Shopping Center Lease Assumption
by David B. Wheeler; Moore & Van Allen, PLLC; Charleston, S.C.
In the case of Trak Auto Corp. the West Town Center LLC (In re Trak Auto Corporation)1, the court was asked to resolve the conflict between §365(f)(1) and 365(b)(3)(C) of the Bankruptcy Code relating to the enforceability of shopping center lease restrictions. The debtor, an auto parts company, filed bankruptcy in Virginia in 2001 at which time it opted to close a number of its retail outlets and thereafter assign the leases for these outlets to third parties through a lease-bidding process. The debtor’s lease and its abandoned site in the West Town Shopping Center in Chicago provided, among other things, that the use of the property was limited to “sale at retail of automobile parts and accessories and such other items as are customarily sold by tenant at its other Trak Auto stores.” When the West Town lease was offered for assumption and assignment, no bids were entered by competing auto parts retailers. The best bid received for the site came from a discount clothing merchandiser.
When the debtor asked the bankruptcy court to approve the assumption and the assignment of the lease to the clothing merchandiser, the shopping center landlord objected on two grounds. First, it argued that the proposed assignment would breach the lease’s restrictive use provision limiting use to the sale of auto parts and accessories and therefore be unenforceable under §365(b)(3)(C).2 Second, it argued that the assignment would disrupt the shopping center’s tenant mix in violation of §365 (b)(3)(D). Notwithstanding the provisions cited by the shopping center, the debtor sought court approval on the basis that §365(f)(1) controlled, and that limiting assignments so stringently and such tenant mix restrictions were unreasonable and unenforceable.
The bankruptcy court approved the proposed assumption and assignment by a non–auto parts retailer. The court first noted that the lease’s use restrictions amounted to an anti-assignment provision of the nature prohibited by §365(f)(1). Second, the court found that the shopping center did not present sufficient evidence to support a finding that assignment of the lease to a clothing retailer would disrupt the tenant mix. The court’s conclusions were based upon, among other things, presentation of evidence that only 59 percent of the Chicago area population owned cars, that the remaining tenants within the shopping center included a vast diversity of retailers (including “an adult entertainment outlet”) and that there were seven auto parts retailers within three miles of the shopping center. On appeal, the district court affirmed.
The Fourth Circuit Court of Appeals reversed the rulings of the bankruptcy and district courts, finding that shopping center use restrictions were fully enforceable notwithstanding the broader terms of §365(f)(1) and, apparently, notwithstanding the amount, if any, of evidence offered by a landlord as to the impact of the assignment upon its tenant mix.
In explaining its ruling, the court first noted that §365(b)(3)(C) specifically requires a debtor-tenant in a shopping center to assign its store lease subject to any provision restricting the use of the premises. On the other hand, §365(f)(1) generally allows a debtor to assign its lease notwithstanding a provision restricting assignment. After examining the legislative history of §365(b)(3)(C), the court relied on the canon of statutory construction that provides that when two provisions in a statute are in conflict, a specific provision closely applicable to the substance of the controversy at hand shall control over a more generalized provision. Therefore, the court reasoned that the more specific shopping center–oriented provisions of §365(b)(3) would control over the seemingly conflicting provisions of §365(f)(1). Since Congress did not leave room for consideration of marketplace factors such as market saturation, the court concluded there was no room for such considerations.
While shopping center landlords probably comprise only a small portion of the UTCC constituency, an understanding of assignment law is important to service upon creditors’ committees and those situations where you or your client’s company wish to enter a bid upon available leases in the bankruptcy arena.
- 367 F.3rd 237 (4th Cir. 2004). For a full discussion of this case, see an article in the forthcoming February 2005 issue of the ABI Journal by Pamela Smith Holleman and Magdalena Ellis (Sullivan & Worcester, Boston). Return to article.
- Interestingly, the landlord did not press enforcement of the lease restriction to the full extent by demanding any substitute tenant be required to sell items “customarily sold by [Trak Auto] at its other… stores,” no doubt observing the maxim that “hogs go to market, while pigs get slaughtered.” Return to article.