Case 16-10527-MFW Doc 2510 Filed 07/14/16 Page 1 of 13 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE Chapter 11 In re: SPORTS AUTHORITY HOLDINGS, INC., et al, Case No. 16-10527 (MFW) (Jointly Administered) Debtors. Hearing Date: July 15, 2016 Related to Docket Nos. 2357, 2404 and 2453 RAMCO-GERSHENSON PROPERTIES, LP'S OBJECTION AND JOINDER TO CERTAIN LANDLORDS' OBJECTIONS TO DEBTORS' PROPOSED SALE OF LEASE DESIGNATION RIGHTS TO DICK'S SPORTING GOODS Ramco-Gershenson Properties, LP ("Landlord"), by its attorneys, hereby submits this Objection and Joinder to Certain Landlords' Objections to Debtors' Proposed Sale of Lease Designation Rights to Dick's Sporting Goods ("Objection") and respectfully states as follows: BACKGROUND 1. Landlord is the lessor under a lease with the Debtors for non-residential real property (Store # 355) located in Jensen Beach, FL (the "Lease") 2. On March 2, 2016, the debtors in possession in the above-captioned jointly administered case (collectively, the "Debtors") filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") 3. On April 14, 2016, the Bankruptcy Court approved certain bidding and auction procedures pursuant to the Order (A) Approving Bid Procedures in Connection with (I) The Sale of Substantially All of the Debtors' Assets and (II) The Transfer, Assumption and Assignment of The Debtors and the last four digits of their respective taxpayer identification numbers are as follows: Sports Authority Holdings, Inc. (9008); Slap Shot Holdings, Corp. (8209); The Sports Authority, Inc. (2802); TSA Stores, Inc. (1120); TSA Gift Card, Inc. (1918); TSA Ponce, Inc. (4817); and TSA Caribe, Inc. (5664) The headquarters for the above-captioned Debtors is located at 1050 West Hampden Avenue, Englewood, Colorado 80110. 204788620
Case 16-10527-MFW Doc 2510 Filed 07/14/16 Page 2 of 13 Certain Unexpired Leases of Nonresidential Real Property, (B) Scheduling Separate Auctions for and Hearings to Approve the Sale of Assets and Unexpired Leases of Nonresidential Real Property Subject to the Debtors' Store Closing Plan, (C) Approving Notice of Respective Date, Time and Place for Auctions and for Hearings on Approval of Respective Sales, (D) Approving Procedures for the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases in Connection with the Sales, (E) Approving Form and Manner of Notice Thereof, and (F) Granting Related Relief [D.I. 1186] (the "Bid Procedures Order"). 4. On April 15, 2016, the Debtors filed a Notice of Possible Assumption and Assignment of Certain Executory Contracts and Unexpired Leases [D.I. 1210] (the "Cure Notice") which provided the Debtors' proposed cure amount for the Lease. 5. On May 2, 2016, Landlord filed its Objection to Debtors' Proposed Cure Amount (the "Cure Objection") [D.I. 1679] that set forth Landlord's proposed cure amounts as of that date ("Landlord's Cure Amount") 6. The Main Auction, as defined in the Bid Procedures Order, commenced on May 16, 2016, and was adjourned as to certain assets to June 29, 2016. 7. On May 17, 2016, the Debtors filed a Notice of Adjourned Main Auction [D.I. 1942] ("Adjourned Auction Notice"). Pursuant to the Adjourned Auction Notice, bids for certain remaining leases, including the Lease, were due on June 23, 2016. Lease counter-parties were to receive adequate assurance packages on June 24, 2016. The Debtors conducted the "Adjourned Main Auction" on June 29, 2016. 8. The Landlord did not receive an adequate assurance package on or before June 24, 2016 and was informed that that there were no bids for the Lease. -2-
Case 16-10527-MFW Doc 2510 Filed 07/14/16 Page 3 of 13 9. Although Landlord was informed that there was no bids on its lease, on June 30, 2016, the Debtors filed a Notice of Successful Bids and Next Highest Bids For Certain Main Auction Assets Subject To Adjourned Main Auction [D.I. 2357] (the "Notice of Successful Bids"), which listed Landlord's leasehold interest as a "Designated Lease" with Dick's Sporting Goods, Inc. ("Dick's") as the Successful Bidder for the Lease. 10. On July 6, 2016, the Debtors filed their Notice Regarding Successful Bid Submitted by Dick's Sporting Goods, Inc. [D.I. 2404] (the "Designation Rights Notice"). The Designation Rights Notice stated (a) the Debtors were not seeking to assume and assign any leases to Dick's at that time; (b) Dick's had submitted a bid for designation rights (but provided no details regarding the agreement); and (c) the Debtors still intended to seek entry of an order approving the Lease Designation Rights Sale at the hearing scheduled for July 15, 2016. 11. On July 8, 2016, the Debtors filed their Notice of Filing of (I) Proposed Order Approving (A) Designation Rights Agreement with Dick's Sporting Goods, Inc. and (B) Disposition of Intellectual Property; (II) Designation Rights Agreement; and (III) Asset Purchase Agreement Related to Purchase of Intellectual Properly [D.I. 24531 (the "July 8 Notice"), which includes, inter alia, the amounts that the Debtors assert are required to cure each lease. As of the filing of this Objection, the Landlord has not received a complete copy of the proposed designation rights agreement since the copy filed with the Bankruptcy Court lacked all of the exhibits. Nevertheless, the Debtors seek approval of a designation rights agreement with Dick's, which has yet to be finalized and filed with the Bankruptcy Court, at the Adjourned Sale Hearing. 12. As a result, Landlord reserve its right to make any appropriate objections to the designation rights agreement between Dick's and Debtors, once such agreement becomes -3-
Case 16-10527-MFW Doc 2510 Filed 07/14/16 Page 4 of 13 finalized and the exhibits are attached, after a reasonable period to review and analyze such agreement. Landlord further reserve its right to make such other and supplemental objections to the terms of any proposed assignment of the Lease to Dick's pursuant to the exercise of its rights under a designation rights agreement and any other relief as may be requested. OBJECTION 13. The Landlord objects to Debtors' proposed sale of Lease Designation Rights to Dick's Sporting Goods on the following grounds: A. the Debtors must perform all of their obligations under the Lease until the Lease is assumed or rejected, including any charges that accrue until the date of assumption; B. any assumption of the Lease, must assume the Lease in full without modifying the terms of the Lease or violating the provisions of the Bankruptcy Code; C. if Lease is assumed, all cures must be satisfied, including the payment of all amounts that have accrued but have not yet been billed (ie CAM and tax reconciliations); D. the sale process lacked transparency; and B. Landlord reserves all rights to any assignment of Lease by Dick's or any proposed use that differs the use clause set forth in the Lease or from a typical Dick's store. A. The Debtors Must Perform All Of Their Obligations Under The Lease 14. Pursuant to section 365(d)(3) of the Bankruptcy Code, the Debtors are required to perform all of their obligations under the Lease until the Lease is assumed or rejected. The Landlord understands that the designation rights agreement will give Dick's until September 28, 2016 to request that the Debtors assign the Lease to Dick's or its assignee or reject the same. 15. Interpreting Section 365(d)(3), the Third Circuit held that "[t]he clear and express intent of Section 365(d)(3) is to require the trustee to perform the lease in accordance with its terms." In re Montgomery Ward Holding Corp., 268 F.3d 205 (3d Cir. 2001).
Case 16-10527-MFW Doc 2510 Filed 07/14/16 Page 5 of 13 16. The Third Circuit declared that an "obligation" is "something that one is legally required to perform under the terms of the lease" and that such an obligation "arises" "when one becomes legally obligated to perform." Montgomery Ward, 268 F.2d at 209. The Court then declared that Section 365(d)(3) requires a debtor in possession to "timely perform" obligations that fall due post-petition and pre-rejection, regardless of when the obligation accrued. Id. (requiring debtor in possession to immediately pay taxes that accrued pre-petition where the taxes were due post-petition, pre-rejection); see also In re MUMZ4 Serv., 279 B.R. 478, 487 (Bankr. D. Del. 2002) (MFW) (applying similar analysis to language of then Section 365(d)(10), which is now Section 365(d)(5), of the Bankruptcy Code). 17. The Third Circuit has also held that a debtor cannot prorate lease obligations that fall due post-petition, pre-rejection. See In re Federal-Mogul Global Inc., 222 Fed.Appx. 196, 199 (3d Cir. March 15, 2007) ("all sums due pre-rejection under the terms of that lease are owing irrespective of whether the sums otherwise can be prorated.") 18. The Landlord objects to any provisions of the designation rights agreement or order approving the same that would allow the Debtors to pro-rate lease obligations or otherwise not perform in full under the Lease until the Lease is either assumed or rejected. B. The Lease Designation Rights Sale Must Not Modify Or Abrogate Any Lease Provision Or The Bankruptcy Code 19. The Debtors are seeking approval of the Lease Designation Rights Sale such that Dick's will have an extended period of time to decide whether or not it wants to assume or reject the Lease. The Landlord objects to any potential attempt to side-step or invalidate any continuous operating covenant or other Lease provisions. The order on the Lease Designation Rights Sale must not allow the Debtors or Dick's to invalidate this, or any other, bargained-for protection in the Lease. -5-
Case 16-10527-MFW Doc 2510 Filed 07/14/16 Page 6 of 13 20. Landlord objects to the proposed Lease Designation Rights Sale to the extent that Dick's will not be held responsible for year-end adjustments. Landlord further objects to the proposed Lease Designation Rights Sale to the extent that it purports to pay per diem rent and lease charges rather than the "in for a day/in for a full month" ruling under the so-called billing theory in the Third Circuit. See In re Montgomery Ward Holding Corp., 268 F.3d 205, 209 (3d Cir. 2001) ("The clear and express intent of 365(d)(3) is to require the trustee to perform the lease in accordance with its terms. To be consistent with this intent, any interpretation must look to the terms of the lease to determine both the nature of the 'obligation' and when it 'arises.' If one accepts this premise, it is difficult to find a textual basis for a proration approach.") (citing In re Koenig Sporting Goods, Inc., 20 F.3d 986 (6th Cir. 2000) (finding that where rent for the coming month was due under the lease on the first of the month and the tenant rejected the lease on the second, " 365(d)(3) is unambiguous as to the debtor's rent obligation and requires payment of the full month's rent" and proration would be inconsistent with the statute)); see also In re Goody's Family Clothing, Inc., 401 B.R. 656, 664 (D. Del. 2009), aff'd sub nom; In re Goody's Family Clothing Inc., 610 F.3d 812 (3d Cir. 2010) (noting that "the Third Circuit adopted the billing-date approach") 21. In addition to the current outstanding rent and other monthly charges due under the Lease, in determining what must be paid as cure pursuant to Section 365(b), other charges must also be taken into consideration and paid by the Debtors or assignee, either as cure or when properly billed under the Lease. Other monthly charges include, attorneys' fees, costs, and interest, some charges for which the Debtors bear responsibility under the Lease have not yet been reconciled and/or adjusted from pre-petition (or even post-petition) periods (e.g. CAM fees and property taxes). The Debtors remain responsible for all accrued or accruing charges under S
Case 16-10527-MFW Doc 2510 Filed 07/14/16 Page 7 of 13 the Lease, and must pay such charges when they come due under the Lease. The Debtors (or successor) assume the Lease subject to its terms, and must assume all obligations owing under the Lease, including obligations that have accrued but may not yet have been billed under the Lease. Any final sale order should clearly state that the Assignee will assume these lease obligations and pay them when due, regardless of whether they relate to the period prior to, or after, the closing of any sale and assignment. Additionally, any assumption and assignment of the Lease must be subject to the terms of the Lease, including the continuation of all indemnification obligations, regardless of when they arose. 22. In addition to the above, Landlord objects to the Proposed DSG Order as it seeks to strip away protections provided to Landlord by the Bankruptcy Code. The Proposed DSG Order seeks to: (a) excuse Dick's from compliance with any radius restrictions; (b) relieve Dick's from any signage restrictions in any lease (or even recorded covenants or restrictions applicable to the shopping center property); (c) allow Dick's to install or construct such signage as it "deem[s] necessary," without any showing of how existing contractual restrictions impose unreasonable restrictions; (d) unilaterally grant Dick's a 150-day "go dark" period to re-stock, refixture and re-model the store locations it might acquire; and (e) relieve Dick's from any liability for 2016 year-end expense and real property tax adjustments, when billed under the terms of the respective leases in 2017, for any portion of the calendar year prior to the Lease Assignment Date, while at the same time granting Debtors a release under the Bankruptcy Code without any regard for contractual restrictions contained in the respective leases or the potential impact such prolonged 'go dark' period may have on co-tenancy provisions in the leases of other shopping center tenants, which is especially relevant for the 4 th quarter holiday season. -7-
Case 16-10527-MFW Doc 2510 Filed 07/14/16 Page 8 of 13 23. If a debtor assumes a contract, it must do so cum onere, with all the burdens as well as the benefits of the contract. See Cinicola v. Scharffenberger, 248 F.3d 110, 119-20 (3d Cir. 2001); Am. Flint Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 78 (3d Cir. 1999); see also In re CellNet Data Sys., 327 F.3d 242, 249 (3d Cir. 2003) ("Under the Bankruptcy Code, a trustee may elect to reject or assume its obligations under an executory contract. This election is an all-or-nothing proposition-either the whole contract is assumed or the entire contract is rejected."). A debtor that seeks to assume an executory contract "must assume the entire contract." In re Nat'l Gypsum Co., 208 F.3d 498, 506 (5th Cir. 2000). "A debtor cannot simply retain the favorable and excise the burdensome provisions of an agreement." In re Kopel, 232 B.R. 57, 63-64 (Bankr. E.D.N.Y. 1999). 24. If forced to continue in the performance of the Lease, Landlord is entitled to the full benefit of the bargain under the Lease with the Debtors. See Matter of Superior Toy and Mfg. Co., Inc., 78 F.3d 1169 (7th Cir. 1996). The "full benefit of the bargain" principle has been held to require payment of interest. "The cure of a default under an unexpired lease pursuant to 11 U.S.C. 365 is more akin to a condition precedent to the assumption of a contract obligation than it is to a claim in bankruptcy. One of the purposes of Section 365 is to permit the debtors to continue in a beneficial contract; provided, however, that the other party to the contract is made whole at the time of the debtor's assumption of the contract." In re Entertainment, Inc., 223 B.R. 141, 151 (Bankr. N.D. Ill. 1998). 25. Any ability to assume and assign the Lease is subject to the protections provided by Section 365. Therefore, any assumption must be in accordance with all provisions of the Lease. Id.
Case 16-10527-MFW Doc 2510 Filed 07/14/16 Page 9 of 13 C. All Cures Must Be Satisfied, If Lease Is Assumed 26. The Bankruptcy Code generally authorizes a debtor, with bankruptcy court approval, to assume an executory contract. Specifically, Section 365(a) provides, in relevant part, that "the trustee, subject to the court's approval, may assume or reject any executory contract." See 11 U.S.C. 365(a). 27. Sections 365(b)(1)(A) and (B) of the Bankruptcy Code, however, also require a trustee to "cure" defaults as a condition to the debtor-in-possession's assumption of an executory contract. See 11 U.S.C. 365(b)(1)(A)-(B); see also Counties Contracting & Constr. Co. v. Constitution Life Ins. Co., 855 F.2d 1054, 1060 (3d Cir. 1988) ("Section 365(b)(1) permits the assumption of a default in an executory contract provided that the trustee cures or provides adequate assurance that the default will be cured."). 28. Additional charges may fall due under the Lease prior to the date of assumption and assignment and interest on all overdue amounts also continues to accrue. The Debtors must pay the full cure amount that is owed as of the date of the assumption and assignment of the Lease. Accordingly, the Landlord reserves the right to require the Debtors to pay all amounts due and owing under the Lease, with interest, as of the date of assumption and assignment. 29. As of the filing of the Objection, the Landlord does not know what the terms of any proposed assignment will be. However, the Debtors must assume the Lease in its entirety and with all of the burdens and the benefits. 30. If a debtor assumes a contract, it must do so cum onere, with all the burdens as well as the benefits of the contract. See Cinicola v. Scharffenberger, 248 F.3d 110, 119-20 (3d Cir. 2001); Am. Flint Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 78 (3d Cir. 1999); see also In re CeliNet Data Sys., 327 F.3d 242, 249 (3d Cir. 2003) ("Under the Bankruptcy Code, a trustee may elect to reject or assume its obligations under an executory S
Case 16-10527-MFW Doc 2510 Filed 07/14/16 Page 10 of 13 contract. This election is an all-or-nothing proposition-either the whole contract is assumed or the entire contract is rejected."). A debtor that seeks to assume an executory contract "must assume the entire contract." In re Nat'l Gypsum Co., 208 F.3d 498, 506 (5th Cir. 2000). "A debtor cannot simply retain the favorable and excise the burdensome provisions of an agreement." In re Kopel, 232 B.R. 57, 63-64 (Bankr. E.D.N.Y. 1999). 31. As the Third Circuit Court of Appeals has declared: Section 365(f) requires a debtor to assume a contract subject to the benefits and burdens thereunder. The [debtor] may not blow hot and cold. If he accepts the contract, he accepts it cum onere. If he receives the benefits he must adopt the burdens. He cannot accept one and reject the other. The cum onere rule prevents the [bankruptcy] estate from avoiding obligations that are an integral part of an assumed agreement. In re Fleming Cos., 499 F.3d 300, 307 (3d Cir. 2007) (internal quotation marks and citations omitted). 32. To the extent that the designation rights agreement, an order approving the designation rights agreement, or any assumption agreement, purports to alter the terms of the Lease, the Landlord objects to the same. B. The Sale Process Lacked Transparency 33. Although Landlord was advised that there were no bids for its Lease, the Lease later appeared on the Notice of Successful Bids, which listed Landlord's leasehold interest as a "Designated Lease" with Dick's as the Successful Bidder for the Lease. In addition to being misinformed about potential bidders for the Lease, the Debtors apparently changed the terms of the auction, from one for assumption and assignment of the Lease, to one for lease designation rights, without notice or an opportunity for other parties, including landlords, to bid on such rights. Furthermore, there has been no allocation of the $8M Cash Consideration among the _ 10 -
Case 16-10527-MFW Doc 2510 Filed 07/14/16 Page 11 of 13 thirty plus leases included in the Designation Rights Agreement, so Landlord, the Bankruptcy Court and others do not have evidence that the Debtors have received the highest and best price for each of the leases.2 The Debtors and Dick's should not be permitted to change the terms of the auction without proper notice and an opportunity for others to place bids on the assets. Transparency and due process are essential in bankruptcy proceedings and help protect the integrity, quality, and respect of the bankruptcy system. Allowing the Debtors to change the terms of the auction and sale without proper notice calls into question the transparency and due process of the sales process and should not be permitted by this Court. E. Landlord Reserves All Rights To Any Assignment of Lease by Dick's or Any Proposed Use That Differs Use Set Forth in the Lease or From A Typical Dick's Store 34. Landlord has no objection to Dick's using the properties subject to the Lease; however, Landlord reserves the right to object if either: (a) the proposed user is any entity other than Dick's; or (b) the proposed use differs from the use clause set forth in the Lease or that of a typical Dick's Sporting Goods store. 35. To the extent the Lease is assigned to an entity other than Dick's or the proposed use differs from the use clause set forth in the Lease or a typical Dick's store, the Landlord reserves all rights and objections. JOINDER IN OBJECTIONS OF OTHER LANDLORDS 36. To the extent not inconsistent with this Objection, Landlord hereby joins in the objections filed by other landlords to the July 8 Notice, the Lease Designation Rights Agreement, the Lease Designation Rights Sale and/or the Notice of Successful Bids, and Landlord hereby 2 Although the Lease Designation Rights Agreement requires Buyer to provide Seller an allocation schedule, such schedule is not required to be filed with the Bankruptcy Court. - 11 -
Case 16-10527-MFW Doc 2510 Filed 07/14/16 Page 12 of 13 incorporates all of the arguments raised by the other objecting landlords as if set forth in detail herein. RESERVATION OF RIGHTS 37. As the Debtors have not yet finalized the designation rights agreement and have not provided a copy of any proposed assumption agreement to the Landlord, the Landlord reserves its right to supplement the Objection. 38. Landlord also reserves its right to amend Landlord's Cure Amounts to include rent, attorneys' fees, interest, and/or other charges that continue to accrue and any other obligations that arise and/or become known to Landlord prior to assumption and assignment of the Lease or to account for adjustments, which have not yet been billed or have not yet become due under the terms of the Lease. CONCLUSION 39. If the Debtors assume the Lease and assign it to Dick's, both the Debtors and Dick's should be bound by the provisions of Lease as well as Bankruptcy Code section 365 and should not be permitted to modify the terms of the Lease via the proposed order approving the designation rights agreement or otherwise. WHEREFORE, Landlord respectfully requests that this Court enter an order (i) denying the Lease Designation Rights Sale or conditioning its approval as set forth in this Objection and objections filed by other landlords; and (ii) granting such other and further relief as this Court deems just and proper. - 12-
Case 16-10527-MFW Doc 2510 Filed 07/14/16 Page 13 of 13 Dated: July 14, 2016 Respectfully submitted, CLARK HILL, PLC /s/ Edward I Kosmowski Edward J. Kosmowski (DE No. 3849) 824 N. Market St, Suite 710 Wilmington, DE 19801 Tel: (302) 250-4750 Fax: (302) 421-9439 ekosrnowski@clarkhill.com and David M. Blau (Admitted pro hac vice) CLARK HILL, PLC 151 S. Old Woodward Ave., Ste. 200 Birmingham, MI 48009 Tel. (248) 988-1817 Fax. (248) 988-2336 db1au(c1arkhi 11.com Counsel to Ramco-Gershenson, Properties, L. P. - 13 -