Court File and Parties

COURT FILE NO.: CV-24-00713029-00CL DATE: 20240403 ONTARIO - SUPERIOR COURT OF JUSTICE – COMMERCIAL LIST

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 FRESH CITY FARMS INC. AND MAMA EARTH ORGANICS INC.

RE: Fresh City Farms Inc. and Mama Earth Organics Inc., Applicants

BEFORE: Peter J. Osborne J.

COUNSEL: Sharon Kour and Caitlin Fell, for the Applicants Shahzrad Hamraz, for the DIP Lender and Proposed Purchaser Aiden Nelms, for the Monitor Michael McTaggart, Monitor

HEARD: April 3, 2024

Endorsement

[1] The Applicants, Fresh City Farms Inc. and Mama Earth Organics Inc., bring this motion for:

a. an approval and reverse vesting order:

i. approving the share Subscription Agreement dated March 27, 2024 between Fresh City as issuer and the DIP Lender, as Purchaser;

ii. approving the Proposed Transaction contemplated in the Subscription Agreement that authorizes the Applicants to complete the Proposed Transaction;

iii. declaring 1000843823 Ontario Inc. (“Residual Co.”) to be an applicant in these CCAA proceedings;

iv. approving the Restructuring Steps necessary for completion of the Proposed Transaction, in sequence, such that upon delivery of a closing certificate by the Court-appointed Monitor, such Restructuring Step shall be deemed to have occurred in that sequence:

1. all directors and officers of Residual Co. shall be deemed to have resigned, effective immediately;

2. all Excluded Contracts and Excluded Liabilities shall vest in Residual Co. and become obligations thereof, and shall no longer be obligations of the Applicants;

3. Fresh City shall assign to a new wholly-owned subsidiary (“Retail Co.”). The retail leases identified in the Subscription Agreement for which the counterparties have provided their consent to such assignment. Absent consent, the Retail Leases and corresponding liabilities shall vest in Residual Co.;

4. Fresh City shall file or be deemed to have filed articles of reorganization;

5. all equity interests in Fresh City shall be terminated, without consideration;

6. Fresh City shall issue 1 million Class D common shares, which shall vest in the Purchaser in consideration for which the Purchaser shall pay the Total Consideration; and

7. the Applicants shall cease being applicants in these CCAA proceedings;

b. Court-ordered third-party Releases in favour of the Released Parties (which include current and former directors, officers, employees, counsel and advisors to the Applicants, the Monitor and its counsel together with their respective present and former directors, officers, partners, employees and advisors, and the Purchaser and its current and former directors, officers, employees, legal counsel and advisors, from any liability existing prior to the Closing Time related to the order sought today or the CCAA proceedings, arising in connection with or relating to the Subscription Agreement, the completion of the Proposed Transaction, or the Restructuring Steps, the Applicants’ property and Business, prior dealings with the Applicants, or any agreement, matter or transaction involving the Applicants arising in connection with any of the foregoing, or the consummation of the proposed Transaction and the Restructuring Steps, all subject to section 5.1(2) of the CCAA;

c. an order:

i. authorizing the Monitor to assign Residual Co. into bankruptcy, and authorizing but not requiring PricewaterhouseCoopers to act as trustee;

ii. extending the Stay Period to the earlier of the date of the bankruptcy of Residual Co. and the Closing Time (the “CCAA Termination Date”);

iii. approving the Pre-Filing Report of the Monitor dated January 17, 2024, the First Report dated January 25, 2024 and the Second Report dated March 29, 2024, together with the activities of the Monitor and its counsel described therein;

iv. approving the fees and disbursements of the Monitor and its counsel as attached to and described in the Second Report; and

v. discharging the Monitor upon occurrence of the CCAA Termination Date; and

d. an order:

i. requiring Stripe Payments Canada, Ltd. (“Stripe”) to remit to the Applicants within 15 calendar days the amount of $317,725.24, representing funds of the Applicants that are or have been withheld by Stripe from and after January 18, 2024;

ii. prohibiting Straight from withholding further funds of the Applicants until the termination of this CCAA proceeding; and

iii. providing Stripe until April 18, 2024 to apply to this Court to vary or amend the order on not less than seven calendar days’ notice to the Applicants, Monitor and any other party likely to be effected by the order.

[2] The Service List has been served. The relief sought today is unopposed, and is recommended by the Court-appointed Monitor and strongly supported by the DIP Lender/Proposed Purchaser.

[3] Defined terms in this Endorsement have the meaning given to them in the motion materials, including but not limited to the Second Report, unless otherwise stated.

[4] The Applicants rely on the Affidavit and Supplementary Affidavit of Ran Goel sworn March 27, 2024 and April 2, 2024, respectively, each, together with Exhibits thereto, and the Second Report, together with the Appendices thereto.

[5] The Applicants operate a large organic grocery business in Ontario that includes an online shopping platform and delivery service, a commercial urban city farm, a commercial grade professional kitchen bakery and butchery, and four baked goods boutiques located in downtown Toronto.

[6] The Applicants sought and were granted relief under the CCAA by Order dated January 18, 2024, amended and restated on January 26, 2024. Also on January 26, 2024, the Court approved a proposed SISP and directed the Applicants to conduct the SISP with the assistance and oversight of the Monitor. That was done.

[7] A virtual data room was populated. Interest was solicited from more than 66 potentially interested parties. Discussions were undertaken with approximately 20 parties. Ultimately, 12 parties executed non-disclosure agreements.

[8] Notwithstanding all of the foregoing, however, no bid or expression of interest was received by the Bid Deadline. The Monitor, in consultation with the Applicants, considered a potential extension of the Bid Deadline, but determined that such was unlikely to yield a superior outcome.

[9] Accordingly, and as contemplated under the SISP already approved, the DIP Lender exercised its right to submit a DIP Credit Bid, and that resulted in the Subscription Agreement pursuant to which the DIP Lender, as Purchaser, would acquire newly issued shares of the Applicants subject to obtaining the Vesting Order.

[10] The Applicants Submit that the Subscription Agreement is the only available option that permits the Business of the Applicants to continue as a going concern for the benefit of all stakeholders and the preservation of the Business as a key enabler for a locally sourced, responsible food infrastructure in Ontario.

[11] The Applicants further submit that the reverse vesting structure contemplated by the Subscription Agreement is necessary and appropriate to avoid disruptions and maximize and preserve the current and future value of the Business for the Purchaser in that it:

a. preserves the significant accrued tax losses of the Applicants, which are non-transferable assets;

b. preserves the scientific research and experimental development tax incentives and refundable tax credits of the Applicants, which have a value of approximately $150,000 and are non-transferable;

c. minimizes the costs, risks and delays associated with a requirement to renegotiate or assign the approximately 270 Continuing Contracts to a new entity; and

d. protects certain licenses and certifications held by the Applicants not easily transferable or replaceable, including the Canadian Food Inspection Agency Licence under the Safe Food for Canadians Act and the Applicants’ B Corp Certification, their AgriCorp Farm Business Registration and their City of Toronto retail licences.

[12] The Purchaser is the DIP Lender, comprised of two existing shareholders of Fresh City. In exchange for the 1 million Class D common shares in Fresh City (“the New Shares”), the Purchaser will deliver as Consideration for the New Shares:

a. a release of all amounts outstanding by the Applicants to the DIP Lender, being approximately $2.2 million plus accrued interest;

b. the payment by the Purchaser on or before Closing, in cash, of all amounts that rank in priority to the DIP Lender’s Charge, including all amounts secured under the Administration Charge, and all monetary defaults existing as of Closing in respect of the Continuing Contracts other than those arising by reason only of the insolvency of the Applicants, the commencement of these proceedings, or the Applicants’ failure to perform a non-monetary obligation; and

c. the payment in cash prior to Closing of $200,000 to the Monitor for professional fees in connection with the winding down of the CCAA proceedings and the bankruptcy of Residual Co.

[13] Continuing Contracts and the liabilities related thereto shall remain with the Applicants. These include 220 employment agreements and 50 other contracts identified in the Subscription Agreement.

[14] Excluded Contracts and Excluded Liabilities will be vested in Residual Co. and include all financing agreements to which the Applicants are borrowers or guarantors.

[15] The Closing Date to the proposed transaction is 10 business days after issuance of the Vesting Order, or later on agreement of the parties, with the consent of the Monitor.

[16] The Applicants submit that the Subscription Agreement and the Proposed Transaction contemplated therein should be approved because:

a. it is the best and only bid received after the extensive SISP;

b. it is the only opportunity for the Business to continue as a going concern for the benefit of all stakeholders, absent which the Applicants will cease operations and liquidate their assets in a bankruptcy, yielding a less favourable result for all stakeholders;

c. it preserves the Business for the benefit of stakeholders and others, such as local, organic farmers and food producers;

d. it contemplates continuing substantially all contracts of the Applicants, including employment contracts with all existing employees, the collective bargaining agreement, supplier contracts and customer contracts;

e. it treats the stakeholders of the Applicants no differently than if the structure were not a reverse vesting structure in that Priority Payables will be paid in cash and parties with Continuing Contracts will be paid their Cure Costs, if any, in cash; and

f. it represents an efficient process to implement the Proposed Transaction in a manner that minimizes cost, risk and delay with respect to the otherwise required renegotiation or assignment of over 250 contracts and non-transferable licences and certifications held by the Applicants.

[17] The Applicants submit that the proposed Releases are appropriate since the Released Parties have been instrumental to these restructuring proceedings and their continued involvement is key to successfully implementing the Proposed Transaction and to the Business going forward, and are fully supported by the Monitor as being fair, reasonable and appropriate in the circumstances.

[18] The Applicants also submit that the extension of the Stay Period to the CCAA Termination Date is appropriate to preserve the status quo until the Proposed Transaction and Restructuring Steps are implemented and the Monitor has completed the remaining administrative steps. The Applicants have acted and continue to act in good faith and with due diligence.

[19] The Applicants further submit that it is appropriate to release them from CCAA protection upon the occurrence of the Closing Time since they will then be solvent and will not require creditor protection.

[20] The Applicants further seek the addition of Residual Co. as a party Applicant in the CCAA proceedings in order that the Court will have jurisdiction to vest the Excluded Contracts in Residual Co. and authorize the Monitor to assign Residual Co. into bankruptcy, all with a view to ensuring that there is no gap and that the Proposed Transaction and Restructuring Steps are implemented in accordance with the Subscription Agreement.

[21] The Applicants also seek approval of the activities and fees of the Monitor and its counsel, all as described in the Second Report.

[22] Finally, the Applicants seek the order requiring Stripe to remit to applicants the sum referred to above, and preventing Stripe from withholding further funds until the termination of this CCAA proceeding.

[23] Over the past number of years, the Applicants have used Stripe as their payment processor pursuant to the Stripe Services Agreement, for the payments received from customers who purchase products from the e-commerce platform of the Applicants. On a daily basis, the Applicants send to Stripe a list of the customer orders to process. Stripe processes those payments based on the respective delivery dates of the online orders.

[24] On or about March 19, 2024, the Applicants realized and became aware that Stripe was retaining a portion of their funds in what Stripe referred to as a “risk reserve” without authority or even notification of the withholding. Stripe continues to withhold funds with the result that its so-called “risk reserve” continues to increase. As of April 2, 2024, Stripe was withholding $317,725.24, representing approximately one week’s revenue for the Applicants.

[25] The Applicants seek the relief today in respect of Stripe because it is unresponsive to all attempts at communication, let alone repayment of the improperly diverted funds. The only options to contact Stripe customer support are by email, live chat or requesting a phone call, although no inbound phone number is provided. The Applicants have availed themselves of all of the available options without success. Stripe’s only response to date has been to advise that it is investigating the matter and that the so-called “risk reserve”, or withholding of funds, was a measure “to protect you, Stripe, and your customers from fees related to potential refunds and disputes”.

[26] Stripe has been repeatedly advised of the CCAA Proceedings and has been provided with a copy of the ARIO which Stripe has breached by the withholding of funds. On March 26, 2024, counsel to the Applicants contacted the legal department of Stripe to escalate the matter. Again, the only response from Stripe was to advise that it continued to investigate the matter.

[27] The Applicants submit that the funds are held in breach of the ARIO, and are of a quantum, continually increasing, that is critical to the continued operation of the Business by the Applicants and were contemplated to be used in the cash flow forecasts as funds necessary for the completion of the CCAA Proceedings.

[28] I am satisfied that the relief sought by the Applicants should be granted.

[29] This Court has jurisdiction pursuant to s.36 of the CCAA to approve the sale of assets outside the ordinary course of business: Nortel Networks Corporation (Re) (2009), 55 C.B.R. (5th) 229 (Ont Sup Ct) (“Nortel”), at para. 48. Section 36(3) sets out the relevant factors to be considered. Those factors overlap and dovetail with the Soundair Principles: Re CanWest Publishing Inc., 2010 ONSC 2870, at para. 13; Royal Bank of Canada v Soundair Corp. (1991), 4 O.R. (3d) 1 (CA).

[30] Where the sale contemplated is to a related party, the test contemplated by ss.36(4) of the CCAA must also be satisfied.

[31] I am satisfied here that as submitted by the Applicants and strongly recommended by the Monitor, the Sale Process and the resulting Transaction meet the statutory test under the CCAA, including the related party criteria, and satisfy the Soundair test.

[32] The Sale Process was fair, transparent and reasonable in the circumstances, and sufficient effort was made to obtain the best price. The Monitor approves of the Sale Process and the Proposed Transaction. The Sale Process, previously approved by this Court, was conducted in a manner that was fair and reasonable to existing creditors and two new potential purchasers. Regrettably, it did not yield fruit.

[33] There is no prejudice to any creditor as a consequence of the Proposed Transaction, and there are no viable alternatives. The Proposed Transaction benefits the whole economic community of stakeholders by permitting the Business to continue as a going concern. I pause to observe that this preserves the employment of 220 employees. Finally, the consideration to be given by the Purchaser through a credit bid is fair and reasonable in all the circumstances.

[34] I am also satisfied that while a reverse vesting structure remains the exception, and not the rule, it is appropriate in the particular circumstances of this case (see: Validus Power Corp et al v. Macquarie Equipment Finance Limited, 2024 ONSC 250 (“Validus”), paras. 43-44; NextPoint Financial, Inc. (Re), 2023 BCSC 2378 (“NextPoint”), para. 14).

[35] This Court has broad jurisdiction pursuant to s. 11 of the CCAA, and that broad jurisdiction has been held to include the jurisdiction to approve a reverse vesting order. In considering whether to grant a reverse vesting order, the Court must be satisfied that the structure is appropriate, and that analysis is informed by a consideration of the following factors, in addition to the Soundair Principles and the statutory test in s.36(3) of the CCAA: Harte Gold Corp. (Re), 2022 ONSC 653, at para. 38.

[36] I am satisfied that those factors have been satisfied here. The reverse vesting order is clearly necessary for the maintenance and preservation of non-transferable licences in a highly regulated environment. Just as Justice McEwen observed in Just Energy Group Inc. et al. v Morgan Stanley Capital Group Inc. et al., 2022 ONSC 6354 at para. 33, a reverse vesting structure may be appropriate where the debtor operates in a highly regulated environment in which its existing permits, licenses or other rights are difficult or impossible to reassign to a purchaser, the debtor is a party to certain key agreements that would be similarly difficult or impossible to assign to a purchaser, and where maintaining the existing legal entities would preserve certain tax attributes that would otherwise be lost in a traditional vesting order transaction. That is the case here, for the reasons expressed above and which include the fact that the tax losses and SRED Claims of a collective value of more than $24 million and would be lost in an asset transaction but are preserved in the proposed reverse vesting structure here.

[37] The reverse vesting structure produces an economic result at least as favourable as any other viable alternative. In this particular case, the economic result is clearly superior as there is no other viable alternative. As noted above, the SISP produced no bids at all with the result that the only alternative to the proposed Transaction is a bankruptcy.

[38] I am satisfied that no stakeholders worse off than they would be under any other viable alternative, principally for the reason that the only alternative is a bankruptcy which will result in the termination of all 220 employment contracts and the loss of those jobs, as well as the termination of all other contracts to which the Applicants are parties. Under the proposed structure, all amounts in priority to the DIP Charge will be paid in full on Closing, all cure costs associated with the Continuing Contracts will be paid in full on Closing and the test for assignment of contracts, as set out in s.11.3 of the CCAA has been satisfied here.

[39] Finally, I am satisfied that the consideration being paid reflects the importance and value of the relevant licences and permits being preserved.

[40] For all of these reasons, the proposed Transaction is approved.

[41] I am also satisfied that the Restructuring Steps required to implement the proposed Transaction should be approved. First, and most obviously, that follows from the approval of the Transaction. I am satisfied that my jurisdiction to approve these Restructuring Steps flows from ss. 11 and 36(1) of the CCAA. That jurisdiction includes the jurisdiction to approve the transaction outside the ordinary course of business despite the requirement for shareholder approval, as would otherwise be required here, for the proposed cancellation of existing shares and equity.

[42] I am also satisfied that in the particular circumstances of this case, the proposed releases, including third party releases, are appropriate and can be granted under s. 11 of the CCAA. The factors set out in Metcalfe & Mansfield Alternative Investments II Corp. (Re), 2008 ONCA 587, at para. 70 (leave to appeal to SCC dismissed, ) and Lydian International Limited (Re), 2020 ONSC 4006, at para. 54, have been satisfied here.

[43] The claims to be released are rationally connected to the transaction and are fair, reasonable, and not overly broad. Here, they are limited to and directly connected to the CCAA Proceedings, the proposed Transaction and the Restructuring Steps. They carve out in preserved claims not permitted to be released pursuant to s.5.1(2) of the CCAA and claims arising from fraud or wilful misconduct.

[44] The continuation of the current officers, directors and employees of the Applicants are critical to the proposed Transaction and required by the Purchaser as a condition. Those parties have all made a contribution to this proceeding, and the results sought to be achieved. The releases benefit stakeholders generally in that, since they are a condition of the proposed Transaction, that Transaction would not occur absent them. The Monitor supports the proposed releases. The Service List has been served and no party appears today to object to this relief.

[45] The proposed releases are approved.

[46] I am also satisfied that the Stay Period should be extended until the CCAA Termination Date, being the date of the bankruptcy of Residual Co. that is necessary to complete the Transaction, protect the status quo and maintain the value sought to be preserved through the Transaction itself. I am satisfied that the Applicants have acted and continue to act in good faith and with due diligence: s. 11.02 of the CCAA.

[47] I am also satisfied that the activities of the Monitor and the approval of its fees and those of its counsel are appropriate and should be approved. The activities were directly related to the steps necessarily undertaken to achieve the Transaction and are consistent with the mandate of the Monitor set out in the order by which it was appointed. The fees of the Monitor and its counsel are appropriate and commence it with the completion of those tasks: see Bank of Nova Scotia v. Deimer, 2014 ONCA 851 at para. 45.

[48] Finally, I am satisfied that the relief sought in respect of Stripe is appropriate in the circumstances. The funds were withheld not only without lawful right or even notice to the Applicants, but in direct breach of the ARIO. If Stripe was not initially aware of the ARIO, it certainly was made aware repeatedly by counsel to the Applicants. Yet still, it refuses to engage meaningfully or even explain the basis upon which it purports to withhold the funds, let alone remit them to the Applicants. The evidence is clear that those funds constitute a material amount that is critical to the cash flow projections and therefore the successful restructuring.

[49] Delivery of the Supplementary Notice of Motion in respect of this relief was short served on Stripe. This was largely as a result of the fact that, notwithstanding the repeated and continuing efforts to contact Stripe, it has no inbound telephone number and is unresponsive to email inquiries. The corporate profile report, filed on this motion, reflects that there is no Canadian resident director of Stripe. I pause to observe that this case is a perfect illustration of why many jurisdictions such as Ontario have such a requirement. In short, it is difficult to contact an actual human being at Stripe, let alone get one to respond on a timely basis, even when advised that Stripe is in breach of a court order. I am satisfied that even if notice as required under the Rules of Civil Procedure had been given, the situation would be no different today.

[50] For all of these reasons, I have granted the relief today. However, and given the short service, the Stripe order also includes a comeback clause, thereby giving Stripe the ability to return to court in short order on seven days’ notice, if it wishes to do so, to seek to vary, amend or set aside the order. It must do so, however, promptly, and no later than April 18, 2024. The evidence in the record establishes that Stripe has been unresponsive, and if this restructuring is to be successful, the Applicants need to know with certainty to their right to receive the funds being withheld by Stripe. In addition, and to state the obvious, nothing in any order I make today affects or prejudices the ability of Stripe to appeal the order in the ordinary course.

[51] The Applicants are directed to serve forthwith a copy of this Endorsement, as well as the orders, on Stripe at the email addresses that the Applicants and their counsel have been using to communicate with Stripe thus far, by courier to the registered records address reflected in the corporation profile report, and to each of the directors of Stripe at their addresses reflected in the corporation profile report, by regular first class mail.

[52] Both orders to go in the form signed by me today. These orders are effective immediately and without the necessity of issuing and entering, although the Applicants may take out either or both orders through the Commercial List office if necessary.

Osborne J.