Law Times

November 3, 2008

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Law Times • November 3, 2008 NEWS Watching canaries flutter in the coal mine BY IAN HARVEY For Law Times to show no quarter to any sector, many eyes are watching retailers on the premise they'll be harbin- gers of how deep the dive will be. As such, retailers are cast in the W hile the current eco- nomic meltdown and recession is expected uncomfortable spotlight as the ca- naries in the coal mine, which may not be fair or accurate; when there's this much pain to go around, mis- ery does love company. None of this is news to those members of the bar who special- ize in insolvency, of course, their phones and BlackBerries have been ringing and chiming like a satanic Christmas carol since the spring when the consequences of the credit meltdown started to show up in economists' charts. And it's worth noting that other leading financial indica- tor, Starbucks, slashed 600 jobs as early as last February noting job cuts in the financial services sector as merchant banks crashed and burned meant fewer custom- ers willing to splash out for $5 grande mocha non-fat, soy milk, organically grown, slow-roasted lattes. Tim Horton's anyone? Retail, of course, is vulner- able on many sides. Retail sales figures from both the U.S. and Canada show consumers have hit the brakes on their spending, though it should have come as no surprise given not just the market roller coaster, the somber mood surrounding the global bank bail- outs, and the doom and gloom headlines which have been sell- ing newspapers and bumping TV ratings for the last six months. In August, Canadian retail sales fell by 0.3 per cent to $35.9 billion; hardly dramatic in isola- tion but remarkable compared to the double digit upward trend which preceded it while U.S. re- tail sales fell 1.4 per cent. That cutback in consumer spending is expected to con- tinue for the near future at least and until the current market uncertainty mitigates. Add in the tighter-than-tight credit market, and retailers, for most of who have a business model based on a rolling line of credit with banks and suppliers, face a double whammy. Aside from the precious few especially a retailer, he says, one of the prime factors in consideration in selling it as a going concern, are the leases. Generally most leases have a clause which prevents assignment of the lease without the landlord' consent but a ruling in Backbay Re- tailing Corp. and Gray's Apparel Co. Ltd. by the Supreme Court of Brit- ish Columbia last May builds on an Ontario court decision to throw that concept into a spin. s who own their locations — Le- on's Furniture for example, which is debt free and its own landlord — those leases which seemed rea- sonable when times were good will start to seem like a millstone around the bottom line unless things dramatically improve over the so-called "fat quarter" or holi- day shopping season. Still, the canaries have been fluttering for air since the begin- ning of the year: Cotton Ginny; Linda Lundstrom; Rodin Bou- tique; Morgane Boutique; Mode Nina Fabri Mode; Saan Stores; Charmante Mme; Jeans 440; Jeans Experts; Park Neckwear; Chez Krista; Rubys; Mariposa; Avanti; and Zacks are all fashion and ap- parel retailers who filed for bank- ruptcy or proposals this year, some immediately after Christmas. "Most of those in proposal or bankruptcy happened before the recent economy tanked," said David Schachter of Canadian Apparel Credit which watches fashion retailers and suppliers. "There was a flurry in late 2007 and early 2008 and it looked like it was going to be an horrendous 'no stone unturned' F Dubin left BY ROBERT TODD Law Times "Basically, his approach was to leave no stone unturned — to go out and get the evidence and then put it before him," Ontario Court of Ap- peal Justice Robert Armstrong, a friend of the judge, told Canadian Press in reference to Dubin's work on the 1988 inquiry that followed sprinter Ben Johnson's positive test for anabolic steroids. The 87-year-old former judge reportedly died of pneumonia on Oct. 27 after a week-long stay in hospital. Dubin, who was born in Hamilton and called to the bar in 1944, ormer chief justice of Ontario Charles Dubin died last week, leav- ing behind a legacy in the legal community that included serving as commissioner of an inquiry into the use of steroids in sport. returned to his law firm Torys LLP in 1996 after his stint as chief justice ended, practising arbitration and litigation. He was first named chief jus- tice in 1990, taking the promotion after acting as associate chief justice since 1987. He was appointed to the Court of Appeal in 1973. Dubin was a senior partner with Kimber Dubin Brunner & Armstrong court decides it's in the best inter- ests of the parties, generally it can make an order to assign the lease as part of the restructuring process re- gardless of the landlord's position. In the ruling, Justice Chris- The B.C. decision holds if the Michael MacNaughton says a recent B.C. decision may be a sign 'things may be more flex- ible in dealing with leases.' year then it slowed to the point where it's a pretty average year. But going forward I think we can expect to see more." Michael MacNaughton, a partner at Borden Ladner Ger- vais specializing in insolvency, says while the impending storm will hit all sectors and not just retail, there are some new wrinkles in two key acts —the Bankruptcy and Insolvency Act and the Canadian Companies' Creditors Arrangement Act — dealing with items such as wage protection and others, that will kick in later and affect lenders. "There's not a lot new," he says. "The basic is that any re- tailer or any entity can seek CCAA protection and reject or repudiate uneconomic contracts including leases while they deal with outstanding creditor claims and are hopeful of refinancing, negotiating with creditors, re- structuring or selling as a going concern," he says. In trying to salvage a company, topher Hinkson ruled that since the stores would stay in place and operate under the new own- ers who would also take over the leases, it was in the debtor com- pany Mariposa's best interests as well as the other creditors, a po- sition supported by the monitor Deloitte & Touche. "In Mariposa in Vancouver, the court in the CCAA assigned the leases over the vigorous ob- jections of the landlord," says MacNaughton. "I think that may be a sign that things may be more flexible in dealing with leases." U.S. retailers are also caught in a squeeze and probably feel- ing it more since much of the consumer spending driving the U.S. economy came from "il- lusionary money" created by subprime mortgages and their ability to continually refinance their homes to pull out more equity in a boom market to fi- nance their lifestyles. When the real estate bubble burst so did their lifestyles, bringing down house prices below their mort- gage valuation and triggering millions of foreclosures. And that's creating a rip- ple in Canada. U.S. chain Ogilvy Renault, who heads up the insolvency and restructuring team, confirms the buzz noting Citibank and CE Corporate Finance (both who heavily leveraged asset backed credit paper) long-time players in DIP financing are pulling back. "It's one of the most profit- able forms of lending, it's virtu- ally bulletproof," says Tay. The slammer is that with- out the backstop of DIP loans, many floundering but salvage- able companies will never find the breathing room to restruc- ture and will slide too quickly into the financial abattoir be- fore they can be saved. LT Linens 'n Things, for example, filed for bankruptcy in May and up to October was trying to find a buyer but folded when it could not find a bidder willing to pay more than the US$475.5 million offered by a group of liquidators for the 589 stores. They expect to double their investment selling off inventory and fixtures. The chain has 40 stores in Canada which it also tried to sell as a going concern, argu- ing the Canadian economy was robust and that there were no liquidity issues here. However it threw in the towel Oct. 21 when it capitulated to the liqui- dators and the stores here have also filed for bankruptcy. And that goes to the heart of the matter. In a climate of tight credit there's no money available to refinance or inject liquidity. There have been reports that the number of financial institu- tions which provide DIP (debtor- in-possession) are greatly reduced, says MacNaughton noting it's of concern because DIP financing puts the lender ahead of other creditors and gives them first shot at the assets of the company should the rescue effort fail. Derrick C. Tay, partner at PAGE 3 FIRM UP! Purchase 5 or more subscriptions for your law firm to Law Times or Canadian Lawyer and save Purchase 20 or more and save before that, and eventually helped merge that firm with Tory Tory DesLau- riers & Binnington. He acted as senior partner and counsel at Torys before being appointed to the bench. In 1950, Dubin was made Queen's Coun- sel, making him the youngest person in the Commonwealth at the time to receive that honour. Other distinctions for Dubin include receiving the 1998 Canadian Bar Association Governor General Ramon John Hnaty- shyn Award for Law; being named an Officer of the Order of Canada in 1998; and being named an Officer of the Order of Ontario in 1997. Aside from serving as royal commissioner to the 1988 steroid inquiry, Dubin headed the Inquiry into the Practices and Procedures of the Hos- pital for Sick Children in 1983, was royal commissioner to inquire into aviation safety in Canada in 1979, and served as a bencher of the Law Society of Upper Canada from 1966 to 1973. "He really liked people and was able to relate to people in all walks of life in a very direct and sympathetic way," Armstrong told CP. "Part of that was his high sense of professionalism. I mean, he was a true professional, a true gentleman, in the best sense of that word." 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