In re Ames Dept. Stores, Inc.

• Decision Date: 02 January 1991
• Docket Number: Bankruptcy No. 90B-11233 (HCB) through 90B-11285 (HCB).
• Citation: 127 BR 744
• Parties: In re AMES DEPARTMENT STORES, INC., Eastern Retailers Service Corporation, et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

127 B.R. 744 (1991)

In re AMES DEPARTMENT STORES, INC., Eastern Retailers Service Corporation, et al., Debtors.

Bankruptcy Nos. 90B-11233 (HCB) through 90B-11285 (HCB).

United States Bankruptcy Court, S.D. New York.

January 2, 1991.

Skadden, Arps, Slate, Meagher & Flom, New York City by Judy F. Chin, for debtors.

Katz, Randall & Weinberg, Chicago, Ill. by Timothy F. Kocian, Siegel, Sommers & Schwartz, New York City by Paul Milbaur, for Pioneer Bank and Trust Co.

DECISION

HOWARD C. BUSCHMAN, III, Bankruptcy Judge.

The debtor, Zayre Illinois Corp. ("Zayre Illinois"), seeks an order permitting it to assign to Schottenstein Stores Corp. ("Schottenstein") an unexpired lease of non-residential real property pertaining to a store located in River Grove, Illinois and located within a group of stores in an area known as The Thatcher Woods Shopping Center (the "Lease"). Schottenstein plans to operate a furniture store in part of the premises and sublease the remainder, all as permitted by the terms of the Lease.

I

The facts relevant to this motion are undisputed, developed through receipt of proffers by the attorneys, certain exhibits at the hearing held on November 29, 1990, and deposition testimony subsequently designated by the parties.

The Lease was entered into on June 7, 1965, between a wholly owned subsidiary of Zayre Corp., known as Zayre of Illinois, Inc. ("Zayre of Illinois"), as tenant and Pioneer Trust and Savings Bank as trustee under a trust known as Trust 14900, a predecessor in interest of the same bank as trustee under a trust known as Trust 21000, the current landlord ("Pioneer"). The Lease is a 20-year lease with four renewal options of five years each. The Lease was negotiated by representatives of Zayre Corp. with Samuel Alexander, an attorney and co-equal general partner of River Grove Development that operates and is beneficial owner of Thatcher Woods Shopping Center ("Thatcher Woods"). Alexander Depo. pp. 23-24. It was of no concern to the owner whether the lease was held by Zayre Corp. or a subsidiary. Alexander testified:

Q. Was there any discussion between you and the Zayre Corp. representatives about who the entity would be that signed the lease for the tenant?

A. I can\'t recall such a discussion. I know at some point or other, whether it was at this meeting or subsequently, I was told that they were putting all of their Chicago stores into a zone under the aegis Zayre of Illinois but that that would be of no concern to us because the parent company with whom we had negotiated with was going to guarantee the lease.

Alexander Depo. p. 31.

The Lease pertains to one of four anchor stores at Thatcher Woods. The other anchor stores are a supermarket known as Dominick's Finer Foods, Walgreen's Drug Store and Gold-Standard Liquors. The Gold-Standard premises were initially rented to National Tea Co., a supermarket. Other tenants include Baskin Robbins Ice Cream Co., a beauty salon, a currency exchange, a video rental store, a shoe store, a clothing store, Dunkin Donuts, a blood center, a health food store, a dry cleaners, a laundromat and a restaurant. The anchor stores and other stores on the site abut three sides of a common parking lot. Other stores and a gas station situated on adjacent premises owned by the landlord abut the parking lot. Ex. 62.

The Lease does not expressly restrict use of the premises in any fashion; nor do any of the leases of existing tenants restrict in any fashion the use of the Zayre of Illinois premises. Unlike the Lease, the remaining leases, except for Walgreen's, Dominick's, and Baskin Robbins, contain clauses restricting the use of the store premises to which each lease pertains. The Gold-Standard, Dominick's, Walgreen's and Baskin Robbins leases contain exclusivity provisions. None of these clauses would be breached by use of the Zayre of Illinois premises for a furniture store. The leases for several stores contain a radius clause barring the tenant from establishing another store within a specified distance. Small store leases have a common hours clause. The Lease contains no such clauses. The various leases refer to a merchant association which has been inactive in recent years. There is no master contract covering all tenants. No lease is terminable by a tenant on grounds of assignment or termination of an anchor store lease.

The Lease provides some constraint on other premises within Thatcher Woods. Without the tenant's consent, the height of other stores' marquees and parapets is restricted; exterior signs, except for stores belonging to regional or national chains, are prohibited. Lease ¶ 2A. So long as the Zayre of Illinois premises are used as a department store, no other premises in Thatcher Woods may be used for an apparel store, shop store, or drug store except for those belonging to a national or regional chain or another department store with certain exceptions.

Furthermore, the Zayre of Illinois Lease, in paragraph 17, precludes assignment by the tenant except to affiliates. That paragraph states, in pertinent part:

(A) Tenant may not assign its interest in this lease or sublet the entire demised premises to any person or business organization without first giving Landlord notice of the intended assignment or intended subletting and the nature of the business intended to be conducted by such person or business organization and the effective date of the intended assignment or subletting. If within twenty days after the giving of such notice by Tenant to Landlord, Landlord shall give notice to Tenant that it elects to terminate the term of the lease as of the intended date of said assignment or subletting, then the term of this lease shall terminate as if said intended date was originally fixed for the termination thereof.

. . . . .

(B) Notwithstanding the provisions of the foregoing Section (A) Tenant may at any time during the term of this lease assign its interest in this lease or sublet the whole or any part of the demised premises without Landlord\'s consent to (i) any business organization affiliated with Tenant, (ii) to any business organization resulting from the consolidation or merger of Tenant with any other business organization or organizations, or (iii) to any business organization which alone or together with affiliated business organizations shall acquire all or substantially all of the store operations of Tenant and its affiliated business organizations. For the purposes of this lease, a business organization shall be deemed to be affiliated with any corporation (a) if such business organization controls said corporation either directly by ownership of a majority of its voting stock or of such minority thereof as to give it substantial control of said corporation, or indirectly by ownership of such a majority of the voting stock of another business organization so controlling said corporation, or (b) if said business organization is so controlled by another business organization so controlling such corporation, or (c) if said business organization and said organization are substantially controlled by the same stockholders or their families.

Lease § 17(A), (B) (emphasis added).

Zayre Illinois transferred the Lease to its 100% parent company, Zayre Corp. prior to 1986. Presumably because its main interest concerning the lease assignment lay in having Zayre Corp.'s guarantee of the tenant's obligations under the Lease, See Alexander Depo. p. 31, and because Zayre Corp. fell within the entities listed in paragraph 17(B) of the Lease, Pioneer did not dispute that assignment. Pursuant to the Lease terms granting extension options, the Lease was extended by Zayre Corp. in 1986 for five years.

Zayre Corp. and Ames Department Stores, Inc. entered into an agreement on September 15, 1988 providing for the sale by Zayre Corp. and the purchase by Ames of substantially all of the Zayre Corp. discount store assets consisting of some 392 stores. In contemplation of that transaction, the Lease was assigned by Zayre Corp. to another wholly owned corporation, Zayre Illinois, on October 25, 1988, as part of an assignment of some forty leases. Zayre Illinois was formed in 1967 and between 1968 and 1988 held title to real estate in Danville, Illinois. Zayre Corp. sold all of the stock issued by Zayre Illinois and certain other wholly owned subsidiaries to Ames. Zayre Illinois continues to hold the leasehold interest of the Thatcher Woods Lease, and, when its bankruptcy petition was filed on April 25, 1990, held some 39 other leases. Since the sale of Zayre Illinois stock to Ames in October 27, 1988, the Zayre Illinois store at Thatcher Woods has been styled an Ames Department store. Zayre Illinois has continued as a wholly owned Ames subsidiary. The Lease itself was never assigned to Ames. By letters dated March 14 and April 21, 1989, Pioneer asserted that the Lease had been terminated because, in its view, the transaction was an assignment in violation of paragraph 17 of the Lease.

Schottenstein plans to use most of the Lease premises as a furniture store and to sublet the remainder.

Rather than assert that the assignment to Schottenstein is impermissible under paragraph 17(A) of the Lease,¹ Pioneer asserts: (i) the Lease was terminated prior to bankruptcy by the Zayre Corp.'s sale of its discount store assets through the assignment from Zayre Corp. to Zayre Illinois and the sale of the Zayre Illinois stock to Ames; (ii) that the Lease implicitly prohibits the use of the premises for any purposes other than as a department store and, therefore, the assignment may not be approved in light of section 365(b)(3) of the Bankruptcy Code, 11 U.S.C. § 365(b)(3) (1990); and (iii) the planned use by Schottenstein will disrupt the tenant mix of the shopping center also in violation of section 365(b)(3).

Zayre Illinois conversely contends (i) since the anti-assignment clause of the Lease, paragraph 17, permits assignment to an affiliate and...