In Re Ames Department Stores, Inc.
127 B.R. 744, 1991 WL 94422, 1991 Bankr. LEXIS 1445 (1991)
Rule of Law:
Under Illinois law, a transfer of all the stock issued by a corporate tenant does not effect an assignment of the lease unless the lease expressly includes a change-of-control provision. In bankruptcy, 11 U.S.C. § 365(b)(3)(D), which requires adequate assurance that assignment of a shopping center lease will not disrupt tenant mix, enforces only legally cognizable contractual protections for tenant mix, not general undefined notions of tenant mix.
Facts:
- On June 7, 1965, Zayre of Illinois, Inc., a wholly-owned subsidiary of Zayre Corp., entered into a 20-year lease with Pioneer Trust and Savings Bank for premises in The Thatcher Woods Shopping Center.
- The Lease allowed assignment to affiliated business organizations (defined as those controlling the corporation by majority stock ownership) without landlord's consent, but it did not contain a provision deeming a change of control of the corporate tenant an assignment.
- The Lease did not expressly restrict the use of the premises in any fashion, and no other tenant leases restricted the use of the Zayre premises.
- Prior to 1986, Zayre of Illinois, Inc. transferred the Lease to its 100% parent company, Zayre Corp., which Pioneer did not dispute, primarily due to the ongoing Zayre Corp. guarantee.
- On September 15, 1988, Zayre Corp. and Ames Department Stores, Inc. agreed for Ames to purchase substantially all of Zayre Corp.'s discount store assets.
- On October 25, 1988, in contemplation of the Ames transaction, Zayre Corp. assigned the Lease to Zayre Illinois, another existing wholly-owned subsidiary of Zayre Corp.
- On October 27, 1988, Zayre Corp. sold all of the stock issued by Zayre Illinois to Ames.
- Schottenstein Stores Corp. plans to use most of the Lease premises for a furniture store and sublet the remainder, an action permitted by the Lease's terms.
Procedural Posture:
- Zayre Illinois, the debtor, filed a petition for bankruptcy on April 25, 1990.
- Zayre Illinois sought an order from the Bankruptcy Court to permit it to assign an unexpired lease to Schottenstein Stores Corp.
- Pioneer, the current landlord, objected to the assignment, arguing that the Lease had been terminated prior to bankruptcy and that the proposed assignment would violate 11 U.S.C. § 365(b)(3) of the Bankruptcy Code.
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Issue:
(1) Was the unexpired lease for the Thatcher Woods Shopping Center premises terminated pre-petition when Zayre Corp. assigned the lease to its wholly-owned subsidiary, Zayre Illinois, whose stock was then sold to Ames Department Stores, given the lease permitted assignment to affiliates but lacked a change-of-control provision? (2) Does 11 U.S.C. § 365(b)(3)(D) require a bankruptcy court to disapprove an assignment of a shopping center lease, where the lease contains no use restrictions, if the proposed use might generally disrupt the shopping center's tenant mix?
Opinions:
Majority - Howard C. Buschman, III
No, the unexpired lease was not terminated pre-petition. Under Illinois law, the transfer of all the stock issued by a tenant corporation does not effect an assignment of the tenant’s lease unless the lease so provides, and this Lease contained no such change-of-control provision. The assignment from Zayre Corp. to Zayre Illinois fell within the express permission of paragraph 17(B) of the Lease as an assignment to an affiliate. The subsequent sale of Zayre Illinois's stock to Ames did not constitute an assignment of the Lease itself but a change of control of the corporate tenant, which the Lease did not prohibit. Pioneer, the landlord, should have bargained for and obtained a change-of-control provision if it desired to terminate the lease on such grounds. The court noted that this result is equitable, as the landlord's primary concern, the Zayre Corp. guarantee, remained in place. No, 11 U.S.C. § 365(b)(3)(D) does not require the court to disapprove the assignment. The Lease contains no provision restricting use of the premises to a department store or excluding a furniture store; Illinois courts strictly construe lease provisions against a lessor. Section 365(b)(3)(D) must be read in context with the rest of § 365(b)(3) and § 365(f)(2), which refer to "adequate assurance of future performance... of such contract or lease," thus directing inquiry to the contractual provisions themselves rather than general notions of tenant mix. Congress's purpose in drafting § 365(b)(3) was to ensure the landlord maintained the benefit of the "original bargain." To require the court to look beyond the lease terms would be at odds with this intent and would implicitly undermine state law property rights, affording the landlord a "windfall" in bankruptcy not available under non-bankruptcy law. Since the Lease permits any use and contains no provisions protecting tenant mix, Pioneer did not legally protect itself from such a change.
Analysis:
This decision significantly clarifies the interpretation of anti-assignment clauses in commercial leases and the scope of Section 365(b)(3)(D) of the Bankruptcy Code for shopping center leases. It emphasizes that landlords must explicitly include 'change of control' provisions in leases with corporate tenants if they wish to prevent indirect transfers of leasehold interests through stock sales. Furthermore, the ruling limits the application of the 'tenant mix' requirement under Section 365(b)(3)(D) to enforcing existing contractual provisions, preventing landlords from gaining additional non-bargained-for protections solely due to a tenant's bankruptcy. This promotes predictability in commercial real estate law and ensures that bankruptcy proceedings do not create new property rights for landlords beyond what was established by state law and the original bargain.
