New York Bankruptcy Court Weighs In on Adequate Assurance of Future Performance under Assigned Leases and Chapter 11 Plan Exculpation Provisions
It is generally well understood that in order to assume and assign an executory contract or unexpired lease, a bankruptcy trustee must cure most defaults under the agreement and provide "adequate assurance" of the assignee's future performance. However, the Bankruptcy Code provides no guidance as to the meaning of "adequate assurance" other than with respect to shopping center leases. See 11 U.S.C. § 365(b)(3) (setting forth adequate assurance parameters with respect to shopping center leases).
In In re Broadway Realty I Co. LLC, No. 25-11050, 2026 WL 147505 (Bankr. S.D.N.Y. Jan. 19, 2026), the U.S. Bankruptcy Court for the Southern District of New York examined this issue in connection with a proposed assignment of thousands of residential leases as part of a free-and-clear sale of debtors' properties. The court held that "adequate assurance" does not mean a guarantee of the assignee's future performance, but merely demonstration that the assignee has the ability to satisfy the underlying obligations.
The bankruptcy court also ruled that an exculpation provision in the debtors' chapter 11 plan exonerating non-estate fiduciaries from liability for actions taken in connection with the chapter 11 case was unobjectionable, provided it was limited in scope to postpetition conduct and actions taken in connection with implementation of the plan after its effective date.
Assumption and Rejection of Executory Contracts and Unexpired Leases in Bankruptcy
Section 365(a) of the Bankruptcy Code provides that, with certain exceptions delineated elsewhere in the statute, "the trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor." The trustee's power to assume or reject is conferred upon a chapter 11 debtor-in-possession ("DIP") under section 1107(a) of the Bankruptcy Code. Rejection results in a court-authorized breach of the contract, with any claim for damages generally treated as a prepetition claim against the estate on a par with the claims of other general unsecured creditors. 11 U.S.C. § 365(g).
Assumption of a defaulted contract or lease requires, among other things, that the trustee "cures or provides adequate assurance that the trustee will promptly cure such default[,]" with certain exceptions. 11 U.S.C. § 365(b)(1).
Upon assumption, most kinds of executory contracts or unexpired leases may be assigned by the trustee or DIP to third parties under certain circumstances, including the requirement in section 365(f)(2)(B) that "adequate assurance of future performance by the assignee of such contract or lease is provided, whether or not there has been a default in such contract or lease."
Section 365(b)(3) specifies what constitutes "adequate assurance of future performance" ((as used in both section 365(b) (assumption) and section 365(f)(2)(B) (assignment)) under shopping center leases. However, it does not provide any guidance as to the meaning of the phrase for other kinds of executory contracts or unexpired leases. See generally Collier on Bankruptcy ("Collier") ¶ 365.06[3][a] (16th ed. 2026) (noting that courts apply the adequate assurance requirement "based upon the facts and circumstances of each case"). This terminology was adopted from section 2-609 of the Uniform Commercial Code, which provides that "when reasonable grounds for insecurity arise with respect to the performance of either party, the other may in writing demand adequate assurance of future performance …." U.C.C. § 2-609; see also Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1309–10 (5th Cir. 1985) (describing the legislative history of "adequate assurance of future performance").
Courts have considered various factors in determining what constitutes adequate assurance of future performance. These include the debtor's payment history, whether there is a guarantee or security deposit, evidence of profitability, a chapter 11 plan designating money exclusively for the landlord, the general outlook in the debtor's industry, and whether an executory contract or unexpired lease is at or below the prevailing market rate. See Collier at ¶ 365.06[3][a] (citing cases).
Chapter 11 Plan Exculpation Clauses
Provisions in chapter 11 plans releasing nondebtors from liability for pre-bankruptcy conduct in exchange for funding for plan distributions, and provisions exculpating estate fiduciaries and other key parties for actions taken during the bankruptcy case, have long been used as a means to facilitate confirmation of plans. Although the U.S. Supreme Court's landmark ruling in Harrington v. Purdue Pharma L.P., 603 U.S. 204 (2024), held that the Bankruptcy Code does not permit nonconsensual, third-party releases under chapter 11 plans that do not pay creditors in full, Purdue dealt only with the lawfulness of nonconsensual third-party releases and related injunctions. It did not address the permissible scope of chapter 11 plan exculpation clauses limiting the liability of certain nondebtor entities for actions taken in connection with a bankruptcy case.
Objections to releases and exculpation provisions in chapter 11 plans are commonly predicated on section 524(e) of the Bankruptcy Code. It provides that, "[e]xcept as provided in subsection (a)(3) of this section [making the discharge injunction applicable to actions to collect against community property], discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt." 11 U.S.C. § 524(e).
Exculpation clauses frequently are described as specifying the scope of, or the standard of care (e.g., ordinary negligence, gross negligence, or willful misconduct) governing, an exculpated party's liability for conduct during the course of the bankruptcy case. See, e.g., In re Aegean Marine Petroleum Network Inc., 599 B.R. 717, 721 (Bankr. S.D.N.Y. 2019) (noting that "an appropriate exculpation provision should say that it bars claims against the exculpated parties based on the negotiation, execution, and implementation of agreements and transactions that were approved by the Court"); In re Murray Metallurgical Coal Holdings, LLC, 623 B.R. 444, 501 (Bankr. S.D. Ohio 2021); see also Blixseth v. Credit Suisse, 961 F.3d 1074, 1084 (9th Cir. 2020) (distinguishing releases and exculpation clauses).
Such provisions commonly insulate estate fiduciaries, including officers, directors, and employees of the debtors and the reorganized debtors, as well as advisors and professionals retained by the estate, official committees and their members from most claims arising from their official conduct during the chapter 11 case. See, e.g., In re PWS Holding Corp., 228 F.3d 224, 246 (3d Cir. 2000); In re LATAM Airlines Grp. S.A., 2022 WL 2206829, at *50 (Bankr. S.D.N.Y. June 18, 2022), corrected, 2022 WL 2541298 (Bankr. S.D.N.Y. July 7, 2022), aff'd, 643 B.R. 756 (S.D.N.Y. 2022), and aff'd, 55 F.4th 377 (2d Cir. 2022); Aegean Marine Petroleum, 599 B.R. at 720.
The validity and permitted scope of exculpation provisions has been the subject of controversy in the courts, perhaps most notably in the Fifth Circuit, where the courts have traditionally been reluctant to permit broad utilization of such provisions. See, In NexPoint Advisors L.P. v. Highland Capital Mgmt., L.P. (In re Highland Capital Mgmt., L.P.), 48 F.4th 419 (5th Cir. 2022) ("Highland I") (reversing a chapter 11 plan confirmation order and holding that, although bankruptcy courts do have authority to approve chapter 11 plans exculpating nondebtor third parties, the plan's definition of "Exculpated Parties" was impermissibly broad under section 524(e) of the Bankruptcy Code because it extended to parties beyond the debtor and related entities, the unsecured creditors' committee and its members, and the debtor's independent directors "for conduct within the scope of their duties"), cert. denied, 144 S. Ct. 2714 (2024), and cert. denied, 144 S. Ct. 2715 (2024), on remand, No. 19-34054-SGJ11, 2023 WL 2250145 (Bankr. N.D. Tex. Feb. 27, 2023) (granting the debtor's motion to alter the exculpation provision in its chapter 11 plan in accordance with Highland I by limiting the scope of the provision to the debtor, the independent directors, the committee, the committee members, and certain "Related Persons" of these parties, but rejecting the argument that the definition of "exculpated parties" should also be made to the definition of "protected parties" shielded by the gatekeeper clause), rev'd and remanded, 132 F.4th 353 (5th Cir. 2025) (ruling that the bankruptcy court should have narrowed the definition of "protected parties" covered by the plan's gatekeeping provision to be co-extensive with the limited scope of parties protected by the plan's exculpation clause), cert. denied and stay vacated, 2025 WL 1621149 (U.S. June 9, 2025), petition for cert. filed sub nom. Highland Capital Management LP, Petitioner v. NexPoint Advisors LP, No. 25-119 (U.S. July 28, 2025).
Broadway Realty
New York City real-estate management company Broadway Realty I Co., LLC ("BRI") indirectly owned more than 80 rent-stabilized residential properties, each held by a limited liability company ("LLC") with its own nonrecourse financing. A single lender (the "lender") held mortgages on all of the properties, which contained more than 5,000 units of affordable housing.
After many of the secured loans went into foreclosure and/or receivership, BRI and its affiliates (collectively, the "debtors") filed for chapter 11 protection in May 2025 in the Southern District of New York.
Following extensive marketing, the debtors conducted an auction sale for the properties free and clear of all liens, claims, and encumbrances under section 363(f) of the Bankruptcy Code (with the lender's consent). The top bid at auction came from Summit Gold, Inc. ("Summit"), a stalking-horse bidder that bid for all of the properties. Summit intended to assign title to each property to a separately owned LLC, all under common Summit ownership. Summit committed to reducing the debt secured by the properties by $275 million and to invest $113 million of its own (unborrowed) funds in the new equity. In addition, the existing lender agreed to provide the debtor with a $3 million line of credit. In connection with the proposed sale, Summit represented that it would invest $30 million over the first five years, including $10 million to be used to address numerous housing code violations and building issues.
The debtors proposed a liquidating chapter 11 plan that was premised on the sale. Under the plan, the debtors would assume and assign each of the tenant leases in the properties to Summit. The plan included an exculpation provision that protected the debtors, their professionals, the lender, and the plan administrator from liability relating to the chapter 11 case or implementation of the plan.
Tenant groups, the City of New York, and the N.Y. State Attorney General's Office objected to confirmation of the plan, the proposed sale of the properties, and assignment of the tenant leases. Among other things, they argued that various housing code violations were "defaults" under the leases and the debtors failed to provide "adequate assurance" that such defaults would be promptly cured as required under section 365(b)(1) of the Bankruptcy Code.
The Office of the U.S. Trustee (the "UST") also objected to confirmation of the plan, arguing that: (i) the plan's exculpation provision was overly broad because it extended not only to estate fiduciaries but the lender and the plan administrator; (ii) the provision improperly exculpated and released the parties for any actions taken upon the advice of counsel, thereby acting as a complete limitation of liability; and (iii) the provision should be limited to acts or omissions occurring during the chapter 11 case, rather than pre-bankruptcy or after the effective date of the plan.
The Bankruptcy Court's Ruling
The bankruptcy court approved the sale and confirmed the debtors' liquidating chapter 11 plan.
U.S. Bankruptcy Judge David S. Jones initially concluded that the debtors' selection of the Summit bid over the only other qualifying bid submitted for the properties was a "sound and reasoned" exercise of the debtors' business judgment. He also found that the sale was proposed in good faith and was in the best interest of creditors and other stakeholders. Broadway Realty, 2026 WL 147505, at *4.
Next, the bankruptcy court explained that it was unclear whether housing code violations under the residential leases were "defaults" that needed to be cured before assumption and assignment of the leases as part of the sale to Summit. However, the court assumed for the purpose of its decision that defaults existed, including breaches of the warranty of habitability or similar lease terms. The court also acknowledged that the situation before it was atypical because it involved not a debtor seeking to assume and assign a lease under which it is the tenant but, rather, a debtor attempting to assume and assign leases under which it is the landlord.
Noting that relevant caselaw "counsels a flexible approach and a pragmatic assessment" of what constitutes "adequate assurance," Judge Jones emphasized that the analysis entails not whether there is a guarantee of future performance under an assumed or assigned lease or contract, but whether it appears that the underlying obligations will be satisfied. Id. at *6 (citing In re Great Atl. & Pac. Tea Co., 472 B.R. 666, 674–75 (S.D.N.Y. 2012) ("A debtor need not provide 'an absolute guarantee of performance'; rather, '[i]t must simply appear that the rent will be paid and other lease obligations met…. The emphasis is on protection.'"); In re Jennifer Convertibles, Inc., 447 B.R. 713, 719 (Bankr. S.D.N.Y. 2011) ("A debtor need not prove that it 'will thrive and make a profit' but only that it appears that it will meet its obligations."); In re Westview 74th St. Drug Corp., 59 B.R. 747, 754 (Bankr. S.D.N.Y. 1986) (the "test is not one of guaranty but simply whether it appears that [underlying obligations] will be paid"). Moreover, Judge Jones explained, assurance of future performance "is to be 'defined by commercial rather than legal standards.'" Id. (quoting In re Sapolin Paints, Inc., 5 B.R. 412, 421 (Bankr. E.D.N.Y. 1980) (citation omitted)).
Judge Jones determined that the remediation plan proposed by Summit satisfied the Bankruptcy Codes' adequate assurance requirements. According to the judge, "Summit has articulated what appears to be a well-considered and reasoned approach to prioritizing the most pressing conditions and taking significant action in a compressed time frame." Id. Among other things, he explained, the record reflected that: (i) Summit estimated the need for $30 million over the ensuing five years to remedy needed repairs and promptly address existing housing code violations; (ii) Summit was investing $113 million of its own funds as equity into the residential building portfolio; (iii) the Summit deal would reduce leverage by 45% (or more than $275 million), freeing up cash flow that could be used to address building conditions; (iv) Summit would rely on qualified professional management companies to run the properties; and (iv) the lender agreed to provide a $3 million revolving credit line to cure housing code violations. Id. at **6–8.
Based on these findings, the bankruptcy court rejected the objectors' argument that more was required to satisfy the Bankruptcy Code's adequate assurance requirements:
Although many objectors demand binding guarantees, a more specific and binding schedule, granular milestones and commitments, dedicated monetary reserves, and/or greater speed than [was] spelled out as Summit's plan, those requests exceed the requirements of the Bankruptcy Code and are best directed, if at all, to the City in the exercise of its regulatory authority. Rather, the transaction, Summit's finances, and its ability to spell out a reasoned and comprehensive approach meet the Code's "adequate assurance" requirements that any existing "defaults" in apartment leases will be cured and Summit will perform under the leases going forward.
Id. at *7.
The bankruptcy court similarly rejected the objectors' argument that the debtors' chapter 11 plan was not feasible, as required by section 1129(a)(11) of the Bankruptcy Code, because the debtors failed to provide adequate information regarding Summit's ability to consummate the sale and Summit might not have adequate resources or inclination to rehabilitate the properties or run them as a profitable business. According to the court, those concerns were more appropriately addressed to the issue of adequate assurance than plan feasibility, and the debtors "have established the reasonable probability that Summit will be able to perform as it projects, which is all that section 1129(a)(1) requires even of debtors and their successors." Id. at *9.
The court was also unconvinced by the contention that Summit should not benefit from the good faith purchaser protections set forth in section 363(m) of the Bankruptcy Code because it was an "insider" of the debtors. Despite connections between the debtors and Summit that gave rise to "serious concerns," Judge Jones ruled that Summit was not an "insider," as defined by either by section 101(31) or any similar nonstatutory standard. Moreover, he noted, the idea that the sale was an improper insider transaction that would act to the detriment of creditors was "belied by the highly visible nature of this case, which ensures as a practical matter that anyone interested in owning and operation Debtors' portfolio of rent stabilized properties had ample notice and opportunity to pursue a transaction." Id. at **7 n.3 and 10.
Addressing the plan's exculpation clause, the bankruptcy court explained that the UST's arguments were "largely contrary to case law in this jurisdiction," which permits exculpation of non-estate fiduciaries that make a substantial contribution to the reorganization and the inclusion of which as exculpated parties is a critical component of formulating a chapter 11 plan. Id. at *11. In this case, Judge Jones emphasized, the lender clearly made substantial contributions to the progress of the debtors' chapter 11 case by, among other things, allowing the debtors to use their cash collateral, partially financing the sale of the properties, and participating in the formulation of the plan. Likewise with the plan administrator, which was entrusted with ensuring that the plan was implemented. Id. at *12.
The bankruptcy court also concluded that the reliance on counsel language in the exculpation clause was expressly conditioned on a reasonableness requirement, undermining the UST's characterization of the provision as "imposing an absolute bar against liability." Id.
In addition, the court explained that bankruptcy courts in the Southern District of New York have approved exculpation of pre- as well as post-bankruptcy conduct. Id. (citing LATAM, 2022 WL 2206829, at *49). However, Judge Jones ruled that the "temporal scope" of the provision in this case should be limited to exclude pre-bankruptcy conduct given the contentious history of the relationship between the debtors and the lender and the lack of any prepetition progress by the parties toward confirming a plan, such as a prepackaged or pre-negotiated framework. Id. By contrast, the court did not find the inclusion of court-authorized post-effective date conduct in implementing the plan objectionable, citing other cases in the Southern District of New York in which the practice has been deemed permissible. Id. at *13 (citing In re Voyager Digital Holdings, Inc., 649 B.R. 111, 136 (Bankr. S.D.N.Y. 2026); In re Genesis Glob. Holdco, LLC, 660 B.R. 439, 528 (Bankr. S.D.N.Y. 2024)).
The bankruptcy court overruled all remaining objections, approved the sale of the properties, and confirmed the debtors' chapter 11 plan, as modified in accordance with its ruling.
Outlook
The ability of a bankruptcy trustee or DIP to assume executory contracts and unexpired leases is an indispensable tool for preserving contracts and leases that may be crucial to the debtor's ability to reorganize and continue operating post-bankruptcy. In addition, the power to assign such leases and contracts can generate value for the estate to pay creditor claims or provide funding for a chapter 11 plan. Both assumption and assignment are governed by the strictures of the Bankruptcy Code, including the requirement that the trustee or DIP cure any monetary defaults (or provide adequate assurance that such defaults will be cured promptly) and that the trustee or DIP provide adequate assurance that the proposed assignee can perform its obligations under the lease or contract after assignment.
As demonstrated by Broadway Realty, the standard for "adequate assurance" (other than with respect to shopping-center leases) is flexible and depends on the facts and circumstances of each case. Although the concept is designed to ensure that either the debtor (in the case of assumption) or its chosen assignee (in the case of assumption and assignment) can satisfy its obligations under the lease or contract going forward, no guarantee of future performance is necessary.
Broadway Realty is also noteworthy for its analysis of the propriety of exculpation provisions in chapter 11 plans. First, the bankruptcy court concluded—as many other courts have done so, especially in the Southern District of New York—that the scope of an exculpation clause can extend beyond estate fiduciaries under appropriate circumstances. Second, although the court ultimately declined to permit exculpation for pre-bankruptcy conduct due to the absence of prepetition restructuring activities, it reinforced the notion that parties can be exculpated under a chapter 11 plan for prepetition conduct, actions taken during the course of the case, and even post-effective date actions taken to implement a plan.
The controversy over exculpation provisions is currently the subject of (yet another) petition for U.S. Supreme Court review in the Highland Capital chapter 11 case. See Highland Capital Mgmt, L.P. v. NexPoint Advisors, L.P., No. 25 119 (U.S. Oct. 14, 2025). It remains to be seen whether the Court will choose to clarify the validity or permitted scope of such provisions.
