United States: Landlords Without Borders: Challenges In Canadian/U.S. Cross-Border Retail Restructurings

By James S. Carr and Eloy A. Peral¹

As with its neighbor to the south, Canada faced an influx of retail insolvencies during the midst of the COVID-19 pandemic. For example, in 2020, Canadian-based clothing retailers such as the Aldo Group and Groupe Dynamite filed applications under the Canadian Companies' Creditors Arrangement Act (CCAA), Canada's equivalent to a chapter 11 case, and commenced chapter 15 proceedings in the U.S.² In 2021, the real estate segment of Sarku Japan, a Japanese quick-service restaurant chain, commenced a CCAA case and a chapter 15 proceeding, even though none of the debtors' 226 restaurants are located in Canada.³

A CCAA cross-border restructuring presents unique challenges for landlords in both the plenary CCAA case and the ancillary chapter 15 case. When a retailer chooses to restructure under the CCAA rather than chapter 11, a glaring problem for landlords is the lack of many of the unique rights and protections afforded to landlords, and in particular shopping center landlords, under § 365 of the Bankruptcy Code. However, the CCAA is not without protections for landlords.

No reported decision exists where a landlord has sought to invoke § 365 in a chapter 15 case to compensate for the comparative lack of rights in the plenary CCAA case. Section 365 does not apply in a chapter 15 case, and when a foreign representative seeks to apply certain provisions of § 365 in the restructuring, the purpose is to impair landlords' rights. However, landlords do not need to accept the status quo.

As illustrated in this article, landlords can optimize the rights available to them in a U.S./ Canadian cross-border restructuring by leveraging the rights and protections present in both jurisdictions. Moreover, the Qimonda decision of the Fourth Circuit concerning the impact of § 365(n) in a chapter 15 case demonstrates how a landlord can bootstrap the landlord protections of § 365 into a chapter 15 case.⁴

The Intersection of Chapter 15 and § 365: The Status Quo

Section 365 appears nowhere in chapter 15 of the Bankruptcy Code, but § 1520 enumerates certain relief that becomes automatic upon recognition of a foreign main proceeding.⁵ Moreover, § 1521(a) provides courts with the discretion to grant the foreign representative "appropriate relief," whether in a foreign main or foreign non-main proceeding, "where necessary to effectuate the purpose of this chapter and to protect the assets of the debtor or the interests of the creditors."⁶ Under § 1521(a)(7), a court may grant "any additional relief that may be available to the trustee" that is not specifically enumerated in § 1521(a)(1)-(6), other than the trustee's avoidance powers.⁷

Foreign representatives often use the catchall provision of § 1521(a)(7) to seek, without objection, the applicability of § 365(e) to the foreign proceeding. Pursuant to § 365(e)(1), clauses in unexpired leases that provide for a default upon a party's commencement of a bankruptcy action (i.e., ipso facto clauses) are unenforceable. In the only published decision addressing the application of § 365(e) to a chapter 15 case, the court, in dicta, criticized the selective application of § 365(e) to the exclusion of the rest of § 365.⁸ Section 365(e) is of limited utility to foreign debtors generally because landlords are generally prohibited from terminating a lease without obtaining relief from the automatic stay,⁹ and especially to CCAA debtors because ipso facto clauses are generally unenforceable under the CCAA.¹⁰

Thus, foreign representatives freely cherry-pick a portion of § 365 that protects the foreign debtor at the expense of landlords. As explained herein, the creditor protections in chapter 15 provide a gateway for landlords to obtain § 365 rights and protections.

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Footnotes

1. The authors represented numerous landlords in the U.S./Canadian cross-border restructurings of the Aldo Group, Groupe Dynamite and the Yatsen Group of Companies (Sarku Japan).

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. Jaffé v. Samsung Elecs. Co. Ltd., 737 F.3d 14, 26 (4th Cir. 2013).

5. 11 U.S.C. § 1520(a).

6. 11 U.S.C. § 1521(a).

7. 11 U.S.C. § 1521(a)(7).

8. In re Bluberi Gaming Techs. Inc., 554 B.R. 841, 845 (Bankr. N.D. Ill. 2016).

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

10. CCAA, R.S.C. 1985, c. C-36, § 34.

Originally published by American Bankruptcy Institute Journal

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