## Facts

- Trak Auto Corp., an auto-parts retailer, leased space in a Chicago shopping center from West Town Center, LLC.
- The lease contained a “permitted use” clause limiting use of the premises to retail sale of automobile parts, accessories, and related items.
- After filing for Chapter 11, Trak Auto sought to assume and assign the lease as part of its bankruptcy process.
- Trak Auto auctioned its leasehold interest; A & E Stores, Inc. was the high bidder and planned to operate a discount clothing store in the premises.
- West Town objected, arguing the proposed assignment would violate the permitted-use clause and disrupt the shopping center’s tenant mix.
- Trak Auto argued the use restriction functioned as an anti-assignment restraint rendered unenforceable by 11 U.S.C. § 365(f)(1).

## Issues

1. Whether a shopping-center lease “permitted use” clause is an unenforceable restriction on assignment under 11 U.S.C. § 365(f)(1) or an enforceable substantive term that binds an assignee.
2. How § 365(f)(1) interacts with the shopping-center protections in 11 U.S.C. § 365(b)(3), including requirements tied to use clauses and tenant mix.

## Decision

- The Fourth Circuit reversed the district court and bankruptcy court orders approving assumption and assignment.
- The court held the permitted-use clause was enforceable and not invalidated by § 365(f)(1).
- Because A & E’s proposed use did not comply with the lease and would alter the agreed tenant mix, Trak Auto could not assume and assign the lease to A & E under § 365.

## Legal Principles

- Section 365(f)(1) prevents enforcement of clauses that prohibit or condition assignment, but it does not allow a debtor to remove substantive, bargained-for economic terms of a lease.
- A permitted-use clause defines the scope of the leasehold interest conveyed; a debtor may assign only the interest it holds, including contractual limits on use.
- For shopping-center leases, § 365(b)(3) requires that assignment be subject to lease provisions such as use clauses and that the assignment not disrupt tenant mix or balance.
- In shopping-center cases, § 365(b)(3) supports enforcing use restrictions rather than treating them as disguised anti-assignment provisions.

## Conclusion

The Fourth Circuit held that a debtor cannot use § 365(f)(1) to assign a shopping-center lease free of a negotiated permitted-use restriction; because the proposed assignee’s use would breach the lease and conflict with § 365(b)(3)’s tenant-mix protections, the assignment was disallowed.


In re Trak Auto Corp., 367 F.3d 237 (4th Cir. 2004)