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People enter a going-out-of-business sale at Target Canada in Toronto on Feb. 5, 2015. Creditors of the insolvent company face renewed uncertainty about recovering their debts one year after the U.S.-owned retailer filed for court protection.MARK BLINCH/Reuters

Creditors of insolvent Target Canada face renewed uncertainty about recovering their debts one year after the U.S.-owned retailer filed for court protection and acknowledged its massive failure.

The Ontario Superior Court this week threw out Target Canada's proposed recovery plan, raising questions about whether creditors will be able to get their hands on a controversial $1.4-billion intercompany claim that U.S. parent Target Corp. could technically keep for itself.

In the proposed plan, Target agreed to cede the intercompany claim to other creditors but only if landlords dropped guarantees many of them had from the parent company to cover their losses if Target Canada faltered.

Now creditors, including some landlords who had fought the proposed plan, face the possibility of receiving even less – and potentially seeing the proceedings collapse into total bankruptcy.

"It's probably like a divorce," said John Crombie, senior vice-president at Triovest Realty Advisors, which is the landlord of two former Target stores. "You make the decision. People move on. But you're trying to get your just rewards. That's just going to be drawn out for probably a long period of time."

A year ago – on Jan. 15, 2015 – Target shocked the industry and consumers by filing for creditor protection after operating in Canada for less than two years. In one of this country's biggest retail failures, Target quickly closed its 133 stores, let go 17,600 employees and faced more than $2.6-billion of claims.

But a year after the retail disaster, creditors are no closer to knowing how much they may recover. Justice Geoffrey Morawetz on Wednesday rejected Target Canada's proposed plan even before creditors got a chance to vote on it. The judge is to provide reasons for his ruling by Friday.

Landlords have a lot at stake because many of them, such as Triovest, are grappling with empty former Target stores and are having difficulty finding replacement retail tenants as more merchants close or shrink outlets in an era of rising digital shopping.

"Does that give us grief?" Mr. Crombie asked rhetorically. "Absolutely … We're not prepared to just sit back and take pittance for the kind of commitment we made."

Catherine Francis, a Minden Gross LLP lawyer for landlord Primaris REIT, which has nine former Target stores, said it could take months to find out more about potential recoveries. Target Canada could even be pushed into full bankruptcy, putting the decisions into the hands of a third-party trustee, she said.

And, while landlords would have gained little from the proposed plan, suppliers would have done relatively well, recovering 75 to 85 per cent of their proven claims.

But some landlords, such as Triovest and a number of Primaris malls, didn't have guarantees. "Landlords without guarantees are in the same boat as everyone else," Ms. Francis said.

She added that the question of whether Target will subordinate its $1.4-billion intercompany claim "is a big issue."

Landlords had argued that the plan contravened Target Canada's initial court order that said the guarantees would not be compromised. The guarantees could be worth hundreds of millions dollars. Landlords also argued that the plan removed them from the claims process, which breached another court order.

Target Canada countered that the plan provided an efficient wind-down that would maximize creditor recovery "without protracted litigation and delay."

Lou Brzezinski, a lawyer at Blaney McMurtry LLP that represents key suppliers, said he thinks Target Corp. ultimately will sweeten the deal for landlords in a revised plan. "I believe there will be a new deal that landlords will support."

Target Canada could seek leave to appeal the judge's ruling but probably will refrain from taking that step, Ms. Francis suggested. "It's tough to get leave to appeal."

Target Canada lawyers said they will evaluate its position after the judge releases his reasons.

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