Opinion
Case No. 399-02649
July 12, 2002
MEMORANDUM ORDER
This matter is before the court on the objections of Weingarten Realty Investors (hereafter "Weingarten") to the debtors' proposed assumption and assignment of its lease for Store Number 172 in Jacksonville, Florida. The debtors' are attempting to assume their lease, and assign it to an entity known substantially as JLPK Hollywood/Orange Park LLC (hereinafter "JLPK"). Following that assignment, according to the debtors, JLPK will then sublease to Michaels Stores, Inc. Weingarten objects based primarily upon a failed showing of adequate assurances of future performance specifically with regard to tenant use and mix protections afforded landlords pursuant to 11 U.S.C. § 365. For the reasons contained herein, the court sustains Weingarten's objections and denies the debtors' motion without prejudice to its refiling.
There was some disagreement between the parties as to the actual name of the assignee. However, the stipulation between the debtors and landlord named the entity "JLPK Hollywood/Orange Park LLC." At the conclusion of the proof, it remained unclear to the court the precise designation for the assignee.
The parties stipulated to the following:
WHEREAS, on March 16, 2002, the court entered an Order Pursuant to 11 U.S.C. § 363 and Bankruptcy Rule 6004(A) Authorizing and Approving the Sale of Designation Rights with Respect to Substantially All of the Debtors' Real Estate Assets; and (B) Granting Related Relief (the "Order"). Attached as Exhibit I to the Order is that certain Asset Purchase Agreement dated March 4, 2002 (the "Designation Rights Agreement") by and among Service Merchandise Company, Inc., a Tennessee corporation, and each of the affiliated entities listed on "Exhibit A" to the Designation Rights Agreement (collectively, "Debtors") and KLA/SM, L.L.C., a Delaware limited liability company ("Designation Rights Purchaser"). All initially capitalized terms used, but not defined, herein shall have the meanings ascribed to such terms in the Order or the Designation Rights Agreement, as applicable;
WHEREAS, pursuant to a lease dated December 20, 1983 (as modified, the "SM Lease") Service Merchandise Company, Inc. leases the property known as the Debtors' Store No. 172, located at 6001-29 Argyle Forrest, Orange Park, Florida (the "Property") from Argyle Village Square Shopping Center, Ltd., which is one of the Properties covered by the Designation Rights Agreement;
WHEREAS, Weingarten Nostat Inc., a subsidary of Weingarten Realty Investors (the "Landlord") successor Argyle Village Square Shopping Center Ltd., is the lessor, under the SM Lease;
WHEREAS, on April 29, 2002, at the direction of the Designation Rights Purchaser, the Debtors sent a Lease Notice proposing to assume and assign the SM Lease to JLPK Hollywood/Orange Park LLC (the "Designee"); and
WHEREAS, on or about May 13, 2002, the Landlord filed its "Limited Objection of Weingarten Realty Investors to Debtor's Lease Notice of Store No. 172 Located at Argyle Village Square, Jacksonville, Florida to JLKP-Hollywood/Orange park LLC" (the "Objection") objecting to the assignment of the SM Lease to the Designee.
NOW, THEREFORE, the Landlord and the Debtors stipulate and agree as follows:
1. Service Merchandise Company, Inc. and Landlord are parties to the AM Lease covering the Property.
2. The Landlord and FCA of Ohio, Inc. are parties to that certain lease dated February 5, 1998 (the "Jo-Ann lease") covering property located at the Argyle Village Square Shopping Center in Jacksonville, Florida.
3. A portion of the Property is subleased by the Debtors to Bed, Bath and Beyond, Inc. pursuant to a sublease dated November 20, 2001 (the "Bed, Bath Sublease").
4. The annual fixed rent currently payable to Landlord under the SM lease is $287,496.
5. The annual fixed rent currently payable to the Debtor under the Bed, Bath Sublease is $175,352.
6. Argyle Village Shopping Center is a shopping center as comtemplated under § 365(b)(3) of the Bankruptcy Code.
Although many offspring spawned from the central issue at trial, the Issue before the court is whether the debtors have carried their burden pursuant to 11 U.S.C. § 365 to allow assumption and assignment of the lease for store number 172 in Jacksonville, Florida. Section 365 of the bankruptcy code provides in relevant part as follows:
Sec. 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 contract 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 compensate, 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 possession by a trustee in a case under this title or a custodian before such commencement; or
(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 subsection and paragraph (2)(B) of subsection (f), adequate assurance of future performance of a lease of real property in a shopping center includes adequate assurance —
(A) of the source of rent and other consideration 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;
(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 any such provision contained 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.
. . .
(f)(1) Except as provided in subsection (c) of this section, notwithstanding a provision in an executory contract 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 termination 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
(B) adequate assurance of future performance by the assignee of such contract or lease is provided, whether or not there has been a default in such contract or lease.
11 U.S.C. § 365 (2002). The heightened requirements of adequate assurance apply not only to assumption when a tenant has defaulted under the lease, but also to adequate assurance of an assignee's ability of future performance under section 365(f)(2)(B). See 11 U.S.C. § 365 (b)(3), (f)(2)(B).
The clear language of the statute requires the debtors to demonstrate, among other things, that the financial condition and operating performance of JLPK and its guarantors are similar to the financial condition and operating performance of Service Merchandise (and its guarantors, if any) when it signed its original lease. The other requirements for proof of adequate assurance of future performance are in addition to the financial condition requirement, but because the debtors did not show the first requirement, the court will preserve for another day discussion of the remaining elements of adequate assurances of future performance.
Section 365(b)(3)(A) requires JLPK and its guarantors, to be in similar financial condition to the debtors when the debtors signed their lease at the Argyle Shopping Center. Because the court heard little or no proof as to JLPK's corporate identity, financial condition, or even proper name, the court cannot, as a matter of strict statutory interpretation, find that adequate assurances of JLPK's future performance have been shown. To the contrary, the court knows little or nothing about JLPK or even if JLPK as an entity existed at the time of the hearing.
The court heard proof at trial that JLPK intented to sublease the remaining Service Merchandise "box" to Michael's Stores, Inc. (hereinafter "Michael's"). The debtors argued that the only issue before the court was the assumption of the lease and assignment to JLPK, and not its eventual sublease to Michael's. this is true, according to the debtors, because their notice to the landlord of assumption and assignment provided:
The Debtors propose to assume and assign the Lease for the leased Property [the lease in at Store No. 172] to JLPK-Hollywood/Orange Park, LLC, a Delaware limited liability company (the "Designee").
The notice did not provide for sublease to Michael's, even though the debtors concede that this is the eventual, intended end-user. If the debtors are correct, then the court cannot consider Michael's position as a potential guarantor for purposes of section 365(b)(3)(A). The debtors cannot have Michael's before the court as a guarantor for purposes of adequate assurances of future performance to enhance JLPK's financial condition, but not have Michael's before the court for other use and tenant mix issues. See In re Sun TV Appliances, Inc., 234 B.R. 356 (Bankr. D. Del 1999) (finding that absent knowledge of the intended use, it would be impossible to determine if use restrictions and tenant mix provisions were violated).
As such, the proof before the court is simply insufficient for purposes of section 365(b)(3)(A), and the court finds that the debtors have failed to show adequate assurances of future performance by JLPK as the proposed assignee under the lease for Store 172. This finding does not preclude the eventual assumption and assignment that the debtors seek provided that proper evidence demonstrates this entity or entity-to-be can provide adequate assurances in compliance with the Code.
The court therefore, sustains the objections of Weingarten and denies the debtors' motion without prejudice to refiling such motion at a later time.
IT IS THEREFORE SO ORDERED.