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 TO TBS ACQUIRECO INC., THE BARGAIN! SHOP HOLDINGS INC. and TBS STORES INC.

BEFORE: D. M. Brown J.

COUNSEL: A. Merskey and D. Pearlman, for the Applicants, TBS Acquireco Inc., The Bargain! Shop Holdings Inc. and TBS Stores Inc.

M. Laugesen, for Wells Fargo Capital Finance Corporation Canada

J. Sirivar, for BlackRock Kelso Capital Corporation

L. Galessiere, for Loblaw Properties Ltd., OPB Realty Inc. and Highland Park Shopping Centre Inc.

E. Lamek, for the Monitor

D. Yiokaris, A. Scotchmer and J. Harnum, for Certain Terminated Employees

HEARD: July 9, 2013

REASONS FOR DECISION

I. Motions in a CCAA proceeding to approve a sale, assign contracts and appoint representative counsel for terminated employees

[1] On February 26, 2013, this Court made an order granting the application of TBS Acquireco Inc. (“TBS”) and certain of its direct Canadian subsidiaries, The Bargain! Shop Holdings Inc. (“TBSHI”) and TBS Stores Inc. (“TBSI”), for relief under the Companies’ Creditors Arrangement Act (“CCAA”) (the “Initial Order”). The Initial Order appointed Ernst & Young Inc. as monitor. The applicants operate a chain of general merchandise retail stores under the names “The Bargain! Shop” and “Red Apple”. The stores largely are located in smaller communities across Canada.

[2] In previous orders this Court approved a sale and investment solicitation process (“SISP”) and the liquidation of a large number of stores the applicants had decided to divest as part of their restructuring under the CCAA process.

[3] The applicants moved for (i) approval of the transaction with BlackRock Kelso Capital Corporation contemplated pursuant to an agreement of purchase and sale dated as of June 10, 2013 between the applicants, as sellers, and BlackRock Kelso, or its designate, as purchaser (the “Transaction”). As well, the applicants sought approval under section 11.3 of the CCAA for the assignment of certain Acquired Store Leases and Designated Contracts.

[4] In addition, Ms. Lucy Zita, a former employee of the applicants, moved for an order appointing her as a representative of terminated employees of the applicants, appointing representative counsel and requiring that the legal fees incurred on behalf of such terminated employees to ensure maximum recovery under the Wage Earner Protection Program Act be paid out of some of the proceeds of the BlackRock Kelso transaction.

[5] Yesterday morning I granted the applicants’ motion and I dismissed the motion by the Terminated Employees, with these written Reasons to follow.

II. The BlackRock Transaction

[6] Section 36(1) of the CCAA governs: see, also, Re White Birch Paper Holding Company, [2010] Q.J. No. 10469, paras. 48-49.

[7] Proper notice of this approval motion was given to all interested parties by service of those on the service list, including secured creditors who were likely to be affected by the proposed sale. No interested party opposed the relief sought. The senior secured creditor, Wells Fargo Capital Finance Corporation Canada, supported the applicants’ motion.

A. The sale process

[8] By order made April 25, 2013, this Court approved the SISP. The approved process permitted a secured lender to make a credit bid.

[9] Both the applicants and the monitor filed detailed evidence describing the steps taken during the SISP. In addition to utilizing a standard solicitation/confidentiality agreement/electronic data room due diligence marketing process, the applicants, after consultation with the Monitor, established a special SISP Committee comprised of senior management which assisted the Monitor in administering the SISP without the need for involving the applicants’ boards. This structure was put in place because most members of the boards were related, had expressed interest in submitting an offer under the SISP, or otherwise were involved with potential SISP participants.

[10] The evidence filed disclosed that the applicants followed the SISP procedures approved by this Court.

[11] The Monitor reported that in its view the timelines in the SISP were commercially reasonable and all interested parties had a reasonable opportunity to participate in the SISP and to submit an offer.

[12] I conclude that the process leading to the proposed sale was reasonable in the circumstances, the securing of court approval of the SISP enabled creditors to comment on the sale process chosen, and the Monitor supported and actively participated in the process leading to the proposed sale.

B. The BlackRock Transaction

[13] By the bid deadline the applicants had received two bids: a financing offer from a Toronto asset-based lender that was subject to further due diligence and negotiation and the BlackRock Kelso going-concern offer. Eric Claus, President of the applicants, deposed the BlackRock Kelso offer “represented the best alternative for the Applicants’ business and its numerous stakeholders, including approximately 1,800 employees, landlords for 165 locations and many suppliers across the country.” The Monitor reported that the BlackRock Transaction “offered financial terms that were clearly superior to the other bid that was received and the Monitor is satisfied that the consideration to be received for the assets is fair and reasonable in the circumstances”.

[14] Under the Transaction, a subsidiary of BlackRock Kelso will purchase substantially all of the applicants’ assets and is committed to continuing running 165 of the applicants’ stores. The purchaser will offer employment to all employees of the applicants, save for those who worked at stores that have been closed or liquidated, and will offer employment to all senior management of the applicants. The purchase price contains several components:

(i) The payment in cash on closing of the applicants’ debt to Wells Fargo of approximately $20 million;

(ii) Settlement of the applicants’ debt to BlackRock Kelso of approximately $23 million, save for about $500,000;

(iii) The purchaser’s commitment, supported by BlackRock Kelso, to transition funding pursuant to a Funding and Transition Agreement, including a commitment to fund certain Priority Payables ($1.2 million) and CCAA Completion Costs ($1.8 million). The Priority Payables consist largely of unremitted HST and PST and a cash collateralization of the administrative reserve; and,

(iv) The assumption by the purchaser of certain obligations of the applicants to its employees and customers, including ordinary course of business obligations to employees who accept employment with the purchaser, obligations under the Acquired Store Leases and Designated Contracts, and honouring gift cards and certificates and obligations incurred post-filing in connection with open purchase orders and goods in transit (all estimated at approximately $3.6 million).

The BlackRock Agreement of Purchase and Sale contains certain conditions, including the obtaining of all consents necessary for the assignment of Acquired Store Leases and Designated Contracts (largely IT service and equipment rental contracts).

[15] The purchase price will not be sufficient to offer any consideration to the applicants’ unsecured creditors for amounts owing prior to the commencement of this CCAA proceeding.

[16] In light of the credit bid component of the BlackRock offer, the Monitor obtained security opinions from its legal counsel concerning the validity, perfection and enforceability of the BlackRock Kelso security. The Monitor reported that “subject to the standard qualifications and assumptions, the security opinions conclude that the BlackRock Kelso security is valid and enforceable, and is properly perfected in each of the Reviewed Provinces where the security is registered against a particular Applicant”. The priority of security between BlackRock Kelso and Wells Fargo is subject to an intercreditor agreement.

[17] The Monitor reported that in its view “the proposed Transaction will maximize value for all stakeholders of the Applicants, including their creditors, employees, suppliers and other stakeholders as opposed to a liquidation under a bankruptcy, as well as to ensure the continued employment of numerous employees of Applicants”.

C. Analysis

[18] Based upon my review of the evidence, the BlackRock Transaction should be authorized. The SISP was approved by this Court and was followed. The applicants seek approval of the superior bid. Although the transaction only will offer consideration to secured creditors, it will see the continuation of a substantial portion of the applicants’ business, albeit under the ownership of the purchaser, with the preservation of approximately 1,800 jobs and the continuation of 165 store leases: Nortel Networks Corp. (Re) (2009), 2009 39492 (ON SC), 55 C.B.R. (5th) 229 (Ont. S.C.J.), para. 47. I therefore authorize the BlackRock Transaction under CCAA s. 36.

III. Assignment of Acquired Store Leases and Designated Contracts

[19] The affidavit of Mr. Klaus and the Monitor’s report described in detail the efforts made to secure the consents of the landlords to the assignment to the purchaser of the store leases for the locations to be assumed under the BlackRock Transaction (the “Acquired Store Leases”) and to secure the consents of the counterparties to several IT servicing and equipment rental contracts, the so-called Designated Contracts. As part of the dealings with the landlords and contract counterparties, the applicants, with the assistance of the Monitor, sought to identify the amount of the cure costs owing in respect of each location or contract. Detailed information packages were sent to each landlord and contract counterparty, and negotiations ensued.

[20] As of the date of the hearing, the applicants, through Monitor’s counsel, had received 149 consents to the assignment of leases, out of the proposed 165 locations. Agreements on cure costs have been reached, but a few landlords have not delivered consents. However, those landlords did not oppose the assignment of their leases to the purchaser.

[21] The Monitor reports that if consents to assign leases were not received before the hearing, it would be “appropriate to order the assignment of the leases of each of the Reconciled Locations to the Purchaser”. Schedule “C” to the proposed Approval and Vesting Order identified the cure cost amount for each of what were termed the “Reconciled Locations”.

[22] As to the Designated Contracts, the applicants have resolved issues with the counterparties to a sufficient extent that those counterparties which have not signed consents do not oppose the relief sought by the applicants. The Monitor recommends that “the Designated Contracts be assigned to the Purchaser by the court at the agreed cure costs amount or, failing which, at the amount of the cure costs reflected in the applicants’ books and records.” Schedule “D” to the proposed Approval and Vesting Order identified each Designated Contract and the cure cost amount for each.

[23] The Monitor approves of the proposed assignment of the Acquired Store Leases and Designated Contracts to the purchaser:

Absent the assignment to the Purchaser, the applicable leases and Designated Contracts would be disclaimed pursuant to the provisions of the CCAA and the inventory at that location would be liquidated, the employees would be terminated and the relevant store would be closed. The Purchaser, a wholly-owned subsidiary of BlackRock Kelso, has the financial resources necessary to carry out the obligations under the Acquired Store Leases, Acquired Option Store Leases and the Designated Contracts. Since the Purchaser will be continuing to carry on the real business operated by the Applicants and will be in a stronger financial position than the Applicants given the reduced debt and closing of unprofitable stores, it is, in the Monitor’s view, appropriate to assign the Acquired Store Leases and Acquired Option Stores Leases to the Purchaser, together with the Designated Contracts.

[24] At the hearing, agreement was reached between the applicants and certain of the landlords on language dealing with the rights of a counterparty to a Lease or Designated Contract to exercise any right or remedy in respect of any non-monetary default under the contract. The agreed upon language now forms paragraph 6 of the Approval and Vesting Order which reads:

THIS COURT ORDERS that no counterparty to an Acquired Premises Lease, or Designated Contract shall terminate a Scheduled Contract as against the Purchaser as a result of the Applicants’ insolvency or the Applicants’ CCAA proceedings. In addition, no counterparty shall terminate a Scheduled Contract as against the Purchaser as a result of the Applicants having breached a non-monetary obligations unless such non-monetary breach arises or continues after the Scheduled Contract is assigned to the Purchaser, such non-monetary default is capable of being cured by the Purchaser and the Purchaser has failed to remedy the default after having received notice of such default pursuant to the terms of the applicable Scheduled Contract. For clarification purposes, no counterparty shall rely on a notice of default sent to the Applicants to terminate a Scheduled Contract to terminate the Scheduled Contract as against the Purchaser.

[25] Section 11.3 of the CCAA governs on this issue. I am satisfied that the applicant has given notice of its request to seek a court-authorized assignment of the Acquired Store Leases and Designated Contracts to every party to such agreements. As noted above, the Monitor approves the proposed assignments. The evidence disclosed that the purchaser would be able to perform the obligations under the contracts, and I think the large number of consents received by the applicants from the landlords attested to their perception of the purchaser’s ability on that score, as did the lack of any opposition at the hearing to the sought assignments. In those circumstances, it would be appropriate to assign the rights and obligations to the purchaser under the Acquired Store Leases and Designated Contracts. That would result in the continuation of business in the greatest number of stores and the continued employment of the greatest number of people. Finally, the identification in the Approval and Vesting Order of the cure amounts required to be paid to the counterparties on the assignment of the contracts indicates that all monetary defaults will be remedied on or before closing, save for those arising by reason only of the company’s insolvency, the commencement of proceedings under this Act or the applicants’ failure to perform a non-monetary obligation: CCAA, s. 11.3(4). Consequently, I granted the assignment order sought by the applicants.

IV. Appointment of representative counsel

A. The request and the context

[26] Lucy Zita had been a long-term employee of the applicants. Her employment was terminated shortly after this CCAA proceeding was commenced.

[27] Ms. Zita deposed that since the commencement of this proceeding the applicants have closed about 66 Bargain! Shop stores and terminated between 450 and 650 employees. From counsel’s submissions I understand that some of the terminated employees may have been working on a part-time basis. Ms. Zita stated that there are substantial severance and termination pay amounts owing to those former employees. She deposed that the terminated employees would be entitled to payments for eligible wages under the Wage Earner Protection Program Act, S.C. 2005, c. 47 (“WEPPA”).

[28] Given that eligibility for payments under WEPPA arises on the bankruptcy or receivership of an employer, Ms. Zita deposed that “we want to ensure that a bankruptcy or receivership takes place as soon as possible so that we can apply for and receive WEPP payments”. According to Ms. Zita, “since most Bargain! Shop employees are lower income people and have to look for another job, it is hard to raise money to hire a lawyer and we do not have any extra cash”. She therefore asks to be appointed as the representative of those employees who have claims against the applicants arising out of their employment with them and seeks the appointment of the firm of Koskie Minsky LLP as representative counsel to act in this proceeding. Her motion contemplated that Koskie Minsky would provide legal advice to employees on employment claims, set up a hotline for employees/former employees answered by trained staff, set up an information webinar for the employees, ensure that a timely bankruptcy occured so that employees could receive their WEPPA payments, calculate and verify severance claim calculations to ensure maximum WEPPA recovery, assist employees in completing WEPPA claims and secure payment of WEPPA claims.

[29] Ms. Zita requests that the funds for representative counsel be paid out of the CCAA Completion Costs which form part of the consideration contained in the BlackRock Kelso APA. At the hearing, proposed representative counsel requested that up to $125,000 from the CCAA Completion Costs be authorized for its work.

[30] The applicants opposed the motion submitting that no need had been demonstrated for the appointment of a representative and representative counsel to deal with the identified employment issues.

[31] Counsel for the Monitor submitted that no cash is left in the applicants’ system at the end of each day; all receipts are swept into an account established under one of their borrowing facilities. As a result, the applicant companies have no money to fund a representative counsel and any funding would have to come from part of the purchase price consideration under the BlackRock Kelso APA. Monitor’s counsel noted that under the terms of the Funding and Transition Agreement which forms part of the Transaction, funding advances by the purchaser under that agreement, which will include advances to pay CCAA Completion Costs, are to be held in a Funding Account under the control of the Monitor. Sections 4.5 and 4.6 of the Funding and Transition Agreement provide that if any excess funds (as defined in that agreement) remain in the Funding Account either on a weekly basis or at the termination of that agreement, then they are to be returned to the purchaser. Since the Funding and Transition Agreement therefore creates a contractual obligation to use funds advanced by the purchaser for specified purposes, including the CCAA Completion Costs, the Monitor submitted it would not be appropriate for this Court to require that they be used for other purposes.

[32] Monitor’s counsel also observed that it is contemplated the applicants will be placed in bankruptcy following the completion of the transition of operations to the purchaser, likely sometime in August, and at that time the Trustee will become responsible to deal with WEPPA claims as specified in section 21 of the WEPPA and its accompanying regulations. The Monitor submitted that there was no need to appoint a representative counsel to perform that work.

B. Analysis

[33] A few months after Nortel Networks Corporation filed under the CCAA, several motions were brought to appoint representative counsel for pensioners, former employees and current employees of the applicant companies. The monitor in that proceeding supported the appointment of representative counsel in light of the large number of former employees of the applicants because:

former employee claims may require a combination of legal, financial, actuarial and advisory resources in order to be advanced and that representative counsel can efficiently co-ordinate such assistance for this large number of individuals.[^1]

[34] In that case the Court appointed representative counsel. It did so because it agreed with the following submissions made by one of the proposed representative counsel:

In the KM factum, it is submitted that employees and retirees are a vulnerable group of creditors in an insolvency because they have little means to pursue a claim in complex CCAA proceedings or other related insolvency proceedings. It was further submitted that the former employees of Nortel have little means to pursue their claims in respect of pension, termination, severance, retirement payments and other benefit claims and that the former employees would benefit from an order appointing representative counsel. In addition, the granting of a representation order would provide a social benefit by assisting former employees and that representative counsel would provide a reliable resource for former employees for information about the process. The appointment of representative counsel would also have the benefit of streamlining and introducing efficiency to the process for all parties involved in Nortel’s insolvency.[^2]

[35] Representative counsel for former employees and retirees also was appointed in the Canwest CCAA proceeding.[^3] Again, the motion for such an appointment was brought only a few months following the making of the initial order under the CCAA and before the Court was asked to approve any sale or plan. As the Court observed in that case:

No one challenged the court’s jurisdiction to make a representation order and such orders have been granted in large CCAA proceedings. Examples include Nortel Networks Corp., Fraser Papers Inc., and Canwest Global Communications Corp. (with respect to the television side of the enterprise)...

Factors that have been considered by courts in granting these orders include: the vulnerability and resources of the group sought to be represented; any benefit to the companies under CCAA protection; any social benefit to be derived from representation of the group; the facilitation of the administration of the proceedings and efficiency; the avoidance of a multiplicity of legal retainers; the balance of convenience and whether it is fair and just including to the creditors of the Estate; whether representative counsel has already been appointed for those who have similar interests to the group seeking representation and who is also prepared to act for the group seeking the order; and the position of other stakeholders and the Monitor.[^4]

[36] I accept the principles set out in the Nortel and Canwest cases, but their application to the specific facts of this case leads to a different result. The present CCAA proceeding does not bear the degree of complexity as did those in Nortel and Canwest. A SISP process was approved by this Court back on April 25, 2013, a fair sales and marketing process was run, and it resulted in only one going-concern offer to purchase. Under that Transaction, no sales proceeds will be available for unsecured creditors. From the evidence filed in this Court, that was the best result achievable under the particular circumstances of these applicant companies. This representation motion has been brought only at the end of that process.

[37] While the loss of a job by any person is devastating to that person, the remedies available to a terminated employee are defined in the law. In the present case no money will be available for pre-filing unsecured claims. The Monitor submitted that a bankruptcy will follow upon the completion of the transition of business operations to the purchaser, and WEPPA claims can be advanced at that time. Given that WEPPA imposes duties on a trustee in respect of such claims, I have difficulty understanding what significant extra “value-added” representative counsel could bring to the employment-related claims process at this very late stage of this proceeding. In addition, counsel for the Monitor indicated that the Monitor had committed to completing the bankruptcy proceeding for about $50,000, a much lower amount than that sought for representative counsel. Finally, the applicant companies have no money to fund representative counsel. To fund representative counsel out of the contractual CCAA Completion Costs portion of the purchase price would result in the purchaser underwriting the legal fees of one class of unsecured creditors. In light of the duties imposed on a trustee to deal with WEPPA claims, I do not regard as fair the proposal of the moving party that the Court, in effect, amend the proposed agreement of purchase and sale - following its submission in a court-approved SISP and following its conditional acceptance by the applicants - to use part of the purchase price for such a purpose. Consequently, I dismissed the motion brought by the Terminated Employees.

V. Other matters

[38] I approved the Monitor’s Eleventh Report.

[39] A few hours after the hearing I signed the formal order granting the motion brought by the applicant companies.

D. M. Brown J.

Date: July 10, 2013

[^1]: Nortel Networks Corporation, 2009 26603 (ON SC), para. 7.

[^2]: Ibid., para. 13, emphasis added.

[^3]: Canwest Publishing Inc., 2010 ONSC 1328.

[^4]: Ibid., paras. 20 and 21.