Opinion
Case No. 3:02-0889, Bankruptcy Case No. 399-02649
October 9, 2002
ORDER
This case concerns the proposed assignment of Service Merchandise Company unexpired lease for store 533, located in West Oaks I Shopping Center, Novi, Michigan. Service Merchandise Company, Inc. seeks to assign the lease to JLPK-Novi LLC, who propose subsequent sublease to Michael Stores, Inc. The Bankrupcty Court's Order dated Se 2002, authorizes the assignment and subsequent sublease. Before the Court is a motion for a stay of the order pending appeal in this Court, pursuant to Bankr. R. 8005, 11 U.S.C.A.
For the reasons more fully contained in the accompanying memorandum, this Court GRANTS the motion for a stay pending final disposition of the appeal.
It is so ORDERED.
MEMORANDUM ON ORDER GRANTING STAY PENDING APPEAL
Before the Court is a motion by Appellant Ramco-Gernshenson Properties, L.P. ("Ramco") seeking a stay of the bankruptcy court's order pending appeal, pursuant to Bankr. R. 8005, 11 U.S.C. The Order approved the assignment of debtor Service Merchandise Company, Inc.'s ("Service Merchandise") unexpired lease for store 533 located in West Oaks I shopping Novi, Michigan, to JLPK-Novi LLC ("JLPK"), and the subsequent sublease by JLPK to Stores, Inc. This Court granted a bridge stay on September 19, 2002, continuing the effect under Bankr. R. 11 U.S.C. § 6006 (d). A hearing on the motion was held on Sept 2002.
I. Relevant Facts
Service Merchandise filed chapter 11 bankruptcy petitions with the United States Bankruptcy Court for the Middle District of Tennessee, Nashville Division, on March 27 Service Merchandise subsequently sought to sublease half of the space in its leased premises to TJX Companies, Inc., ("TJX") and Ramco ultimately consented to the sublease. As a consent, Service Merchandise and Ramco entered into the Third Amendment to the Lease, effective December 1, 2000. Ramco contends that this amendment ratifies and confirms terms the original lease in a post-bankruptcy contract.
In March 2002, within the context of winding down business operations, Service
Merchandise sold the designation rights to all of its properties to KLA/SM, LLC ("KLA"). Ramco approved the sale of the designation rights for store 533 in Novi, Michigan, to KLA. Concurrently, the parties entered into a written stipulation preserving Ramco's right to object to any proposed use of the leased premises under the provisior's of the lease until such time that the Debtor proposed assignment to an end-user of the premises.
In August 2002, KLA submitted a further designation of assignment to Ramco for approval, attempting to designate the assignment to JLPK. Ramco withheld its consent to this further sublease or assignment. Ramco contends that JLPK's planned sublease to Michael Stores, Inc. ("Michael Stores") will disrupt the tenant nix of the West Hill's "shopping center and cause Ramco to violate provisions in a lease with a different anchor tenant, Jo-Ann's Etc. ("Jo Ann's"), an alleged competitor of Michael Stores.
Ramco contends it was reasonable in withholding consent because JLPK failed to meet requirements as to adequate assurance and tenant mix provisions under 11 U.S.C. § 365 which protect the tenant mix of shopping centers. Service Merchandise, KLA, and JLPK contend that (1) adequate assurance exists and was provided under 11 U.S.C § 365, and (2) their least existed prior to and is carved out from negotiations between Ramco and its other tenants.
On September 9, 2002, the Bankruptcy Court ordered Ramco to approve the proposed assignment to JLPK and subsequent sublease to Michael. Pursuant to Bank. R. 6006, a ten-day temporary stay began. On the same day, Ramco filed a motion seeking a stay of the order pending appeal pursuant to Bank. R. 8005. Finding that Ramco could show neither "irreparable harm" nor "likelihood of success on the merits of its appeal," the Bankruptcy Court denied the motion for a stay on Sept. 11, 2002. On Sept. 16, 2002, Ramco filed a motion for a stay pending appeal in this court.
II. Standard of Review
This Court has described the standard of review for a district court's review of a matter previously decided by a Bankruptcy Court in In re Creekstone Apartments Associates, L.P., 1995 WL 588904 (M.D. Tenn. Sept. 18, 1995). Under Bank. R. 8013, a bankruptcy judge's findings of fact are not set aside unless "clearly erroneous," and the bankruptcy judge's conclusions of law are reviewed de novo. Id. at 3. The Sixth Circuit cites the same standard in Woolum v. Bank One, Lexington, N.A., 979 F.2d 71 (6th Cir. 1992), in which it reversed a district court judge's use of the de novo standard because the issue was improperly labeled a mixed question of law and fact.
III. Stay Pending Appeal
A. Relevant Case Law
Sixth Circuit law is unequivocal that in order to approve the appellant's motion or a stay pending appeal, this Court must find a "serious question going to the merits" of the bankruptcy appeal, balanced with the harm to the other parties. See Michigan Coalition of Radioactive Material Users, Inc. v. Griepentrog, 945 F.2d 150, 153-155 (6th Cir. 1991). In evaluating whether a stay should be granted, the Court considers the same factors relevant to evaluating motion for a preliminary injunction. Id. at 153; In re Bradford, 192 B.R. 914 (Bankr. E.D. Tenn. 1996); Ottawa Development Corporation v. U.S. Dept. Housing, 2001 WL 1299041 (6th Cir. Aug. 9, 2001). The appellant must show: (1) the likelihood of the appeal's success on the mute, (2) the likelihood of irreparable harm to the movant if the stay is not granted, (3) the prospect f others being harmed if the stay is granted, and (4) the public interest in granting the stay. Griepentrog, 945 F.2d at 153. "These factors are prerequisites that must be met, but are interrelate considerations that must be balanced together." Id. at 153 (citing In re Delorean, 755 F.2d 1223 (6th Cir. 1985)). The Sixth Circuit explains the balancing of likelihood of success and irreparable harm as inversely proportional, noting that more irreparable harm requires less probability of success on appeal. Id. at 153. Nevertheless even if the harm is great, the movant m at demonstrate more than a mere "possibility" of success. Id. (citing Mason County Medical Ass'n v. Knebel, 563 F.2d 256, 261 n. 4 (6th Cir. 1977)). Reiterating the Sixth Circuit's position and consolidating prior precedent, the Griepentrog court held that the minimum standard t be balanced with the other factors is "serious questions going to the merits" of the appeal. Id. at 155 (citing In re DeLorean, 755 F.2d at 1229); Friendship Materials, Inc. v. Michigan Brick, Inc., 679 F.2d 100, 105 (6th Cir. 1982)). See, e.g., In re Best Reception Systems, Inc., 210 B.R. 988, 993-994 (Bankr. E.D. Tenn. 988) (applying the Griepentrog analysis to a motion for a stay pending appeal under Bankr. R. 8005).
B. Serious Questions Going to the Merits
Ramco alerts the Court to several issues it will raise on appeal. Three of thesZ arguments constitute the source of reservations and raise serious questions as to the merits of the bankruptcy court's legal analysis. Following the court in Griepentrog, the Court hereby identifies the source of its reservations but finds it inappropriate to partake of a "detailed discussion" on the merits during this ruling on the preliminary motion. Griepentrog, 945 F.2d at 154.
First, Ramco argues that the Third Amendment to the Service Merchandise lease, signed post-bankruptcy and concurrently with the sublease to TJX, created a new lease such that the bankruptcy court cannot excise terms under 355(f). If the court finds this to be true as a matter of law, then the bankruptcy court's decision to strike Ramco's purchase rights as an a anti-assignment clause under 11 U.S.C. § 365 (f) must be overturned on appeal.
Second, Ramco argues that the reasonable consent clause in the original and amended Service Merchandise lease be read within the "shopping center context," such that landlords are given broader latitude to define what is "reasonable" in right of tenant mix considerations. If reasonable consent in a business judgement context is read to contain more than the bankruptcy court's limited considerations of adequate future performance and financial strength, then Ramco's "reasonableness" in withholding consent must be re-evaluated under a business judgement standard particular to shopping center lessors.
The Court acknowledges the Bankruptcy Court's finding that West Oaks I and II are separate "shopping centers" and saves further review for appeal on the merits of the order.
Third, Ramco argues that when originally bargaining with Service Merchandise over the 1980 lease, it intended for the "reasonable consent" clause to break the link between the right of Service Merchandise to use the space for "any lawful use" and the right of Service Merchandise to sublease or assign this same broad usage right. If Ramco's reading of the lease is correct, it is a strong argument for incorporating 11 U.S.C. § 365 (f), and allowing Ramco to take tenant mix considerations into account.
Although not dispositive, this Court considers that if a stay is not granted before the lease is assigned, the appeal risks being moot because a reversal would "affect the validity of the sale or lease. See In re Rickels Inc., 209 F.3d 291, 299 (3rd Cir. 2000). This Court believes justice warrants a full consideration of these issues on their merits on appeal.
C. Balance of Equities
In addition to showing serious questions as to the merits of the appeal, Ramco must also demonstrate that it would suffer irreparable harm if the stay were not granted. Although this Court finds both parties exaggerating the potential harm this ruling could inflict, the Court does find that Ramco's loss of tenant goodwill, if the stay is not granted, to be immediate and unquantifiable, and thus the kind of harm a stay pending appeal is intended to limit. Griepentrog, 945 F.2d at 154.
1. Irreparable Harm to Ramco
Ramco argues that it risks irreparable harm if the stay is not granted for 3 reason (1) Jo-Ann may sue for violation of the protected use clause in its lease, and Ramco risks losing up to 90% of Jo-Ann's lease; (2) other tenants will lose good faith in Ramco's willingness and ability to balance tenant mix carefully; and (3) its appeal on the merits could be rendered moot under the statutory or equitable mootness doctrine. The Court finds the first reason unconvincing, because although Jo-Ann's lease gives Ramco up to thirty days to cure alleged violations of the protected use clause before rent reduction is available, it also notes that "such thirty (30) day period may be extended should Landlord have commenced legal action against such party and continues to diligently pursue legal action against such party forcing them to permanently cease violating such Market Condition." Jo-Ann Etc. Lease § 14(a) at 14. This clause was intended to protect Ramco during exactly this type of litigation, and it stays Jo-Ann's remedies under its own leaf until closure of court proceedings.
Nevertheless, this Court does find that Ramco risks irreparable harm with respect to a loss of goodwill from its other tenants. See Multi-Channel TV Cable Co. v. Charlottesville Quality Operating Co., 22 F.3d 546, 552 (4rth Cir. 1994) (holding that a movant's potential loss of goodwill establishes irreparable injury in the absence of a stay pending appeal). "A shopping center is a carefully planned enterprise . . . [and] certain mixes will attract higher patronage of the stores in the center." In re Josh Slocum, 922 F.2d 1081, 1089 (citing the Bankruptcy Reform Act of 1978, H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 348 (1977), reprinted in 1978 U.S Code Cong. Admin News 5787, 6305). Denying the stay would result in a loss of filth mid goodwill towards Ramco by not only Jo-Ann, but also the other tenants of West Oaks I and II. This includes tenants who profit from protected who clauses within their own leases as well as tenants who profit generally from a shopping center whose tenant mix is well managed. Loss of tenant goodwill will be immediate and unquantifiable and thus the kind of harm this stay is intended to limit. Griepentrog, 945 F.2d at 154.
Finally, although we do not say that it alone rises to the level of irreparable harm, this Court finds that the risk of rendering moot the appeal on the merits does weigh on the balance in favor of granting the stay.
3. Harm to Others
The Court finds the harm to others to be minimal. The debtors surrendered the majority of their interest in the outcome of this appeal when they sold the designation rights to KLA for $116.4 million dollars. As to the small percent remaining, because of its location and duration, the value of this "crown jewel" in the Service Merchandise portfolio is unlikely to be tarnished during the length of the appeal. Also importantly, because Service Merchandise has been remunerated for most of the lease's value, the stay will not significantly hinder the bankruptcy process. In balancing the harm to the two parties, the Court finds the alleged harm to the appellee by requiring it to wait for a hearing on the merits is not so substantial as to require front and relief.
4. Public Interest
This Court is not persuaded by either party's arguments on this prong. Thus, the Court the existing balance of factors.
IV. Conclusion
For the foregoing reasons, Ramco's motion for a stay pending appeal will be GRANTED in its entirety.
An appropriate order will enter.