Court File and Parties

COURT FILE NO.: CV-17-11758-00CL DATE: 2017-04-20 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED AND IN THE MATTER OF PAYLESS HOLDINGS INC LLC, PAYLESS SHOESOURCE CANADA INC., PAYLESS SHOESOURCE CANADA GP INC. AND THOSE OTHER ENTITES LISTED ON SCHEDULE “A” HERETO APPLICATION OF PAYLESS HOLDINGS LLC UNDER SECTION 46 OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED

BEFORE: Regional Senior Justice G.B. Morawetz

COUNSEL: John MacDonald and Patrick Reisterer, for the Applicant Clifton Prophet and Mark Crane for Ivanhoe Cambridge Inc. Ashley Taylor and Lee Nicholson, for Alvarez & Marsal Inc., Proposed Information Officer David Bish, for the Cadillac Fairview Corporation Ltd. Tony Reyes, for Wells Fargo, ABL DIP Lender (Agent) Linda Galessiere, for 20 Vic; Morguard; SmartREIT, Oxford; RioCan; Triovest; Springwood; Crombie REIT; Blackwood; Southridge Mall

HEARD and ENDORSED: Friday, April 7, 2017 REASONS: April 20, 2017

Endorsement

[1] At the conclusion of the hearing, the record was endorsed:

The requested relief for an Interim Recognition Order proceeded on an unopposed basis. Initial Recognition Order granted, with the exception of paragraph 6 of the Draft Order. Paragraphs 6-10 and 12 of the Supplemental Order also granted. The remaining issues – in particular the remaining requested relief in the form of the Supplemental Order - are adjourned to Monday, April 10, 2017 at 2:15 p.m. Reasons with respect to Initial Recognition Order will follow.

[2] These are the reasons.

[3] Payless Holdings LLC (the “Applicant”), in its capacity as foreign representative (the “Foreign Representative”) of itself, as well as those entities listed in Schedule “A” that filed the voluntary petitions for relief pursuant to Chapter 11 of the U.S. Bankruptcy Code (collectively, with the Applicant, the “Chapter 11 Debtors”, and with their non-debtor affiliated companies “Payless”), applied for Orders pursuant to sections 46 through 49 of the Companies’ Creditors Arrangement Act (“CCAA”), inter alia:

(a) recognizing the Chapter 11 Cases as foreign main proceedings pursuant to Part IV of the CCAA; (b) recognizing certain First Day Orders; (c) appointing Alvarez & Marsal Canada Inc. (“A&M”) as Information Officer in this proceeding; and (d) granting the DIP ABL Lenders’ Charge, Canadian Unsecured Creditors’ Charge, and Administration Charge.

[4] The matter proceeded on an unopposed basis. At the conclusion of the hearing, I granted the Initial Recognition Order, save and except for the portion of the draft order that related to the Information Officer. The appointment of the Information Officer was deferred. I also granted certain stay provisions which were contained in the draft Supplemental Order. The remaining issues, including recognition of certain First Day Orders, the granting of the DIP ABL Lenders’ Charge, Canadian Unsecured Creditors’ Charge, and Administration Charge were all adjourned to be addressed at a subsequent hearing scheduled for April 10, 2017.

[5] Payless is an American footwear retailer, founded in 1956 in Topeka, Kansas, where it is still headquartered today. Payless markets its brand through retail locations and e-commerce internet sites. There are nearly 4,400 Payless stores in more than 30 countries and Payless employs nearly 22,000 people. Payless global sourcing networks include more than 90 manufacturing partners that produce over 110 million pairs of shoes annually. Payless’s integrated supply chain, together with the remainder of the buying and logistics functions, are managed out of Payless’s head office in Kansas.

[6] On April 4, 2017, each of the Chapter 11 Debtors filed voluntary petitions for relief (the “Petitions”) pursuant to Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Eastern District of Missouri (the “U.S. Court”).

[7] The Chapter 11 Debtors filed several motions with the U.S. Court and on April 5, 2017 the U.S. Court heard motions (the “First Day Motions”) for various interim or final orders (collectively, the “First Day Orders”) including:

(a) Joint Administration Motion; (b) Cash Management Motion; (c) Critical Vendors and Shippers Motion; (d) Customer Programs Motion; (e) DIP Motion; (f) Employee Wages Motion; (g) Foreign Representative Motion; (h) Insurance Motion; (i) Surety Bond Motion; and (j) Tax Motion.

[8] The Chapter 11 Debtors operate on an integrated basis. The Applicant is the ultimate parent of the Chapter 11 Debtors. The Chapter 11 Debtors consist of:

(a) The Applicant and 25 of its wholly-owned subsidiaries that are incorporated under the laws of the United States; (b) Two (2) wholly-owned subsidiary entities incorporated under the laws of Canada – Payless ShoeSource Canada Inc. and Payless ShoeSource GP Inc.; and (c) One (1) limited partnership established under the laws of Ontario – Payless ShoeSource Canada LP.

[9] The three Canadian entities are collectively referred to as the “Payless Canada Group”.

[10] For the fiscal year 2016, Payless generated approximately $2.28 billion in net revenues on a consolidated basis. Canadian sales accounted for approximately 7% of those net revenues; U.S. sales amounted to almost 75%.

[11] The Applicant takes the position that the Payless Canada Group’s operations are fully integrated with Payless US operations. The affidavit of Michael Schwindle, Senior Vice-President and CFO of the Applicant, establishes that all corporate and other major decision-making occurs in the U.S., and the Payless Canada Group is entirely reliant on U.S. managerial functions for all overhead services including accounting and finance, buying, logistics, marketing, strategic direction, IT and other functions.

[12] Payless Canada Group employs approximately 2100 employees, all of whom work in the stores except for five who work at the regional office in Toronto, and another 15 who work in field management functions throughout Canada. There is no union representation for the Canadian employees.

[13] Payless currently operates 258 leased stores in Canada, with almost half of them in Ontario. Approximately 56 leases are subject to an indemnity with cross default provisions such that an event of default under the lease will occur if the “Indemnifier” becomes bankrupt or insolvent, or takes the benefit of any statute for bankrupt or insolvent debtors. The “Indemnifier” of those leases is Payless ShoeSource, Inc. (incorporated under the laws of Missouri), which is a Chapter 11 Debtor.

[14] Mr. Schwindle also states that Payless Canada Group’s assets consists principally of merchandise, much of which is stored at Payless stores in Canada and other warehouses and distribution facilities across Canada. The Payless Canada Group does not independently design or source its own merchandise. Mr. Schwindle also states that the Payless Canada Group relies entirely on the buying power and sourcing relationships of the entire Payless enterprise.

[15] Payless Canada Group estimates that, as of March 27, 2017, arms’-length trade creditors are owed approximately $2.6 million. The largest arms-length trade creditor Kuehne & Nagel Ltd. (“K&N”), which provides logistics and freight operation, is owed approximately $1.2 million. It is anticipated that K&N will be paid in the ordinary course as the Chapter 11 Debtors intend to pay all pre-petition amounts owing to K&N through a Critical Vendors Order.

[16] Mr. Schwindle states that since early 2015, Payless has experienced a top-line sales decline, driven primarily by:

(a) a set of significant and detrimental non-recurring events; (b) foreign exchange rate volatility; and (c) challenging retail market conditions.

[17] Mr. Schwindle also states that these pressures led to the Chapter 11 Debtors’ inability to both service their pre-petition security indebtedness and remain current with their trade obligations.

[18] Mr. Schwindle also states that the Chapter 11 Debtors have worked with a steering committee of the secured term loan lenders to develop a comprehensive financing restructuring and recapitalized plan that will be implemented through the Chapter 11 Cases.

[19] The Applicant takes the position that it requires protection and coordinated relief in Canada to facilitate an effective and efficient restructuring. The Applicant takes the position that a coordinated approach provides for the best potential outcome and that a Canadian Recognition Order and Stay under the CCAA will allow the Chapter 11 Debtors to implement the pre-arranged restructuring and allow the Payless Canada Group to continue as a going concern, thereby maximizing value for all stakeholders of Payless Canada Group and the rest of the Chapter 11 Debtors.

[20] The issues on this motion are:

(a) Are the Chapter 11 cases a “foreign main proceeding” under Part IV of the CCAA? (b) Are the Chapter 11 Debtors entitled to the relief sought in the Initial Recognition Order, and Supplemental Order pursuant to sections 46 through 50 of the CCAA, including: i. Granting the Stay of Proceedings; ii. Recognizing certain First Day Orders; iii. Appointing A&M as Information Officer; iv. Granting the DIP ABL Lenders’ Charge and Canadian Unsecured Creditors’ Charge; and v. Granting the Administration Charge.

[21] Section 47 of the CCAA states that two requirements must be met for an order recognizing a foreign proceeding:

1. The proceeding must be a “foreign proceeding”; and
2. The applicant must be a “foreign representative” in respect of that foreign proceeding.

[22] This court has consistently recognized proceedings under the U.S. Bankruptcy Code to be foreign proceedings for the purposes of the CCAA. The Applicant has been declared a “foreign representative” in the Chapter 11 case by the U.S. Court, and I am satisfied that the Chapter 11 Cases should be recognized as a “foreign proceeding” within the meaning of subsection 47(1) of the CCAA.

[23] Having determined that the proceeding is a “foreign proceeding”, section 47(2) requires the Court to specify whether the foreign proceeding is a “foreign main proceeding” or a “foreign non-main proceeding”. A “foreign main proceeding” is defined as a “foreign proceeding in a jurisdiction where the debtor company has the centre of its main interest” (“COMI”).

[24] Section 45(2) of the CCAA provides that, in the absence of proof to the contrary, a debtor company’s registered office is deemed to be the centre of its COMI. To rebut this presumption, sufficient evidence is required. Further, because Part IV of the CCAA does not take into account corporate groups, it is necessary to conduct the COMI analysis on an entity by entity basis.

[25] Of the Chapter 11 Debtors:

(a) Twenty-six are incorporated or established in the U.S. and have registered assets within the U.S. The section 45(2) presumption deems the COMI of each of those entities to be in the U.S. (b) The three entities in the Payless Canada Group are established under the laws of Canada, with their registered head office in Etobicoke, Ontario.

[26] The Applicant takes the position that the COMI of each of the Payless Canada Group entities is in the U.S.

[27] In determining the COMI for Canadian entities that are part of a larger corporate group, the relevant factors to consider include, among others:

(a) the location of the debtor’s headquarters, head office functions, or nerve centre; (b) the location of the debtor’s management; and (c) the location that significant creditors recognize as being the centre of the company’s operations (see: Lightsquared LP (Re) (2012) ONSC 2994 and Massachusetts Elephant & Castle Group, Inc. (Re), 2011 ONSC 4201).

[28] A review of the foregoing factors is designed to determine that the location of the proceeding, in fact, corresponds to where the debtor’s true seat or principal place of business actually is, consistent with the expectations of those who dealt with the enterprise prior to commencement of the proceedings.

[29] In my view, the following factors support a finding that the COMI of the entities in the Payless Canada Group is in the United States and that the Chapter 11 cases should be recognized as a “foreign main proceeding” in Canada:

(a) the Payless Canada Group’s operations are fully integrated with Payless U.S. operations; (b) only one of the senior executives, and only one of the directors, of the entities in the Payless Canada Group reside in Canada; (c) all corporate, strategic, financial, inventory sourcing and other major decision-making occurs in the U.S.; (d) the Payless Canada Group is entirely reliant on U.S. managerial functions; and (e) Payless Canada Group is entirely dependent on the other Chapter 11 Debtors for all of their licencing agreements, design partnerships, and company owned lands.

[30] I therefore find that the COMI of each entity the Payless Canada Group is in the United States.

[31] In the result, I am satisfied that Chapter 11 Cases should be recognized as a “foreign main proceeding”.

[32] The relief requested in the Initial Recognition Order is granted, with the exception of paragraph 6 of the Draft Order which relates to certain directions to be provided to the Information Officer.

[33] The Applicant also sought a Supplemental Order, in accordance with the provisions of section 49 of the CCAA, which provides that the court may, at its discretion, make any order that it considers appropriate if it is satisfied that it is necessary for the protection of the debtor’s property or the interest of one or more creditors. Section 50 provides that the Order under Part IV may be made on any terms and conditions that the court considers appropriate in the circumstances.

[34] Section 52(1) provides that if an order recognizing a foreign proceeding is made, the court “shall cooperate, to the maximum extent possible, with the foreign representative and the foreign court involved in the foreign proceedings”.

[35] In the context of cross-border insolvencies, Canadian courts have consistently encouraged comity and cooperation between courts in various jurisdictions in order to enable enterprises to restructure on a cross-border basis (see: Lear Canada (2009), 2009 ONSC 37931, 55 CBR (5th) 57 (Ont. SCJ.) (Commercial List) at paras. 11 and 11; Re Babcock and Wilcox Canada Ltd. (2000), 2000 ONSC 22482, 18 CBR (4th) 157 (Ont. SCJ) (Commercial List) at para. 9.)

[36] Counsel to the Applicant submits that, in light of the events leading up to the Chapter 11 cases and this application, it is both necessary and appropriate for the court to grant a stay of proceedings sought by the Applicant. Without the stay, the objective of the Chapter 11 cases, mainly the emergence of Payless as a going concern, cannot be achieved.

[37] Counsel also submits that the CCAA expressly applied, by its terms, to debtor companies, but not partnerships. However, where the partnership’s operations are integral and closely related to the debtor companies’ operations, the court has jurisdiction to extend the protection of the stay of proceedings and related relief to those partnerships in order to ensure that the purpose of the CCAA can be achieved (see: Canwest Global Communications Corp. (Re), 2009 ONSC 55114 at paras. 28-29). Counsel submits that it is appropriate to extend relief to the partnership, which carries on operations that are integral to the business of the Payless Canada Group.

[38] I accept these submissions and order the requested relief in paras. 6 – “No proceedings against the Chapter 11 Debtors or the Property”, 7 – “No exercise of rights or remedies”, 8 – “No interference with rights”, 9, 10 and 12 – “Additional protections”.

[39] The remaining issues set out in the draft Supplemental Order are adjourned to April 10, 2017.

Regional Senior Justice G.B. Morawetz Date: April 20, 2017