Owners Without Borders: Challenges of Cross-Border Retail Restructuring in Canada and the United States – Insolvency/Bankruptcy/Restructuring

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By James S. Carr and Eloy A. Peral1

Like its neighbor to the south, Canada has faced an influx of retail insolvencies amid the COVID-19 pandemic. For example, in 2020, Canadian-based clothing retailers such as Groupe Aldo and Groupe Dynamite filed claims under the Canadian Companies’ Creditors Arrangement Act (CCAA), the Canadian equivalent of a Chapter 11 matter, and commenced a Chapter 15 proceeding in the United States.2 In 2021, the real estate segment of Sarku Japan, a Japanese quick-service restaurant chain, filed CCAA and Chapter 15 proceedings, even though none of the debtors’ 226 restaurants are located in Canada.3

A cross-border restructuring under the CCAA presents unique challenges for owners, both in the full CCAA case and in the ancillary Chapter 15 case. When a retailer chooses to restructure under the CCAA rather than of Chapter 11, a glaring problem for landlords is the absence of many of the unique rights and protections granted to landlords, and in particular shopping center landlords, under Section 365 of the Bankruptcy Code. However, the CCAA is not without protections for homeowners.

No published case exists in which an owner sought to invoke Section 365 in a Chapter 15 case to compensate for the relative lack of rights in the full CCAA case. Section 365 does not apply in a Chapter 15 matter, and when a foreign representative seeks to enforce certain provisions of Section 365 in the restructuring, the purpose is to infringe the rights of owners. However, owners are not required to accept status quo.

As illustrated in this article, owners can maximize the rights available to them in a cross-border restructuring between the United States and Canada by taking advantage of the rights and protections present in both jurisdictions. Moreover, the Qimonda The Fourth Circuit’s decision regarding the impact of Section 365(n) in a Chapter 15 case shows how a homeowner can prime the protections of the Section 365 owner in a Chapter 15 case.4

The intersection of Chapter 15 and § 365: The status quo

Section 365 does not appear anywhere in Chapter 15 of the Bankruptcy Code, but Section 1520 lists certain actions that become automatic upon recognition of a foreign main proceeding.5 In addition, section 1521(a) gives courts the discretion to award the foreign representative “appropriate relief”, whether in a foreign main or foreign non-main proceeding, “when necessary to carry out the purpose of this chapter and to protect the debtor’s assets or the interests of creditors. »6 Under section 1521(a)(7), a court may award “any additional relief that may be available to the trustee” that is not specifically listed in section 1521(a)(1)-( 6), other than avoidance by the trustee powers.seven

Foreign representatives often use the catch-all provision of § 1521(a)(7) to seek, without objection, the applicability of § 365(e) to the foreign proceeding. Pursuant to Section 365(e)(1), clauses in unexpired leases which provide for default upon the commencement of a bankruptcy action by a party (i.e. ipso facto clauses) are inapplicable. In the only published decision on the application of section 365(e) to a Chapter 15 case, the court, in dicta, criticized the selective application of section 365(e) to the excluding the remainder of section 365.8Section 365(e) is of limited use to foreign debtors generally because landlords are generally prohibited from terminating a lease without obtaining relief from the automatic stay,9 and particularly to debtors under the CCAA because ipso facto clauses are generally unenforceable under the CCAA.ten

Thus, the foreign representatives freely select a part of § 365 which protects the foreign debtor at the expense of the owners. As explained here, Chapter 15 creditor protections provide a gateway for homeowners to obtain the rights and protections of Section 365.

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Footnotes

1. The authors have represented numerous owners in the cross-border restructurings of the Aldo Group, Groupe Dynamite and the Yatsen Group of Companies (Sarku Japan) between Canada and the United States.

2. In re The Aldo Grp. Inc., et al., No. 20-11062 (JKO) (Bankr. D. Del.); In re Groupe Dynamite Inc., et al., no. 20-12085 (CSS) (Bankr. D. Del.).

3. In re Yatsen Group of Cos. Inc., et al., No. 21-10073 (BLS) (Bankr. D. Del.).

4. Jaffe c. Samsung Electronics. Co.Ltd., 737 F.3d 14, 26 (4th Cir. 2013).

5. 11 USC § 1520(a).

6. 11 USC § 1521(a).

7. 11 USC § 1521(a)(7).

8. In re Bluberi Gaming Techs. Inc., 554 BR 841, 845 (Bankr. ND Ill. 2016).

9. See In the Mirant Corp. case, 440 F.3d 238, 252-53 (5th Cir. 2006).

10. CCAA, RSC 1985, c. C-36, § 34.

Originally published by American Bankruptcy Institute Journal

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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