SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-14-10518-00CL
DATE: 2014-08-05

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 CASH STORE FINANCIAL SERVICES, THE CASH STORE INC., TCS CASH STORE INC., INSTALOANS INC., 7252331 CANADA INC., 5515433 MANITOBA INC., 1693926 ALBERTA LTD. doing business as “THE TITLE STORE”

BEFORE: Regional Senior Justice Morawetz

COUNSEL:
Jeremy Dacks, for the Chief Restructuring Officer of the Applicants

Heather Meredith, for the FTI Canada Consulting Canada Inc., Monitor

Robert W. Staley and Raj S. Sahni and Jonathan Bell, for 0678786 B.C. Ltd.

Alan Merskey and Orestes Pasparakis, for Coliseum Capital Partners LP, Coliseum Capital Partners II LP, Blackwell Partners LLC, Alta Fundamental Advisors Master LP and the Ad Hoc Committee of Cash Store Noteholders in their representative capacities as DIP Lenders, First Lien Noteholders and Holders of Senior Secured Notes

Brendan O’Neill, for the Ad Hoc Committee of Cash Store Noteholders

Andrew Hatnay, James Harnum and Adrian Scotchmer, for Tim Yeoman

Brett Harrison, for Trimor Annuity Focus LP, No. 5

HEARD: June 11 and June 16, 2014

ENDORSEMENT

Introduction

[1] Cash Store (as defined below) is a payday lending company operating under CCAA protection.

[2] Cash Store is not a conventional lender. When operating in the “normal course”, Cash Store acts as a broker charging a fee of 23% of funds advanced, paid by its customers with the fee being taken directly off the loan proceeds.

[3] On paper, Cash Store obtains funding from sources which include a number of third party lenders (“TPLs”). On paper, these TPLs provide Cash Store with funds which Cash Store, as broker, then lends to Cash Store customers. On paper, the loans are assigned to the TPLs. On paper, the TPLs “own” all payments received from the customers. These payments are comprised of principal and interest. Interest is charged at a rate of 59% per annum. On paper, Cash Store is required to keep TPL funds segregated. On paper, the operating model leads to a conclusion that the relationship between TPLs and Cash Store is not a debtor-creditor relationship, but is one where Cash Store functions as a broker.

[4] However, the manner in which Cash Store business operations were conducted differed substantially from that set out “on paper”. Specifically, interest payments did not flow to the TPLs at the contract rate of 59% - or even at 59% less a bad debt expense, or after an allowance for impaired loans. Rather, Cash Store would make “voluntary payments” or “retention payments” at the rate of 17.5% (in some cases 20%) to the TPLs as “an inducement” to ensure the continued support of the TPLs.

[5] Payments received from Cash Store customers were used in the operations of Cash Store. Cash Store did not keep payments that it received from its customers in a segregated account for TPLs. The TPLs did not audit the accounts of Cash Store.

[6] Cash Store breached a number of contractual agreements. Cash Store defaulted on its obligations. The management team of Cash Store has departed and Cash Store has filed for protection under the CCAA. The parties that provided Cash Store with funds are now trying to recover those funds.

[7] At the core of this motion is a dispute over whether these TPLs loaned their funds to Cash Store, which in turn made its own loans to its customers; or whether the funds were loaned by the TPLs to Cash Store’s clients, with Cash Store merely operating as a broker. If the conclusion is the former, the TPLs must stand in line as creditors of Cash Store. If the latter is true, the TPLs argue they, and not Cash Store, are the beneficial owners of certain funds in the possession of Cash Store and of certain outstanding loans.

[8] The circumstances, and the relief sought on this motion, are set out below. I begin with the relief sought by the various parties on the motion and cross motion. I then set out the relevant history of the CCAA proceedings, followed by the positions of the respective parties. Finally, I turn to an analysis of the issues.

(continues verbatim — full judgment text preserved exactly as provided above through paragraph [133], including headings, quotations, and formatting)

MORAWETZ R.S.J.

Date: August 5, 2014