In Re: Rickel Home Center

• Decision Date: 06 April 2000
• Docket Number: No. 98-7181,98-7181
• Citation: 209 F.3d 291
• Parties: (3rd Cir. 2000) IN RE: RICKEL HOME CENTERS, INC., Debtor L.R.S.C. CO., Appellant v. RICKEL HOME CENTERS, INC.; STAPLES, INC
• Court: U.S. Court of Appeals — Third Circuit

Page 291

209 F.3d 291 (3rd Cir. 2000)

IN RE: RICKEL HOME CENTERS, INC., Debtor

L.R.S.C. CO., Appellant v. RICKEL HOME CENTERS, INC.; STAPLES, INC.

No. 98-7181

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued September 7, 1999

Decided April 6, 2000

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. [Copyrighted Material Omitted]

Robert E. Gerber Fried, Frank, Harris, Shriver & Jacobson New York, NY 10004

Brendan L. Shannon Young, Conaway, Stargatt & Taylor Wilmington, DE 19899-0391, Attorneys for Rickel Home Centers, Inc.

Barry W. Frost (Argued) David A. Martin Teich, Groh & Frost Trenton, NJ 08619

Allan R. Plapinger L.R.S.C. Co. Lawrenceville, NJ 08648-4099, Attorneys for L.R.S.C. Co.

Norman L. Pernick Saul, Ewing, Remick & Saul Wilmington, DE 19899

Patrick Dinardo (Argued) Gayle P. Ehrlich Maria Carroll Furlong Sullivan & Worcester Boston, MA 02109, Attorneys for Staples, Inc.

Before: SLOVITER and ROTH, Circuit Judges, and POGUE, Judge, United States Court of International Trade^*

OPINION OF THE COURT

SLOVITER, Circuit Judge.

L.R.S.C. Co. ("LRSC") appeals an order of the United States District Court for the District of Delaware that authorized the assignment of its lease with debtor Rickel Home Centers, Inc. to Staples, Inc., both of which are appellees, and that struck from that lease a provision limiting the tenant's use of the premises to a "Channel Home Center." The principal issue on appeal is whether LRSC's failure to obtain a stay of the order has rendered its appeal moot. If not, we must consider LRSC's various challenges on their merits.

I.

LRSC is the landlord of a shopping center in Lawrence Township, New Jersey (the "Lawrence center"). The Lawrence center contains a variety of tenants including, inter alia, stores that sell furniture, music and electronics items, clothing, shoes, and auto parts, as well as restaurants and banks. The center also contains three anchor stores. One is a Burlington Coat Factory. Another is an Acme supermarket. The third was formerly operated by Rickel, the debtor, as a home improvement store. Rickel is the successor in interest to Channel Companies, Inc. (Channel), which had a lease from LRSC for premises covering approximately 38,000 square feet of retail space ("the Lease"). The Lawrence center premises had been used as a home improvement store since 1976 in accordance with a use provision contained in Article 10 of the Lease, which provides:

Use ART. 10. Tenant may use the Premises as a Channel Home Center 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. . . . Notwithstanding anything to the contrary contained in this Article 10, provided Tenant has complied with the provisions of Article 15B hereof [which effectively requires the landlord's consent], any non-"Successor" or non-"Affiliate" (as defined in Article 15A) assignee or sublessee of Tenant may use and operate the Premises for any lawful retail purpose, subject to the restrictions contained in Article 15B hereof.

Addendum to Appellant's Br. at 1.

Article 10 references Article 15 of the Lease, which provides, inter alia, (1) that the tenant may assign or sublease any portion of the premises to a successor entity -one resulting from the consolidation, merger, or transfer of substantially all of the tenant's assets -without providing notice to or obtaining the consent of LRSC, and (2) that LRSC may terminate the Lease upon an assignment or sublease of more than 80 percent of the premises by the tenant to any non-successor entity: ¹ The original term of the Lease was for fifteen years with three five-year options to renew. One option was exercised by Channel on January 29, 1991. Its successor Rickel sought to renew for another five years on January 29, 1996 although the Lease was apparently in default at that time. However, on January 10, 1996 Rickel had filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. It remained in possession and continued its retail operations as debtor-inpossession.

On December 10, 1996, LRSC filed a motion in the Bankruptcy Court seeking an order (1) compelling Rickel to assume or reject the Lease prior to the March 6, 1997 deadline established by the court for the assumption or rejection of non-residential real property leases and (2) declaring void Rickel's prior exercise of its option to renew the Lease for another term. The parties subsequently entered into a stipulation in which Rickel agreed to file a motion to assume or reject the Lease on or before February 18, 1997 and LRSC agreed that Rickel had effectively exercised its option to extend the Lease until January 31, 2002. Rickel did move to assume the Lease on February 18, 1997. The Bankruptcy Court granted that motion and directed Rickel to pay almost $18,000 to cure its default.

After settling the dispute with LRSC, Rickel continued to operate as debtor-in-possession and attempted to reorganize its operations. It subsequently concluded that it would be unable successfully to reorganize and determined to wind up its operations and liquidate its retail store inventories and remaining assets. On October 24, 1997, the Bankruptcy Court entered an order granting Rickel's motion to liquidate its inventory and sell its furniture, fixtures, equipment, and other personal property (FF&E). The inventory was subsequently sold in a bulk sale. Thereafter, the leases to which Rickel was a party were its most substantial remaining assets.

Rickel hired a broker to market the leases and received numerous offers. Among them was one from Staples to purchase a package of forty-one leases, including the Lawrence center Lease, for $35.5 million. The offer allowed the purchaser to assign its rights to any nominee, although Rickel and Staples anticipated that any such nominee would be a Staples affiliate and would operate a Staples office superstore on the premises. Staples planned to occupy 24,000 of the 38,000 square feet of the Lawrence center premises as a Staples store and to sublet the balance.

On February 12, 1998, Rickel sought court approval for its proposed transaction with Staples. Specifically, Rickel moved for an order authorizing it "to sell 41 of its leases [including the Lawrence Lease] to Staples (or its nominee) . . . ."² Rickel also sought to invalidate various provisions contained in some or all of the leases, including terms "providing in substance that the premises may be used only for a `Rickel' or `Channel' store[,] . .. . only for a `Home Center' store or for the sale of goods typically sold therein[, or terms] . . . . conditioning assignment on landlord consent . . . ."³

LRSC objected, arguing, inter alia, that these lease provisions were integral to the bargain it had struck with Rickel and also that by seeking to excise or waive these terms Rickel was attempting to renege on the parties' prior stipulation allowing Rickel to assume the Lease and extend it for another term. On February 26, 1998, the District Court withdrew the reference to the Bankruptcy Court and held hearings relating to the proposed transaction on February 26, March 3, and March 4, 1998.

On March 6, 1998, the court granted Rickel's motion. The court determined that due to changes in the home improvement industry "the market for [home improvement centers] is either non-existent or in dire straits, [and that] such use restrictions would make it impossible . . . to assign the Lawrence Lease . . . ." In re Rickel Home Centers, Inc., 240 B.R. 826, 832 (D. Del. 1998). The court based this finding on the proffer of testimony by Joseph Nusim, president and chief executive officer of Rickel, that the four home center chains that formerly operated in New Jersey were out of business or no longer operating in that state, a pattern apparently typical in the home center industry. Supp. App. at 128-29. Nusim's proffered testimony would have described the negative impact of large-scale home improvement centers like Home Depot on smaller home improvement centers like Rickel. Supp. App. at 129-30. The court also noted that LRSC did not contest this proffer and that LRSC's intended use for the Lawrence center premises, which involved dividing the premises into a series of smaller stores catering to specific home improvement needs, actually supported Rickel's claim that there were no potential buyers who could comply with the use restriction. The District Court therefore held that the Article 10 use provision amounted to a de-facto prohibition on assignment and permanently excised the use provision from the Lease.

The court also determined that the leases in the Staples transaction constituted 96 percent of Rickel's assets and that, as a result, Staples qualified as a "successor" under Article 15A of the Lease. This holding relieved Rickel of the need to notify LRSC of or obtain its consent to the assignment to Staples. The court did not excise the assignment provisions from the Lease and, in fact, held that "once the leases have been assigned to Staples . . . Staples will be subjected to all the provisions of the leases for purposes of their subletting efforts." In re Rickel, 240 B.R. at 837.

Purporting to act under sections 363, 365(a) and 365(f) of the Bankruptcy Code, the District Court granted Rickel's request to "sell 41 of its leases to Staples . . . and to assume (where applicable) and assign the selected leases that Staples desires to have assigned to it . . . ." Id. at 828. Furthermore, the court determined that Staples and its nominee would receive the protection of section 363(m) of the Bankruptcy Code, which protects good faith purchasers or lessees of property of the bankruptcy estate from the effects of a reversal or modification on appeal of the authorization to sell or lease the property, if the...