Movie Gallery

December 31, 2012


Movie Gallery

The Challenge:

Movie Gallery filed Chapter 11 proceedings in US, resulting in the liquidation and closure of approximately 1,200 stores across the US.  Initially, little if any attention was focussed on the Canadian operations which comprised 180 stores across Canada.  As all back-office functions were provided from Movie Gallery’s head office Portland, Oregon and this was being shut, an orderly liquidation of sale of the Canadian operation was required.  Landlords were in arrears and the company faced significant risks of legal action by numerous landlords.

The Solution:

Movie Gallery filed a Notice of Intention to Make Proposal under the Bankruptcy & Insolvency Act (“BIA Proposal”). Farber was appointed as Proposal Trustee with a mandate to oversee the sale/liquidation of the Canadian stores. The BIA Proposal provides a streamlined process for companies to restructure or sell distressed businesses in Canada. It is a process very similar to Chapter 11 proceedings in USA and restructurings under the Companies Creditor Arrangement Act (“CCAA”) in Canada. Many national retail chains have been restructured or sold under CCAA protection but, in this particular case, we opted for use of the BIA Proposal as a cost-effective and streamlined mechanism to achieve the same objectives.

Due to the legacy nature of the DVD/video store business, restructuring was not a viable long term objective.  Thus, Farber expeditiously launched a Court-approved sales and marketing process whereby the Canadian assets of Movie Gallery were offered for sale as a going concern. Liquidation bids were simultaneously requested from liquidators.  Given the state of this industry and impending closure of head-office in Portland, it is not surprising that liquidation was the preferred course of action.

Farber supervised the liquidation of the 180 stores, located in strip malls across Canada, and worked closely with the liquidator that was selected to operationalize the retail liquidation.  The typical and preferred mode of operation for the sale or liquidation of insolvent retail chains is to leave the debtor-in-possession, which continues to provide supporting services such as human resources, finance and accounting and IT.

The BIA or CCAA filing provides protection from creditors in the form of a stay of proceedings. This provides critical breathing room for the company to restructure or conduct an orderly sale of its business. This is extremely important when dealing with a national retailer with many thousands of employees, landlords and other creditors. The entire restructuring, including the sales and marketing process, is supervised by the Courts in Canada. Where necessary Chapter 15 recognition or a companion Chapter 11 filing will be necessary in the USA to deal with retail stores and distribution centres located south of the border.

BIA/CCAA provides crucial tools for dealing with landlords. This includes allowing for the liquidation sales of inventory and fixtures to be conducted in stores, subject to Court approved Sale Guidelines.  These statutes enable the retailer/insolvency practitioner to disclaim non-profitable lease locations and assign desirable leases to a successor entity.  Farber has extensive experience in negotiating with these critical stakeholders and has well-established credibility with major landlord groups in Canada.

The Results:

Importantly, the process enables the Company to access debtor-in-possession financing (commonly referred to as “DIP Financing”) to finance the operations and costs of a restructuring/liquidation.  The Court will often award such DIP lender a priority charge to facilitate such borrowing, which is the lifeblood of any successful restructuring.  Farber can assist with sourcing DIP financing through its extensive network.

In Movie Gallery, the Canadian liquidation went exceedingly well and will result in the Canadian creditors receiving 100 cents on the dollar, with possible repatriation of equity to the US parent company.

Allan Nackan is a Partner at Farber and co-leads the firm’s Restructuring practice. His practice focuses on corporate insolvency and restructuring, financial advisory services, cross-border restructuring, fraud investigations and forensic accounting. Allan can be reached at 416.496.3732 and