Weingarten Nostat v. Service Merchandise

• Decision Date: 24 January 2005
• Docket Number: No. 03-5709.,No. 03-5345.,03-5345.,03-5709.
• Citation: 396 F.3d 737
• Parties: WEINGARTEN NOSTAT, INC., Appellant, v. SERVICE MERCHANDISE COMPANY, INC., Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

396 F.3d 737

WEINGARTEN NOSTAT, INC., Appellant, v. SERVICE MERCHANDISE COMPANY, INC., Appellee.

No. 03-5345.

No. 03-5709.

United States Court of Appeals, Sixth Circuit.

Argued: November 3, 2004.

Decided and Filed: January 24, 2005.

ARGUED: Henry J. Kaim, Bracewell & Patterson, Houston, Texas, for Appellant. Patrick J. Nash, Jr., Skadden, Arps, Slate, Meagher & Flom, LLP, Chicago, Illinois, for Appellee. ON BRIEF: Henry J. Kaim, Bracewell & Patterson, Houston, Texas, Robin E. Harvey, Baker & Hostetler, Cincinnati, Ohio, for Appellant. Patrick J. Nash, Jr., Frances P. Kao, Skadden, Arps, Slate, Meagher & Flom, LLP, Chicago, Illinois, Paul G. Jennings, Bass, Berry & Sims, Nashville, Tennessee, for Appellee.

Before: RYAN, COLE, and ROGERS, Circuit Judges.

OPINION

ROGERS, Circuit Judge.

Weingarten Nostat, Inc., a shopping center landlord, appeals a bankruptcy court order, affirmed by the district court, allowing the assumption and assignment of a shopping center lease by Service Merchandise Company, Inc., a chapter 11 debtor in possession, to JLPK, LLC. Weingarten opposes the assignment of the lease because JLPK's assurance of future payment of rent was allegedly inadequate and because JLPK subleased the space to a store that competes directly with an existing tenant in the mall. Weingarten also appeals the district court's decision to deny a stay pending appeal of the bankruptcy court order allowing the assumption and assignment of the lease to proceed. The two appeals were consolidated for briefing and argument. Also pending before the court is Service Merchandise's motion to dismiss the appeals as moot under 11 U.S.C. § 363(m), which requires the dismissal as moot of an appeal of a bankruptcy court order approving the sale of property of an estate under § 363, if the order has not been stayed pending appeal.

We grant Service Merchandise's motion to dismiss the appeal as moot under § 363(m), because the sale and assignment transaction at issue, while complex, meets the requirements of a sale under 11 U.S.C. § 363. Therefore, § 363(m) applies and Weingarten's failure to obtain a stay requires the dismissal of its appeals as moot.

I.

Weingarten owns the Argyle Village Square Shopping Center in Jacksonville, Florida, a 300,000 square foot retail shopping center. Weingarten's predecessor in interest entered into a long-term lease with Service Merchandise on December 20, 1983, for 50,000 square feet of retail space (the "Argyle Village lease"). The Argyle Village lease was set to expire in 2010, with a series of five-year options that could extend the lease through the year 2040. The lease contained only loose restrictions on assignment, sublease and use. In 1998, Weingarten entered into a long-term lease with FCA of Ohio, Inc. for a Jo-Ann's, Etc. store (Jo-Ann's) located near the Service Merchandise store. The lease to Jo-Ann's contained a provision that gave the Jo-Ann's the option of reducing rent by one third or terminating the lease if another store selling arts and crafts supplies, fabrics, items related to sewing, or artificial flowers moved into the shopping center.

Service Merchandise filed a voluntary chapter eleven bankruptcy petition on March 27, 1999. After operating under bankruptcy protection for several years, Service Merchandise determined in January of 2002 that liquidation was preferable to reorganization. Pursuant to the process of liquidation, on March 16, 2002, the bankruptcy court approved the sale of Service Merchandise's "designation rights" to most of its real property and retail leases pursuant to 11 U.S.C. § 363 and Bankruptcy Rule 6004(a). The sale was to KLA/SM LLC (KLA) for $116.4 million. KLA later designated JLPK as the assignee of Service Merchandise's lease in the Argyle Village shopping center.¹ Service Merchandise then notified Weingarten of the proposed assumption of the lease by Service Merchandise, assignment to JLPK, and simultaneous subleases by JLPK to Bed Bath & Beyond, Inc. and Michaels Stores, Inc. (Michaels). Michaels sells many of the same types of arts and crafts supplies as Jo-Ann's, and allegedly caters to the same customers.

Weingarten objected to the proposed assignment and sublease, claiming the sublease to Michaels failed to meet the requirements of 11 U.S.C. § 365(b)(3), which requires the assignee of a shopping center lease to provide the landlord specific assurances of future performance under the lease. Weingarten argued that Service Merchandise failed to provide adequate assurance of future performance because: (1) the proposed assignee was not similar to Service Merchandise at the time the lease was originally consummated in terms of operating history and financial performance, see 11 U.S.C. § 365(b)(3)(A); (2) the proposed assignment and sublease breached Weingarten's lease with Jo-Ann's, see 11 U.S.C. § 365(b)(3)(C);² and (3) the proposed assignment and sublease would disrupt the tenant mix or balance of the Argyle Village shopping center, see 11 U.S.C. § 365(b)(3)(D).

The assignment and sublease transaction was initially rejected by the bankruptcy court because JLPK failed to provide Weingarten adequate protection under § 365(b)(3), because the financial performance and operating history of the assignee, JLPK, was not similar to that of Service Merchandise when the lease was originally executed. Rather, JLPK was a newly formed shell entity with no assets aside from the subleases to Bed Bath & Beyond and Michaels. On January 27, 2003, after JLPK's affiliates offered Weingarten a limited guarantee of one year's base rent, the bankruptcy court issued a memorandum opinion rejecting Weingarten's arguments that the JLPK assignment and sublease failed to comply with 11 U.S.C. §§ 365(b)(3)(A), (C) & (D). In a February 18, 2003, order implementing the memorandum, the bankruptcy court approved the sale and assignment of the lease to JLPK pursuant to 11 U.S.C. §§ 363 and 365(a).

Weingarten vigorously sought to stay the order pending appeal, but all such efforts were denied in turn by the district court and this court. In denying the motion for a stay pending appeal, the district court accepted the reasoning of the bankruptcy court in approving the assignment and sublease, finding that Weingarten had failed to show a likelihood of success on the merits. The district court acknowledged the possibility that Weingarten would incur irreparable harm should the stay be denied because of § 363's mootness provision, but denied the motion for a stay nonetheless. Weingarten then moved in this court for an emergency stay of the bankruptcy court order pending appeal or in the alternative for a writ of mandamus. The motion was denied on March 21, 2003, on similar grounds.

On March 14, 2003, two days after the district court denied Weingarten's motion for a stay pending appeal, Service Merchandise assumed and assigned the lease to JLPK. JLPK paid KLA $300,000 for designating JLPK as the assignee of the Argyle Village lease. JLPK then executed the sublease with Michaels on March 21, 2003. Michaels took possession, invested in configuring the space as a Michaels store, and celebrated their grand opening in the Argyle Village shopping center. On May 8, 2003, the district court denied Weingarten's motion for reconsideration of the decision to deny the stay pending appeal and affirmed the bankruptcy court order approving the assignment and sublease. Weingarten then appealed the district court's order affirming the bankruptcy court's approval of the assumption and assignment of the Argyle Village lease. While Weingarten's appeals were pending, Service Merchandise moved to dismiss the appeals as moot under 11 U.S.C. § 363(m).

II.

We grant Service Merchandise's motion to dismiss the appeal as moot under § 363(m) because the transactions involving the Argyle Village lease, while complicated, are governed by § 363, and Weingarten's failure to obtain a stay requires dismissal.³ Section 363(m) encourages parties to deal with a debtor and promotes the finality of a sale under 11 U.S.C. § 363(b). It provides:

The reversal or modification on appeal of an authorization... of a sale or lease of property [under § 363(b)] does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.

11 U.S.C. § 363(m) (2000). This language is referred to by the courts of appeals as a "statutory" or "bankruptcy" mootness provision. See LRSC Co. v. Rickel Home Centers, Inc. (In re Rickel Home Centers), 209 F.3d 291, 298 (3d Cir.2000); In re 255 Park Plaza Assocs., 100 F.3d at 1217. "Bankruptcy" mootness is predicated on the particular need to encourage participation in bankruptcy asset sales and increase the value of the property of the estate by protecting good faith purchasers from modification by an appeals court of the bargain struck with the debtor. See Anheuser-Busch, Inc. v. Miller (In re Stadium Mgmt. Corp.), 895 F.2d 845, 847 (1st Cir.1990). "[Section 363(m) reflects] the salutary policy of affording finality to judgments approving sales in bankruptcy by protecting good faith purchasers, the innocent third parties who rely on the finality of bankruptcy judgments in making their offers and bids.... The finality and reliability of the judicial sales enhance the value of the assets sold in bankruptcy." Id. (quoting Tri-Cran, Inc. v. Fallon (In re Tri-Cran, Inc.), 98 B.R. 609, 617 (Bankr.D.Mass.1989)).

While the primary goal of § 363(m) is to protect good faith purchasers it also reflects the more general constitutional consideration that an appeal must be dismissed as moot when, by virtue of intervening events, the court of appeals cannot fashion effective relief. See generally Spencer v. Kemna, 523 U.S. 1, 7, 118 S.Ct. 978, 140 L.Ed.2d 43 (1998); see also In re 255 Park...