In Re: Old Market Group Holdings Corp.

Background

Fairway Group Holdings Corp. and its affiliates filed for Chapter 11 bankruptcy and reorganized as Old Market Group Holdings Corp. During the bankruptcy proceedings, the debtors transferred their leasehold interest in a warehouse to Village Supermarkets by assuming and assigning the lease. Under Bankruptcy Code section 365(b)(1), a debtor generally cannot assume an unexpired lease after a default unless the debtor cures the default, compensates the other party, or provides adequate assurance of future performance.

The debtors sent 400 Walnut Avenue, LLC, the warehouse landlord, a notice proposing to pay $86,000 in cure costs. The landlord objected and asserted that approximately $2.01 million was required. The Bankruptcy Court considered threshold legal arguments before determining the amount of any cure costs.

Bankruptcy Court’s Ruling

The debtors argued that Village remained responsible under the assigned lease for repairs, including conditions that existed before the transaction, and that no default existed under the lease because the landlord had not separately demanded repairs. The Bankruptcy Court rejected those arguments. It held that the lease’s “as is” language did not impose an affirmative repair obligation on Village and that the landlord’s cure objection served as notice of the needed repairs. More than 30 days passed before the lease was assumed and assigned.

The Bankruptcy Court also held that “default” in section 365(b)(1) had its ordinary meaning rather than the narrower definition in the lease. Under that interpretation, a default existed when the debtors failed to perform obligations imposed by the lease, even if the lease’s own definition of default had not been satisfied. The amount needed to cure the alleged defaults was left for later proceedings.

Request for Interlocutory Appeal

The debtors sought permission under 28 U.S.C. § 158(a)(3) to appeal the Bankruptcy Court’s interlocutory order. An interlocutory order is a nonfinal order issued before the case is fully resolved. The District Court applied the standards in 28 U.S.C. § 1292(b), which require a controlling legal question, a substantial basis for disagreement about that question, and an appeal that would materially advance the end of the litigation. The court also considered whether exceptional circumstances justified immediate review.

The District Court stated that the debtors’ proposed question did not accurately describe the Bankruptcy Court’s ruling: the Bankruptcy Court had found that the debtors were already in default at the time of the transaction, even under the lease’s terms, and had also held that the lease did not control the statutory meaning of “default.” The District Court nevertheless treated the proposed issue as potentially controlling because a ruling for the debtors could materially affect their liability for the repairs.

The court concluded that the debtors had not shown a substantial basis for disagreement. It reasoned that section 365(b)(1) requires curing defaults existing when the lease is assumed, not defaults measured only when the landlord files a cure objection. It also found no conflicting authority supporting the debtors’ proposed timing rule. Because the debtors failed to satisfy that requirement, the court did not need to decide whether an immediate appeal would materially advance the litigation. It further held that the debtors had not shown exceptional circumstances.

Disposition

Judge P. Kevin Castel denied the motion for leave to appeal. The Clerk was directed to close the case. The opinion did not determine the ultimate amount of cure costs.