In Re: The Great Atlantic & Pacific Tea Company, Inc.

Background

Washington Town Center LLC owned a shopping center in Washington Township, New Jersey. A&P was a tenant there, and dry-cleaning businesses had operated at the property since 1970. An environmental investigation in 1999 found perchloroethylene and related compounds in the soil and groundwater above applicable legal standards. Washington notified the New Jersey Department of Environmental Protection and had been performing environmental remediation at the property for years.

In 2015, A&P and affiliates filed Chapter 11 bankruptcy cases. A&P sought to sell and assign its lease for space at the shopping center. Washington objected to the proposed cure amount, stating that the amount should include additional rent, late fees, cleanup charges, and account reconciliations that were allegedly due before the bankruptcy filing. The Bankruptcy Court later entered a sales order approving the transaction and allowing the assets to be sold free and clear of liens, claims, liabilities, and other interests, except for liabilities expressly assumed by the buyer.

Jersey Markets became the tenant under the assigned lease. The lease required the tenant to pay certain contributions, including its share of common-area expenses. Those expenses included costs of complying with environmental laws relating to common areas. Washington later charged Jersey Markets for ongoing environmental-remediation expenses resulting from the earlier dry-cleaning operations.

Jersey Markets sued Washington in New Jersey state court, alleging that Washington improperly sought to collect Jersey Markets’ share of the remediation costs. Washington filed a counterclaim seeking, among other things, its remediation costs. While that litigation was pending, Jersey Markets asked the Bankruptcy Court to enforce the 2015 sales order. The Bankruptcy Court granted the request and ruled that remediation of contamination existing before the sales order and closing date was a liability, obligation, claim, or interest that arose or accrued before those dates. It barred Washington from seeking reimbursement from Jersey Markets for those remediation costs. Washington appealed.

Issues and Arguments

Washington argued that the remediation costs were not a bankruptcy “claim” because A&P had no direct obligation to Washington or anyone else to perform the environmental remediation or pay for it. Washington characterized the charges instead as the tenant’s pro rata share of common-area expenses under the lease.

Washington also argued that enforcing the sales order against these costs violated the rule that a debtor assuming a lease must accept both its benefits and burdens without changing the lessor’s rights. Jersey Markets responded that Washington had notice of the sale, participated in the bankruptcy proceedings, and did not object to the relevant sale terms or seek the remediation costs through the cure process.

Court’s Analysis

The District Court reviewed the Bankruptcy Court’s factual findings for clear error and its legal conclusions without deference. The court held that the question was not limited to whether the remediation costs fit the Bankruptcy Code’s definition of a “claim.” The 2015 sales order used broader language covering all liens, claims, rights, liabilities, encumbrances, and other interests of any kind connected with the debtors, their assets, their business operations, or the asset transfer. The order expressly referred to environmental liabilities.

The court agreed with the Bankruptcy Court that the sales order covered liabilities existing before the closing date. It also noted that bankruptcy claims are broadly defined and that a contract claim generally arises when the parties enter into the agreement if the relationship then contains the elements necessary to create a right to payment. Because Washington knew of the contamination by 1999 and argued that the lease gave it a right to payment for remediation as a common-area expense, the court concluded that the relevant liability existed before the sale and was covered by the sales order.

The court rejected Washington’s argument that the Bankruptcy Court had improperly modified the lease. The order did not bar environmental-remediation claims arising under the lease after 2015 and did not alter the lease’s provisions. Instead, it determined that Jersey Markets acquired the lease free of liabilities, obligations, claims, or interests that arose before the sale and closing dates.

The court further reasoned that Washington could have sought recovery for pre-sale remediation obligations by objecting to the cure amount or objecting to the sale and its terms. Washington had received notice, filed a limited objection to the cure amount, and knew about the contamination and the sale. The District Court therefore applied the sales order as written.

Disposition

The District Court affirmed the Bankruptcy Court’s judgment enforcing the 2015 sales order. The court held that Washington could not seek reimbursement from Jersey Markets for environmental-remediation costs tied to contamination existing before the sales order and closing date. The court stated that claims arising under the lease after 2015 were not barred and directed the Clerk to close the case.