Lease Profit Sharing Provisions Held Per Se Unenforceable Under 11 U.S.C. § 365(f)(1)

Antone Corp. v. Haggen Holdings, LLC (In re Haggen Holdings, LLC), No. 15-1136 (GMS), 2017 WL 3730527 (D. Del. Aug. 30, 2017)

In this Opinion, Judge Sleet of the Delaware District Court affirmed the holding of Judge Gross of the Delaware Bankruptcy Court that profit sharing provisions contained in leases are per se unenforceable anti-assignment provisions under section 365(f)(1) of the Bankruptcy Code.  The provision at issue on appeal entitled the landlord to fifty percent of any “net profits” of the subject lease should the debtor-tenant assign it.  In connection with its proposed sale in bankruptcy, the debtor-tenant sought to do exactly that, and the landlord objected absent receipt of the profit sharing payment. Despite the landlord’s contention that the provision was a bargained-for element given in exchange for provisions benefiting the debtor-tenant, the provision was determined by both Courts to fall squarely within the meaning of section 365(f)(1) and, thus, unenforceable as a matter of law as it “restrict[ed], or condition[ed]” assignment.  See 11 U.S.C. § 365(f)(1) (“[N]otwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trust may assign such contract or lease under paragraph (2) of this subsection.”).  Such findings were buttressed by both Courts’ determinations that the profit sharing provision prevented the debtor-tenant from realizing the full value of the lease in its sale, thus thwarting a fundamental bankruptcy policy underpinning both section 365(f)(1) and the case law invalidating profit sharing provisions – namely, the encouragement of debtors to maximize estate value for the benefit of all creditors.

[Update – On July 17, 2018, the Third Circuit Court of Appeals affirmed the Delaware District Court’s decision.]