Petition for Writ of Certiorari — L.R.S.C., Co. v. Rickel Home Centers, Inc., 121 S. Ct. 175 (2000) (No. 00-42)
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00 42 wwLosomp
No.
In The
Supreme Court of the United States
Loos. CO.,
Petitioner,
RICKEL HOME CENTERS, INC. AND STAPLES, INC.,
Respondents.
On Petition For A Writ Of Certiorari
To The United States Court Of Appeals
For The Third Circuit
¢
PETITION FOR A WRIT OF CERTIORARI
ALFRED ARONOVITZ
Counsel of Record
Post Office Box 16-4550
Miami, Florida 33116-4550
(305) 412-4120
MELE WE THE Stee = 3
COCKLE LAW BRIEF PRINTING CO., (800) 225-6964
OR CALL COLLECT (402) 342-2831
i
QUESTION PRESENTED FOR REVIEW
WHETHER A SHOPPING CENTER LANDLORD CLAIM-
ING THAT A LOWER TRIBUNAL EXCEEDED ITS
AUTHORITY UNDER 11 U.S.C. SUBSECTION 365(b)(3)
IN PERMITTING A DEBTOR TO ASSIGN AN EXECU-
TORY LEASE MAY OBTAIN APPELLATE REVIEW
WITHOUT FIRST OBTAINING A STAY PURSUANT TO
11 U.S.C. SUBSECTION 363(m).
li
PARTIES TO THE PROCEEDING
The parties to the proceeding are only those noted in
the caption.
iii
TABLE OF CONTENTS
Page
QUESTION PRESENTED FOR REVIEW ............ i
PARTIES TO THE PROCEEDING .................. ii
OPINIONS AND ORDERS BELOW ................ 1
STATEMENT OF JURISDICTION................... 1
RELEVANT STATUTORY AND RELATED PROVI-
eh On Sess chee y oc esi ecs) 6 ccks beck. 1
STATEMENT OF THE CASE AND FACTS. ......... 2
I B56 8 0 0 0) ih ok os Fn ve wk 3
A SHOPPING CENTER LANDLORD CLAIMING
THAT A LOWER TRIBUNAL EXCEEDED ITS
AUTHORITY UNDER 11 U.S.C. SUBSECTION
365(b)(3) IN PERMITTING A DEBTOR TO ASSIGN
AN EXECUTORY LEASE MAY OBTAIN APPEL-
LATE REVIEW WITHOUT FIRST OBTAINING A
STAY PURSUANT TO 11 U.S.C. SUBSECTION
eer ec 3
iv
TABLE OF AUTHORITIES
Page
Cases
In re Joshua Slocum, Ltd., 922 F.2d 1081 (3rd Cir.
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STATUTES AND RULES
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11 U.S.C. Subsection 365(b)(3)............ £34447
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Fed. Rules of Civil Procedure, Rule 62(d).......... 1, 6
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OPINIONS AND ORDERS BELOW
In re: Rickel Home Centers, Inc., Petitioner. L.R.S.C. Co.,
Appellant v. Rickel Home Centers, Inc.; Staples, Inc., No.
98-7181 (3rd Cir. April 6, 2000)
Order In re: Rickel Home Centers, Inc., Debtor, No. 96-26
(U.S. Bankruptcy Court, D. Delaware, March 6, 1998)
Opinion In re: Rickel Home Centers, Inc., Debtor, No.
96-26 (U.S. Bankruptcy Court, D. Delaware, March 6, 1998)
Errata Order In re: Rickel Home Centers, Inc., Debtor,
No. 96-26 (U.S. Bankruptcy Court, D. Delaware, March 12,
1998)
STATEMENT OF JURISDICTION
The judgment below was entered on April 6, 2000.
Jurisdiction is conferred on this Court by 28 U.S.C. Sec-
tion 1254.
+
RELEVANT STATUTORY AND
RELATED PROVISIONS
11 U.S.C. Section 365
11 U.S.C. Section 363
These statutes are lengthy and are set out in full in
the Appendix.
Fed. Rules of Civil Procedure, Rule 62(d)
¢
STATEMENT OF THE CASE AND FACTS
On January 10, 1996, Rickel Home Centers, Inc.
(Debtor), a home improvement center retailer with
numerous stores, filed a voluntary petition for relief in
the U. S. Bankruptcy Court for the District of Delaware.
Petitioner, L.R.S.C. Co., was the landlord of one of
Debtor’s outlets, a 38,000 square foot space in a shopping
center in Lawrenceville, New Jersey.! Debtor remained in
possession of its properties and continued to operate its
business.
On February 12, 1998, Debtor sought an order
authorizing it to sell its interest in 41 lease agreements -
including Debtor’s lease with Petitioner — to Staples, Inc.
(Staples) for $35,500,000.00 under an all or nothing pro-
posal. Staples intended to itself occupy space of only
24,000 square feet in Petitioner’s shopping center for use
as an office supply center and desired to partition and
sublease any excess space under the lease to others for
undesignated purposes. Debtor’s lease with Petitioner
contained use restrictions, percentage rent requirements
and other provisions commonly contained in shopping
center leases. Accordingly, simultaneously with its
request for authority to sell, Debtor requested relief from
certain of these restrictions. Petitioner objected, but, after
hearing, the Honorable Joseph J. Farnan, on March 6,
1998, entered an order and filed an opinion (App. 3, 20)
granting Debtor’s requested relief. Jurisdiction in the
lower tribunal was conferred by 28 U.S.C. Section 1334.
' It is not disputed in this proceeding that Petitioner owns
a shopping center within the meaning of 11 U.S.C. Subsection
365(b)(3).
Petitioner timely filed its appeal to the U.S. Circuit
Court of Appeals for the Third Circuit, claiming that the
lower tribunal had exceeded its authority in allowing the
assignment to Staples without use restrictions and with-
out use limitations except as determined by the lower
tribunal’s future orders.
The Circuit Court heard argument on September 7,
1999, and, by judgment dated April 6, 2000 held (as
relevant here) that Petitioner’s substantive arguments
were moot as Petitioner had not obtained a stay of pro-
ceedings pursuant to 11 U.S.C. subsection 363(m). This
Petition is directed to the Circuit court’s opinion.
¢
ARGUMENT
A SHOPPING CENTER LANDLORD CLAIMING
THAT A LOWER TRIBUNAL EXCEEDED ITS
AUTHORITY UNDER 11 U.S.C. SUBSECTION 365(b)(3)
IN PERMITTING A DEBTOR TO ASSIGN AN EXECU-
TORY LEASE MAY OBTAIN APPELLATE REVIEW
WITHOUT FIRST OBTAINING A STAY PURSUANT
TO 11 U.S.C. SUBSECTION 363(m).
The Third Circuit opinion ignored the clear language
of 11 U.S.C. subsection 363(b)(1) that limits the applica-
tion of this subsection to “property of the estate”, and in
doing so nullified the limitations clearly articulated in
subsection 365(b)(3). This subsection, relating specifically
to shopping centers, requires that the landlord receive
“adequate assurance”:
“(A) of the source of rent and other con-
sideration due under such lease, and in the case
of an assignment, that the financial condition
and operating performance of the proposed
assignee and its guarantors, if any, shall be simi-
lar to the financial condition and operating per-
formance of the debtor and its guarantors, if
any, as of the time the debtor became the lessee
under the lease;
“(B) that any percentage rent due under
such lease will not decline substantially;
“(C) that assumption or assignment of
such lease is subject to all the provisions thereof,
including (but not limited to) provisions such as
a radius, location, use, or exclusivity provision,
and will not breach an such provision contained :
in any other lease, financing agreement, or mas-
ter agreement relating to such shopping center; |
and
eet ee ee TET
“(D) that assumption or assignment of
such lease will not disrupt any tenant mix or
balance in such shopping center.”
a i i a ll
Subsection 363(m), indeed all of Section 363, does not
contemplate that there is a contest as to what constitutes
the “property of the estate”. Petitioner’s contention is
that if subsection 365(b)(3) conditions are not met, the
Debtor has no property interest in the lease to assign. The
Third Circuit’s opinion simply assumes that the property |
rights challenged by Petitioner are the “property of the qi
estate” without regard to subsection 365(b)(3). While
there appear to be no other circuit courts in conflict with
the Third Circuit judgment, the judgment itself is in
conflict with the Third Circuit’s holding in In re Joshua
Slocum, Ltd., 922 F.2d 1081 (3rd Cir. 1990). There, the
extent of the lower court’s departure in modifying a
shopping center lease was determined to be the threshold
| |
issue, and subséction 363(m) was held to be no bar to a
landlord’s appeal.
In the present case, the lower court not only modified
the use provision, but allowed the assignee to sublease to
others a portion of the demised premises for indetermi-
nate usage. In nullifying the specific conditions imposed
by subsection 365(b)(3), the lower court relied upon sub-
section 365(f). Reliance on this subsection was misplaced
because subsection 365(f)(2)(A) requires that the assignee
assume the lease “in accordance with the provisions of
this section”, which necessarily includes the conditions
enumerated in subsection 365(b)(3) with the sole excep-
tion of the anti-assignment requirement. Even so, the
lower court recognized the conditional nature of the
Debtor’s property right in the challenged lease and, in
treating this lease as a salable property, retained jurisdic-
tion to determine whether a sub-tenancy was for a rea-
sonable usage. The Bankruptcy Code makes no provision
for indefinite retention of jurisdiction - possibly extend-
ing beyond the bankruptcy proceeding itself - to deter-
mine the reasonableness of a future subtenant and creates
no standard of reasonableness or otherwise to apply in
making a decision. Moreover, if Staples can sublease a
portion of the premises free of review without a stay
pursuant to subsection 363(m), there appears to be no
legal concept that would impede their right to sublease
the entire premises. And if an assignee has such author-
ity, as is allowed by the Third Circuit, similarly there
appears to be no legal concept to prevent assignees with
no immediate occupancy requirements from purchasing
leases solely for the purpose of speculation.
By not considering major departures from the articu-
lated limitations of subsection 365(b)(3) without a stay of
the proceedings, the Third Circuit’s opinion required
Petitioner to obtain a supersedeas bond for a potential
$35,500,000.00 loss to Debtor.? The size of such a super-
sedeas bond bore no relationship to any actual loss of the
single lease agreement in dispute, and effectively barred
Petitioner from obtaining review of its claim. Petitioner
has been unable to obtain information of the number of
bankruptcies now involving bulk sales of shopping center
lease agreements as such data is not published, but sug-
gests that this has become a common occurrence in busi-
ness bankruptcies. The Third Circuit’s holding, for all
practical purposes, prevents this class of shopping center
landlords from appellate review by imposing an unrea-
sonable supersedeas requirement, and makes the District
Court the sole and only arbiter of what constitutes the
“property of the estate”.
2 Fed. Rules of Civil Procedure Rule 62(d)
(d) Stay Upon Appeal. When an appeal is taken the
appellant by giving a supersedeas bond may obtain a stay
subject to the exceptions contained in subdivision (a) of this
rule. The bond may be given at or after the time of filing the
notice of appeal or of procuring the order allowing the appeal,
as the case may be. The stay is effective when the supersedeas
bond is approved by the court.
a
CONCLUSION
The Court is urged to grant certiorari because the
Third Circuit’s judgment requires an unreasonable super-
sedeas bond, to cover a potential loss of a $35,500,000.00
transaction contemplating 41 leases, when Petitioner was
seeking relief as to only one such lease. Additionally, the
Third Circuit’s judgment improperly extended 11 U.S.C.
subsection 363(m) to cover issues where the property
rights of the Debtor were themselves in dispute and, by
doing so, nullified the requirements of 11 U.S.C. subsec-
tion 365(b)(3).
Respectfully submitted,
ALFRED ARONOVITZ
Attorney for Petitioner
Post Office Box 164550
Miami, Florida 33116-4550
Phone: (305) 412-4120
App. 1
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 98-7181
IN RE: RICKEL HOME CENTERS, INC.,
Debtor
ines, CO.,
Appellant
V.
RICKEL HOME CENTERS, INC.; STAPLES, INC.
On Appeal from the United States District Court
for the District of Delaware
(D.C. Civ. No. 96-cv-00026)
District Judge: Hon. Joseph J. Farnan, Jr.,
Argued September 7, 1999
Present: Sloviter and Roth, Circuit Judges, and Pogue,
United States Court of International Trade*
JUDGMENT
This cause came on to be heard on the record from
the United States District Court for the District of Dela-
ware and was argued on September 7, 1999.
On consideration whereof, it is now here ordered and
adjudged by this court that the appeal by L.R.S.C. of the
* The Honorable Donald C. Pogue, Judge United States
Court of International trade, sitting by designation.
App. 2
District Court’s order authorizing the Staples transaction
and excising the use provision as moot pursuant to sec-
tion 363(m) of the Bankruptcy Code is dismissed. The
portion of L.R.S.C.’s appeal regarding the District Court’s
order retaining jurisdiction is dismissed as it is not ripe
for review. Costs taxed against appellant. All of the above
in accordance with the opinion of this Court. |
ATTEST:
/s/ Marcie M. Waldron
Acting Clerk
Dated: April 6, 2000
Certified as a true copy and issued in lieu
of a formal mandate on April 28, 2000.
Teste: /s/ Marcie M. Waldron
Acting Clerk, United States
Court of Appeals for the Third Circuit
App. 3
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
Chapter 11
Case No. 96-26 (JJF)
In re:
)
RICKEL HOME CENTERS,
INC., '
Debtor. _)
: ORDER PURSUANT TO SECTIONS 363, 365(a)
AND 365(f) OF THE BANKRUPTCY CODE
: AND BANKRUPTCY RULES 6004 AND 6006
AUTHORIZING THE DEBTOR-IN-POSSESSION TO
ASSUME (WHERE APPLICABLE) AND SELL AND
ASSIGN NONRESIDENTIAL REAL
PROPERTY LEASES
Upon the motion (the “Motion”) of Rickel Home
Centers, Inc., the above-captioned debtor and debtor-in-
possession (the “Debtor”), dated February 12, 1998, for an
order pursuant to Sections 363, 365(a) and 365(f) of title
) 11 of the United States Code (the “Bankruptcy Code”)
: and Rules 6004 and 6006 of the Federal Rules of Bank-
: ruptcy Procedure (the “Bankruptcy Rules”) authorizing
the Debtor to (a) sell 41 nonresidential real property
leases, as more particularly described on Exhibit A
attached to this Order (the “Staples Leases”), pursuant to
the terms and conditions of that certain Further Revised
Offer to Purchase Leasehold Interests by Staples, Inc.
(“Staples”) or its nominee dated as of February 3, 1998,
which was signed by the Debtor on February 4, 1998, a
true copy of which is attached as Exhibit B to this Order
and the Assumption and Assignment Agreement by and
between the Debtor and Staples, a true copy of which is
attached as Exhibit C to this Order (collectively, the
App. 4
“Agreement”), and to (b) assume (where applicable) and
assign to Staples or its nominee the Assigned Leases (as
defined below);
And the Court having jurisdiction over this matter
pursuant to 28 U.S.C. §§ 157 and 1334; and this being a
core proceeding pursuant to 28 U.S.C. § 157(b)(2);
And it appearing that the relief requested is in the
best interests of the Debtor’s estate and its creditors;
And it appearing that good and sufficient notice of
the Motion and the hearing thereon has been given to (a)
the Office of the United States Trustee; (b) Wachtell, Lip-
ton, Rosen & Katz, the attorneys for the Official Commit-
tee of Unsecured Creditors; (c) Otterbourg, Steindler,
Houston & Rosen, P.C., the attorneys for Congress Finan-
cial Corporation, one of the Debtor’s postpetition lenders;
(d) Sullivan & Cromwell and Shearman & Sterling, the
attorneys for West Windsor Holding corporation, one of
the Debtor’s postpetition lenders; (e) each of the land-
lords under the Assigned Leases (the “Landlords”) and
other parties-in-interest to the Staples Leases identified
on Exhibit D attached to this Order; (f) counsel for Sta-
ples; (g) other bidders or their counsel, including Star-
wood-Ceruzzi LLC (“Starwood”) and Rickel Realty LLC
(“Rickel Realty”); and (h) all parties that have filed a
notice of appearance in this chapter 11 case; and it
appearing that no other notice need be given;
And the Court having held hearings on the Motions
on February 26, March 3 and March 4, 1998, and having
considered the objections thereto, and having overruled
such objections as were not consensually resolved as to
the assumption (where applicable) and assignment of the
App. 5
Assigned Leases, except the objection of Plainbridge, Inc.
and Pathmark Stores Inc. which the Court has sustained
in a separate Memorandum Opinion and Order, including
the objections of the landlord for the Debtor’s Ramsey, NJ
store;
NOW, THEREFORE, the Court hereby finds as fol-
lows:
A. The Debtor has determined, in the exer-
cise of reasonable business judgment, that the
Staples Leases should be sold to Staples or its
nominee.
B. The Debtor has determined to enter into
the Agreement.
C. The assumption (where applicable) and
assignment of the Assigned Leases pursuant to
section 365 of the Bankruptcy Code is in the best
interests of the Debtor’s estate and its creditors.
D.~ Staples’ offer, made pursuant to sec-
tions 363 and 365 of the Bankruptcy Code and
Bankruptcy Rules 6004 and 6006, and the terms
and conditions of such offer, provides the best
offer that the Debtor received for the Staples
Leases, and such offer is fair and reasonable.
E. Pursuant to section 365(f) of the Bank-
ruptcy- Code, Staples has provided adequate
assurance of future performance under the
Assigned Leases.
F. Staples has designated Brick Norse
Realty as its nominee for the Debtor’s Brick-
town, New Jersey store lease (the “Bricktown
Lease”), which will be authorized by separate
order of this Court and the assumption and
App. 6
assignment and sale of the Bricktown Lease
shall not be affected by this Order.
G. With respect to any Assigned Lease of
property in a Shopping Center (as that term is
used in section 365(b)(3) of the Bankruptcy
Code), the assumption (if applicable) and the
assignment of such leasehold to Staples for its
intended use as an office superstore will not
disrupt any tenant mix or balance in such Shop-
ping Center and is otherwise in compliance with
§ 365(b)(3) of the Bankruptcy Code.
H. Except with respect to amounts as to
which a Landlord has filed an objection reflect-
ing a difference of views between the landlord
and the Debtor (and as to which the Debtor has
placed into escrow funds representing the dif-
ference, pending agreement or resolution by the
Court), the Debtor’s outstanding prepetition
obligations under those of the Staples Leases
that are Assigned Non-assumed (as defined
below) are the amounts set forth on Exhibit E
attached to this Order (the “Cure Amounts”).
I. Each of the Assigned Leases is in full
force and effect, with no events of default hav-
ing occurred which will not be cured by
Debtor’s payment of the Cure Amounts or by
the application of funds escrowed to effect such
cure.
J. Staples negotiated the Agreement and
purchased the Staples Leases in good faith,
within the meaning of Bankruptcy Code section
363(m), and Staples is found to be a good faith
purchaser under section 363(m).
K. The Debtor, as borrower, and Congress
Financial Corporation (“Congress”), as lender,
App. 7
are parties to that certain Loan and Security
Agreement dated November 3, 1996, as
amended by the Amendment and ratification
Agreement dated January 10, 1997, as amended
(the “Congress DIP Agreement”), which was
approved by final order of this Court dated
February 13, 1996 (the “Congress Final Order”).
L. The Debtor, as borrower, and West
Windsor Holding corporation (“West Windsor”),
as lender, are parties to a Post-Petition Credit
Agreement (the “West Windsor DIP Agree-
ment”), dated as January 9, 1996, which was
approved by final order of this Court dated
February 13, 1996.
M. Each of Congress and West Windsor
has a first priority lien and superpriority admin-
istrative claim in and to certain of the Debtor’s
leasehold interests.
N. The Agreement does not separately
allocate the purchase price among any of the
Staples Leases, with the exception of the lease
for West Chester, PA (the “West Chester Lease”),
for which $1,000,000 of the purchase price has
been allocated.
O. Pursuant to a separate ruling by the
Court, approved by separate order, the landlord
with respect to the West Chester Lease exercised
a right of first refusal and thereby purchased the
West Chester Lease for $1,025,000 (the “Jaymate
First Refusal Payment”), as a consequence of
which the West Chester Lease was removed
from the Agreement and the purchase price pay-
able by Staples thereunder has been reduced by
the Jaymate First Refusal Payment.
App. 8
P. The purchase price under the Agree-
ment exceeds the aggregate amount of all debt
secured by liens upon the Staples leases.
Q. The proceeds of the sale of the Staples
Leases will be used first to repay any amounts
due each of West Windsor and Congress.
R. Two Leasing Associates, as agent for,
and William K. Langfan, Robin Hammer, Mark
Langfan and Dayna Langfan (collectively, the
“Langfan Group”) have filed an objection to the
Motion relating to the premises located in Ham-
ilton, New Jersey (the “Langfan Premises”)
described in and leased to the Debtor pursuant
to that certain lease for the Langfan Premises
dated January 26, 1979 (the “Langfan Lease”).
The Langfan Group and Debtor have agreed to
settle and resolve the Langfan Group’s objection
to the Motion; notwithstanding anything herein
to the contrary, on the following basis:
(a) Debtor shall cause $350,000 to be
placed into escrow (the “Escrow Fund”),
with such Escrow Fund to be held by
Morris, James, Hitchens & Williams in its
interest bearing escrow account;
(b) If the building on the Langfan
Premises that formerly was the Arthur
Treachers Fast Food Restaurant (the “Build-
ing”) is not rebuilt within four years of the
closing on the transaction between the
Debtor and Staples pursuant to which the
Langfan Lease is to be assumed by the
Debtor and assigned by it to Staples (the
“Closing”) then the escrow will be broken
and the Escrow Fund, plus all accrued inter-
est thereon, shall be paid to the Langfan
Group;
App. 9
(c) If the building is rebuilt within
four years of the Closing then the escrow
shall be broken and the Escrow Fund, plus
all accrued interest thereon, shall be paid to
Staples;
(d) For the Building to be considered
as “rebuilt” within the contemplation of
subparagraphs (b) and (c) above, a certifi-
cate of occupancy (the “CO’s”) of all local
regulatory bodies with jurisdiction over the
Langfan Premises must have been issued
and in force, with the CO’s providing that
the Building meets or exceeds all applicable
building codes and is ready for occupancy
for its intended use; and
(e) Time shall be considered as of the
essence with respect to the obligation to
rebuild the Building within four years of the
Closing.
S. Objectors and Limited or Conditional
Objectors (“Objectors”) Arlington Shopping
Plaza, Inc.; Big M, Inc.; Bloomfield Plaza Associ-
ates, LP; Brick Norse Realty LLC; Davkee Cor-
poration; Fusco Enterprises; Levin Management
Corporation; Pal-Pike Associates; Prestige Bay
Plaza Development Corp.; Ramco-Gershenson
Properties, L.P.; Lester Robbins, Trustee; and
two Leasing Associates, Inc. withdrew their
objections to the Motion, following undertak-
ings or agreements on the part of the Debtor
and/or Staples.
ACCORDINGLY, after due deliberation, and suffi-
cient cause appearing therefore, it is hereby
App. 10
ORDERED that the Motion is hereby approved, sub-
ject to the terms and conditions of this Order; and it is
further
ORDERED that the Agreement is incorporated herein
by reference and its terms shall be binding upon the
Debtor and each of the other parties thereto; and it is
further
ORDERED that pursuant to sections 363 of the Bank-
ruptcy Code, the Debtor is hereby authorized to sell the
Staples Leases to Staples or its nominee pursuant to the
Agreement; and it is further
ORDERED that pursuant to sections 363, 365(a) and
365(f) of the Bankruptcy Code, the Debtor is hereby
authorized to assume, sell and assign to Staples or its
nominee those of the Staples Leases described on Exhibit
F attached to this Order (the “Assigned Non-assumed
Leases”), pursuant to the terms and provisions of the
Agreement; and it is further
ORDERED that pursuant to sections 363, 365(a) and
365(f) of the Bankruptcy Code, the Debtor is authorized
to sell and assign to Staples or its nominee those of the
Staples Leases described on Exhibit G attached to this
Order (the “Assigned Assumed Leases,” and together
with the Assigned Non-assumed Leases, the “Assigned
Leases”), pursuant to the terms and provisions of the
Agreement; and it is further
ORDERED that nothing contained in this Order shall
constitute or be deemed to be an assumption (where
applicable) or authorization or approval of an assumption
(where applicable) or assignment of those of the Staples
App. 11
Leases referred to as “Deferred Leases” on Exhibits F and
G attached to this Order (the “Deferred Leases”), or an
expression of views as to the foregoing; and it is further
ORDERED that nothing contained in this Order shall
prejudice the rights of any Landlord in connection with
any subsequent motion by the Debtor to assume (where
applicable) and/or assign a Deferred Lease, and the
rights of all parties as to the Deferred Leases shall be
preserved and reserved; and it is further
ORDERED that upon the entry of this Order and the
closing of the Agreement, the Agreement shall be fully
effective, and staples or its nominee(s) shall succeed to
the entirety of the Debtor’s rights and obligations in each
of the leases assigned hereunder, first accruing from and
after the date of closing, and shall have the rights of the
tenant thereunder; and it is further
ORDERED that upon entry of this Order, Staples and
its nominee(s) shall be entitled to the protections of Bank-
ruptcy Code section 363(m); and it is further
ORDERED that pursuant to section 365(b)(1) of the
Bankruptcy Code, the Debtor is authorized and directed
to pay any Cure Amounts set forth on Exhibit E attached
to this Order in connection with the assumption and
assignment of the Assigned Non-assumed leases, which
payment shall be in full satisfaction of any and all claims
that may arise against the Debtor in connection with the
Assigned Leases; and it is further
ORDERED that with respect to any Cure Amount as
to which a Landlord filed an objection voicing a differ-
ence between the Landlord’s belief as to the proper Cure
App. 12
Amount and the Debtor’s, and as to which the Court did
not make a finding as the proper Cure Amount, the
Debtor is authorized to cause funds equal in amount to
such difference to be placed into escrow, pending resolu-
tion of the proper Cure Amount, as an alternate means of
satisfying any and all claims that may arise against the
Debtor in connection with the Staples Leases; PROVIDED
that the claims deemed to be satisfied under this decretal
paragraph shall only be those which are required to be
satisfied under sections 365(f)(2)(A) and (b)(1)(A) of the
Bankruptcy Code; and it is further
ORDERED that for the purposes of the preceding
paragraph, Pal-Pike Associates, the landlord of the
Debtor’s Randolph, New Jersey store, shall be deemed to
have filed an objection with respect to the Cure Amount
and to be entitled to the protections described in the
preceding paragraph; and it is further
ORDERED that the sale and assignment authorized
hereunder shall be free and clear of all liens, claims,
encumbrances on the Staples Leases, including without
limitation, the liens of postpetition lenders Congress and
West Windsor (the “Postpetition Lenders”), which shall
attach to the proceeds received from Staples, to the extent
now secured by leases, not to exceed the collective value
of the leases that are each lienor’s or the Postpetition
Lender’s collateral; and it is further
ORDERED that at the closing on the sale of the
Staples Leases, the Debtor shall direct Staples to remit to
West Windsor all amounts due to West Windsor, as of the
date of the closing on the sale of the Staples Leases (the
“Staples Closing Date”), pursuant to the terms of the
App. 13
West Windsor DIP Agreement; PROVIDED that to the
extent (and only the extent) that the Debtor disputes in
good faith any amount said by West Windsor to be due
under the West Windsor DIP Agreement, the Debtor shall
be in compliance with the obligation in this decretal
paragraph if it directs Staples to pay the disputed amount
into a separate interest bearing escrow account, for the
benefit of West Windsor and the Debtor, and as to which
West Windsor shall have a first lien on the escrow balance
(the disbursement of which escrow balance may be made
upon written directions jointly executed by the Debtor,
the Creditors’ Committee and West Windsor, without fur-
ther Court order, or failing such, the direction of the
Court), and the existence of such escrow, and any pay-
ment into such escrow, shall be wholly without prejudice
to the rights of any entity in connection with any dispute
as to such disputed amount; and PROVIDED FURTHER
that the right to escrow, in lieu of payment, amounts
disputed in good faith shall not extend to unpaid princi-
pal or accrued interest at the regular (non-default) rate;
and PROVIDED FURTHER that except to the extent any
amounts disputed in good faith are paid into escrow in
lieu of payment, all amounts claimed to be due to West
Windsor shall be paid to West Windsor; and it is further
ORDERED that at the closing on the sale of the
Staples Leases, the Debtor shall direct Staples to remit to
Congress all amounts due Congress, as of the Staples
Closing Date, pursuant to the terms of the Congress DIP
Agreement and Congress Final Order; PROVIDED that to
the extent (and only the extent) that the Debtor disputes
in good faith the Early Termination Fee (as defined in the
App. 14
Congress DIP Agreement), the Debtor shall be in compli-
ance with the obligation in this decretal paragraph if it
directs Staples to pay the disputed amount referred to
below into a separate interest bearing escrow account, for
the benefit of Congress and the Debtor, and as to which
Congress shall have a first lien on the escrow balance (the
disbursement of which escrow balance may be made
upon written directions jointly executed by the Debtor,
the Creditors’ Committee and Congress, without further
Court order, or, failing such, the direction of the Court),
and the existence of such escrow, and any payment into
such escrow, shall be wholly without prejudice to the
rights of any entity in connection with any dispute as to
such disputed amount; and PROVIDED FURTHER that
the Debtor’s right to escrow, in the absence of a further
Court order, amounts disputed in good faith shall be
limited to the Early Termination Fee, in an amount not to
exceed $700,000; and PROVIDED FURTHER that except
to the extent such disputed amount is paid into escrow in
lieu of payment, all amounts claimed to be due to Con-
gress shall be paid to Congress; and PROVIDED FUR-
THER that nothing herein shall restrict the Debtor from
seeking authority from the Court (on expedited notice if
necessary) to deposit into escrow additional amounts that
it disputes in good faith; and it is further
ORDERED that if and to the extent that the Debtor
has not already done so, the Debtor shall cause the pro-
ceeds of the Jaymate First Refusal Payment to be paid to
Congress, as a credit against indebtedness of the Debtor
to Congress; and it is further
ORDERED that if and to the extent that the Debtor
has not already done so, the Debtor shall cause the
App. 15
proceeds of the sale of the Bricktown Lease to be paid to
West Windsor, as a credit against indebtedness of the
Debtor to West Windsor; and it is further
ORDERED that the closing on the sale of the Staples
Leases shall not be deemed to have occurred until each of
West Windsor and Congress has received payment in full
of all undisputed amounts due each of West Windsor and
Congress, respectively, as of the Staples Closing Date,
pursuant to the West Windsor DIP Agreement, the Con-
gress DIP Agreement and the Congress Final Order,
respectively and deposit of any amounts disputed in
good faith has been made into escrow, as provided in the
decretal paragraphs above; and it is further
ORDERED that any loans, advances or other finan-
cial accommodations extended to Debtor by Congress, in
its sole discretion, prior to the closing of the sale of the
Staples Leases, shall be secured by first priority liens and
security interests in all of Debtor’s assets, including,
without limitation, the proceeds from the sale of the
Staples Leases, in accordance with the terms, provisions
and conditions set forth in the Congress DIP Agreement
and the Congress Final Order; and it is further
ORDERED that the terms and conditions of the Con-
gress DIP Agreement and the Congress Final order, and
the liens, claims and security interests and superpriority
administrative claim status previously granted in favor of
Congress, shall continue to remain in full force and effect
until all of the outstanding obligations, liabilities and
indebtedness due Congress by Debtor has been fully paid
and satisfied; and it is further :
App. 16
ORDERED that except as otherwise agreed between
any Landlord and Staples, nothing in this Order shall be
deemed to annul or vary any provision of any lease other
than a provision that the Court has found prohibits,
restricts or conditions the assignment of such lease to
Staples or its nominee or is
(a) a provision providing in substance that
the premises may be used only for a “Rickel” or
“Channel” store;
- (b) a provision providing in substance that
the premises may be used only for a “Home
Center” store or for the sale of goods typically
sold therein;
(c) a provision unreasonably prohibiting
necessary alterations to the premises or signage
required to convert them to an alternative use;
(d) a provision commonly referred to as a
“going dark” or “continuous operations” provi-
sion, providing in substance for a forfeiture of
the lease or an increase in rent or other penalty
by reason of the Debtor's cessation of retail
operations before the assignment, and/or any
delay by the assignee in reestablishing retail
operations after the assignment, except that
with respect to space not used for a Staples
store, that delay may not exceed 18 months,
unless the particular facts and circumstances of
a given store warrant additional time which cir-
cumstances shall include without limitation the
extent of restrictions and exclusives which limit
potential tenants, the age and condition of the
shopping center, the location of the premises in
the shopping center, the shape of the premises
to be assigned or sublet, the demographics of
the shopping center’s location and the overall
App. 17
quality of the shopping center and its existing
tenants;
(e) a provision conditioning assignment on
landlord consent, or requiring payment to the
landlord as the price of assignment;
(f) a provision effecting forfeiture or a
modification of any of tenant's rights or obliga-
tions presently in effect under the Lease upon
an assignment by the Debtor of the Lease; or
(g) a provision conditioning the Debtor’s
ability to assign its leasehold rights upon any
terms not otherwise required under the Bank-
ruptcy Code; and it is further
ORDERED that nothing in this Order shall be
deemed to invalidate any otherwise valid guaranty of the
tenant’s obligations under the lease for the Union, New
Jersey store; and it is further
ORDERED that Staples and/or its nominee, assigns
or successors shall be bound by and honor the provisions
of any valid sublease under the leases with respect to the
Debtor’s Ramsey and Union, New Jersey-stores; and it is
further
ORDERED that with respect to any of the Objectors
Arlington Shopping Plaza, Inc. and Pal-Pike Associates
which has not entered into a definitive agreement with
Staples and, if applicable, the Debtor, resolving its objec-
tion on or before March 10, 1998, such Objector may file,
on or before March 13, 1998, a motion for a determination
by the Court as to the construction of any interim agree-
ment reached between such Objector and Staples prior to
the entry of this Order, instead of the remedy described
in the preceding paragraph; and it is further
App. 18
ORDERED that upon entry of this Order, this Order
and the Findings hereunder shall be binding upon all
parties to the Assigned Leases and the Agreement, and it
is further
ORDERED that at the closing, immediately after Con-
gress and West Windsor are paid upon the closing, the
Debtor is authorized and directed to next cause to be paid
Rickel Realty LLC $916,500, on account of, and in full
satisfaction of, the “breakup fee” as defined in and autho-
rized under the “Order Pursuant to Sections 105, 363 and
364 of the Bankruptcy Code (A) Approving, Subject to
Higher and Better Offers and Necessary Section 365(b)
Showings, Stalking Horse Floor Purchase Price Agree-
ment (B) Approving Bidding Procedures for Solicitation
of Higher Bids; and (C) Authorizing Payment of Breakup
Fee,” dated December 24, 1997;
ORDERED that this Court shall retain jurisdiction to
construe and determine any disputes under this Order or
under the Agreement; and it is further
ORDERED that the Debtor and Staples are hereby
authorized and directed to execute and deliver any and
all documents and to do all things necessary to effectuate
the purposes of this Order, to transfer the Debtor’s inter-
ests in and to the Staples Leases, in accordance with the
terms of the Agreement, and to carry out the terms and
conditions of such Agreement; and it is further
ORDERED that Staples as assignee and purchaser is
not the successor in interest to the Debtor (other than
with respect to the Debtor’s rights and obligations under
the Staples Leases first accruing after Staples takes an
_ App. 19
assignment thereunder as provided for under the Agree-
ment), or its bankruptcy estate by virtue of the transac-
tions to be closed under the Agreement, or otherwise as a
result of Staples taking title or possession of the Staples
Leases and the subject premises and Staples is not assum-
ing any liabilities or obligations of the Debtor or its
bankruptcy estate, except as may be specifically provided
for the Agreement; and it is further
ORDERED that notice of the Motion having been
provided to (i) the Office of the United States Trustee; (ii)
Wachtell, Lipton, Rosen & Katz, attorneys for the Official
Committee of Unsecured Creditors; (iii) Otterbourg,
Steindler, Houston & Rosen, P.C., attorneys for Congress,
one of the Debtor’s postpetition lenders; (iv) Sullivan &
Cromwell and Shearman & Sterling, attorneys for West
Windsor, one of the Debtor’s postpetition lenders; (v) the
Landlords and other parties-in-interest to the Staples
Leases identified on Exhibit D attached to this Order; (vi)
counsel for Staples; (vii) other bidders or their counsel,
including Starwood and Rickel Reality; and (viii) all other
parties who have filed a notice of appearance in this
chapter 11 case, and any and all further notice of the
relief granted in this Order is dispensed with and waived.
Dated: Wilmington Delawate
March 6, 1998
/s/ Joseph J. Farnan, Jr.
UNITED STATES DISTRICT JUDGE
App. 20
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
IN RE Chapter 11
RICKEL HOME CENTERS, ‘~ Case No. 92-26-JJF
INC.,
Debtor.
Laura Davis Jones, Esquire and Brendan Linehan Shan-
non, Esquire of YOUNG, CONAWAY, STARGATT & TAY-
LOR, Wilmington, Delaware, Robert E. Gerber, Esquire
and Matthew Barr, Esquire of FRIED, FRANK, HARRIS
SHRIVER & JACOBSON, New York, New York. Attor-
neys for debtor and debtor-in-possession.
Norman Pernick, Esquire of SAUL, EWING, REMICK
& SAUL, Wilmington, Delaware, Patrick P. DiNardo,
Esquire and Deborah A. O’Malley, Esquire of SULLIVAN
& WORCHESTER, LLP, Boston Massachusetts, Attorneys
for Staples, Inc.
Douglas P. Bartner, Esquire and Frederic Sosnick,
Esquire of SHEARMAN & STERLING, New York. Attor-
neys for Vornado, Inc.
Stephen M. Miller, Esquire of SMITH, KATZEN-
STEIN & FURLOW, LLP, Wilmington, Delaware. Richard
J. Mason, P.C., and Brian L. Shaw, Esquire of ROSS &
HARDIES, Chicago, Illinois. Attorneys for Net Realty
Holding Trust.
William L. Witham, Jr., Esquire and Patricia Pyles
McGonigle, Esquire of PRICKETT, JONES, ELLIOTT,
KRISTOL & SCHNEE, Wilmington, Delaware. Barry W.
4
a
App. 21
Frost, Esquire and Donna Markey DeGrezia, Esquire of
TEICH, GROH AND FROST, Trenton, New Jersey. Attor-
neys for L.R.S.C. Co.
OPINION
March 6, 1998
Wilmington, Delaware
/s/ Joseph J. Farnam, Jr.
Farnam, Chief Judge.
Presently before the Court are three objections to the
Motion For An Order Pursuant To Sections 363, 365(a)
and 365(f) Of The Bankruptcy Code And Bankruptcy
Rules 6004 And 6006 Authorizing The Debtor-In-Posses-
sion To Assume (Where Applicable) And Sell And Assign
Nonresidential Real Property Leases filed by Rickel
Home Centers, Inc. (the “Debtor”) (D.I.1275). Objections
have been raised by Vornado, Inc. (“Vornado”)}, Net
Realty Holding Trust (“Net”) (D.1.1299) and L.R.S.C., Co.
(“LRSC”) (D-1.1300). For the reasons set forth below, the
Court will overrule the Objections.
FACTUAL BACKGROUND
I. The Debtor’s Motion
In its Motion, the Debtor seeks an order authorizing
it to sell 41 of its leases to Staples, Inc. (“Staples”), or its
1 For the record, the Court notes that Vornado’s Objection
does not appear on the docket sheet for this case, and therefore,
the Court cannot cite to the appropriate Docket Item Number.
App. 22
nominee, and to assume (where applicable) and assign
the selected leases that Staples desires to have assigned to
it, pursuant to an agreement between the Debtor and
Staples. Under the terms of this agreement, Staples has
agreed to pay the Debtor $35.5 million in exchange for
the leases. To secure its performance under the Agree-
ment, Staples has posted a $3 million deposit, which is
currently being held in escrow.
In addition, the Agreement provides that Staples may
assign its rights under the Agreement to any nominee.
The Debtor and Staples have represented that they expect
such nominee to be a Staples affiliate. In the event of an
assignment by Staples to its nominee, Staples has agreed
to unconditionally guarantee all of its obligations under
the Agreement.
II. The Objections
Although numerous objections were initially raised
to the Motion, Staples and the Debtor have negotiated
settlement agreements with all but three of the objecting
parties. The remaining objections have been filed by Vor-
nado, Net and LRSC. 7
A. Vornado
Vornado is the owner of a shopping center known as
the Bradlees Shopping Center, on Hackensack Avenue,
Hackensack, NJ (the “Hackensack Shopping Center”).
Pursuant to the terms of a lease (the “Hackensack Lease”)
dated November 1, 1982, between Vornado and Grace
Retail Corporation, Vornado agreed to lease a 41,000
App. 23
square foot store (the “Hackensack Store”) in the Hacken-
sack Shopping Center to Grace, the predecessor of Chan-
nel Home Centers, Inc., for the purposes of Operating a
Channel Home Center. In 1994, Channel was acquired by
Rickel Home Center, Inc., who continued to operate the
Hackensack Store as a home improvement store until it
completed its “going out of business” sales. Staples has
represented that it intends to open a 24,000 square foot
Staples Store in the former Rickel’s store and sublet the
remaining 17,000 square foot store to another entity.
Vornado objects to the Debtor’s Motion on both con-
stitutional and statutory grounds. With respect to the
constitutional aspect of its objection, Vornado contends
that the Debtor’s Motion deprives Vornado of its due
process rights because, to the extent that the Debtor is
seeking to modify the Hackensack Lease in its Motion,
the Motion fails to specify the provisions the Debtor
seeks to modify.? With respect to the statutory grounds
raised, Vornado raises three specific objections premised
on Section 365(b)(3) of the Bankruptcy Code: (1) that the
Debtor and Staples should not be permitted to disregard
the use restrictions in the lease; (2) that Staples’ need to
paint and subdivide the Hackensack Store will violate
provisions in the lease concerning alterations to the prop-
erty; (3) that Staples’ proposed use of the Hackensack
2 Based on the record of the hearing, it is the Court’s
understanding that the Debtor and Staples remedied any
deficiency in their Motion by pointing out those provisions in
the lease that they seek to modify. Because the Court
understands that the parties have resolved this issue, the Court
will not address it.
App. 24
Store will disrupt the tenant mix in the Hackensack Shop-
ping Center; and (4) that any modifications to the lease,
including the excise of the provisions and restrictions
discussed above and certain provisions pertaining to
future assignments of the lease, should not be permanent.
At the hearing, Vornado took the position that the
Court could appropriately waive all of the provisions and
restrictions in the lease, with the exception of the alter-
ations provision, on a “one-time” basis for the purposes
of allowing the Debtor to assign the lease to Staples for
the operation of an office supply store. However, because |
Staples will only be operating a Staples Store in 24,000
square feet of the space and intends to sublet the remain-
ing portion of the store, Vornado directs its objections to
that portion of the Hackensack Store which Staples
intends to sublet.
B. Net
Net is the landlord under a lease (the “Bethlehem
Lease”) pertaining to the Debtor’s store located in the |
Lehigh Shopping Center in Bethlehem, Pennsylvania (the
“Lehigh Shopping Center”). Presently, the Lehigh Shop-
ping Center has two vacant stores, a 48,000 square foot
store formerly occupied by Rickel (the “Bethlehem
Store”) and a 60,000 square foot store formerly occupied
by a department store. Staples has represented that it
intends to operate a 24,000 square foot Staples Store in
the store formerly occupied by Rickel and sublet the
remaining 24,000 square foot store to another entity.
——
App. 25°
Although Net raises several objections to the
Debtor’s Motion, for purposes of discussion, these objec-
tions can be categorized into four grounds: (1) Staples
should not be permitted to occupy only a portion of the
space and sublet the remaining space; (2) the tenant mix
of the shopping center will be affected by the assignment
to Staples, because the store will “go dark” for a period of
time; (3) the percentage rent at the shopping center wiil
be affected; and (4) the Debtor and Staples have not
provided sufficient evidence of what Staples intends to
do with the Bethlehem Store (i.e. when Staples will com-
mence operations, how much space Staples will occupy,
leave dark or attempt to sub-let).%
C. LRSC
LRSC entered into a lease agreement (the “Lawrence
Lease”) with the Debtor, as successor in interest after a
series of assignments from Channel dated March 22, 1976,
pertaining to Store No. 15 (the “Lawrence Store”) at the
Lawrence Shopping Center, Lawrence Township, Mercer
County, New Jersey (the “Lawrence Shopping Center”).
3 At the hearing, Staples proffered that it intends to utilize
24,000 square feet of the Bethlehem Store as a Staples Store and
sublet the balance of the Bethlehem Store to another entity. Net
objected to the proffer as insufficient and moved to dismiss the
Debtor’s Motion.. The Court denied the motion to dismiss,
finding the proffer sufficient. Accordingly, the Court will
overrule Net’s objection that the Debtor and Staples did not
provide sufficient evidence of Staples’ intent regarding the
Bethlehem Store.
App. 26
Since 1976, the Lawrence Store has been a home improve-
ment store. The original term of the lease was for fifteen
years, with three five-year options. Two of these three
five-year options were previously exercised by Channel
on January 29, 1991 and then by the Debtor on January
29, 1996.
With respect to the Lawrence Lease, a dispute arose
concerning the Debtor’s exercise of an option to renew
the lease prior to the Debtor’s assumption or rejection of
the lease. On December 10, 1996, LRSC filed a motion for
an order pursuant to § 365 of the Bankruptcy Code
requiring the Debtor to assume or reject the lease within a
shortened period of time and for an order declaring the
Debtor’s exercise of the option void. Prior to a hearing on
LRSC’s motion, the Debtor and LRSC settled the matter.
The Lawrence Store is approximately 38,000 square
feet. As with the previous stores discussed, Staples has
represented to the Court that it intends to operate a
Staples Store in 24,000 square feet and sublet the balance.
LRSC has represented to the Court that its intent, if
successful in its objection, is to divide up the 38,000
square foot store into a series of smaller stores that will
cater to home improvement needs, such as carpeting,
kitchen cabinetry, wallpaper and window treatments.
LRSC objects to the Debtor’s Motion on the grounds
that: (1) the Debtor and Staples should not be permitted
to disregard the use provision in the lease; (2) the Debtor
and Staples should not be permitted to disregard provi-
sions requiring landlord consent for assignment, requir-
ing payment to landlord as a price of assignment and
affecting forfeiture or modification of any tenants’ rights
App. 27
or obligations under the lease; (3) the tenant mix at the
Lawrence Shopping Center will be affected and (4) Sta-
ples and the Debtor have not provided sufficient evi-
dence concerning the financial condition of Staples.
DISCUSSION
I. Use Restrictions
Both Vornado and LRSC object to the Debtor’s
Motion on the grounds that the proposed operation of a
Staples Store in their respective shopping centers will
violate use restriction provisions in their respective
leases. Section 9.01 of the Hackensack Lease provides that
the Hackensack Store shall only be used “for the pur-
poses of a typical Channel Home Improvement Center
and for no other purpose.” Additionally Section 1.08(b) of
the Hackensack Lease makes clear that the tenant’s oper-
ation is to be a “Home Improvement Center.” Similarly,
Article 10 of the Lawrence Lease provides that the
“[t]enant may use the Premises as a Channel Home Cen- ;
ter similar in operation to a majority of the Channel
Home Centers then in operation in New Jersey, and
except as provided herein, for no other purpose.” Both
Vornado and LRSC contend that these restrictions are
important to preserving the tenant mix in their shopping
centers.
While Vornado agrees that the use restriction may be
overlooked for the purposes of the Debtor’s assignment
to Staples, Vornado contends that it would be inappropri-
ate to excise this provision from the lease, such that it
would be inapplicable to any future assigns or sublets of
the remaining 17,00 [sic] square feet of the subject space
App. 28
that will not be used as a Staples Store. However, LRSC
does not limit its objection solely to the space to be
sublet. Rather, LRSC contends that the operation of a
Staples Store in any portion of the premises should not be
permitted. In addition to the grounds raised above, LRSC
points out that this provision was important to the settle-
ment arranged between the Debtor and LRSC concerning
LRSC’s previous motion, and that LRSC intends to main-
tain this use provision, if it is successful in its motion, by
dividing the Lawrence Store and leasing it to entities
involved in the home improvement business.
At the hearing, the Debtor proffered the testimony of
Mr. Joseph Newsome, president and chief executive offi-
cer of the Debtor. If called, Mr. Newsome would testify
that the typical Channel Home Improvement Center,
which is referred to in the Hackensack and Lawrence
Leases, has either become obsolete or is struggling to
remain in existence, as a result of the advent of ware-
house type home improvement stores like Home Depot.
Mr. Newsome would further testify that none of the
Debtors’ stores would be suitable for a warehouse style
store, and that no warehouse style home center stores
indicated an interest in any of the Debtor’s leases. Fur-
ther, Mr. Newsome would testify that although some
Sears Hardware Stores have recently opened in New
Jersey, these stores are not a home center, because they do
not sell product lines that constitute 57% of the typical
home improvement center business.
Factually, neither Vornado nor LRSC have offered
any evidence to rebut the Debtor’s proffer in this regard.
Indeed, LRSC’s plans for the Lawrence Store support the
Debtor’s proffer in that LRSC must subdivide and rent to
App. 29
a variety of entities to continue the home improvement
use, because of the difficulty of finding a single viable
entity engaged in the home improvement business.
Legally, in support of their positions concerning the
use restrictions, Vornado and LRSC rely upon the lan-
guage of Section 365(b)(3)(C), which provides that the
assumption or assignment of leases is subject to all the
provisions of the relevant leases. However, Section
356(b)(3) is not meant to be read in isolation. Rather,
Section 365(b)(3) must be read in conjunction with the
section that it cross-references, Section 365(f). In pertinent
part, Section 365(f)(1) provides:
[NJotwithstanding a provision in an executory
contract or unexpired lease of the debtor, or in
applicable law, that prohibits, restricts, or condi
tions, the assignment of such contract or leace,
the trustee may assign such contract or lease
under paragraph (2) of this subsection . . .
11 U.S.C. § 365(f)(1).
In interpreting Section 356(f), courts and commenta-
tors alike have construed the terms to not only render
unenforceable lease provisions which prohibit assign-
ment outright, but also lease provisions that are so
restrictive that they constitute de facto anti-assignment
provisions. See e.g. In re Joshua Slocum Ltd., 922 F.2d 1081,
1090 (3d Cir. 1991) (recognizing that “[e]ven under the
tightly drawn definition of “adequate assurance” in the
shopping center context, Congress did not envision literal
compliance with all lease provisions”); In re Paul Harris,
1992 Bankr. LEXIS 2418 (S.D. Ind. 1992); S. Rep. No. 98-65,
98th Cong. Ist Sess. 41 (1983); Collen, Buying and Selling
Real Estate in Bankruptcy, (1997) { 7.06[3]. Based upon the
App. 30
Debtor’s proffered testimony of Mr. Newsome, which the
Court finds both credible and unrebutted, the Court con-
cludes that the provisions of the Hackensack Lease and
Lawrence Lease restricting the use of the respective stores
to Channel Home Centers, or to home improvement cen-
ters, are de facto anti-assignment clauses. Given that the
market for such centers is either non-existent or in dire
straits, such use restrictions would make it impossible for
the Debtor to assign the Lawrence Lease to any entity and
impossible for the Debtor and/or for Staples to assign or
sublet the 17,000 square feet not used for a Staples Store
under the Hackensack Lease to any entity. Accordingly,
the Court concludes that it is appropriate to permanently
strike these restrictive use provisions from the Hacken-
sack and Lawrence Leases.
ll. Alterations Provisions
Both Vornado and Net raise concerns regarding alter-
ations provisions in the Lease. While both parties oppose
Staples’ proposed subdivision of their respective stores,
Vornado raises additional alterations concerns regarding
Staples’ need to paint the premises. In addition, Vornado
has taken a different legal approach to the questions
involved, and therefore, the Court will address Vornado
and Net’s alterations concerns separately.
A. Vornado
Vornado contends that Staples’ need to paint and
subdivide the Hackensack Store will violate the lease
provisions concerning alterations. Vornado raises these
App. 31
objection [sic] both to the use of the Hackensack Store as
a Staples Store and to that portion of the Hackensack
Store which is to be divided and sublet by Staples.
To the extent that Vornado contends that the Court
cannot overlook this provision so as to allow a Staples
Store to operate on the premises, the Court will deny the
objection. At the hearing Vornado conceded that the
Court could overlook use restrictions, as well as six-
month to 12-month consent provisions for subletting, in
order to allow a Staples Store to operate. Vornado further
conceded that such use restrictions and consent provi-
sions are more substantive than painting and space divi-
sion restrictions. However, Vornado maintained that
painting and division restrictions cannot be overlooked in
order to allow a Staples to operate. It is the Court’s view
that such alterations provisions are essentially “nuisance”
provisions, in the context of the present discussion which
may be more easily overlooked by a court to allow a
Debtor to assign property, than use or consent provisions,
which Vornado concedes may be overlooked by the
Court. Further, the Court finds credible and accepts the
unrebutted proffer by Staples that Vornado is presently
the landlord to eight Staples Stores in various locations.
Based on this proffer, the Court finds Vornado’s concerns
about the alterations to the property to be disingenuous.
To the extent that Vornado contends that physically
subdividing the Hackensack Store would destroy an
anchor space in the~ Hackensack Shopping Center, the
Court will likewise overrule Vornado’s objection. Again,
the Court finds credible and accepts the unrebutted prof-
fer by Staples that its stores are often considered anchors
App. 32
in shopping centers, and that such stores generate a sig-
nificant amount of weekday, as well as weekend traffic to
draw in customers, which both parties agree is the princi-
ple function of so-called anchor stores in shopping cen-
ters. Based on this testimony, the Court finds that
although Staples intends to occupy 24,000 square feet of
the assigned 41,000 square feet, Staples would still be an
anchor for the shopping center and attract a sizeable
customer base. Therefore, insofar as the instant alter-
ations clauses could preclude the Debtor’s assignment to
Staples under the circumstances of this case, the Court
finds the alterations clauses to be de facto anti-assign-
ment clauses. Accordingly, the Court will overrule Vor-
nado’s objection to the modification of alterations
provisions, as they pertain to the operation of a Staples
Store on the premises.
As to Vornado’s objection that the alterations clauses
should not be permanently excised from the lease, so as
to be non-binding on the entity that sublets the remaining
space not utilized by Staples, the Court will sustain Vor-
nado’s objection. It is the Court’s view that the retention
of these provisions will provide the Hackensack Shop-
ping Center owner with a reasonable measure of control
over the entity to which Staples will sublet the property.
In addition, the Court further finds that these provisions
will not have an adverse affect on the subletting of the
lease, rendering these provisions de facto anti-assignment
provisions.
4 For further discussion on the issue of the permanent
excise of lease provisions see infra Part VI of this Opinion.
App. 33
B. Net
Net objects to Staples proposal to physically subdi-
vide the Bethlehem Store. In support of its objection, Net
presented the testimony of Kevin O’Shea, Senior Director
of Leasing of Net Realty. Mr. O’Shea testified that in his
view, a larger store would be more likely to generate
more customer traffic and that the Staples Store use
would be too narrow to generate enough traffic in the
Bethlehem Shopping Center. Mr. O’Shea further testified
that he did not believe that a Staples Store would assist
his efforts in leasing the vacant 60,000 square foot store in
the Bethlehem Shopping Center.
In response, Staples again proffered the testimony
that Staples Stores are often considered anchors in shop-
ping centers, and that such stores generate a significant
amount of weekday, as well as weekend traffic to draw in
customers, which, both parties again agree is the princi-
ple function of so-called anchor stores in shopping cen-
ters. In addition, Staples proffered that Net maintains a
lease with a Staples Store occupying only 17,000 square
feet in a New York shopping center and that although the
New York store is smaller than the proposed Staples Store
for the Bethlehem Store, the New York store is considered
an anchor.
In reviewing the record, the Court credits and accepts
Staples proffer. Clearly, Staples, who is in the business of
operating Staples Stores, has a stronger basis from which
to testify about the traffic that a Staples Store generates
than Mr. O’Shea, whose experiences with Staples have
been limited to the leasing of one Staples Store and to his
experience as a customer of Staples Stores. The Court also
App. 34
notes that Net offered no evidence to support Mr.
O’Shea’s view that a Staples Store would not generate
enough customer traffic. In contrast, Staples has proffered
estimates of its most recent sales figures, which impres-
sively indicate that Staples generates a strong and prof-
itable business.
In addition, the Court finds that in the context of the
assignment between the Debtor and Staples, any prohibi-
tions on subdividing in the Bethlehem Lease would con-
stitute de facto anti-assignment provisions. Staples has
based its bid for the Debtor’s leases, including the
Bethlehem Lease, on its ability to subdivide and sublet
those portions of the stores not utilized by Staples to
operate Staples Stores. In addition, Staples has proffered
that in its experience in the office supply industry, a
24,000 square foot store is the most suitable size store in
which to conduct its business. Therefore, to prohibit Sta-
ples from subdividing the store in this context would in
effect preclude the Debtor from being able to assign the
instant lease to Staples.
To the extent that Net relies on In re Joshua Slocum,
LTD., 922 F.2d 1081 (3d Cir. 1990) for the proposition that
the Court cannot overlook the alterations provisions in
the Bethlehem Lease, the Court finds Joshua Slocum to be
distinguishable from the instant case. While recognizing
that literal compliance with all lease provisions is not
required in the context of Section 365 assignments, the
Court of Appeals for the Third Circuit held that the
bankruptcy court could not excise a provision in the
debtor’s lease authorizing either party to terminate the
lease if the debtor’s gross sales for the first six lease years
did not average $711,245 per year. Id. at 1090-1092. As the
App. 35
court recognized in its discussion, this clause was closely
tied into the percent rent clause of the lease, and was
necessary to enable the Landlord to accurately calculate
the minimum total rent that he could be expected to
receive.
In the Court’s view, however, rent clauses, such as
the one at issue in Joshua Slocum, are clearly more mate-
rial and substantial to a lease than the alterations clauses
at issue in this case, which the Court has already
described as akin to “nuisance provisions.” As such, the
Court does not read Joshua Slocum to preclude the Court
from overlooking the alterations clauses in the Bethlehem
Lease for the purposes of allowing the assignment
between the Debtor and Staples. Accordingly, the Court
will overrule Net’s objection to Staples’ proposed subdi-
vision.
III. Tenant Mix
Based on the record adduced at the hearing, as well
as the papers submitted, it appears to the Court that
Vornado and LRSC’s tenant mix concerns are related to
their concerns over the use restrictions in their respective
_ leases. In contrast, Net raises the tenant mix issue in
connection with its concerns that the Bethlehem property
may be “dark” for some time. Therefore, the Court will
address Net’s tenant mix objection separately from the
tenant mix objections of Vornado and LRSC.
App. 36
A. Vornado and LRSC
Both Vornado and LRSC argue that the use restric-
tions help preserve the tenant mix in the Hackensack
Shopping Center. However, as the Court overruled the
objection based on the use restrictions, the Court must
likewise overrule the tenant mix objection, to the extent
that it overlaps with the use restriction objection.>
B. Net
Net contends that the tenant mix in its shopping
center will be disrupted by the Debtor’s assignment of
the Bethlehem Lease to Staples, because the Debtor and
Staples have not provided any evidence concerning how
long the Bethlehem Store will be dark. After reviewing
the submissions and the record on this issue, the Court
will overrule Net’s objection.
First, the Court notes that the Bethlehem Lease does
not contain any provisions prohibiting “going dark.” To
this extent, Net cannot argue that the assignment from
5 For clarification regarding Vornado’s position, the Court
notes that Vornado does not contend that the operation of a
Staples Store in the Hackensack Shopping Center will upset the
tenant mix. Furthermore, it appears to the Court that Vornado
did not raise tenant mix with regard to the portion of the
property to be sublet. In any event, however, based on the
representations of Staples, it appears to the Court that this is not
an issue. Staples has represented to the Court that it intends to
seek tenants that will complement the existing tenant mix, and
that it seeks the landlord’s acceptance of any proposed sublet
tenant.
App. 37
the Debtor to Staples will interfere with any provision of
the Bethlehem Lease.
Second, at the present time, the Bethlehem Store is
vacant because of the Debtor’s liquidation. At the hear-
ing, Staples proffered that it would take approximately
six months for a Staples Store to become operational in a
given site. Given the present condition of the Bethlehem
Store, the Court does not find this period of time to be
unreasonable, such that it would adversely affect the
present tenant mix of the Bethlehem Shopping Center. In
addition, with respect to the portion of the store not used
by Staples, Staples proffered that it is in their best inter-
est, as well as the shopping center’s interest, to sublet the
premises as quickly as possible. Based on Staples’ prof-
fers, which the Court credits, the Court has no reason to
believe that Staples would allow the portion of the
Bethlehem Store not used by Staples to remain dark for
an unreasonable period of time.®
IV. Percentage Rent
Net objects to the Debtor’s assignment of the
Bethlehem Lease to Staples on the grounds that the
assignment will cause a substantial decline in percentage
rent. Net contends that, because a Staples Store will not
generate a strong customer base, the sales in the shop-
ping center will drop, and therefore, the percentage rents
© Of course, if Staples efforts to sublet the property become
unreasonable, the Landlord can seek the appropriate redress at
that time.
App. 38
owed to Net under the lease and by other tenants in the
shopping center will decrease.
Section 365(b)(3)(B) provides that “adequate assur-
ance of future performance of a lease of real property in a
shopping center includes adequate assurance - (B) that
any percentage rent due under such lease will not decline
substantially.” 11 U.S.C. § 365(b)(3)(B) (emphasis added).
It is clear based upon the language of this Section, that
the percentage rent referred to is rent due under the lease
to be assigned. Therefore, to the extent that Net premises
its argument upon the percentage rents owed by other
tenants in the shopping center, the Court must overrule
Net’s objection.
To the extent that Net is concerned about the percent-
age rent due under the Bethlehem Lease, Staples prof-
fered that the Debtor has not been paying any percentage
rent, because the Debtor has liquidated. The Court finds
Staples proffer credible and notes that Net has not offered
any evidence to rebut the proffer. As there has been no
percentage rent paid under the lease, there can be no
decline in percentage rent as a result of the assignment of
the Bethlehem Lease to Staples. Accordingly, the Court
will overrule Net’s percentage rent objection.
V. Financial Condition of Staples
LRSC objects to the assignment of the Lawrence
Lease from the Debtor to Staples on the ground that
neither the Debtor nor Staples have provided sufficient
information regarding the financial condition of Staples.
The basis for LRSC’s objection is its concern that Staples
SHIPTON > -
ERAT LO ae
App. 39
will not be able to meet its financial obligations due
under the Lawrence Lease.
At the hearing, Staples proffered evidence that it
operates 752 stores across the United States and approxi-
mately 30,000 stores world-wide. Staples further prof-
fered that its most recently available sales figures indicate
that Staples sales reached over $5 billion and that Staples
net gross was over $170 million after taxes.
Under the Lawrence Lease, rent payments are
approximately $2.22 per square foot, an amount well
below the market value for the area, which is at least $10
per square foot. Given the proffer regarding Staples’
financial condition, which the Court accepts and finds
credible, and the low rent payments due under the Law-
rence Lease, the Court finds that Staples has sufficient
financial ability to satisfy its obligations under the Law-
rence Lease.
VI. Modifications to the Lease
Both LRSC and Vornado object to the Debtor’s
Motion to the extent that it asks the Court to permanently
_ strike certain provisions from their leases. LRSC and
Vornado maintain that under Section 365(b)(3)(C), Staples
is required to take the lease “subject to all provisions
thereof, including (but not limited to) provisions such as
radius, location, use, or exclusivity provision and will not
breach any such provision contained in any other lease,
financing agreement or master agreement relating to such
shopping centers.”
App. 40
A. Use Restriction Clauses
To the extent Vornado and LRSC raise this argument
with respect to their use restriction provisions, the Court
has already found these provisions to be so unreasonable
as to constitute de facto anti-assignment provisions.
Accordingly, the Court finds it appropriate to perma-
nently strike these provisions from the Hackensack and
Bethlehem Leases, and therefore, Vornado and LRSC’s
objection, in this regard, is overruled.
B. Assignment and Subletting Clauses
In arguing that Staples is required to take the leases
subject to all their provisions, Vornado and LRSC partic-
ularly emphasize the assignment and subletting clauses
in their respective leases. Because of slight differences in
their positions, the Court will address Vornado and
LRSC’s concerns regarding the assignment and subletting
clauses separately.
1. Vornado
The Court understands that Vornado does not object
to overlooking the assignment and subletting provisions
for the purposes of allowing Staples into the Hackensack
Store. As such, the Court understands Vornado to object
to the permanent excise of these provisions, such that
they will be inapplicable to Staples efforts to sublet that
portion of the Hackensack Store not used for a Staples
Store.
ee E—eEEEEeEeEeEEeEEEE=aa>E=EeeEeEeEeEeEeEeEeEee
App. 41
The Debtor’s Motion, however, does not seek to per-
manently excise reasonable provisions from the Hacken-
sack Lease, but only unreasonable provisions that would
have the effect of blocking or prohibiting a sublet by
Staples. In reviewing the Hackensack Lease, the Court
does not find any of its assignment and subletting provi-
sions to be facially unreasonable, and therefore the Court
will not permanently excise any of these provisions from
the Hackensack Lease. As Vornado concedes, the provi-
sions will be set aside to allow Staples to take the assign-
ment of the property, however, those provisions will
remain in effect so that Staples will be subjected to them
for purposes of their subletting efforts.
2. LRSC
Unlike Vornado, LRSC has not conceded that the
Court may set aside assignment and subletting provision
to allow the Debtor to assign the property to Staples. To
the extent that LRSC objects to the setting aside of the
assignment provision in the Lawrence Lease for purposes
of allowing the assignment from the Debtor to Staples,
the Court overrules LRSC’s objection.
Article 15A of the Lawrence Lease provides that the
“[t]enant shall have the right, without Landlords consent
and without any requirements to notify Landlord as pro-
vided in B below to (A) assign its interest as tenant under
this Lease or sublet any portion of the Demised Premises
at any time or times to (i) a successor person, firm, or
corporation resulting from consolidation, merger or from
transfer of substantially all of Tenant’s assets, (herein
referred to as Successor’) ...” In this case, the Debtor
App. 42
has proffered that the transaction with Staples has
involved the transfer of 96% of the Debtor’s assets. The
Court has no reason to doubt the credibility of this prof-
fer and finds 96% of the Debtor’s assets to be substan-
tially all of its assets. Accordingly, under the very
provisions of the Lawrence Lease, the Court concludes
that the assignment from the Debtor to Staples is permiss-
ible.
To the extent that LRSC is concerned about the per-
manent excise of these provisions from the Lawrence
Lease, the Court reiterates that the Debtor’s Motion is not
seeking to permanently excise reasonable provisions from
the Lawrence Lease, but only unreasonable provisions
that would have the effect of blocking or prohibiting a
sublet by Staples. The Court has reviewed the Lawrence
Lease and finds that the assignment and subletting provi-
sions are not facially unreasonable. Therefore, once Sta-
ples assumes the Lawrence Lease, Staples will be
required to abide by these provisions.
C. Other Lease Provisions
To the extent that Vornado, Net and LRSC object to
the permanent excise of any provisions of their respective
leases, the Court will overrule the objection.
As stated above in discussing the assignment and
sublet clauses, the Debtor’s Motion only seeks to excise
unreasonable provisions in the leases that will prohibit a
sublet by Staples. The Court has reviewed the Hacken-
sack Lease, the Bethlehem Lease and the Lawrence Lease.
App. 43
With the exception of the use restriction clauses con-
tained in the Hackensack Lease and Lawrence Lease dis-
cussed above, the Court finds that all of the provisions in
each of the three leases are facially reasonable. As such,
once the leases have been assigned to Staples by the
Debtor, Staples will be subjected to all the provisions of
the leases for purposes of their subletting efforts.
While the Court will not strike any provisions in the
leases at this time, the Court will retain jurisdiction over
this matter under the terms of the Order presented with
the Debtor’s Motion. Therefore, should any landlord
attempt to enforce a lease provision in an unreasonable
manner, Staples is free to return to this Court for the
appropriate relief. Likewise, if Staples attempts to unrea-
sonably disregard any reasonable provision in its efforts
to sublet the property, such that the landlord believes
Staples is violating § 365 of the Bankruptcy Code, the
landlord may also return to this Court for the appropriate
relief.
CONCLUSION
For the reasons discussed, the Court will overrule the
Objections filed by Vornado, Net and LRSC.
An appropriate Order will be entered.
App. 44
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
IN RE : Chapter 11
RICKEL HOME CENTERS, ‘ Case No. 96-26-JJF
INC.,
Debtor.
ERRATA ORDER
WHEREAS, the Court issued an Opinion in the
above-captioned matter on March 6, 1998 which requires
correction;
NOW THEREFORE, IT IS HEREBY ORDERED this 12
day of March 1998, that:
1) On page 9 and page 10, the name “Mr. Joseph
Newsome” is corrected to read “Mr. Joseph Nusim”;
2) On page 9 of the Opinion, the reference to “Sec-
tion 356(b)(3)” and “Section 356(f) is corrected to read
“Section 365(b)(3)” and “Section 365(f)”;
3) On Page 19 of the Opinion the sentence, “At the
hearing, Staples proffered evidence that it operates 752
stores across the United States and approximately 30,000
stores world-wide,” is corrected to read, “At the hearing,
Staples proffered evidence that it operates 752 stores
world-wide and has approximately 30,000 employees
world-wide.”
/s/ Joseph J. Farnan, Jr.
UNITED STATES
DISTRICT JUDGE
App. 45
11 U.S.C. § 363. Use, sale, or lease of property
(a) In this section, “cash collateral” means cash,
negotiable instruments, documents of title, securities,
deposit accounts, or other cash equivalents whenever
acquired in which the estate and an entity other than the
estate have an interest and includes the proceeds, prod-
ucts, offspring, rents, or profits of property and the fees,
charges, accounts or other payments for the use or occu-
pancy of rooms and other public facilities in hotels,
motels, or other lodging properties subject to a security
interest as provided in section 552(b) of this title, whether
existing before or after the commencement of -a case
under this title.
(b)(1) The trustee, after notice and a hearing, may
use, sell, or lease, other than in the ordinary course of
business, property of the estate.
(2) If notification is required under subsection (a) of
section 7A of the Clayton Act in the case of a transaction
under this subsection, then -
(A) notwithstanding subsection (a) of such
section, the notification required by such sub-
section to be given by the debtor shall be given
by the trustee; and
(B) notwithstanding subsection (b) of such
section, the required waiting period shall end on
the 15th day after the date of the receipt, by the
Federal Trade Commission and the Assistant
Attorney General in charge of the Antitrust
Division of the Department of Justice, of the
notification required under such subsection (a),
unless such waiting period is extended -
App. 46
(i) pursuant to subsection (e)(2) of
such section, in the same manner as such
subsection (e)(2) applies to a cash tender
offer;
(ii) pursuant to subsection (g)(2) of
such section; or
(iii) by the court after notice and a
hearing.
(c)(1) If the business of the debtor is authorized to
be operated under section 721, 1108, 1203, 1204, or 1304 of
this title and unless the court orders otherwise, the
trustee may enter into transactions, including the sale or
lease of property of the estate, in the ordinary course of
business, without notice or a hearing, and may use prop-
erty of the estate in the ordinary course of business
without notice or a hearing.
(2) The trustee may not use, sell, or lease cash col-
lateral under paragraph (1) of this subsection unless -
(A) each entity that has an interest in such
cash collateral consents; or
(B) the court, after notice and a hearing,
authorizes such use, sale, or lease in accordance
with the provisions of this section.
(3) Any hearing under paragraph (2)(B) of this sub-
section may be a preliminary hearing or may be consoli-
dated with a hearing under subsection (e) of this section,
but shall be scheduled in accordance with the needs of
the debtor. If the hearing under paragraph (2)(B) of this
subsection is a preliminary hearing, the court may autho-
rize such use, sale, or lease only if there is a reasonable
likelihood that the trustee will prevail at the final hearing
na
OC te
as eect i als a
a
SE ENA See Ne SEs
App. 47
under subsection (e) of this section. The court shall act
promptly on any request for authorization under para-
graph (2)(B) of this subsection.
(4) Except as provided in paragraph (2) of this sub-
section, the trustee shall segregate and account for any
cash collateral in the trustee’s possession, custody, or
control.
(d) The trustee may use, sell, or lease property
under subsection (b) or (c) of this section only to the
extent not inconsistent with any relief granted under
section 362(c), 362(d), 362(e), or 362(f) of this title.
(e) Notwithstanding any other provision of this sec-
tion, at any time, on request of an entity that has an
interest in property used, sold, or leased, or proposed to
be used, sold, or leased, by the trustee, the court, with or
without a hearing, shall prohibit or condition such use,
sale, or lease as is necessary to provide adequate protec-
tion of such interest. This subsection also applies to prop-
erty that is subject to any unexpired lease of personal
property (to the exclusion of such property being subject
to an order to grant relief from the stay under section
362).
(f) The trustee may sell property under subsection
(b) or (c) of this section free and clear of any interest in
such property of an entity other than the estate, only if -
(1) applicable nonbankruptcy law permits
sale of such property free and clear of such
interest;
(2) such entity consents;
App. 48
(3) such interest is a lien and the price at
which such property is to be sold is greater than
the aggregate value of all liens on such prop-
erty;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a
legal or equitable proceeding, to accept a money
satisfaction of such interest.
(g) Notwithstanding subsection (f) of this section,
the trustee may sell property under subsection (b) or (c)
of this section free and clear of any vested or contingent
right in the nature of dower or curtesy.
(h) Notwithstanding subsection (f) of this section,
the trustee may sell both the estate’s interest, under sub-
section (b) or (c) of this section, and the interest of any co-
owner in property in which the debtor had, at the time of
the commencement of the case, an undivided interest as a
tenant in common, joint tenant, or tenant by the entirety,
only if -
(1) partition in kind of such property
among the estate and such co-owners is imprac-
ticable; )
(2) sale of the estate’s undivided interest
in such property would realize significantly less
for the estate than sale of such property free of
the interests of such co-owners;
(3) the benefit to the estate of a sale of
such property free of the interests of co-owners
outweighs the detriment, if any, to such co-
owners; and
(4) such property is not used in the pro-
duction, transmission, or distribution, for sale,
App. 49
of electric energy or of natural or synthetic gas
for heat, light, or power.
(i) Before the consummation of a sale of property to
which subsection (g) or (h) of this section applies, or of
property of the estate that was community property of
the debtor and the debtor’s spouse immediately before
the commencement of the case, the debtor’s spouse, or a
co-owner of such property, as the case may be, may
purchase such property at the price at which such sale is
to be consummated.
(j) After a sale of property to which subsection (g)
or (h) of this section applies, the trustee shall distribute to
the debtor’s spouse or the co-owners of such property, as
the case may be, and to the estate, the proceeds of such
sale, less the costs and expenses, not including any com-
pensation of the trustee, of such sale, according to the
interests of such spouse or co-owners, and of the estate.
(k) Ata sale under subsection (b) of this section of
property that is subject to a lien that secures an allowed
claim, unless the court for cause orders otherwise the
holder of such claim may bid at such sale, and, if the
holder of such claim purchases such property, such
holder may offset such claim against the purchase price
of such property.
(1) Subject to the provisions of section 365, trustee
may use, sell, or lease property under subsection (b) or
(c) of this section, or a plan under chapter 11, 12, or 13 of
this title may provide for the use, sale, or lease of prop-
erty, notwithstanding any provision in a contract, a lease,
or applicable law that is conditioned on the insolvency or
financial condition of the debtor, on the commencement
App. 50
of a case under this title concerning the debtor, or on the
appointment of or the taking possession by a trustee in a
case under this title or a custodian, and that effects, or
gives an option to effect, a forfeiture, modification, or
termination of the debtor’s interest in such property.
(m) The reversal or modification on appeal of an
authorization under subsection (b) or (c) of this section of
a sale or lease of property does not affect the validity of a
sale or lease under such authorization to an entity that
purchased or leased such property in good faith, whether
or not such entity knew of the pendency of the appeal,
unless such authorization and such sale or lease were
stayed pending appeal.
(n) The trustee may avoid a sale under this section
if the sale price was controlled by an agreement among
potential bidders at such sale, or may recover from a
party to such agreement any amount by which the value
of the property sold exceeds the price at which such sale
was consummated, and may recover any costs, attorneys’
fees, or expenses incurred in avoiding such sale or recov-
ering such amount. In addition to any recovery under the
preceding sentence, the court may grant judgment for
punitive damages in favor of the estate and against any
such party that entered into such an agreement in willful
disregard of this subsection.
(0) In any hearing under this section —
(1) the trustee has the burden of proof on
the issue of adequate protection; and
(2) the entity asserting an interest in prop-
erty has the burden of proof on the issue of the
validity, priority, or extent of such interest.
App. 51
11 U.S.C. § 365. Executory contracts and unexpired
leases
(a) Except as provided in sections 765 and 766 of
this title and in subsections (b), (c), and (d) of this section,
the trustee, subject to the court’s approval, may assume
or reject any executory contract or unexpired lease of the
debtor.
(b)(1) If there has been a default in an executory
contract or unexpired lease of the debtor, the trustee may
not assume such contratt or lease unless, at the time of
assumption of such contract or lease, the trustee -
(A) cures, or provides adequate assurance
that the trustee will promptly cure, such default;
(B) compensates, or provides adequate
assurance that the trustee will promptly com-
pensate, a party other than the debtor to such
contract or lease, for any actual pecuniary loss
to such party resulting from such default; and
(C) provides adequate assurance of future
performance under such contract or lease.
(2) Paragraph (1) of this subsection does not apply
to a default that is a breach of a provision relating to -
(A) the insolvency or financial condition
of the debtor at any time before the closing of
the case;
(B) the commencement of a case under this
title;
(C) the appointment of or taking posses-
sion by a trustee in a case under this title or a
custodian before such commencement; or
App. 52
(D) the satisfaction of any penalty rate or
provision relating to a default arising from any
failure by the debtor to perform nonmonetary
obligations under the executory contract or
unexpired lease.
(3) For the purposes of paragraph (1) of this subsec-
tion and paragraph (2)(B) of subsection (f), adequate
assurance of future performance of a lease of real prop-
erty in a shopping center includes adequate assurance —
(A) of the source of rent and other consid-
eration due under such lease, and in the case of
an assignment, that the financial condition and
operating performance of the proposed assignee
and its guarantors, if any, shall be similar to the
financial condition and operating performance
of the debtor and its guarantors, if any, as of the
time the debtor became the lessee under the
lease;
(B) that any percentage rent due under
such lease will not decline substantially;
that assumption or assignment of such
lease is subject to all the provisions thereof,
including (but not limited to) provisions such as
a radius, location, use, or exclusivity provision,
and will not breach any such provision con-
tained in any other lease, financing agreement,
or master agreement relating to such shopping
center; and
(D) that assumption or assignment of such
lease will not disrupt any tenant mix or balance
in such shopping center.
(4) | Notwithstanding any other provision of this sec-
tion, if there has been a default in an unexpired lease of
the debtor, other than a default of a kind specified in
App. 53
paragraph (2) of this subsection, the trustee may not
require a lessor to provide services or supplies incidental
to such lease before assumption of such lease unless the
lessor is compensated under the terms of such lease for
any services and supplies provided under such lease
before assumption of such lease.
(c) The trustee may not assume or assign any execu-
tory contract or unexpired lease of the debtor, whether or
not such contract or lease prohibits or restricts assign-
ment of rights or delegation of duties, if —
(1)(A) applicable law excuses a party,
other than the debtor, to such contract or lease
from accepting performance from or rendering
performance to an entity other than the debtor
or the debtor in possession, whether or not such
contract or lease prohibits or restricts assign-
ment of rights or delegation of duties; and
(B) such party does not consent to such
assumption or assignment; or
(2) such contract is a contract to make a
loan, or extend other debt financing or financial
accommodations, to or for the benefit of the
debtor, or to issue a security of the debtor;
(3) such lease is of nonresidential real
property and has been terminated under appli-
cable nonbankruptcy law prior to the order for
relief; or
(4) such lease is of nonresidential real
property under which the debtor is the lessee of
an aircraft terminal or aircraft gate at an airport
at which the debtor is the lessee under one or
more additional nonresidential leases of an air-
craft terminal or aircraft gate and the trustee, in
App. 54
connection with such assumption or assignment,
does not assume all such leases or does not
assume and assign all of such leases to the same
person, except that the trustee may assume or
assign less than all of such leases with the air-
port operator’s written consent.
(d)(1) In a case under chapter 7 of this title, if the
trustee does not assume or reject an executory contract or
unexpired lease of residential real property or of personal
property of the debtor within 60 days after the order for
relief, or within such additional time as the court, for
cause, within such 60-day period, fixes, then such con-
tract or lease is deemed rejected.
(2) In a case under chapter 9, 11, 12, or 13 of this
title, the trustee may assume or reject an executory con-
tract or unexpired lease of residential real property or of
personal property of the debtor at any time before the
confirmation of a plan but the court, on the request of any
party to such contract or lease, may order the trustee to
determine within a specified period of time whether to
assume or reject such contract or lease.
(3) The trustee shall timely perform all the obliga-
tions of the debtor, except those specified in section
365(b)(2), arising from and after the order for relief under
any unexpired lease of nonresidential real property, until
such lease is assumed or rejected, notwithstanding sec-
tion 503(b)(1) of this title. The court may extend, for
cause, the time for performance of any such obligation
that arises within 60 days after the date of the order for
relief, but the time for performance shall not be extended
beyond such 60-day period. This subsection shall not be
App. 55
deemed to affect the trustee’s obligations under the pro-
visions of subsection (b) or (f) of this section. Acceptance
of any such performance does not constitute waiver or
relinquishment of the lessor’s rights under such lease or
under this title.
(4) Notwithstanding paragraphs (1) and (2), in a
case under any chapter of this title, if the trustee does not
assume or reject an unexpired lease of nonresidential real
property under which the debtor is the lessee within 60
days after the date of the order for relief, or within such
additional time as the court, for cause, within such 60-day
period, fixes, then such lease is deemed rejected, and the
trustee shall immediately surrender such nonresidential
real property to the lessor.
(5) Notwithstanding paragraphs (1) and (4) of this
subsection, in a case under any chapter of this title, if the
trustee does not assume or reject an unexpired lease of
nonresidential real property under which the debtor is an
affected air carrier that is the lessee of an aircraft terminal
or aircraft gate before the occurrence of a termination
event, then (unless the court orders the trustee to assume
such unexpired leases within 5 days after the termination
event), at the option of the airport operator, such lease is
deemed rejected 5 days after the occurrence of a termina-
tion event and the trustee shall immediately surrender
possession of the premises to the airport operator; except
that the lease shall not be deemed to be rejected unless
the airport operator first waives the right to damages
related to the rejection. In the event that the lease is
deemed to be rejected under this paragraph, the airport
operator shall provide the affected air carrier adequate
opportunity after the surrender of the premises to remove
App. 56
the fixtures and equipment installed by the affected air
carrier.
(6) For the purpose of paragraph (5) of this subsec-
tion and paragraph (f)(1) of this section, the occurrence of
a termination event means, with respect to a debtor
which is an affected air carrier that is the lessee of an
aircraft terminal or aircraft gate -
(A) the entry under section 301 or 302 of
this title of an order for relief under chapter 7 of
this title;
(B) the conversion of a case under any
chapter of this title to a case under chapter 7 of
this title; or
(C) the granting of relief from the stay
provided under section 362(a) of this title with
respect to aircraft, aircraft engines, propellers,
appliances, or spare parts, as defined in section
40102(a) of title 49, except for property of the
debtor found by the court not to be necessary to
an effective reorganization.
(7) Any order entered by the court pursuant to
paragraph (4) extending the period within which the
trustee of an affected air carrier must assume or reject an
unexpired lease of nonresidential real property shall be
without prejudice to -
(A) the right of the trustee to seek further
extensions within such additional time period
granted by the court pursuant to paragraph (4);
and
(B) the right of any lessor or any other
party in interest to request, at any time, a short-
ening or termination of the period within which
App. 57
the trustee must assume or reject an unexpired
lease of nonresidential real property.
(8) The burden of proof for establishing cause for an
extension by an affected air carrier under paragraph (4)
or the maintenance of a previously granted extension
under paragraph (7)(A) and (B) shall at all times remain
with the trustee.
(9) For purposes of determining cause under para-
graph (7) with respect to an unexpired lease of nonresi-
dential real property between the debtor that is an
affected air carrier and an airport operator under which
such debtor is the lessee of an airport terminal or an
airport gate, the court shall consider, among other rele-
vant factors, whether substantial harm will result to the
airport operator or airline passengers as a result of the
extension or the maintenance of a previously granted
extension. In making the determination of substantial
harm, the court shall consider, among other relevant fac-
tors, the level of actual use of the terminals or, gates
which are the subject of the lease, the public interest in
actual use of such terminals or gates, the existence of
competing demands for the use of such terminals or
gates, the effect of the court’s extension or termination of
the period of time to assume or reject the lease on such
debtor's ability to successfully reorganize under chapter
11 of this title, and whether the trustee of the affected air
carrier is capable of continuing to comply with its obliga-
tions under section 365(d)(3) of this title.
(10) The trustee shall timely perform all of the obli-
gations of the debtor, except those specified in section
365(b)(2), first arising from or after 60 days after the
App. 58
order for relief in a case under chapter 11 of this title
under an unexpired lease of personal property (other
than personal property leased to an individual primarily
for personal, family, or household purposes), until such
lease is assumed or rejected notwithstanding section
503(b)(1) of this title, unless the court, after notice and a
hearing and based on the equities of the case, orders
otherwise with respect to the obligations or timely perfor-
mance thereof. This subsection shall not be deemed to
affect the trustee’s obligations under the provisions of
subsection (b) or (f). Acceptance of any such performance
does not-constitute waiver or relinquishment of the les-
sor’s rights under such lease or under this title.
(e)(1) Notwithstanding a provision in an executory
contract or unexpired lease, or in applicable law, an exec-
utory contract or unexpired lease of the debtor may not
be terminated or modified, and any right or obligation
under such contract or lease may not be terminated or
modified, at any time after the commencement of the case
solely because of a provision in such contract or lease that
is conditioned on -
(A) the insolvency or financial condition
of the debtor at any time before the closing of
the case;
(B) the commencement of a case under this
title; or
(C) the appointment of or taking posses-
sion by a trustee in a case under this title or a
custodian before such commencement.
(2) Paragraph (1) of this subsection does not apply
to an executory contract or unexpired lease of the debtor,
App. 59
whether or not such contract or lease prohibits or restricts
assignment of rights or delegation of duties, if -
(A)(i) applicable law excuses a party, other
than the debtor, to such contract or lease from
accepting performance from or rendering per-
formance to the trustee or to an assignee of such
contract or lease, whether or not such contract
or lease prohibits or restricts assignment of
rights or delegation of duties; and
(ii) such party does not consent to such
assumption or assignment; or
(B) such contract is a contract to make a
loan, or extend other debt financing or financial
accommodations, to or for the benefit of the
debtor, or to issue a security of the debtor.
(f)(1) Except as provided in subsection (c) of this
section, notwithstanding a provision in an executory con-
tract or unexpired lease of the debtor, or in applicable
law, that prohibits, restricts, or conditions the assignment
of such contract or lease, the trustee may assign such
contract or lease under paragraph (2) of this subsection;
except that the trustee may not assign an unexpired lease
of nonresidential real property under which the debtor is
an affected air carrier that is the lessee of an aircraft
terminal or aircraft gate if there has occurred a termina-
tion event.
(2) The trustee may assign an executory contract or
unexpired lease of the debtor only if -
(A) the trustee assumes such contract or
lease in accordance with the provisions of this
section; and
App. 60
(B) adequate assurance of future perfor-
mance by the assignee of such contract or lease
is provided, whether or not there has been a
default in such contract or lease.
(3) Notwithstanding a provision in an executory
contract or unexpired lease of the debtor, or in applicable
law that terminates or modifies, or permits a party other
than the debtor to terminate or modify, such contract or
lease or a right or obligation under such contract or lease
on account of an assignment of such contract or lease,
such contract, lease, right, or obligation may not be termi-
nated or modified under such provision because of the
assumption or assignment of such contract or lease by the
trustee.
(g) Except as provided in subsections (h)(2) and
(i)(2) of this section, the rejection of an executory contract
or unexpired lease of the debtor constitutes a breach of
such contract or lease -
(1) if such contract or lease has not been
assumed under this section or under a plan
confirmed under chapter 9, 11, 12, or 13 of this
title, immediately before the date of the filing of
the petition; or
(2) if such contract or lease has been
assumed under this section or under a plan
confirmed under chapter 9, 11, 12, or 13 of this
title -
(A) if before such rejection the case
has not been converted under section 1112,
1208, or 1307 of this title, at the time of such
rejection; or
App. 61
(B) if before such rejection the case has
- been converted under section 1112, 1208, or
1307 of this title —
(i) immediately before the date of
such conversion, if such contract or
lease was assumed before such conver-
sion; or
(ii) at the time of such rejection, if
such contract or lease was assumed
after such conversion.
(h)(1)(A) If the trustee rejects an unexpired lease of
real property under which the debtor is the lessor and -
(i) if the rejection by the trustee
amounts to such a breach as would entitle
the lessee to treat such lease as terminated
by virtue of its terms, applicable non-
bankruptcy law, or any agreement made by
the lessee, then the lessee under such lease
may treat such lease as terminated by the
rejection; or
(ii) if the term of such lease has com-
menced, the lessee may retain its rights
under such lease (including rights such as
those relating to the amount and timing of
payment of rent and other amounts payable
by the lessee and any right of use, posses-
sion, quiet enjoyment, subletting, assign-
ment, or hypothecation) that are in or
appurtenant to the real property for the bal-
ance of the term of such lease and for any
renewal or extension of such rights to the
extent that such rights are-enforceable
under applicable nonbankruptcy law.
App. 62
(B) If the lessee retains its rights under
subparagraph (A)(ii), the lessee may offset
against the rent reserved under such lease for
the balance of the term after the date of the
rejection of such lease and for the term of any
renewal or extension of such lease, the value of
any damage caused by the nonperformance
after the date of such rejection, of any obligation
of the debtor under such lease, but the lessee
shall not have any other right against the estate
or the debtor on account of any damage occur-
ring after such date caused by such nonperfor-
mance.
(C) The rejection of a lease of real property
in a shopping center with respect to which the
lessee elects to retain its rights under subpara-
graph (A)(ii) does not affect the enforceability
under applicable nonbankruptcy law of any pro-
vision in the lease pertaining to radius, location,
use, exclusivity, or tenant mix or balance.
(D) In this paragraph, “lessee” includes
any successor, assign, or mortgagee permitted
under the terms of such lease.
(2)(A) If the trustee rejects a timeshare interest
under a timeshare plan under which the debtor is the
timeshare interest seller and -
(i) if the rejection amounts to such a breach as
would entitle the timeshare interest purchaser to
treat the timeshare plan as terminated under its
terms, applicable nonbankruptcy law, or any agree-
ment made by timeshare interest purchaser, the
timeshare interest purchaser under the timeshare
plan may treat the timeshare plan as terminated by
such rejection; or
App. 63
(ii) if the term of such timeshare interest has
commenced, then the timeshare interest purchaser
may retain its rights in such timeshare interest for the
balance of such term and for any term of renewal or
extension of such timeshare interest to the extent that
such rights are enforceable under applicable non-
bankruptcy law.
(B) If the timeshare interest purchaser retains its
rights under subparagraph (A), such timeshare interest
purchaser may offset against the moneys due for such
timeshare interest for the balance of the term after the
date of the rejection of such timeshare interest, and the
term of any renewal or extension of such timeshare inter-
est, the value of any damage caused by the nonperfor-
mance after the date of such rejection, of any obligation
of the debtor under such timeshare plan, but the
timeshare interest purchaser shall not have any right
against the estate or the debtor on account of any damage
occurring after such date caused by such nonperfor-
mance.
(i)(1) If the trustee rejects an executory contract of
the debtor for the sale of real property or for the sale of a
timeshare interest under a timeshare plan, under which
the purchaser is in possession, such purchaser may treat
such contract as terminated, or, in the alternative, may
remain in possession of such real property or timeshare
interest.
(2) If such purchaser remains in possession —
(A). such purchaser shall continue to make
all payments due under such contract, but may,
offset against such payments any damages
occurring after the date of the rejection of such
contract caused by the nonperformance of any
obligation of the debtor after such date, but such
App. 64
purchaser does not have any rights against the
estate on account of any damages arising after
such date from such rejection, other than such
offset; and
(B) the trustee shall deliver title to such
purchaser in accordance with the provisions of
such contract, but is relieved of all other obliga-
tions to perform under such contract.
(j) A purchaser that treats an executory contract as
terminated under subsection (i) of this section, or a party
whose executory contract to purchase real property from
the debtor is rejected and under which such party is not
in possession, has a lien on the interest of the debtor in
such property for the recovery of any portion of the
purchase price that such purchaser or party has paid.
(k) Assignment by the trustee to an entity of a con-
tract or lease assumed under this section relieves the
trustee and the estate from any liability for any breach of
such contract or lease occurring after such assignment.
(1) If an unexpired lease under which the debtor is
the lessee is assigned pursuant to this section, the lessor
of the property may require a deposit or other security
for the performance of the debtor’s obligations under the
lease substantially the same as would have been required
by the landlord upon the initial leasing to a similar ten-
ant.
(m) For purposes of this section 365 and sections
541(b)(2) and 362(b)(10), leases of real property shall
include any rental agreement to use real property.
App. 65
(n)(1) If the trustee rejects an executory contract
under which the debtor is a licensor of a right to intellec-
tual property, the licensee under such contract may
elect -
(A) to treat such contract as terminated by
such rejection if such rejection by the trustee
amounts to such a breach as would entitle the
licensee to treat such contract as terminated by
virtue of its own terms, applicable non-
bankruptcy law, or an agreement made by the
licensee with another entity; or
(B) to retain its rights (including a right to
enforce any exclusivity provision of such con-
tract, but excluding any other right under
applicable nonbankruptcy law to specific perfor-
mance of such contract) under such contract and
under any agreement supplementary to such
contract, to such intellectual property (including
any embodiment of such intellectual property to
the extent protected by applicable non-
bankruptcy law), as such rights existed imme-
diately before the case commenced, for -
(i) the duration of such contract; and
(ii) any period for which such contract
may be extended by the licensee as of right
under applicable nonbankruptcy law.
(2) If the licensee elects to retain its rights, as
described in paragraph (1)(B) of this subsection, under
such contract —
(A) the trustee shall allow the licensee to
exercise such rights;
(B) the licensee shall make all royalty pay-
ments due under such contract for the duration
~
App. 66
of such contract and for any period described in
paragraph (1)(B) of this subsection for which the
licensee extends such contract; and
(C) the licensee shall be deemed to waive -
- (i) any right of setoff it may have with
respect to such contract under this title or
applicable nonbankruptcy law; and
(ii) any claim allowable under section
503(b) of this title arising from the perfor-
mance of such contract.
(3) If the licensee elects to retain its rights, as
described in paragraph (1)(B) of this subsection, then on
the written request of the licensee the trustee shall -
(A) to the extent provided in such con-
tract, or any agreement supplementary to such
contract, provide to the licensee any intellectual
property (including such embodiment) held by
the trustee; and .
(B) not interfere with the rights of the
licensee as provided in such contract, or any
agreement supplementary to such contract, to
such intellectual property (including such
embodiment) including any right to obtain such
intellectual property (or such embodiment) from
another entity.
(4) Unless and until the trustee rejects such con-
tract, on the written request of the licensee the trustee
shall -
(A) to the extent provided in such contract
or any agreement supplementary to such con-
tract -
App. 67
(i) perform such contract; or
(ii) provide to the licensee such intel-
lectual property (including any embodiment
of such intellectual property to the extent
protected by applicable nonbankruptcy law)
held by the trustee; and
(B) not interfere with the rights of the
licensee as provided in such contract, or any
agreement supplementary to such contract, to
such intellectual property (including such
embodiment), including any right to obtain such
intellectual property (or such embodiment) from
another entity.
(0) In a case under chapter 11 of this title, the
trustee shall be deemed to have assumed (consistent with
the debtor’s other obligations under section 507), and
shall immediately cure any deficit under, any commit-
ment by the debtor to a Federal depository institutions
regulatory agency (or predecessor to such agency) to
maintain the capital of an insured depository institution,
and any claim for a subsequent breach of the obligations
thereunder shall be entitled to priority under section 507.
This subsection shall not extend any commitment that
would otherwise be terminated by any act of such an
agency.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.