Eagle Insurance v. Bankvest Capital Corp. (In Re Bankvest Capital Corp.)

United States Court of Appeals
For the First Circuit

No. 03-9006
IN RE BANKVEST CAPITAL CORP.,
Debtor.

EAGLE INSURANCE COMPANY and NEWARK INSURANCE COMPANY,

Appellants,

v.

BANKVEST CAPITAL CORP.,

Appellee.

APPEAL FROM THE UNITED STATES BANKRUPTCY APPELLATE PANEL
FOR THE FIRST CIRCUIT

Before

Lynch, Circuit Judge,
Campbell, Senior Circuit Judge,
and Lipez, Circuit Judge.

Joseph S.U. Bodoff, with whom Richard P. O'Neil and Bodoff &
Slavitt LLP were on brief, for appellants.

Jay L. Gottlieb, with whom Arianna Frankl, Brown Raysman
Millstein Felder & Steiner LLP, Frederic D. Grant, Jr., and Grant
& Roddy were on brief, for appellee.

March 15, 2004
 LYNCH, Circuit Judge. This case presents a narrow but

important question of statutory interpretation under the Bankruptcy

Code: whether 11 U.S.C. § 365(b)(2)(D) permits the debtor-in-

possession to assume an unexpired lease without first curing non-

monetary defaults. The Ninth Circuit, in the only court of appeals

opinion to address this question, held that non-monetary defaults

must be cured before assumption. In re Claremont Acquisition

Corp., 113 F.3d 1029, 1034-35 (9th Cir. 1997). In the proceedings

below, the bankruptcy court and the Bankruptcy Appellate Panel

(BAP) reached the opposite conclusion. We disagree with the Ninth

Circuit and affirm.

I.

For purposes of this appeal, we accept the facts as

alleged by appellants.1 BankVest Capital Corporation, the debtor

and appellee in this action, was in the business of originating,

securitizing, selling, and servicing equipment leases. On May 27,

1999, appellants Eagle Insurance Company and Newark Insurance

Company entered into separate but substantially similar lease

1
This appeal arises from a special proceeding established
under BankVest's confirmed Chapter 11 plan for the determination of
cure costs under 11 U.S.C. § 365(b). The bankruptcy court treated
the debtor's motion in opposition to appellants' claim for cure
costs essentially as a motion to dismiss, accepting appellants'
allegations of fact as true for purposes of the assumption analysis
under § 365. Neither party has contested that sensible approach
and we adopt it here.

-2-
agreements with BankVest.2 BankVest agreed to lease 190 specified

items of computer equipment to each of the appellants for a term of

48 months. Under the leases, Eagle and Newark were obligated to

make monthly rental payments of $10,111.82 and $11,940.61,

respectively. BankVest agreed to arrange for delivery of the

equipment directly from Nortel, the manufacturer.

Eagle and Newark were aware, however, that Nortel would

not complete production of twenty of the 190 items until several

months after the start of the lease term. Those twenty items,

Eagle and Newark say, collectively accounted for 60% of the entire

value of the leased goods and constituted the most critical pieces

of equipment. Accordingly, it was agreed that Nortel would provide

appellants with substitute "loaner" equipment until those twenty

items were completed and delivered.3 Nortel delivered the leased

equipment, including the substitute items, in August 1999. On

August 25, Eagle and Newark executed certificates of acceptance

2
The leases also named as a lessor LeaseVest Capital
Corporation, a wholly owned subsidiary of BankVest. LeaseVest
subsequently assigned its rights under the leases to BankVest.
3
BankVest denies that it was a party to the loaner
arrangement and questions whether that arrangement actually
occurred. BankVest says that Eagle and Newark unconditionally
accepted all 190 items as delivered; that they never claimed the
allegedly substitute equipment was defective or inferior; and that
they in fact used those twenty items for two years without
complaint.

-3-
acknowledging their receipt of the leased equipment in operating

condition.4

On December 17, 1999, before the loaner equipment could

be replaced, an involuntary Chapter 11 petition was filed against

BankVest in the United States Bankruptcy Court for the District of

Massachusetts. BankVest did not contest the petition, and the

bankruptcy court entered an order for relief on January 25, 2000.

Once in bankruptcy, BankVest proposed a plan of reorganization that

contemplated a gradual liquidation of its assets. After several

revisions, the bankruptcy court confirmed the plan on May 31, 2001.

Meanwhile, Eagle and Newark continued to use the leased computer

equipment but paid no rent to BankVest, accumulating a collective

arrears of approximately $1 million. That debt remains unpaid.

This appeal arises out of the provisions in BankVest's

confirmed Chapter 11 plan that govern the assumption of BankVest's

unexpired equipment leases. The plan provides that every equipment

lease in which BankVest is the lessor shall be deemed assumed by

the estate under 11 U.S.C. § 365 unless (1) the lease is

specifically rejected or (2) any party to the lease files a claim

for cure costs. In the event a claim for cure costs is made, the

4
Eagle and Newark argued to the bankruptcy court that they
were forced to sign the certificates of acceptance before Nortel
actually delivered the leased equipment, so they should not be
estopped from asserting a defense of non-delivery if BankVest sues
to recover unpaid rent. Like the bankruptcy court, we do not reach
the estoppel question.

-4-
plan permits BankVest to defer its decision whether to assume or

reject the lease until the bankruptcy court determines the amount

of the cure costs, if any, that the estate would be obligated to

pay upon assumption.5 See 11 U.S.C. § 365(b)(1).

On June 15, 2001, Newark and Eagle filed timely claims

for cure costs under this procedure. They charged that BankVest

had defaulted on the leases by failing to replace the loaner

equipment with the final twenty items from Nortel.6 Further, they

contended that this non-monetary default was an historical fact not

5
Specifically, paragraph 7.1 of the confirmed plan provides:

All equipment leases, in which the Debtor is lessor, . .
. shall be deemed assumed upon the Effective Date [of the
plan] unless specifically rejected on or before such date
. . . , or unless a claim is made on or before the
Effective Date that assumption hereunder requires the
Debtor to pay Cure Costs to any party to an assumed
contract or lease. In the event a claim for Cure Costs
is made, the time for the Debtor to assume or reject any
such contract or lease shall be extended until such time
as the Bankruptcy Court enters a Final Order as to the
Claimant's entitlement to Cure Costs and the amount of
such Cure Costs, at which time the Debtor may determine
whether to assume or reject such contract or lease.

The plan defines "Cure Costs" as "[t]hose payments and assurances
required upon assumption of an executory contract or unexpired
lease pursuant to 11 U.S.C. § 365(b)(1)."
6
Newark and Eagle also argued that BankVest's failure to
deliver this equipment voided the leases entirely, so that there
remained nothing to assume. The bankruptcy court did not address
this issue, however, and appellants have not raised it on appeal.
Accordingly, we will assume that appellants' leases are "executory
contracts or unexpired leases" within the meaning of 11 U.S.C.
§ 365. Cf. Gallivan v. Springfield Post Rd. Corp., 110 F.3d 848,
851 (1st Cir. 1997) (discussing the meaning of "executory").

-5-
susceptible to cure (i.e., nothing BankVest could do would remedy

its historical failure to deliver the equipment on time). In the

alternative, Newark and Eagle argued that if the estate were

allowed to cure, they would each be entitled to damages in excess

of $300,000, as well as reductions in the rent payments owed to

BankVest. Finova Loan Administration, Inc., filed an objection to

appellants' cure claims on behalf of the estate on August 15,

2001.7

Treating Finova's objection as a motion to dismiss, the

bankruptcy court held a non-evidentiary hearing on November 7,

2001. On December 11, 2001, the court dismissed appellants' cure

claims on a ground not raised by either party: that 11 U.S.C.

§ 365(b)(2)(D) permits the debtor-in-possession8 to assume an

executory contract or unexpired lease without first curing non-

monetary defaults. In re BankVest Capital Corp., 270 B.R. 541, 543

7
On August 6, 2001, Finova and BankVest (in its capacity as
debtor-in-possession) filed a stipulation with the bankruptcy court
whereby Finova assumed BankVest's responsibility to defend
appellants' cure claims. Since that time, Finova itself has filed
for bankruptcy protection; U.S. Bank Portfolio Services has
succeeded Finova on BankVest's behalf.
8
Section 365 speaks only of "the trustee," but in a Chapter
11 case, the debtor-in-possession enjoys all the rights and powers
of the trustee. 11 U.S.C. § 1107(a). The debtor-in-possession is
the "same entity which existed before the filing of the bankruptcy
petition, but empowered by virtue of the Bankruptcy Code to deal
with its contracts and property in a manner it could not have done
absent the bankruptcy filing." NLRB v. Bildisco & Bildisco, 465
U.S. 513, 528 (1984) (internal quotation marks omitted). For
brevity and convenience, this opinion refers to BankVest in its
capacity as debtor-in-possession simply as "the debtor."

-6-
(Bankr. D. Mass. 2001). Because BankVest was not in default on any

monetary provision -- indeed, all of the payments under the leases

flowed to BankVest, not from it -- the court held that there were

no cure claims that had to be satisfied before assumption. Id. at

544. The BAP affirmed on the same ground. In re BankVest Capital

Corp., 290 B.R. 443, 447-48 (B.A.P. 1st Cir. 2003). Eagle and

Newark timely appealed.

II.

This court has jurisdiction over appeals from the BAP

under 28 U.S.C. § 158(d). We review the bankruptcy court's

conclusions of law de novo, with the benefit of the BAP's

bankruptcy expertise but without deference to its conclusions.

Fed. R. Bankr. P. 7052; In re Werthen, 329 F.3d 269, 272 (1st Cir.

2003).

A. Legal Background

The dispute in this case concerns what is, in effect, an

exception to an exception to the usual rule under 11 U.S.C. § 365.

Section 365 generally allows the trustee in bankruptcy -- or, as in

this case, the debtor-in-possession -- to assume or reject any pre-

petition executory contract or unexpired lease, subject to the

approval of the bankruptcy court. § 365(a); In re FBI Distrib.

Corp., 330 F.3d 36, 42 (1st Cir. 2003). This is one of the basic

reorganizational tools available to debtors under the Bankruptcy

Code. "[T]he authority to reject an executory contract is vital to

-7-
the basic purpose [of] a Chapter 11 reorganization, because [it]

can release the debtor's estate from burdensome obligations that

can impede a successful reorganization." NLRB v. Bildisco &

Bildisco, 465 U.S. 513, 528 (1984). Under the Code, a rejected

contract is considered to have been in breach prior to the

bankruptcy petition, leaving the nondebtor party to the contract

with a general unsecured claim for contract damages. 11 U.S.C. §§

365(g)(1), 502(g); FBI Distrib., 330 F.3d at 42. If the debtor

assumes a contract, however, it accepts both the burdens and the

benefits of the bargain, and any liabilities incurred in the

contract's postpetition performance will be treated as

administrative expenses with priority status. See 11 U.S.C.

§ 507(a)(1) (priority for administrative expenses); FBI Distrib.,

330 F.3d at 45. By permitting debtors to shed disadvantageous

contracts but keep beneficial ones, § 365 advances one of the core

purposes of the Bankruptcy Code: "to give worthy debtors a fresh

start." In re Carp, 340 F.3d 15, 25 (1st Cir. 2003).

There are, however, a variety of restrictions on the

debtor's power to assume executory contracts and unexpired leases.

Most relevant to this case is § 365(b), which provides that if the

debtor has defaulted on a contract prior to assumption, the debtor

cannot assume that contract unless it (1) cures the default; (2)

compensates the nondebtor party for any actual pecuniary losses

resulting from the default; and (3) provides adequate assurance of

-8-
future performance under the contract.9 § 365(b)(1). Like the

bankruptcy court, we will assume arguendo that BankVest's failure

to replace the loaner equipment constituted such a default.

Yet the requirement in § 365(b)(1) that the debtor cure

defaults prior to assumption itself has exceptions. Section

§ 365(b)(2) provides:

(2) Paragraph (1) of this subsection does not apply to
a default that is a breach of a provision relating
to –-
...
(D) the satisfaction of any penalty rate or
provision relating to a default arising from
any failure by the debtor to perform
nonmonetary obligations under the executory
contract or unexpired lease.

The bankruptcy court held, and the parties do not dispute, that

BankVest's failure to deliver certain equipment is a

"quintessential example of a nonmonetary default" within the

meaning of subparagraph (2)(D). 270 B.R. at 544. The question on

appeal is whether subparagraph (2)(D) excuses BankVest from the

obligation that it otherwise bears under paragraph (1) to cure that

default before assumption.

B. Interpretation of § 365(b)(2)(D)

(1) Plain text

As in any statutory interpretation case, we start with

the text of the statute. In re Hart, 328 F.3d 45, 48 (1st Cir.

9
If cure and compensation are not feasible prior to
assumption, the debtor may provide "adequate assurance" that it
will do so promptly afterwards. 11 U.S.C. § 365(b)(1).

-9-
2003). The language of § 365(b)(2)(D) can plausibly be interpreted

in at least two ways. Eagle and Newark argue that the word

"penalty" in subparagraph (2)(D) describes both "rate" and

"provision." On their reading, Congress intended that subparagraph

to read like this:

(D) the satisfaction of any penalty rate[, or any
penalty provision] relating to a default arising
from any failure by the debtor to perform
nonmonetary obligations under the executory
contract or unexpired lease.

This is essentially the interpretation that the Ninth Circuit

endorsed in In re Claremont Acquisition Corp., supra, and a number

of bankruptcy courts have since followed suit, see, e.g., In re

Williams, 299 B.R. 684, 686 (Bankr. S.D. Ga. 2003); In re New Breed

Realty Enters., 278 B.R. 314, 320 (Bankr. E.D.N.Y. 2002); In re

Vitanza, No. 98-19611DWS, 1998 WL 808629, at *21 n.44 (Bankr. E.D.

Pa. Nov. 13, 1998).10

BankVest, on the other hand, argues that the word

"penalty" describes only the term "rate," and that the second half

of subparagraph (2)(D) creates a distinct exception for non-

monetary defaults. On this view, the statute is best interpreted

like this:

(D) the satisfaction of any penalty rate[, or any]
provision relating to a default arising from any
failure by the debtor to perform nonmonetary

10
BankVest does not contend that its obligation to deliver
the leased equipment was a "penalty provision."

-10-
 obligations under the executory contract or
unexpired lease.

This is the interpretation favored by the bankruptcy court and the

BAP below, as well as by the district court in the Claremont case.

See In re Claremont Acquisition Corp., 186 B.R. 977, 990 (C.D. Cal.

1995); see also In re Walden Ridge Dev., LLC, 292 B.R. 58, 67 & n.2

(Bankr. D.N.J. 2003); In re W. Pac. Airlines, Inc., 219 B.R. 298,

304 (Bankr. D. Colo. 1998), rev'd on other grounds, 219 B.R. 305

(D. Colo. 1998); In re GP Express Airlines, Inc., 200 B.R. 222,

233-34 (Bankr. D. Neb. 1996).

If the plain language of the Bankruptcy Code required

either of these interpretations, that would end the matter. Lamie

v. United States Trustee, 124 S. Ct. 1023, 1030 (2004). But we see

no textual basis for preferring appellants' interpretation to the

one adopted by the bankruptcy court, which strikes us as equally

consistent with the text. Nothing in the language or syntax of

§ 365(b)(2)(D) unambiguously requires either outcome. Indeed, we

are hard-pressed to endorse any "plain meaning" argument where, as

here, other federal courts have reached conflicting answers to the

same question based on the same "plain" language. Compare

Claremont, 113 F.3d at 1034, and Williams, 299 B.R. at 686, with

BankVest, 290 B.R. at 447, and Claremont, 186 B.R. at 990.11

11
Eagle and Newark conspicuously have not urged this court to
adopt the Ninth Circuit's textual analysis. In Claremont, the
Ninth Circuit concluded that construing subparagraph (2)(D) to
create a distinct exception for non-monetary defaults would be

-11-
 With a simple comma or two, Congress could have made its

preferred interpretation clear. But the Code as written is

ambiguous, so we must divine Congress's intent from other sources.

See In re Weinstein, 272 F.3d 39, 48 (1st Cir. 2001) (where the

Bankruptcy Code is ambiguous, courts look to "its historical

context, its legislative history, and the underlying policies that

animate its provisions"); In re Christo, 192 F.3d 36, 39 (1st Cir.

1999).

(2) Legislative history

The legislative history of § 365(b)(2)(D) is not

instructive. Congress inserted subparagraph (D) as part of the

Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, 108 Stat. 4106.

Eagle and Newark place great weight on the single sentence in the

legislative history of that Act that pertains to § 365(b)(2)(D):

"grammatically incorrect and nonsensical" because the statute
becomes grammatically incoherent if one simply deletes the words
"satisfaction of any penalty rate." 113 F.3d at 1034. Even if
that argument were properly before us, we would reject it. The
text of § 365(b)(2)(D) is awkward and ungrammatical on any reading,
including the reading that appellants urge; it proves nothing to
say that the statute remains syntactically flawed when whole
clauses are omitted. In any event, "the task of statutory
interpretation involves more than the application of syntactic and
semantic rules to isolated sentences." Cablevision of Boston, Inc.
v. Pub. Improvement Comm'n, 184 F.3d 88, 101 (1st Cir. 1999). The
wiser methodology, and the one that we employ here, is to interpret
Congress's words in light of the goals and underlying policies of
the statute as a whole. Nieves-Marquez v. Puerto Rico, 353 F.3d
108, 116 (1st Cir. 2003); In re Weinstein, 272 F.3d 39, 48 (1st
Cir. 2001).

-12-
 Finally, section 365(b) is clarified to provide that when
sought by a debtor, a lease can be cured at a nondefault
rate (i.e., it would not need to pay penalty rates).

H. Rep. No. 103-835 (parenthetical in original), reprinted in 1994

U.S.C.C.A.N. 3340, 3359. From this, appellants conclude that

Congress must have intended subparagraph (2)(D) to address

"penalty" provisions only. The Claremont decision likewise points

to this legislative history as evidence "that Congress intended

only to relieve debtors of the obligation to pay penalties." 113

F.3d at 1034.

We disagree. At best, the legislative history indicates

that Congress intended § 365(b)(2)(D) to free debtors from lease

provisions requiring the payment of penalty rates –- something that

both parties here agree that it does.12 But subparagraph (2)(D)

also refers to non-monetary defaults, and the legislative history

does not indicate what Congress intended by that reference. To

interpret the House Report's explanation of one clause of

subparagraph (2)(D) as a limitation on the scope of a different,

unmentioned clause would "overstate[] the inferences that can be

drawn from an ambiguous act of legislative drafting." Martin v.

12
Even this much was not always clear, as the text of
§ 365(b)(2)(D) could be read, by negative implication, to require
debtors to pay penalty rates arising from monetary defaults. See
In re Phoenix Bus. Park Ltd. P'ship, 257 B.R. 517, 521 (Bankr. D.
Ariz. 2001); Stein & Wheatly, The Impact of Cure and Reinstatement
on Default Interest, 16 Am. Bankr. Inst. J. Jul./Aug. 1997, at 1.
While that problem does not bear directly on the dispute in this
case, it does tend to reinforce our conclusion that the text of
subparagraph (2)(D) is ambiguous.

-13-
Hadix, 527 U.S. 343, 357 (1999) (refusing to limit the scope of a

statute by negative implication from the legislative history).

Like the statutory text, the legislative history simply offers no

guidance on the question that divides the parties.

Eagle and Newark also point to pending bankruptcy reform

legislation that, they say, would codify their interpretation of

subparagraph (b)(2). That is both untrue and unhelpful. For

several years Congress has debated versions of the so-called

Bankruptcy Abuse Prevention and Consumer Protection Act. None has

yet passed. The most recent version of which we are aware,

introduced in February 2003 by Representative Sensenbrenner, would

strike the phrase "penalty rate or provision" in § 365(b)(2)(D) and

replace it with "penalty rate or penalty provision." See H.R. 975,

108th Cong. § 328(a)(1)(B) (2003). But the same bill would also

amend § 365(b)(1) to relax the cure requirement for certain non-

monetary defaults. See id. § 328(a)(1)(A). The most that can be

gleaned from this unenacted legislation is that at least some

members of Congress are aware that § 365(b)(2)(D) is a problem. It

does not tell us how Congress in 1994 intended the present version

of subparagraph (2)(D) to operate in cases like the one at bar.

(3) Practical implications

The best approach to interpreting §365(b)(2)(D) focuses

on practical considerations of bankruptcy policy and Congress's

overarching purposes in the Bankruptcy Code. The Claremont

-14-
decision has drawn sharp criticism from bankruptcy commentators,

who nearly unanimously regard that case as an obstacle to the

successful reorganization of many debtors in bankruptcy. See,

e.g., 3 Collier on Bankruptcy § 365.05[4] (15th ed. rev. 2003)

(suggesting that Claremont reflects a "questionable" reading of

subparagraph (2)(D) that is inconsistent with Congress's likely

intent); Weintraub, Historical Defaults and Cross-Defaults: Here

a Default, There a Default, Everywhere a Default, Default, Default,

26 Cal. Bankr. J. 286, 287 (2003) (Claremont imposes a

"considerable roadblock" to the assumption and assignment of

valuable contracts and "can have a potentially devastating effect"

on the ability of certain debtors to reorganize); Stang, Assumption

of Contracts and Leases: The Obstacle of the Historical Default,

24 Cal. Bankr. J. 39, 39 (1998) ("In restricting a debtor's ability

to assume contracts and leases, the Claremont court undermined an

important bankruptcy tool . . . in contravention of fundamental

bankruptcy precepts.").

The reasons for this criticism are evident. Many non-

monetary defaults are "historical facts" that are impossible to

cure after the fact –- for example, a debtor's failure to maintain

leased property in a certain condition, to use leased equipment

only for approved purposes, or to meet certain standards of quality

-15-
or performance.13 See Vitanza, 1998 WL 808629, at *24 n.51 (most

non-monetary defaults involve unalterable historical facts).

Requiring a debtor to cure such incurable defaults is tantamount to

barring the debtor from assuming any lease or contract in which

such a default has occurred -- no matter how essential that

contract might be to the debtor's reorganization in bankruptcy.

Indeed, that is exactly what happened in several cases following

the Claremont rule. For example, in In re Williams, supra, the

debtor was a professional truck driver who defaulted on his truck

lease, which provided that he could only use his truck in the

service of his employer. 299 B.R. at 684-85. The bankruptcy court

ruled that the debtor's violation of that provision was an

13
Of course, this depends on the definition of "cure," a term
that is not defined in the Bankruptcy Code. Some courts and
commentators have argued that some or even all non-monetary
defaults are curable under the Code, whether or not they are
"historical facts." See, e.g., In re Walden Ridge Dev. Corp., 292
B.R. 58, 66-67 (Bankr. D.N.J. 2003); In re Garcia, 276 B.R. 627,
639-40 (Bankr. D. Ariz. 2002); Stang, Assumption of Contracts and
Leases: The Obstacle of the Historical Default, 24 Cal. Bankr. J.
39 (1998). The prevailing view, however, is that many non-monetary
defaults -- especially those deemed "material" to the contract --
cannot meaningfully be cured in bankruptcy. See, e.g., Claremont,
113 F.3d at 1034-35 (holding assumption barred because the debtors'
default was an historical fact that could not be cured); In re
Beckett, No. CIV.A. 00-5337, 2001 WL 767601, at *5-*6 (E.D. Pa.
Jul. 5, 2001) (similar); In re GP Express Airlines, Inc., 200 B.R.
222, 233 (Bankr. D. Neb. 1996) (airline's failure to maintain
contractual performance obligations was an historical, non-monetary
default and impossible to cure); In re Lee West Enters., 179 B.R.
204, 208 (Bankr. C.D. Cal. 1995) (franchisee's closure for three
months prior to bankruptcy petition was a non-monetary default that
could not be cured); cf. 3 Collier on Bankruptcy § 365.05[4] (15th
ed. rev. 2003) (referring to situations "where the trustee cannot
go back in time to undo an act or omission of the debtor").

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incurable historical default, then (citing Claremont) barred

assumption of the lease under § 365, lifted the automatic stay, and

allowed repossession of the debtor's truck. See id. at 686-87; see

also In re Beckett, No. CIV.A. 00-5337, 2001 WL 767601, at *1, *5-

*6 (E.D. Pa. Jul. 5, 2001) (permitting the debtor's eviction

because the debtor could not cure her historical default on a lease

provision requiring her to maintain her apartment in a "clean,

orderly, and safe condition").

This cannot, in our view, be what Congress intended. To

prevent a debtor from assuming a contract based on historical

events that it cannot remedy undermines Congress's basic purpose in

§ 365: to promote "the successful rehabilitation of the business

for the benefit of both the debtor and all its creditors."14 FBI

Distrib., 330 F.3d at 45. This case well illustrates the force of

14
Eagle and Newark argue that § 365(b)(1) reflects a different
policy goal: to ensure that the nondebtor party to an executory
contract receives the benefit of its bargain if it is forced to
continue performance after the debtor has filed for bankruptcy.
See In re Superior Toy & Mfg. Co., 78 F.3d 1169, 1174 (7th Cir.
1996). That policy concern is a legitimate one, but it does not
control here. Bankruptcy by design involves the re-ordering of
debtor-creditor relationships and the adjustment of bargains
negotiated under more optimistic circumstances. Neither
§ 365(b)(1) nor any policy reflected therein alters the broader
objective of the Bankruptcy Code to "give worthy debtors a fresh
start." In re Carp, 340 F.3d 15, 25 (1st Cir. 2003); cf. Bildisco,
465 U.S. at 527 (bankruptcy courts "must focus on the ultimate goal
of Chapter 11 when considering the[] equities" under § 365). Nor
is the nondebtor party to a contract that is assumed
notwithstanding a non-monetary default necessarily denied the
benefit of its bargain, as it is free to sue the debtor for breach
of contract after assumption.

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that concern. Eagle and Newark together owe BankVest approximately

$1 million in unpaid rent. Yet they argued to the bankruptcy court

that BankVest's failure to complete delivery of the leased

equipment is an "historical fact" not susceptible to cure. 270

B.R. at 541. So rather than simply seek an offset for any

pecuniary harm they may have suffered, Eagle and Newark would deny

the estate all $1 million in unpaid rent by compelling BankVest to

cure what they allege is incurable.15 That is plainly inconsistent

with Congress's purpose in the Bankruptcy Code to maximize the

value of the estate for all creditors. Toibb v. Radloff, 501 U.S.

157, 163 (1991); In re Summit Corp., 891 F.2d 1, 5 (1st Cir. 1989);

see also United States v. Shadduck, 112 F.3d 523, 531 (1st Cir.

1997) (all creditors are injured by the efforts of a single

creditor to keep property out of the estate).

All of this suggests that Congress meant § 365(b)(2)(D)

to excuse debtors from the obligation to cure non-monetary defaults

as a condition of assumption. The text, as we have said, readily

bears that interpretation. It is not inconsistent with the meager

legislative history. And developments in the bankruptcy courts

prior to the 1994 amendments put Congress on notice of the problem

15
We do not hold that BankVest's failure to deliver the last
twenty items of leased equipment was in fact an incurable default,
or even that it was a default at all. We merely accept that
allegation for purposes of this appeal. The parties are free to
litigate the facts of the appellants' allegations on remand (and
after assumption).

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of irremediable non-monetary defaults. See, e.g., In re Toyota of

Yonkers, Inc., 135 B.R. 471, 477 (Bankr. S.D.N.Y. 1992) (failure to

operate car dealership for seven consecutive days would constitute

incurable historical default); In re Deppe, 110 B.R. 898, 904

(Bankr. D. Minn. 1990) (debtor's failure to maintain constant

operations at gas station constituted incurable historical

default); In re Anne Cara Oil Co., Inc., 32 B.R. 643, 648 (Bankr.

D. Mass. 1983) (gas station lessee's commingling of gasoline

products was likely an incurable non-monetary default that would

bar assumption).

This interpretation is also consistent with the remaining

subparagraphs in § 365(b)(2), which are directed to so-called ipso

facto clauses (for instance, contract provisions that force debtors

into default merely for becoming insolvent or seeking bankruptcy

protection). See § 365(b)(2)(A)-(C). Like defaults based on

breaches of ipso facto clauses, non-monetary defaults are often a

product of the debtor's very financial distress. In Claremont

itself, for example, the non-monetary default that prevented the

debtors from assuming their franchise agreement was their decision

to close their automobile dealership for the two weeks immediately

prior to their bankruptcy petition. Id. So in the end, they were

denied a valuable asset in their Chapter 11 reorganization because

the same financial hardship that drove them into bankruptcy also

forced them to default on their dealership agreement. This, we

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conclude, is among the ipso facto harms that Congress intended

§ 365(b)(2)(D) to prevent.16 Cf. Weintraub, supra, at 292 n.20

(noting the similar interests served in § 365(b)(2)(D) by barring

the enforcement of penalty rates and by preventing historical non-

monetary defaults from automatically precluding assumption).

Eagle and Newark assert that subparagraph (2)(D) cannot

apply to all non-monetary defaults because that interpretation

would render the ipso facto default provisions superfluous. See

Claremont, 113 F.3d at 1034 (endorsing this argument). We

disagree. The ipso facto defaults described in subparagraphs (A)-

(C) are not necessarily non-monetary. For example, a breach of a

provision relating to "the financial condition of the debtor" might

well be monetary in nature, depending on the underlying contract.

Subparagraph (2)(D) is not so "wholly superfluous" as to preclude

what we consider to be its most sensible interpretation. Conn.

Nat'l Bank v. Germain, 503 U.S. 249, 253 (1992). There may be

substantial overlap among the provisions of § 365(b)(2), but

redundancy is not the same as surplusage. See Germain, 503 U.S. at

16
Non-monetary contractual obligations are similar to the ipso
facto provisions in § 365(b)(2)(A)-(C) in another respect: the
likelihood of default is under the control of the parties. This
creates the risk that a potential creditor can effectively
"bankruptcy-proof" its contract with a financially troubled company
by making the deal contingent on the achievement of stringent
performance or quality benchmarks. One recognized purpose of the
ipso facto clauses in § 365(b)(2) is to prevent creditors from
opting out of the bankruptcy process in this manner. See generally
Collier on Bankruptcy, supra, at § 365.05[4].

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253 ("Redundancies across statutes are not unusual events in

drafting, and so long as there is no positive repugnancy between

two laws . . . a court must give effect to both." (internal

citation and quotation marks omitted)).

C. Application of § 365(b)(2)(D)

We hold that under § 365(b)(2)(D), BankVest need not cure

non-monetary defaults before assuming its equipment leases with

Eagle and Newark. This clears the way for BankVest to assume the

leases (subject to the approval of the bankruptcy court) and to

file an action to collect the $1 million in outstanding rent. And

in that action, Eagle and Newark may raise their defenses to

payment and may counterclaim for damages for any losses actually

suffered through BankVest's alleged breach. "[I]t seems that

Congress's intent in enacting [§ 365(b)(2)(D)] was to address just

such a situation, that is, where the trustee cannot go back in time

to undo an act or omission of the debtor but could compensate for

any actual pecuniary loss that the other contracting party suffered

as a result of the default." Collier on Bankruptcy, supra,

§ 365.05[4] (criticizing Claremont). We emphasize, however, that

the assumption proceeding itself is not the place to resolve those

issues. See In re Orion Pictures Corp., 4 F.3d 1095, 1098-99 (2d

Cir. 1993) ("At heart, a motion to assume should be considered a

summary proceeding, intended to efficiently review the trustee's or

debtor's decision to adhere to or reject a particular contract in

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the course of the swift administration of the bankruptcy estate.

It is not the time or place for prolonged discovery or a lengthy

trial with disputed issues."); In re Docktor Pet Ctr., Inc., 144

B.R. 14, 16 (Bankr. D. Mass. 1992). As the BAP concluded, "[i]f a

debtor wants to assume [a contract] in its business judgment,

knowing that issues other than payment due may be litigated after

assumption, the debtor should be allowed to do so." 290 B.R. at

448.

III.

The judgment of the Bankruptcy Appellate Panel is

affirmed.

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