Case KJC Doc 381 Filed 07/14/16 Page 1 of 8 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

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1 Case KJC Doc 381 Filed 07/14/16 Page 1 of 8 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE x Chapter 11 In re: : : Case No (MFW) Draw Another Circle, LLC, et al., 1 : Jointly Administered : : Hearing Date: July 22, 2016 at 11:00 a.m. EST Debtors. : Objection Deadline: July 15, 2016 at 4:00 p.m. EST x Related to Docket Nos. 16, 140, 260 LIMITED OBJECTION OF WHLR-FORREST GALLERY, LLC TO (1) COMBINED MOTION FOR ENTRY OF ORDERS: (I) ESTABLISHING BIDDING AND SALE PROCEDURES; (II) APPROVING THE SALE OF ASSETS; AND (II) GRANTING RELATED RELIEF, AND (2) NOTICE OF (I) POTENTIAL ASSUMPTION AND ASSIGNMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES AND (II) CURE AMOUNTS WHLR-Forrest-Gallery, LLC (the Landlord ), by and through its attorneys, submits this limited objection and reservation of rights (the Objection ) to the (1) Debtors Combined Motion for Entry of Orders: (I) Establishing Bidding and Sale Procedures; (II) Approving the Sale of Assets; and (III) Granting Related Relief [Docket No. 16] (the Sale Motion ) and (2) Notice of (I) Potential Assumption and Assignment of Executory Contracts and Unexpired Leases and (II) Cure Amounts [Docket No. 140] (the Cure Notice ) filed by the abovecaptioned debtors (the Debtors ). In support of this Objection, the Landlord respectfully represents as follows: JURISDICTION 1. The United States Bankruptcy Court for the District of Delaware (the Court ) has jurisdiction over this matter pursuant to 28 U.S.C. 157 and This is a core proceeding pursuant to 28 U.S.C. 157(b)(2). 1 The Debtors and the last four digits of their respective federal taxpayer identification numbers are as follows: Draw Another Circle, LLC (2102); Hastings Entertainment, Inc. (6375); MovieStop, LLC (9645); SP Images, Inc. (7773); and Hastings Internet, Inc. (0809). The Debtors executive headquarters are located at 3601 Plains Boulevard, Amarillo, TX

2 Case KJC Doc 381 Filed 07/14/16 Page 2 of 8 BACKGROUND 2. On June 13, 2016, each of the Debtors commenced a bankruptcy case by filing a voluntary petition for relief under chapter 11 of the Bankruptcy Code. 3. Upon information and belief, the Debtors are operating their businesses as debtors in possession, pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. 4. The Landlord and one (1) of the Debtors are parties to an unexpired lease of nonresidential real property (the Lease ) of premises (the Premises ) as follows: Landlord Shopping Center Location WHLR-Forrest-Gallery, LLC Forrest Gallery Shopping Center Tullahoma, TN 5. The Premises is located within a shopping center as that term is used in 365(b)(3) of the Bankruptcy Code. See In re Joshua Slocum, Ltd., 922 F.2d 1081, (3d Cir. 1990). 6. On June 13, 2016, the Debtors filed the Sale Motion. Pursuant to the Sale Motion, the Debtors are required to file a notice of proposed cure amounts that must be paid in order to cure all defaults under each executory contract or unexpired lease to potentially be assumed and assigned. 7. On June 23, 2016, the Debtors filed the Cure Notice. 8. On July 6, 2016, the Court entered the Order (I) Approving Bid and Sale Procedures, (II) Approving Certain Bidding Protections, (III) Approving the Form and Manner of Notice of the Sale and Assumption and Assignment of Executory Contracts and Unexpired Leases and (IV) Scheduling an Auction Sale Hearing (the Bid Procedures Order ). Certain hearing and objection deadlines were modified through the Bid Procedures Order. 2

3 Case KJC Doc 381 Filed 07/14/16 Page 3 of 8 LIMITED OBJECTION A. Cure Objection 9. As a condition of any assumption and assignment of the Lease, the Landlord is entitled to have all defaults cured. 11 U.S.C. 365(b)(1)(A). The Debtors are currently in default under the Lease for failure to pay rent and other charges currently due and owing. 10. Through the Cure Notice, the Debtors assert that the cure amount is $3, ( Proposed Cure Amount ). 11. The Landlord objects to the Proposed Cure Amount because it is incorrect, subject to change, and does not include attorneys fees. The correct cure amount as of July 12, 2016, exclusive of attorneys fees, is $19, (the Correct Cure Amount ). An itemization of the Correct Cure Amount owed by the Debtors pursuant to the Lease is attached hereto as Exhibit A. 12. The Correct Cure Amount remains subject to change through and including the date of any assumption and assignment of the Lease. The Debtor should be directed to timely comply with all of its obligations under the Lease pending any assumption and assignment of the Lease, including the payment of currently outstanding post-petition rent. The Proposed Cure Amount is inaccurate and does not include accrued, but unbilled or not yet due, rent and charges under the Lease, such as adjustments and reconciliations. Additionally, the Proposed Cure Amount does not include other contractual obligations to indemnify the Landlord for any events occurring prior to any assumption of the Lease. Such claims may include, but are not limited to, (i) claims for personal injuries which occur at the Premises where the Landlord is joined as a party defendant; (ii) claims for damage and destruction to the property by Debtors or their agents; and (iii) claims for environmental damage or environmental cleanup. All of these 3

4 Case KJC Doc 381 Filed 07/14/16 Page 4 of 8 obligations should be assumed as part of any assumption and assignment of the Lease in accordance with the requirement that the Landlord receive adequate assurance of future performance under the Lease. See 11 U.S.C. 365(b)(1)(A). Finally, the Proposed Cure Amount does not include attorneys fees. 13. The Landlord is entitled to attorneys fees under the Lease. Attorneys fees are properly included in the Landlord s cure amount as actual pecuniary losses suffered by the Landlord. In re Child World, 161 B.R. 349, 353 (Bankr. S.D.N.Y. 1993) ( Although attorneys fees are not independently recoverable under the Bankruptcy Code, section 365(b)(1)(B) allows for such recovery if based upon the existence of a separate agreement between the parties. ); In re Westview 74th Street Drug Corp., 59 B.R. 747, 756 (Bankr. S.D.N.Y. 1986) (Courts have consistently recognized that an express contractual provision for attorney s fees gives rise to a right to obtain a reasonable attorney s fee as part of curing the debtor s default and in compensation for the landlord s actual pecuniary loss under Section 365 of the Code ); see also In re Williams, 2011 Bankr. LEXIS 2463, *3 (Bankr. D. Del. June 24, 2011) (holding that attorneys fees incurred because of enforcement actions taken to enforce a lease are properly recoverable as part of a cure payment if the lease provides for attorneys fees); see also In re Crown Books Corp., 269 B.R. 12, 16 (Bankr. D. Del. 2001). B. Sale Motion Objection 14. Section 365 of the Bankruptcy Code controls the assumption and assignment of nonresidential real property leases. A debtor must provide adequate assurance that a proposed assignee has the ability to perform under such lease as a condition to assuming and assigning the lease. 11 U.S.C. 365(b)(1)(C) & (f)(2). The Debtor bears the ultimate burden of persuasion as to issues under 11 U.S.C See In re Great NW Recreation Center, Inc., 74 B.R. 846, 4

5 Case KJC Doc 381 Filed 07/14/16 Page 5 of (Bankr. Mont. 1993) (citing Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, (5th Cir. 1985)). 15. Unlike a typical lease assignment, 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. In re Joshua Slocum Ltd., 922 F.2d 1081, 1086 (3d. Cir. 1990). Therefore, when the lease involved is a shopping center lease, the Bankruptcy Code requires more than the basic adequate assurance of future performance of the lease under Section 365(b)(1)(C). In re Arden and Howe Associates, Ltd., 152 B.R. 971, 976 (Bankr. E.D. Cal. 1993). The heightened adequate assurance requirements are detailed in section 365(b)(3) of the Bankruptcy Code and include the following: The source of rent and assurance that the financial condition and operating performance of the proposed assignee and its guarantor(s), if any, must be similar to the financial condition and operating performance of the debtor and its guarantor(s), if any, as of the time the debtor became the lessee. See 11 U.S.C. 365(b)(3)(A); Any percentage rent due under the lease will not decline substantially. See 11 U.S.C. 365(b)(3)(B); An assumption and assignment of the lease is subject to all provisions thereof, including (but not limited to) provisions such as radius, location, use, or exclusivity, and will not breach any such provision in any other lease, financing agreement, or master agreement relating to such shopping center. See 11 U.S.C. 365(b)(3)(C); and An assumption and assignment of the lease will not disrupt the tenant mix or balance of the shopping center. See 11 U.S.C. 365(b)(3)(D). The Debtor must satisfy all of the adequate assurance requirements prior to assumption and assignment of the Leases. 16. Until the identity of any successful bidder for the Debtors assets is known, it is impossible to determine whether the Landlord will receive adequate assurance of future performance under the Lease. Thus, the Landlord preliminarily objects to any assumption and assignment of the Lease, until the identity of the proposed bidder is known, and the Landlord has 5

6 Case KJC Doc 381 Filed 07/14/16 Page 6 of 8 had sufficient time to assess any proposed assumption and assignment of the Lease and review adequate assurance of future performance information of the proposed bidder. 17. Section 365(l) of the Bankruptcy Code entitles the Landlord to require a guaranty from a creditworthy entity or other suitable form of credit enhancement. The Landlord requests security under Section 365(l). Until the successful bidder is known and the Landlord has its adequate assurance information, the Landlord reserves its rights to determine the type and extent of security pursuant to section 365(l). 18. If the Debtors seek to assume and assign the Lease, it must be assumed and assigned in full without modification. Any assumption and assignment of the Lease must be as is, and subject to all of the Lease terms including, but not limited to, the use provisions of the Lease. See 11 U.S.C. 365(b)(3)(C). Unexpired leases and executory contracts must be assumed cum onere, or not at all. In re ANC Rental Corp., 277 B.R. 226, (Bankr. D. Del. 2002). Although 365(f)(1) provides that a debtor in possession may assign a lease notwithstanding a provision in the lease prohibiting assignment, the Court may not re-write or permanently abrogate lease provisions. Section 365(b)(3)(C) specifically provides: that assumption or assignment of [a]... 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. 11 U.S.C. 365(b)(3)(C). Section 365(f)(1) does not modify 365(b). See Trak Auto Corp. v. West Town Ctr. LLC (In re Trak Auto Corp.), 367 F.3d 237, (4th Cir. 2004) (holding that the general anti-assignment provision in 365(f)(1) does not abrogate the protections granted to landlords in 365(b)(3)(C)). 19. Congress adopted this proposition with the adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ( BAPCPA ), as evidenced by Senator 6

7 Case KJC Doc 381 Filed 07/14/16 Page 7 of 8 Hatch s remarks that Section 365(f)(1) is amended to make sure that all the provisions of Section 365(b) are adhered to and that 365(f) of the Code does not override Section 365(b). 151 Cong. Rec. S. 2459, (daily ed. Mar. 10, 2005) (Floor Statement of Senator Orrin Hatch). One of the prime focuses of the BAPCPA amendments was to implement additional protections for operators of shopping centers: A shopping center operator... must be given broad leeway to determine the mix of retail tenants it leases to. Congress decided that use or similar restrictions in a retail lease, which the retailer cannot evade under nonbankruptcy law, should not be evaded in bankruptcy. It is my understanding that some bankruptcy judges have not followed this mandate. Under another provisions (sic) of the Code, Section 365(f), a number of bankruptcy judges have misconstrued the Code and allowed the assignment of a lease even though terms of the lease are not being followed. 151 Cong. Rec. S. 2459, (daily ed. March 10, 2005) (Floor Statement of Senator Orrin Hatch). The intent behind the BAPCPA amendments that courts must strictly enforce use and other provisions of leases was echoed in the House of Representatives. See H.R. Rep. No , pt. 1, at 87, reprinted in 2005 U.S. Code Cong. & Admin. News 153 ( assumption and assignment of a lease of real property in a shopping center must be subject to the provisions of the lease, such as use clauses. ). C. Joinder and Reservation of Rights 20. The Landlord joins in any other objections filed by the Debtors landlords to the extent such objections are not inconsistent with this Objection. 21. The Landlord reserves its right to supplement this Objection and make such other and further objections as it deems necessary or appropriate. The Landlord also reserves all rights to object to any proposed assumption or assumption and assignment of the Lease on any grounds. 7

8 Case KJC Doc 381 Filed 07/14/16 Page 8 of 8 WHEREFORE, the Landlord respectfully requests that the Court (i) set the cure amount consistent with the amount set forth herein, subject to adjustment by the Landlord; (ii) deny the Sale Motion as to the Lease; and (iii) grant any further relief the Court may deem just and proper. Dated: July 15, 2016 Respectfully submitted, Wilmington, Delaware /s/ Leslie C. Heilman Leslie C. Heilman (No. 4716) BALLARD SPAHR LLP 919 North Market Street, 11 th Floor Wilmington, DE Telephone: (302) Facsimile: (302) heilmanl@ballardsparh.com -and- Kevin M. Newman (pro hac vice pending) Jeffrey D. Eaton (pro hac vice pending) MENTER, RUDIN & TRIVELPIECE, P.C. 308 Maltbie Street, Suite 200 Syracuse, New York Telephone: (315) Facsimile: (315) knewman@menterlaw.com jeaton@menterlaw.com Attorneys for WHLR-Forrest-Gallery, LLC 8

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14 Case KJC Doc Filed 07/14/16 Page 1 of 2 CERTIFICATE OF SERVICE Leslie C. Heilman, Esquire hereby certifies that on this 14th day of July, 2016, a true and correct copy of the foregoing Limited Objection of WHLR-Forrest-Gallery, LLC to (1) Debtors Combined Motion for Entry of Orders: (I) Establishing Bidding and Sale Procedures; (II) Approving the Sale of Assets; and (III) Granting Related Relief, and (2) Notice of (I) Potential Assumption and Assignment of Executory Contracts and Unexpired Leases and (II) Cure Amounts was served upon the addressees listed on the attached service list in the manner indicated. Dated: July 14, 2016 Wilmington, Delaware /s/ Leslie C. Heilman Leslie C. Heilman (DE No. 4716) BALLARD SPAHR LLP

15 Case KJC Doc Filed 07/14/16 Page 2 of 2 SERVICE LIST Via Hand Delivery & Christopher M. Samis, Esq. Katherine Good, Esq. Whiteford, Taylor & Preston LLC The Renaissance Centre 405 North King Street, Suite 500 Wilmington, DE csamis@wtplaw.com kgood@wtplaw.com Proposed Counsel for the Debtors Maria Aprile Sawczuk, Esq. Goldstein & McClintock, LLP 1201 North Orange Street, Suite 7380 Wilmington, Delaware marias@restructuringshop.com Proposed Counsel to the Official Committee of Unsecured Creditors Gregory Taylor, Esq. Ashby & Geddes, P.A. 500 Delaware Avenue P.O. Box 1150 Wilmington, DE gtaylor@ashby-geddes.com Counsel to Bank of America, N.A. Mark D. Collins, Esq. John H. Knight, Esq. Richards; Layton & Finger, P.A. One Rodney Square 920 North King Street Wilmington, DE collins@rlf.com knight@rlf.com Counsel to Pathlight Capital LLC Hannah Mufson McCollum The Office of the United States Trustee J. Caleb Boggs Building 844 King Street, Suite 2207 Lockbox 35 Wilmington, Delaware hannah.mccollum@usdoj.gov Via First Class U.S. Mail Only: Debtors and Debtors In Possession c/o Hastings Entertainment, Inc. ATTN: Duane A. Huesers 3601 Plains Boulevard Amarillo, TX Debtors Via First Class U.S. Mail & Cathy Hershcopf, Esq. Michael A. Klein, Esq. Cooley LLP 1114 Avenue of the Americas New York, NY chershcopf@cooley.com mklein@cooley.com Proposed Corporate Counsel for the Debtors Bruce Buechler, Esq. Bruce S. Nathan, Esq. Lowenstein Sandler LLP 65 Livingston Avenue Roseland, New Jersey bbuechler@lowenstein.com bnathan@lowenstein.com Proposed Counsel to the Official Committee of Unsecured Creditors Donald E. Rothman, Esq. Steven E. Fox, Esq Riemer & Braunstein, LLP Three Center Plaza Boston, MA drothman@rimerlaw.com sfox@riemerlaw.com Counsel to Bank of America, N.A. Kevin J. Simard, Esq. Choate, Hall & Stewart LLP Two International Place Boston MA ksimard@choate.com Counsel to Pathlight Capital LLC