A sign for a Target store is seen in the Chicago suburb of Evanston, Illinois, in this file photo taken February 10, 2015.JIM YOUNG/Reuters
When Target Corp. announced plans to retreat from Canada, the company chose a surprising legal route for its exit.
The big U.S. retailer's Canadian division applied for court protection under the Companies' Creditors Arrangement Act, an insolvency law that was designed to be used by companies seeking to restructure their finances and stay in business.
Not so for Target Canada, which made it clear from the start that it planned to shut all its stores and liquidate its inventory and other assets.
The unexpected departure of Target Canada, after operating here for less than two years, highlights how insolvent businesses are increasingly using the CCAA in creative ways to shut their businesses – raising questions about how the process benefits creditors.
The stakes are high because Target, which is letting go 17,600 employees and not trying to downsize or look for buyers, owes creditors hundreds of millions of dollars. But its single biggest creditor is essentially itself through a $1.9-billion inter-company debt.
Now that all 133 of Target's stores are closing by April 12 – a month earlier than initially scheduled – creditors are waiting to see how the company will handle their claims in a process that, on the surface, seems stacked in the retailer's favour. Other stakeholders count on the judge overseeing the case to ensure they get a fair shake.
"There is no question that the notion of using the CCAA as a liquidation strategy is contested in Canada," said Janis Sarra, a law professor at the University of British Columbia and an insolvency expert. "There's a live debate about whether or not it's the appropriate tool."
The Target collapse comes as Ottawa is reviewing its insolvency statutes, including the growing use of the CCAA by faltering companies to simply liquidate rather than try to save the business and jobs. What was merely a debate among bankruptcy specialists takes on new meaning as the repercussions of Target's massive failure ripple through the economy.
"Target has used the CCAA process to its advantage," said Heather Ferris, partner at law firm Lawson Lundell LLP in Vancouver and head of the Canadian Bar Association's insolvency group. She also represents a landlord in the Target matter.
Early in the proceedings, a group of landlords, including the one she represents, argued that Target should not have used the CCAA for a liquidation because it wasn't attempting to continue operating and, thus, ran contrary to the statute's original purpose. Instead, the retailer should have filed under the Bankruptcy and Insolvency Act, which would have put an independent trustee in control of the process and applied stricter rules to the timing of the sale of Target's store leases, the landlords argued in court documents. The landlords are anxious to find new tenants quickly for their empty spaces.
Target counters the CCAA gives it more flexibility amid "a very wide range of restructuring options," it said in a filing. "The sheer magnitude and complexity of the Target Canada Entities' business including the number of stakeholders whose interests are affected are ideally suited to the flexible framework and scope for innovation offered by this 'skeletal' legislation." A Target spokesperson could not be reached.
Ultimately, the landlords never pushed for Target to be put into all-out bankruptcy after they came to an agreement with the retailer that gave them many of the protections they sought. So far, Target has sold 11 of its best leases back to their landlords in a $138-million deal that it called a "premium" value that would benefit creditors. The lease sale process continues until June 30.
David Ullmann, a partner at Minden Gross LLP who also represents some landlords, said the CCAA provides Target with considerable control over the unwinding process while the bankruptcy act would have robbed the retailer of that influence. As well, Target has no outside lender which, as a secured creditor, often calls the shots. In this case, U.S. parent Target Corp. is the lender.
Still, the Ontario Superior Court is going out of its way to try to ensure the rights of other creditors – landlords, suppliers, franchised pharmacists and employees – are being recognized in the process, Mr. Ullmann said.
For example, in an unusual move, Justice Geoffrey Morawetz has allowed suppliers' lawyers to investigate Target's timing of its pre-filing insolvency planning, including an upcoming cross-examination of the retailer's general counsel.
Target Canada subsequently disclosed it started seriously mulling an insolvency filing around late October. The suppliers are trying to establish that Target benefited by bulking up on inventory orders in the 30 days before its Jan. 15 filing, leaving vendors on the hook. The unpaid suppliers are fighting to recover the value of those 30-day goods; under the bankruptcy act, they would have the right to try to reclaim them.
Lou Brzezinski, a partner at Blaney McMurtry LLP who represents some suppliers, has even suggested that Brian Cornell, CEO of parent Target Corp., be put on the witness stand. Mr. Brzezinski is trying to persuade Target to give the suppliers' estimated $400-million of claims priority over the retailer's $1.9-billion inter-company claim.
Judge Morawetz's unusual concessions to creditors "reflect a recognition from the court that this CCAA filing is right at the outer limit of what really should be permitted in terms of restructurings of these kinds," Mr. Ullmann said.
Even so, Target isn't alone – a growing number of insolvent companies are using the CCAA to liquidate rather than restructure, according to a federal government report last year.
The Industry Canada discussion paper on insolvency laws invited interested groups to weigh in on whether the CCAA should be amended to codify protections for stakeholders and principles for courts to consider in "liquidating CCAA" proceedings. The House of Commons' industry committee has until October to make its recommendations, a spokesman for Industry Minister James Moore said.
"Stakeholders have expressed concern with the appropriateness of liquidating CCAAs because there is often no opportunity for creditor approval," the report says. "Additionally, there can be pressure on the court to approve sales as there is no other going-forward solution. The sales may avoid many of the checks and balances provided by the plan approval process."
Still, legal groups such as the bar association and the Insolvency Institute of Canada, a group of specialists in the field, don't support doing away with liquidating CCAAs. Rather, they're pushing for revising the law to protect stakeholders and provide asset distribution rules similar to those in the bankruptcy act.
Hap Stephen, a restructuring expert who has overseen an array of bankruptcy proceedings, said Target's situation stands out because the retailer's U.S. parent is big and financially sound. "A lot of suppliers would say: 'This is Target. They'll never leave us hanging.' Well, they did."
Prof. Sarra said insolvencies increasingly involve U.S. parents that can flex their muscles, with no interest in saving jobs in Canada. However, as the process becomes more complex, it lends itself to a CCAA proceeding which can be tailored to different situations, she added.
Target has developed some initiatives to help creditors. It set up a $90-million trust fund for employees and subordinated to other creditors $3.1-billion of debt that Target owes its parent. It raised $2.2-million (U.S.) by selling Target-branded items, such as shopping carts, to the parent.
Creditors can hold out some hope for recoveries. Investment firms that purchase distressed creditor debt are buying Target claims for up to 50 cents on the dollar, industry insiders say.
The firms expect to recover more than the amounts for which they purchased the debt, said Darius Goldman, partner at Katten Muchin Rosenman LLP in New York which represents some of the firms. "Time will tell if this was a smart investment," Mr. Goldman said. "It's no different than buying shares of IBM stock, which you do if you think the stock price has hidden value."