Court Opinion

ID: 2967941
Source: CourtListenerOpinion
Date Created: 2015-09-22 03:49:14.724089+00
Date Added: 2024-06-11T15:28:20.372957
License: Public Domain

PUBLISHED

UNITED STATES COURT OF APPEALS
                FOR THE FOURTH CIRCUIT

In re: TRAK AUTO CORPORATION,           
                           Debtor.

TRAK AUTO CORPORATION, d/b/a
Grundy Auto, d/b/a Twin B Auto,
                 Plaintiff-Appellee,
CONGRESS FINANCIAL CORPORATION
(CENTER); A&E STORES,
INCORPORATED,
              Intervenors-Appellees,
                 v.                             No. 03-1136
WEST TOWN CENTER LLC,
            Defendant-Appellant,
                and
UNITED STATES TRUSTEE,
                             Trustee.

INTERNATIONAL COUNCIL OF SHOPPING
CENTERS, ICSC,
      Amicus Supporting Appellant.
                                        
           Appeal from the United States District Court
          for the Eastern District of Virginia, at Norfolk.
                Raymond A. Jackson, District Judge.
                   (CA-02-466; BK-52-1281465)

                      Argued: October 29, 2003

                      Decided: April 22, 2004
2                      IN RE: TRAK AUTO CORP.
    Before WILKINSON, MICHAEL, and SHEDD, Circuit Judges.

Reversed and remanded by published opinion. Judge Michael wrote
the opinion, in which Judge Wilkinson and Judge Shedd joined.

                            COUNSEL

ARGUED: Matthew Ward Schlegel, KUPELIAN, ORMOND &
MAGY, P.C., Southfield, Michigan, for Appellant. Peter Gilbert
Zemanian, WILLCOX & SAVAGE, P.C., Norfolk, Virginia, for
Appellees. ON BRIEF: Paul K. Campsen, J. Ellsworth Summers, Jr.,
KAUFMAN & CANOLES, P.C., Norfolk, Virginia, for Appellant.
James T. Lloyd, Jr., TRAPANI, BERNARD & LLOYD, Norfolk,
Virginia; John C. McLemore, TINKHAM & McLEMORE, Norfolk,
Virginia, for Appellees. Thomas J. Lease, Dustin P. Branch, KAT-
TEN, MUCHIN, ZAVIS & ROSENMAN, Los Angeles, California,
for Amicus Curiae.

                             OPINION

MICHAEL, Circuit Judge:

   A Chapter 11 debtor-tenant sought to assign its shopping center
lease in contravention of a provision that limits use of the premises
to the sale of auto parts. The bankruptcy and district courts approved
the assignment, and the lessor and owner of the shopping center
appeals. We are asked to resolve the conflict between 11 U.S.C.
§ 365(f)(1), which generally allows a debtor to assign its lease not-
withstanding a provision restricting assignment, and § 365(b)(3)(C),
which specifically requires a debtor-tenant in a shopping center to
assign its lease subject to any provision restricting use of the prem-
ises. We hold that § 365(b)(3)(C), the more specific provision, con-
trols in this case. As a result, we reverse and remand.
                        IN RE: TRAK AUTO CORP.                         3
                                   I.

   Trak Auto Corporation (Trak Auto) is a retailer of auto parts and
accessories that once operated 196 stores in Virginia, eight other
states, and the District of Columbia. On July 5, 2001, in the Eastern
District of Virginia, Trak Auto filed a petition under Chapter 11 of the
Bankruptcy Code and continued in business as debtor in possession.
As part of its effort to reorganize, Trak Auto obtained court approval
to close its stores in four states, Illinois, Indiana, Michigan, and Wis-
consin. Thereafter, Trak Auto sought to assume and assign certain of
its leases of retail space where stores had been closed. One of these
leases (the West Town lease or the lease) is at West Town Center, a
shopping center in Chicago. Trak Auto’s lessor and the owner of the
shopping center is West Town Center LLC (West Town), the appellant.1
The West Town lease contains explicit use restrictions. Section 1.1(L)
limits "PERMITTED USES" to the "[s]ale at retail of automobile
parts and accessories and such other items as are customarily sold by
Tenant at its other Trak Auto stores." J.A. 579. In section 8.1 Trak
Auto "covenants . . . to use the Leased Premises only as a Trak Auto
Store and for the Uses provided in Section 1.1(L)." J.A. 588.

   Trak Auto engaged a real estate firm to advertise the availability
of the West Town lease and to solicit bids. Of the bids received, none
came from an auto parts retailer. The high bidder was A&E Stores,
Inc. (A&E), an apparel merchandiser that offered $80,000 to buy out
the lease. If A&E obtains the lease, it will open a Pay Half store on
the premises, selling brand name family apparel at discount prices.

   In a motion filed in the bankruptcy court, Trak Auto sought an
order authorizing it to assume the West Town lease and to assign it
to A&E. West Town, Trak Auto’s lessor, objected on two grounds.
First, West Town argued that the proposed assignment would breach
the lease provision limiting use to the sale of auto parts and accesso-
  1
   LaSalle National Trust, N.A. was the original lessor and the actual
party opposing the assignment in the bankruptcy and district courts.
After LaSalle appealed to this court, West Town became the owner of
the shopping center and Trak Auto’s lessor. West Town has been substi-
tuted as the appellant, so we will use "West Town" to refer to both West
Town and its predecessor, LaSalle.
4                       IN RE: TRAK AUTO CORP.
ries. According to West Town, this use provision was enforceable
under 11 U.S.C. § 365(b)(3)(C). (West Town did not rely on the lease
restriction that said the premises could be used "only as a Trak Auto
Store.") Second, West Town argued that the assignment would disrupt
its shopping center’s tenant mix in violation of § 365(b)(3)(D). Trak
Auto responded that the use restrictions in the lease were unenforce-
able anti-assignment provisions under § 365(f)(1) and that an assign-
ment to A&E would not, as a matter of fact, disrupt the tenant mix.

   The bankruptcy court held an evidentiary hearing and made the fol-
lowing factual findings, which we accept. The West Town shopping
center is in an urban area (Chicago) where only fifty-nine percent of
the population own cars. The shopping center is surrounded by com-
peting shopping areas not owned by West Town. The twenty-five ten-
ants in West Town Center include clothing stores, food vendors, a K-
Mart, a laundromat, a travel agency, a bank, a cash advance (or small
loan) agency, an adult entertainment outlet, and a public library
branch. Trak Auto was the shopping center’s only auto parts retailer,
but there are seven auto parts retailers within three miles of the center.
After announcing its factual findings, the bankruptcy court issued its
conclusions. First, the court concluded that the lease’s use restrictions
amounted to anti-assignment provisions that were prohibited by
§ 356(f)(1) of the Bankruptcy Code. Second, the court concluded that
West Town did not present sufficient evidence to support a finding
that assignment of the lease to A&E would disrupt the tenant mix at
West Town Center. Based on these conclusions, the bankruptcy court
entered an order granting Trak Auto’s motion to assume the West
Town lease and, in turn, to assign it to A&E.

   West Town filed a notice of appeal to the district court, and the
bankruptcy court stayed its order pending appeal. The district court
affirmed, and West Town then appealed to our court. We have also
granted a stay. On October 7, 2003, three weeks before oral argument,
West Town filed a motion to dismiss its own appeal as moot, arguing
that its lease to Trak Auto had expired by its own terms on September
30, 2003. We deferred a ruling on the motion, which we take up now.

                                   II.

  West Town moves to dismiss its appeal as moot, arguing that Trak
Auto no longer has any lease to assign. The facts relevant to West
                       IN RE: TRAK AUTO CORP.                         5
Town’s motion are undisputed. Trak Auto’s lease from West Town
ran through September 30, 2003, but automatically extended for
another sixty months if Trak Auto was not in material default. After
Trak Auto filed for bankruptcy in July 2001, it made post-petition rent
payments to West Town for several months, see 11 U.S.C.
§ 365(d)(3), but stopped making these payments after December
2001. On March 12, 2002, West Town filed a motion requesting the
bankruptcy court to order Trak Auto to pay administrative rent due
under § 365(d)(3). The court determined that West Town had a valid
administrative claim for rent, but the court declined to make a specific
order about payment timing, deferring that issue until a decision was
made on whether Trak Auto could assign the lease.

   The bankruptcy court later entered an order allowing Trak Auto to
assign the lease to A&E; the order provided that West Town would
be paid the administrative rent from proceeds of the assignment. This
meant that West Town would not be paid the rent until the assignment
was concluded. The assignment was put on hold by stays pending
appeal issued by the bankruptcy court and this court at the request of
West Town. Furthermore, West Town did not object to or appeal the
part of the bankruptcy court’s order that deferred Trak Auto’s time for
payment of the rent. In light of all of this, West Town surely under-
stood two things: first, that appeal of any decision allowing the
assignment would take some time; and second, that the term of the
lease would automatically extend on September 30, 2003, if an appeal
was then pending because Trak Auto would not yet be obligated to
deliver the rent payment according to the unchallenged provision in
the bankruptcy court’s order. In these circumstances, we conclude
that West Town has waived any argument in this appeal that the lease
has expired because Trak Auto has not paid accrued post-petition
rent. See In re Lane, 991 F.2d 105, 107 (4th Cir. 1993); In re Arnold,
869 F.2d 240, 244-45 (4th Cir. 1989). West Town’s motion to dismiss
the appeal is accordingly denied.

                                  III.

   Today’s substantive issue requires us to deal with the conflict
between two provisions in § 365 of the Bankruptcy Code dealing with
the assignment of a lease by a debtor (or trustee). Section
365(b)(3)(C) specifically requires a debtor-tenant at a shopping center
6                        IN RE: TRAK AUTO CORP.
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.
In this case, the bankruptcy court permitted Trak Auto to assign its
shopping center lease to the highest bidder, refusing to enforce the
restriction that required the premises to be used for the retail sale of
auto parts and accessories. The district court affirmed. The legal issue
is dispositive of this appeal, and we (like the district court) review the
bankruptcy court’s legal conclusions de novo. See Butler v. David
Shaw, Inc., 72 F.3d 437, 440-41 (4th Cir. 1996). We hold that
§ 365(b)(3)(C) controls in this case. This means that the bankruptcy
court erred in permitting Trak Auto to assign its lease to an apparel
merchandiser that would not honor the use restriction. Our analysis
follows.

   Section 365(a) allows a Chapter 11 debtor to assume an unexpired
lease. 11 U.S.C. § 365(a). The debtor may, in turn, assign the lease
if the assignee provides "adequate assurance of future performance."
Id. § 365(f)(2)(B). When a debtor-tenant in a shopping center seeks
to assign its lease, the "adequate assurance of future performance"
must include specific assurances that are spelled out in the Code.
Most important to this case, there must be adequate assurance that
assignment of a shopping center lease "is subject to all the provisions
thereof, including (but not limited to) provisions such as a radius,
location, use, or exclusivity provision, and will not breach any such
provision contained in any other lease, financing agreement, or master
agreement relating to such shopping center." Id. § 365(b)(3)(C). Sec-
tion 365(f)(1), on the other hand, contains a general provision that
prohibits the enforcement in bankruptcy of anti-assignment clauses in
leases. This section allows a debtor to assign a lease "notwithstanding
a provision . . . that prohibits, restricts, or conditions . . . assignment."
Id. § 365(f)(1). Again, we must decide whether Congress intends, not-
withstanding § 365(f)(1), for a debtor’s assignee to provide adequate
assurance that it will comply with use restrictions in a shopping center
lease, such as the restriction here that limits the use of the space to
the sale of auto parts and accessories.

   We begin our inquiry with a look at the interesting history of Con-
gress’s efforts to protect shopping center landlords in § 365(b)(3) of
the Bankruptcy Code. Congress has been interested in the financial
                       IN RE: TRAK AUTO CORP.                         7
well-being of shopping centers since at least the late 1970s. Specifics,
such as the importance of a carefully selected tenant mix, have not
escaped Congress’s attention. The House Judiciary Committee dis-
cussed the tenant mix subject in a 1977 report:

       A shopping center is often a carefully planned enterprise,
    and though it consists of nuemrous [sic] individual tenants,
    the center is planned as a single unit, often subject to a mas-
    ter lease or financing agreement. Under these agreements,
    the tenant mix in a shopping center 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.

H.R. Rep. No. 95-595, at 348 (1977). To maintain proper tenant mix,
that is, store variety, shopping center landlords have routinely placed
use restrictions in leases. Before 1978 the bankruptcy of a shopping
center tenant with a use restriction did not present an inordinate prob-
lem for a landlord; the typical lease provided that the landlord could
terminate the lease if the tenant went bankrupt. The termination
option allowed the landlord to engage a new tenant that would con-
tribute to an acceptable mix of stores. See Jeffrey S. Battershall, Com-
mercial Leases and Section 365 of the Bankruptcy Code, 64 Am.
Bankr. L.J. 329, 329 (1990). With the enactment of the Bankruptcy
Reform Act of 1978 (the 1978 Act), however, landlords "were no lon-
ger able to regain control of the leased property in the event of bank-
ruptcy, and the lease routinely became part of the debtor’s estate to
be administered" in the bankruptcy. Id. at 330. See 11 U.S.C.
§ 365(e). Still, shopping center landlords were able to persuade Con-
gress that they needed special protection, which Congress attempted
to write into the 1978 Act. The 1978 legislation provided that a
debtor-tenant could not assign its shopping center lease unless there
was adequate assurance that "assignment of [the] lease [would] not
breach substantially any provision, such as a radius, location, use, or
exclusivity provision, in any other lease, financing agreement, or
master agreement relating to such shopping center." 11 U.S.C.
§ 365(b)(3) (1982) (emphases added).

   Shopping center landlords soon realized that the 1978 provisions
did not provide them with sufficient protection against debtor-tenant
8                       IN RE: TRAK AUTO CORP.
lease assignments that were being made in breach of use (and other)
restrictions, with the approval of bankruptcy courts. For example,
debtors avoided the 1978 provisions by convincing bankruptcy courts
that an assignment would not "breach substantially" a use, radius,
location, or exclusivity provision in another lease. See id.
§ 365(b)(3)(C) (1982). And, debtors were able to convince courts that
even though an assignment would breach a use provision in the lease
sought to be assigned, the assignment could proceed because the 1978
Act only prevented assignment if some other lease or agreement relat-
ing to the shopping center would be breached. See id. Shopping center
landlords were, as a result, able to convince Congress that bankruptcy
courts were too often "creating new [shopping center] leases by
changing essential lease terms to facilitate assignments" by debtor-
tenants. 130 Cong. Rec. S8891 (daily ed. June 29, 1984) (statement
of Sen. Hatch), reprinted in 1984 U.S.C.C.A.N. 590, 600. Congress
was told that this practice of avoiding use restrictions was creating
problems with tenant mix in affected shopping centers. These loca-
tions were losing their balance-of-merchandise drawing card, which
was a threat to overall sales revenues in the shopping center sector of
the economy. See Battershall, supra, at 334-35.

   Congress responded in 1984 by amending the shopping center pro-
visions in the Bankruptcy Code. Among other things, § 365(b)(3)(C)
was amended to delete the word "substantially" from the provision
previously requiring that assignment of a shopping center lease must
not "breach substantially" certain restrictions. This section was also
amended to provide that any assigned shopping center lease would
remain subject to all of the provisions of the lease and not just the
provisions of "any other lease" relating to the center. Again, the
amended provision that we interpret today provides: "adequate assur-
ance of future performance of a lease of real property in a shopping
center includes adequate assurance . . . that assumption or assignment
of such lease is subject to all the provisions thereof, including (but not
limited to) provisions such as a radius, location, use, or exclusivity
provision." 11 U.S.C. § 365(b)(3).

  This background brings us to the matter of resolving the conflict
between § 365(f)(1), a general provision that permits lease assignment
notwithstanding anti-assignment clauses, and § 365(b)(3)(C), a more
specific provision that requires the assignee of a shopping center lease
                        IN RE: TRAK AUTO CORP.                         9
to honor a clause restricting the use of the premises. For guidance in
sorting out the conflict, we turn to the canons of statutory construc-
tion. See In re Windsor on the River Assocs., Ltd., 7 F.3d 127, 130
(8th Cir. 1993). When two provisions in a statute are in conflict, "a
specific [provision] closely applicable to the substance of the contro-
versy at hand controls over a more generalized provision." Sigmon
Coal Co. v. Apfel, 226 F.3d 291, 302 (4th Cir. 2000) (internal quota-
tion marks and citation omitted). See also Norman J. Singer, 2A Suth-
erland Statutes and Statutory Construction § 46:05 (6th ed. 2000).
Under this canon, § 365(b)(3)(C) controls because it speaks more
directly to the issue, that is, whether a debtor-tenant assigning a shop-
ping center lease must honor a straightforward use restriction. This
construction is consistent with "the purpose[ ] Congress sought to
serve." Norfolk Redevelopment & Hous. Auth. v. Chesapeake & Poto-
mac Tel. Co., 464 U.S. 30, 36 (1983) (internal quotation marks and
citation omitted). Congress’s purpose is clear from the history (recited
above) that culminated in the 1984 shopping center amendments to
the Bankruptcy Code and from the language of § 365(b)(3)(C) after
those amendments. Specifically, when a shopping center lease is
assigned in bankruptcy, Congress’s purpose in § 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. In re Ames Dep’t Stores, Inc., 121 B.R. 160, 165
n.4 (Bankr. S.D.N.Y. 1990). We therefore hold that because A&E
does not propose to take the West Town lease subject to the specific
restriction limiting use of the premises to the sale of auto parts and
accessories, Trak Auto’s motion to assume and assign the lease must
be denied.

   The bankruptcy and district courts gave this case careful attention,
and we owe them a further explanation as to why we are rejecting
their particular approaches. The bankruptcy court concluded that
because no auto parts dealer bid on the West Town lease, the market
in the area is saturated and "cannot bear [the] restriction" limiting use
to the sale of auto parts and accessories. J.A. 421. According to the
bankruptcy court, the market has turned the use restriction into an
anti-assignment clause that is unenforceable under § 365(f)(1). This
analysis overlooks the fact that West Town, the shopping center land-
lord, made the judgment that an auto parts retailer is important to a
successful mix of stores in the center. And, in its lease with Trak
10                       IN RE: TRAK AUTO CORP.
Auto, West Town successfully negotiated to have the leased space
dedicated to the sale of auto parts. West Town insists that this use
restriction be honored by any assignee of Trak Auto, and that is West
Town’s right under § 365(b)(3)(C), regardless of market conditions.
Section 365(b)(3)(C) simply does not allow the bankruptcy court or
us to modify West Town’s "original bargain with the debtor." S.Rep.
No. 98-65, at 67-68 (1983) (emphasis added).

   The district court concluded that the use restriction in the West
Town lease was an unenforceable anti-assignment clause under
§ 365(f)(1) because the lease says that the tenant must use the prem-
ises "only as a Trak Auto Store." J.A. 588. West Town does not seek
to restrict assignment to a tenant operating a Trak Auto store, and the
parties have proceeded on that understanding. See Amer. Metal Form-
ing Corp. v. Pittman, 52 F.3d 504, 509 (4th Cir. 1995) (parties to a
lease are free to modify it). The Trak Auto store designation is thus
not in the picture, and West Town is free to enforce the remaining
restriction that limits use of the premises to the retail sale of auto parts
and accessories.

   Our decision to block Trak Auto’s lease assignment is not an
attempt on our part to water down one of the important purposes of
Chapter 11. That purpose is to give business debtors with some pros-
pects the opportunity to reorganize, revive their operations, and con-
tinue in existence. The assumption and assignment of leases can be
an important part of this effort. See In re Shangra-La, Inc., 167 F.3d
843, 849 (4th Cir. 1999). Shopping center leases are in a special cate-
gory, however, because Congress has made it more difficult for
debtor-tenants to assign these leases in Chapter 11. This special pro-
tection for shopping center landlords, as spelled out in § 365(b)(3)(C),
dictates the result in today’s case. But this does not mean that
§ 365(f)(1) can never be used to invalidate a clause prohibiting or
restricting assignment in a shopping center lease. But see In re Joshua
Slocum Ltd., 922 F.2d 1081, 1090 (3d Cir. 1991) (concluding that
§ 365(b)(3) (1982) rendered § 365(f)(1) inapplicable to shopping cen-
ter leases). A shopping center lease provision designed to prevent any
assignment whatsoever might be a candidate for the application of
§ 365(f)(1). For example, Senator Hatch, in explaining the 1984
amendment to § 365(b)(3)(C), said that the "amendment is not
intended to enforce requirements to operate under a specified trade
                         IN RE: TRAK AUTO CORP.                          11
name." 130 Cong. Rec. S8891 (daily ed. June 29, 1984), reprinted in
1984 U.S.C.C.A.N. 590, 600. Senator Hatch’s comment suggests that
Congress did not intend to make § 365(f)(1) completely inapplicable
to shopping center leases. Of course, the issue of when § 365(f)(1)
might apply is a subject for some future case.

                                    IV.

   In conclusion, we deny West Town’s motion to dismiss this appeal
as moot. On the merits, we hold that because A&E does not propose
to take the West Town lease subject to the restriction limiting prem-
ises use to the retail sale of auto parts and accessories, Trak Auto’s
motion in bankruptcy court to assume and assign the lease must be
denied under 11 U.S.C. § 365(b)(3)(C). The district court’s order to
the contrary is reversed. On remand the district court will return the
case to the bankruptcy court for the entry of an order consistent with
this opinion.2

                                          REVERSED AND REMANDED
  2
   Because our decision under § 365(b)(3)(C) disposes of the case, we
do not reach West Town’s argument that the bankruptcy court erred in
finding (a finding affirmed by the district court) that the proposed assign-
ment would not disrupt the tenant mix in West Town Center. See 11
U.S.C. § 365(b)(3)(D).