A fundamental benefit of Chapter 11 is a debtor’s ability to assume and assign executory contracts and unexpired leases over the objection of a nondebtor counterparty, even when the contract contains otherwise valid anti-assignment provisions. Moreover, as demonstrated in a recent decision by the U.S. District Court for the District of Delaware, this statutory tool can be used despite its negative impact upon the underlying economics of the original contract, as in Antone v. Haggen Holdings (In re Haggen Holdings), 2017 U.S. Dist. LEXIS 139272 (D. Del. Aug. 30). Specifically, in Haggen, the district court effectively negated a profit sharing obligation contained within a commercial real estate lease by finding it to be an unenforceable restriction on assignment and unenforceable as a matter of law.
The debtors operated 164 grocery stores prior to filing Chapter 11 in September 2015. After filing, a sale process for certain of the stores was commenced, which included the proposed assumption and assignment of the underlying store leases. Antone Corp. was the lessor at one of the affected stores and objected to the assignment of its commercial property lease. The lease contained a profit sharing provision, which gave the landlord 50 percent of any net profits made by the debtors from the assignment of the lease. Antone objected because the proposed sale did not require the debtors to honor its profit sharing obligation. The landlord argued that any assumption and assignment of the lease must be conditioned upon full compliance with its terms, including payment of half the net profits. In support of its argument, Antone submitted declarations demonstrating that the profit sharing agreement was a bargained for right provided by the debtors as consideration for the landlord accepting below-market rent, and therefore must be enforced.
