SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED

AND IN THE MATTER OF a Plan of Compromise or Arrangement of The Futura Loyalty Group Inc., Applicant

BEFORE: D. M. Brown J.

COUNSEL:
S. Reid, for the Applicant

G. Azeff and A. Iqbal, for the Monitor, Harris & Partners Limited

J. Desjardins, for DirectCash Payments Inc.

D. Pearlman, for Aimia Canada Inc.

HEARD: November 13, 2012

REASONS FOR DECISION

I. Overview of orders sought under the CCAA

[ 1 ] By Initial Order made October 16, 2012, the applicant, The Futura Loyalty Group Inc., obtained the protection of the Companies’ Creditors Arrangement Act , R.S.C. 1985, c. C-36. By order made October 26, 2012, another judge of this Court approved a proposed Sale and Investor Solicitation Process and granted other relief. Futura now moves for orders (i) extending the Stay Period until January 18, 2013, (ii) increasing the DIP Facility from $175,000 to $300,000, (iii) permitting it to honour prepayments made for Aeroplan Miles by Prepaying Merchant Customers, and (iv) varying the Initial Order to defer giving notice under section 23 of the CCAA to Prepaying Merchant Customers.

II. Extending the Stay Period and increasing the DIP Facility

[ 2 ] Futura seeks an extension of the Stay Period in order to enable it to work on the SISP which, it hopes, will result in either a going-concern sale or new investment implemented through a plan of compromise or arrangement. The Monitor supports the request and, in its Second Report dated November 9, 2012, expressed the view that Futura has acted and continues to act in good faith and with due diligence. DirectCash Payments Inc., which holds first ranking secured debt of about $300,000, also supported the extension, as did Aimia Canada. I am satisfied that the evidence disclosed that Futura has acted, and is acting, in good faith and with due diligence and the requested extension is necessary to implement the SISP. The updated cash flow forecast filed by Futura shows that with the increase in the DIP Facility, the applicant has sufficient cash to carry on its operations until January 18, 2013. Pursuant to CCAA s. 11.02(2) I grant the extension of the Stay Period until January 18, 2013.

[ 3 ] As to the proposed increased in the DIP Facility, Futura has demonstrated the need for such an increase in order to maintain its operations until the end of the Stay Period. The parties present, including the secured creditor, supported the proposed increase. The evidence filed by the applicant and the Monitor satisfies the requirements of CCAA s. 11.2, and I approve the requested increase in the DIP Facility.

III. Prepaying Merchant Customers: request to honour prepayments made prior to the Initial Order

[ 4 ] As described by David Campbell, Futura’s CEO, in his affidavit sworn November 9, 2012, Futura provides “loyalty solutions” for its customers. Its major customer reward program involves selling Aeroplan Miles to merchants under an Aeroplan Coalition Program. Over 75% of the applicant’s revenues are generated by the resale of Aeroplan Miles pursuant to the Aeroplan Coalition Program.

[ 5 ] Under that Program, Merchant Customers of Futura typically pay the applicant monthly, in arrears, for Aeroplan Miles they have issued to their customers in that month. However, prior to the filing of its application under the CCAA , Futura on occasion offered Merchant Customers the opportunity of buying Aeroplan Miles at volume discounts. The Merchant Customers would purchase those discounted Aeroplan Miles by pre-paying Futura.

[ 6 ] Mr. Campbell deposed that as of the date of the Initial Order ten (10) Prepaying Merchant Customers had prepaid to Futura approximately $108,000 for 2.5 million Aeroplan Miles. Futura has calculated that it pays out approximately $20,000 a month to Aeroplan on account of those pre-paid Miles.

[ 7 ] Futura seeks an order of this Court permitting it to honour prepayments made for Aeroplan Miles by those Prepaying Merchant Customers. Mr. Campbell deposed:

Although payment to Aeroplan on behalf of Prepaying Merchant Customers for prepayments made prior to the date of the Initial Order could be considered to be payment for the benefit of the Prepaying Merchant Customers as unsecured creditors of the Applicant, such payments are necessary in order to maintain the status quo and to ensure the continuous ongoing operations of the Applicant’s business and the preservation of the Applicant’s brand in the marketplace. This would enhance the likelihood of a going-concern sale by the Applicant that would maximize value for the benefit of all creditors.

Mr. Campbell also pointed out that Futura had made a similar request in its October 26 motion to allow the continuous payment of Futura Reward Payments; the court approved that request in its October 26 Order.

[ 8 ] In its Second Report the Monitor supported Futura’s request for an authorization order:

Futura and the Monitor share the view that such payments are necessary in order to maintain the status quo , ensure the continuous ongoing operations of Futura’s business and preserve its brand in the marketplace.

[ 9 ] DirectCash and Aimia Canada supported the relief sought by Futura.

[ 10 ] Section 11 of the CCAA authorizes a court to “make any order that it considers appropriate in the circumstances”, “subject to the restrictions set out in this Act”. As Morawetz J. observed in Re Nortel Networks Corp. , the “ CCAA is intended to be flexible and must be given a broad and liberal interpretation to achieve its objectives…” [1] Although counsel could not point me to a case in which a court had permitted an applicant to satisfy a pre-filing credit or claim enjoyed by a customer outside of the CCAA claims process, some precedent exists for permitting the payment of pre-filing obligations in the case of non-critical suppliers.

[ 11 ] In both Eddie Bauer of Canada Inc. [2] and EarthFirst Canada Inc. [3] the courts considered requests to approve payments to creditors in respect of pre-filing obligations. In the Eddie Bauer case Morawetz J. granted the approval writing:

[22] The proposed order also provides that the Applicants shall be entitled but not required to pay amounts owing for goods and services actually supplied to the Applicants prior to the date of the Order. The RSM Report comments on this point. The Eddie Bauer Group is of the view that operations could be disrupted and its vendor relationships adversely impacted if it does not have the ability to pay pre-filing obligations to certain vendors and it further believes that the value of its business will be maximized if it can pay its pre-filing creditors. RSM has reviewed this issue and is supportive of this provision as the Eddie Bauer Group believes it is a necessary provision and the DIP Lenders are supportive of the Restructuring Proceedings. The relief requested in these proceedings is consistent with the relief sought in the Chapter 11 Proceedings. This provision is unusual but, in the circumstances of this case, appears to be reasonable. (emphasis added)

[ 12 ] In EarthFirst Canada Romaine J. approved the creation of a “hardship fund” to pay pre-filing obligations owed to certain suppliers and contractors of the applicant. The evidence in that case revealed that some suppliers and contractors in a remote community had become quite dependent upon the applicant’s wind farm project and, if they were not paid, they would “face immediate financial difficulty”. Romaine J. wrote:

[7] While the nature of payments from the hardship fund is different from the issue that was before Farley, J. in Re Air Canada , 2003 CarswellOnt. 5296 (at para. 4 ), and while EarthFirst is not suggesting that recipients of the fund are "critical suppliers" in the usual sense of the term, it appears to be the case that, as in Air Canada , the potential future benefit to the company of these relatively modest payments of pre‑filing debt is considerable and of value to the estate as a whole. The decision to allow the hardship fund thus outweighs the prejudice to other creditors, justifying a departure from the usual rule.

[ 13 ] In those two cases the courts were prepared to countenance the payment of pre-filing obligations to suppliers in order to prevent disruption to the operations of the applicant and to maximize the value of the business for purposes of the re-organization or realization process. In the EarthFirst Canada case the court engaged in a form of proportionality or cost-benefit analysis, weighing the cost of the pre-payments against the benefit to the estate as a whole.

[ 14 ] The present case does not involve a request to make payments to suppliers for pre-filing obligations, but concerns a somewhat analogous request to make payments which would satisfy pre-filing credits enjoyed by some important customers. The kind of cost-benefit reasoning undertaken in the Eddie Bauer and EarthFirst cases offers some guidance. My Reasons granting the Initial Order stated that the book value of Futura’s assets was approximately $1.35 million. The most recent cash-flow projection filed by the applicant made allowance for “payments to loyalty currency providers”, which included the payments in respect of the Prepaying Merchant Customers. When compared against projected inflows from the collection of receivables through to January 18, 2013 of approximately $440,000 (the only source of cash apart from the increased DIP Financing), the honouring of $108,000 in pre-paid Aeroplan Miles for the Prepaying Merchant Customers is not an insignificant amount. However, on the other side of the scale is the evidence from Futura that 75% of its revenue comes from the resale of Aeroplan Miles and under its SISP it is seeking to secure a going-concern sale of the company’s business.

[ 15 ] Given the importance of the ongoing resale of Aeroplan Miles to the viability of Futura as a going-concern, the benefit to the company’s re-organization efforts of trying to maintain the Prepaying Merchant customers as continuing customers, and the absence of any opposition to the order sought, I conclude that it is appropriate in the circumstances to grant an order “permitting the Applicant to honour prepayments made for Aeroplan Miles by Prepaying Merchant Customers” prior to the making of the Initial Order, as requested in paragraph 5 of Futura’s notice of motion. Such authorization, in my view, is consistent with and fosters the objectives of the CCAA .

[ 16 ] Futura submitted a draft order which contained different language of authorization. I informed counsel that the revised language was vague and imprecise, and I would not approve it. Paragraph 5 of Futura’s notice of motion was short, sweet and to the point, so the language of the draft order Futura submits for my consideration must reflect that precision.

IV. Dispensing with notice to Prepaying Merchant Customers

[ 17 ] The Prepaying Merchant Customers were not given notice of this motion. I have made the order authorizing the honouring of their prepayments in any event because it is to their benefit. Futura requests that I vary the CCAA s. 23 notice provision in my Initial Order in order to “defer notice to Prepaying Merchant Customers”. Again, the Monitor, DirectCash Payments and Aimia Canada support the applicant’s request.

[ 18 ] Section 23(1)(a)(ii)(B) of the CCAA requires a monitor, within five days after the making of an initial order, to send, in the prescribed manner, “a notice to every known creditor who has a claim against the company of more than $1,000 advising them that the order is publicly available”. In this case the Monitor has not sent such notice to the Prepaying Merchant Customers.

[ 19 ] Why is that so? No explanation was offered by the Monitor in its Second Report. I am disappointed that none was. In oral submissions Monitor’s counsel stated that the Monitor only learned from the applicant on October 27, 2012 that the Prepaying Merchant Customers were creditors of the applicant. Mr. Campbell, in his affidavit, did not explain why it took the applicant almost two weeks after the Initial Order to recognize the Prepaying Merchant Customers as creditors and to so inform the Monitor.

[ 20 ] Why does the applicant not want the Monitor to give CCAA s. 23 notices to the creditor Prepaying Merchant Customers? In his affidavit Mr. Campbell deposed:

Direct notification of the CCAA Proceedings to the Prepaying Merchant Customers could cause them to cancel their participation in the Aeroplan Coalition Program, which would have a detrimental effect on the ongoing operation and value of the Applicant’s business.

Since the Applicant is seeking an order allowing it to continue to honour prepayments made under the Aeroplan Coalition Program in the ordinary course, and since a going concern sale of this business may be achieved, it is not currently necessary, and could be detrimental to the Applicant’s business, to provide such merchants with direct notice of the CCAA Proceedings at this time. If a going concern sale of its Aeroplan Coalition Program cannot be achieved, such that the Prepaying Merchant Customers may be affected by this proceeding, the Applicant will give notice to such merchants at the relevant time.

In its Second Report the Monitor echoed the position of Futura.

[ 21 ] I recognize that the October 26 Order contained a variation of the paragraph 43 Initial Order notice provision to exempt, from the Monitor’s statutory duty to give notice of this proceeding, “claimants under the Futura Rewards Program”. No reasons accompanied that order, so I am unable to understand the basis for the granting of that variation.

[ 22 ] I am not prepared to vary the Initial Order to excuse the Monitor from providing the requisite creditor notice to the Prepaying Merchant Customers under section 23(1)(a)(ii)(B) of the CCAA . Transparency is the foundation upon which CCAA proceedings rest - a debtor company encounters financial difficulties; it seeks the protection of the CCAA to give it breathing space to fashion a compromise or arrangement for its creditors to consider; in order to secure that breathing space, the CCAA requires the debtor to provide its creditors, in a court proceeding, with the information they require in order to make informed decisions about the compromises or arrangements of their rights which the debtor may propose. As a general proposition, open windows, not closed doors, characterize CCAA proceedings.

[ 23 ] In the present case the Monitor published, as ordered, a notice in the Globe and Mail shortly after the Initial Order was made and, as ordered, established a website to which the Initial Order was posted. Given that the Monitor has given general public notice of these proceedings as ordered by this Court, I cannot see any principled basis upon which to excuse the Monitor from giving specific notice to one group of creditors – the Prepaying Merchant Customers.

[ 24 ] Mr. Campbell deposed that giving notice to the Prepaying Merchant Customers “could cause them to cancel their participation in the Aeroplan Coalition Program”. Initiating CCAA proceedings always carries some risk that the applicant’s suppliers or customers may re-think doing business with the debtor. One of the tasks of a debtor’s management is to persuade suppliers or customers that in the long-run it would be better to hang in with the debtor than to abandon it. Such persuasion must be done in every CCAA proceeding; this one is no different.

[ 25 ] For those reasons I decline to grant the applicant’s request to vary the notice provisions of the Initial Order.

V. Summary

[ 26 ] By way of summary, I grant the applicant an extension of the Stay Period until January 18, 2013, an increase in the DIP Facility to $300,000, and permission to honour prepayments made for Aeroplan Miles by Prepaying Merchant Customers. I also approve the First and Second Reports of the Monitor and the actions and activities of the Monitor described therein.

________ (original signed by) ________________

D. M. Brown J.

Date : November 13, 2012

[1] (2009), https://www.canlii.org/en/on/onsc/doc/2009/2009canlii39492/2009canlii39492.html , 55 C.B.R. (5 th ) 229 (Ont. S.C.J.), para. 47 .

[2] https://www.canlii.org/en/on/onsc/doc/2009/2009canlii32699/2009canlii32699.html

[3] https://www.canlii.org/en/ab/abqb/doc/2009/2009abqb78/2009abqb78.html