44 LEXPERT MAGAZINE
|
JULY/AUGUST 2016
| ART OF THE CASE |
claims process and Target Canada began
to develop a plan that would distribute the
proceeds and complete an orderly winding-
down of the business.
But closing the stores and selling the as-
sets proved far simpler than winding down
and leaving.
"It's important to understand the com-
plexity involved in this restructuring,"
says Tracy Sandler, a member of Target
Canada's legal team at Osler, Hoskin &
Harcourt LLP in Toronto. "It was the most
challenging mandate of my 25-year career."
To begin with, Target's insolvency was
the first of a major anchor tenant since that
of the T. Eaton Company in 1999. But Tar-
get had more than twice as many stores as
Eaton's did.
"We were in unheard-of territory, largely
because the premises were so huge," says
Linda Galessiere of McLean & Kerr LLP in
Toronto, who acted for a significant group
of independent landlords.
e 133 stores ranged in size from
80,000 to 125,000 square feet. ere were
four unopened stores, three huge distribu-
tion facilities, three owned distribution
centres, a leased headquarters building, 10
office suites and six warehouse facilities.
"Each retail location could probably have
sustained a CCAA proceeding on its own,"
Sandler says.
Many of the locations also had unique is-
sues attached to them, including those em-
ments discontinued under various fran-
chise programs," Sasso says. "ere was no
offer to buy back assets or provide financial
relief. Instead, the pharmacists were told
they alone were responsible for shutdown
costs and for their own employees and con-
tractors. en Target cut off communica-
tions. I'm not even quite sure I heard any-
one saying 'good luck.'"
Ultimately, however, the negotiations
and outcome turned on three pivotal is-
sues: the status of Target's intercompany
debt claims; the status of guarantees that
Target US had signed in support of 75 leas-
es; and suppliers' "30 Day Goods" claims,
those involving inventory that could be
repossessed under the Bankruptcy and In-
solvency Act, but not under the Companies'
Creditors Arrangement Act, by unpaid sup-
pliers if they had been delivered within 30
days of the bankruptcy.
Remarkably, all was substantially re-
solved in less than 16 months from the
original filing. e scenario was one that
had seemed unlikely even four
months earlier in January 2016
when Justice Morawetz, in a rare
ruling, refused to send an initial
restructuring plan put forward by
Target Canada to a creditor vote.
is despite the fact that the Mon-
itor, Alvarez & Marsal Canada,
and its counsel, a team from Goodmans
LLP in Toronto led by Jay Carfagnini, sup-
ported the motion.
But in May 2016, Justice Morawetz sent
a new plan from Target to the creditors. It
provided for subordination of the inter-
company debt and a release of Target US's
lease guarantees. Unsecured creditors re-
ceived between 66 and 77 per cent of what
they were owed, an almost unheard-of re-
sult. e vote in favour was unanimous. At
press time, the distribution of funds was to
begin in early July.
As it turns out, Target Canada could
simply have gone bankrupt under the
Bankruptcy and Insolvency Act. According
to Sandler, Target US preferred this route,
at least initially.
"e parent company would have been
very prepared to have this go into a bank-
ruptcy because the recovery for them would
be so much better," Sandler says. "ey
wouldn't have subordinated the intercom-
pany debt and that would have funded the
anating from differences in provincial law.
Some of the landlords had guarantees from
the parent and some didn't. While the eco-
nomic interests of the various landlords
were in many cases discrete in other ways as
well, consensus was ultimately required to
present a common front in the proceeding.
"It was a miracle that 100 per cent of the
landlords ultimately signed on to the de
facto group," says one landlord's counsel.
"We really pulled a rabbit out of the hat."
Suppliers also came in different shapes
and sizes: some from Canada, some from
the US, some from abroad, some who had
ongoing relationships with Target US and
some who did not. As well, Target em-
ployed about 17,600 employees in Canada,
all of whom were terminated together with
800 in the US who were working on the
Canadian operation.
en there were the stores within the
stores, including kiosks, pharmacies, food
markets and Starbucks. When Justice
Morawetz made his initial protection or-
der, goods were in the outlets, in inventory,
in transit and on the dock. ere were is-
sues relating to such diverse matters as sig-
nage, refrigeration systems and regulatory
concerns regarding controlled drugs in the
possession of 110 shuttered pharmacies.
"Arguably, the pharmacists were the
most affected group," says William Sasso
of Sutts, Strosberg LLP in Windsor, Ont.,
who represented them. "Target set up pro-
grams and compensation funds for their
own employees, many of the suppliers had
the leverage that came from ongoing deal-
ings and relationships with Target US, and
many of the landlords had guarantees from
the parents."
e pharmacists, who as profession-
als were stuck with legal responsibilities
as well as financial consequences, found
themselves on the wrong end of the stick.
"Target wasn't going to accept any re-
sponsibilities for shutdown costs or pay-
"If this had been a bankruptcy, there would have been no subordination.
Instead, we'd have had a liquidation followed by ongoing, costly litigation
over the landlord guarantees and the 30-day goods that would have
depleted the amount of the recovery available from the liquidation."
TRACY SANDLER
>
OSLER, HOSKIN & HARCOURT LLP
