Dive Brief:

• A lender sued Hudson's Bay Co. last week alleging it stripped assets from the company and moved them under the ownership of a recently created Bermuda corporation, putting a mortgage on Hudson's Bay properties at risk.
• Hudson's Bay hit back in a filing this weekend, asking a federal judge to dismiss the case and ignore a request to freeze the company's assets. Attorneys for Hudson's Bay called the lawsuit "nothing more than a transparent attempt to gain leverage in negotiations with borrowers who are trying to do the best they can in the face of the global pandemic."
• The lawsuit comes after Hudson's Bay defaulted on $7.4 million in debt payments on a loan on its properties. According to the company it was "in the middle of discussions" with the one of the plaintiffs — Situs Holdings, a servicer on the loan — on the missed payments when Situs filed the lawsuit.

Dive Insight:

The lenders' complaint against Hudson's Bay opened with stark language about the reorganization the Canadian retail company undertook after going private earlier this year. The lender alleged the corporate changes were a "clandestine corporate shell game that has looted the credit support" for an $850 million mortgage loan.

At issue is a stipulation that Hudson's Bay guarantee the loan, repayment of which depends on the company's store banners — namely Saks and Lord & Taylor, which has since been acquired — paying rent on the properties owned by Hudson's Bay. As attorneys for the plaintiffs explained in the complaint, "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 plaintiffs maintain that the transfer of company assets to a newly formed Bermuda corporation, which is owned by Hudson's Bay's controlling shareholders and sits atop the corporate hierarchy that controls the retailer, threw the role of guarantor into question. They allege that the transfer of assets is "improper," a violation of the loan agreement, and raises risk to the loan's repayment.  

"It is now apparent that the shareholders in control of HBC embarked on a surreptitious restructuring that allowed them to remove assets from HBC and thus the Operating Lease Guarantees, thereby leaving Lender without its bargained-for support if the tenants became unable to pay their rent," the lenders allege.  

Meanwhile, Hudson's Bay maintains that the changes amount to a name change and that Situs has no claim on the assets that the retailer's owners moved around on paper.  "Plaintiff's suggestion that it was 'shocked' that HBC would want to sign a proposed pre-negotiation agreement using its correct name — Hudson's Bay Company ULC — is completely overblown," attorneys for the company said in a memo to the court. "So too are its claims that Defendants 'concealed' the Internal Restructuring, and 'deliberately hid' what they were doing from Plaintiff."

But such seemingly innocuous paper changes can lead to fierce legal battles. Just ask the owners of Neiman Marcus, which have been sued on multiple occasions by lenders for moving the fast-growing and valuable MyTheresa e-commerce unit to a different spot on the corporate umbrella, where it was controlled by the luxury retailer's private equity sponsors rather than the retail operating company. As is the case with Hudson's Bay, lenders argued that doing so made their (the lenders') position more vulnerable in a default scenario by putting MyTheresa out of their legal reach. 

The Hudson's Bay lawsuit also comes as retailers and landlords across the country are talking, negotiating and sometimes going to court over unpaid rent while retailers try to free up cash amid an unprecedented wave of mass store closures in response to the coronavirus pandemic. Bloomberg recently reported that landlords are sending out "thousands" of default notices to retail tenants. The court fights could just be getting started.