Court File and Parties

COURT FILE NO.: CV-24-00717340-00CL DATE: 20240515

ONTARIO - SUPERIOR COURT OF JUSTICE – COMMERCIAL LIST

IN THE MATTER OF THE COMPANIES' CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-3, AS AMENDED AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF PRIDE GROUP HOLDINGS INC. and those entities listed in Schedule "A" hereto

RE: Pride Group Holdings Inc., et al., Applicants

BEFORE: Peter J. Osborne J.

COUNSEL: Leanne Williams, Rachel Nicholson and Puya Fesharaki, Counsel for the Applicants Raj Sahni and Joshua Foster, Counsel for the Directors and Officers of the Applicants Heather Meredith and Geoff Hall, Counsel for National Bank of Canada Jeff Carhart, Counsel for CWB Maximum Fin. Daniel Richer and Stuart Brotman, Canadian Counsel for RBC, as Admin Agent Trevor Courtis, Counsel for Bennington Financial Chris Burr and Kelly Bourassa, Counsel for the Monitor, Ernst & Young Inc. Craig Colraine, Counsel for PACCAR Financial et al. Shaun Parsons, Counsel for TD Equipment Finance Canada Caroline Descours, Counsel for Regions Bank, Regions Equipment Finance Corporation and Regions Commercial Equipment Finance LLC Shaun Irving, Counsel for RBC as Securitization Party Elaine Gray, Counsel for Daimler Truck Financial Services Canada Corporation and Daimler Truck Financial Services USA LLC Lee Nicholson and Rania Hammad, Counsel for BNY Trust Company John Salmas, Counsel for BMO Brendan Bissell, Counsel for Versafinance US Corp. Harvey Chaiton and Blair McRadu, Counsel for Mitsubishi HC Capital Canada Inc. Jessica Chen, Counsel for VFS Canada Inc. Thomas Gertner, Counsel for VFS Canada Inc. and VFS U.S. LLC Monique Sassi, Counsel for Flagstar Financial

HEARD: May 15, 2024

Endorsement

[1] The Applicants seek various relief in accordance with the Notice of Motion, being:

a. an approval and vesting order in respect of the Transaction contemplated by an agreement of purchase and sale dated April 9, 2024 between the Applicants, Bishop Road Holding Corp. as Vendor and Tyler Collins or his designee as Purchaser for the real property municipally known as 1696 Bishop Road, Chehalis, Washington State, and the other assets described in the Sale Agreement;

b. an order approving the Third Report and the Supplement to the Second Report of the Monitor dated May 2, 2024 and May 6, 2024, respectively, and approving the activities of the Monitor as described therein;

c. an AR Protocols Order, amending and restating the Protocols Order that I made on April 5, 2024; and

d. a Sale Process Order approving a SISP in respect of the business, operations and assets of the PGL Entities.

[2] The Applicants rely upon the Affidavit of Randall Benson, the CRO, sworn May 10, 2024, together with exhibits thereto, the Fourth Report of the Monitor dated May 10, 2024 and the Fifth Report of the Monitor dated May 13, 2024.

[3] Defined terms in this Endorsement have the meaning given to them in earlier Endorsements I have made in this proceeding and/or the motion materials or the Fifth Report, unless otherwise stated.

[4] The Service List has been served with the motion materials, although as further described below, service of some materials was short.

[5] There is no opposition to the proposed vesting order in respect of the Chehalis Property, nor to the approval of the reports of the Monitor and the conduct described therein.

[6] There is opposition to certain terms of the proposed Revised Governance Protocol sought to be captured in the draft AR Protocols Order. In addition, while there is no opposition to the proposed Sale Process Order generally, a number of creditors expressed concerns with certain proposed terms of the process.

[7] I will address first the Transaction approval for the sale of the Chehalis Property. I observe that the mortgagee, Roynat, and the DIP Lenders, consent to and support the proposed sale.

[8] The Chehalis Property was purchased by Bishop in November, 2021 and operated as a secondary dealership location providing ancillary services to customers of the Pride Entities. The location is relatively remote, as a result of which the property was never intended to be a primary dealership location, and it did not form a core asset.

[9] Given liquidity challenges facing the Pride Entities earlier this year, Bishop retained a licensed commercial real estate broker on January 9, 2024 to publicly list the property for sale. It was formally marketed for approximately 90 days, resulting in several indications of interest and ultimately, one offer from the Purchaser.

[10] The Applicants and as noted, the mortgagee on the property and the DIP Lenders, all support the sale on the basis that the proposed Sale Agreement represents the highest and best value for the Purchased Assets in the circumstances, and that the sale is in the best interests of the Pride Entities, their creditors and all stakeholders. The Monitor recommends approval of the sale.

[11] I am satisfied that the Transaction should be approved.

[12] The purchase price is USD $3,500,000 and the closing date is May 29, 2024. I am satisfied that the sale process leading to the Transaction was fair and reasonable, that notwithstanding the fact that the sale process was not a court-supervised process, the Soundair Principles have been satisfied: Royal Bank of Canada v. Soundair Corp., (1991), 4 O.R. (3d) 1, 83 D.L.R (4th) 76.

[13] I will address next the approval of the reports of the Monitor and the activities described therein. As stated, there is no opposition to this requested relief. I am satisfied that the Reports in respect of which approval is sought, and the conduct and activities of the Monitor described, are appropriate, reasonable, and consistent with the fulfilment of the duties and mandate given to the Monitor in the Amended and Restated Initial Order (“ARIO”). They are approved.

[14] Third, I will address the proposed SISP (Sale Process). The PGL Entities provide logistics, brokering and delivery services to their customers, particularly in the grocery and food and beverage areas. The PGL Entities employ approximately 800 people. It is important to note that the business of the PGL Entities is an operating business. The trucks, trailers and other equipment used in the logistics business are not, in distinction to similar equipment owned by other Pride Entities, inventory held for resale or lease.

[15] The proposed Sale Process has been developed by the Monitor, in consultation with the CRO and the Pride Entities. It is fully set out in the materials and, in particular, at Appendix “A” to the Fourth Report.

[16] The Sale Process contemplates that process to bidders may gain access to due diligence materials, it contemplates the receipt and negotiation of bids received, the ultimate evaluation and selection of one or more Successful Bids, and if applicable, Back-up Bidders, and thereafter, the requisite approvals to be sought from both this Court and the U.S. Bankruptcy Court, as applicable.

[17] Formal offers are required by June 19, 2024. Accordingly, the timeline is relatively short. However, I am satisfied in the circumstances of this case that the proposed timelines are appropriate. First, it is accretive to the chances of the success of this restructuring that liquidity and monetization of assets, where appropriate, be achieved as soon as possible.

[18] Moreover, I am satisfied that the market and universe of potential purchasers for these businesses is relatively small, and consists of known sophisticated players who are familiar with the business of the PGL Entities already. This supports the short timelines.

[19] I observe submission of the Applicants that there will be no access to bids for insiders or the principals of the Applicants or their family members.

[20] No party opposes the SISP generally, the timelines, the need to market, and the proposed method of marketing, the assets and business of the PGL Entities.

[21] However, a number of creditors raised concerns. One of the first concerns flowed from the fact that motion materials were delivered only late last week, with the result that certain parties had only a few business days to consider the relief sought and instruct counsel. These challenges were exacerbated by the fact that there are parties, and counsel, in numerous different jurisdictions in Canada and the United States.

[22] However, it is important to note that none of these parties requested an adjournment of this aspect of the Applicants’ motion. They did, however, express concerns with respect to communications about the process.

[23] Other lenders expressed concerns, or more accurately, potential concerns, about an allocation of costs of the Sales Process. That is for another day. The Bank of Montréal expressed preliminary concerns that the Sales Process ought to await the ongoing security and securitization review, since BMO was concerned that the assets to be sold might include trucks over which BMO was claiming, or might be claiming in the future, an ownership interest. However, this objection was addressed by confirmation from the Applicants, supported by the Monitor, to the effect that there are no such vehicles.

[24] Still other lenders, or Securitization Parties, are concerned about the lack of consultation. The Applicants submit that no sale approval is being sought at this time, but rather only the proposed sale process is the subject of the motion, with the result that any lender or other affected stakeholder will have the ability to object to any future sale approval. It would be unworkable, they argue, for every potentially affected creditor to have a veto over any en bloc sale.

[25] Having heard the submissions of all parties, it is my view that the proposed Sale Process should be approved, with the one amendment that paragraph 35 of Appendix “A” to the Fourth Report is amended to provide that rather than the Monitor, in consultation with the CRO, “may” consult with secured creditors of PGL, it should do so to the extent that such creditors are directly affected, and subject to, as already provided in that paragraph, such assurances being provided as to confidentiality as the Monitor may require.

[26] As I stated to the parties during the hearing when I advised of my decision in this regard, I expect all parties to be reasonable and practical. In directing that the Monitor should consult with directly affected creditors, I am not directing that every electronic mail communication be the subject of consultation. Counsel are reminded of the “Three Cs” of the Commercial List.

[27] The proposed Sale Process is approved.

[28] Fourth, I turn to the Revised Governance Protocol, which is the substance of the AR Protocols Order.

[29] As is clear from my prior Endorsements made in this proceeding, this Court has already approved a Governance Protocol. Then, as now, the Protocol does not represent a final document, with effect for all time. On the contrary, it is expressly intended to be (and is) an interim document to provide for the orderly and efficient continuation of certain specified activities accretive to the restructuring of the business of the Pride Entities.

[30] In particular, the Protocol allows the Pride Entities to continue to sell trucks and, importantly, make distributions on an interim basis while the security review is ongoing. It is common ground that absent a form of Protocol, those activities would be frozen.

[31] All stakeholders are supportive of the Protocol in principle, and largely for the above reasons. However, and as further described below, a number of Securitization Parties raised concerns or opposed certain terms of the proposed Protocol, and in particular, the provisions providing that a default commission of 12% of the vehicle purchase price be paid in respect of Multiple Collateral Vehicles sold, and that a default commission of 20% be paid on Soft Collections.

[32] The rationale for, and summary of, the overarching effect of, the Protocol is set out in the Supplement to the Second Report. I accept the position of the Monitor (supported by the Applicants) that given the fact that there is such a significant number of creditors of the Pride Group and the fact that numerous assets (particularly vehicles) appear to be subject to competing security interest claims or ownership, a measure of discipline, predictability, flexibility and transparency needs to be imposed.

[33] It is to that end that the proposed Protocol is directed, in order to provide for how cash receipts from vehicle sales, lease payments, Soft Collections and other vehicle -related revenues will be addressed.

[34] The original Governance Protocol is discussed in the First Report and in particular, at paragraphs 55 – 80. Since it was approved by this Court, the Monitor has requested and received comments and proposed amendments from numerous stakeholders, all as set out in the Second Supplement. Upon receipt of those comments, the Monitor worked with the CRO and the Pride Group with a view to incorporating and consolidating the comments into a comprehensive revised version of the Protocol, but one that could be reasonably performed by the Pride Entities, taking into account any potential prejudice to a stakeholder that could result from the amendments.

[35] That consolidated draft revised version was then reviewed with the DIP Agent, in large part because the Governance Protocol is a schedule to the DIP Term Sheet which requires compliance therewith. Accordingly, approval of the DIP Agent is necessary for any changes to the original Governance Protocol.

[36] The draft was then further revised, and further comments from stakeholders were then received, all culminating in the proposed Revised Governance Protocol for which approval is sought today. It is appended to the Supplement to the Second Report at Appendix “B”, in a version that includes a blackline as well as explanatory notes. The amendments as against the original Governance Protocol, summarized in chart form at paragraph 39 of the Second Report, are significant.

[37] Such is to be expected given the circumstances, including the fact that the books and records of the Pride Entities are lacking, refinement thereof continues to evolve, and the fact that there are so many different stakeholders with understandably different practical and economic interests in the inventory of the Pride Group.

[38] The majority of amendments requested by stakeholders have been incorporated. Those that have not fall into four main categories, the first of which is the issue with respect to the proposed commissions referenced above. The other three relate to the recovery of collateral by Financiers; the replacement of “servicers” by Securitization Parties; and the delivery of a list of Multiple Collateral Vehicles that includes competing interests.

[39] The Monitor submits that the commissions are appropriate, reasonable and necessary. They are said to be necessary to maintain fairness among Financiers, such that costs and overhead expended in the realization of value for one Financier are not borne (unfairly) by another Financier as would be the case if the costs and overhead are not deducted from the sale proceeds of a particular vehicle or vehicles, or from the proceeds of Collections.

[40] A number of Securitization Parties oppose the 12% and 20% commission rates. Many of the submissions overlap. In the main, the objection is twofold: the charging of any commission represents a re-writing of pre-filing contracts in which the Court should not engage; and in any event, and even if commissions were appropriate, the proposed rates are too expensive and are above market.

[41] A number of Securitization Parties emphasized that their own agreements already provide for a specific (sometimes lower) commission, or even if they do not, those agreements represent a codification of the terms agreed by the parties which include as part of the overall consideration paid, an implied component for commissions to be paid on vehicle sales as part of the ordinary course of business.

[42] In the event that the Applicants desired not to perform those agreements according to their terms, the remedy ought to be, they submitted, a disclaimer of the contracts.

[43] Other parties suggested that in their general business experience, commissions in the range of 5 – 10% more accurately reflected the market.

[44] In the same way, some Securitization Parties took issue with the pace and terms of the transition of servicing for vehicles. A repeated theme was that the delay is coming at a great expense to Securitization Parties. Certain Securitization Parties submitted that their own contracts contemplated (in the same way as commissions on sales referenced above) payment for servicing upfront with the result that there ought not to be any additional fees or commissions paid.

[45] In response to the concerns raised by Financiers, the proposed Revised Governance Protocol now provides that the 12% and 20% commission rates respectively for inventory, sales and Soft Collections of any Securitization Party Assets, are default rates that are subject to alternative negotiated rates between and among the particular affected Financier and the Pride Entities.

[46] As set out in the Supplement to the Second Report, each Financier is in a different position from others with respect to the nature of the interests of that Financier in vehicles and leases, the economics of the financing arrangements, the structure of their transactions, and their alternatives to the monetizing of inventory by the Pride Entities in which they may have an interest. For all of these reasons, different arrangements with each Financier may be appropriate and not unfair.

[47] I pause to observe that many Financiers submitted that they have already made alternative arrangements with the Pride Entities (and with the approval of the Monitor) that in numerous cases provide for commission rates that differ from the proposed default rates. Other Financiers are, as at the time of the hearing of this motion, in advanced negotiations with the Pride Entities to do the same thing.

[48] In addition, the proposed Revised Governance Protocol provides that Financiers must consent to any inventory sale (and thereby consent to the corresponding commission). Securitization Parties can direct the Pride Entities not to undertake Soft Collections (thereby avoiding the payment of any commission) with the result that no commission can be imposed on any Financier without their knowledge and consent.

[49] In short, any Financier who does not agree with the commission payable pursuant to the Revised Governance Protocol, and who has not negotiated a separate commission, can refuse to consent to inventory sales, or direct the Pride Entities not to undertake Soft Collections.

[50] The result will be that any such Financier has ensured that it is not exposed to any commission to which it has not agreed. However, to be clear, it will also mean that the applicable vehicle or lease will not be monetized in the short term.

[51] The DIP Lenders, who support the proposed Revised Governance Protocol, do not agree to a reduction of the default commission rates. As noted above, the consent of those parties is a critical condition to the continued DIP funding which is in turn critical to the ongoing operation of the Pride Entities.

[52] The DIP Lenders concede that the proposed revisions to the Protocol are far from perfect but observe that the quantum of the DIP was sized based upon the cash flow forecasts, and submit that in all the circumstances, the proposed revisions are fair.

[53] Having considered all of the objections and the issues, in my view the proposed commission structure balances in a fair and equitable way, the need of the Pride Entities to cover the costs of undertaking vehicle sales or collections with the desire of a number of Financiers to not have commissions imposed upon them.

[54] I accept that the solution is imperfect. But in the circumstances (and even aside from the fact that the continued support of the DIP Lenders is critical at an overarching level), I am satisfied that the proposed commission structure is fair and reasonable.

[55] In so concluding, I observe, in particular, the factors referred to above, namely that:

a. the revised version of the Protocol contemplates the negotiation of non-default commission rates (an opportunity of which numerous Financiers have already availed themselves, with success);

b. an affected Financier has what is effectively a veto in the sense that it can decline to consent to the sale of any vehicle (and therefore the applicable commission) such that there is a built-in governor on the unreasonableness of a commission in the particular or unique circumstances of any proposed sale and an incentivization on all parties to be reasonable;

c. the Protocol is not intended, and nor is it a permanent, irrevocable imposition of terms, but rather is an interim measure to maximize stability and provide for vehicle sales and distributions in respect thereof (as well as Soft Collections) on an interim basis; and

d. there is no other practically available alternative.

[56] With respect to the service of vehicles, a number of Securitization Parties have requested that the Protocol address the issue of replacement servicers as contemplated, in many cases, by the terms of the existing agreements. These issues are discussed at length in the Second Report (see paras. 75 – 83).

[57] The Protocol does contemplate the situation where replacement servicer has already been appointed and the Pride Entities receive payments that ought to have been made to the replacement servicer, in which case, those funds will be transferred to the applicable replacement servicer or Financier. The treatment of mistaken proceeds is also addressed in the revised Protocol.

[58] I am satisfied that, at least for the time being, additional provisions as to how a replacement servicer may be appointed, and on what terms, is beyond the scope of the current document. It may be addressed at a later time.

[59] With respect to multiple collateral vehicle lists, the Monitor advises that Financiers have been provided with a list of Multiple Collateral Vehicles in respect of which that Financier has an interest.

[60] However, two points are worthy of note. First, these lists do not include the names or details of competing interests (which obviously are what makes the vehicles or the leases Multiple Collateral Vehicles in the first place). Second, the lists are based on the Books and Records of the Pride Entities which continue to evolve and be refined as the Monitor obtains further information.

[61] As a result of these two issues, Financiers are understandably requesting updated lists which include competing claims. I accept the submission of the Monitor, made both in oral submissions of counsel and in the Supplement to the Second Report, that it is premature for the Monitor or the Pride Entities to provide such an updated list before the Monitor has received statements from Financiers, which it has requested, disclosing the vehicles in which they asserted security or ownership interest, and prior to the security review being conducted by the Monitor being advanced. It naturally follows that without that additional information and corresponding review, any lists would be incomplete and potentially misleading and therefore not accretive to advancing the process or to the interests of any party.

[62] That said, a number of Financiers were both clear and vigourous in their submissions to the Court about the pace of the security review and the effects that the delay continues to have on their respective businesses. The Monitor appreciates the urgency of the situation and is redoubling its efforts to complete the security review as quickly as possible.

[63] Indeed, and to that end, the Fifth Report dated May 14, 2024 addresses the status of the ongoing security review and the issues. As with many things on the Commercial List, acceleration of the process requires and depends upon the cooperation of all parties. The issues in this proceeding are complex, and the scale and scope of the securitization reviews are almost unprecedented.

[64] The fleet of the Pride Entities includes approximately 25,000 trucks, the majority of which are inventory leased to customers. In many cases, those leases and vehicles are subject to securitization facilities. At the same time, over 240 trucks and over 1000 trailers are utilized by the Pride Entities as equipment in their logistics business (as opposed to inventory for lease or sale).

[65] At any point in time, all of these vehicles are located in jurisdictions across Canada and the United States. While, as reported by the Monitor, some vehicles have been repossessed and remain in the possession of the Pride Group pending the results of ongoing security and securitization reviews, the majority of the fleet is constantly in transit.

[66] While Securitization Parties quite understandably want these reviews completed as quickly as possible, the practical reality is that the work is complex and time-consuming. What is even more detrimental to the maximization of chances of a successful outcome than delay, is a completed securitization review that is done in haste, is inaccurate and/or incomplete, and therefore misleading. Such an outcome does not advance the interests of any party.

[67] As stated above, the draft Revised Governance Protocol is an interim measure. However, it is an important one in that it allows for the continued and continuing sale of vehicles and for the completion of distributions, even while the securitization review is ongoing. It does so in a manner that attempts to equitably preserve those rights in dispute and, to the greatest extent possible, fairly allocate costs.

[68] In my view, all of this is appropriate, reasonable and preferable to the alternative of simply freezing everything until significantly more analytical work is done, given the incomplete and evolving state of the Books and Records of the Pride Entities.

[69] For all of these reasons, the Revised Governance Protocol is approved.

[70] Finally, the proposed AR Protocols Order would implement minor amendments to the Intercompany and Unsecured Claims Preservation Protocol. Those amendments, and the rationale for them, are fully set out in the Reports of the Monitor and the motion materials. They are not opposed, they are recommended by the Court-appointed Monitor, and they are approved for the reasons set out in the Reports.

Result and Disposition

[71] For all of the above reasons, the motion record of the Applicants is granted, subject to the amendment to the Sale Process discussed above.

[72] I have signed the Approval and Vesting Order in respect of the Chehalis Property, the Sale Process Approval Order and the AR Protocols Order. Those orders are effective immediately and without the necessity of issuing and entering, although any party may take out any or all of the orders through the Commercial List office if and as required.

Osborne J.