TORONTO — Fears of Sears Canada retirees were realized Thursday when the insolvent retailer confirmed it will seek court approval next week to suspend their health, dental and life insurance benefits as well as special payments to the company’s underfunded defined benefit pension plan, which has a deficit of almost $267 million.
The company filed for CCAA protection from its creditors in Ontario Superior Court on June 22, when it announced the layoffs of 2,900 employees and the closure of 59 stores. Sears Canada will also ask the court on July 13 to extend the injunction that protects it from creditors until Oct. 4 as it works to find a buyer for the business or its assets.
In the meantime, a group of ousted employees is accusing the retailer’s current executives of insensitivity and poor taste for throwing a Canada Day party at Sears’ pop-up store on Toronto’s trendy Queen West strip
just days after laying off its employees without severance.
“Who paid for that party?” said Peter Myers, a former senior director of planning at Sears Canada who worked for more than 35 years until he was laid off on June 22. “I’m pretty sure that I did, with my severance. I am not surprised, but the optics of this are terrible.”
Sears Canada spokesman Vincent Power said the Canada Day party “was a planned marketing event open to the public …celebrating the Canada Day weekend, selling some of our Canada 150 merchandise, and bringing awareness to our brand reinvention through the pop-up store during a very important national celebration,” he said in an email.
Myers, who starred in a 2014 Sears Canada commercial alongside his brother, the actor and comedian Mike Myers, is one of several longtime employees who expressed frustration with the company’s strategic direction in the last year, which included a costly rebuild of its IT platform and the opening of an e-commerce strategy lab, Initium.
“We had an online system that was built on our old-school catalogue system, which was a bad decision,” Myers said. “But we created a new system that didn’t work properly.”
He and other former employees also question why the company spent money to form The Cut Inc., a New York-based team of 27 employees hired to work on the company’s new off-price merchandise strategy, to compete with the likes of Winners. “Why would they do that if they were trying to erase duplication in the company and they had a full buying team in Canada doing the same thing?” Myers said.
Seeking court protection from paying creditor debts is a common way for companies to gain breathing room in order to help revive their business, and Sears Canada has appealed for the same to implement the latest of its many revival efforts over the years. The transformation plan includes an aggressive push into e-commerce, sales of off-price merchandise and a revamped private label collection.
The company’s cash position on its balance sheet fell to $164.4 million in the first quarter of 2017 from $349.8 million in the first quarter of 2016, and the struggling retailer announced in June that it had serious doubts about being able to continue as a going concern as it struggled to meet its obligations coming due over the next 12 months. The retailer’s sales have dwindled to $2.6 billion in 2016 from $6.7 billion in 2001.
Sears Canada had already indicated on June 22 that it planned to suspend life insurance, health and dental benefits to certain employees during the restructuring process. The company is also asking the court to approve some $7.6 million in retention payments to ensure 43 key employees remain with the retailer during the restructuring process.
The scenario is an all too familiar echo of the demise of Eaton’s for Marinella Gonzalez, who had worked at Sears’ head office for the past 17 years until she was laid off with other head office employees last month. She was an employee of Eaton’s when that department store chain folded in 1999, leaving many employees without severance or benefits. Sears employees that were laid off have been encouraged to make court claims along with other unsecured creditors, as the Eaton’s employees ended up doing.
“Over about five to seven years, we received about 40 cents on the dollar of what we were owed,” said Gonzalez, another vocal critic of Sears’ Canada Day party.
Whether Sears Canada’s resurrection strategy will work is a matter of debate, experts say.
“I don’t know if they are doing this to buy time, to see how all the pieces fit together and what they can get for certain (assets),” said insolvency expert Ira Smith, founder of Toronto-based Ira Smith Trustee & Receiver Inc. “The jury is still out as to whether this is going to be a restructuring, or if it will be a liquidation like Target, which filed CCAA but came out up front and said it was going to be a liquidation.”
Employees and retirees typically suffer the biggest downside of bankruptcy protection.
“The sudden recent CCAA filing by Sears Canada and the proposed sales process for its assets appears to be a liquidation of what remains of Sears Canada,” Andrew Hatnay, of Koskie Minsky LLP, representative counsel for the retailer’s retirees, said in a statement. “The process that Sears Canada is following offers no protection for the retirees’ pension losses, and Sears Canada now also seeks to cut off retiree health and life insurance benefits. This is a totally unacceptable situation for Sears retirees who earned their pensions and benefits during their employment service for the company.” He added counsel is “actively involved” in protecting the retirees’ pensions and benefits.
“Landlords are typically secured and bankers are always secured,” said retail consultant Jim Danahy of Customer Lab. “Employees and retirees and the large and small companies who employ people to make the goods that are sold at (insolvent retailers) are typically the victims in this situation.”
Lawyer Lior Samfiru of Toronto employment law firm Samfiru Tumarkin LLP has negotiated several severance packages for former Sears Canada employees in recent years, said while the law allows companies to do so, most companies do not leave their employees with zero severance.
“In many situations, companies provide the statutory minimum severance entitlements without employees having to file as unsecured creditors (in court) — that is not something you usually have to file for,” Samfiru said.
“But our bankruptcy laws are such that a company can do that. That is where the problem lies. We can talk about Sears Canada’s actions being unfair and inequitable, but it is certainly not illegal.”