Representation: Landlord of Ames Department Stores, Inc.
Bankruptcy – Southern District of New York
Situation: Ames Department Stores, Inc., purchased substantially all of the assets and business of the Zayre Stores Division of TJX. Among the assets of the Zayre Stores Division transferred to Ames were various leases. Among those leases was one for which a Bernstein and Bernstein, P.C., client was the landlord.
Although the lease was assigned to Ames, TJX remained obligated under the lease in the event that Ames should default. On the other hand, the purchase agreement between Ames and TJX required Ames to indemnify TJX for any damages which TJX may suffer as a result of Ames’ breach under the lease.
Ames, burdened by the debt incurred in the purchase of the Zayre Stores Division, filed for Chapter 11 in the Southern District of New York. Ames immediately began to consolidate its operations, including closing stores and rejecting leases. Among those leases was that of the firm’s client.
Action: Bernstein and Bernstein, P.C. and the client chose to ignore the bankruptcy of Ames and sued TJX in the United States District Court for the Western District of Pennsylvania for damages arising out of Ames’ breach of the lease. TJX responded by asking the District Court to refer the civil action to the Bankruptcy Court (in Pittsburgh) as a matter “related to” the Ames bankruptcy proceeding and, further, asking the Court to stay the lawsuit in light of the Ames bankruptcy case. TJX argued that since it was entitled to indemnity from Ames for any liability which may be assessed against it, the civil action was “related to” the Ames bankruptcy proceeding and should be litigated in front of the Bankruptcy Court and/or stayed until the Ames case was resolved.
The case raised significant landlord-tenant and bankruptcy issues. TJX, essentially in the role of a guarantor as a non-debtor third party, was seeking the protection of the Ames bankruptcy without having to file its own bankruptcy. TJX was liable on a number of rejected leases all over the country. In every published opinion on the issue, and in every prior case which had been litigated in the Western District of Pennsylvania, TJX had succeeded in having the matter referred to the Bankruptcy Court in New York. In most of the cases, TJX had also succeeded in obtaining a stay.
Nevertheless, based on the arguments developed by Bernstein and Bernstein, P.C. attorneys, the District Court initially refused to refer the matter to the Bankruptcy Court and then, based on a recent Supreme Court decision, changed its mind. However, once in Bankruptcy Court, Bernstein and Bernstein, P.C. was still able to prevent the transfer of the matter to the Bankruptcy Court for the Southern District of New York and, further, prevented the Court from imposing a stay.
Because of the success in preventing the transfer to New York and the imposing of a stay, payment in full soon followed.
