In Re: The Penn Traffic Company, Reorganized Debtors

07-1854-bk
In re: The Penn Traffic Company, et al., Reorganized Debtors
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
______________________
August Term 2007
(Submitted: September 27, 2007 Decided: April 29, 2008)
Docket No. 07-1854-bk
IN RE: THE PENN TRAFFIC COMPANY , ET AL., REORGANIZED DEBTORS
_______________________
COR ROUTE 5 COMPANY , LLC,
Appellant,
— v. —
THE PENN TRAFFIC COMPANY ,
Debtor-Appellee.
________________________
Before:
MINER and WESLEY , Circuit Judges,
SWAIN , District Judge.*
________________________
*
The Honorable Laura Taylor Swain of the United States District Court for the
Southern District of New York, sitting by designation.
Appeal from order of United States District Court for the Southern District of
New York (Buchwald, J.) affirming order of United States Bankruptcy Court for the Southern
District of New York (Hardin, B.J.) authorizing debtor’s rejection of an executory contract.
Affirmed.
_____________________________
C. MACNEIL MITCHELL, Winston & Strawn LLP (Justin E. Rawlins and Sarah L.
Trum, on the brief), New York, NY, and ROBERT KENNETH WEILER,
Green & Seifer, Attorneys, PLLC, Syracuse, NY, for Appellant.
KELLY A. CORNISH , Paul, Weiss, Rifkind, Wharton & Garrison LLP (Allan Arffa
and Ross B. Rosenfelt, on the brief), New York, NY, for Debtor-Appellee.
_______________________________
SWAIN, District Judge:
This matter comes before us on the appeal of COR Route 5 Company, LLC
(“COR” or “Appellant”), from a consent order of the United States District Court for the
Southern District of New York (Buchwald, J.), affirming a stipulated bankruptcy court order
authorizing the rejection of a supermarket construction, land sale and leaseback contract.1 An
earlier appeal of Judge Buchwald’s 2005 order affirming in part, reversing in part and remanding
a 2005 order of the United States Bankruptcy Court for the Southern District of New York
(Hardin, B.J.) in which the Bankruptcy Court, finding that the contract was non-executory as of
the time the debtor had moved to reject it and for that reason denying the motion to reject, was
dismissed by this Court in 2006 for lack of jurisdiction. See COR Route 5 Co., LLC v. The Penn
Traffic Co. (In re The Penn Traffic Co.), 466 F.3d 75 (2d Cir. 2006) (“Penn Traffic III”). The
consent order from which COR appeals explicitly provided for the preservation in this appeal of
1
The parties refer to the bankruptcy court order in some of their papers as the
“Bankruptcy Court Rejection Order.” We do likewise below.
the issues raised in the initial appeal, by “restat[ing] and reissu[ing]” the District Court’s opinion
in The Penn Traffic Co. v. COR Route 5 Co., LLC (In re The Penn Traffic Co.), No. 05 Civ.
3755 (NRB), 2005 WL 2276879 (S.D.N.Y. Sept. 16, 2005) (“Penn Traffic II”) “as the
Memorandum and Order of this Court on the Second District Court Appeal from the Bankruptcy
Court Rejection Order,” and affirming the Bankruptcy Court Rejection Order without prejudice
to the parties’ rights to appeal. (Mem. and Order Deciding Appeal from Order of Bankruptcy Ct.
at 3, Apr. 9, 2007.)
BACKGROUND
I. Underlying Transaction and Initial Proceedings on Motion to Reject
The background facts of this matter are detailed extensively in the opinions below,
familiarity with which is assumed. See In re The Penn Traffic Co., 322 B.R. 63 (Bankr.
S.D.N.Y. 2005) (“Penn Traffic I”); Penn Traffic II. For the instant purposes, repetition of the
background summary from Penn Traffic III will suffice. COR is a commercial real estate
developer whose holdings include certain tracts of land near a shopping mall known as Towne
Center, in Fayetteville, New York. Debtor-Appellee The Penn Traffic Company (“Penn Traffic”
or “Debtor-Appellee”), the debtor-in-possession in the underlying chapter 11 reorganization
proceeding, is one of the leading food retailers in the United States. Penn Traffic owned land
with a building, adjacent to the Towne Center, that could not have been developed into a modern
suburban supermarket as part of the Towne Center without the inclusion of contiguous and
connecting real property owned by COR.
Prior to the commencement of Penn Traffic’s bankruptcy case, COR and Penn
Traffic entered into a “Project Agreement” providing for, inter alia, the exchange of certain
parcels of land, the site preparation and construction of a modern supermarket, reimbursement by
COR to Penn Traffic of a specified portion of the construction costs, Penn Traffic’s conveyance
to COR of the parcel of land on which the supermarket is situated, and Penn Traffic’s leaseback
of the improved supermarket parcel from COR. At the time of Penn Traffic’s bankruptcy filing,
COR had performed all of its obligations under the Project Agreement except for the
reimbursement of the construction costs (amounting to approximately $3.5 million) and the
tender of a lease to Penn Traffic. Penn Traffic had not conveyed the supermarket parcel to COR.
Several months after Penn Traffic filed its bankruptcy petition, COR wrote a letter
to Penn Traffic in which, the Bankruptcy Court found, COR tendered reimbursement of the $3.5
million in construction costs, as well as a signed lease, as called for by the Project Agreement.
Penn Traffic declined to accept COR’s tender and, several months thereafter, moved pursuant to
§ 365 of the Bankruptcy Code (the “Code”)2 to reject the Project Agreement.
The Bankruptcy Court held that, while the Project Agreement was executory on
the petition date (in that both sides had subsisting, unperformed obligations at that time), COR’s
post-petition tender of the payment and the lease had rendered the Project Agreement non-
executory and thus incapable of rejection. The Bankruptcy Court, accordingly, denied Penn
Traffic’s motion to reject the Project Agreement on the ground that the Project Agreement was
non-executory. Noting briefly the deferential standard applied to debtors’ business judgments as
to whether to assume or reject executory contracts, the Bankruptcy Court observed that:
2
Together, §§ 365(a) (relating to executory contracts and unexpired leases) and
1107(a) (providing that a debtor-in-possession generally has the rights of a trustee in bankruptcy)
of the Code generally permit a chapter 11 debtor-in-possession to assume or reject, subject to the
court’s approval, any executory contract or unexpired lease of the debtor. See 11 U.S.C. §§
365(a), 1107(a).
4
[t]he debtor’s decision to reject the Project Agreement, if found executory,
appears to meet the low threshold of the business judgment test, in that the debtor
has obtained an appraisal of the fair market value of the Penn Traffic Supermarket
Parcel at $9.8 million, contrasted with the $3.5 million reimbursement of the
Construction Allowance which triggers the debtor’s contractual duty to convey
title to the Penn Traffic Supermarket Parcel to COR.
Penn Traffic I, 322 B.R. at 68. Penn Traffic appealed the Bankruptcy Court’s order to the
District Court, which affirmed the Bankruptcy Court’s determination that the Project Agreement
had been an executory contract as of the petition date but rejected the Bankruptcy Court’s
holding that executory contract status should be determined as of the rejection motion date and
take into account post-petition performance. The District Court reversed the latter aspect of the
decision, holding that “post-petition performance cannot alter the executoriness of a contract,”
and remanded the matter “to the Bankruptcy Court for further proceedings consistent with this
opinion.” Penn Traffic II, 2005 WL 2276879, at *6.
II. Initial Appeal and Proceedings on Remand
COR appealed Judge Buchwald’s decision to this Court, arguing that the
Bankruptcy Court had correctly found that the Project Agreement was no longer executory and
thus could not be rejected. In Penn Traffic III, we explained that we lacked jurisdiction of the
appeal because Penn Traffic II’s remand provision contemplated significant further Bankruptcy
Court proceedings and thus was not a final order within the meaning of 28 U.S.C. § 158(d).
Following our dismissal of the appeal for lack of jurisdiction, the Bankruptcy
Court entered the Bankruptcy Court Rejection Order. Among other things, the Bankruptcy Court
Rejection Order held that rejection of the Project Agreement was in the debtor’s best interests
and provided that COR was not, by agreeing to entry of the order, waiving its positions that the
5
Project Agreement was not an executory contract at all and that, in any event, the Project
Agreement was not executory at the time Penn Traffic moved to reject it. On the appeal of the
Bankruptcy Court Rejection Order to the District Court, that Court, as noted above, entered a
stipulated Memorandum and Order Deciding Appeal from Order of Bankruptcy Court reinstating
and reissuing its Penn Traffic II decision and affirming the Bankruptcy Court Rejection Order
without prejudice to the parties’ appellate rights. This appeal followed.
We have jurisdiction of this appeal pursuant to 28 U.S.C. § 158(d)(1), because the
District Court’s April 6, 2007, Memorandum and Order constitutes a final order. Fed R. App. P.
6(b). We review de novo the legal determinations below; the factual determinations of the
Bankruptcy Court in this core proceeding are reviewed for clear error. Fed. R. Bankr. P. 8013.
DISCUSSION
The principal issue presented on this appeal is whether the non-debtor party to a
contract that is executory at the time a bankruptcy case is commenced can, by post-petition
tender or performance of its own outstanding obligations under the contract, deprive the debtor
party of the ability to exercise its statutory right to reject the contract as disadvantageous to the
estate. We hold that it cannot.
Section 365 of the Code (when read alongside § 1107, see note 2, supra) provides
that, with exceptions not pertinent here, a trustee or chapter 11 debtor-in-possession may, with
court approval, assume or reject any executory contract or unexpired lease of the debtor. 11
U.S.C. § 365(a).3 Assumption is in effect a decision to continue performance. It requires the
3
For simplicity, the term “debtor” is at times used in this discussion to refer to the
chapter 11 debtor-in-possession.
6
debtor to cure most defaults and continues the parties’ rights to future performance under the
contract or lease. See 11 U.S.C. § 365(b). Rejection is in effect a decision to breach the contract
or lease. See 11 U.S.C.A. § 365(g) (West 2004) (“[T]he rejection of an executory contract or
unexpired lease of the debtor constitutes a breach of such contract or lease . . . immediately
before the date of the filing of the petition.”). In the event of rejection, the non-debtor party is
generally relegated to pursuing an unsecured prepetition claim against the estate. In re Child
World, Inc., 147 B.R. 847, 852 (Bankr. S.D.N.Y. 1992) (“[R]ejection under 11 U.S.C. § 365(a)
simply means that the court will permit the debtor to breach the contract, with the result that the
contractual obligations will be reduced to general unsecured claims for prepetition damages
pursuant to 11 U.S.C. § 365(g)(1).”). Where assets of the estate are insufficient to pay unsecured
creditors in full, the non-debtor party to a rejected executory contract, like other unsecured
creditors of the estate, may receive only a fraction of the value of its claim.
The plain language of the Code permits a chapter 11 trustee (and, by extension
through § 1107, a debtor-in-possession) to assume or reject the executory contract “at any time
before the confirmation of a plan.” 11 U.S.C.A. § 365(d)(2) (West 2004). A counterparty
desiring an earlier determination of the debtor’s course of action regarding assumption or
rejection of the agreement may petition the court to order the debtor to make its determination
within a specified period of time. Id.The Code does not define the term “executory contract.” In Eastern Air Lines,
Inc. v. Ins. Co. of Pa. (In re Ionosphere Clubs, Inc.), 85 F.3d 992 (2d Cir. 1996), we characterized
an executory contract as one “on which performance remains due to some extent on both sides,”
id. at 998-99 (quoting Nat’l Labor Relations Bd. v. Bildisco & Bildisco, 465 U.S. 513, 522 n.6
7
(1984)) (internal quotation marks omitted), but we were not called upon to address the question
of how much performance must be outstanding for the contract to be treated as executory under §
365. In addressing that question, most courts and scholars look to the standard first articulated
by Professor Vernon Countryman in his seminal 1973 law review article regarding treatment of
contracts under the former Bankruptcy Act—i.e., that an executory contract is one “under which
the obligation of both the bankrupt and the other party to the contract are so far unperformed that
the failure of either to complete performance would constitute a material breach excusing
performance of the other.” Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57
Minn. L. Rev. 439, 460 (1973); see 3 Collier on Bankruptcy ¶ 365.02[1] (15th ed. rev. 2007).
We do not have to determine the precise contours of the test for executoriness to
resolve the issues here on appeal because, as the Bankruptcy Court found, the parties’
unperformed obligations under the Project Agreement satisfied the Countryman standard as of
the petition filing date:
Applying what may be referred to . . . as the “substantial performance” test4 . . . , it
is clear that the Project Agreement was an executory contract upon the date of
filing of the Penn Traffic Chapter 11 petition, because on that date, May 30, 2003,
COR had not paid or tendered reimbursement of the $3.5 million required of it
under Section 4.3 of the Project Agreement as a precondition of its right to
conveyance to it of title to the Penn Traffic Supermarket Parcel.
Penn Traffic I, 322 B.R. at 69.
COR contends, however, that the Project Agreement should not be treated as an
executory contract at all. Invoking the familiar principle that a court properly looks beyond the
form or title of an agreement to determine the true nature of the transaction, see e.g., Liona Corp.,
4
The Bankruptcy Court used the term “‘substantial performance’ test” to describe
the Countryman standard. See Penn Traffic I, 322 B.R. at 69.
8
N.V. v. PCH Assocs. (In re PCH Assocs.), 804 F.2d 193, 197 (2d Cir. 1986), COR argues that
the Project Agreement should be treated as a “financing lease,” a “prepaid option” or a form of
secured real estate transaction, and that any such treatment precludes the application of the rules
governing executory contracts to Penn Traffic’s rights and obligations under the Project
Agreement. The Bankruptcy Court, which analyzed the Project Agreement under the executory
contract rules, see Penn Traffic I, 322 B.R. at 68-71, implicitly rejected COR’s attempt to take
the matter outside those rules. The District Court explicitly addressed and rejected COR’s
arguments in this regard. Penn Traffic II, 2005 WL 2276879, at *3-4.
The courts below properly rebuffed COR’s attempt to avoid application of § 365
of the Code to the parties’ rights and obligations under the Project Agreement. COR’s
“financing lease” argument focuses on our holdings in In re PCH Assocs. and Int’l Trade Admin.
v. Rensselaer Polytechnic Inst., 936 F.2d 744 (2d Cir. 1991), both of which addressed the
applicability to certain contractual relationships of special Code provisions dealing with the
treatment of unexpired leases in bankruptcy proceedings. See In re PCH Assocs., 804 F.2d at
194 (addressing applicability of § 365(d)(3), (d)(4)); Int’l Trade Admin., 936 F.2d at 745-46(addressing applicability of § 365(d)(4)); see also 11 U.S.C. § 365(d)(5). In each case, the
relationship at issue was denominated as a leasehold but was found to be something other than a
true lease, and the Code provisions at issue on appeal were found to be inapplicable. These
decisions were not at all concerned with the construction of the term “executory contract,”
however, and thus provide no support for COR’s argument that the Project Agreement is not
executory.
COR’s “prepaid option” argument is equally unavailing. While some courts have
9
held that options contracts under which the optionee fully paid its price for the option to buy
property before the debtor filed for bankruptcy are not executory (because no performance is due
from the optionor unless the option is exercised), see, e.g., Unsecured Creditors’ Comm. of
Robert L. Helms Constr. & Dev. Co. v. Southmark Corp. (In re Robert L. Helms Constr. & Dev.
Co.), 139 F.3d 702, 706 (9th Cir. 1998) (option contract not executory if optionee did not
exercise option prior to petition’s filing); Brown v. Snellen (In re Giesing), 96 B.R. 229, 232
(Bankr. W.D. Mo. 1989) (option contract not executory), and others treat such contracts as
executory, see, e.g., In re Simon Transp. Servs., 292 B.R. 207, 219-20 (Bankr. D. Utah 2003)
(option contracts executory); In re A.J. Lane & Co., Inc., 107 B.R. 435, 437 (Bankr. D. Mass.
1989) (same), there is no factual basis for application of the prepaid option analysis in this matter
because it is undisputed that COR had an unsatisfied contractual obligation to pay some $3.5
million as of the petition date.
COR’s secured real estate purchase transaction argument focuses on the aspects of
the Project Agreement that call for exchanges and transfers of particular parcels of property.
COR argues that the outstanding real property transfer aspect of the Project Agreement
constitutes a provision for the return or redemption of property securing the money advanced
under the agreement for construction of the supermarket, alluding to decisions in which courts
have found that property transactions in which the seller retains possession of, or title to, the
property until payment in full has been made may constitute secured transactions under
applicable law outside the bankruptcy context. See, e.g., In re Pearson Indus., Inc., 142 B.R. 831,
838-39 (Bankr. C.D. Ill. 1992) (applying law of secured transactions where purpose of seller’s
retention of title was to ensure payment); Beard v. Newsome, 333 S.E.2d 527, 530 (N.C. Ct.
10
App. 1985) (whether property remained in possession of seller is a factor in determining whether
property transaction was actually a mortgage); see 3 Collier on Bankruptcy ¶ 365.02[1][a] (15th
ed. rev. 2007). The Project Agreement, however, involved multiple transfers of property and
money conditioned on obligations to be performed at various times by the two parties. COR’s
attempt to analogize this complex arrangement to a simple purchase of property with title
retained until payment has been made in full, or a simple loan secured by a pledge of property, is
untenable. Furthermore, the analogy necessarily fails because the supermarket parcel that the
Project Agreement requires Penn Traffic to transfer to COR upon repayment of the construction
costs includes property that never belonged to COR. See Penn Traffic I, 322 B.R. at 66 (“The
7.2 acre parcel containing the [s]upermarket and adjacent parking lots . . . consists of the land
originally owned by Penn Traffic, augmented by the Developer’s Swap Parcel and construction
of the [s]upermarket and diminished by the Owner’s Swap Parcel conveyed to COR.”).
Accordingly, the courts below properly determined that the Project Agreement
was an executory contract within the meaning of § 365 of the Code as of the date Penn Traffic
commenced its chapter 11 bankruptcy proceeding.
Executoriness and the debtor’s rights with respect to assumption or rejection of an
executory contract are normally assessed as of the petition date (the date on which a voluntary
bankruptcy such as Penn Traffic’s is commenced). In re Riodizio, Inc., 204 B.R. 417, 421
(Bankr. S.D.N.Y. 1997). Some courts have, however, denied debtors’ post-petition attempts to
assume or reject contracts that were executory “as of the petition date” in light of post-petition
events affecting those contracts. COR relies on general statements in such decisions to the effect
that “events after the filing of the bankruptcy petition may cause the contract to be regarded as
11
not executory when the motion to assume or reject was made,” see e.g., In re Child World, Inc.,
147 B.R. 847, 852 (Bankr. S.D.N.Y. 1992), in arguing that where, as in this case, the non-debtor
party to the contract has rendered (or at least tendered) its remaining performance post-petition
under a contract that was executory at the petition date, the contract is no longer executory.
The cases in which the post-petition evaluation principle has been invoked to find
that formerly executory contracts had lost their executory status by the time the debtor made its
motion to assume or reject do not, however, provide support for the notion that a non-debtor
party’s unilateral post-petition actions can vitiate the executory status of a contract where the
debtor has done no more than exercise its Code-granted right to enjoy “breathing space” while
deciding whether to assume or reject the contract. Rather, courts have looked to the impact of
post-petition events where the contract expired post-petition by its terms, such that there were no
longer any obligations to assume or reject, or where the debtor itself had taken affirmative action
under a contract that affected the existence of outstanding performance obligations. See e.g.,
Counties Contracting & Constr. Co. v. Constitution Life Ins. Co., 855 F.2d 1054, 1061 (3d Cir.
1988) (“A contract may not be assumed under § 365 if it has already expired according to its
terms.”); In re Spectrum Info. Techs., Inc., 193 B.R. 400, 404 (Bankr. E.D.N.Y. 1996) (finding
employment agreement no longer executory where debtor discharged employee after petition was
filed and prior to motion to reject agreement, as employee “no longer had any material
unperformed obligations under the . . . [a]greement”); In re Total Transp. Serv., Inc., 37 B.R.
904, 906 (Bankr. S.D. Ohio 1984) (holding collective bargaining agreement no longer executory
where enterprise ceased operations post-petition and “there can be no future performance by
either the employer or union members . . . of . . . [their] obligations”); In re Pesce Baking Co.,
12
Inc., 43 B.R. 949, 957 (Bankr. N.D. Ohio 1984) (holding that collective bargaining agreement
that expired by its own terms prior to hearing on motion to reject was no longer executory
because “there can be no performance by either party under the terms of the agreement”). In the
instant matter, by contrast, the Project Agreement had not expired at the time of Penn Traffic’s
rejection motion, nor had Penn Traffic taken any affirmative action affecting the existence of
outstanding performance obligations.
Sympathy for the non-debtor that may, through no fault of its own, bear some
significant burden from the debtor’s rejection of an executory contract due to the happenstance of
an unforeseen bankruptcy proceeding is understandable. The notion that a non-debtor could
prevent the exercise of § 365 rights with regards to an executory contract through post-petition
performance of the non-debtor’s contractual obligations is, however, inconsistent with both the
plain language and the policy of the Code. As for the language of the statute, §§ 365 and 1107
expressly permit a chapter 11 debtor to move to assume or reject an executory contract at any
time before the confirmation of a plan unless the court orders it to make an earlier determination.
See 11 U.S.C. §§ 365(a), 365(d)(2), 1107(a). The Code does not condition the right to assume or
reject on lack of prejudice to the non-debtor party, and the satisfaction of claims at less than their
full non-bankruptcy value is common in bankruptcy proceedings, as is the disruption of non-
debtors’ expectations of profitable business arrangements.
As for policy, we have noted that “[t]he main purpose of Section 365 is to allow a
debtor to reject executory contracts in order to relieve the estate of burdensome obligations while
at the same time providing ‘a means whereby a debtor can force others to continue to do business
with it when the bankruptcy filing might otherwise make them reluctant to do so.’” Frito-Lay,
13
Inc. v. LTV Steel Co., Inc. (In re Chateaugay Corp.), 10 F.3d 944, 954-55 (2d Cir. 1993) (quoting
Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1310 (5th Cir. 1985)).
Ordinarily, the [chapter 11] debtor need not commit itself to assumption or rejection of
such a contract until a reorganization plan is confirmed. In the meantime, the executory
contract remains in effect and creditors are bound to honor it. If and when assumed, the
contract operates according to its tenor. . . . Parties who wish to know where they stand
may, pursuant to 11 U.S.C. § 365(d)(2), seek to compel an early election. . . . But there is
no assurance that the judge will acquiesce. The interests of the creditors collectively and
the bankrupt estate as a whole will not yield easily to the convenience or advantage of one
creditor out of many.
Pub. Serv. Co. of N.H. v. N.H. Elec. Coop. (In re Pub. Serv. Co. of N.H.), 884 F.2d 11, 14-15
(1st Cir. 1989) (citations omitted). “In short, § 365 permits the trustee or debtor-in-possession,
subject to the approval of the bankruptcy court, to go through the inventory of executory
contracts of the debtor and decide which ones it would be beneficial to adhere to and which ones
it would be beneficial to reject.” Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion
Pictures Corp.), 4 F.3d 1095, 1098 (2d Cir. 1993).
However long this process may take, however onerous the dilemmas faced by the
non-debtor party to an executory contract may be while the non-debtor awaits the debtor’s
decision, and whether or not the bankruptcy judge grants a motion by the non-debtor party to
accelerate the debtor’s timetable for making its election to assume or reject, the power to make
that election is, as we made clear in In re Chateaugay Corp., that of the debtor alone. 10 F.3d at
955 (“Section 365 does not confer any power of election upon the other contracting party.”);
accord, In re Pub. Serv. Co. of N.H., 884 F.2d at 15 (“The Bankruptcy Code places the option of
assuming or rejecting executory contracts with the debtor, not with its business partners. To
disturb this mechanism would unbalance the Code’s overriding policy favoring debtor
14
reorganization and rehabilitation.”).
That the debtor’s interests are paramount in the balance of control is underscored
by the business judgment standard employed by courts in determining whether to permit the
debtor to assume or reject the contract. See Orion Pictures, 4 F.3d at 1099 (“[B]ankruptcy court
reviewing a trustee’s or debtor-in-possession’s decision to assume or reject an executory contract
should examine a contract and the surrounding circumstances and apply its best ‘business
judgment’ to determine if it would be beneficial or burdensome to the estate to assume it. . . .
[T]he process of deciding a motion to assume is one of the bankruptcy court placing itself in the
position of the trustee or debtor-in-possession and determining whether assuming the contract
would be a good business decision or a bad one.” (citations omitted)); Sundial Asphalt Co. v.
V.P.C. Investors, Corp. (In re Sundial Asphalt Co.), 147 B.R. 72, 81 (E.D.N.Y. 1992) (“Under
the ‘business judgment’ test, an executory contract . . . should be rejected if the debtor can
demonstrate that rejection will benefit the estate.” (citation omitted)). This standard rather
obviously presupposes that the estate will assume a contract only where doing so will be to its
economic advantage and will reject contracts whose performance would benefit the counterparty
at the expense of the estate.
The Code provisions permitting a debtor to accept or reject an executory contract
do not alter the parties’ contractual rights. The terms of the contract are unchanged and thus, as
shown above, where the contract expires by its own terms in the course of the bankruptcy, or the
debtor takes action in the course of the bankruptcy to terminate the outstanding obligations, the
contract’s mere executory nature as of the commencement of the proceeding—without more—
will not guarantee the debtor the availability of § 365’s assumption and rejection provisions.
15
Where, however, the parties’ rights under the terms of their pre-petition agreement have not been
altered or extinguished by operation of nonbankruptcy law, both parties remain subject to the
contractual obligations, and rejection of the contract constitutes a breach. In the event of
rejection of such an executory contract, the Code governs the treatment of the non-debtor party’s
resulting claim within the bankruptcy proceeding.
Here, neither the terms of the Project Agreement nor any applicable principles of
nonbankruptcy law warrant deviation from the general rule requiring treatment of the Project
Agreement, which was executory as of the commencement of Penn Traffic’s bankruptcy
proceeding, as executory notwithstanding COR’s attempt to complete its performance. We have
considered COR’s remaining arguments for reversal of the District Court’s decision and find
them, similarly, without merit.5
Accordingly, the District Court properly held in Penn Traffic II that the Project
5
COR also argues that, even if Penn Traffic properly rejected the Project
Agreement, COR is not limited to a general unsecured claim against the estate. COR contends
that it is entitled to invoke the benefit of § 365(i) and/or (j) of the Code (which provide
counterparties to certain rejected executory real estate sales or purchase contracts with rights to
particular elements of relief), or to obtain specific performance of the Project Agreement.
Because these arguments anticipate issues that may arise in claims-adjudication proceedings that
have not yet commenced, we think it best to permit the Bankruptcy Court to consider these
arguments in the first instance.
COR also relies upon Columbia County Indus. Dev. Agency v. Hudson Valley
Care Ctrs., Inc., No. 1:06-CV-1158 (LEK), 2007 WL 2261585 (N.D.N.Y. Aug. 2, 2007), in a
submission to this Court pursuant to Federal Rule of Appellate Procedure 28(j). That reliance is
misplaced. Columbia County is clearly distinguishable from the present case in several respects.
Most obviously, Columbia County did not discuss the specific issue before us here – whether
post-petition performance by the non-debtor party to a contract may render a contract non-
executory for purposes of § 365 of the Bankruptcy Code. Aside from the fact that this case
presents a question not resolved by the district court in Columbia County, we are satisfied, in any
event, that there was far greater performance by the appellant there, and that the unique tax policy
concerns in that case are here without parallel.
16
Agreement remained executory as of the time Penn Traffic moved to reject it, and the District
Court’s subsequent order affirming the Bankruptcy Court’s grant of the motion to reject the
Project Agreement is hereby affirmed.
CONCLUSION
The April 9, 2007, Memorandum and Order Deciding Appeal from Order of
Bankruptcy Court is affirmed.
17