Thursday, August 09, 2018

An Otherwise Enforceable Anti-Assignment Clause in a Lease Will be Treated Differently in Bankruptcy

By Bill Siegel

What appears to be one thing is not always the case.  Take an anti-assignment provision of a lease.  Outside of bankruptcy, such a provision would be enforced. On the other hand, Bankruptcy Courts will not enforce anti-assignment provisions in leases.  In Haggen Holdings LLC v. Antone Corp. (In re Haggen Holdings LLC)1, a profit sharing agreement provision was disregarded as a restriction to the debtor’s ability to assign the lease.  

In Haggen, a non-precedential opinion by the Third Circuit Court of Appeals, the Court held that a landlord cannot enforce a profit sharing agreement in a lease when the lease is assumed and assigned to a third party in a bankruptcy proceeding when the profit sharing provision contains an anti-assignment clause.

Haggen is an example of what is occurring in Chapter 11 reorganization proceedings.  Haggen was filed as a controlled liquidation under Chapter 11 which allowed  the Debtor to control its liquidation (or at least have a say), as opposed to a Chapter 7 liquidation controlled by a Chapter 7 Trustee.  In some cases, more can be realized in a Chapter 11 Reorganization (rather than in a Chapter 7 liquidation where the debtor is not operating and assets are liquidated by a Chapter 7 Trustee). 

One aspect of liquidation is the assumption and assignment of leases.  In Haggen, the Debtor sought to assign 200 grocery store leases, one of which contained a profit-sharing agreement requiring the Debtor to pay the landlord 50% of any “net profit” upon assignment.  Upon filing the motion to assume and assign, the landlord filed an objection demanding half the proceeds the Debtor would have received upon assignment.  

The Third Circuit held that the profit share agreement constituted an anti-assignment provision and was therefore not enforceable under Bankruptcy Code section 365(f)(1).  The Court did not accept the landlord’s position that in consideration for granting, among other things, an extension to the term of the lease, fixed rent and the elimination of certain use restrictions, the Debtor granted the profit sharing interest in the event of a subsequent assignment.  In so holding, and following other courts, the Third Circuit, noting that the landlord had failed to find a case supporting its position, held that section 365(f) “… extends to any clause that ‘restricts or conditions’ such  assignment.”   Even though the landlord argued that the profit sharing provision was a negotiated, bargained-for benefit, the provision nevertheless was hostile to the considerations that come into play in a bankruptcy case.2

The lesson here is that any provision that restricts or conditions an assignment of a lease will be interpreted differently in a bankruptcy case when other considerations come into play that will override an anti-assignment provision of a lease.

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1. Haggen Holdings LLC v. Antone Corp. (In re Haggen Holdings LLC), at *5-*6 citing-, In re Great Atl. & Pac. Tea Co., No. 15 Civ. 8932 (NSR), 2016 WL 6084012, at *3-*4 (S.D.N.Y. Oct. 17, 2016) (emphasis added).

2. Citing In re Great Atl. & Pac. Tea Co., supra.


 

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