The Bankruptcy Hotline

First Circuit Creates Circuit Split on Lease Assumption Issue

Becoming the first circuit court to address the issue since the Ninth Circuit's controversial ruling in In re Claremont Acquisition Corp., 113 F.3d 1029, 1034-35 (9th Cir. 1997), the First Circuit has rejected the Ninth Circuit's rationale holding that non-monetary defaults of unexpired leases are not required to be cured before assumption. Eagle Insurance Company and Newark Insurance Company v. BankVest Capital Corp. (In re BankVest Capital Corp.), No. 03-9006 (March 15, 2004).

The First Circuit affirmed the bankruptcy court and the Bankruptcy Appellate Panel (BAP) and held that under ' 365(b)(2)(D) of the Bankruptcy Code, a debtor-in-possession is not required to assume an unexpired lease without first curing non-monetary defaults. The court noted that Ninth Circuit's decision in Claremont has been sharply criticized by “bankruptcy commentators, who nearly unanimously regard that case as an obstacle to the successful reorganization of many debtors in bankruptcy,” and that the uninstructive legislative history of ' 365(b)(2)(D) “at best” indicates an intent “to free debtors from lease provisions requiring the payment of penalty rates.” The court concluded that 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.”

First Circuit Creates Circuit Split on Lease Assumption Issue

Becoming the first circuit court to address the issue since the Ninth Circuit's controversial ruling in In re Claremont Acquisition Corp., 113 F.3d 1029, 1034-35 (9th Cir. 1997), the First Circuit has rejected the Ninth Circuit's rationale holding that non-monetary defaults of unexpired leases are not required to be cured before assumption. Eagle Insurance Company and Newark Insurance Company v. BankVest Capital Corp. (In re BankVest Capital Corp.), No. 03-9006 (March 15, 2004).

The First Circuit affirmed the bankruptcy court and the Bankruptcy Appellate Panel (BAP) and held that under ' 365(b)(2)(D) of the Bankruptcy Code, a debtor-in-possession is not required to assume an unexpired lease without first curing non-monetary defaults. The court noted that Ninth Circuit's decision in Claremont has been sharply criticized by “bankruptcy commentators, who nearly unanimously regard that case as an obstacle to the successful reorganization of many debtors in bankruptcy,” and that the uninstructive legislative history of ' 365(b)(2)(D) “at best” indicates an intent “to free debtors from lease provisions requiring the payment of penalty rates.” The court concluded that 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.”