Opinion
Case No. 01-72167-DHA, Chapter 11
April 24, 2002
MEMORANDUM OPINION AND ORDER
This matter is before the Court on the motion of one of debtor's landlords, LaSalle National Trust, N.A. ("LaSalle"). After rendering a decision in our March 4, 2002 Memorandum Opinion and Order on certain of the issues LaSalle raised in its Response in Opposition to Motion of the Debtor to Assume and Assign Certain Nonresidential Real Property Leases, LaSalle now files a Motion For Clarification and/or Reconsideration of Court's Memorandum Opinion and Order Dated March 4, 2002 ("LaSalle Motion"). At issue is whether debtor should be granted permission to assume and assign its lease for store number 331 to AE Stores. This is a core proceeding over which this Court has jurisdiction under 28 U.S.C. § 157 (b)(2) and 1334(b). Venue is proper pursuant to 28 U.S.C. § 1408 and 1409.
FINDINGS OF FACT
Trak Auto Corporation ("debtor") filed a voluntary petition under Chapter 11 of Title 11 of the United States Code on July 5, 2001. Debtor remains in possession and control of its auto parts supply business and assets pursuant to 11 U.S.C. § 1107. Debtor has decided to liquidate its stores in the "Chicago Market" which include its store number 331 in the West Town Shopping Center (hereinafter, "West Town Center"). As part of this process, debtor hired the asset liquidating firm Hilco Real Estate to advertise and solicit bids for its unexpired leases in the Chicago Market. This particular store received a bid from AE Stores, Inc. for $80,000 to buy out the lease and its remaining option periods and to assume all liabilities that accrue under the lease. Debtor did not receive a bid for this store from any company in the auto parts business. The proposed assignee for the lease operates a discount and off-price women's apparel and accessories store.
The landlord's shopping center consists of approximately twenty five stores arranged in three separate buildings with a large parking lot in the middle of its plaza. On the north end of the plaza are its two largest stores — Big K and Jewel/Osco. On the southern end of the plaza are the smaller shops ranging from food stores, such as Popeye's and Subway, to a branch of the Chicago Public Library and including several fashion and clothing stores. The store occupied by the debtor is one of the larger storefronts in this area of the shopping center and on either side of it are the following stores: Subway, The Avenue, One Price Clothing, and Sally Beauty Supply. On the back side of debtor's store are about a dozen sites that face out onto Milwaukee Avenue. To the east of the building where debtor's store is located is a smaller grouping of stores that contain the following establishments: Suds Coin Laundry, Dunkin Donuts, Harris Bank, Lover's Lane, Escape Travel, and Instant Cash Advance. Out of all of these sites, LaSalle has clothing retailers in five of its stores, at least three of which sell women's clothing. In the southeastern corner of the West Town Center is a Rainbow store, a clothing retailer. The landlord of this store is not LaSalle, but the store is clearly part of the West Town Center.
The stores located on Milwaukee Avenue consist of the following: Blockbuster, For Site Optical, Eat First, Total Communication, Radio Shack, Chicago Public Library, Rent-A-Center and five sites listed as having space available but the schematic lists as tenants for those sites Popeye's, Fashion Cents, Dollar Bills, General Nutrition, and J. Silver. See Exhibit 4 to April 11, 2002 hearing.
Testimony during the April 11, 2002 hearing indicates that of the clothing stores in the West Town Shopping Center, Big K, One Price, and The Avenue all sell large amounts of women's clothing. The Fashion Cents and J. Silver stores cater predominantly to junior sizes.
The debtor is the only auto parts store within this shopping plaza. For the surrounding area, testimony at the hearing on April 11, 2002 indicated that within a one mile radius from LaSalle's shopping center is an independent auto parts retailer, i.e. not part of a large regional or national chain of auto parts stores. Within a three mile radius from the West Town Shopping Center are approximately seven auto parts stores, all serving an area where only approximately fifty nine percent of the population own cars.
CONCLUSIONS OF LAW
LaSalle seeks reconsideration of this Court's decision regarding the assignability and permitted use provisions of its lease with debtor. LaSalle was given the opportunity in the opinion of March 4, 2002 to present further evidence on the issues of the lease restrictions and tenant mix for this shopping center. It argues that the restrictions on the assignment of the lease and on the permitted uses of the premises were part of the tenant mix protections built into its lease with the debtor.
A. Permitted Use Restrictions
We held in our March 4, 2002 Memorandum Opinion that the "Permitted Uses" provision and the covenants the debtor made in its lease with LaSalle constitute defacto anti-assignment clauses. As such, they are clauses that restrict the assignability of unexpired leases and are not enforceable under the Bankruptcy Code. 11 U.S.C. § 365 (f)(1). While debtor is required to assume its unexpired leases cum onere and is not permitted to rewrite the terms of the lease in assuming it, when the provisions of the lease violate the explicit commands of the Bankruptcy Code, this Court must strike those offending portions but give force and effect to the remaining non-offending parts of the lease. See In re Washington Capital Aviation Leasing, 156 B.R. 167, 172 (Bankr. E.D. Va. 1993); In re Rickel Home Ctrs., Inc., 240 B.R. 826, 831 (D. Del. 1998).
We find that reconsideration of this issue is not warranted. LaSalle has not provided any new evidence or argument that persuades this Court that its initial decision was incorrect. LaSalle argues that it was part of the bargain struck with the debtor to have as a tenant an auto parts store. Debtor asserts that while that may be the landlord's desire, it simply is not feasible because no auto parts retailers offered to buy this lease, which shows that the market cannot bear such a restriction. The sale of the debtor's LaSalle lease was widely advertised and apparently this site was not an attractive one for an auto parts store. Therefore, while it may be part of the bargain struck by this landlord to have an auto parts store in its shopping mall, the restrictive terms of the debtor's lease clearly violate the express language of 11 U.S.C. § 365 (f)(1). Where the market indicates that such a restriction would amount to an anti-assignment clause, we cannot uphold that provision of the contract.
However, we note that we were not presented with any evidence as to the intent of the landlord in its shopping center design that would complete its argument regarding the diverse tenant mix it now asserts was a motivating factor in leasing the site to debtor. Thus, we do not have sufficient evidence as to the intent of LaSalle to find that part of the bargain struck was for this particular debtor to occupy space in this shopping center.
As part of the evidence presented to the Court, of note is the fact that data for the area where debtor's store 331 is located indicates that approximately 41% of the individuals that reside in that area do not own an automobile. Without an automobile, those potential customers are certainly not going to frequent an auto parts store. We also note that this figure may be somewhat outdated, since it was generated from the 1990 census data, but it is the only evidence before this Court relating to the demographics of the average potential customer for the stores in this shopping plaza.
B. Tenant Mix
LaSalle again presents its argument on the tenant mix it seeks to protect for its shopping center. We have previously ruled on certain aspects of this argument, but hereby render a more complete analysis of LaSalle's argument because the Court now has the evidence before it on which to base a final determination.
As noted in our prior opinion, we were concerned with the due process received by LaSalle and presented them with the opportunity to request a further hearing on the tenant mix issue during which time LaSalle could present additional evidence on this issue and others relating to it and not addressed in our prior ruling. See Memorandum Opinion and Order, No. 01-72167 (Bankr. E.D. Va. March 4, 2002).
The shopping center at issue is the West Town Center operated by LaSalle. This shopping center consists of the approximately twenty five store fronts available for lease by LaSalle and one non-LaSalle store within what this Court determines to be the shopping center. A complete layout of the shopping center and the tenants occupying the stores is part of the record as Exhibit 4 to the April 11, 2002 hearing. As stated supra, the shopping center has approximately six stores that sell clothing, one of which is not leased by LaSalle, and a variety of other stores ranging from food vendors to electronics stores and a laundromat and public library branch. See Exhibit 4 to April 11, 2002 hearing.
Of the five clothing stores in the West Town Center, the selection and average price of each tenant's goods ranges dramatically. Both Fashion Cents and J. Silver sell predominantly junior's clothing and even though the age demographic sought by each is similar, the average price of the clothing each sells is quite different. Fashion Cents offers inexpensive junior's clothing and thereby caters to a market that is arguably very different from J. Silver, whose merchandise was characterized as "high end" clothing. Therefore the two stores do not overlap in the merchandise offered for sale. The Avenue offers almost exclusively women's plus sizes in a moderate price range. Big K offers clothing in all sizes and age groups for a relatively inexpensive price. One Price sells mostly women's wear with a small selection of men's and children's clothing and all are in a wide range of prices. Pay Half, the store AE seeks to place in the debtor's store location, is a family clothing store that offers approximately twenty percent men's wear, forty percent children's wear, and forty percent ladies' wear that consists of both women's and junior's sizes. Most of their merchandise is brand clothing and offered at a higher price range than stores such as Fashion Cents and One Price. Thus, the most likely competitor of Pay Half would be J. Silver, a store listed in the store schematic as having space available. Therefore, we find that given the wide range of clothing options in each store and varying prices for which the clothing is sold at each clothing retailer, the addition of a Pay Half operated by AE does not disrupt the landlord's tenant mix.
It was not explained to the Court what the "space available" designation on the shopping center layout means. See Exhibit 4 to April 11, 2002 hearing. We can only assume that this tenant has either space it is not using or that designation is indicative of a tenant who no longer operates a store out of this site as Super Trak Auto, the debtor's store in this center, is also shown with space available and we know for a fact that debtor no longer operates is auto parts business from this location.
LaSalle based its tenant mix argument partly on the demographics of the shopping plaza. LaSalle's expert testified that currently, the shopping center has about 15,174 square feet used for clothing stores, which amounts to 12.7 percent of the shopping center space. She also testified that the average mix in a shopping center such as West Town is about 10 percent in retail clothing and the addition of AE (in the form of Pay Half) would result in 20.8 percent of the center used for clothing sales — an excessive amount, in her opinion. See Testimony of Joan E. Primo from April 11, 2002 hearing. However, these figures are based on the total square footage of each store and does not take into account that the landlord has indicated there is space available in two of the stores used to reach the reported result. Further, we note that Big K, one of the largest leaseholders in this plaza, was not included in these calculations which would again place the landlord well above the average for a shopping center even if only one-fifth of the total Big K square footage is presumed to be used for the sale of clothing, which would add another 13, 350 square feet to the total space involved in clothing sales. This would result in approximately 15.3 percent of its space being used for clothing sales prior to the addition of a Pay Half store. ((15,174 + 13,350) ÷ 186,348 gross leaseable square feet = 15.3%). With Pay Half in this shopping center, the landlord may face a large percentage of its space used for clothing sales, but given the fact that several of its clothing retailers are marked as having "space available", the Court is not certain that all of the clothing retailers are even operating and selling clothes out of the stores in the West Town Center. Even if such stores are open and operating, the fact that not all of the space available in these stores is used for clothing sales deflates the percentage used by the landlord's expert to show a disproportionate tenant mix with the addition of a Pay Half store. Taking into account the fact that apparently not all of this space is being used by two of its clothing retailers, the impact of an AE tenant on the other retailers is lessened and the tenant mix argument becomes similarly less persuasive. We also note that the Rainbow store was not used in calculating these percentages. Given our finding that this store is part of the "shopping center" at issue, the percentage of the shopping center used for clothing sales climbs even higher. Thus, we find that the addition of another clothing store to the West Town Center will not disrupt the tenant mix which already has a higher than average percentage of its space being utilized for clothing sales without an apparent detrimental impact on those retailers.
In further evaluating the landlord's tenant mix, we must look to § 365(b)(3) and to the terms of the lease with debtor. As we have previously stated, § 365(b)(3) requires that "a shopping center tenant [be held] to its bargain with a landlord and to leave intact the property interests of debtor and landlord as set forth in that bargain, the courts should not imply an additional non-bargained-for-term." In re Ames Department Stores, 127 B.R. 744, 753 (Bankr. S.D.N.Y. 1991). Further, we adhere to our earlier finding that debtor's lease requires any assignment first be approved by the landlord and that any assignee not violate the provisions contained in any of the other tenants' leases. As will be discussed more fully infra, the assignment to AE does not violate any provisions in the leases of LaSalle's other tenants in the West Town Center.
This issue turns on whether the lease contains an exclusivity provision or a restrictive use clause. The landlord proposes that the terms contained in its lease with debtor amount to exclusive use clauses and as such, are binding on any subsequent assignee. The debtor and Congress Financial argue that the lease contains a restrictive use clause that is not binding on assignees of the debtor.
The issue of restrictive versus exclusive use clauses has been most clearly articulated in In re Sun TV and Appliances, Inc., 234 B.R. 356 (Bankr. D. Del. 1999). The court differentiated between exclusive use provisions and restrictive provisions as follows: "while the purpose of restrictive use provisions is to benefit all of the tenants and the Landlord by attempting to achieve an optimum tenant mix, the purpose of an exclusive use provision is to provide protection to a single tenant." Id. at 366-67. Further, the court found that to have a true exclusive use clause in a lease "requires that the leases [for all the stores in the shopping center] contain complementary restrictive use provisions such that it is clear that the various tenants are bound to provide a complementary and diverse array of products and services, which together will attract a large number of customers to the shopping center." Id. at 366. We hold that it is the landlord's burden to produce evidence in support of its assertion that the lease contains an exclusive use provision. LaSalle has not carried that burden in this case.
To find that debtor's lease contained an exclusive use provision, LaSalle was required to show all of its various leases are interdependent and reflect its desire for a diverse tenant mix. LaSalle did not put on evidence in the form of testimony from its landlord as to the combined effect or intent behind its leases with the tenants in the West Town Center. The evidence we have are the leases for all of LaSalle's tenants. This Court also has before it debtor's lease and the financial statements in support of debtor's contention that the proposed assignee would be able to fulfill the terms of its lease. We do not have any evidence relating to the intent behind the use provisions, therefore, we find the debtor's lease contained only restrictive use clauses.
The restrictive clauses, being the "permitted uses" as defined in debtor's lease, are only binding on the debtor and not its proposed assignee. In other words, only debtor is bound by the terms governing use, and therefore, debtor may assign the lease to an entity that does not comply with that stated use. LaSalle's argument that debtor may not assign because of this use restriction is without merit.
However, all of the leases for the West Town Center contain similar language in their "negative covenants" sections. These provisions provide a lengthy enumeration of the variety of prohibited uses for each location whereby the parties agree that the store will not be operated for the sale of certain goods. Nowhere in the lengthy list of prohibited uses are restrictions on operating any store for the sale of clothing. Further, none of the leases for LaSalle's other clothing store tenants contain any restrictions that could be construed as protecting their rights to 8 a limited market for the sale of clothing in this shopping center. See Exhibit 1 to April 11, 2002 hearing (Leases of The Avenue, Fashion Cents, J. Silver, Big K and One Price Clothing). We find that the leases for this shopping center do not contain complementary restrictive use provisions that are designed to show the landlord's intent to create a diverse tenant mix. None of LaSalle's clothing store tenants are protected in the retail clothing market by the terms of these leases. None of the leases contain provisions that restrict the number of tenants that may have clothing as their only merchandise or that limit the square footage of the shopping center that may be devoted to the sale of clothing. Without any evidence in the leases that the tenant mix was a primary concern of the landlord, and without any evidence as to LaSalle's intent behind these leases, we find that debtor may assign its lease to a party that proposes to operate a retail clothing store.
Debtor's lease contains the following provisions:
Section 8.2 Negative Covenants. Tenant covenants at all times during the Lease Term and such further time as Tenant occupies the Leased Premises or any part thereof:
B. . . . nor shall Tenant use or permit the use of any portion of the Leased Premises as living quarters, sleeping apartments or lodging rooms or for industrial purposes or for the operation of a food supermarket or grocery store, a drugstore, a pharmacy, a restaurant, a banquet ball, or a game room featuring electronic or coin-operated games or devices, the sale of alcoholic beverages, any sports, entertainment, amusement or recreational purpose such as a cinema, theater, skating rink, howling alley, amusement gallery, arcade, health club, gymnasium, pool room, or for any business which is not primarily engaged in the sale at retail of merchandise, or for any bank, savings and loan, finance company, financial institution, real estate, insurance, professional or non-professional or other office of any kind, or for any service or establishment such as, without limitation, barber shop, beauty salon, cleaner, travel agency, hospital, clinic, or other medical service or health care facility, not do any unreasonable act tending to injure the reputation of the Shopping Center.
Exhibit 1 from April 11, 2002 hearing (Lease of Trak Auto East Corporation) at Section 8.2.B.
Although the general clothing market is not limited in any of the leases for the West Town Center, a few tenants have sought use restrictions on the sale of specific types of clothing. However, AE's Pay Half store does not violate any of these use provisions. The lease for The Avenue protects its market hold on plus size clothing in this shopping center. The Avenue lease provides as follows:
. . . Landlord shall not, as to only the premises which have their main or front entrance facing the existing Jewel/Osco and K Mart stores or Ashland Avenue, enter into a lease with another tenant wherein the use by such tenant is a store which uses at least fifteen per cent (15%) or more of the sales floor area for the selling of women's apparel, size 16 or larger, but the foregoing shall not be applicable to the sale of women's apparel, size 16 or larger in the buildings currently occupied by Kmart or Jewel/Osco and in any store with a floor area in excess of 20,000 square feet. Notwithstanding the foregoing to the contrary this paragraph shall not be applicable to any tenant or other occupant with a sales floor area of less than 1,000 square feet.
See Exhibit 1 from April 11, 2002 hearing (lease Amendment Number One to The Avenue lease at ¶ 11). Fashion Cents also has a restrictive use clause in its lease. However, this provision does not apply to the location at issue as debtor's store does not face onto Milwaukee Avenue, nor is the debtor attempting to assign its lease to any of the prohibited retailers enumerated in this provision. See Exhibit I from April 11, 2002 hearing (Fashion Cents lease at Section 11.24) ("Providing . . . Landlord shall not enter into a lease with M.J. Petrie, Inc., Fashion Bug, Inc., Dots, Rainbow or Simply Fashions for a premises which has its main front entrance on Milwaukee Avenue."). Finally, Lover's Lane has sought an exclusive market for lingerie sales in its lease. Again, this provision is not violated by AE because, according to the testimony of AE's representative, their store does not plan to sell as its primary merchandise lingerie. See Exhibit 1 from April 11, 2002 hearing (lease of Lover's Lane at Section 11.23) (This lease provides: ". . . Landlord covenants not to enter into a lease agreement for space in the Shopping Center with a person or entity whose primary business in such Premises will be the sale of lingerie.").
The only other lease that contains an exclusive use provision relating to the clothing market is the Blockbuster lease (the music and video store) which restricts the assignment of that lease when Fashion Cents is a tenant in the shopping center. The provision states that "so long as Fashion Cents, its sublessee or successors or assigns, is a tenant of the Shopping Center, the Demised Premises shall not be leased to J.J. Petrie, Fashion Bug, Dots, Rainbow or Simply Fashion . . ." all of which are apparently clothing stores. See Exhibit 1 to April 11, 2002 hearing (Blockbuster Lease, Exhibit H). However, this provision merely restricts the assignees from which Blockbuster may choose for its site and it does not prohibit the use of the site as a clothing store altogether. See also footnote 8 supra.
C. Business Judgment Test
As previously recited in this case, debtor's proposed assumption and assignment of the executory contract is governed by general standards of business judgment. See In re Trak Auto Corp., No. 01-72167 (Bankr. E.D. Va. Jan. 9, 2002); N.L.R.B. v. Bildisco and Bildisco, 465 U.S. 513 (1984). This review is highly deferential to the debtor but we must consider all of the facts and circumstances surrounding debtor's decision. In making this determination, we have adopted the factors used by the courts in In re Gateway Apparel, Inc., 210 B.R. 567 (Bankr. E.D. Mo. 1997) and In re Valley View Shopping Center, L.P., 260 B.R. 10, 39 (Bankr. D. Kan. 2001): (1) the effect of debtor's proposed assumption or rejection upon debtor's estate; (2) how the lessor is impacted by the assumption or rejection of its lease; (3) whether any benefit or harm to the unsecured creditors arises from the assumption or rejection of the subject lease; and (4) the significance of the lease to debtor's overall reorganization efforts.
First, the effect upon debtor's estate is shown by the payment debtor will receive for the assignment of the lease it proposes to assume. Here, AE Stores will pay debtor $80,000 for the assignment of this lease to it. Clearly, this is a positive impact for debtor's estate when the cure amount for this location is approximately $18,000. This cure amount includes the rents owing to the landlord and other charges that make up what would be its administrative claim against the debtor upon rejection of the lease. By accepting the AE bid, the debtor eliminates an $18,000 administrative claim and brings additional monies into the estate. This store is located in the Chicago Market which area is being liquidated by debtor. Thus, the recovery that will be obtained on what would otherwise be a vacant store with an administrative claim from unpaid post-petition rent enhances debtor's estate as it eliminates the loss that would otherwise result had this assignee not sought to assume debtor's lease.
LaSalle will receive from this transaction a rent-paying tenant, which debtor has not been for much of the post-petition period. Further, given the financial evidence before this Court regarding the assignee's ability to perform its duties under this lease, as debtor's own witness stated, the proposed lessee is in a better financial position than debtor when it signed this lease. We find that debtor's assignee, AE Stores will be able to financially fulfill all of the lease obligations owing to LaSalle. Thus, the impact on the landlord is minimal in this case.
Third, we find no discernible harm to the unsecured creditors from the assumption and assignment of this lease. The unsecured creditors will benefit to some extent from debtor's cash influx from the payout of the lease from AE Stores as this additional cash will hopefully help debtor's reorganization efforts and consequently the recovery to the unsecured creditors. Debtor and its unsecured creditors will not be harmed by a default under the terms of the lease by AE Stores. Assignment of the lease by the debtor specifically exonerates debtor from any liability for a default under that lease by its assignee. See 11 U.S.C. § 365 (k) ("Assignment by the trustee to an entity of a contract 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.").
Finally, we find this lease will not negatively impact debtor's overall reorganization efforts. If the site were of value, other than the payout it will receive from the assignment, debtor would not be liquidating this market in an effort to cut its losses in this unprofitable area of its enterprise. The only significance this site holds is the payout debtor will receive from the assignment of the lease.
Therefore, we find debtor may assume its lease with LaSalle and assign it to AE Stores. Debtor has satisfied the Court that the assignment will ultimately benefit its estate. LaSalle objected on the basis of its use provisions, the lack of information regarding the proposed assignee's ability to perform under the lease, and its efforts to preserve its tenant mix. We find that the use provision in the lease does not prohibit debtor from assigning this lease and that its objection based on the assignee's ability to perform have been resolved by the evidence produced by the debtor at the hearing on this matter. Further, the argument based on tenant mix fails because the leases themselves do not show any such intent nor were we presented with any evidence as to the intent of the parties to preserve any tenant mix. The objections of LaSalle are hereby OVERRULED. Therefore, Debtor's motion to assume and assign its store number 331 is GRANTED.
IT IS SO ORDERED.