In re Ames Dept. Stores, Inc., Bankruptcy No. 90B-11233 (HCB) to 90B-11285 (HCB).

• Decision Date: 13 November 1990
• Docket Number: Bankruptcy No. 90B-11233 (HCB) to 90B-11285 (HCB).
• Citation: 121 BR 160
• Parties: In re AMES DEPARTMENT STORES, INC., Eastern Retailers Service Corporation, et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

121 B.R. 160 (1990)

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

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

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

November 13, 1990.

COPYRIGHT MATERIAL OMITTED

Skadden, Arps, Slate, Meagher & Flom, New York City by Edward J. Meehan, James P.S. Leshaw, for debtors.

Bruce H. Roswick, New York City, for Sidcor Westmont Associates.

DECISION

HOWARD C. BUSCHMAN, III, Bankruptcy Judge.

Ames Department Stores, Inc. ("Ames") seeks an order pursuant to Sections 365(b) and (f) of the Bankruptcy Code, 11 U.S.C. § 365(b) and (f) (1986) authorizing a debtor subsidiary, Zayre Illinois ("Zayre") (collectively, the "Debtors"), to assume a lease of non-residential real property located in Westmont, Illinois (the "Lease"), and assign it to Schottenstein Stores Corporation ("Schottenstein").

I

Zayre entered into the Lease with Du Pag Trust Company as trustee for the landlord on April 15, 1969. Sidcor Westmont Associates ("Sidcor" or the "Landlord") purchased the original landlord's interest in the property in 1986.

The Lease covers approximately 81,550 square feet of store premises located in one of two buildings abutting a common parking area and lying perpendicular to each other the two buildings and contiguous land owned by the landlord are hereinafter referred to as "Westmont". The two buildings contain 15 stores rented to various businesses. The Lease premises comprise 56% of the gross leasable space of all the stores. Tr. 49¹. Zayre is the anchor tenant, Tr. 134, and has operated a retail department store in the premises. Since Ames acquired Zayre, the store has operated under the Ames name.

The various stores located in Westmont include Ames, a hair dresser, a women's clothes store, Kinney's Shoes, a dentist, a currency exchange, a dry cleaner, Trax Auto, Apple Foods, Hallmark Gifts, a travel agency, a food store, Walgreen Drugs and Glidden Paint. Tr. 113-121. The Ames, women's clothes and Kinney Shoes stores are closed. Tr. 135 Another tenant, Hallmark Gifts, is threatening to close. Tr. 138.

The Landlord contends² that, notwithstanding the absence of a use clause in the Lease restricting the use of the premises to a department store, the assignment to Schottenstein violates the requirement of section 365(b)(3)(D) of the Bankruptcy Code, 11 U.S.C. § 365(b)(3)(D) (the "Code"), that the tenant mix in a shopping center be preserved in the assignment of a lease pursuant to section 365(f) of the Code. Schottenstein plans to operate a furniture store in most of the premises and sublet the remainder.

The Lease, however, does not afford the Landlord any right to object to a tenant's assignment or subletting. Under the Lease, Zayre has the absolute right to assign and sublet the premises:

tenant shall have the right to assign its interest in this lease and to sublet all or any portion of the Demised Premises without the consent of the landlord. Tenant shall promptly upon such assignment or subletting deliver to the landlord a copy thereof . . . Notwithstanding any assignment of Tenant\'s interest in this lease or any subletting of the whole or any part of the Demised Premises, Tenant shall remain primarily liable for the performance of all agreements of the Tenant hereunder.

Lease § 17.1 (emphasis added).

Since Sidcor purchased Westmont in 1986, it did not choose the majority of current tenants. Their leases were already in place. Tr. 115, 118. Sidcor's only control over "tenant mix" is by favoring a former tenant upon renewal of its lease. Tr. 118.

Schottenstein plans to operate a Value City furniture store in a portion of the premises and sublet the remaining 20,000 square feet to financially secure tenants. Tr. 178. It is acquiring at least two other Chicago stores from this estate, also to be operated as Value City furniture stores. Two years ago, Schottenstein's Value City stores were ranked as the 7th largest furniture chain in the nation. Tr. 169-70. Sales have increased dramatically since then. The furniture is priced to be attractive to middle income families. Id.

Value City stores are located in various community shopping centers in Ohio, Pennsylvania, Indiana, Virginia and Connecticut. Tr. 172, 174-75. These centers contain usually 5-6 shops and provide services similar to those at Westmont. Tr. 173. In some centers, Schottenstein is the anchor tenant. Tr. 174-75. Schottenstein highly promotes its merchandise through various media channels and intends to emphasize advertisement during the opening period, Tr. 170; i.e., it devotes 8% of an average volume of sales of $10 million to advertising; other furniture or department stores invest only 3-4% of their sales to advertising. Tr. 170. Although Zayre has not paid a percentage rent to the Landlord in the last 3 years, Schottenstein believes it would "have as good an opportunity as the Ames operation to pay percentage rent sometime in the future." Tr. 180.

II

Section 365(f)(2) of the Code permits assignments of executory contracts and unexpired leases only if the lease is assumed and "adequate assurance of future performance of such contract or lease is provided. . . ." 11 U.S.C. § 365(f)(2). With respect to a leasehold in a shopping center, adequate assurance of future performance contemplates that there will be no substantial decrease in percentage rent as a result of the assignment and no failure to comply with radius, location, use and exclusivity provisions of the lease other leases in the center or a financing or master agreement. 11 U.S.C. § 365(b)(3).³ Section 365(b)(3)(D) further provides:

that assumption and assignment of such lease will not disrupt any tenant mix or balance in such shopping center.

11 U.S.C. § 365(b)(3)(D).

A landlord seeking to avail itself of the protection of section 365(b)(3) bears the burden of proof that the area in question is a shopping center. E.g. In re Joshua Slocum, Ltd., 99 B.R. 250, 257 (Bankr.E.D.Pa. 1989).

The term "shopping center" is to be strictly construed but is not expressly defined in the Code. 2 L. King, J. Lewittes, H. Miller, P. Murphy, J. Samet, W. Stern, 2 Collier on Bankruptcy ¶ 365.043 (15th ed. 1989). The language of the statute, however, gives meaning to the term by speaking of such clauses as radius, location, use, and exclusivity clauses of the store lease, other leases, and financing and master agreements relating to the premises as a whole. These provisions and similar provisions such as common hours clauses and so called anchor clauses committing a tenant only so long as another tenant remains are common to shopping centers. They serve to define the term as one contemplating a group of independently owned stores that are contractually interrelated as to the use of store premises contiguous to a common area and thereby planned as a single unit. Hoffman v. 905 International Stores, Inc. (In re 905 International Stores, Inc.), 57 B.R. 786, 787-88, 14 Collier Bankr.Cas.2d (MB) 1016 (E.D. Mo.1985); see also In re Goldblatt Bros., Inc., 766 F.2d 1136, 1140-41, 13 Collier Bankr.Cas.2d (MB) 115, Bankr.L.Rep. (CCH) ¶ 70,642 (7th Cir.1985). Through a pattern of legal interrelationships, the developer landlord creates and maintains balanced group of tenants, thereby maximizing the potential benefits to the landlord and tenants alike. Brooks, Shopping Center Tenants in Bankruptcy: the Effect of the 1984 Code Amendments, 1988 U.Ill.L. Rev. 725, 735-36 (1988).

This interrelationship distinguishes a shopping center under the Code from a strip or series of stores on main street. A strip or downtown shopping district, like a shopping center, may afford common parking but the tenants may not have the legal protections inter se such as Congress sought to protect in section 365(b)(3). In re Joshua Slocum, 99 B.R. at 256.

Under this analysis, it is readily apparent that Sidcor did not carry its burden of proof on the issue of whether Westmont is a shopping center under the Code. The Zayre Lease provides an unrestricted right of assignment. No evidence was introduced indicating a master agreement creating common store hours, joint advertising, or otherwise affording other tenants rights with respect to operation of the Lease premises. The only radius clause in the Lease serves to protect Zayre and Ames by limiting the Landlord's ability to lease other premises for use as a department store while the Zayre premises are operated as a department store. Lease §§ 2.2(A)(1) and (C). Simply put, there is nothing in this record evidencing any right enforceable by the Landlord or other tenants of the nature referred to by Congress in Section 365(b)(3).

To be sure, the Westmont area may physically look like a small shopping center and Schottenstein has referred to it as a shopping center. Tr. 173. Physical criteria, such as common ownership of contiguous stores, the existence of an anchor tenant, and shared parking facilities, serve a threshold purpose in determining whether a given area is a shopping center. There must be some physical resemblance to a shopping center before section 365(b)(3) can apply. See In re Goldblatt Bros., 766 F.2d at 1140-41 (physical criteria are significant but never determinative). While such physical appearance is one thing, the statute indicates that Congress was concerned with protecting the legal relationships among tenants and with landlords contained in leases and other documents. It is the absence of such legal relationships that governs here. In re Goldblatt Bros., 766 F.2d at 1141.

III

Even were a shopping center to be defined by its physical characteristics rather than legal interrelationships, it would be anomalous to interpret section 365(b)(3)(D) to preclude Zayre from assigning the Lease when the Lease itself affords Zayre with the unfettered right to assign and sublet regardless of impact on tenant mix.

The language of section 365(b)(3)(D), read in isolation, does not...