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In re Joshua Slocum Ltd

argued: July 31, 1990.


On Appeal from the United States District Court for the Eastern District of Pennsylvania; D.C. Civil Action No. 89-03587.

A. Leon Higginbotham, Jr., Chief Judge, Sloviter and Alito, Circuit Judges.

Author: Higginbotham


HIGGINBOTHAM, JR., Circuit Judge

This case concerns the power of the bankruptcy court to excise a paragraph from a shopping center lease. On November 21, 1988 (the "Filing Date"), Joshua Slocum, Ltd., a Pennsylvania corporation (the "Debtor"), filed a voluntary petition for relief under chapter 11 of the United States Code with the bankruptcy court. On February 16, 1989, the bankruptcy court appointed Melvin Lashner (the "Trustee") to act as trustee in the case pursuant to 11 U.S.C. § 1104. Appellant George Denney ("Denney") contends that the bankruptcy court erred in entering its orders excising paragraph 20 of the lease in question, and then authorizing the assumption and assignment of that lease, without paragraph 20, over his objections. He also maintains that the district court erred in affirming the bankruptcy court's decision. We agree with the appellant and therefore will reverse the district court's summary affirmance of the bankruptcy court's judgment.


The Debtor, Joshua Slocum, Ltd., d/b/a JS. Acquisition Corporation, began its relationship with Landlord, George Denney, in May of 1983 when Debtor signed a ten year lease for retail space at the Denney Block in Freeport, Maine. The Denney Block, which consisted of three buildings containing seven stores, was developed in two phases commencing in 1982 and completed in 1983. The first phase was undertaken by Cole Haan, a manufacturer and retailer of fine men's and women's shoes, of which Denney is the President. Cole Haan purchased and renovated a building on Main Street in Freeport, Maine, and gave Denney the option to purchase the building in the event that the stock of Cole Haan was acquired by a third person. When the capital stock of Cole Haan was purchased by Nike, George Denney exercised his option to purchase the Cole Haan building.

Shortly thereafter, Denney purchased the building immediately adjoining the Cole Haan building and a third building separated from the second building by a courtyard. Architectural plans to develop the two new buildings in a manner consistent with the Cole Haan building as a common scheme were commissioned by Denney and presented to the Freeport, Maine planning board for approval.

The buildings comprising Denney Block front on Main Street and are part of the downtown shopping district in Freeport. The shopping district consists of a number of streets lined with stores. In addition to the Landlord's three buildings, the Denny Block has a courtyard located between two of its buildings and a parking lot behind the stores. George Denney owns the parking lot which is primarily for the use of patrons of the Denney Block, although according to local ordinance it is also open to the public (thus, it can be used by all persons who shop in the stores along Main Street, Freeport).

Debtor's lease, signed in 1983, along with the leases of some or all of the other Denney Block tenants, contains an average sales clause. This clause allows for Debtor or Landlord to terminate the lease if, after six years, Debtor's average yearly sales are below $711,245. A similar option also existed after the third year of the lease. At that point, either party held the power to terminate the lease if the tenant's average yearly sales were below $602,750.

The lease also contains a percentage rent clause. For the years currently remaining in the lease, this clause requires the tenant to pay additional rent in the amount of four percent of gross sales in excess of $1,175,362. Otherwise, the base rent due in the final five years of the lease is $3,917.88 per month. The leases also require the tenants to provide Landlord with financial information concerning their business so that these lease provisions can be implemented.

Joshua Slocum, Ltd. filed a voluntary petition for relief under chapter 11 of the United States Bankruptcy Code with the bankruptcy court. By application to the bankruptcy court dated February 2, 1989 (the "Application"), the Trustee requested authorization to assume and assign the Lease pursuant to 11 U.S.C. § 365. In March 1989, Denney filed written objections and a memorandum of law in opposition to the application with the bankruptcy court.

By opinion (the "opinion") and order both dated March 29, 1989 (the "interim order"), 99 Bankr. 250, the bankruptcy court granted the relief requested in the Application and authorized the Trustee to assume and assign the Lease to European Collections, Inc. (the "assignee"). The bankruptcy court entered another Order on April 11, 1989 (the "final order"), setting forth fully the rights and obligations of the parties. In the opinion and the final order, the bankruptcy court held unenforceable and excised paragraph 20 of the Lease ("paragraph 20"), which provides that "in the event that Tenant's gross sales for the first six (6) lease-years of the term of this Lease do not average Seven Hundred Eleven Thousand Two Hundred Forty Five and 00/100 Dollars ($711,245.00) per lease-year either Landlord or Tenant may elect to terminate this Lease."

The court approved the assignment of the lease without paragraph 20 to European Collections. European Collection has begun occupancy and operation of a store in George Denney's premises in Freeport, Maine. Denney's consolidated appeals followed.

On May 31, 1989, the Trustee filed a motion to dismiss George Denney's appeal as moot. By Order dated December 21, 1989 the district court affirmed without opinion the bankruptcy court's opinion and final order and denied Trustee's motion to dismiss. On January 22, 1990, Denney appealed the district court order.

II. Discussion

A. Mootness

Before we can turn to our discussion of the merits we must address the threshold issue of whether we have appellate jurisdiction. Appellee asks this court to dismiss this appeal as moot due to the landlord-appellant, George Denney's failure to obtain a stay pending appeal. Trustee argues that the principle of finality embodied in § 363(m) of the Bankruptcy Code should be applied to assignments under § 365 of that same statute. Further, Trustee maintains that such assignments, if made to good faith assignees, should not be subject to invalidation on appeal. We find the Trustee's argument inapposite to the situation presented. Denney has not challenged the assignment of the lease to European Collections. Accordingly, the issue before us is not the assignment of the lease, as the Trustee asserts, but rather whether the bankruptcy court had the authority to excise paragraph 20 of that lease. The request to dismiss as moot must be denied, because we find that under the facts of this case Denney was under no obligation to obtain a stay.

We note that only two provisions of the Bankruptcy Code, 11 U.S.C. §§ 363(m) and 364(e), specifically require that a party seek a stay pending appeal.*fn1 Appellee concedes that § 363(m) of the Bankruptcy Code does not apply to assignments of leases under § 365. We decline to interpret the mootness principles in such a way that would, in effect, create a third situation where parties are required to seek a stay, i.e., the assignment of leases under § 365. While § 363(m) contains a provision requiring a stay, the section that applies in this case, § 365, does not.

We have been willing to go beyond the statutory framework and dismiss an appeal as moot, where, during the pendency of the appeal, events occurred preventing the appellate court from granting effective relief. See, e.g., In re Cantwell, 639 F.2d 1050 (3d Cir. 1981); In re Highway Truck Drivers, 888 F.2d 293 (3d Cir. 1989). In Cantwell, the creditors appealed an order of the district court that dissolved a stay of discharge. The discharge appellants sought to be stayed was granted during the pendency of the appeal. The order granting the discharge had not been appealed. The sole issue before the court was the district court's order dissolving the stay. As Judge Sloviter noted, "even if we vacate that order - the relief appellant requests - it will not change the fact that the discharge, the act appellants sought to delay has been granted . . . . Hence, the propriety of the stay of discharge is moot." 639 F.2d at 1054. Cantwell is inapposite to the present situation. In Cantwell, unlike the matter at hand, the discharge of bankruptcy, i.e., the event occurring during the pendency of the appeal, had not been appealed. This Court's grant of a stay of that discharge would have been an empty gesture. Therefore, the court could not provide effective relief in that instance.

Similarly, in Highway Truck Drivers, during the pendency of the appeal, the state Supreme Court relieved the debtor of all liability. The state Supreme Court's decision was not before this court. Because no stay had been requested, no relief could be granted. "To hold otherwise would allow the district court to nullify retroactively a validly entered state court judgment, thereby emasculating the fundamental doctrines of federalism and comity." Highway Truck Drivers, 888 F.2d at 299. No such concern is present in the case sub judice.

In both Cantwell and Highway Truck Drivers, the event occurring during the pendency of appeal was a decision of a court. We do not imply that only an intervening judicial decree will moot an appeal. However, in neither Cantwell nor Highway Truck Drivers was the intervening court decision reviewable by this Court, thus in neither case could the appellant obtain effective relief in this forum.

In the matter at hand, there has been no intervening event that altered the rights of the Trustee vis-a-vis Denney. The action the Trustee claims to have mooted this case, i.e., the assignment of the lease, is not the action appealed from, and not the action upon which we base our decision. The excisement of paragraph 20 is the action presently before us, and the Trustee has presented no argument to the effect that that issue has been mooted during the pendency of the appeal. Thus, effective relief can be granted in this case.*fn2

In this instance, we find that no event has occurred during the pendency of the appeal to render Denney's appeal moot, nor are we precluded from granting effective relief. We find that we have appellate jurisdiction to hear the merits of this appeal. Accordingly, what has been done can be undone, if necessary, we can and will reverse the bankruptcy court's decision to hold unenforceable and to excise paragraph 20 of the Lease.

B. Shopping Center

The Bankruptcy Code imposes heightened restrictions on the assumption and assignment of leases for shopping centers. See 11 U.S.C. § 365(b)(3).*fn3 A debtor in a bankruptcy proceeding can raise working capital by assuming and assigning executory leases and contracts. See 11 U.S.C. § 365. Ordinarily to obtain the bankruptcy court's permission to assign a lease a debtor need only provide assurance that the assignee will perform under the lease's terms. See 11 U.S.C. § 365(f)(2)(B). However, Congress in 1978 and again in 1984 placed additional restrictions on assignment of shopping center leases in order to protect the rights of the lessors and the center's other tenants. See S. Rep. Nos. 98-70, 98th Cong. 1st Sess. (1983). Congress recognized that unlike the usual situation where a lease assignment affects only the lessor, an assignment of a shopping center lease to an outside party can have a significant detrimental impact on others, in particular, the center's other tenants. Id. However, the Bankruptcy Code does not define "shopping center." Rather, the proper definition of this term "is left to case-by-case interpretation." In re Goldblatt Brothers, Inc., 766 F.2d 1136, 1140 (7th Cir. 1985).

George Denney, the landlord of the Denney Block, wishes to take advantage of these heightened restrictions in order to block the assignment of the lease to European Collections. Thus, appellant Denney contends that the Denney Block is a "shopping center" within the meaning of 11 U.S.C. § 365(b)(3). We agree.

However, the bankruptcy court agreed with the appellee, Trustee, and found that Denney Block was not a "shopping center" within the meaning of 11 U.S.C. § 365(b)(3). The court looked to Collier on Bankruptcy and two cases addressing the question of whether a particular arrangement of stores constitutes a "shopping center" for purposes of § 365(b)(3). See In re Goldblatt Bros., Inc., 766 F.2d 1136, 1140-41 (7th Cir. 1985); In re 905 Int'l Store, Inc., 57 Bankr. 786, 788-89 (E.D.Mo. 1985). Both of these appellate decisions affirm bankruptcy court determinations that the respective premises in question were not in "shopping centers."

In Goldblatt, although the court found the common ownership of contiguous parcels, the presence of an "anchor tenant" (Goldblatt) and joint off street parking adjacent to all stores was significant in deciding whether the arrangement at issue was a shopping center, those factors were not determinative. The court was persuaded by the absence of other typical indicia of shopping centers, i.e., a master lease, fixed hours during which the stores are all open, common areas ...

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