R.H. Macy & Co. v. May Department Stores Co.

RODOWSKY, Judge. This case involves White Marsh, a regional shopping center on the west side of Interstate 95, a short distance north of the Baltimore Beltway in Baltimore County. When White Marsh opened there were five anchor department stores, each of which owned its store site in fee. All of the anchor stores were parties, together with the developer, to a Construction, Operation and Reciprocal Easement Agreement (the REA).

When one of the original department store operators became insolvent, another anchor store claimed that the REA prohibited transfer of the insolvent’s original store site and expansion area. The issue in this case is whether the purported restriction on alienation is legally valid. White Marsh was developed by The Rouse Company through two general partnerships which we shall call “Rouse.” The REA was entered into July 17, 1980. The department store signatories to the REA were Sears, Roebuck and Co. (Sears), J.C. Penney Properties, Inc. (Penney), Hutzler Brothers Company (Hutzler), Woodward & Lothrop, Inc. (W & L), and an indirect subsidiary of R.H. Macy & Co., Inc., Marymarsh Properties Corp. (Macy). 1 We shall call these anchor department stores the “Majors.” In the REA Hutzler covenanted with Rouse, Penney, Macy and W & L (but not with Sears, which disclaimed any right of enforcement) that Hutzler, for fifteen years from the date that its store opened for business, would “continually operate or cause the Hutzlers Main Building to be operated as a department store of at least 100,000 square feet or more of Floor Area under the name ³²⁶ ‘Hutzlers’____” 2 Similar operating covenants were made by the other Majors in the REA.

Section 20.2 of the REA contains certain restrictions on transfer of a Major’s fee simple property in White Marsh. Section 20.2 in part reads: “(a) Each Party shall, in respect of the Parcel owned by it, have the right at any time and from time to time (and nothing in this REA or in this Article contained shall be deemed to restrict any such right) to Transfer, make a Mortgage of, or consummate a Sale and Leaseback in respect of its Parcel, provided, however, that the following provisions of this Section 20.2 shall be complied with (and be conditions to the exercise of such right, when so provided herein): “(i) In the case of a Transfer other than a Sale and Leaseback: “(1) As to the Parcel of a Major: (aa) prior to the expiration of the Operating Covenant of such Major, the following (x) and (y) shall be conditions to such right: (x) the Parcel in question may only be Transferred as a whole, along with the entire interest of the Transferor under this REA; and (y) the Transferee of such Major’s Parcel shall be an Affiliate of the Transfer- or; “(iii) In the case of a Sale and Leaseback of the Parcel in question, it shall be a condition of such right that the transactions expressly cover the interest under this REA of the Transferor in respect of the Parcel which is the subject of such Sale and Leaseback, and that the transactions be expressly made subject and subordinate to this REA.” “Affiliate” is a defined term in the REA meaning, essentially, an entity over which another exercises more than fifty percent control. ³²⁷ In April 1989 Hutzler conveyed its site at White Marsh in fee to certain investors (the Investors) who leased the site back to Hutzler. 3 It appears to be conceded between the parties to the instant litigation that none of the Investors was the owner or operator of a department store comparable to the Majors. By deed dated September 27, 1989 the Investors conveyed their legal title to the Hutzler parcel to Comeo, Inc., as nominee for a new Maryland limited partnership, RL Holdings Limited Partnership. The latter was formed by the Investors with RL Holdings, Inc., a Maryland corporation, and held the beneficial interest in the property.

We shall hereinafter refer to the holder of the reversionary interest in the Hutzler parcel, underlying the leaseback to Hutzler, as Comco/RL. 4 On January 2, 1990 Hutzler made an assignment for the benefit of its creditors, and jurisdiction over the insolvent’s estate was assumed by the Circuit Court for Baltimore County. It further appears that Comco/RL terminated its lease to Hutzler, pursuant to the provisions of that lease, based on defaults by Hutzler, including nonpayment of rent. 5 Following Hutzler’s economic demise Rouse undertook to place another major store in the space where Hutzler was no longer operating a department store. By April 1990 Rouse and Comco/RL had negotiated an arrangement with The May Department Stores Company ³²⁸ (May Co.) under which it would operate a Hecht store on the former Hutzler site. The agreement included a contribution by Rouse to May Co. of $1.8 million toward May Co.’s costs of acquiring and renovating the property.

By letter of April 3, 1990 Rouse advised Macy that May Co. would replace Hutzler at White Marsh and that May Co. desired to expand the area of the former Hutzler store.. Rouse sought Macy’s agreement in principle, prior to execution of appropriate amendments to the REA and to the White Marsh site plan. Macy replied that it was unable to take any position because of insufficient information and that it expected Rouse to enforce the existing REA. By deeds dated May 18, 1990 Comco/RL conveyed the former Hutzler site to May Co., and Rouse conveyed the Hutzler expansion site to May Co. In March 1991 Rouse circulated amendments to the REA which Macy refused to sign.

Thereafter Macy brought the instant action in the Circuit Court for Baltimore County against Comco/RL, May Co., and Rouse alleging that the conveyances to May Co. violated the REA. The heart of Macy’s allegations is that “[a] transfer of a parcel to a non-affiliate of the transferor, whether or not such transfer is subsequent to a sale and leaseback, is prohibited under the Transfer Restrictions, Section 20.2(a) of the REA.” The relief requested by Macy included a judgment declaring that “operation of a department store under a trade name other than ‘Hutzlers’ ... on the Hutzler Parcel is in violation of the REA and thus consent from Macy ... was required----” Macy also sought an injunction against “the operation of a department store on the Hutzler Parcel under a trade name other than ‘Hutzlers’ ... until the expiration of the Section 9.6 Operating Covenant in August 1996.” Macy’s brief in this Court fleshes out its legal theory, as follows: “Section 20.2(a)(i)(1)(aa) [of the REA] provides that, prior to the expiration of any Major’s Operating Covenant (fifteen years), a transfer of any Major’s parcel could only be ³²⁹ effected by a sale and leaseback transaction, or by a transfer to an affiliate of the Major. Under these provisions, two types of transfers of a Major’s parcel are expressly permitted: (1) a sale and leaseback; or (2) a transfer to an affiliate. Under the REA, a transfer of a parcel to a non-affiliate of the transferor, whether or not such transfer is subsequent to a sale and leaseback, is expressly prohibited for a period of fifteen years.

However, Sections 27.1 and 27.2 set forth procedures for amending the REA which would allow transfers to non-affiliates by consent of the parties prior to fifteen years.” Brief of Appellants at 3. Under Macy’s construction of the REA, absent transfer by sale and leaseback or to an affiliate, an amendment of the REA is required, or the owner of a Major’s site must wait for the expiration of the operating covenant, in order to transfer. The Hutzler covenant was not due to expire by its terms until approximately six and one-half years after Hutzler made its assignment for the benefit of creditors. Macy acknowledges that “[f]rom a business perspective [its] consent to the Hecht’s store would have been sensible.” Reply Brief of Appellants at 20.

Macy, however, further submits that “[t]he only question would be the amount of money needed to compensate Macy for the economic risk and loss of business caused by the advent of a new retailer in a refurbished store.... ” Id. In the circuit court the defendants contended that the REA did not even address, and hence could not prohibit, a further transfer, following an authorized sale and leaseback transaction, by the owner of the reversionary interest into which a Major’s leasehold interest had merged following termination of the lease for default. The defendants also contended that the construction on which Macy relied made the covenants of REA § 20.2 an invalid restraint on alienation. The Circuit Court for Baltimore County, adopting the latter argument, granted summary judgment in favor of the defendants.

The circuit court further declared that May Co. had “properly acquired the Hutzler parcel and the Hutzler expansion parcel ³³⁰ and remains free to operate a Hecht’s Department Store on those parcels.” Macy appealed to the Court of Special Appeals. Before consideration of the matter by that court, we issued the writ of certiorari on our own motion. We shall affirm on the ground relied upon by the circuit court. In so doing, we assume, arguendo, that the provisions of REA § 20.2 on which Macy relies can bear, both textually and under the canons of construction for restrictions on alienation, the construction that Macy seeks to place upon the words.

Restraints on alienation have been classified by some treatises as disabling, promissory, or forfeiture. Restatement (First) of Property § 404 (1944) (Property I); 5B R. Powell, Powell on Real Property § 839, at 77-2 through 77-6 (1991) (Powell). These classifications have been developed to assist in determining who may enforce a valid restraint, by what remedy, and with what effect, Property I § 404, comment c, and not to assist in determining a restraint’s validity, id., comment a. The three classifications are described in Property I § 404 as follows: “(1) A restraint on alienation ... is an attempt by an otherwise effective conveyance or contract to cause a later conveyance (a) to be void [ (a disabling restraint) ]; or (b) to impose contractual liability on the one who makes the later conveyance when such liability results from a breach of an agreement not to convey [ (a promissory restraint) ]; or (c) to terminate or subject to termination all or a part of the property interest conveyed [ (a forfeiture restraint) ].” REA § 20.2(a) in part states that compliance with its provisions shall “be conditions to the exercise of’ the right to transfer therein described.

If that language has the effect of creating a disabling condition, then the restraint would be invalid under the rule recognized in Property I § 405 (“Disabling restraints, other than those imposed on equitable interests ³³¹ under a trust, are invalid.”). See Meade v. Dennistone, 173 Md. 295, 305-06 , 196 A. 330, 335 (1938). Macy, however, does not contend that the deeds to May Co. are void. The complaint rests on a construction of provisions in the REA, allegedly breached by parties bound thereby, for which Macy seeks monetary, injunctive, and declaratory relief.

We accept Macy’s characterization of the restraint that it seeks to enforce as promissory. The nature of a promissory restraint is discussed in comment g to Property I § 404. “The contractual liability ‘results from a breach of an agreement not to convey’ not only when the promise not to convey is unqualified but also when it is qualified by permitting alienation with consent and the consent is not obtained; or by permitting alienation after a certain period of time and alienation is made before the period of time elapses; or by permitting alienation by some methods and alienation is by one of the methods not permitted; or by permitting alienation to some people and alienation is to people not in such described group.” The test to determine the validity of restraints on alienation of indefeasible possessory estates in fee simple is addressed in Property I § 406 which states, in relevant part: “[A] restraint on the alienation of a legal possessory estate in fee simple which is, or but for the restraint would be, indefeasible is valid if, and only if, (a) the restraint is a promissory restraint or a forfeiture restraint, and (b) the restraint is qualified so as to permit alienation to some though not all possible alienees, and (c) the restraint is reasonable under the circumstances ____” Comment i to Property I § 406 presents factors to be considered in determining reasonableness, as follows: “Even though a restraint on alienation is a ... promissory restraint and is qualified so as to permit alienation to some ³³² though not all possible alienees, the restraint must still be found to be reasonable under all circumstances. The following factors, when found to be present, tend to support the conclusion that the restraint is reasonable: 1. the one imposing the restraint has some interest in land which he is seeking to protect by the enforcement of the restraint; 2. the restraint is limited in duration; 3. the enforcement of the restraint accomplishes a worthwhile purpose; 4. the types of conveyances prohibited are ones not likely to be employed to any substantial degree by the one restrained; 5. the number of persons to whom alienation is prohibited is small---- “The following factors, when found to be present, tend to