Failed U.S.-owned retailer Target Canada faces yet another big setback.
In an unusual move, the Ontario Superior Court has rejected the insolvent retailer's proposed recovery plan for its creditors. The decision late Wednesday by Justice Geoffrey Morawetz followed stiff opposition to the proposal by major landlords who stood to gain little in the would-be plan. Still, other creditors, including suppliers, would have received as much as 75 to 85 per cent of their "proven" claims.
Now, Target Canada, which filed for court protection from its creditors almost exactly a year ago – on Jan. 15, 2015 – will almost certainly have to draw up a new plan in the case, which has squeezed a wide swath of suppliers, landlords and other businesses.
"It's not often that judges will reject plans before they are voted on" by creditors, Linda Galessiere, a lawyer at McLean & Kerr LLP, which represents key landlords, said in an interview. "We're going to go back to the drawing board."
In one of this country's most high-profile retail failures, Target Canada collapsed into court protection last January after operating here for less than two years. The retailer had invested more than $7-billion in its Canadian operation but found it wouldn't make a profit for another five years. It let go its 17,600 employees and shut all 133 of its stores within three months.
Today, landlords are stuck with empty retail space after Target abandoned many of its stores. At the same time, other retailers are closing or shrinking stores in a fast-changing market amid the rise of e-commerce, putting added pressure on landlords.
In a brief ruling on Wednesday, Justice Morawetz said Target Canada's proposed plan "is not accepted for filing" in dismissing a court motion. "Reasons will follow," the judge said.
Landlords had fought the plan, noting that it breached guarantees that U.S. parent Target Corp. had made to the landlords to cover expenses they incurred in the event that the retailer failed in Canada. The initial court order in the Target Canada court case said the guarantees would not be compromised. The guarantees could be worth a lot of money for the landlords, their lawyers have said.
Landlords also argued that the proposed plan removed them from the claims process, contravening another order that was made in the court process.
"It's a significant decision because it affects so many different people," said Lou Brzezinski, lawyer at Blaney McMurtry LLP, which represents some major suppliers, such as Nintendo. "My clients will not be happy."
But landlords were unhappy with the proposed plan. And they pushed the retailer to disclose more details about a $132-million settlement Target Canada came to with its largest landlord, RioCan Real Estate Investment Trust, in exchange for it dropping its claim to the guarantees that parent Target Corp. had pledged to it and other landlords for lost rent on store leases if Target Canada faltered.
RioCan received about twice the amount provided for under the landlord formula in Target Canada's proposed plan, Matthew Gottlieb, a lawyer at Lax O'Sullivan Lisus Gottlieb LLP, which represents one of the landlords, said in a court filing last week.
"The huge discrepancy between the amount RioCan would obtain under the landlord formula and what it received under the settlement manifestly supports the position that a 'one-size fits all' formula is unreasonable in these circumstances and demonstrates that the plan confiscates significant rights from the landlords with respect to the guarantees from Target Corp.," he said in the filing.
In Target Canada's recovery plan, filed on Nov. 27, the U.S. parent company agreed to let creditors have a controversial $1.4-billion of inter-company claims that could have landed in its corporate coffers. But in exchange, Target proposed that landlords accept a formula of payments, plus a "top-up," which would have released Target Corp. from having to guarantee future lost rents for some landlords.
Target Canada argued that its plan would maximize creditor recovery and allow the controlled and orderly winding down of Target Canada in a timely manner "without protracted litigation and delay, which could detrimentally impact the recovery from the estate," it said. Its lawyers could not be reached on Wednesday.