directly applicable here,
the Court of Appeals held:
The Bankruptcy Code does not define “default.” We interpret an undefined
statutory term “in accordance with [its] ordinary meaning.” Octane Fitness, LLC v.
ICON Health & Fitness, Inc., 572 U.S. 545, 553, 134 S. Ct. 1749, 188 L. Ed. 2d
816 	(2014) 	(citation 	omitted). 	The 	ordinary 	meaning 	of 	“default” 	is
uncontroversial: it means “[a] failure to perform a task or fulfill an obligation.”
American Heritage Dictionary of the English Language 345 (1976); see also
Black's Law Dictionary 505 (4th ed. 1968) (defining “default” as the “omission or
failure to perform a legal duty”).
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In re Hawkeye Ent., LLC, 49 F.4th at 1237–38 (applying definitions in use at the time the
Bankruptcy Code was adopted in 1978).
Metromedia Fiber Network, Inc., 335 B.R. 41 (Bankr. S.D.N.Y. 2005), aff’d sub nom.
Abovenet, Inc. v. SBC Telecom, Inc., No. 06-CV-8269 (CLB), 2007 WL 636602 (S.D.N.Y. Feb.
26, 2007), is also closely on point. There, as here, the debtor contended that its non-performance
did not give rise to a default under the contract it sought to assume — and therefore did not give
rise to a default under Section 365 — because its counterparty had not provided written notice and
an opportunity to cure, as the contract required. Judge Hardin rejected this argument, holding 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 fulfill some obligation or duty imposed by law or contract.” Id. at 48–50 (citing Black’s
Law Dictionary 417 (6th ed. 1990); Webster’s Collegiate Dictionary 301 (10th ed. 2002)).7 On
appeal, Judge Brieant affirmed, adopting the bankruptcy court’s plain-meaning construction of
Section 365. Abovenet, Inc., 2007 WL 636602, at *3–5.
Consideration of the purposes of Section 365(b)(1) reinforces the conclusion that the
statutory term “default” should be construed to include any failure to perform contractually-
required obligations. Section 365 gives debtors broad powers to enforce a defaulted contract or
7 Judge Hardin added that his ruling also rested on the fact that the debtor’s counterparty had not asserted a
right to cure or a right to damages under subparts (A) and (B) of subsection 365(b)(1), but merely a right to
adequate assurance under subpart (C). According to the court, the debtor’s argument concerning notice and
the opportunity to cure “would carry weight” if cure or damages were sought and if, “under state law
principles of contract interpretation a counter-party . . . were contractually required to give formal notice of
a default and an opportunity to cure as the predicate for the counter-party’s right to a cure or to damages for
breach . . . .” Id. at 49–50. This potential limitation on the Metromedia holding has no bearing on the present
case, however, because the Lease does not require notice and an opportunity to cure as a predicate for the
Landlord’s right to demand repairs. Instead, as discussed above, that right arises immediately whenever
repairs are needed. Paragraph 19’s requirements of notice and an opportunity to cure are relevant only to
whether the tenant’s non-performance has ripened into an Event of Default, permitting the Landlord to
terminate the Lease.
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lease, and to assign it to a third party. To reduce the resulting burdens on the debtor’s counterparty,
subsection 365(b)(1) imposes counterbalancing obligations of cure, compensation and adequate
assurance on the debtor. A narrow construction of “default” — permitting a debtor to assume and
assign a contract or lease without curing its own breaches, simply because those breaches do not
qualify as a default under the contract — would undermine the balance struck by these provisions.
The problem is that contractual definitions of default serve a variety of purposes, not
always related to the remedial purposes of subsection 365(b)(1). For example, it is not uncommon
for a contract to define default to require notice and an opportunity to cure, and to make a default
a prerequisite for a party’s right to terminate the contract. See, e.g., In re Hawkeye Ent., LLC,
49 F.4th at 1237–38; see also Lease [ECF No. 947-5] ¶ 19(a)(4), (b)(1) (upon a default, such as
tenant’s failure to perform repairs within 30 days after demand, Landlord is entitled to terminate
Lease.). With a default definition of this sort, the debtor’s counterparty may have no reason to
trigger a default by employing the contract’s notice-and-opportunity-to-cure procedures, even if
the debtor’s breaches are substantial, unless it wishes to terminate the contract. To find no default
under Section 365 for this reason — because the debtor’s counterparty has not followed contractual
procedures it was not required to follow and had no reason to follow — would undermine the
compensatory purposes of subsection 365(b)(1). It would deprive the counterparty of any remedy
for potentially substantial breaches, while giving the debtor a windfall.
That is exactly what would happen in this case were the Court to adopt the Debtors’
interpretation of Section 365. The Debtors do not claim the Landlord’s failure to demand repairs
prior to filing its Cure Objection prejudiced them in any way. Moreover, the Lease did not require
the Landlord to give the Debtors notice of the need for repairs, and the Landlord does not appear
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to have had any reason to do so. Thus, the interpretation advocated by the Debtors would unfairly
penalize the Landlord and give the Debtors a windfall.
CONCLUSION
For the reasons stated above, the Court finds that the threshold issues raised by the Debtors
lack merit. The Court will schedule a status conference to address the completion of discovery in
this cure dispute.
IT IS SO ORDERED.
Dated: New York, New York
December 13, 2022
/s/ Philip Bentley
Honorable Philip Bentley
United States Bankruptcy Judge
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