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
Am 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.),
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.,
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
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:
[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 debt- or 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,
II. Initial Appeal and Proceedings on Remand
COR appealed Judge Buchwald’s decision to this Court, arguing that the Bankruptcy Court had correctly found thgt the Project Agreement was no longer executo-ry and thus could not be rejected. In Penn Traffic III, we explained that we lacked jurisdiction of the appeal because Penn Traffic IT 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).
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 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 pre-petition claim against the estate.
In re Child World, Inc.,
The plain language of the Code permits a chapter 11 trustee (and, by extension through § 1107, a debtor-in-pos
The Code does not define the term “executory contract.” In
Eastern Air Lines, Inc. v. Ins. Co. of Pa. (In re Ionosphere Clubs, Inc.),
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” test 4 ..., 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,
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., N.V. v. PCH Assocs. (In re PCH Assocs.),
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.
COR’s “prepaid option” argument is equally unavailing. While some courts have held that options contracts under which the optionee fully paid its price for the option to buy property before the debt- or 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.),
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.,
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.,
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.,
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, Inc. v. LTV Steel Co., Inc. (In re Chateaugay Corp.),
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),
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
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,
The Code provisions permitting a debtor to accept or reject an execu-tory 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 execu-tory nature as of the commencement of the proceeding—without more—will not guarantee the debtor the availability of § 365’s assumption and rejection provisions. 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 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.
Notes
. The parties refer to the bankruptcy court order in some of their papers as the "Bankruptcy Court Rejection Order." We do likewise below.
. 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).
. For simplicity, the term "debtor” is at times used in this discussion to refer to the chapter 11 debtor-in-possession.
. The Bankruptcy Court used the term " 'substantial performance’ test” to describe the Countryman standard.
See Penn Traffic I,
. 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 counter-parties 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 Agree
COR also relies upon
Columbia County Indus. Dev. Agency v. Hudson Valley Care Ctrs., Inc.,
No. 1:06-CV-1158 (LEK),