C OURT FILE NO.: CV-23-00695619-00CL DATE: 2023-03-03 SUPERIOR COURT OF JUSTICE – ONTARIO2023-03-01
RE: IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT , R.S.C. 1985, c.C-36, AS AMENDED AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF NORDSTROM CANADA RETAIL INC., NORDSTROM CANADA HOLDINGS INC., LLC AND NORDSTROM CANADA HOLDINGS II, LLC
BEFORE: Chief Justice G.B. Morawetz
COUNSEL: Jeremy Dacks, Tracy Sandler, Martino Calvaruso and Marleigh Dick , for the Applicants Susan Ursel, Karen Ensslen , for the Proposed Employee Representative Counsel Brendan O’Neill and Brad Wiffen , for the Proposed Monitor George Benchetrit , for the Directors and Officers of the Nordstrom Canada Entities Aubrey Kauffman , for Nordstrom, Inc. (U.S.)
HEARD and DETERMINED: March 2, 2023 REASONS: March 3, 2023
ENDORSEMENT
Background
[1] At the conclusion of the hearing on March 2, 2023, I granted the requested relief, with reasons to follows. These are the reasons.
[2] Nordstrom Canada Retail, Inc. (“Nordstrom Canada”), together with the other applicants listed above (collectively, the “Applicants”), seek relief under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (the “CCAA”). The Applicants seek a stay of proceedings (the “Stay”) for the initial ten-day period (the “Initial Stay Period”) under section 11.02(2) of the CCAA, together with related relief necessary to preserve the Applicants’ business and stakeholder value during the Initial Stay Period. The Applicants also seek to extend the stay of proceedings to Nordstrom Canada Leasing LP (“Canada Leasing LP”) and, for limited purposes, to Nordstrom, Inc. (“Nordstrom US”). The Applicants and Canada Leasing LP are referred to collectively below as the “Nordstrom Canada Entities.”
[3] Nordstrom Canada is a retailer which acts as the Canadian operating subsidiary of Nordstrom US. Nordstrom Canada entered the Canadian marketplace in September 2014 and currently operates 13 retail stores in Ontario, Alberta and British Columbia. Nordstrom Canada has experienced losses each year. Nordstrom Canada has only been able to sustain operations due to the financial support of Nordstrom US, which has provided Nordstrom Canada with approximately USD$775 million in net funding through various means since inception. Nordstrom US also provides various other ongoing strategic support, and administrative services.
[4] Given Nordstrom Canada’s financial performance and after considering available options, Nordstrom US has determined that it is in the best interest of its stakeholders to discontinue further financial and operational support for Nordstrom Canada in order to focus on its core business in the US. Nordstrom US has terminated its support and IP licensing arrangements with the Nordstrom Canadian Entities and replaced them with a Wind-Down Agreement (described further below).
[5] The Applicants contend that without support from Nordstrom US, the Nordstrom Canada Entities are insolvent and require the flexibility of the CCAA in order to effect an orderly, responsible and controlled wind-down of operations.
[6] The Applicants further contend that the requested relief is urgent, as the Nordstrom Canada Entities cannot operate without Nordstrom US’s support, and continued support during the wind-down process is conditional on obtaining protection under the CCAA.
[7] The requested relief includes the approval of the Employee Trust, the appointment of Employee Representative Counsel, Court-ordered Administration and D&O charges in an amount required for the Initial Stay Period, as well as a Co-tenancy Stay of proceedings (the “Co-tenancy Stay”) and a stay in favour of Nordstrom US.
[8] At the Comeback Hearing, the Applicants anticipate seeking certain additional relief, including the approval of an Employee Retention Plan. Additionally, the Applicants, in consultation with Alvarez & Marsal Canada Inc. (the “Proposed Monitor”), also plan to solicit bids from a number of professional third-party liquidators and to seek court approval in the near term to engage the successful liquidator bidder and to conduct an orderly realization process.
[9] The facts have been set out in an affidavit of Misti Heckel, President of Nordstrom Canada Retail, Inc., and President and Treasurer of Nordstrom Canada Holdings, LLC and Nordstrom Canada Holdings II LLC. In addition, the Proposed Monitor has filed a pre-filing report.
[10] The Proposed Monitor supports the position of the Applicants.
The Nordstrom Canada Entities
[11] Nordstrom Canada is incorporated pursuant to the laws of British Columbia. It is a wholly-owned subsidiary of Nordstrom International Limited (“NIL”). NIL is a wholly-owned subsidiary of Nordstrom US, a publicly traded company on the New York Stock Exchange. Nordstrom Canada serves as the Canadian retail sales operating entity.
[12] As of January 28, 2023, Nordstrom Canada employed approximately 1925 full-time and 575 part-time employees. Of these, 2,047 are full-line store and 310 are Rack store employees.
[13] Nordstrom Canada Holdings, LLC (“NCH”) is a US single member limited liability company wholly-owned by NIL. NCH, as general partner, owns 99.9% of Canada Leasing LP, the Canadian leasing entity. Nordstrom Canada Holdings II, LLC (“NCHII”) is a US holding company that owns 0.1% of Canada Leasing LP, as its limited partner.
[14] Canada Leasing LP is an Alberta limited partnership responsible for the Canadian real estate activities, such as leasing retail space from the Landlords, and subleasing the retail space to Nordstrom Canada.
Business of the Applicants
[15] Nordstrom Canada currently operates six Nordstrom-branded full-line stores and seven off-price Nordstrom Rack stores in Ontario, Alberta and British Columbia. These retail operations are conducted in facilities which are leased to Canada Leasing LP, as lessee, by third-party landlords (the “Landlords”) pursuant to leases (the “Leases”) and sublet by Canada Leasing LP to Nordstrom Canada pursuant to subleases (the “Subleases”).
[16] Ms. Heckel contends that Nordstrom Canada Entities’ business is dependent on Nordstrom US for administrative and business support services, including legal, finance, accounting, bill processing, payroll, human resources, merchandising, strategy, and information technology project support (the “Shared Services”). Nordstrom US formerly provided these Shared Services under an inter-affiliate licence and services agreement, effective as of February 3, 2019, between Nordstrom US and Nordstrom Canada (the “Licence and Services Agreement”).
[17] On March 1, 2023, Nordstrom US notified Nordstrom Canada that it would be terminating the Licence and Services Agreement in accordance with its terms, as well as the other agreements referenced above to which it is a party. Subsequently, the Nordstrom Canada Entities agreed to have the termination become effective immediately. Nordstrom US and the Nordstrom Canada Entities have entered into a new administrative services agreement effective March 1, 2023 (the “Wind-Down Agreement”) for Nordstrom US to continue providing Shared Services, as well as a license to use the essential IP, for the sole purpose of an orderly wind down under the CCAA.
Financial Position of the Nordstrom Canada Entities
[18] As of January 28, 2023, the Nordstrom Canada Entities had combined total assets with a book value of approximately $500,784,000 and total liabilities of approximately $561,024,000.
[19] Since 2014, Nordstrom Canada has experienced yearly losses across the majority of its 13 Canadian locations. For the year ended January 28, 2023, Nordstrom Canada generated revenue of $515,046,000. As a result of its high occupancy and other operating costs, its EBITDA for the year ending January 28, 2023, was negative $34,563,000, prior to taking into account intercompany payments.
[20] Most of the Nordstrom Canada Entities’ losses have been absorbed by Nordstrom US through intercompany payments. However, Nordstrom US has resolved to discontinue this support, without which Nordstrom Canada cannot continue operating.
[21] The Nordstrom Canada Entities do not owe any secured indebtedness. Prior to the commencement of this proceeding, by virtue of amendments agreed upon by parties to a revolving Credit Agreement among Nordstrom US (as Borrower), Wells Fargo Bank, National Association, and certain other lenders, Nordstrom Canada was released from its guarantee obligations in relation to this indebtedness. The corresponding security interest granted by Nordstrom Canada was also released. Nordstrom Canada does not have any commitments under and has not granted any security in relation to the remaining debt agreements of Nordstrom US.
[22] Ms. Heckel states that since 2014, Nordstrom US has provided the Nordstrom Canada Entities with approximately USD $950 million. Taking into account the distributions of USD $175.6 million made by Nordstrom Canada to Nordstrom US, Nordstrom US has provided net funding to Nordstrom Canada of USD $775 million.
[23] Nordstrom US, with the support of its advisors, has decided in its business judgment that it is in the best interests of Nordstrom US to discontinue its support of the Canadian operations. The Applicants contend that due to its operational and financial dependence on Nordstrom US, Nordstrom Canada cannot continue operations without the full support of Nordstrom US, including a licence to use Nordstrom US’s IP.
[24] The Nordstrom Canada Entities believe that these CCAA proceedings are the only practical means of ensuring a fair and orderly wind-down. Additionally, Nordstrom US has indicated that it is only willing to continue providing the Shared Services and to permit use of the IP if the wind-down is supervised by this Court under the CCAA.
Requested Relief
[25] Having reviewed the record and hearing submissions, I am satisfied that the Applicants are all affiliated debtor companies with total claims against them in excess of $5 million. I am also satisfied that Nordstrom Canada and the other Applicants are each a “company” for the purposes of s. 2 of the CCAA because they do business in or have assets in Canada.
[26] I accept that without the ongoing support of Nordstrom US, the realizable value of the Nordstrom Canada Entities’ assets will be insufficient to satisfy all of their obligations to their creditors. I am satisfied that the Applicants in these proceedings are either currently insolvent under the definition of “insolvent person” in the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”) or the expanded concept of insolvency adopted by this Court in Stelco Inc., Re.
[27] I am also satisfied that this Court has jurisdiction over the proceedings. The chief place of business of the Nordstrom Canada Entities is Ontario: 8 of the 13 Nordstrom Canada retail stores are located in Ontario, while approximately 1,450 out of Nordstrom Canada’s 2,500 full and part-time employees work in Ontario. Further, during fiscal year 2022, store sales in Ontario totalled $220 million, compared to $148 million in British Columbia and $77 million in Alberta.
[28] There are a number of examples of CCAA proceedings that have been commenced for the purpose of winding down a business. Recent examples include Target Canada Co. (Re), 2015 ONSC 303, Bed Bath & Beyond Canada Limited (Re), 2023 ONSC 1014, and Bed Bath & Beyond Canada Limited (Re), 2023 ONSC 1230.
[29] Section 11.02(1) of the CCAA permits the Court to grant an initial stay of up to 10 days on an application for an initial order, provided such a stay is appropriate and the applicants have acted with due diligence and in good faith. Under section 11.001, other relief granted pursuant to this Court’s powers under section 11 of the CCAA at the same time as an order under s. 11.02(1) must be limited “to relief that is reasonably necessary for the continued operation of the debtor company in the ordinary course of business during that period.” In my view, the relief requested in this first-day application meets these criteria.
[30] Where the operations of partnerships are integral and closely related to the operations of the applicants, it is well-established that the CCAA Court has the jurisdiction to extend the protection of the stay of proceedings to those partnerships in order to ensure that the purposes of the CCAA can be achieved. (See: Target Canada Co. (Re), 2015 ONSC 303 at paras. 42 and 43; 4519922 Canada Inc. (Re), 2015 ONSC 124 at para. 37; Just Energy Corp. (Re), 2021 ONSC 1793 at para. 116; Bed Bath & Beyond Canada Limited (Re), 2023 ONSC 1014, at para. 28).
[31] The Applicants submit that it is appropriate to extend the Stay to Canada Leasing LP. As the lessor of Nordstrom Canada’s retail premises, its business and operations are fully intertwined with those of the Nordstrom Canadian Entities, and any proceedings commenced against Canada Leasing LP would necessarily involve key personnel of the Applicants, who collectively hold a 100% interest in Canada Leasing LP. As counterparty to the store Leases, Canada Leasing LP is also insolvent and needs the breathing space provided by the stay to prevent the exercise of Landlord remedies during the pendency of the proposed liquidation sale.
[32] I accept this submission. In my view, the proposed extension of the Stay is appropriate in the circumstances.
[33] Many retail leases provide that other tenants within the same shopping centre have certain rights against the Landlords upon an anchor tenant’s (such as Nordstrom Canada’s) insolvency or cessation of operations. In order to alleviate potential prejudice, the Applicants request that the Court extend the Stay to all rights of third-party tenants against the Landlords, owners, operators or managers of the commercial properties where the Nordstrom Canada’s stores, offices or warehouses are located that arise as a result of the Applicants’ insolvency, or as a result of any steps taken by the Applicants pursuant to the proposed Initial Order.
[34] The Court’s authority to grant the Co-tenancy Stay flows from the broad jurisdiction under sections 11 and 11.02(1) of the CCAA to make an initial order on “any terms that may impose.” The Applicants submit that a Co-tenancy Stay is justified on the basis that, if tenants were permitted to exercise these “co-tenancy” rights during the Initial Stay Period (and beyond), the claims of the landlords against the debtor company would greatly increase, with a potentially detrimental impact on the restructuring efforts of the debtor company and that such claims would result in a multiplicity of proceedings which would be detrimental to an efficient and orderly wind-down.
[35] I have been persuaded that the Co-tenancy Stay should be granted in the circumstances.
[36] The Applicants also request that the Stay be extended (subject to certain exceptions related to the Cash Management System) to Nordstrom US in relation to claims that are derivative of the primary liability of or related to the Nordstrom Canada Entities (the “Parent Stay”). The Applicants submit that, among others, the Parent Stay would affect contractual counterparties with contracts or purchase orders involving Nordstrom Canada merchandise and concession operations entered into or issued by Nordstrom US on behalf of, or jointly with, Nordstrom Canada. The Parent Stay would also affect claims that arise out of or in connection with any indemnity, guarantee or surety relating the Leases. The proposed Initial Order further provides that any Landlord claim pursuant to an indemnity or guarantee in relation to either Canada Leasing LP or the Applicants shall not be released or affected in any way in any Plan filed by the Applicants under the CCAA, or any proposal under the BIA.
[37] The Parent Stay is being requested as a temporary measure designed to preserve the status quo and create breathing space during the Initial Stay Period, in particular to engage in good faith discussions with the Landlords. It is intended to prevent a multitude of proceedings being commenced in several different jurisdictions against Nordstrom US during this initial period with possibly inconsistent outcomes.
[38] The Court recently granted similar relief during the initial stay period in Bed Bath & Beyond Canada Limited (Re), 2023 ONSC 1014. I note that it is the Applicants’ intention to request a continuation of the Parent Stay for a reasonable period beyond the Initial Stay Period at the Comeback Hearing.
[39] I note that the Applicants submit that section 11.04 of the CCAA does not prohibit this relief. Firstly, the Indemnities are not “guarantees.” Secondly, even if the Indemnities could be characterized as “guarantees”, the opening words of section. 11.04 do not oust the Court’s jurisdiction under section 11 to grant a third party stay in favour of a guarantor in appropriate circumstances.
[40] The Applicant submits that the Court has jurisdiction under section 11 to grant a third party stay and references Target Canada at para. 50, McEwan Enterprises Inc., 2021 ONSC 6453 at para. 45, Laurentian University of Sudbury 2021 ONSC 659 at paras. 30–33 and Lydian International Limited, 2019 ONSC 7473 at para. 39. The Applicant submits that section 11.04 of the CCAA does not prevent the Court from granting such a remedy in its discretion on the basis that the section is inapplicable, as the indemnities at issue here are not guarantees. In its factum, the Applicant also references that the Alberta Court of Queen’s Bench in Northern Transportation Company Limited (Re), 2016 ABQB 522 at para. 69 took a contrary view. The contrary view was also expressed in Cannapiece Group Inc. v. Carmela Marzili, 2022 ONSC 6379.
[41] This issue is not free of doubt and affected landlords have not been served and did not appear at this hearing.
[42] There are outstanding issues as between the Applicant and the landlords that have to be addressed in the near future. In an effort to encourage discussions as between the Applicants and the various landlords, I am prepared to grant the Parent Stay for the initial 10-day period prior to the comeback hearing.
[43] Ms. Heckel states that it is expected that the vast majority of Nordstrom Canada’s employees will be provided with working notice of termination on, or shortly after, the commencement of these CCAA proceedings.
[44] Nordstrom Canada is seeking this Court’s approval of the Employee Trust, which is to be funded by Nordstrom US. The Employee Trust is intended to provide Nordstrom Canada employees with a measure of financial security during the wind-down process.
[45] The Applicants submit that the Court in Target Canada exercised its CCAA jurisdiction to sanction the establishment of an employee trust established by the debtor company’s parent for similar purposes.
[46] The Applicants submit that the Employee Trust is intended to ensure that these employees receive the full amount of termination and severance pay owing to them pursuant to employment standards legislation in a timely manner. Nordstrom US has a right of subrogation against Nordstrom Canada in respect of amounts paid pursuant to the Employee Trust.
[47] I am satisfied that the creation of an Employee Trust is fair and appropriate in the circumstances. The Employee Trust is approved.
[48] The Applicants seek the appointment of Ursel Phillips Fellows Hopkinson LLP as Employee Representative Counsel, to represent Nordstrom Canada’s store-level employees and all non-KERP eligible non-store employees. Among other things, Employee Representative Counsel will assist with questions regarding Eligible Employee Claims and other issues with respect to the Employee Trust.
[49] I am satisfied that the appointment of Employee Representative Counsel is appropriate in these circumstances. Employees who do not wish to be represented by Ursel Phillips will have the right to opt out.
[50] The Applicants also seek authorization, with the consent of the Monitor, to make payments of pre-filing amounts owing to certain suppliers, including: (i) logistics or supply chain providers; (ii) providers of information, internet, telecommunications and other technology; and (iii) providers of payment, credit, debit and gift card processing related services. The Applicants believe that categories of suppliers are fundamental to continuing operations and the proposed liquidation sale and any disruptions of their services could jeopardize the orderly wind down, given the expedited timelines for the proposed Realization Process.
[51] For third-party suppliers or service providers other than those listed above, the Initial Order proposes permitting payments in respect of pre-filing amounts up to a maximum aggregate amount of $1,000,000 with the consent of the Monitor, if, in the opinion of the Nordstrom Canada Entities, the supplier is critical to the orderly wind down of Nordstrom Canada’s business.
[52] The Applicants submit that the Court has exercised its jurisdiction on multiple occasions to grant similar relief (See: Target Canada at paras. 62-65; Just Energy, at para. 99; Original Traders Energy Ltd. and 2496750 Ontario Inc. (Re), 2023 ONSC 753, at paras. 72-74; Boreal Capital Partners Ltd et al. (Re), 2021 ONSC 7802, at paras. 20-22). The Court in Index Energy Mills Road Corporation (Re), 2017 ONSC 4944 at para. 31 outlined the factors that courts have considered in determining whether to grant such authorization, including (a) whether the goods and services are integral to the business of the applicants; (b) the applicants’ dependency on the uninterrupted supply of the goods or services; (c) the fact that no payments will be made without the consent of the Monitor (which is a requirement under the proposed Initial Order); and (d) the effect on the debtors' operations and ability to restructure if it could not make such payments.
[53] In my view, a consideration of these factors leads to the conclusion that this requested relief should be granted.
[54] Pursuant to section 11.52 of the CCAA, the Applicants are requesting an Administration Charge in favour of the Proposed Monitor, along with its counsel, counsel to the Nordstrom Canada Entities, counsel to the directors and officers of the Nordstrom Canada Entities, and Employee Representative Counsel, as security for their respective fees and disbursements up to a maximum of $750,000 (the “Administration Charge”), which amount covers the time period until the comeback hearing. The Applicants anticipate requesting an increase to $1.5 million at the Comeback Hearing. The Administration Charge was sized in consultation with the Proposed Monitor and is proposed to have first priority over all other charges and security interests.
[55] In my view, the requested Charge satisfies the well-accepted factors originally established by Pepall J. (as she then was) in Canwest Publishing Inc./Publications Canwest Inc. (Re), 2010 ONSC 222, at para. 39. Among other factors, the requested amount is fair and reasonable, and appropriate to the size and complexity of the businesses being restructured. In addition, the initial amount requested is tailored only to the needs within the Initial Stay Period. This relief is granted.
[56] In accordance with section 11.51 of the CCAA, the Applicants also seek a directors and officers charge (the “Directors’ Charge”) in the amount of $10.75 million until the Comeback Hearing. The Applicants anticipate requesting an increase to $13.25 million at the Comeback Hearing. The Applicants submit that the quantum of the Director’s Charge was arrived at in consultation with the Proposed Monitor and is proposed to be secured by the property of the Nordstrom Canada Entities and to rank behind the Administration Charge. The Directors’ Charge would act as security for the Nordstrom Canada Entities’ indemnification obligations for director and officer liabilities that may be incurred after the commencement of the CCAA proceeding. This charge would only be relied upon to the extent liabilities are not covered by existing insurance.
[57] In light of the potential liabilities, the continued service and involvement of the director and officers in this proceeding is conditional upon the granting of an Order which includes the Directors’ Charge. I am satisfied that the Directors’ Charge is necessary in the circumstances.
Disposition
[58] In summary, the Applicants’ request for the relief set out in the proposed Order is granted and Alvarez & Marsal Canada Inc. is appointed as Monitor. The Comeback Hearing is scheduled for March 10, 2023.
Chief Justice G.B. Morawetz Date: March 3, 2023