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In Re: the Great Atlantic & Pacific Tea Company, Inc., et al v. the Great Atlantic & Pacific

May 8, 2012

IN RE: THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., ET AL., DEBTORS.
ANDROSE ASSOCIATES OF ALLAIRE, LLC, APPELLANT,
v.
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., ET AL., APPELLEES.



The opinion of the court was delivered by: Seibel, J.

OPINION AND ORDER

Before the Court is the appeal of Androse Associates of Allaire, LLC ("Androse" or "Appellant") from the Bankruptcy Court's Order ("Final Order")*fn1 granting a motion to assume certain unexpired leases and related subleases of non-residential real property (the "Assumption Motion"), (Bankr. Doc. 1959),*fn2 of The Great Atlantic & Pacific Tea Company, Inc. ("A&P") and certain of its affiliates (collectively, "Appellees" or "Debtors"). For the reasons stated below, the Bankruptcy Court's Final Order is AFFIRMED.

I. BACKGROUND

On or about May 1, 1986, Supermarkets General Corporation and Levcom-Allaire Village Associates ("Levcom") entered into a lease for certain non-residential real property located at Allaire Village Plaza in Wall Township, New Jersey (the "Lease"). (Bankr. Doc. 2112 ¶¶ 2, 3; see generally Lease.*fn3 ) Subsequently, Pathmark Stores, Inc. ("Pathmark"), a debtor in the underlying bankruptcy, acquired Supermarkets General Corporation, and Levcom assigned the Lease to Androse. (Bankr. Doc. 2112 ¶ 3.)

The Lease is for a twenty-five year term, subject to possible extensions, at an annual rent of $470,630, exclusive of taxes and common area maintenance charges. (Id.) The Lease contemplated that Pathmark's store was one of many stores in a "Shopping Center" named "Allaire Village Plaza," (see, e.g.,Lease ¶¶ 1.1(a); 2.1; 3.2; 7.1; 7.4; 7.5; 9.2--9.5; 10.1; 11.1); indeed, it was the "anchor store" there, (see Bankr. Doc. 2112 ¶ 4). Under the Lease, Pathmark was required to open the store "for business to the public as a supermarket, but thereafter . . . [was] not . . . obligated to conduct, or to remain open for the conduct of, any business." (Lease ¶ 6.1.)

At the time that Pathmark acquired the Lease, Pathmark and A&P did not have any relationship with each other. In 2007, however, A&P, which operated an A&P store directly across the street from Allaire Village Plaza, acquired Pathmark. (See Bankr. Doc. 2112 ¶ 4.) Pathmark operated the Allaire Village Plaza store until sometime in 2009 when it "went dark" and ceased its operations there, although it remained the lessee of the property. (See id.) In the time since the Pathmark store went dark, Appellant has contended with other tenants of Allaire Village Plaza vacating their locations and asking for rent concessions because the anchor store has not been operational and thus the shopping center has been attracting fewer customers. (See id.)

Appellees commenced their bankruptcy case on December 12, 2010 by filing a voluntary petition for relief under chapter 11 of the Bankruptcy Code (the "Code"). (Bankr. Doc. 1.) At the outset of the case, Appellees entered into an $800 million debtor-in-possession post-petition financing facility (the "DIP Facility") to aid their restructuring efforts. (See Bankr. Doc. 1959 ¶ 2.) Appellees were given until April 26, 2011 to reject any unexpired non-residential real property leases under Section 365 of the Code. (See id. ¶ 2.) Together with "substantial involvement of the official unsecured creditors' committee . . . and other key constituents," Appellees had their real estate advisor, Hilco Real Estate LLC, "review[] their store portfolio to identify opportunities to exit burdensome lease arrangements" and "determin[e] the value of retaining" other leases. (Id. ¶ 3.) After completing this analysis, Appellees decided to reject 150 "dark store" leases and subleases, and exit or sell 57 other operating locations. (Id.) Appellees also obtained rent concessions from certain landlords in efforts to generate approximately $14 million in savings over the life of certain leases they sought to assume. (Id.)

On June 22, 2011, Appellees filed their Assumption Motion with the Bankruptcy Court seeking entry of an order authorizing Appellees, among other things, to assume 205 leases and 98 related subleases of real property (the "Assumed Leases"). (See id. at 2.) In determining which leases to assume, Appellees had "implemented a systematic process to determine whether to retain or exit store locations," (Bankr. Doc. 2106 ¶ 7), and had "taken into account the cost to cure any existing defaults under the Assumed Leases," (Bankr. Doc. 1959 ¶ 5), each store's potential for rehabilitation or cost savings from closure, (id. ¶ 11; see Bankr. Doc. 2106 ¶ 7), the effect of assumption or rejection on other restructuring initiatives, (Bankr. Doc. 1959 ¶ 11; Bankr. Doc. 2106 ¶ 7), and that closing some stores would not result in savings to Appellees' estate "and would forfeit the strategic benefits offered by keeping such stores in their portfolio," (Bankr. Doc. 1959 ¶ 31). The Assumption Motion pertained to all the Assumed Leases, which included the Lease at Allaire Village Plaza, but did not specifically discuss that lease. (See generally id.)

Appellees represented to the Bankruptcy Court that their decision to assume the Assumed Leases satisfied the business judgment standard. (See Bankr. Doc. 2106 ¶ 12 (decision is "product of substantial process, analysis, and negotiations, and . . . is a sound exercise of the [Appellees'] business judgment, utilizing the extensive expertise of the [Appellees'] management and professionals"); see id. ¶¶ 13--25 (explaining Appellees' process and rationale for assuming).) To that end, Appellees stated that they took into consideration that "[i]n a highly competitive industry with relatively low margins, a competitor's ability to take over a strategic location, which may not have been operated profitably by the [Appellees], could detrimentally affect the [Appellees'] store locations in the surrounding geographic area." (Bankr. Doc. 1959 ¶ 28.) Appellees represented that they would cure all monetary defaults,*fn4 and that they had provided adequate assurance of future performance for the Assumed Leases under which they had defaulted based on their cash on hand and the proceeds from the DIP Facility. (See Bankr. Doc. 1959 ¶¶ 39, 41; Bankr. Doc. 2106 ¶ 26 ("The [Appellees] collectively have in excess of $300 million in cash and cash-equivalent investments (as well as access to additional undrawn proceeds of the DIP Facility's revolver).").)

On July 1, 2011, Appellant filed an objection to the Assumption Motion. (See Bankr. Doc. 2112.) Appellant argued that Appellees had not provided adequate assurance of future performance for the assumption of a shopping center lease under Section 365(b)(3) because Appellees had not made assurances concerning "the source of rent and other consideration due under the Lease," (id. ¶ 6 (internal quotation marks omitted)), and, further, Appellees had not (1) given Appellant a security deposit or guarantee, (2) filed a plan of reorganization, or (3) presented specific information demonstrating their ability to make future rental payments or become profitable, (id. ¶ 11). Appellant also argued that Appellees had failed to demonstrate that the assumption of the Lease was a sound business judgment for a store that was not operational. (Id. ¶ 17.) Appellant represented to the Bankruptcy Court that it had offered Appellees $1.25 million to terminate the Lease, but that Appellees rejected the offer without demonstrating the strategic value of the Lease. (See id.)

On July 6, 2011, Appellees filed an omnibus reply in support of their Assumption Motion, (see Bankr. Doc. 2156), and this time made arguments specifically regarding the Lease. For example, Appellees stated that Appellant was not entitled to additional assurances that are generally provided to landlords of real property in a shopping center under Section 365(b)(3) of the Code, because (1) Appellant had not set forth evidence demonstrating that it qualified as such a landlord, (id. ¶ 18); (2) certain Section 365(b)(3) factors were inapplicable to the case, (see id. ¶¶ 20--21); and (3) Appellees were not seeking to assign the Lease and had adequately assured Appellant based on their cash on hand, (see id. ¶ 20). Appellees also argued that there was "obvious value" to the Lease because Appellant was willing to pay $1.25 million to terminate it and there were potential offers from other bidders, which supported the conclusion that the decision to assume the Lease was based on an exercise of Appellees' sound business judgment. (Id. ¶ 24.)

On the same day, Appellant filed an amended objection to the Assumption Motion, (see Bankr. Doc. 2164), that set forth the same arguments as before, and added an additional argument regarding Appellees' failure to comply with certain insurance requirements under the Lease, which allegedly created a non-monetary default that Appellant believed had to be cured prior to assumption, (see id. ¶¶ 14--16).

On July 7, 2011, the Bankruptcy Court heard oral argument on the Assumption Motion (the "Hearing") from both Appellant and Appellees. The Bankruptcy Court granted the Assumption Motion and stated its reasons on the record. (See Hr'g Tr. 92:20--104:21.)*fn5 As to whether Appellees had appropriately exercised their business judgment in deciding to assume the Lease, Judge Drain found that their decision was made, among other things, after "a lengthy and thorough process . . . with heavy involvement by their retained professionals" and consideration of the value of the Lease to the bankruptcy estate. (Id. at 95:5--18.) On the issue of adequate assurance of prompt cure, Judge Drain had no doubt that Appellees would promptly cure the $42,300.37 pre-petition monetary default "within ten days of the entry of the [Final Order]" based on Appellees' "cash position, as well as the availability to it of amounts under the [DIP Facility]." (See id. at 94:20--95:4.) Further, he held that there was no requirement under the Lease that Appellees maintain insurance with a specific deductible limit and, in any event, based on the Appellees' cash position, a $500,000 deductible on the insurance policy did "not create any issue as to adequate assurance of prompt cure." (See id. at 97:15--19, 97:25--98:3.) As to adequate assurance of future performance, Judge Drain determined, among other things, that Appellees had "sufficient cash on hand and on tap under its [DIP Facility] . . . to perform under this lease" and that the Lease was apparently valuable, considering that the unsecured creditors' committee supported the Assumption Motion and Appellant sought "to buy back the lease for a substantial sum." (Id. at 101:21--102:11; see id. at 101:16--102:4 ($300 million cash and cash equivalents; DIP Facility; value of Lease to bankruptcy estate).) Finally, on the issue of whether the Lease related to real property that was part of a "shopping center" within the meaning of Section 365(b)(3) of the Code, Judge Drain determined that testimony on this issue was not necessary because it was an issue he did not need to decide. (See id. at 98:19--99:11; see also id. at 99:1--5 (noting that Appellees had objected to testimony of Appellant's witness on this issue because witness had not been previously identified to Appellees and thus Appellees were not able to take deposition prior to hearing).) Rather, Judge Drain discussed the Section 365(b)(3) factors with Appellant's counsel and determined, with counsel's concurrence, that the only factor applicable to this case was subsection (A), which requires that a bankruptcy court find adequate assurance of the source of rent and other consideration due under the lease. Because that determination required the same inquiry that he had to make under the general Section 365(b)(1)(C) analysis of adequate assurance of future performance, Judge Drain concluded that he did not need to determine under these facts whether the Lease was for a store in a shopping center. (See id. at 99:12--100:20.)

For all these reasons, the Bankruptcy Court granted the Assumption Motion, (see id. at 104:20--21), and entered its Final Order granting Appellees' ...


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