In re Kmart Corp.

• Decision Date: 22 February 2005
• Docket Number: No. 02 B 2474.,02 B 2474.
• Citation: 359 B.R. 189
• Parties: In re KMART CORPORATION, et al., Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

359 B.R. 189

In re KMART CORPORATION, et al., Debtors.

No. 02 B 2474.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

February 22, 2005.

COPYRIGHT MATERIAL OMITTED

William J. Barrett, George R. Mesires, Gillian E. Munitz, Kimberly J. Robinson, Barack Ferrazzano Kirschbaum, George R. Mesires, Gardner Carton & Douglas LLC, Chicago, IL, Andrew N. Goldman, Wilmer, Cutler and Pickering, Michael J. Canning, New York, NY, Craig Goldblatt, Wilmer Cutler Pickering Hale & Dorr LLP, Eric R. Markus, Washington, DC, David E. Gordon, Northbrook, IL, Victoria F. Maroulis, Quinn Emanuel Urquhart Oliver etc, Redwood Shores, CA, Jon R. Steiger, Quinn Emanuel Urquhart Oliver & Hedges, Los Angeles, CA, Michelle Bock, Elisabetta G. Gasparini, James H. Geary, Joseph M. Harrison, IV, Lisa A. Lynch, Patrick M. McCarthy, Charles A. Newman, Julie E. Patterson, Robert O. Sands, Brian A. Sher, Jeremy S. Simon, Michael Snyder, for Debtors.

MEMORANDUM OPINION

SUSAN PIERSON SONDERBY, Bankruptcy Judge.

This matter comes before the court on the Motion of DDR MDT Midway Marketplace LLC ("DDR") to Clarify this Court's April 15, 2003 Order Authorizing Assumption and Assignment Of Certain Property to Wal-Mart (the "Motion"). For the reasons set forth herein, the Motion is denied for lack of jurisdiction.

BACKGROUND

On January 22, 2002 (the "Petition Date"), Kmart Corporation and thirty-seven of its affiliates filed voluntary petitions for reorganization under chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101 et seq. (the "Code"). The court entered an order on the Petition Date providing for the joint administration of the estates pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure. On April 23, 2003, the court entered an order (the "Confirmation Order") confirming the First Amended Joint Plan of Reorganization of Kmart Corporation and its Affiliated Debtors and Debtors — in — Possession (the "Plan"). The Plan became effective on May 6, 2003 (the "Effective Date").

In October of 1994, Kmart entered into a lease (the "St. Paul Lease") pursuant to which it leased approximately 114,000 square feet of retail space (the "Former Kmart Store") in the Midway Marketplace Shopping Center in St. Paul, Minnesota (the "Shopping Center") from DDR's predecessor-in-interest. There are a number of other retail stores in the Shopping Center, including one operated by Supervalu, Inc. as a "Cub" supermarket. The St. Paul Lease and all other leases of space in the Shopping Center are subject to a Reciprocal Easement Agreement regulating and restricting each tenant's use of its store ("REA").

The St. Paul Lease provides, in pertinent part,

so long as the Supervalu Lease is in effect, except for [Supervalu/Cub], no portion of the Shopping Center will be occupied or leased as a supermarket, convenience food market, grocery store or department within a store or other store facility or department within a store for the retail or wholesale purveyance for off-site consumption of food, fruit, vegetables, dairy produces, cookies, candy, groceries, produce, bakery products, meats, and/or delicatessen products and/or other miscellaneous foods (excluding stores which primarily sell prepared sandwiches for on — or off-site consumption); provided, however that (i) the occupant of [the Former Kmart Store] shall be permitted to sell such items so long as no more than 7,500 square feet of Gross Floor Area, including aisles, nor more than ten percent (10%) of the lineal feet of shelving in such occupant's premises are used for the sale of such products, and so long as such items do not include any fresh baked goods or perishable fresh or frozen meat, fish, poultry, produce or diary products, which such occupant shall not sell . . .

Exhibit E to St. Paul Lease, ¶ 32.

On April 15, 2003, this court entered an order authorizing Kmart to, inter alia, assume, sell and assign the St. Paul Lease to Wal-Mart Stores, Inc. (the "Assignment Order") pursuant to Section 365 of the Code.¹ The Assignment Order contemplated that Kmart's authorization to assign the St. Paul Lease would be pursuant to the terms of a proposed form Lease Assignment and Assumption Agreement attached as an exhibit to the Assignment Order. That form Agreement provided, inter alia,

3. Assumption of Leasehold Obligations. Assignee hereby accepts the foregoing assignment and covenants with Assignor, that from and after the Assignment Date, Assignee and its successors and assigns hereby assume and agree to keep, perform, fulfill or cause to be performed all of the terms, covenants, conditions and obligations contained in the Lease, which, by the respective terms therein, are imposed upon Assignor.

4. Ratification of Lease. Assignor and Assignee hereby ratify, reaffirm and adopt and agree that the Lease shall be in full force and effect as to Assignee.

On April 22, 2003, Kmart and Wal-Mart executed a Lease Assignment and Assumption Agreement with respect to the St. Paul Lease and a separate REA Assignment Agreement pursuant to which Kmart assigned its rights and obligations under the REA to Wal-Mart.

The Assignment Order also provides in the decretal portion at subparagraph (f),

While the Court does not expressly decide the issue of whether the [Former Kmart Store] is part of a "shopping center" within the meaning of Section 365, all of the so-called "shopping center" provisions of the Bankruptcy Code with respect to the assumption of a shopping center lease have been satisfied in connection with the assumption and assignment of the [St. Paul Lease] and ... the Purchaser's use of the premises is in a manner consistent with its typical retail operations.

Approximately one month after receiving the assignment of the St. Paul Lease, Wal-Mart commenced retail operations from the Former Kmart Store. DDR contends that Wal-Mart is currently selling grocery items, such as fresh and frozen meat, fish, poultry, produce and dairy products, in contravention of the use restrictions in the REA. Wal-Mart is also purportedly using more than the square footage allowable under the St. Paul Lease for the sale of non-perishable grocery items.

DDR sent Wal-Mart a letter dated May 28, 2004, with a copy to Supervalu's counsel, notifying Wal-Mart that it was in default under the St. Paul Lease and demanding that Wal-Mart "cease the sale of any and all items violating the `prohibited uses' ... of the REA." In response, Wal-Mart sent correspondence dated. June 8, 2004, to Supervalu's counsel setting out Wal-Mart's position that the terms of the Assignment Order authorized it to operate the Former Kmart Store in a manner consistent with Wal-Mart's "typical retail operations," which include the present grocery sales. A similar letter dated June 9, 2004, was sent by Wal-Mart to DDR's counsel. Another letter dated June 21, 2004, was sent by DDR to Wal-Mart further elaborating DDR's position that Wal-Mart defaulted under the St. Paul Lease and advising that if Wal-Mart did not stop its continuing violation of the St. Paul Lease and REA, "[DDR] shall seek not only injunctive relief to ensure such compliance, but will also seek any damages, including attorneys' fees, arising from Wal-Mart's refusal to comply with the terms of the [St. Paul. Lease] and REA." The last correspondence included in the parties' briefs is dated June 23, 2004 and was sent by Wal-Mart's bankruptcy counsel to DDR's counsel. The June 23 letter reiterated Wal-Mart's previous arguments, including its contention that DDR is precluded from complaining about the grocery sales because although DDR knew that such sales were part of Wal-Mart's "typical retail operations," it failed to object to the entry of the Assignment Order.

To date neither party has commenced a complaint to resolve their dispute. On July 14, 2004, DDR filed this Motion asking the court to clarify that the Assignment Order authorized the assignment cum onere and thus did not eliminate the use restrictions in the St. Paul Lease and the REA. Moreover, DDR requests the court to explain that none of the provisions of the Assignment Order, most particularly subparagraph (l) quoted above, should be construed to negate the REA use provisions so as to effectively give Wal-Mart carte blanche on what kind of groceries it can sell in the Former Kmart Store and how much of the store space can be devoted to its sale of groceries.

In response to the Motion, Wal-Mart argues that the Assignment Order unambiguously authorized Wal-Mart to use the Former Kmart Store in a manner consistent with its "typical retail operations," which include selling the types of groceries it is currently selling at the store. Wal-Mart further contends that because the Assignment Order is now final and nonappealable, DDR is barred by res judicata from revisiting the issues, such as the purported elimination of the use restrictions, that were necessarily decided against DDR with the entry of the Assignment Order.

At the initial oral arguments on this matter, the court sua sponte raised the issue of whether it has subject matter jurisdiction over a motion brought more than a year after the entry of the Confirmation Order and the Effective Date of the Plan involving a dispute between a former Kmart landlord and a third-party assignee of a Former Kmart Store. The court asked the parties to provide supplemental briefs on the jurisdiction issue. The court also requested that the parties address whether the Motion seeks an advisory opinion given that the dispute thus far has been limited to the arena of competing correspondence.

DISCUSSION

Bankruptcy Subject Matter Jurisdiction

A bankruptcy court must determine as a threshold matter whether it has subject matter jurisdiction over a proceeding. See In re Federated Dept. Stores Inc., 240 B.R. 711, 716 (Bankr.S.D.Ohio 1999). Subject matter jurisdiction is generally defined as "the court's authority to hear a given type of case." U.S. v. Morton, ...