Only a Party to an Assumed Executory Contract can Assert a Cure Claim

Matthew Hanauer

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

Under section 365 of title 11 of the United States Code (the “Bankruptcy Code”), a debtor may assume an executory contract, provided it (1) cures any existing defaults, (2) compensates the nondebtor party for any monetary loss caused by the debtor’s default, and (3) provides adequate assurance of future performance of the contract.^[1]  Additionally, cure claims arising from the assumption of executory contracts are given administrative priority.^[2]  In some instances, the amount of a cure claim may be disputed.  The United States Court of Appeals for the Second Circuit  held that only a party to an assumed contract can assert a cure claim against the debtor in In re George Wash. Bridge Bus Station Dev. Venture.^[3]   George Washington Bridge Bus Station Development Venture LLC (“Debtor”) was party to a ground lease (“Ground Lease”) with the Port Authority of New York and New Jersey (“Port Authority”).^[4]  Under the Ground Lease, Debtor was responsible for hiring and paying contractors for developing the retail portion of the George Washington Bridge Bus Station.^[5]  In accordance with the Ground Lease, Debtor hired Tutor Perini as the general contractor.^[6]  Following missed payments by Debtor to Tutor Perini, Debtor and Tutor Perini went into arbitration.  While the arbitration was pending, Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, which resulted in a stay of the arbitration.^[7]  In an effort to sell its rights in the Ground Lease, Debtor  assumed the Ground Lease and rejected its contract with Tutor Perini.^[8]  Under the Bankruptcy Code, Debtor was required to cure any defaults in the Ground Lease before it could be assumed.^[9]  However, Debtor was not required to cure defaults owed under the rejected contract with Tutor Perini.  Nevertheless, in an attempt to be paid for their work, Tutor Perini asserted a cure claim against the Debtor as a third party beneficiary to the Ground Lease that was being assumed.^[10]  Tutor Perini argued that before Debtor could assume the Ground Lease, Debtor must first cure the defaults of the contractor because the contractor was a party to the Ground Lease.^[11]  Tutor Perini additionally argued they were entitled to assert a cure claim because the Bankruptcy Code has no textual limitation on who may assert a cure claim to an assumed contract.^[12]  However, the bankruptcy court ruled Tutor Perini could not assert a cure claim because they were not a party to the Ground Lease.^[13]  Tutor Perini appealed the ruling to the United States District Court for the Southern District of New York, which affirmed the bankruptcy court.^[14]

On Tutor Perini’s appeal of the district court’s decision, the Court of Appeals for the Second Circuit concluded that section 365 was designed to make the nondebtor counterparty to a contract whole before it was obligated to continue performance under an assumed contract.^[15]  Consequently, the Second Circuit held that only a party to an executory contract can assert a cure claim against the debtor.^[16]  Because Tutor Perini was not a party to a contract being assumed by the Debtor, Tutor Perini was not entitled to a cure claim.^[17]  Additionally, the Second Circuit held Tutor Perini did not have standing as a third party beneficiary to the Ground Lease. ^[18]  The Court reasoned that whether a party may sue as a third-party beneficiary is governed by relevant state law.  Under New York law, an intended third-party beneficiary may sue on a contract made for its benefit.  However, an incidental beneficiary has no standing.^[19] The Court concluded that Tutor Perini was an incidental third-party beneficiary because it was not listed among the Ground Lease’s specific intended third-party beneficiaries.^[20]  Instead, Tutor Perini was a party to a contract that was being rejected by the Debtor and was entitled to the money entitled to all unsecured creditors.^[21]  According to the Second Circuit only a counterparty to a contract can assert a cure claim, and third-party beneficiaries may only assert such a claim if it is permissible under state law.^[22]

Under section 365, a debtor can assume an executory contract provided, among other things, it cures any defaults.^[23]  In that regard, a debtor will often propose paying the outstanding amounts owed.  However, a nondebtor counterparty to a contract has standing to contest the cure amount under New York law.^[24]  An entity that is not a party to a contract may believe it is affected by the assumption and attempt to demand payment of damages or losses incurred. According to the Second Circuit’s interpretation of New York law, only a contracting party has standing to demand payment of arrears or outstanding amounts.^[25]  An entity that is not a party to a contract is not entitled to a cure payment.^[26]