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Full title: Objection by Creditor STORE Master Funding XV, LLC and STORE Master Funding XVI, LLC to 175 Motion to sell property free and clear of liens. (Singer, George) (Entered: 03/10/2021)

Document posted on Mar 9, 2021 in the bankruptcy, 12 pages and 1 tables.

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DISTRICT OF MINNESOTA _____________________________________________________________________________ In re: Tea Olive I, LLC d/b/a Stock+Field, BKY Case No. 21-30037 (Chapter 11) Debtor. _____________________________________________________________________________ LIMITED OBJECTION AND RESERVATION OF RIGHTS OF STORE MASTER FUNDING XV, LLC AND STORE MASTER FUNDING XVI, LLC TO DEBTOR’S ASSUMPTION AND ASSIGNMENT NOTICE _____________________________________________________________________________ STORE Master Funding XV, LLC (“SMF XV”) and STORE Master Funding XVI, LLC (“SMF XVI” and together with SMF XV, the “Landlords”) by and through their undersigned counsel, hereby submit this Limited Objection and Reservation of Rights (the “Objection”) to Debtor’s Assumption and Assignment Notice [D.I. 178] (the “Cure Notice”), and in connection therewith states as follows: 1. On January 10, 2021 (the “Petition Date”), Tea Olive I, LLC d/b/a Stock + Field (the “Debtor”), filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). The Debtor continues to operate its businesses and manage its properties as a debtor in possession pursuant to 11 U.S.C. §§ 1107(a) and 1108. 2. The Debtor leases retail space (the “Premises”) from the Landlords pursuant to unexpired leases of nonresidential real property (individually, a “Lease,” and collectively, the “Leases”) set forth in detail in paragraph 18 below. 3. The Leases are leases “of real property in a shopping center” as that term is used in Section 365(b)(3). See In re Joshua Slocum, Ltd., 922 F.2d 1081, 1086-87 (3d Cir. 1990). 4. On February 26, 2021, Debtor filed its Notice of Hearing and Motion for an Order (I)

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[D.I. 175] seeking inter alia, approval of an asset purchase agreement with R.P. Acquisition Corporation (“Purchaser”) for substantially all of its assets. As more fully set forth in the Sale Motion, the sale of assets to Purchaser include the assumption and assignment of certain of the Debtors’ non-residential real property leases, including some or all of the Leases. I. ARGUMENT General Objections to Assumption and Assignment of Leases 5. While Landlords do not generally object to a sale of the Debtors’ assets to maximize the value of the estate for the benefit of all creditors, including Landlords, Landlords do object to any proposed assumption and assignment of the Leases unless Debtors and/or the Purchaser comply with all of the requirements of Sections 365 of the Bankruptcy Code. Absent the ability, or willingness, of the Debtors and the proposed assignee to satisfy said requirements, any proposed assumption and assignment must be denied. Any Assumption and Assignment Must Comply with the Terms of the Leases6. Through the BAPCPA amendments, “Section 365(f)(1) was amended to make sure that all of the provisions of Section 365(b) are adhered to and that 365(f) of the Code does not override Section 365(b).” Floor Statement of Senator Orrin Hatch, 151 Cong. Rec. S. 2459, 2461-62 (daily ed. March 10, 2005). In explaining the change to Section 365(f)(1), Senator Hatch stated: The bill helps clarify that an owner should be able to retain control over the mix of retail uses in a shopping center. When an owner enters into a use clause with a retail tenant forbidding assignments of the lease for a use different than that specified in the lease, that clause should be honored. Congress has so intended already, but bankruptcy judges have sometimes ignored the law. 151 Cong. Rec. S. 2459, 2461 (daily ed. March 10, 2005).

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enforce use and other lease provisions. Again, Senator Hatch’s remarks in the Congressional Record clarify the intent behind Section 365(b) and 365(f): A shopping center operator . . . must be given broad leeway to determine the mix of retail tenants it leases to. Congress decided that use or similar restrictions in a retail lease, which the retailer cannot evade under nonbankruptcy law, should not be evaded in bankruptcy. It is my understanding that some bankruptcy judges have not followed this mandate. Under another provisions of the Code, Section 365(f), a number of bankruptcy judges have misconstrued the Code and allowed the assignment of a lease even though terms of the lease are not being followed. 151 Cong. Rec. S. 2459, 2461-62 (daily ed. March 10, 2005). 8. BAPCPA clarified Section 365 to reflect the Congressional intent that a Debtor cannot use Section 365(f)(1) to void lease provisions, and to overrule those prior court decisions that did not strictly enforce lease terms. The predicate to the limited ability to assign a lease over a landlord’s objection under Section 365(f) is that such assignment must be subject to the protections of Section 365(b)(1) and (3). 9. Section 365(f)(1) does not modify or override Section 365(b). Trak Auto Corp. v. West Town Ctr. LLC (In re Trak Auto Corp.), 367 F.3d 237, 243-44 (4th Cir. 2004) (bankruptcy courts could not use the general anti-assignment provision of Section 365(f)(1) to trump the specific protections granted to landlords in Section 365(b)(3)(C)). Any assignment must remain subject to all provisions of the Leases, including those provisions concerning use, radius, exclusivity, tenant mix and balance.

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Adequate Assurance of Future Performance 10. Pursuant to Section 365(f)(2)(B) of the Bankruptcy Code, Debtors may only assume and assign the Landlords’ Leases if “adequate assurance of future performance by the assignee of such . . . lease is provided, . . . .” 11. The burden of proof on adequate assurance issues is with the Debtors. See In re Lafayette Radio Elecs. Corp., 12 B.R. 302, 312 (Bankr. E.D.N.Y. 1991). 12. To date, Landlords have not received adequate assurance information relating to the Purchaser. Landlords demand strict proof of Purchaser’s ability to provide adequate assurance of future performance prior to any objection deadline and no later than at any hearing on the Sale Motion. 13. Further, since the Debtors’ stores are located in shopping centers, Debtors and the Purchaser must meet the heightened requirements of adequate assurance that the Bankruptcy Code contemplates in the case of such assignments. The Bankruptcy Code requires more than the basic adequate assurance of future performance of the Leases under Section 365(b)(1)(C). In re Sun TV and Appliances, Inc., 234 B.R. 356, 359 (Bankr. D. Del. 1999). In order to assume and assign shopping center leases, Debtors must satisfy the heightened requirements set forth in 11 U.S.C. § 365(b)(3)(A) – (D). See Joshua Slocum, 922 F.2d at 1086; see also L.R.S.C. Co. v. Rickel Home Centers, Inc. (In re Rickel Home Centers, Inc.), 209 F. 3d 291, 299 (3d Cir. 2000). The heightened adequate assurance requirements include the following:  The source of rent and assurance that the financial condition and operating performance of the proposed assignee and its guarantors, if any, must be similar to the financial condition and operating performance of the debtor and its guarantor(s), if any, as of the time the debtor became the lessee. See 11 U.S.C. § 365(b)(3)(A);  That any percentage rent due under the lease will not decline substantially. See 11 U.S.C.

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(but not limited to) provisions such as a radius, location, use, or exclusivity provision, and will not breach of any such provision in any other lease, financing agreement, or master agreement relating to such shopping center. See 11 U.S.C. § 365(b)(3)(C); and  That assumption and assignment of the lease will not disrupt the tenant mix or balance in the shopping center. See 11 U.S.C. § 365(b)(3)(D). Additional Security 14. If a Purchaser does not possess sufficient operating experience or capitalization to satisfy Landlords’ requirements, Purchaser must also provide some type of credit enhancement as part of its adequate assurance of future performance demonstration, such as: (i) a guaranty of future performance from a financially capable parent or other entity; (ii) a letter of credit; or (iii) a cash security deposit, as required by Section 365(l) of the Bankruptcy Code. 15. Accordingly, pursuant to Section 365(l) of the Bankruptcy Code, Landlords demand that Purchaser post either a letter of credit or, in Landlords’ sole discretion, a security deposit, equal to three (3) month’s rent and additional rental charges under each Lease. Proposed Cure Amount 16. The Cure Notice lists three separate leases with “Store Capital” and a single cure amount of $1,102,517.00. 17. As an initial matter, the Cure Notice does not adequately identify the contract counterparties to the Leases and does not identify the proposed cure amounts associated with each Lease.

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Table 1 on page 6. Back to List of Tables
Amended and Restated Master
Lease Agreement dated July 1,
(Portfolio #1)
SMF XV 3660 Commerce Dr., Warsaw, IN
4301 South Franklin Street,
Michigan City, IN 46360
3363 North Vermilion, Danville,
IL 61832
1200 East Walnut Street, Watseka,
IL 60970
902 Erskine Plaza, South Bend, IN
Amended and Restated Master
Lease Agreement dated February
9, 2019 (Portfolio #2)
SMF XV 2100 Peace Tree Village,
Rochester, IN 46975
15830 South Bell Road, Homer
Glen, IL 60491
1625 South Georgetown Road,
Tilton, IL 61833
2655 Sycamore Drive, Morris, IL
3501 South Main Street, Elkhart,
IN 46517
70 Cherry Tree Shopping Center,
Washington, IL 61571
Master Lease Agreement dated
August 17, 2018 (Portfolio #3)
SMF XVI 1550 North Cass Street, Wabash,
IN 46992
1027 West Reynolds, Pontiac, IL
3315 Court Street, Pekin, IL 61554
1240 North 7th Street, Rochelle,
IL 61068
623 East First Street, Gibson City,
IL 60936
1601 US Highway 231,
Crawfordsville, IN 47933
19. In addition to the current outstanding rent and other monthly charges due under the Leases, in determining what must be paid as cure pursuant to Section 365(b), the charges referenced below must also be taken into consideration and paid, either as cure on the effective date of any assumption or assumption and assignment, or when properly billed under the Leases. i. Attorneys’ Fees, Costs and Interest

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event the Landlords are required to take legal action to protect their interests. The Debtor is obligated to cure all defaults under the Leases, and compensate the Landlords for their actual pecuniary losses as a result of defaults under the Leases. See 11 U.S.C. § 365(b)(1)(A) and (B). The principle is well-recognized. In re LCO Enterprises, 12 F.3d 938, 941 (9th Cir. 1993); Elkton Associates v. Shelco Inc. (Matter of Shelco), 107 B.R. 483, 487 (Bankr. D. Del. 1989) (debtors allowed to assume lease provided it cured all pre-petition defaults). 21. The Debtor (or its assignee) takes the Leases cum onere—subject to existing burdens. The Debtor cannot assume the favorable portions, and reject the unfavorable provisions, of its leases. In re Wash. Capital Aviation & Leasing, 156 B.R. 167, 172 (Bankr. E.D. Va. 1993). If forced to continue in the performance of the Leases, the Landlords are entitled to the full benefit of the bargain under the Leases with the Debtor. 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 Entm’t, Inc., 223 B.R. 141, 151 (Bankr. N.D. Ill. 1998) (citation omitted; bankruptcy court allowed interest at 18%). Interest on pre-petition lease charges continues to run from the filing of the Debtors’ petitions and must be paid as a condition of the assumption of the Leases. See In re Skylark Travel, Inc., 120 B.R. 352, 355 (Bankr. S.D.N.Y. 1990). Interest calculations are, therefore, not cut short by the automatic stay, and payment of such interest is required to fully compensate Landlords for the Debtor’s defaults under the Leases, and thus to

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853 (9th Cir. 2001). 22. Attorneys’ fees and costs incurred in enforcement of the covenants, obligations, and conditions of a lease are also proper components of a cure claim, and the Debtor (or successor) must satisfy these lease charges as part of the assumption or assumption and assignment of the Leases. Entm’t, Inc., 223 B.R. at 152 (citation omitted). There is no logical distinction for purposes of Section 365 between attorneys’ fees incurred in connection with pre-petition defaults and fees incurred with post-petition defaults. Id. at 154. The fact that a landlord uses bankruptcy procedures to enforce a lease should not preclude recovery of attorneys’ fees and costs for such enforcement activity (particularly where the Bankruptcy Court is the exclusive forum where the landlord can obtain any relief, being foreclosed from state court relief by the automatic stay). Id., see also In re Crown Books Corp., 269 B.R. 12 (Bankr. D. Del. 2001) (Landlords’ fees and costs are recoverable as a component of cure under 11 U.S.C. § 365(b)(1)); Urban Retail Props. v. Loews Cineplex Entm’t Corp., et al., 2002 WL 5355479 (S.D.N.Y. Apr. 9, 2002) (where lease “provides for recovery of attorneys’ fees and interest, their receipt deserves the same priority under Section 365(d)(3) as any of the debtors’ other obligations that arise postpetition . . . .”); Three Sisters Partners, L.L.C. v. Harden (In re Shangra-La, Incorporated), 167 F.3d 843, 850 (4th Cir. 1999). The Supreme Court has upheld the enforceability of such attorneys’ fees clauses, ruling that pre-petition attorneys’ fee clauses were enforceable with respect to issues peculiar to bankruptcy law. Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric, 127 S. Ct. 1199, 1206 (2007). 23. Accordingly, Landlords further request that they be reimbursed for all of their actual pecuniary losses including, but not limited to, attorney’s fees and costs expended with regard to Debtor’s bankruptcy proceedings. To date, the Landlords estimate their attorney’s fees and costs to

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24. In addition to rent and related monthly charges, attorneys’ fees, costs and interest, some charges for which the Debtor bears responsibility under the Leases have not yet been reconciled and/or adjusted from pre-petition (or even post-petition) periods. By way of example, the Debtor occupies retail space pursuant to a triple-net lease, where it typically pays rent and related lease charges in advance for each month. The Debtor is responsible for payment of real property taxes due on the Properties. Such tax payments are to be made by Debtor on or before the date such taxes become delinquent or accrue interest. 25. Because taxes are typically paid in arrears, there are tax obligations that may have accrued but that may not yet be due. Since Section 365(b) only requires debtors to cure defaults under their leases, and since there can be no default for failure to pay an amount that has not as yet been billed, these accrued, but unbilled, charges are not yet due under the Leases, and they do not create a current default that gives rise to a requirement of cure by the Debtor at this time. The obligation to pay these amounts is, however, certainly a part of the obligation to provide adequate assurance of future performance. Any attempt to assign the Leases “free and clear” of these obligations, therefore, must be denied. 26. Debtor remains responsible for all accrued or accruing charges under the Leases, and must pay such charges when they come due under the Leases. The Debtor (or any assignee) assumes and assigns the Leases subject to their terms, and must assume and assign all obligations owing under the Leases, including obligations that have accrued but may not yet have been billed under the Leases. Any final assumption or sale order should clearly state that the Debtor (or any assignee) will assume these lease obligations and pay them when due, regardless of whether they relate to the period prior to, or after, the assignment. In addition, any provision in a sale order that purports to

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charges that come due under the Leases. 27. In addition, the Leases require the Debtor (or any successful purchaser) to indemnify and hold the Landlords harmless with respect to any existing claims which may not become known until after the assumption and assignment of the Leases, examples of which may include such claims as personal injuries at the Premises and damage to the Premises by the Debtors, the Purchaser or their agents. Any assumption or assumption and assignment of the Leases must be subject to the terms of the Leases, including the continuation of all indemnification obligations, regardless of when they arose. In the alternative, the Debtor must provide (by insurance or otherwise) that it can satisfy the indemnification obligations under the Leases for any claims that relate to the period prior to assumption or assumption and assignment of the Leases. Nothing in any sale order should preclude the Landlords from pursuing the Debtor, its insurance, or any other party that may be liable under the Leases, and the Landlords request that any order specifically preserve their right to pursue such rights irrespective of any resolution of cure amounts herein. 28. Landlords, therefore, request that in the event an assumption or assumption and assignment of the Leases is approved by the Court, language must be inserted into the any assignment or sale order to provide that the proposed assignee shall be responsible for all accrued but unbilled or unpaid amounts, whether accruing prior to or after the effective date of assumption of the Leases, when such charges become due in accordance with the terms of the Leases. iii. The Cure Amounts Serve Only As Estimates 29. Landlords can only provide the information presently available regarding amounts owing by the Debtor, while reserving the right to amend the Objection as necessary to include any additional or unknown charges that arise, including but not limited to subsequent rent defaults,

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recover charges to which it is entitled under the Leases. iv. The Debtor Must Pay Undisputed Cure Amounts Immediately 30. Section 365(b)(1)(A) requires that the Debtor promptly cure outstanding balances due under the Leases upon assumption or assumption and assignment. To the extent there is a dispute over the total cure obligation for the Leases, all undisputed cure amounts should be paid immediately. Debtor should escrow disputed amounts, and the Court should set a status conference within thirty (30) days of the assumption or assumption and assignment of the Leases to deal with any disputes that remain unresolved after such period. Objection to Sale Order 31. Landlords reserve the right to raise other and further objections to any proposed Sale Order(s) or transaction documents once any final proposed Sale Orders and/or Asset Purchase Agreements are filed of record. Joinder in Other Objections 32. Landlords hereby join in the objections filed by the Debtor’s other landlords and creditors to the extent that such objections are not inconsistent with the provisions hereof.

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WHEREFORE, the Landlords pray that the Court enter an order consistent with the foregoing objections; and for such other and further relief as may be just and proper under all of the circumstances. Dated: March 10, 2021 BALLARD SPAHR LLP By: /e/ George H. Singer George H. Singer, #262043 2000 IDS Center 80 South 8th Street Minneapolis, MN 55402 Phone: (612) 371-2493 Fax: (612) 371-3207 E-mail: