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In re Haggen Holdings, LLC

United States District Court, D. Delaware

August 30, 2017

IN RE HAGGEN HOLDINGS, LLC, et al., Debtors.
v.
HAGGEN HOLDINGS, LLC, et al., Appellees. ANTONE CORP., Appellant, Civ. No. 15-1136 (GMS)

          MEMORANDUM OPINION

         I. INTRODUCTION

         On December 8, 2015, appellant Antone Corp. ("Antone") filed a notice of appeal (D.I. 1) seeking review of a portion of an order (B.D.I. 839)[1]("Sale Order") entered by the United States Bankruptcy Court for the District of Delaware ("Bankruptcy Court") on November 24, 2015, which approved an asset purchase agreement and allowed Haggen Holdings, LLC and certain affiliates ("Debtors") to sell certain assets. In connection with this sale, Antone objected to the assignment of its commercial property lease with debtor HH Opco South, LLC (formerly Haggen Opco South, LLC) on the basis that the assignment must include enforcement of a profit sharing provision contained in the lease, which would entitle Antone to 50% of any net profits upon assignment. Ruling from the bench, the Bankruptcy Court specifically overruled Antone's objection, holding that the profit sharing provision was an unenforceable anti-assignment provision under § 365(f)(1) of the Bankruptcy Code, and approved the sale. (See B.D.I. 873, 11/24/15 Hr'g Tr. at 98:14-99:6.) For the reasons that follow, the court will affirm the Sale Order.

         II. BACKGROUND

         On September 8, 2015 ("Petition Date"), Debtors filed voluntary petitions with the Bankruptcy Court for relief under chapter 11 of title 11 of the Bankruptcy Code. As of the Petition Date, Debtors owned and operated 164 grocery stores and one pharmacy through three operating companies: Haggen, Inc. (n/k/a HH Legacy, Inc.), Haggen Opco North, LLC (n/k/a HH Opco North, LLC), and Haggen Opco South, LLC (n/k/a HH Opco South, LLC).

         On October 3, 2015, the Debtors filed a motion seeking, inter alia, approval of bidding procedures to govern the sale of dozens of stores, as well as the assumption and assignment of certain executory contracts and unexpired leases in connection therewith (B.D.I. 262) ("Sale Motion"). The commercial lease between Debtor Haggen Opco South, LLC and Antone (as later amended, the "Lease") was among the leases subject to the Sale Motion. On October 22, 2015, Debtors filed their Notice of Assumption, Assignment and Cure Amount with Respect to Executory Contracts and Unexpired Leases of the Debtors (B.D.I. 511) ("Cure Notice"). Antone objected to the Cure Notice, arguing that the Debtors' proposed cure amount was insufficient and that assumption and assignment of the Lease must be conditioned on "full performance and compliance of all Lease provisions going forward, including the provision at ¶ 9 of the Lease providing for payment to [Antone] of one-half of the net profit realized by the Debtor ... upon the assignment and transfer of the Lease to a third party." (See B.D.I. 630 at 5.) This profit sharing provision is set forth in ¶ 9(B) of the Lease amendment dated April 8, 1993 and provides, in relevant part:

In the event Tenant assigns this Lease or sublets more than fifty percent (50%) of the demised premises, Tenant shall deliver to Landlord fifty percent (50%) of any "net profits" (as such term is hereinafter defined) within thirty (30) days of Tenant's receipt thereof pursuant to such assignment or subletting.

         (D.I. 11 at ¶ 92.) Antone's objection did not cite any case law or authorities in support of its argument that the profit sharing provision must be enforced. (See B.D.I. 630.) The objection was supported by the declaration of Sara Antonicelli as president and CEO of Antone ("Antonicelli Declaration").

         On November 13, 2015, after conducting a marketing and auction process approved by the Bankruptcy Court, Debtors filed a notice (B.D.I. 707) ("Sale Notice") identifying Good Food Holdings (Bristol Farms) as the "Successful Bidder" for the Debtors' store (Store No. 2204) subject to the Lease, and identifying Good Food Holdings LLC as the assignee of the Lease. (See Sale Notice, Ex. A, at 2.) On November 19, 2015, Antone filed a limited objection to the Sale Notice contending that Debtors' proposed cure amount was insufficient and that assumption and assignment of the Lease must be "subject to the Debtors satisfying their obligations, " including compliance with the profit sharing provision. (See B.D.I. 780 at 3-4.) Again, Antone's objection did not cite any case law or authority to support enforcement of the profit sharing provision. (See id.) Antone's limited objection was supported by the declaration of Mike Moser, a California real estate broker with 29 years of experience in retail and commercial leasing, and an advisor and consultant to Antone ("Moser Declaration") (B.D.I. 785.) According to Antone, "[t]he Moser Declaration provides Moser's expert opinion regarding the economic deal terms of the Lease and the underlying rationale for Antone's inclusion of the non-customary provision of fixed minimum rent" in exchange for the profit sharing provision. (D.I. 9 at 6 (citing Moser Decl. at ¶ 7.))

         On November 23, 2015, Debtors filed an omnibus reply in further support of the Sale Motion, arguing that a profit sharing provision, such as the one in the Lease, is unenforceable as an anti-assignment provision under § 365(f)(1) of the Bankruptcy Code. (See B.D.I. 825 at 19-21.) Debtors cited long-standing precedent holding profit sharing provisions unenforceable and urged the Bankruptcy Court to overrule Antone's objection. (See id.)

         On November 24, 2015, the Bankruptcy Court held a hearing on the Sale Motion, and Antone argued that the profit sharing provision at issue in the Lease must be distinguished from similar provisions invalidated in the decisions cited by Debtors based on the unique facts and circumstances of this transaction. (See B.D.I. 873, 11/24/15 Hr'g Tr. at 89:5-90:13.) According to Antone, the Bankruptcy Court was required to look to the facts and circumstances of this particular case, and based on its declarations, [2] Antone argued that the profit sharing provision was a bargained for element, given in exchange for below-market rent, and should therefore be enforced. (See id.) The Bankruptcy Court overruled Antone's objection on the basis that the profit sharing provision "is an anti-assignment provision" and "unenforceable under Section 365(f)(1)." (Id. at 98:14-19.) The Bankruptcy Court observed that the profit sharing provision Antone sought to enforce was "very much akin, if not identical" to profit sharing provisions previously held to be unenforceable anti-assignment provisions by several courts, and that enforcing such a provision "would defeat the purpose of Section 365(f)(1) which is to ... enable the Debtor to realize the full value of its assets." (Id. at 98:19-99:6.) As result, the Bankruptcy Court entered the Sale Order which, inter alia, approved the sale, authorized assumption and assignment of the Lease, and prohibited enforcement of the profit sharing provision. (B.D.I. 839.)

         On December 8, 2015, Antone filed a timely notice of appeal of the Order. (D.I. 1.) The appeal has been fully briefed by the parties. (See D.I. 9, 14, 15.)

         III. PARTIES' CONTENTIONS

         On appeal, Antone argues that the Bankruptcy Court erred by failing to consider undisputed evidence of the unique facts and circumstances of this transaction in connection with its analysis of the enforceability of the profit sharing provision. (See D.I. 9 at 10-11.) According to Antone, an understanding of the bargained-for exchange that led to the profit sharing provision was critical to this analysis, and the Bankruptcy Court's analysis fell short. (See Id. at 11-12) Antone further argues that the cases cited by the Bankruptcy Court, refusing to enforce provisions "very much akin, if not identical" to the profit sharing provision at issue in this case, are factually distinguishable. (See Id. at 13-14.)

         Conversely, Debtors argue that the Bankruptcy Court correctly determined, based on the plain language of the statute and the clear weight of authority, that a profit sharing provision like the one in the Lease is a de facto anti-assignment provision that is unenforceable by operation of law under § 365(f)(1). (D.I. 14 at 8-9.) As such, Debtors argue the Bankruptcy Court was not required to "balance the equities" or otherwise analyze the facts and circumstances of the case, and that the cases Antone ...


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