Cure Periods for Assuming Executory Contracts and Leases

Cure Periods for Assuming Executory Contracts and Leases

Section 365(b)(1) of the Code sets forth the requirements which a debtor must satisfy to assume an unexpired lease or executory contract and it specifically provides that:

“If there has been a default on an… unexpired lease of the debtor, the [debtor in possession] may not assume such… lease unless, at the time of assumption of such…lease, the [debtor in possession]—

(A) cures, or provides adequate assurance that the [debtor in possession] will promptly cure, such default;

(B) compensates, or provides adequate assurance that the [debtor in possession] will probably compensate, a party other than the debtor to such… lease, for any actual pecuniary loss to such party resulting from such default; and

(C) provides adequate assurance of future performance under such…lease.”

The Bankruptcy Code fails to specifically define the terms “cure” or “prompt cure.” Consequently, the definition of these terms has been left to the courts. Some courts have held that a “prompt cure” of a monetary default is one made at or about the time of a contract’s or lease’s assumption. See In re Fisha Industries, Inc., 9 B.R. 834, 835 (Bankr.Nev.1981). See also Wolf–Smith & Connor, The Meaning of “Prompt and Adequate,” Journal of Bankruptcy Law and Practice, Vol. 13, No. 4 at 96 (2004). One bankruptcy treatise states that in most cases, a period exceeding one year should not be considered prompt, even if the promised payments include interest:

“A ‘prompt’ cure should mean prompt. A trustee or debtor in possession may not promptly cure a default by promising to pay the amount due because of the default over a period of years even though the promised payments would include interest. A time period of up to one year is not necessarily in violation of the standard that the cure be prompt although a period to cure extending beyond a year should not be considered prompt in most cases.

Norton Bankruptcy Law and Practice 2d § 39:29 (2004)(emphasis added and citations omitted).

Some courts have permitted cure periods exceeding a year. See In re Coors of North Mississippi, Inc., 27 B.R. 918, 922 (Bankr.N.D.Miss.1983) (permitting debtor to cure a prepetition default totaling between $110,000 and $115,000 over a 36 month period in the debtor’s assumption of a beer distributorship).See In re Valley View Shopping Ctr., L.P., 260 B.R. 10, 26 (Bankr.D.Kan.2001) (allowing payment of cure amount over two years by debtor seeking to assume 22–year lease); In re Mako, Inc., 102 B.R. 818, 821 (Bankr.E.D.Okla.1988) (“The period of time that is considered ‘promptly’ may vary in accordance with the circumstances on a case by case basis. Under the appropriate set of facts, a period of time in excess of a year could be prompt.”) (citations omitted) (internal quotation marks omitted).

The issue of promptness ultimately depends upon the facts and circumstances of each case. In In re Berkshire Chemical Haulers, Inc., 20 B.R. 454 (Bankr.Mass.1982), the court, under the facts of that case, held that the proposed 18 month cure period was not “prompt” within the meaning of the Bankruptcy Code, but reasoned that in other circumstances, 18 months may be a “prompt” cure period:

… what is a prompt cure can often vary according to the circumstances of a given case…. For instance, a debtor with 90 years remaining on a 99 year lease, who proposed to cure its arrearage by monthly payments over an 18 month period, might be found to have offered adequate assurance of a prompt cure. On the other hand, where in this case the debtor’s offer to cure its lease default over the next 18 months contemplates the final payment being made contemporaneously with the expiration of the lease term, I cannot say that any Court, under any circumstance, would find that such a proposal qualifies as a “prompt” cure under section 365(b)(1).

Berkshire Chemical, 20 B.R. at 458.

In determining whether a cure is “prompt”, many courts consider several factors, including a debtor’s past financial performance, any inequitable conduct engaged in by the non-debtor party, and the remaining term of a lease or relationship between the parties. See In re Embers 86th Street, Inc., 184 B.R. 892, 900–901 (Bankr.S.D.N.Y.1995) (and cases cited therein); In re R/P International Technologies, Inc., 57 B.R. 869 (Bankr.S.D.Ohio 1985).


 

Attorney, Jamie L. HarrisBy: Jamie L. Harris, Esq.

Jamie Harris is an associate attorney with DelCotto Law Group PLLC. Her practice of law focuses on helping business owners hurdle financial obstacles. Jamie is best known for her experience in filing Chapter 7, 11, 12, and 13 bankruptcies. In her Chapter 11 cases, Jamie has represented companies from many different industries including healthcare, nonprofit, trucking, construction, commercial real estate and telecommunications.

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