WESTERN & SOUTHERN LIFE INS. CO. v. CROWN AMERICAN

• Decision Date: 04 June 1993
• Docket Number: Civ. A. No. 93-87.
• Citation: 877 F. Supp. 1041
• Parties: The WESTERN AND SOUTHERN LIFE INSURANCE COMPANY, Plaintiff, v. CROWN AMERICAN CORPORATION; Hess's Department Stores, Inc., Defendants. and Lazarus, Inc., Intervening Defendant.
• Court: U.S. District Court — Eastern District of Kentucky

877 F. Supp. 1041

The WESTERN AND SOUTHERN LIFE INSURANCE COMPANY, Plaintiff, v. CROWN AMERICAN CORPORATION; Hess's Department Stores, Inc., Defendants and Lazarus, Inc., Intervening Defendant.

Civ. A. No. 93-87.

United States District Court, E.D. Kentucky, at Covington.

June 4, 1993.

Robert B. Craig, Taft, Stettinius & Hollister, Crestview Hills, KY, for Western and Southern Life Ins. Co.

Dorothy M. Pitt, Rogers, Fuller & Pitt, Louisville, KY, for Crown American Corp., Hess's Dept. Stores, Inc.

John Zeiger, Matthew A. Kairis, Richard A. Chesley, Todd S. Swatsler, Jones, Day, Reavis & Pogue, Columbus, OH, for Lazarus.

OPINION AND ORDER RE: INTERLOCUTORY INJUNCTIVE RELIEF

BERTELSMAN, Chief Judge.

I. Introduction

This matter involves the Florence Mall and the series of agreements between the four anchor department stores and the owner/developer of the mall. The controversy requires the court to interpret the agreements in light of the closure of one of the anchors and the impending sale of its site to one of the other existing anchors.

The owner/developer of the mall is Western & Southern Life Insurance Company (hereinafter "Western & Southern"). The anchor store that closed is Hess's Department Stores, Inc., a subsidiary of Crown American Corporation (hereinafter "Crown/Hess's" or "Crown" and "Hess's"). The other three anchor stores are Sears, Roebuck & Co. (hereinafter "Sears"); J.C. Penney Properties, Inc. (hereinafter J.C. Penney"); and Lazarus, Inc. (hereinafter "Lazarus"), which is a subsidiary of Federated Department Stores, Inc. (hereinafter "Federated"). Crown/Hess's intends to sell its property to Lazarus.

Each of these companies is a signatory to, or otherwise bound by, the series of agreements commencing in 1974. Because of the various transfers and/or other evolving corporate relationships over the years the history of the occupants at the Hess's site is as follows: Adcor Realty Corporation (hereinafter "Adcor") and its affiliate that operated department stores owned by Adcor (Associated Dry Goods Corporation), owned and operated one of the four anchor sites under the name of H & S Pogue Company ("Pogue's"). Later, the store was operated under the name "L.S. Ayers." The site was then sold to Snyder's, Inc. ("Snyder's) by Adcor. Snyder's merged with Hess's, which in turn transferred its interest in the property to its parent Crown. Hess's decided to shut down the store and began taking steps to do so.

Western & Southern filed this action seeking to prohibit Crown/Hess from closing and to prohibit Crown/Hess from transferring the site to Lazarus. Jurisdiction is based on diversity.

In a previous order, the court declined to enter injunctive relief prohibiting the closure, but did enjoin the proposed transfer of the site to Lazarus. Furthermore, Lazarus was permitted to intervene. The matter was then set for trial on June 1, 1993 and June 2, 1993, to determine whether further preliminary injunctive relief should issue and whether the prior injunction should be maintained or dissolved. Subsequently Crown/Hess's filed a motion for summary judgment.

At trial Robert B. Craig, W. Stuart Dornette, and Joan A. Heffernan appeared on behalf of Western & Southern; Dorothy M. Pitt and Ruby Fenton appeared on behalf of Crown/Hess's Department Stores, Inc.; and John W. Zeiger, Todd S. Swatsler, Richard A. Chesley, and Matthew A. Kairis appeared on behalf of Lazarus.

On June 3, 1993, the court held a hearing to orally advise the parties of its decision. At that time the court also heard argument on Western & Southern's motion for an injunction pending appeal under Fed.R.Civ.P. 62.

This opinion and order pertains to plaintiff's motion for interlocutory injunctive relief. It also embodies the court's definitive rulings on several issues of law and fact — including interpretation of the key contract provisions at issue — which will be binding for the rest of this case barring exceptional circumstances. A separate opinion and order, entered concurrently herewith, pertains to the Rule 62 motion.

For the reasons stated below, the court finds that the contract section invoked by Western & Southern to prohibit the transfer of the property is unenforceable as an unreasonable restraint upon alienation and that the anchor site at issue can be transferred. However, the transferee takes the property subject to the obligation to operate a "retail department store" on the premises as that phrase is defined below. Accordingly, the court's prior injunction will be dissolved.

II. Factual Background

In formulating their relationship with regard to the operation of the Florence Mall, the parties have memorialized their agreements in several different documents, principally: the original "Operating Agreement" dated October 18, 1974, Plf. Ex. 1; the "Restated Operating Agreement" dated November 5, 1976, Plf. Ex. 5; and the supplemental agreements signed by each anchor setting forth, among other terms, the length and nature of the commitment. Hess's occupied what was originally the Pogue's or Adcor site and is bound by the terms of the supplemental agreement for that site. Plf. Ex. 3. The court finds that all of these documents constitute one agreement among the parties and must be construed in pari materia.

The pertinent sections of the "operating covenants" require each anchor to "continuously" operate a "retail department store" for the term contained in its respective supplemental agreement:

"Section 8.1.... Each anchor covenants and agrees ... that it will (so long as Western & Southern complies with its agreement to keep the Mall open) ...

(a) Continuously operate ... a two-level retail department store ... for such periods of time set forth in separate agreements dated as of the date hereof...."

Plf. Exs. 1 & 5, § 8.1. The operating covenant for the Hess's site provides:

"Pogue agrees to continuously operate the Pogue store on the Pogue site as retail department store under the name `Pogues' or `The H. & S. Pogue Company' or other such trade name as is then being used to describe the stores being operated by Associated in the metropolitan Cincinnati, Ohio, area for a period of twenty (20) years from the date the Pogue store opens for business to the general public pursuant to the terms of the Original Master Operating Agreement, and for a period of ten (10) years thereafter as comparable retail department store with no requirement as to name."

Plf. Ex. 3, § 8.1.

The transfer restriction clause prohibits transfers between nonaffiliates before the end of the term of the contract and provides:

"Section 25.2 ... (a) Each anchor ... shall have the right at any time, ... to transfer, mortgage or sell and leaseback their property and nothing in this agreement other than in this Article contained shall be deemed to restrict any such right (but, with respect to any such transfer before the termination date or the termination date as to a Party, as the case may be, the right to do so shall be conditioned on compliance with the terms and conditions hereinafter set forth):

(i) Transfer the parcel ... only if the Transferee is an Affiliate of the Transferor and transferee assumes all of transferor's obligations under the various agreements."

Plf. Ex. 5, § 25.2.

Finally, there is a section providing that In the event of any violation or threatened violation by any Party or any Occupant of any part of the Shopping Center Site or Future Development Parcel, if bound hereby, of any of the terms, covenants and conditions of this agreement, any of the Parties shall have the right to apply to a court of competent jurisdiction for an injunction against such violation or threatened violation.

Plf. Ex. 1 & 5, 28.10, 27.10.

III. Analysis

A. Western & Southern Has Standing

Section 8.1(a) of the restated operating agreement recites that each named anchor covenants "with" and "for the benefit of" each other to continuously operate department stores on their respective premises for the term set forth in their respective supplemental agreements. Crown/Hess's argues that because this section does not expressly mention the mall owner/developer, Western & Southern is not an intended beneficiary and cannot enforce the covenant.

This argument is without merit. Section 27.10 of the operating agreement, to which Western & Southern is a party, gives "any Party" the "right to apply to a court of competent jurisdiction for an injunction against" the "violation or threatened violation" of "any part" of the agreement. Accordingly, the court finds that Western & Southern has standing to enforce the terms of the agreements.

B. The Operating Covenants Are Not Enforceable by Injunction, But Western & Southern's Damages Remedy Against Crown/Hess's Remains Unaffected

As properly read together, the operating covenants in the agreements and supplement for the Hess's site require the occupant to continuously operate a retail department store under the Pogue name for twenty years from the date the Pogue store opened and thereafter for ten years as a comparable retail department store but without the name requirement. It is undisputed that Crown and Hess's are bound by this covenant. Furthermore, it is undisputed that Pogue's opened for business on September 22, 1976. Thus, the 1993 proposed transfer falls within the thirty-year term.

Earlier, at the conclusion of the hearing on plaintiff's request for preliminary injunction, the court concluded the operating covenant is unenforceable primarily because the relief would involve the court in continuous supervision of the operations of the store to make sure that it was being operated in good faith as a going concern. See CBL & Assocs., Inc. v. McCrory Corp., 761 F.Supp. 807 (M.D.Ga. 1991); 8600 Assocs., Ltd. v. Wearguard Corp., 737 F.Supp. 44 (E.D.Mich.1990); M. Leo Storch Ltd. Partnership v. Erol's, Inc., 95 Md.App. 253, 620 A.2d 408 (1993). Indeed, the court notes that Western & Southern has...