In re Martin Paint Stores, Bankruptcy No. 95 B 43607(SMB).

Citation199 BR 258
Decision Date06 August 1996
Docket NumberBankruptcy No. 95 B 43607(SMB).
PartiesIn re MARTIN PAINT STORES, a Partnership, Debtor.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

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Siegel, Sommers & Schwartz, L.L.P., New York City (James Beldner, Ronald Sussman, Eric Haber, of counsel), for Debtor.

Teitelbaum, Braverman & Borges, New Hyde Park, New York (Shari Braverman, of counsel), for Creditors Committee.

Gold & Wachtel, New York City (John H. Reichman, of counsel), for Southern Boulevard, Inc. d/b/a Persuasion Ladies' Stores.

Barry S. Schwartz, New York City, for Pretty Girl, Inc.

Feldco Realty Co., Bronx, New York, Landlord pro se.

MEMORANDUM REGARDING ASSUMPTION AND ASSIGNMENT OF LEASE

STUART M. BERNSTEIN, Bankruptcy Judge.

The debtor presently rents space from Feldco Realty Company ("Feldco") in a commercial building (the "Premises") located at 947 Southern Boulevard in the Bronx. It seeks, with the support of the Creditors' Committee, to assume the lease and assign it to Pretty Girl, Inc. Pretty Girl sells ladies clothing.

Feldco and Southern Boulevard, Inc. d/b/a/ Persuasion Ladies' Stores ("Persuasion"), another tenant in the Premises who is engaged in the same business as Pretty Girl, object to the proposed assignment. For the reasons that follow, the objections are overruled.1

FACTS

At all relevant times, the debtor was engaged in the retail sale of paint, hardware and other home improvement products at a chain of stores located in the greater New York area. When it commenced this chapter 11 case on August 18, 1995, it operated approximately 30 such stores, including one at the Premises. After initial attempts to reorganize failed, the debtor decided to liquidate and auction its remaining leases.

At the auction, Pretty Girl bid $75,000.00 for the lease at the Premises. The lease runs through July 31, 2007, and the present monthly rental is $9,500.00. The debtor owed Feldco approximately $18,000.00 in prepetition arrears, and the net gain to the estate, after curing the default and paying commissions, would total approximately $40,000.00. Clearly the highest and best (and only) offer, the debtor and the Creditors' Committee accepted Pretty Girl's bid.2

Feldco objected. Through one of its partners, William Feldman, Feldco conceded that the Premises was not a shopping center. He raised several issues, but only two need detain me. First, he contended that Feldco's lease with Persuasion precluded him from renting the debtor's space to Pretty Girl. He did not, however, bring the other lease to court, and I did not consider this objection further at that time.

Second, he pointed to a use clause in the debtor's lease which limited the tenant to selling hardware, paint and related items. Over the years, he had been careful to avoid renting to competitors of his existing tenants, and was concerned that Pretty Girl's presence might harm Persuasion's business and threaten Feldco's ability to collect rent. However, the evidence adduced at an evidentiary hearing conducted on June 26, 1996, showed that the amount of Persuasion's rent did not depend on its sales or income. Further, Persuasion had survived in the face of substantial competition during its ten years at the Premises. According to Feldman, five or six ladies clothing stores already operated within a two block radius, and Persuasion had competed against many of them during its tenancy.

At the conclusion of the June 26, 1996 hearing, I overruled the landlord's objection, granted the debtor's application, and directed the debtor to settle an order which it did shortly thereafter. Before I signed the order, two related events occurred. First, Persuasion commenced a state court action against Feldco and Pretty Girl, and obtained an ex parte temporary restraining order that prevented Pretty Girl from selling ladies' clothes at the Premises. The moving papers failed to describe the bankruptcy court proceedings, and the hearing on the preliminary injunction was scheduled five weeks into the future.3 In addition, Persuasion filed an objection in this court to the proposed order.

Persuasion based its objection on two grounds: the use clause in the debtor's lease, and the exclusivity provision in its own. Its lease with Feldco provides that the "landlord will not rent space in this building to any other tenant who sells ladies clothes exclusively." It is undisputed that Pretty Girl sells ladies' clothes exclusively, and Persuasion asserted that the proposed assignment would cause "irreparable and incalculable injury."

Although I expressed reservations regarding Persuasion's standing, I assumed that it had standing, and I scheduled an evidentiary hearing for July 24, 1996 to consider Persuasion's objection. The only witness to testify at that hearing was Nathan Cohen, a principal of Persuasion. He described the Premises as a three story commercial building with five stores located at the street level. Aside from the debtor and Persuasion, he did not identify the other tenants.

Mr. Cohen testified that Persuasion has been a tenant at the premises for approximately ten years. During this period, three to four competitors of Persuasion have operated within a two block radius, and three still do. Cohen insisted on the exclusivity provision in Persuasion's lease to limit competition. He testified that Persuasion's sales dropped 20% during the last year when a third competitor moved onto the same block, and opined that Pretty Girl's presence would hurt sales because it could undersell Persuasion, at least on the Pretty Girl-manufactured merchandise which comprised a small part of Persuasion's business. Mr. Cohen also stated that Pretty Girl could adversely affect foot traffic, but was clearly speculating and lacked any expertise on this issue.

I reserved decision, but called the parties in one week later to render an oral decision from the bench. I granted the debtor's application, and signed the order at that time. I stated, however, that the issue of Persuasion's standing still troubled me even though I had assumed standing and heard its objection. I now conclude that Persuasion lacked independent standing to object to the proposed assumption and assignment, and have issued this memorandum primarily to explain my reasoning on this issue.

DISCUSSION
A. The Requirements of Section 365

Section 365 governs the assumption and assignment of unexpired leases. In all cases, the debtor must cure any defaults, compensate the lessor for any pecuniary injury, and provide "adequate assurance of future performance." 11 U.S.C. §§ 365(b)(1), 365(f)(2). On this last requirement, the Bankruptcy Code distinguishes between shopping center and non-shopping center leases. Section 365(b)(3), which deals with shopping center leases, provides:

(3) For the purposes of paragraph (1) of this subsection and paragraph (2)(B) of subsection (f), adequate assurance of future performance of a lease of real property in a shopping center includes adequate assurance —
(A) of the source of rent and other consideration due under such lease, and in the case of an assignment, that the financial condition and operating performance of the proposed assignee and its guarantors, if any, shall be similar to the financial condition and operating performance of the debtor and its guarantors, if any, as of the time the debtor became the lessee under the lease;
(B) that any percentage rent due under such lease will not decline substantially;
(C) that assumption or assignment of such lease is subject to all the provisions thereof, including (but not limited to) provisions such as a radius, location, use, or exclusivity provision, and will not breach any such provision contained in any other lease, financing agreement, or master agreement relating to such shopping center; and
(D) that assumption or assignment of such lease will not disrupt any tenant mix or balance in such shopping center.

These provisions are intended to protect the landlord's economic expectations rather than those of the other tenants. The legislative history to an earlier version of section 365(b)(3)4 states:

A shopping center is often a carefully planned enterprise, and though it consists of numerous individual tenants, the center is planned as a single unit, often subject to a master lease or financing agreement. Under these agreements, the tenant mix in a shopping center may be as important to the lessor as the actual promised rental payments, because certain mixes will attract higher patronage of the stores in the center, and thus a higher rental for the landlord from those stores that are subject to a percentage of gross receipts rental agreement. Thus, in order to assure a landlord of his bargained for exchange, the court would have to consider such factors as the nature of the business to be conducted by the trustee or his assignee, whether that business complies with the requirements of any master agreement, whether the kind of business proposed will generate gross sales in an amount such that the percentage rent specified in the lease is substantially the same as what would have been provided by the debtor, and whether the business proposed to be conducted would result in a breach of other clauses in master agreements relating, for example, to tenant mix and location.

H.R.Rep. No. 595, 95th Cong., 1st Sess. 348-49 (1977) ("House Report") (emphasis added); see S.Rep. No. 989, 95th Cong., 2d Sess. 59 (1978) ("Senate Report").

The Bankruptcy Code does not, on the other hand, define "adequate assurance of future performance" in situations involving non-shopping center leases. The legislative history indicates, however, that the focus is still on the prejudice to the landlord:

If the trustee is to assume a contract or lease, the courts will have to insure that the trustee\'s performance under the contract or lease gives the other contracting party the full benefit of his bargain.

House Report at 348 ...

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