613 B.R. 51
S.D.N.Y.2020Background
- Sears, as debtor, sought Bankruptcy Court approval to assume and assign its Mall of America lease to Transform Leaseco (an affiliate of Transform Holdco), following a § 363 sale.
- The Sears lease and incorporated REA are highly tenant-favorable: nominal base rent, a Major Operating Period that expired in 2007, broad post-2007 use and assignment rights, and limited landlord veto rights.
- Lease/REA protections for the landlord (MOAC) include a right of first refusal/buyout (Article 6.3) and an REA clause relieving Sears of liability if an assignee has ≥ $50 million net worth and executes an undertaking (Article XXV(D)(4)(a)).
- Bankruptcy Judge Drain approved the assignment after finding Transform would abide by lease/REA restrictions and likely had ≥ $50 million equity; he relied on In re Ames for treating § 365(b)(3) provisions in light of lease terms.
- MOAC appealed, arguing the assignment violated 11 U.S.C. § 365(b)(3)(D) (tenant-mix) and § 365(b)(3)(A) (financial condition/operating performance similar to debtor at lease inception).
Issues
| Issue | Plaintiff's Argument (MOAC) | Defendant's Argument (Sears/Transform) | Held |
|---|---|---|---|
| Whether § 365(b)(3)(D) forbids assignment because it would disrupt tenant mix | Assignment to Transform (and unspecified subtenants) would alter Mall of America’s tenant mix and permit loss of department-store anchors | Lease/REA impose few use restrictions post-2007; Transform agreed to abide by REA and ROFR; tenant mix should be measured by lease terms | Court: Affirmed Bankruptcy Court — § 365(b)(3)(D) not violated; tenant-mix inquiry is informed by lease/REA terms (In re Ames approach) |
| Whether § 365(b)(3)(A) allows assignment without an assignee whose financial condition/operating performance is similar to Sears at lease inception | § 365(b)(3)(A) independently requires similarity to Sears (1991); Transform failed to show similarity | Transform and Bankruptcy Court: lease’s $50M net-worth clause and other assurances suffice; statutory standard should be read in light of lease | Court: Reversed on (A) — § 365(b)(3)(A) is an independent congressional requirement; Transform did not meet the statutory similarity standard; assignment disallowed |
| Whether the Bankruptcy Court’s factual finding that Transform had ≥ $50M equity was adequately supported | Finding unsupported by evidentiary record; Transform’s financials were draft/uncertain | Bankruptcy Court relied on inference from financing arrangements to deem ≥ $50M “highly likely” | Court: Even if $50M standard could substitute (it cannot), the Bankruptcy Court’s “highly likely” finding lacked substantial evidence and would require remand for proof |
Key Cases Cited
- In re Ames Dep’t Stores, Inc., 127 B.R. 744 (Bankr. S.D.N.Y. 1991) (treats § 365(b)(3)(D) tenant-mix inquiry through the lease’s terms; relied on heavily)
- In re Ames Dep’t Stores, Inc., 121 B.R. 160 (Bankr. S.D.N.Y. 1990) (earlier Ames discussion of tenant-mix as an ‘‘undefined’’ term to be informed by lease)
- Ramco-Gershenson Props., L.P. v. Serv. Merch. Co., 293 B.R. 169 (M.D. Tenn. 2003) (examines financial similarity via guarantors, cash flow, and financial statements)
- In re Casual Male Corp., 120 B.R. 256 (Bankr. D. Mass. 1990) (assesses operator experience/financial ratios for newly formed assignees)
- Matter of Federated Dep’t Stores, Inc., 135 B.R. 941 (Bankr. S.D. Ohio 1991) (protects bargained-for expectations created in bankruptcy negotiations; cautions against rewriting bargains)
- In re Sun TV & Appliances, Inc., 234 B.R. 356 (Bankr. D. Del. 1999) (denies assignment where use restrictions exist and proposed assignee/ultimate use were unidentified)