Letter to the Editor

Letter to the Editor

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Editor's Note: The following exchange of letters responds to the publication of an article on the sale of designation rights in the Montgomery Ward case, published in the September 2001 issue of the Journal.

Dear Editor:

We are counsel for Kimco Realty Corp. in connection with its recent purchase of designation rights from the Montgomery Ward bankruptcy estate. This letter is intended to clarify several inaccurate and misleading statements contained in the article written on this topic by William F. Taylor Jr. and James A. Tiemstra.

I note that neither Mr. Taylor nor Mr. Tiemstra had a significant role in this transaction or the litigation relating thereto. The authors apparently made no effort to speak with any of the key participants (i.e., Kimco, Montgomery Ward, the creditors' committee, GECC or their respective counsel).

Kimco's purchase of Ward's designation rights was subject to many weeks of exhaustive negotiations by the creditors' committee, Wards and GECC (which is the shareholder and largest secured creditor) and was supported in all respects by such parties and by the vast bulk of the creditors and landlords. Moreover, every single one of the 91 objecting parties ultimately consented to the transaction and withdrew its objection, and Kimco received enthusiastic approval by Judge Lyons.

The authors minimize the benefits to the estate merely as an "up-front payment and the prospect of additional payments upon sale." The up-front payment was substantial and unrecoverable unless Kimco reached certain thresholds of recoveries to the estate. Wards faced an immediate and severe cash shortage such that Wards could not pay even a portion of the multi-million dollar monthly carrying costs for the 315 properties. Absent Kimco's agreement to guarantee payment of all monthly carrying costs, Wards would have been compelled to hold an immediate fire sale of the properties or to abandon the assets. The estate also benefitted by Kimco's unmatched expertise in marketing "big-box" retail space and Kimco's close relationships with the key big-box end-users. As the largest owner of community shopping centers in the United States (over 500), Kimco's experience in this area greatly exceeded that of Ward's personnel or any broker Wards could have hired.

The authors wrongly claim that the proposal to override anti-assignment clauses was "[b]uried" in the motion papers. This innuendo suggesting that Kimco or Wards was hiding something is absurd. The proposed order was accompanied by a separate additional notice, which was sent to all landlords and restrictive easement agreement parties clearly informing them that their substantive rights were going to be affected. Further, the proposed order contained a bold-print and capitalized heading which reads "Anti-assignment Provisions," which distinctly highlights all such provisions and gathers them together in one easy-to-find location within the order.

The authors incorrectly state that since the sale to Kimco "was approved without a formal opinion from the court," the "fundamental question" of whether designation rights sales are permitted under the Bankruptcy Code was not addressed.

The authors incorrectly assert that since "the designated rights purchaser was not a creditor of Montgomery Ward's bankruptcy estate, it had no particular motivation to act on behalf of the estates' creditors." Kimco and its partners were the largest landlords of Wards and substantial creditors, and such fact was disclosed to the court. In fact, Kimco's intimate familiarity with a large number of Ward's properties was one of the significant factors relied upon by the court in approving the sale. Since every dollar of profits is shared between Kimco and the estate (with the initial sharing in favor of the debtors and creditors), their pecuniary interests are identical.

The unsupported allegation that the transaction had "several aspects" that were "adverse to creditors" is contrary to the facts. The creditors' committee and GECC fully supported the designation rights agreement with Kimco. Only a tiny percentage of the thousands of creditors filed objections (and 100 percent of the objections were withdrawn and such parties consented to the sale). Finally, every assignment to a designee has been or will be subject to the full panoply of protections under §§363 and 365 upon request of an affected party. With unanimous support of the creditor body (and the full array of statutory protections), where is the adversity?

There is no basis for the speculation that the designation rights were "sold at deep discount." Rather, GECC, the committee and the debtor had valuations of Ward's real estate portfolio, and Kimco's bid was deemed by all such parties to be fair and reasonable. Further, the authors fail to note that a public auction for the designation rights was held the day before the hearing, and over 50 interested parties appeared. Ultimately, Kimco and another bidder (who had successfully purchased designation rights in other bankruptcy cases) engaged in a competitive auction for the entire package of designation rights. After nearly four hours, Kimco was unanimously selected by Wards, the committee and GECCas the highest and best offer at the auction (which selection was subsequently approved by the court on March 1, 2001, after an extensive multi-day hearing with numerous witnesses). It is most telling that not a single creditor in the Wards case questioned the fairness of the purchase price. The authors, as strangers to the value of the Wards portfolio, have no basis to make spurious allegations about a "deep discount," especially where a duly noticed, competitive auction was conducted. To the contrary, the debtors and GECC crafted an agreement that provided for a (a) substantial up-front guarantee, (b) guarantee of payment of all carrying costs and (c) substantial sharing agreement that preserved up-side value for the estate.

The sale of designation rights has now become fairly common. Cases that have approved sales of designation rights or variations thereof include, among others, Ernst Home, Best Products, Bradlees, Caldor, Grand Union, Hechingers, Sun T.V., Montgomery Ward and Homelife. The authors' failure to mention the existing state of the law is directly contrary to the basic theme of the article, and I am unaware of any court that has failed to approve a sale of designation rights. With at least nine courts approving the sales of designation rights (and no court ruling to the contrary), we question the fundamental premise of the article urging a court to "take this issue on directly." In short, the issue has already been taken on directly and the result is a unanimous string of orders upholding such sales, and such sales are now a common and accepted practice in retail bankruptcy cases.

--Neil E. Herman
Morgan, Lewis & Bockius LLP; New York

James A. Tiemstra replies:

I find it unfortunate that the gist of Mr. Herman's criticisms seems to be that the sale of "designation rights" in the Montgomery Ward bankruptcy case was justified under the facts and circumstances of that matter, was expedient, preserved value and returned a handsome profit to his client. Of course, the very point that our article attempted to make was whether such considerations justify disregard of the Bankruptcy Code's provisions and relevant case law. Nowhere in Mr. Herman's letter does he attempt to join in an intellectual debate over the application of bankruptcy law in this case. Rather, Mr. Herman relies on many unsubstantiated assertions of fact in contending that the article contained "inaccurate and misleading statements" that undermine its conclusions.

Mr. Herman initiates his criticisms by a personal attack on the authors of the article through the assertion that we had no "significant role in this transaction or the litigation relating thereto" and "made no effort to speak with any of the key participants." Not only did Mr. Taylor and I represent a number of landlords involved in the sale, but we filed opposition papers (much of which found its way into the article), appeared at the hearing with witnesses, spoke to all of the counsel for the parties mentioned above and even negotiated directly with Mr. Herman to resolve our objections!

Unfortunately, Mr. Herman's letter fails to improve in his one-sided characterization of the transaction. While asserting that, after extensive negotiations, the procedure for selling designation rights was embraced by all, he admits that the motion drew objections from more than 91 parties. The fact that resolutions were negotiated with each of those parties, including our clients, does not mean that the subject matter was without controversy. On the contrary, I spoke with many of the landlords' counsel who were very seriously concerned about the entire process and who remain unconvinced that such procedures are either appropriate or supported by bankruptcy law.

Mr. Herman's claims regarding Ward's financial condition and his client's expertise simply argue with the facts and are based on unsupported surmise and speculation. Mr. Herman provides no evidence, accounting or other information that would support the assertions made in this paragraph.

The argument by Mr. Herman that notice of the anti-assignment provisions was adequate is nothing more than his opinion. Parties who read the papers are welcome to make their own determinations. However, the fact that an equal number of landlords to those objecting did not file objections and had so-called "anti-assignment provisions" excised from their leases would seem to suggest a due-process problem. These issues were raised in many of the oppositions filed by the 91 objecting parties.

On his point about the existence of a "formal opinion from the court," Mr. Herman should really know better. A copy of the transcript of the court's statements in support of its ruling is neither precedential nor persuasive and is hardly a "formal opinion." Indeed, the actual basis of the court's ruling was that all of the objections had been withdrawn, and "in light of the withdrawal of those objections I will grant the debtor's motion for the sale of the designation rights." Had the objections been pressed, the court might have come to a very different conclusion.

To assert that Kimco was not motivated primarily by its own pecuniary interests is unbelievable. The alleged fact that it was also a substantial creditor of the estate may further "beg the question" as to the propriety of its activities as the designation rights purchaser.

Once again, Mr. Herman grossly overstates his case by asserting that the sale of the designation rights was non-controversial. He does not attempt to take issue with the primary concerns raised by the article (e.g., that a substantial portion of the proceeds from the assignment of leases would not be available for distribution to creditors and that landlords would have no claim for damages against the "designation rights purchaser" for rejection or default). The statutory protections of §§363 and 365 are part of a delicate balance of bankruptcy rights and remedies between contracting parties, not third parties seeking to profit by the distressed circumstances of the bankruptcy case.

Mr. Herman offers no evidence that the sale of the designation rights provided the estate with the equivalent value of a direct sale. It stands to reason that the premium paid for the purchase of the designation rights was a portion of the value that would have otherwise gone to the estate, or no one would make such a purchase. Economics and the profit motive are the principal engines of these transactions, and they certainly worked to the benefit of GECC and Kimco. However, I have no doubt that in the absence of a mechanism for the sale of designation rights, parties would find an alternative means of achieving maximum value without injuring the interests of creditors in the process.

Finally, Mr. Herman engages in argumentum baculinum by asserting that a number of bankruptcy courts have approved sales of "designation rights or variations thereof." Of course, there are many transactions approved by courts on a routine basis only later to be found improvident, improper or unsupported by law. The article appropriately criticizes the only published opinion supporting the notion that designation rights can be sold in bankruptcy and suggests that the application of relevant authority in the Third Circuit would lead to a contrary result. Unfortunately, Mr. Herman's criticisms of the article do not even attempt to support the legal reasoning of the Ernst Home case, nor does he proffer reasoned legal support for his position. On the other hand, the article clearly questions the soundness of the Ernst Home decision under relevant provisions of bankruptcy law and openly invites a reasoned debate on the subject.

Journal Date: 
Saturday, December 1, 2001