In re Evelyn Byrnes, Inc.

• Decision Date: 30 August 1983
• Docket Number: Bankruptcy No. 83 B 10433.
• Citation: 32 BR 825
• Parties: In re EVELYN BYRNES, INC., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

32 B.R. 825 (1983)

In re EVELYN BYRNES, INC., Debtor.

Bankruptcy No. 83 B 10433.

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

August 30, 1983.

Otterbourg, Steindler, Houston & Rosen, P.C., New York City, for debtor; Warren R. Graham, New York City, of counsel.

Albert Togut, New York City, for the Creditors' Committee.

Steven W. Stutman, New York City, for Landlord, Park 58 Corp.

Simon, Uncyk & Borenkind, New York City, for Proposed Assignee, Park Avenue Fashions; Alan Borenkind, New York City, of counsel.

HOWARD C. BUSCHMAN III, Bankruptcy Judge.

The debtor, Evelyn Byrnes, Inc. seeks the permission of this Court, pursuant to § 365 of the Bankruptcy Code, 11 U.S.C. § 365 (1978) (the "Code"), to assume and assign its unexpired lease of a store.

I

In April 1980, Evelyn Byrnes, Inc. entered into a lease agreement with Park 58 Corporation ("Park 58") whereby it leased the corner store in the building known as 470 Park Avenue in New York City, located on the corner of Park Avenue and 58th Street. The lease had a ten year term. In addition to setting forth the annual rent and containing the usual covenants to a store lease, the lease, in a rider prepared by Park 58,¹ contained a use clause providing that:

Tenant shall use and occupy the demised premises for the sale of fine women\'s clothing and related accessories and for no other purpose. Tenant shall at all times conduct its business in a high grade and reputable manner and shall keep show windows and signs in a neat and reputable condition.

The lease further prohibited the affixing of any exterior signs to the building without the approval of the landlord and required the landlord's consent to alteration of the interior of the premises. It contained the further covenant that

Tenant affirmatively represents that it understands and is aware of the high caliber of Landlord\'s building and Tenant agrees and guarantees that it will maintain the premises in a manner consistent with the high standards of the building and all of its alterations and exterior and interior decorations and furnishings will comply therewith.

The debtor filed a petition for reorganization under Chapter 11 of the Code on March 22, 1983. On July 26, 1983, the debtor, pursuant to a prior order of this Court, conducted an auction sale of the leasehold. At the auction, Park Apparels Fashions Ltd., an affiliate of Labels For Less Inc. (jointly referred to as "Labels For Less"), submitted the high bid of $250,000, which bid was accepted subject to the approval, if any, of this Court.

Upon notice, a trial was held on the debtor's motion to assume the lease and assign it to Labels For Less. Testimony of a representative of Labels For Less and of a representative of the managing agent for 470 Park Avenue were taken and exhibits were submitted. The evidence revealed the following facts.

Labels For Less currently owns eight stores, all of which sell better and designer women's sportswear and dresses as are sold in well-known department stores such as Saks Fifth Avenue, B. Altman & Co., and Bloomingdale's.² This is apparently "fine women's clothing and related accessories" for there appears to be no genuine dispute that the use clause of the lease will be complied with if the assignment to Labels For Less is approved.³

Park 58, moreover, does not contend, were the lease to be assigned to Labels for Less, that it would lack adequate assurance of future performance in regard to the financial obligations of the lease. Labels For Less has, at Bankers Trust Company, a general unsecured credit line in the amount of $500,000 and an additional credit line for the store it would open at 470 Park Avenue, if the assignment of the lease is approved, in the amount of $350,000. It intends to spend $250,000 to obtain the lease and $100,000 for alteration of the store and plans to stock the store initially with $150,000 retail value of inventory.⁴

In addition, all the Labels For Less stores have been profitable; none has been closed. For the fiscal year ended May 31, 1983, Labels For Less had annual total sales, net of sales tax and commissions of approximately $6,167,000, broken down by store location as follows:

                Rockefeller Center            $1,013,000
                99 Park Avenue                   607,000
                130 E. 34th Street               910,000
                800 Third Avenue               1,126,000
                65th Street and Third Avenue     525,000
                639 Third Avenue                 761,000
                Lincoln Towers Complex           451,000
                70th Street and First Avenue     774,0005
                

This success is apparently due to the Labels For Less practice of selling at discount women's clothing identical to or of the same quality as that sold at finer department stores in stores appointed to attract customers who might also shop at such department stores. In at least one store, those appointments include overhead track lighting, chrome fixtures and clothing racks and carpeting.⁶

It is this practice, however, that is of concern to Park 58. While it concedes that Labels For Less is a "very good operation,"⁷ Park 58, according to its witness, sought in leasing the store to Evelyn Byrnes, Inc., a "salon" having an interior decorated much in the manner of a living room in an apartment or home. To Park 58, track lighting and chrome fixtures and racks are simply not "elegant" and therefore are unsuitable for its building. It notes, moreover, that the immediate neighborhood on Park Avenue consists of speciality shops. It urges that the appearance of Labels For Less is incompatible with the building.⁸

Examination of the lease, however, reveals that the term "salon" is nowhere included as a term of limitation in describing the use or decoration of the store and nowhere is a discount operation expressly prohibited.

II

From these facts arises the issue of whether Park 58 has or will receive adequate assurance of future performance of the unexpired lease as required by §§ 365(b)(1) and 365(f)(1) for the debtor to assume and assign the Lease. Since the assurance tendered by the debtor upon the assumption of the lease is the prospective performance of the assignee Labels For Less under § 365(f)(1), we turn to that section. It provides:

(f)(1) Except as provided in subsection (c) of this section notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts or conditions the assignment of such contract of lease, the trustee may assign such contract or lease under paragraph (2) of this subsection.

(2) The trustee may assign an executory contract or unexpired lease of the debtor only if—

(A) the trustee assumes such contract or lease in accordance with the provisions of this subsection; and

(B) adequate assurance of future performance by the assignee of such contract or lease is provided, whether or not there has been a default in such contract or lease.

There being no dispute that the debtor is able to assume the lease subject to all the restrictions imposed by the Code, our attention is directed to whether adequate assurance of future performance has been provided to the landlord.

"The terms `adequate assurance' of future performance are not words of art; the legislative history of the Code shows that they were intended to be given a practical, pragmatic construction." In re Sapolin Paints, Inc., 5 B.R. 412, 6 B.C.D. 776, 781, 2 C.B.C.2d 854, 864 (Bkrtcy.E.D.N.Y. 1980) As such, its primary focus centers on the assignee's ability to satisfy the financial obligations imposed by the lease. In re Brentano's, Inc., 29 B.R. 881, 883, 10 B.C.D. 717, 718, 8 C.B.C.2d 566, 569 (Bkrtcy.S.D.N. Y.1983); In re U.L. Radio Corp., 19 B.R. 537, 542, 8 B.C.D. 1273, 1275, 6 C.B.C.2d 430, 436 (Bkrtcy.S.D.N.Y.1982); In re Lafayette Radio Electronics Corp., 9 B.R. 993, 998, 4 C.B.C.2d 220, 227 (Bkrtcy.E.D.N.Y.1981). Since the landlord, at the hearing on this proceeding, essentially conceded that the assignee's financial status is not in issue, we, therefore, consider the other, less significant, concepts embodied in this phrase.

These additional concepts, including, inter alia, tenant mix and balance and the exclusivity provisions of other leases in the same project, are neither defined nor mandated by the Code, except with regard to leases of real property in shopping centers. The legislative history of § 365, as carefully reviewed by Judge John J. Galgay of the United States Bankruptcy Court for the Southern District of New York in In re U.L. Radio Corp., supra, shows, however, that Congress equated "adequate assurance" with that which will give the landlord the full benefit of his bargain. 19 B.R. at 541, 543,⁹ 8 B.C.D. at 1275, 6 C.B.C.2d at 435.

But, it is equally clear that in so doing, Congress did not mandate that the courts require the assignee to literally comply with each and every term of the lease. 19 B.R. at 544, 8 B.C.D. at 1276, 6 C.B.C.2d at 438. It has entrusted to the courts the determination, on a case-by-case basis, of the meaning of the term "adequate assurance", taking into account whether the landlord's opposition to the assignment is "based upon reason and . . . is not . . . arbitrary or capricious." 19 B.R. at 542; In re Sapolin Paints, Inc., 5 B.R. 412, 421, 6 B.C.D. 776, 2 C.B.C.2d 854 (Bkrtcy.E.D.N.Y.1980); accord In re U.L. Radio, Corp., supra, 19 B.R. at 542, 8 B.C.D. at 1275, 6 C.B.C.2d at 436. Such a determination is, nevertheless, to be made in the light of Congress' express policy of favoring assumption and assignment as a means of continuing performance and realizing value and thereby assisting the debtor in its rehabilitation or liquidation. Accordingly,

To prevent an assignment of an unexpired lease by demanding strict enforcement of a use clause and thereby contradict clear Congressional policy, a landlord or lessor must show that actual and substantial detriment would be incurred by him if the deviation in use was permitted.

In re U.L. Radio Corp., supra, 19 B.R. at 544.

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