Law Times

Page 12 March 21, 2016 • Law TiMes www.lawtimesnews.com Landlords score big in Target case BY JIM MIDDLEMISS For Law Times I t's not often that judges re- fuse to put a restructuring plan to a creditor vote, but that's what happened in January when Ontario Superior Court Regional Senior Justice Geof- frey Morawetz threw a wrench in Target Canada's plan to pay creditors under the Companies' Creditors Arrangements Act. In Target Canada Co. (Re), 2016 ONSC 316, Morawetz sided with a group of objecting land- lords who held guarantees and ruled that the proposed plan "does not have even a reason- able chance of success, as it could not, in this form be sanctioned." Putting it to a vote "would only re- sult in a waste of time and money," he wrote, when sending the par- ties back to the negotiating table. In early March, a settlement was reached with the landlords and it's expected a new plan will be presented and voted on later this spring. e Target case sends a warn- ing to restructuring experts that while the CCAA regime is flex- ible, there are limits to which a court will allow plan sponsors to run roughshod over creditors who hold guarantees and existing court orders for the sake of expe- diency and arriving at a deal. It also shows the importance of negotiating upfront to protect guarantees. Target made headlines in Jan- uary 2015, when the Canadian arm of the retailing giant filed for creditor protection about four years aer the company purchased the leases of the old Zellers Inc. stores for $1.8 billion. Target spent a total of $7 billion entering Canada, its first foray outside the United States. At the time of filing, the Ca- nadian operation, which was represented in the CCAA filing by Osler Hoskin & Harcourt LLP, had grown to 133 stores and em- ployed 17,600 people. However, the Canadian stores never lived up to sales expecta- tions, averaging losses in 2013 and 2014 of $200 million a quarter. A poor supply chain, expand- ing too quickly, pricing and prod- uct issues, and lack of an online presence were to blame. With losses expected to con- tinue for as many as five more years, Target tossed in the towel. Landlords were out millions of dollars; however, many had an ace up their sleeve. Some had negotiated guar- antees from U.S. parent Target Corporation, which was repre- sented by Davies Ward Phillips & Vineberg LLP, while others had indemnities that flowed back to the original leasee, Zellers Inc., which had been acquired by Hudson's Bay Co. Following the initial order, a group of landlords fought tooth and nail to amend the initial order to protect their guarantees. "e first thing I thought of was how do I protect my client's guarantees," says Linda Galess- iere, a litigator at McLean & Kerr LLP, who represented a group of REITs that were landlords caught up in the CCAA process, includ- ing some with guarantees. A month later, the order was amended to include provision 19A, a critical move. at provi- sion held that the landlords' guar- antees would not be affected by the plan. In exchange, the landlords agreed not to force Target to liq- uidate under the Bankruptcy & Insolvency Act. e claims procedure order was also settled aer prolonged negotiations among creditors, in- cluding the landlords, and it pro- vided for a comprehensive claims review process that would be de- termined by a judge of the Com- mercial List. at paved the way for Target to maximize the value of its leases for creditors under a sales process, which saw retailers, such as Wal- Mart Canada, Lowes, and Cana- dian Tire, pick up leases. However, not all leases were sold and a number were dis- claimed. When the windup plan was filed with the court in No- vember 2015, it was cleverly structured to win over creditors, partly at the expense of landlords holding guarantees. First, the plan would see "af- fected creditors" receive between 75 and 85 cents on the dollar, with the parent Target Corporation subordinating upwards of $5 bil- lion in intercompany claims. e plan also proposed that af- fected creditors would be lumped into a single class for voting pur- poses, which would avoid the problem of one class of creditors having the power to veto the plan. It also said that creditors owed less than $25,000 would be paid out in full. ey amounted to a sizable group, which would help with the voting numbers required to pass a plan. However, it also proposed a formula for determining land- lord claims for restructuring their premises. It was an enhanced version of the scheme set out in the Bankruptcy and Insolvency Act, which would see landlords get an additional year of rent paid for by Target Corporation, more than they would under the BIA. However, in exchange, U.S. par- ent Target Corporation wanted releases covering not only itself but also third parties such as Zellers and HBC. A group of ob- jecting landlords cried foul, ar- guing that the plan breached the court order because it messed with their guarantees and the claims procedure order. ey challenged Target's mo- tion to put the plan to a vote. at set up the showdown be- fore Morawetz, which pitted the Target entities, the monitor, which supported the plan and was repre- sented by Goodmans, and various other creditors against a remain- ing group of landlords holding disclaimed leases worth millions of dollars in claims. e landlords argued the plan amounted to a violation of the ear- lier court orders and if approved would undermine the CCAA pro- cess by creating uncertainty and an unreliable process. e Target applicants argued that "affected creditors should be allowed to vote and express their views." Morawetz, however, said the CCAA process is "one of building blocks." Stays are granted and or- ders are issued, he said. "It is essential that court orders made during the CCAA process are respected," he said, noting that the amendment order protecting the guarantee was "heavily negoti- ated by sophisticated parties." LT FOCUS REACH ONE OF THE LARGEST LEGAL AND BUSINESS MARKETS IN CANADA! AVAILABLE ONLINE AND IN PRINT 8JUINPSFUIBOQBHFWJFXTBOEVOJRVF WJTJUPSTNPOUIMZDBOBEJBOMBXMJTUDPNDBQUVSFTZPVSNBSLFU FOR MORE INFORMATION CONTACT Colleen Austin T: 416.649.9327 | E: colleen.austin@thomsonreuters.com www.canadianlawlist.com Get noticed by the lawyers, judges, corporate counsel, finance professionals and other blue chip cilents and prospects who find the contacts they need for Canadian legal expertise at canadianlawlist.com with an annual Gold or Silver Enhanced listing package. ENCHANCE YOUR LISTING TODAY! 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