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Law360 (May 18, 2020, 10:25 PM EDT) -- Wilmington Trust has filed a suit in Delaware federal court claiming that Canadian retailer Hudson's Bay Company engaged in a "covert corporate shell game" and attempted to shirk its guarantor responsibilities as payments it was ultimately responsible for came due amid the global coronavirus pandemic.
The financial services firm said in its suit filed Monday it discovered in early April that Hudson's Bay had made a series of restructuring moves that violated the terms of an agreement between the parties.
The trust company claims that defendants Hudson's Bay Company, Hudson's Bay Company ULC and HBC LP had "engaged in deliberate and concealed corporate restructurings that stripped assets from HBC — a well-financed, Canadian former public company, and the absolute and unconditional ultimate guarantor of [a loan agreement] — and transferred them to newly formed, foreign entities in violation of numerous provisions of governing loan documents and related guarantees."
Wilmington is the trustee of a nearly $850 million trust formed for a joint venture between Hudson's Bay and real estate investment trust Simon Property Group Inc, Wilmington said Monday.
The trust's assets are loaned, as mortgages, to the landlords of retail store tenants for which Hudson's Bay is "the ultimate parent" company, including Lord & Taylor and Saks Fifth Avenue locations, Wilmington said in its suit.
"HBC is the unconditional and absolute guarantor of the borrower entities' tenants' operating leases, which means it must step in and pay rent when the tenants are unable to do so for any reason, including financial distress," the financial firm said Monday, emphasizing that the retail clothing industry is "highly vulnerable to recessions and other disruptions to the economy" because the industry depends on shoppers' discretionary income.
"Having a company with the financial wherewithal of HBC backstopping the borrowers' tenants' rent obligations substantially reduced the risk that the stores would be forced to close and sales disrupted because they could not pay rent due to periodic economic dislocations," it added.
This is why it was surprising that "on April 1, 2020, and without prior notice, despite having recently been engaged in potential prepayment discussions, Ian Putnam, HBC's President Real Estate and Chief Development Officer, sent a letter on behalf of the borrowers) advising [the trust's loan servicer Situs Holdings LLC] that the borrowers would not make the debt service payment due on April 1 because the rent due under the leases had not been paid," the firm said.
Wilmington Trust said HBC didn't pay the shortfall like it was supposed to, and HBC didn't give Wilmington any advance notice that such a situation might be imminent, the trustee said. HBC instead asked to defer four months of debt service payments.
Wilmington and HBC worked together to draft a to a prenegotiation agreement before taking next steps, Wilmington said.
But "after negotiating terms and exchanging several versions, and just when plaintiff thought it had agreement on an execution copy and was ready for signing, the borrowers' counsel advised — with no explanation — that the signature block for HBC, as guarantor under the critical operating lease guarantees, would have to be revised to reflect a different entity," Wilmington claimed.
When Wilmington asked why, HBC explained in an April 17 letter that after Hudson's Bay Company was taken private, restructuring made a new, unlimited liability Hudson's Bay company into the ultimate parent entity, which is 100% indirectly owned by another new Bermuda company called HBC LP. HBC LP now "holds all of the assets and liabilities that were held by Hudson's Bay Company immediately prior to the closing," HBC told Wilmington in the letter.
"The April 17th representation nonchalantly advised the [trust and trustee] that its bargained-for, ultimate guarantor of its" $850 million loan no longer existed, and apparently had been succeeded instead by an empty shell," Wilmington said in its suit.
Wilmington also said that even though the restructurings "predate and have nothing to do with the COVID-19 pandemic, defendants have seized on the crisis as an opportunity to try to smokescreen their numerous breaches of their obligations."
Wilmington Trust also cited media reports that Lord & Taylor might liquidate existing inventory, or that its "stores may never reopen," and reports that "imply efforts to propose a merger between Saks and the now-bankrupt Neiman Marcus. There is clearly no more critical time for plaintiff to understand its position and rights vis-à-vis the entity that promised to fully backstop the rent payments of those stores under the operating leases."
Attorneys for Wilmington Trust and a representative for Wilmington Trust and representatives for Hudson's Bay did not immediately respond to requests for comment Monday.
Wilmington Trust is represented by Michael T.G. Long, Sheila A. Sadighi and Thomas E. Redburn of Lowenstein Sandler LLP and Craig A. Welin of Frandzel Robins Bloom & Csato LC.
Counsel information for Hudson's Bay was not immediately available Monday.
The case is Wilmington Trust, National Association v. Hudson's Bay Company et al, case number 1:20-cv-03830, in the U.S. District Court for the Southern District of New York.
--Editing by Amy Rowe.
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