In re George Washington Bridge Bus Station Dev. Venture LLC, 65 F.4th 43 (2d Cir. 2023)

The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:

SUMMARY

In a published opinion, the Second Circuit Court of Appeals (the Court) recently ruled that § 365(b)(1)(A) of the Bankruptcy Code does not provide an administrative priority claim to a creditor (here a general contractor) who seeks payment from a debtor under one contract but whose assertion of uncured default arises from a separate contract (here a ground lease) in which the creditor has no contractual right. In addition, the Court held that the contractor was not a third-party beneficiary of the lease.  In re George Washington Bridge Bus Station Dev. Venture LLC, 65 F.4th 43 (2d Cir. 2023).

To view the opinion, click here.

FACTS

The debtor, George Washington Bridge Bus Station Development Venture LLC, is the redeveloper of a bus station at the Port Authority in New York. As part of the redevelopment, the debtor and the Port Authority entered into a contract under which in exchange for managing and arranging for secured funding for the project, the debtor received a 99-year Ground Lease.  The Ground Lease provided that the debtor was to hire and pay all contractors and the Port Authority would have no liability for any of the construction work.  The debtor and Tutor Perini Building Corp entered into a contract under which Tutor Perini was to act as general contractor on the project.  Disputes arose between the debtor and Tutor Perini about the amount due, which resulted in an arbitration proceeding that was still pending when the debtor filed chapter 11 in October 2019.  In the arbitration Tutor Perini asserted that the debtor owed it $113 million, a sum which would normally be an unsecured claim in the chapter 11.

In the chapter 11, the debtor sought to sell substantially all of its assets, which included the Ground Lease. To sell the Ground Lease, the debtor was required to assume the executory contract with the Port Authority and to cure any existing defaults under § 365(b)(1)(A).  Tutor Perini objected to the sale motion, asserting that in order to assume the Ground Lease, the debtor must pay the $113 million allegedly due to it as part of the cure.  It argued that the debtor was in breach of the clause in the Ground Lease which required it to pay all contractors and that this breach had to be cured for assumption.  Tutor Perini asserted that § 365(b)(1)(A) did not textually limit the party who might assert a cure claim, which meant the debt owed to it should be paid as part of the cure based on the debtor’s breach of its contract with the Port Authority.  In the alternative, it submitted that it was a third-party beneficiary of the lease.

The bankruptcy court rejected Tutor Perini’s arguments and approved the assumption and eventual sale.  The district court affirmed.  Tutor Perini appealed to the Court, which also affirmed.

REASONING

The Court noted at the outset that in the normal priority scheme, Tutor Perini would be a general unsecured creditor, last in line to be paid in a chapter 11 (other than equity holders).  Its argument, if successful, would allow Tutor Perini to be an administrative priority creditor, skipping forward in the priority line for payment.  The cure provisions under § 365(b)(1)(A) grant priority to what would otherwise be an unsecured claim if paying the claim is necessary to cure any existing default under the assumed contract. 

The Court acknowledged that Tutor Perini was correct that the statutory language does not “spell out which parties may raise a default in an assumed contract” but also referenced a well-established presumption in bankruptcy cases that statutory priorities are to be narrowly construed.  Therefore, the Bankruptcy Code must make it clear that Tutor Perini’s assertion – that a non-party to the assumed contract might assert a breach and therefore a right to cure – was the purpose of § 365(b)(1)(A).  Here, that clear purpose was missing.  In addition, the entirety of § 365 gave a context for the required cure: to insure that a contracting party would receive the full benefit of its bargain if it was forced to continue performance.  Such assurance was intended only for a direct party to the assumed contract, here the Port Authority.  Moreover, other subsections of § 365 strongly suggest the benefits are meant only for direct parties.  Analyzing all these factors, the Court concluded “Tutor Perini’s position regarding §365(b)(1)(A) makes little sense” when one considers that Tutor Perini had its own independent contract with the debtor.  The Court held that only a direct party to an assumed contract could assert a cure claim.

Addressing the third-party beneficiary argument, the Court noted that whether a party could assert such claim was governed by New York law, which distinguishes between an intended third-party beneficiary, for whom a contract was made for its benefit, and an incidental beneficiary which had no right to enforce the contract.  New York law generally provides that in construction contracts, intended third-party beneficiaries require express contractual language.  Mere retention of a party to assist in the performance of promises does not create an intended beneficiary.  Moreover, the Ground Lease specifically named certain third-party beneficiaries and Tutor Perini was not among them.  For all those reasons, the Court rejected the third-party beneficiary claim.    

AUTHOR’S COMMENTS

This has to be the correct ruling.  If this unique argument was successful, it would allow normally unsecured creditors who were parties to non-executory contracts with debtors to coat-tail on the cure provisions of a true executory contract if there was some relationship between the performance of their contract and the performance of the executory contract. My imagination runs wild on the myriad of unsecured creditors who might make such claims, especially when the debtor is engaged in construction.  To my knowledge, no non-direct contracting parties have ever been accorded administrative priority as a cure claim when an executory contract with a different party has been assumed.  This case assures such claims will not prevail in the Second Circuit and probably elsewhere.

This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.