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The 1st U.S. Circuit Court of Appeals opened a rift between itself and its sister circuit on the opposite coast in a March bankruptcy decision, In re BankVest Capital Corp., No. 03-9006. The 1st Circuit conceded that the 9th Circuit’s 1997 reading of 11 U.S.C. 365(b)-which deals with the terms under which a corporate debtor-in-possession may assume prebankruptcy contracts-is supported by the statutory text and legislative history. But the 1st Circuit’s decision to strike out in a new direction is not a mere matter of contrariness. In the words of U.S. Circuit Judge Sandra L. Lynch, who wrote the opinion for the three-member panel, the 9th Circuit’s decision in In re Claremont Acquisition Corp., 113 F.3d 1029, “has drawn sharp criticism from bankruptcy commentators, who nearly universally regard that case as an obstacle to the successful reorganization of many debtors in bankruptcy.” ‘Loaner’ equipment In 1999, BankVest Capital Corp., a computer equipment leasing company, signed contracts with Eagle Insurance Co. and Newark Insurance Co., according to Lynch’s opinion. Because some equipment was not immediately available, BankVest agreed to provide “loaners” to be replaced with new equipment as it became available. Before that replacement could take place, BankVest was forced into involuntary bankruptcy. Eagle and Newark continued to use the loaner equipment, but stopped making payments called for under their contracts, accumulating arrears of about $1 million, Lynch wrote. Under BankVest’s Chapter 11 reorganization plan, which a bankruptcy judge approved, the debtor-in-possession decided to continue, or assume, all of its equipment leases. Eagle and Newark objected that their contracts could not be assumed because BankVest had failed to deliver replacement equipment on time, thus creating an incurable default. According to the 9th Circuit’s reading of � 365(b), a debtor or trustee may not assume a contract unless it has cured defaults, whether they be monetary (like rental payments) or nonmonetary (like the failure to deliver equipment by a certain date). The 9th Circuit arrived at that reading by diving into the tortured syntax of the statute and its murky legislative history. The court held that an alternative reading-that only monetary defaults need be cured before assumption-would render the statute grammatically incorrect. In contrast, Lynch all but threw her hands up at actually making sense of the text of � 365(b). “The text . . . is awkward and ungrammatical on any reading,” she said. “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.” Lynch argued that the legislative history was too ambiguous to be of any help in that respect. Instead, she looked to “Congress’s overarching purposes in the Bankruptcy Code.” In the view of Lynch and of many commentators, the 9th Circuit reading impedes the rehabilitation of businesses because while a monetary default can be cured with a payment, a nonmonetary default is often beyond cure. “Many non-monetary defaults are ‘historical facts’ that are impossible to cure after the fact,” Lynch wrote, noting that many lower courts that follow the 9th Circuit’s lead have prevented debtors from continuing with contractual work that figured in their plans for renewed viability. Young’s e-mail address is [email protected].

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