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While the U.S. Bankruptcy Code provides special protections for shopping center landlords, it also provides the court with the power to invalidate lease provisions that restrict a debtor’s ability to assume and assign the lease. Recently, the U.S. Bankruptcy Court for the Southern District of New York in In re Ames Dept. Stores Inc., 316 B.R. 772 (Bankr. S.D.N.Y. 2004), looked at this statutory conflict and held that a deeded supermarket use restriction should be enforced and would not be classified as an unenforceable anti-assignment provision under the Bankruptcy Code. In the Ames case, an adversary action was filed by Hannaford Bros. Co. against the debtor, Ames Department Stores, and the Stop & Shop Supermarket Co. as a result of Stop & Shop’s assigned right to take over Ames’ tenant interest in the lease of an Ames store situated on a tract of land that was developed as part of a community shopping center in Nashua, N.H. Hannaford was the operator of a supermarket on an adjacent tract that was part of the shopping center. Stop & Shop proposed to operate a supermarket at the former Ames store, which Hannaford opposed pursuant to the terms of a 1972 deed of declaration. The declaration expressly prohibited the operation of a competing supermarket on the site of the Ames store, so long as Hannaford continued to operate a supermarket on its parcel. The declaration, by its own terms, ran with the land so long as a supermarket was operated thereon. In the adversary action, Hannaford filed a summary judgment motion seeking the enforcement of the use restriction in the declaration, thus prohibiting Stop & Shop from operating a competing supermarket on the site of the former Ames store. Stop & Shop, joined by Ames, opposed the motion on the contention that the requirement for operating a shopping center on the land had not been satisfied. Ames also raised an argument that the declaration was unenforceable under 11 U.S.C. 365(f)(1), as the supermarket use restriction was tantamount to an anti-assignment clause. Bankruptcy Code � 365(a) allows a debtor to assume an executory contract or unexpired lease. The debtor may then assign the assumed contract or lease if the assignee provides adequate assurance of future performance, as required under 11 U.S.C. 365(f)(2). Although potentially detrimental to an individual landlord, it is clear that a debtor’s ability to assume and assign its leases can lead to a significant influx of money to fund the debtor’s estate. In fact, many bankruptcy cases would never survive, but for the assets generated through the debtor’s assignment of unexpired leases. In order to help provide the debtor with greater latitude in assuming and assigning its unexpired contracts and leases, 11 U.S.C. 365(f)(1) allows a debtor to assign notwithstanding a provision in the contract or lease that bars, restricts or conditions the assignment. The Bankruptcy Code also outlaws provisions that allow a party to terminate or modify the assumed contract or lease as a result of the assignment itself. 11 U.S.C. 365(f)(3). The 3d U.S. Circuit Court of Appeals has acknowledged that the Bankruptcy Code generally favors free assignability as a means to maximize the value of the debtor’s estate and, to that end, allows the trustee to assign notwithstanding a provision in the contract or lease, or applicable law, prohibiting, restricting or conditioning the assignment. See In re Rickel Home Ctrs. Inc., 209 F.3d 291, 299 (3d Cir. 2000). In interpreting Bankruptcy Code � 365(f), courts and commentators alike have construed the terms to render unenforceable not only lease provisions that prohibit assignment outright, but also lease provisions that are so restrictive that they constitute de facto anti-assignment provisions. See In re Rickel Home Ctrs. Inc., 240 B.R. 826, 831 (D. Del. 1998). De facto anti-assignment provisions may be found in a variety of forms, including lease provisions that limit the permitted use of the leased premises, lease provisions that require payment of some portion of the proceeds or profit realized upon assignment, and cross-default provisions. Shopping center landlords receive special protection under the Bankruptcy Code. Bankruptcy Code � 365(b)(3)(C) requires a debtor-tenant at a shopping center to assign its store lease subject to restrictive provisions contained in the lease. In order to meet the assignment requirements of 11 U.S.C. 365(f)(2), whereby the assignee must provide adequate assurance of future performance, the assignee of a shopping center lease must show that the assignment is subject to all of the provisions of the lease, including, but not limited to, provisions such as radius, location, use and exclusivity. Further, the assignment of a shopping center lease must not breach any radius, location, use or exclusivity provision contained in any other lease, financing agreement or master agreement relating to the shopping center. Congressional efforts to protect shopping center landlords is reflected in the legislative history of 11 U.S.C. 365(b)(3), as set forth in a 1977 House Judiciary Committee report. The report provides that a shopping center is often a carefully planned enterprise, one often subject to a master lease or financing agreement. Under these agreements, the tenant mix may be as important to the lessor as the actual promised rental payments, because certain mixes will attract higher patronage of the stores in the center, and thus a higher rental for the landlord from those stores that are subject to a percentage of gross receipts rental agreement. H.R. Rep. No. 95-595, at 348-49 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6305. Despite the clearly pro-landlord protections provided in 11 U.S.C. 365(b)(3)(C), the U.S. Bankruptcy Court for the Southern District of New York, some 22 years before the Ames decision, recognized that even under the tightly drawn definition of adequate assurance in the shopping center case, Congress did not envision literal compliance with all lease provisions. In re U.L. Radio Corp., 19 B.R. 537, 544 (Bankr. S.D.N.Y. 1982). Insubstantial disruptions in, for example, tenant mix and insubstantial breaches in other leases or agreements were contemplated and allowed. Id. Looking at the debtor protections of 11 U.S.C. 365(f), the Ames court noted that � 365(f) performs an important function for maximizing the value of the estate for creditors, as it protects the body of creditors as a whole from lease provisions that frustrate the estate’s ability to convert the economic value in leases into cash that can increase creditor recoveries. The Ames court recognized, however, that while the bankruptcy court is given the power to invalidate lease provisions that frustrate the goals of � 365(f), the court retains discretion in determining whether a lease provision hinders the possibility of assignment to a sufficient degree to render it unenforceable. The Ames court found that in balancing the protections of 11 U.S.C. 365(f) and 11 U.S.C. 365(b)(3)(C), the bankruptcy court must examine the particular facts and circumstances of the transaction to determine whether a lease clause restricts or conditions assignment. The factors that the court must examine include the extent to which the provision hampers a debtor’s ability to assign, whether the provision would prevent the bankruptcy estate from realizing the full value of its assets and the economic detriment to the nondebtor party. In making such a determination, the Ames court recognized that the court must consider the details of the proposed lease assignment to ensure that a proper balance is reached between the interests of the debtor-tenant and the economic detriment to the nondebtor. While the invalidation of a bargained-for element of a contract under 11 U.S.C. 365(f) is certainly permissible, Congress has suggested that the modification of a contracting party’s rights is not to be taken lightly. In re Joshua Slocum Ltd., 922 F.2d 1081, 1091 (3d Cir. 1990). A bankruptcy court, in authorizing assumptions and assignments of unexpired leases, must be sensitive to the rights of the nondebtor contracting party and the policy requiring that the nondebtor receive the full benefit of his or her bargain. Id. Many uses remained for store After weighing these factors, the Ames court granted Hannaford’s summary judgment motion and found that the supermarket use restriction in the deed of declaration did not foreclose assignment or result in a forfeiture of the leasehold for the Ames store. The court held that the restriction merely prohibited one of the many uses to which the Ames store could be put. The court noted that when a use provision is limited-as was the one in the declaration, whose purpose and effect was to protect a neighboring business from a single prohibited use-and when, under the express language of 11 U.S.C. 365(b)(3)(C), it could not be invalidated in a shopping center lease, it would be inappropriate to invoke � 365(f)(1) in the extraordinarily broad manner requested by Ames. The court held that because the store could be used for many purposes other than a supermarket, the enforceability of the supermarket use restriction would not thwart the fundamental policy of maximizing estate assets for the benefit of creditors. The court further recognized that the harm to Hannaford would be significant if the supermarket use restriction was invalidated and Stop & Shop was permitted to open a competing supermarket on an adjoining tract. The Ames decision follows a similar holding of the 4th Circuit approximately six months earlier in In re Trak Auto Corp., 367 F.3d 237 (4th Cir. 2004). In Trak Auto, the 4th Circuit reversed the U.S. District Court for the Eastern District of Virginia, which had struck down an auto parts store use restriction as being an unenforceable anti-assignment clause. The 4th Circuit held that when a shopping center lease is assigned in bankruptcy, Congress’ purpose in 11 U.S.C. 365(b)(3)(C) is to preserve the landlord’s bargained-for protections with respect to premises use and other matters that are spelled out in the lease with the debtor-tenant. 367 F.3d at 244. In upholding the auto parts store use restriction, the Trak Auto court ruled that � 365(b)(3)(C), a more specific Bankruptcy Code provision relating to the assignment of shopping center leases, controls over the general anti-assignment provision set forth in � 365(f). Id. at 243-44. With these two recent decisions, shopping center landlords should no longer feel out in the cold when a tenant files for bankruptcy. The current trend in enforcing use provisions should provide greater stability for landlords in maintaining their bargained-for tenant mix. It is important to note that Ames did not decide whether provisions in deeded restrictions, like leases, are subject to invalidation under 11 U.S.C. 365(f), as the facts in Ames were slightly atypical, with the assignment restrictions being found in a deed as opposed to a lease. This leaves the door open for a landlord or other party-in-interest to argue that a bankruptcy court’s power to invalidate restrictive assignment provisions under � 365(f) does not apply to deeded restrictions. Kevin H. Buraks is an associate in the Philadelphia office of Wolf, Block, Schorr and Solis-Cohen. He represents creditors and landlords in bankruptcy matters and litigation. He can be reached at [email protected].

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