Fresh & Easy, a supermarket chain of 200 stores, filed for bankruptcy last week. Unlike most bankrupts, F&E has no third party debts, no fraying lines of credit and neither hounding banks nor outraged bond holders. Why? Because F&E is a division of the world’s third largest—and second most profitable—retailer, the British company, Tesco PLC. Only Wal-Mart and Carrefour are larger than Tesco and Wal-Mart alone is more profitable. F&E’s only debts are current operating obligations: money owed to employees, vendors and landlords.

How is it that one of the world’s richest companies can toss a wholly-owned, debt-free subsidiary into bankruptcy like yesterday’s lottery ticket? Easy. The actual bankrupt is Fresh & Easy Neighborhood Market, Inc. which, despite its 100 percent ownership by Tesco, is an independent company. And regardless of the staggering wealth of its owner, an independent entity can be sliced like sushi any day of the week.

According to its bankruptcy filing, F&E has never made any money since its formation in 2006 and lost about $260 million in its fiscal year ending February 2013. (Declaration of James Dibbo in Support of Chapter 11 Petitions and First Day Motions and Applications dated September 30, 2013). A $260 million loss would likely have the most stalwart among us reading Chapter 11, but, unlike most of us, Tesco still managed to take home profits of $3.6 billion last year after writing off its F&E losses.

Since it could easily afford it, should Tesco continue to pay its subsidiary’s debts? Sure, but no one other than Forrest Gump would ever look for morality in big business or, worse, in a bankruptcy court. And to be fair to Tesco, the losers in this bankruptcy action should have known just how Faustian their bargain was when they accepted the signature of its inadequately capitalized subsidiary.

F&E’s bankruptcy plan is simple: it’s going to sell itself to Ron Burkle, who with a reported net worth of $2.7 billion is number 201 on the Forbes 400 list. Technically, the buyer will be YFE Holdings Inc., a subsidiary of the billionaire’s investment vehicle, The Yucaipa Companies, LLC.

Why would the billionaire, arguably the smartest supermarket player in the country, want to take over the worst British disaster since the loss of Rangoon? Easy. He doesn’t; he just wants its best real estate. Besides, unless key provisions of the bankruptcy filing are written in Harry Potter’s invisible ink, the billionaire is not only getting F&E for free, but Tesco is lending him $120 million in exchange for his willingness to “assume significant liabilities and contracts of the business.”

Horace Walpole once wrote, “Life is a tragedy for those who feel and a comedy for those who think.” If so, F&E’s bankruptcy filing is truly hilarious, particularly that pleasant-sounding lie, “assume significant liabilities.” With the blessing of the law, this billionaire won’t assume a dollar more in liability than he absolutely must. In broad terms, F&E’s plan calls for closing 50 of its 200 stores and keeping the remaining 150 open. The declaration makes this sound like a necessary but vaguely unpleasant operation—think colonoscopy—designed solely to maximize employee jobs. In fact, it claims the sale to the billionaire will “preserve the jobs of more than 4,000 of Fresh & Easy’s 4,187 current employees…”

It may happen that a failed company closing 25 percent of its stores will actually retain 96 percent of its employees. And it may also happen that F&E will, as it promises, pay 100 cents on the dollar to its vendors. If so, that will leave only one creditor class to be decimated: the landlords. And there is nothing our laws can do to protect them.

Photo courtesy of Flickr

In bankruptcy, even a retailer being silver-plated from one billionaire to another may dump any lease it wants by paying its landlord a walk-away fee of one year’s rent. Unfortunately for landlords, retailers, despite occasional appearances, are not stupid—they seldom drop leases of any value. They punt where the rent is over-market or where tenant demand for their former premises is non-existent. The landlord may get a year’s rent from the bankruptcy court, but it might take her 5 years to lease the space for half the bankrupt retailer’s former rent.

Not content with the reaming officially sanctioned by law, the billionaire’s henchmen offered the landlords of the 50 closing stores—including us—a pre-bankruptcy, take-it-or-leave-it special of 8 months’ rent. When we asked to see F&E’s financial reports to assess the likelihood of at least getting the official pittance, we were told, no, take the offer blind or get in line at the courthouse.

If the future is anyone’s guess, here’s mine for how this plays out for the billionaire and a typical owner of one of the closed stores:

The billionaire will announce to the owners of his remaining 150 stores that he will shutter their stores in a heartbeat unless they, too, lower their rent by 50 percent.  Many will comply. With his new reduced cost structure, the billionaire will then slightly retool the supermarket chain, change its unfortunate name (like “Nigel”, “Fresh and Easy” sounds better in London) to Wild Oats, run the company for a few years, add a location here and there and then sell the little chain to a big one, making a few hundred million for the effort.

Let’s say our hypothetical owner paid $3,400,000 for an F&E market that was paying $240,000 in annual rent (about a 7 percent return). Let’s say her rent has fallen about as far as ours has with our own F&E market—roughly 33 percent.  If capitalization rates remain steady and she manages to re-lease her market within the next year, her loss will only be about $1,500,000 (value loss, new tenant improvements and leasing commissions). Depending on her net worth, this could be a tragedy. If, for example, she had a two million dollar loan on the property, she would have no equity and could easily lose the property in foreclosure.

Why do we care that a billionaire is screwing 50 small landlords—all presumably at least worth a few million and unlikely to ever go hungry? Because the same cut-throat maneuvers can be applied against anyone in bankruptcy court. Because if we let big business run free, if it can continue to subvert the good intentions of simple laws—here, those protecting a small, failing retailer with a single location—everyone else will lose. As it relates to commercial real estate, our bankruptcy code is a national disgrace.