Opinion
NO. 3:03-0134, Bankruptcy Case No. 399-02649
March 12, 2003
MEMORANDUM
Pending before the Court is Appellant's, Weingarten Nostat, Inc. ("Weingarten"), Amended Motion for Stay Pending Appeal (Docket No. 8). For the reasons stated herein, Weingarten's Amended Motion for Stay Pending Appeal (Docket No. 8) is DENIED. The stay issued pursuant to the Court's February 12, 2003 Order (Docket No. 5) is vacated.
Service Merchandise Co., Inc. ("Debtor") filed for chapter 11 bankruptcy protection in March, 1999. On or about January, 2002, Debtor decided to liquidate and sold the "designation" rights of all of its real estate leases to KLA/SM LLC ("KLA") pursuant to an Order of the Bankruptcy Court dated March 13, 2002. KLA designated JLPK as the assignee of the subject lease. Debtor sought to assume a lease of its Store No. 172 located at Argyle Village Square, Jacksonville, Florida and assign it to JLPK LLC ("JLPK"), who would in turn sublease the space to Michaels, Inc. ("Michaels") and Bed Bath Beyond. Weingarten objected to the proposed assumption and assignment to Michaels.
On January 27, 2003, the Bankruptcy Court issued a Memorandum decision which denied Weingarten's objection to the proposed assumption and assignment (Bankruptcy Court Docket No. 8125). On February 6, 2003, Weingarten filed a Motion for Stay Pending Appeal in the Bankruptcy Court of the Bankruptcy Court's January 27, 2003 Memorandum decision. On February 7, 2003, the Bankruptcy Court issued an order denying Weingarten's Motion for Stay Pending Appeal (Bankruptcy Court Docket No. 8200). On February 12, 2003, Weingarten filed its Motion for Stay Pending Appeal (Docket No. 1) with this Court. On February 12, 2003, the Court issued an Order (Docket No. 5) staying the Bankruptcy Court's January 27, 2003 Memorandum decision "pending resolution of the appeal or further order of the Court." Upon further review of Weingarten's Amended Motion, the Court finds as follows:
As suggested by Rule 8005 of the Federal Rules of Bankruptcy Procedure, Weingarten first sought a stay of the proceedings in the Bankruptcy Court. A stay issued pursuant to Rule 8005 of the Federal Rules of Bankruptcy Procedure is discretionary. In re Rhoten, 31 B.R. 572, 577 (M.D. Tenn. 1983). "Weingarten has not filed an appeal of the Bankruptcy Court's denial of its motion for stay pending appeal." (Docket No. 9 at 4). Rather, Weingarten has filed a motion in this Court for a stay pending appeal. To the extent that Weingarten's Amended Motion can be construed to be an appeal of the Bankruptcy Court's denial of a stay, this Court's role in reviewing the decision of the Bankruptcy Court is to determine whether the Bankruptcy Court abused its discretion in denying the stay. Id. A bankruptcy court's findings of fact shall not be set aside unless clearly erroneous; a bankruptcy court's conclusions of law are reviewed de novo. Michel v. Federated Dep't Stores, Inc., 44 F.3d 1310, 1315 (6th Cir. 1995).
In determining whether a stay should be granted pending appeal, the Court must consider the same four factors that are traditionally considered in evaluating the granting of a preliminary injunction. Michigan Coalition of Radioactive Material Users, Inc. v. Griepentrog, 945 F.2d 150, 153 (6th Cir. 1991). Those factors are: (1) likelihood of success on the merits of the appeal; (2) any irreparable harm if the stay is not granted; (3) any harm to others if the stay is granted; and (4) the public interest in granting the stay. Id. "In addition to considering each of these factors, the court must consider how the factors should be balanced in light of the overall circumstances of the case." In re Grand Traverse, 151 B.R. at 796 (citing In re DeLorean Motor Company, 755 F.2d 1223, 1228 (6th Cir. 1985)). If a motion is made to stay a proceeding pending appeal, the movant has a higher burden to establish the likelihood of success than if the motion were made for a preliminary injunction. Id. While in balancing the factors to be considered, the probability of success is inversely proportional to the irreparable harm to the movant, "the movant is required to demonstrate more than a mere `possibility' of success on the merits." Id. (quoting Michigan Coalition, 945 F.2d at 153-154). Applying the factors for determining whether to issue a stay, the Court finds that Weingarten has not demonstrated a probability of success on the merits.
Weingarten first argues that the proposed assignment to Michael's violates Section 365(b)(3)(A) of the United States Bankruptcy Code, 11 U.S.C. § I, et seq (the "Bankruptcy Code"), by not providing adequate assurance of future performance.
Section 365(b)(3)(A) of the Bankruptcy Code provides in relevant part:
(b)(3) 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.11 U.S.C. § 365(b)(3)(A). The legislative history behind Section 365(b)(3)(A) indicates that the purpose of the statute is "to insure that the assignee itself will not soon go into bankruptcy and will provide operating and advertising benefits to the other tenants similar to those provided by the original tenant when its lease was executed." In re Casual Male Corporation, 120 B.R. 256, FN7 (quoting 130 Cong. Rec. 889 reprinted in App. 3 Collier on Bankruptcy XX-71 (15th ed. 1989).
The Bankruptcy Court found that the financial strength of Debtor's proposed sublessee, JLPK, was at least as strong as Debtor in 1983, the time Debtor became the lessee under the subject lease. Specifically, the Bankruptcy Court found that:
(a) JLPK will receive $15,351 per year in annual rent from Bed Bath and Beyond, and $164,166 from Michaels. Together, these amounts exceed the overlease rent by approximately $52,000 per year. Furthermore, there was no indication that the rent streams had been pledged to any other creditor.
(b) Schottenstein Stores Corp. (hereinafter "Schottenstein") and Kimco Realty Corp. (hereinafter "Kimco") are the parent companies of JLPK. Schottenstein has total assets of over $1 billion and shareholder's equity of more than $400 million. Kimco has over $5 billion in total assets and $1.9 billion in shareholder's equity. Both Kimco and Schottenstein have extensive retail holdings and extensive retail experience.
(c) Kimco and Schottenstein have signed, absolute guarantees, limited to one year's fixed rent. The guarantee, according to Mr. Jeffrey S. Gould's testimony, was limited to one year, because that was the outside time it would take to re-let the space in the event of a JLPK default.
(d) Although there is some dispute as to the timing and extent of the Recognition Agreement signed by Michaels, it is uncontroverted that Michaels agreed to pay all rents directly to the landlord in the event of a JLPK default, thus providing Weingarten with the availability of all of Michaels' assets as recourse for subsequent Michaels' defaults.
(Bankruptcy Court Docket No. 8125 at 4). In addition, the Bankruptcy Court found the JLPK had shown adequate assurance of the operating performance of Michaels, Bed Bath Beyond, Schottenstein and Kimco given their extensive operating history and performance.
It is Weingarten's argument that JLPK is a shell entity with no financial history and no significant assets. Weingarten further argues that the guarantors of the proposed sub-lease guarantee only one year of base rent and that there is no financially responsible entity that will be in privity with Weingarten for the entire term and for all obligations of the subject lease. The Court finds, however, that Weingarten has not presented sufficient evidence to convince the Court that the factual findings of the Bankruptcy Court with respect to JLPK's financial condition are clearly erroneous or that the Bankruptcy Court's conclusions of law are incorrect.
Weingarten also asserts that the proposed assumption and assignment violates 11 U.S.C. § 365(b)(3)(C)(D) by breaching the use or exclusivity provision in other leases in its shopping center and by disrupting the tenant mix in the subject shopping center. The Bankruptcy Court concluded in its Order that Weingarten had by "arms-length negotiation bargained away control of the Service Merchandise space by allowing Service Merchandise, and thus its assignee and sublessee, to use the space for any lawful purpose." (Bankruptcy Court Docket No. 8200 at 2). The Bankruptcy Court further found that Weingarten's lease with FCA of Ohio, Inc. d/b/a Jo-Ann's ("Jo-Ann's"), would not be breached by Debtor's assignment of the lease to Michaels. Instead, the Bankruptcy Court found that "the parties foresaw the likelihood of such an event, and Jo-Ann's Etc. provided protections to itself by the election of reduced rent or termination of the lease." (Bankruptcy Court Docket No. 8200 at 2). The Court agrees with the conclusion of the Bankruptcy Court.
Clearly, the drafters of the Jo-Ann's lease contemplated that such a change in use could occur with respect to Debtor's property and built protections into its own lease for such an eventuality. Furthermore, Weingarten has failed to present any evidence that the subject lease restricts Debtor's, or its assignee's, use of the premises. The Court cannot re-write the provisions of the subject lease. See In re Tech Hifi, Inc., 49 B.R. 876, 879 (D. Mass. 1985), superseded by statute as stated in In re Casual Male Corporation, 120 B.R. 256 (D. Mass. 1990). This is especially true with respect to Weingarten's argument that the proposed assumption and assignment violates 11 U.S.C. § 365(b)(3)(D) by disrupting the tenant mix or balance in the shopping center. The purpose of 11 U.S.C. § 365(b)(3) is to give Weinstein and its other tenant's the benefit of its original bargain with the Debtor. In re Ames Department Stores, Inc., 127 B.R. 744, 753 (S.D.N.Y 1991). Section 365(b)(3) does not deal with a third party's benefit of its own bargain with a landlord. In re Martin Paint Stores, 199 B.R. 258, 264 (S.D.N.Y 1996). Section 365(b)(3) does not give a landlord an additional non-bargained for term with respect to tenant mix. In re Ames, 127 B.R. at 753. Accordingly, the Court finds Weingarten's arguments under Sections 365(b)(3)(C) (D) unpersuasive.
With respect to the second factor to be applied by the Court in making its determination to issue a stay, the Court does recognize that irreparable harm may result to Weingarten if the stay is not continued pending appeal. See In re Rickel Home Centers Inc., 209 F.3d 291, 306 (3rd Cir. 2000). Specifically, Weingarten's appeal may be rendered moot if the Debtor is allowed to proceed with the proposed assumption and assignment. Furthermore, Weingarten may suffer additional harm in either diminished rent under its lease with Jo-Ann's or the termination of the lease by Jo-Ann's. Weingarten, however, has failed to show that it has raised "serious questions going to the merits." Michigan Coalition, 945 F.2d 150, 153-154. Without such a showing that it has more than a mere possibility of success on the merits, the Court is unable to weigh this factor in favor of Weingarten.
With respect to the third factor of the Court's analysis, the Court finds that the risk of harm to others weighs against a stay. As noted above, Jo-Ann's has provided a remedy in its lease with Weingarten for any harm it will incur because of the contemplated assignment. Moreover, in evaluating the harm to others factor, the Court finds merit in the Debtor's argument that the harm to the Bankruptcy Estate could be substantial if the proposed assumption and assignment is stayed pending appeal. Debtor alleges, and Weingarten does not disprove, that Debtor's share of the sale proceeds from the sale of its designation rights to KLA will be further reduced by the carrying costs of the subject lease, plus interest, if the assumption and assignment is stayed pending appeal. Furthermore, if a stay is in place pending appeal, distributions to unsecured creditors under Debtor's liquidation plan will be delayed. The Court finds these factors significant in determining that there is the risk of significant harm to others if the assumption and assignment is stayed pending appeal.
Finally, with respect to the last element of the Court's analysis, the Court finds that the public interest is better served by denying the stay pending appeal. The public interest in this case lies in the shopping center being fully operational. Harm would come to the other occupants of the shopping center and to the general public if the Debtor's space were allowed to go vacant. The other tenants and the general public would suffer from the financial deterioration of the shopping center that could have both short term and long term effects on the value of the collateral and the shopping center as well. In addition, the Court finds that the public interest does not lie in the frustration of the purpose and intent of commercial and bankruptcy law by prohibiting a valid assignment of a commercial shopping center lease.
For these reasons, the Court denies the Amended Motion for Stay Pending Appeal (Docket No. 8). To the extent that Weingarten is seeking review of the Bankruptcy Court's denial of a stay, the Court affirms the decision of the Bankruptcy Court Order entered February 7, 2003 in Case No. 399-02649 denying a stay pending appeal (Bankruptcy Court Docket No. 8200). The stay issued pursuant to the Court's February 12, 2003 Order (Docket No. 5) is vacated.
IT IS SO ORDERED.