## Facts

- Penn Traffic, a supermarket operator, filed for Chapter 11 and continued as debtor-in-possession.
- Penn Traffic and COR Route 5 Co., a real-estate developer, entered a project agreement for development of a supermarket site near a shopping center in Fayetteville, New York.
- The agreement contemplated land exchanges, Penn Traffic’s construction of a supermarket, COR’s reimbursement of roughly $3.5 million in construction costs, Penn Traffic’s conveyance of the improved parcel to COR, and COR’s lease-back of the parcel to Penn Traffic.
- On the petition date (May 30, 2003), COR had substantially performed but had not yet paid the $3.5 million reimbursement or tendered the lease; Penn Traffic had not conveyed the supermarket parcel.
- After the bankruptcy filing, COR tendered the $3.5 million and a signed lease in an effort to complete the transaction; Penn Traffic declined the tender.
- Penn Traffic sought court approval to reject the project agreement under 11 U.S.C. § 365(a).
- The bankruptcy court initially found the agreement executory as of the petition date, but concluded COR’s post-petition tender made it non-executory and not rejectable; later proceedings resulted in an order authorizing rejection, affirmed by the district court.

## Issues

1. Whether a contract’s executory status for purposes of 11 U.S.C. § 365 is determined as of the bankruptcy petition date, and whether this agreement was executory on that date.
2. Whether a non-debtor’s post-petition performance can eliminate the debtor’s statutory right to reject an executory contract under § 365.
3. Whether the agreement should be treated as something other than an executory contract (e.g., financing lease, prepaid option, or secured real-estate transaction) such that rejection would be unavailable or materially altered.

## Decision

- The Second Circuit affirmed the order authorizing rejection.
- The court held that executory status for § 365 purposes is assessed as of the petition date.
- The agreement was executory on the petition date because both sides still owed material performance: COR’s payment and lease tender, and Penn Traffic’s conveyance of the parcel.
- COR’s post-petition tender could not defeat Penn Traffic’s right to seek rejection of a petition-date executory contract.
- The court rejected COR’s attempts to recharacterize the agreement as a non-executory financing or secured transaction.
- The court upheld rejection under the business-judgment standard, finding no basis to disturb the debtor’s decision as unreasonable or in bad faith.

## Legal Principles

- Under 11 U.S.C. § 365(a), a debtor-in-possession may assume or reject an executory contract with court approval; rejection constitutes a breach that generally yields a prepetition claim for damages.
- A contract is “executory” under the Countryman test when both parties have unperformed obligations such that failure by either would be a material breach.
- The executory character of a contract for § 365 purposes is fixed as of the petition date.
- A non-debtor’s unilateral post-petition performance cannot convert a petition-date executory contract into a non-executory one in a way that removes the debtor’s § 365 choice to assume or reject.
- Rejection decisions are reviewed under a deferential business-judgment standard, absent bad faith or arbitrary decisionmaking.

## Conclusion

The Second Circuit held that the project agreement was executory as of the petition date and that COR’s post-petition tender could not strip the debtor of its statutory right to reject under § 365; the court further declined to recharacterize the deal and affirmed rejection as a proper exercise of business judgment.


COR Route 5 Co. v. Penn Traffic Co. (In re Penn Traffic Co.), 524 F.3d 373 (2d Cir. 2008)