Court File and Parties
Court File No.: CV-24-00730212-00CL
Date: 2025-03-10
Ontario Superior Court of Justice – Commercial List
Re: Royal Bank of Canada, Applicant
And: Chesswood Group Ltd. et al., Respondents
Before: Peter J. Osborne
Counsel:
- Marc Wasserman and Mark Sheeley, for the Monitor
- Bradley Wiffen, for Wafra Inc.
- Milly Chow and Kelly Bourassa, for Royal Bank of Canada
- Chris Burr, for North Mill Equipment Finance LLC
- Lee Nicholson, for Deutsche Bank AG, New York Branch
Heard: 2025-03-07
Endorsement
Introduction
The Court-appointed Monitor of the Chesswood Group moves for various relief as more particularly set out in the Notice of Motion:
a. a reverse vesting order approving the proposed Transaction, being a sale of all of the issued and outstanding shares of the Purchased Companies to North Mill, as Purchaser, and granting related relief including the removal of the Purchased Companies from the CCAA Proceedings and the addition of a newly incorporated affiliate of the Vendor (“Residual Co.”);
b. a release in respect of certain parties in respect of claims or potential claims;
c. a sealing order in respect of Confidential Appendix B-2 to the Fourth Report of the Monitor dated February 28, 2025 containing an unredacted copy of the share purchase agreement; and
d. a stay extension to and including May 2, 2025.
Defined terms in this Endorsement have the meaning given to them in the motion materials unless otherwise stated.
The Monitor relies on the Fourth Report, together with the Appendices thereto, which include the Cash Flow Forecast.
At the conclusion of the hearing, I advised the parties that I would grant the motion for reasons to follow. These are those reasons.
Approval of the Proposed Transaction and Reverse Vesting Structure
On December 19, 2024, I approved the sale and investment solicitation process (“SISP”) in this CCAA Proceeding. That SISP has now been completed, and the bid reflected in the proposed Transaction has been determined by the Monitor to be the highest and best bid, with the result that the Monitor seeks approval of the Transaction on this motion.
The nature of the business and the proposed Transaction are somewhat unique, and therefore some background is in order.
Pawnee Leasing Corporation (“Pawnee”) and Tandem Financing (“Tandem”) (collectively, the “Purchased Companies”) are Colorado corporations. They are also subsidiaries of Chesswood US Acquisitionco Ltd., the Pawnee Vendor.
Pawnee is, and Tandem was, in the business of equipment financing in the United States. When Tandem ceased origination activity, Pawnee absorbed Tandem’s loan servicing operations.
Pawnee, together with various special-purpose securitization vehicles that are not subject to these proceedings (the “SPVs”), are party to a number of structured financing, securitization and servicing agreements (the “Securitization Agreements”) and related transactions with various lenders or trustees acting for investors.
Pawnee has originated equipment loans and leases. Pursuant to the Securitization Agreements, Pawnee sold certain pools of equipment leases and loans, together with related receivables, to the related SPVs. Those SPVs in turn pledged those pools of equipment leases and loans to the related Securitization Funders who provided financing to the related SPV. That financing is directly or indirectly secured by those pools of equipment loans and leases (the “Sold Originated Assets”).
The equipment leases and loans originated by Pawnee that have not been sold and pledged are referred to as the “Retained Originated Assets”.
Legal title for equipment related to the Sold Originated Assets and Retained Originated Assets is held either: (i) in the name of a titling trust; or (ii) in the name of Pawnee. As of February 13, 2025, Pawnee held title to 5,156 Sold Originated Assets and 461 Retained Originated Assets.
Sold Originated Assets to which Pawnee holds registered legal title are subject to a Vehicle Trust Agreement or a Vehicle Lienholder Nominee Agreement pursuant to which Pawnee holds such registered legal title for the benefit of the applicable Securitization Funders.
The economic interest of Pawnee in the Sold Originated Assets is based on servicing agreements and potential rights to residual payments where amounts received under the applicable Sold Originated Asset are in excess of the amounts due to the Securitization Funders pursuant to the Securitization Agreements. The Securitizations restrict the retitling of titles while the Securitization Funders are still owed repayments of their original financing. Any re-titling of titles in violation of that restriction could negatively impact the Securitizations, including by depriving the Securitization Funders of the collateral securing their financing, and causing a default under the securitization.
The economic interest in the Retained Originated Assets, which essentially consists of the right to all payments under the applicable leases and loans, together with the underlying equipment, is held by Pawnee. It is these economic interests that together constitute most of the value of Pawnee’s assets and business. These assets are held across 49 states in the United States and where the assets consist of equipment, the interests are registered in the corresponding title Registry in each of those 49 states.
As part of the SISP, the Monitor contacted 198 potential purchasers for Pawnee’s business, of which 32 signed non-disclosure agreements to access the virtual data room. The Monitor received six offers, including one from North Mill Equipment Finance LLC (“North Mill”), that was ultimately identified as the highest and best bid. The assets being purchased by North Mill are therefore primarily comprised of vehicles, vehicle leases, loans and equity interests (directly or indirectly).
On February 28, 2025, the Pawnee Vendor and North Mill entered into the Pawnee SPA, pursuant to which North Mill will acquire, rather than title to the above-noted assets, all issued and outstanding shares in the capital of the Purchased Companies through a reverse vesting structure. The Transaction contemplates that the aggregate cash proceeds will be distributed to the DIP Agent as a mandatory repayment in accordance with the DIP Term Sheet.
Certain assets and liabilities would be retained in the Purchased Companies, while others would be transferred to Residual Co. That latter category includes certain Tax records, Excluded Contracts (together with Claims directly related thereto) and the Equity Interests of Bishop Holdings, LLC (“Bishop”), among other things.
While this Court and other CCAA courts have confirmed their jurisdiction to approve a reverse vesting structure through the exercise of the discretion conferred by section 11 of the CCAA, the courts have also repeatedly confirmed that reverse vesting orders should be the exception and not the rule.
The CCAA, as well as the related jurisprudence, is clear that, in determining whether to approve such a transaction, a court should consider the factors set out in section 36 of the CCAA which address court approval of an asset sale, outside the ordinary course of business:
a. whether the process leading to the proposed disposition was reasonable in the circumstances;
b. whether the monitor approved the process leading to the proposed disposition;
c. whether the monitor filed with the court a report stating that in their opinion the disposition would be more beneficial to creditors than a disposition under a bankruptcy;
d. the extent to which the creditors were consulted;
e. the effects of the proposed disposition on the creditors and other interested parties; and
f. whether the consideration to be received for the assets is reasonable and fair, taking into account their market value.
- These factors have considerable analytical overlap with the Soundair Principles set out in Royal Bank of Canada v. Soundair Corp., 4 O.R. (3d) 1 (C.A.):
a. whether sufficient effort has been made to obtain the best price and the debtor has not acted improvidently;
b. the interests of all parties;
c. the integrity and efficacy of the process for obtaining offers; and
d. whether there has been any unfairness in the working out of the process.
- Where the proposed transaction includes a reverse vesting structure, the following factors as set out in the decision of Penny, J. in Harte Gold Corp. (Re), 2022 ONSC 653 at paras. 36-37 are also properly considered:
a. why the RVO is necessary;
b. whether the RVO structure produces an economic result at least as favourable as any other viable alternative;
c. whether any stakeholder is worse off under the RVO structure than they would have been under any other viable alternative; and
d. whether the consideration reflects the importance and value of the licences and permits (or other intangible assets) being preserved under the RVO structure.
Evidence and Analysis
At the outset, I make one observation about the evidence required on sale approval motions generally. Here, the moving party is the Court-appointed Monitor. There is nothing improper about that, particularly in the circumstances of this case.
However, the requirement remains that properly filed evidence justify the relief being sought. As noted above, the Monitor relies on its Fourth Report. While the law is clear that a report from a Court officer such as a receiver or monitor is properly admissible as evidence (see: Farber v. Goldfinger, 2011 ONSC 2044 and Intercity Realty Inc. v. PricewaterhouseCoopers Inc. et al., 2024 ONSC 2400), the more direct the evidence, the more probative that evidence is. Best practice, particularly on a motion for substantive extraordinary relief like a reverse vesting order, would be to include direct evidence from the parties or, at a minimum, explain why none is available.
Here, and as discussed further below, satisfaction of important elements of the Harte Gold test depend on statements of the Monitor alone as to why a traditional asset sale is impossible. Important facts about other elements of the test from the proposed Purchaser are put in the record by way of a letter from counsel to the Purchaser included as an Appendix to the Fourth Report. An affidavit from an officer or director of the Purchaser (or an explanation as to why none was available) would be more compelling than a letter from counsel appended to a report of the Monitor.
As Walker, J. of the British Columbia Supreme Court has observed at least twice, it is critical, given the extraordinary nature of reverse vesting orders, that there be sufficient evidence filed on applications or motions seeking such relief to explain why it ought to be granted. See: PaySlate Inc. (Re), 2023 BCSC 608 and MCAP Financial Corporation v. QRD (Willoughby) Holdings Inc., 2024 BCSC 1654.
Finally in this regard, I echo the observations of Penny, J. about the importance on motions to approve these types of transactions for a clear and forthright explanation, particularly from the Court officer (whether or not it is the moving party), about the effect of the proposed transaction on all stakeholders, including junior or unsecured creditors and equityholders. See: MPX International Corporation (Re), 2022 ONSC 7152 at paras. 12–14. This is an important part of the analysis, particularly where, as I have found here, there is good answer to the question about the effect and potential prejudice to the stakeholders.
Ultimately, the parties satisfied me with respect to the Harte Gold factors, to which I now turn.
Application of the Harte Gold Factors
With respect to the first Harte Gold factor, is the RVO structure necessary? The obvious question with respect to the proposed Transaction is why a traditional asset sale would not work here. The business of the Applicants is essentially equipment, vehicle and legal financing. It was not immediately clear to me from a review of the motion materials why title to assets such as equipment could not be transferred and why agreements and security interests could not be assigned.
At paragraph 41 of the Fourth Report, the Monitor states that “an asset structure whereby title is transferred post-closing would significantly delay a buyer’s ability to gain the economic benefit of the Retain Originating Assets … [there] would be a significant administrative burden on the Pawnee Vendor and the Purchased Companies, [and] it would result in significant additional costs.” The Fourth Report goes on to describe, based on information the Monitor received from the Purchaser, how the titling transfer process would take approximately three months, would require that a third-party titling service be retained, and would have an estimated cost of USD $500,000.
In my view, the fact that a period of time would be required to register the transfer of assets, that there would be an administrative burden, and that additional costs would be incurred, would not automatically make a reverse vesting structure necessary. Among other things, those challenges could presumably be factored into the purchase price, closing date, and other terms of any offer for the assets being sold.
However, I am satisfied here that, while these factors were clearly present, a reverse vesting structure is indeed the only mechanism by which the proposed transaction (or any similar transaction) could be effected in the somewhat unique circumstances of this case. Among other things, the proposed Purchaser (and indeed any proposed purchaser) would be unable to finance the purchase price, as was clearly required, since the relevant ratings agencies would not accept an alternative structure, and therefore would not provide the necessary financing.
North Mill intends to finance its acquisition through a Warehouse Lender, and then securitize the Purchased Assets comprised of loans and leases immediately following closing, or to the extent that the Purchased Assets are already part of a securitization program maintained by the applicable Applicants, to continue to service such Securitized Purchased Assets through a subsidiary, acting as a replacement servicer.
In either case, however, North Mill will require that the new or existing securitization programs be rated by applicable rating agencies. The letter appended to the Fourth Report is clear in stating that: “If the Rating Agencies will not rate the post-Closing securitization programs, North Mill will withdraw the Offer”. This flows from the fact that North Mill has been advised (according to the letter) that the Warehouse Lenders will not lend against, and the Reading Agencies will not permit Purchased Assets titled in the name of PLC to be included in, the collateral of North Mill’s securitization programs.
North Mill consulted with two ratings agencies: Moody’s Investor Service Inc. and Fitch Ratings Inc. The letter from counsel to the proposed Purchaser confirms that neither of those two ratings agencies would permit any Retained Originated Assets titled in Pawnee’s name to be included in the calculation of collateral of the Purchaser’s securitization programs, absent a reverse vesting structure. Moreover, such a restriction would apply regardless of whether a power of attorney was in place with respect to such assets.
The letter goes on to describe additional but significant Titling Issues (which are defined), and the requirement for various Consents provided by the beneficiaries under the titling trusts, all of which can be avoided through a reverse vesting structure, absent which the threshold requirement of getting the Purchased Assets into North Mill’s securitization programs would remain impossible.
It follows that North Mill advised that it would be prepared to proceed only by way of a reverse vesting structure since North Mill would be unable to finance the Transaction (also as confirmed in the letter), through its Warehouse Lender if the titling issue was not resolved.
I also observe that the only other potential transaction, being negotiated as a backup transaction, also requires a reverse vesting structure (but provides for less consideration, without a deposit and contains a due diligence condition). That gives me additional comfort that the issues and concerns are not, for example, unique to North Mill and its ability to finance the purchase.
With respect to the second Harte Gold factor, does the RVO structure produce an economic result at least as favourable as any other viable alternative? I am satisfied that it does. The proposed transaction represents the best and highest bid identified in the SISP (and, as noted above, the only other potential transaction requires the same structure).
The Monitor has opined that the consideration payable under the proposed transaction represents a greater recovery than could be achieved in a bankruptcy. The transaction is supported by the Pre-Filing Lenders and the DIP Lenders (including RBC, represented on this motion).
With respect to the third Harte Gold factor, are any stakeholders worse off under an RVO structure than they would have been under any other viable alternative? On my review of the materials, this was another concern. It was not clear precisely which, if any, stakeholders would be prejudiced by the proposed RVO structure, and if so, precisely to what extent. For example, the specific nature and quantum of the excluded liabilities and Excluded Contracts sought to be stranded in Residual Co. was not immediately clear. There are both secured and unsecured creditors of the Applicants today.
With respect to this factor, I am now satisfied that no stakeholders, including, in particular, existing creditors (secured or unsecured), would be worse off. I have come to this conclusion for a number of reasons.
As a preliminary matter, in this regard, I note that the motion materials were served on the Service List, and also all contractual counterparties of the Purchased Companies whose contracts may contain change of control or assignment provisions. None has filed materials or appears to oppose the relief sought.
As to the substantive issue, the cash portion of the purchase price is significantly less than the quantum of the aggregate secured obligations outstanding under the Existing Credit Agreement and the outstanding DIP Borrowings. The result is that all of the net proceeds, in this or any other transaction, would ultimately be payable to the Pre-Filing Lenders and the DIP Lenders. Both of those constituencies support the proposed transaction. Moreover, there would still be a material shortfall in the repayment of amounts owed to the Pre-Filing Lenders.
Moreover, the Fourth Report states that the Monitor has reviewed the books and records of the Purchased Companies and understands that unsecured claims total approximately USD $3.2 million.
Given the shortfall noted above with respect to the Credit Facility Obligations, the Monitor anticipates, and I accept, that the Pre-Filing Lenders would be able to carry a vote on any plan of arrangement since their deficiency claim would “swamp” the vote of the unsecured creditors, given the aggregate value of unsecured claims.
In addition, given the results of the SISP and anticipated recoveries resulting from net proceeds, under either the proposed Transaction or any alternative transaction or in a bankruptcy, there is no scenario in which there is likely to be any recovery for unsecured creditors in any event. Accordingly, none is worse off.
There is one wrinkle with respect to Bishop. As noted above, the Equity Interests of Bishop are Excluded Assets. The indirect shareholder of Bishop is Wafra, who appeared on this motion. As at the date of the hearing, the parties were in discussions and were confident that those discussions would result in a consensual resolution of issues between them. However, no agreement had been reached. As a result, but in order to facilitate approval of the relief sought now, the Monitor and North Mill jointly requested (with the support and consent of Wafra), that the following language be in this Endorsement:
The Court is advised that discussions are ongoing between North Mill and Wafra, the indirect shareholder of Bishop Holdings LLC and Bishop Holdings Finance Trust LLC (collectively the “Bishop Entities”), with respect to the treatment under the Pawnee Transaction of certain servicing and other agreements among Pawnee and the Bishop Entities (collectively, the “Bishop Agreements”). To provide additional time for such discussions, the Monitor, North Mill and Wafra agree that all matters with respect to the Bishop Agreements shall, if necessary, be determined by the Court at a future attendance, and all parties’ rights are reserved. Accordingly, the approval of the SPA and the granting of the ARVO does not constitute a determination (a) that the Bishop Agreements constitute Retained Contracts for purposes of the SPA; or (b) whether paragraph 14(i) of the ARVO (relating to change of control provisions) shall apply in respect of the Bishop Agreements. The Monitor, North Mill and Wafra agree that in all circumstances the ARVO does not amend, modify, or alter the terms of the Bishop Agreements.
If North Mill and Wafra reach consensual arrangements pursuant to which the Bishop Agreements constitute Retained Contracts and no modifications to the ARVO in relation to the Bishop Agreements are required, the Monitor’s Certificate shall reference that outcome and no further relief or determination will be required from the Court with respect to the Bishop Agreements. If North Mill and Wafra do not reach consensual arrangements, the Court will make a determination with respect to the Bishop Agreements and the application of the ARVO at a further attendance. If a further attendance is required, the Monitor, North Mill and Wafra may establish a schedule for the filing of materials or schedule a case conference with the Court as necessary.
I am prepared to accede to the joint request and include the above language, but do so only having clarified its effect with the parties at the hearing. The agreed language above provides, in relevant part, that if North Mill and Wafra do not reach an agreement, the Court is to make a determination with respect to the Bishop Agreements and the application of the Transaction approval and vesting order being sought today.
To be clear, this means that as of the hearing of this motion, the Bishop Agreements may or may not be Retained Contracts or Excluded Contracts (i.e., they may or may not be included in the Transaction). I confirmed with all parties, and in particular North Mill as Purchaser, that the fact that it was prepared to proceed and indeed wished to proceed with the approval motion now meant that it was prepared to close the Transaction with or without the Bishop Agreements.
The issue may be moot if the parties resolve all concerns, but if it remains outstanding to be determined, such will not affect the approval of the Transaction or the preparedness of the parties to complete the Transaction if approved. Absent that confirmation, this issue would have been another reason weighing against approval of the transaction at this time.
With respect to the fourth Harte Gold factor, does the consideration payable in the proposed Transaction reflect the importance of the licences and permits being preserved? I struggled with this factor also, as there is not a great deal of direct evidence on the point. However, and having reviewed with counsel at the hearing the above factors, I am satisfied that the evidence referred to above also satisfies this requirement.
By that I mean that the nature of the assets being conveyed (title to a significant number of vehicles and security interests registered in a large number of jurisdictions), and in particular, the fact that the rating agencies will not permit the value of the purchased assets to be included in a calculation of the quantum of collateral to be pledged as security for the required financing absent an RVO structure, can only mean, if implicitly, that the consideration being offered by way of the purchase price reflects the preservation of the necessary licences and permits.
For all of these reasons, I am satisfied that the proposed Transaction, including the reverse vesting structure, should be approved. Fundamentally, all economically affected stakeholders are on notice and none opposes the relief sought. As noted above, the net proceeds from the Transaction will be paid to the same parties in any event, so none is worse off.
Proposed Releases
The proposed order provides for limited releases in favour of the Released Parties. I am satisfied, having heard the submissions of counsel and based on the record concerning the relatively unique circumstances of this case, that the proposed releases are appropriate in the circumstances. See: Lydian International Limited (Re), 2020 ONSC 4006 at para. 54. The proposed releases are limited in scope to matters arising in connection with or relating to the share purchase agreement, the proposed Transaction, and the proposed RVO.
In approving the releases here, it seems to me that the list of parties proposed to be released is toward the high water mark of those individuals and parties who meet the Lydian test. I recognize that there have been many cases in which third party releases have been approved in favour of the parties, their professional advisors, as well as their directors, officers and others, including outside the context of a plan of arrangement and in connection with the sale transaction. See: Arrangement relatif à Blackrock Metals Inc., 2022 QCCS 2828 at para. 128. Depending on the circumstances of each individual case, such releases may be entirely appropriate.
I do, however, remind the parties of the requirement for evidence in the record upon which any relief granted by the court must be based. Moving parties requesting such relief, and their counsel, should be prepared to point to evidence in the record before the court as to how, for example, a former director or consultant to a proposed purchaser satisfies the Lydian factors of having been necessary to the restructuring and having contributed to the restructuring.
Extension of Stay of Proceedings
I am satisfied that the stay of proceedings should be extended from March 31, 2025 to and including May 2, 2025 pursuant to section 11.02(2) of the CCAA. This will give the Monitor and the stakeholders sufficient time to close the transaction, address and complete post-closing matters, and otherwise administer the estate. They have been acting, and continue to act, in good faith and with due diligence.
Updated cash flow projections prepared by the CCAA Parties, in consultation with the Monitor, demonstrate that the CCAA Parties will have sufficient liquidity to fund operations through the proposed extension period. I am satisfied that no creditor would be materially prejudiced by the proposed extension.
Sealing Order
Finally, the Monitor seeks a sealing order in respect of the Confidential Appendix to the Fourth Report. The Confidential Appendix contains commercially sensitive information related to the Transaction which, if public, would materially impair any sales process that would be required in the event that the Transaction did not close, and the shares or assets were required to be remarketed and sold. The proposed sealing order is in effect only until further order of the Court.
I am satisfied that there is a public interest in both maximizing recovery in this insolvency and in protecting the integrity of a Court-ordered sales process. There are no reasonable alternatives to sealing the Confidential Appendix and the information contained therein is discrete, proportional and limited. It follows that the salutary effects of sealing the material outweigh the deleterious effects of doing so. For all of these reasons, the test set out by the Supreme Court of Canada in Sierra Club and refined in Sherman Estate is met.
Result and Disposition
- For the above reasons, the motion is granted. I have signed both orders and they have immediate effect without the necessity of issuing and entering.
Peter J. Osborne
