On September 27, 2006, Appellant Columbia County Industrial Development Agency ("CCIDA"or "Appellant") filed with this Court a Notice of Appeal from an Order of the United States Bankruptcy Court for the Northern District of New York (Littlefield, B.J.), entered on July 7, 2006, granting Debtor's Motion to assume the receivership agreement and reject two payment in lieu of tax agreements ("PILOT"). Notice of Appeal (Dkt. No. 1); Order (Dkt. No. 1, Attach.1). Appellant now contends that the Bankruptcy Court erred by allowing Debtor Hudson Valley Care Center ("Debtor"or "HVCC" or "Appellee") to reject the PILOT agreements. For the reasons discussed below, this Court agrees with Appellant and reverses the Bankruptcy Court's Order.
This case stems from a bond financing transaction in February 2002, between Debtor and CCIDA, which assisted Debtor's acquisition of the Green Manor Nursing Home, Adult Home and Health Care Complex ("the Facilities").*fn1 HVCC's Mem. of Law (Dkt. No. 9) at 4-5; CCIDA's Mem. of Law (Dkt. No. 6) at 2-3. Under the terms of the transaction, the Facilities are titled to CCIDA until HVCC repays the bonds. HVCC's Mem. of Law (Dkt. No. 9) at 5. CCIDA's possession of title makes the Facilities exempt from property taxes. Id. However, to ensure that the local municipalities do not lose all tax proceeds, HVCC is responsible for making payments in lieu of taxes to CCIDA, which transfers the payments to the relevant local authorities. Id. at 6; CCIDA's Mem. of Law (Dkt. No. 6) at 3-4. The PILOT payments equal a certain reduced percentage of the taxes that would be assessed against the Facilities, if they were taxable. Over the course of the PILOT agreement, the payments increase until they equal the full amount the Facilities would be taxed. HVCC's Mem. of Law (Dkt. No. 9) at 6; PILOT (Dkt. No. 3, Attach. 2) at 67-105. The transaction is described in an Installment Sale Agreement ("ISA") and two PILOT agreements. CCIDA's Mem. of Law (Dkt. No. 6) at 3; ISA and PILOT (Dkt. No. 3, Attach. 2) at 9-161 (including agreements between CCIDA and HVCC's predecessors in interest).
HVCC, which is currently a debtor-in-possession of the property, is seeking to reject the PILOT agreements under Section 365(d)(4) of the Bankruptcy Code. On July 7, 2006, Judge Littlefield granted HVCC's motion. Order (Dkt. No. 1, Attach. 1); See also Oral Decision (Dkt. No. 3, Attach. 12) at 4-13. CCIDA then appealed that decision to this Court. Appeal (Dkt. No. 1). This Court has jurisdiction over the parties and subject matter pursuant to Section 158 of Title 28 of the United States Code.
In reviewing the rulings of a bankruptcy court, a district court applies the clearly erroneous standard to a bankruptcy court's conclusions of fact, and reviews de novo conclusions of law. In re Momentum Mfg. Corp., 25 F.3d 1132, 1136 (2d Cir. 1997). Mixed questions of law and fact are reviewed de novo. In re Vebeliunas, 332 F.3d 85, 90 (2d Cir. 2003).
Before allowing the Debtor to reject the PILOT agreements, a court must determine both (1) that the agreements are the type of contractthat can be rejected under Section 365 and (2) whether rejection would be beneficial to the estate, under the business judgment rule. In re Orion Pictures Corp., 4 F.3d 1095, 1099 (2d Cir.1993).
A. Are PILOT Agreements Executory Contracts?
Section 365 of the Bankruptcy Code allows a debtor to assume or reject any executory contract or unexpired lease of the debtor, subject to a court's approval. 11 U.S.C. § 365(a). Although the Bankruptcy Code does not define an executory contract, courts in the Second Circuit frequently use the "Countryman" definition, which identifies a contract as executory if it is unperformed such that the failure of either party to complete performance would constitute a material breach. See In re Hotel Syracuse, 155 B.R. 824, 843 (N.D.N.Y. 1993) (Gerling, B.J.);In re Helm, 335 B.R. 528 (S.D.N.Y. 2006) (quoting Countryman, "Executory Contracts in Bankruptcy: Part I", 57 Minn. L. Rev. 439, 460 (1973)).
The parties disagree whether the PILOT agreements can be considered executory contracts. HVCC describes the PILOT agreements as annually renewable, in which each year HVCC pays CCIDA the PILOT payments and, in return, CCIDA grants HVCC tax-exempt status. HVCC's Mem. of Law (Dkt. No. 9) at 15. The Bankruptcy Court accepted HVCC's characterization of the PILOT contract. Oral Decision (Dkt. No. 3, Attach. 12) at 10. However, CCIDA argues that this characterization of the contract is wrong and that its performance under the contract is primarily completed. CCIDA's Reply (Dkt. No. 10) at 7. The material performance required of CCIDA was issuing civic bonds to finance HVCC's acquisition of the Facilities. CCIDA describes its remaining obligations to collect HVCC's payments and distribute them to the local taxing authorities as de minimis. The only material obligation remaining, according to CCIDA, is that of HVCC to make the payments. Id.
1. Connection Between PILOT Agreements and ISA
An important issue in this dispute is how the PILOT agreements are linked to the ISA. If the PILOT agreements and ISA are parallel but separate, as HVCC claims, CCIDA's issuing of bonds (an obligation under the ISA) would not be CCIDA's performance requirement under the PILOT. Instead, CCIDA's obligation to transmit HVCC's payments to the relevant taxing authorities, which CCIDA here describes as de minimis, would be the material performance required. Under such a scheme, the PILOT agreements would be executory, as performance would be due from both parties on an ongoing basis. Instead, if the PILOT and ISA agreements are interconnected, as CCIDA argues, then one cannot be rejected ...