Letter to the Editor

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.