Document 2538967

Court File Number: 32-1896275
Estate Number: 32-1896275
Estate Number: 32-1896278
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
IN THE CONSOLIDATED MATTERS OF THE NOTICE OF INTENTION TO MAKE A
PROPOSAL UNDER THE BANKRUPTCY AND INSOLVENCY ACT, R.S.C. 1985, c. B-3, AS
AMENDED OF
XS CARGO LIMITED PARTNERSHIP
&
XS CARGO GP INC.
Applicants
FACTUM OF THE APPLICANTS
(Motion returnable September 29, 2014)
Dated September 26, 2014
STIKEMAN ELLIOTT LLP
40th Floor
1155 Réné-Lévesque Blvd. West
Montréal, Canada H3B 3V2
Guy P. Martel
Tel: (514) 397-3163
Fax: (514) 397-3222
5300 Commerce Court
199 Bay St.
Toronto, Canada M5L 1B9
Maria Konyukhova LSUC#: 52880V
Tel: (416) 869-5230
Fax: (416) 869-0445
Counsels to the Applicants
#11140807
Court File Number: 32-1896275
Estate Number: 32-1896275
Estate Number: 32-1896278
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
IN THE CONSOLIDATED MATTERS OF THE NOTICE OF INTENTION TO MAKE A
PROPOSAL UNDER THE BANKRUPTCY AND INSOLVENCY ACT, R.S.C. 1985, c. B-3, AS
AMENDED OF
XS CARGO LIMITED PARTNERSHIP
&
XS CARGO GP INC.
Applicants
FACTUM OF THE APPLICANTS1
PART I - INTRODUCTION
1.
XS Cargo Limited Partnership ("XS LP") and XS Cargo GP Inc. ("XS GP", together with
XS LP, "XS Cargo" or the "Applicants") bring this motion for an order assigning to 9014454
Canada Inc. ("Newco" or the "Purchaser") all of the rights and obligations of XS Cargo under
the lease agreements related to the 29 Stores which the Purchaser may choose to keep in
operation (collectively, the "Chosen Stores") in accordance with the Asset Purchase Agreement
(the "APA") entered into on September 15, 2014 between XS Cargo and the Purchaser, save for
those lease agreements related to the Chosen Stores for which the Purchaser has already
obtained voluntary consents to assign from the counterparties to those agreements.
2.
As further described herein, this Motion is brought following the conduct of a court-
supervised sale, refinancing and investment solicitation process in respect of its assets
(the "SISP") which was approved by the Honourable Justice Penny of the Ontario Superior
Court of Justice (Commercial List) on August 6, 2014.
Unless otherwise defined herein, all capitalized terms shall have the meaning attributed to them in the
Supplemental Affidavit of Duncan Reith sworn September 25, 2014 (the "Fifth Reith Affidavit").
1
#11140807
-23.
After due consideration and consultation with the Trustee and CIBC, XS Cargo decided
to accept an offer (the "Hybrid Offer") which will allow, inter alia, the possibility of (i) keeping
a portion of XS Cargo’s business alive by keeping up to 29 Stores (as defined below) in
operation, (ii) preserving the employment of up to approximately 350 employees of XS Cargo,
(iii) maintaining XS Cargo’s business relationship with some of XS Cargo’s landlords and
business partners (iv) while closing down the remaining underperforming Stores and (v)
ensuring the maximization of the recovery for its creditors given the advantageous net
minimum guarantee offered by the Agent.
4.
Accordingly, on September 15, 2014, XS Cargo entered into the following agreements:
(a) an Agency Agreement (the "Agency Agreement") with a Tiger Capital Group,
LLC ("Tiger" or the "Agent"); and
(b) the APA with the Purchaser.
5.
On September 19, 2014, the Honourable Justice Penny of the Ontario Superior Court of
Justice (Commercial List) rendered an order (the "Approval and Vesting Order") approving
the transactions contemplated under the Agency Agreement and the APA. While the Approval
and Vesting Order was rendered, this Court ordered however that XS Cargo’s request
contained in its Notice of Motion dated September 15, 2014 (the "Notice of Motion") regarding
the assignment of certain lease agreements pursuant to sections 84.1 and 66(1) of the Bankruptcy
and Insolvency Act (the "BIA") be heard by this Court on September 29, 2014 (the "September
29, 2014 Hearing")
6.
Although the Chosen Stores have not yet been determined by the Purchaser, XS Cargo
must, nonetheless, given the time constraints imposed under the APA, seek at the September
29, 2014 Hearing, an order authorizing the assignment to the Purchaser of all the lease
agreements related to the 29 Stores for which no satisfactory executed consent forms have yet
been received (collectively, the "Remaining Stores"). However, XS Cargo proposes that such
assignment be effective only upon filing by the Trustee of a certificate (the "Trustee’s
Certificate") in the form attached as Schedule A to the Approval and Vesting Order,
#11140807
-3confirming: (a) that all closing conditions set forth under the APA have been met, and (b) the
identity of the Chosen Stores for which the requested assignments shall be effective.
Fifth Reith Affidavit, at para. 17.
7.
With respect to the Other Material Contracts, the Purchaser has agreed to extend the
period during which XS Cargo may attempt to obtain the necessary assignment in respect of
such contracts, and to seek, post-closing, a Court order authorizing their assignment to the
Purchaser, to the extent necessary.
Fifth Reith Affidavit, at para. 18.
PART II - THE FACTS
8.
One of the fundamental terms contained in the APA is the fact that the Purchaser has
been given an option to choose, by no later than 9:30 a.m. on September 29, 2014, which of the
29 Stores will remain open and in operation by the Purchaser (collectively, the "Chosen
Stores").
Fifth Reith Affidavit, at para. 10.
9.
Accordingly, one of the closing conditions to the APA is that the Purchaser must have
obtained, prior to the APA Closing Date, either voluntary consents to assign to the Purchaser
all of XS Cargo’s rights and obligations under the lease agreements related to the Chosen
Stores, (collectively, the "Required Leases"), together with consents relating to other material
contracts of XS Cargo relating to the business carried on at the Chosen Stores (collectively, the
"Other Material Contracts"), or an order from this Court authorizing same.
Fifth Reith Affidavit, at para. 11.
10.
Therefore, in order to meet the above closing condition with regards to the Required
Leases, XS Cargo sent, by email and by courier, respectively on September 18 and 19, 2014, a
notice (the "Landlord Notice") to each of the landlords of the 29 Stores (collectively, the
"Landlords") informing them, inter alia, of XS Cargo’s intention to sell to the Purchaser, on a
#11140807
-4going-concern basis, up to 29 Stores, and that assignment in respect of the lease agreements
related to the Chosen Stores would be required. Accordingly, XS Cargo attached to the
Landlord Notice a list of the 29 Stores, as well as a draft consent form (the "Consent Form")
which XS Cargo requested the Landlords to sign. The Landlords were advised in the Landlord
Notice that unless executed Consent Forms were received forthwith, XS Cargo would have to
return before this Court to seek an order pursuant to sections 84.1 and 66(1) of the BIA in order
to have such lease agreements assigned to the Purchaser. A copy of the Landlord Notice, along
with the schedules thereto, including the draft Consent Form, is attached to the Fifth Reith
Affidavit as Exhibit B.
Fifth Reith Affidavit, at para. 12.
11.
XS Cargo also reached out to each of the Landlords following the issuance of the
Landlord Notice, in order to obtain the necessary consents to proceed with the assignments
required under the APA. According to the Purchaser, in certain cases, the Purchaser had direct
communications with the Landlords. As of the date hereof, XS Cargo and/or the Purchaser
have been able to communicate directly with almost all of the Landlords, or their respective
representatives, either by telephone or by email.
Fifth Reith Affidavit, at para. 13.
12.
As of the date hereof, out of the 29 Stores, XS Cargo has received eleven (11) fully
executed Consent Forms. No refusal to assign the lease agreement related to any of the 29
Stores has been received by XS Cargo. However, according to the Purchaser, a number of
Landlords have provided comments on the proposed Form of Consent that are unacceptable to
the Purchaser and negotiations to resolve these differences are ongoing. The progress made so
far by XS Cargo and/or the Purchaser in obtaining the necessary consents by the Landlords is
summarized in a table attached to the Fifth Reith Affidavit as Exhibit C.
Fifth Reith Affidavit, at para. 14.
13.
Although XS Cargo may continue to receive additional executed Consent Forms, XS
Cargo must, however, seek, without further delay, given the time constraints due to the APA
Closing Date, the approval from this Court of the assignment in favour of the Purchaser of the
#11140807
-5lease agreements related to the Chosen Stores for which no Consent Form has yet been
received.
Fifth Reith Affidavit, at para. 15.
PART III - ISSUES
14.
The issue on this motion is whether the Court should approve at the proposed
assignment in respect of the lease agreements related to the Chosen Stores and which the
Purchaser wishes to assume (collectively, the "Assumed Leases").
PART IV - LAW AND ARGUMENT
A)
The Court has Jurisdiction to Order the Assignment of Agreements
15.
Section 84.1 of the BIA authorizes the Court to make an order assigning the rights and
obligations of the insolvent applicant under an agreement to any person who is specified by
the Court and who agrees to the assignment.
BIA, s. 84.1.
16.
Section 66(1) of the BIA provides that all provisions of the BIA (but for the Consumer
Proposal provisions) apply to proposals with such modification as the circumstances require.
Section 66(1.1) of the BIA requires the court to consider, when deciding whether to make an
order assigning an agreement under s. 84.1 in the proposal context, whether the NOI trustee
has approved the assignment.
BIA, s. 66(1.1).
17.
As such, assignments of material contracts in favour of a purchaser similar to those
requested herein have been granted by the Courts in either BIA or CCAA proceedings:
See, In the matter of the Notice of Intention to make a Proposal of Herbal
Magic Inc., (July 30, 2014), Ont. No. 31-1890162 (Ont. S.C.J.), at paras. 2 and 3,
#11140807
-6Tab 1 of the Applicant’s Book of Authorities (the "BOA"); In the Matter of a Plan
of Compromise or Arrangement of Northstar Aerospace, Inc., (July 24, 2012), Ont.
No. CV-12-9761-00CL, Tab 2 of the BOA, at paras. 5 and 6; Ford Credit Canada
Ltd. v. Welcome Ford Sales Ltd., 2011 ABCA 158 at paras. 8 and 71, Tab 3 of the
BOA; Re White Birch Paper Holding Company (2010), 72 C.B.R. (5th) 63 (Que.
S.C.), at paras. 16 and 17, Tab 4 of the of the BOA.; Re Sterling Shoes Inc. (30
April 2012), Vancouver No. S117081 (B.C.S.C.) at para. 3, Tab 5 of the BOA;.
B)
The Criteria for Assignment of Contracts under Section 84.1 of the BIA
18.
Section 84.1 of the BIA (as modified by s. 66(1.1)) provides the following test for
determining whether an agreement should be assigned in a proposal proceeding:
(a)
whether the person to whom the rights and obligations are to be assigned is able
to perform the obligations;
(b)
whether it is appropriate to assign the rights and obligations to that person; and
(c)
whether the proposal trustee has approved the assignment.
BIA, ss. 84.1, 66(1.1).
19.
In addition, every party to an agreement subject to assignment must be provided with
notice of presentation of such a motion.
20.
Finally, the court must be satisfied that all monetary defaults in relation to the
agreement — other than those arising by reason only of the person’s insolvency or failure to
perform a non-monetary obligation — will be remedied on or before the day fixed by the court.
BIA, s. 84.1(5).
21.
The objective of the above provisions is to preserve the estate of a debtor as a whole,
even if contractual rights of some creditors are compromised in the process.
Ford Credit Canada Ltd. v. Welcome Ford Sales Ltd., 2011 ABCA 158 at para.
71, Tab 3 of the Applicant’s Book of Authorities (the "BOA").
22.
Pursuant to section 11.3 of the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36,
as amended (the "CCAA"), which is analogous to section 84.1 of the BIA, Courts have ordered
#11140807
-7the assignment of a debtor’s rights and obligations under a contract notwithstanding a
restriction or prohibition on assignment contained in said contract.
See Re White Birch Paper Holding Company (2010), 72 C.B.R. (5th) 63 (Que.
S.C.) at para. 16, Tab 4 of the of the BOA.; Re Sterling Shoes Inc. (30 April
2012), Vancouver No. S117081 (B.C.S.C.) at para. 6, Tab 5 of the BOA.
(i)
Whether the person to whom the rights and obligations are to be assigned is
able to perform the obligations
23.
One of the closing conditions to the APA is that the Purchaser must have received
financing, including an amount sufficient to complete the transactions contemplated under the
APA, on terms and conditions satisfactory to the Purchaser. As previously mentioned, the
assignment of Required Leases will only become effective upon closing of the APA and filing
of the Trustee’s Certificate confirming same. Therefore, if such closing occurs, this will imply
that sufficient financing will have been obtained by the Purchaser by such date, in which case,
the Purchaser should be able to perform its obligations under the lease agreements related to
the Chosen Stores.
Fifth Reith Affidavit, at para. 20.
24.
Based on information obtained by the directors of the Purchaser, as at September 25,
2014, the Purchaser had received conditional commitments for up to $6 million for a senior
revolving credit facility, as well as additional conditional commitments for equity investments,
which represents the required levels projected in its modeling to complete the proposed
transaction contemplated under the APA. The Purchaser has until the APA Closing Date
(October 1, 2014) to secure such financing.
Fifth Reith Affidavit, at para. 21.
(ii)
25.
Whether it is appropriate to assign the rights and obligations to that person
Prior to the enactment of s. 84.1 of the BIA and s. 11.3 of the CCAA, Justice Wilton-
Siegel found it appropriate to approve the assignment of contracts to a purchaser in a CCAA
proceeding where it was "important to the reorganization process", furthering the purpose and
#11140807
-8spirit of the CCAA proceedings. The assignment of the lease agreements related to the Chosen
Stores, is such an instance in the proposal context.
Re Nexient Learning Inc., 2009 CarswellOnt 8071 at paras. 53-54, 56, 59, Tab 6
of the BOA.
26.
To the extent that the Purchaser does decide to keep in operation certain Stores, the
assignment of the contracts and lease agreement relating to these Stores is crucial to the
Purchaser, and as such, is a fundamental term of the APA.
Affidavit of Duncan Reith sworn September 15, 2014 (the "Third Reith
Affidavit"), Motion Record, Tab 2, at para. 44.
27.
Without such assignment, the Purchaser runs the risk of being unable to operate the
business of XS Cargo. Failure to assign the lease agreements related to the Chosen Stores will
prevent the APA to close, and will possibly result in the end of XS Cargo’s business to the
detriment of its employees, customers and suppliers.
28.
In any event, it submitted that the assignment of the lease agreements related to the
Chosen Stores will allow the Purchaser to step into the shoes of XS Cargo, ensuring a smooth
transition for the benefit of counterparties, employees and other stakeholders.
(iii)
29.
Whether the Trustee Approve of the Proposed Assignment
The Trustee is fully aware of the closing conditions set forth under the APA, and has
been kept appraised on XS Cargo’s efforts in obtaining from the Landlords voluntary consents
to the proposed assignment.
Fifth Reith Affidavit, at para. 22.
(iv)
30.
Whether Landlords were Duly Notified
As appears below, the Landlords have been duly provided with notice of presentation
of the present motion on no fewer than five (5) occasions:
(a)
On September 12, 2014, XS Cargo’s counsel sent a letter to the service list
in which each interested party, including the Landlords, were advised of XS
#11140807
-9Cargo’s intentions to have the Agency Agreement and the APA approved, and
to have certain contracts assigned in favour of the Purchaser, a copy of which is
attached to the Fifth Reid Affidavit as Exhibit D;
(b)
On September 15, 2014, the Notice of Motion, as well as the full Motion
Record related thereto, was served upon each Landlord by email (by XS Cargo’s
counsel) and by courier (by the Trustee) in the following days;
(c)
XS Cargo sent, by email and by courier, respectively on September 18
and 19, 2014, the Landlord Notice to each of the Landlords informing them, inter
alia, of XS Cargo’s intention to sell to the Purchaser, on a going-concern basis, up
to 29 Stores, and that assignment, in respect of the lease agreements related to
the Chosen Stores would be required, a copy of said Landlord Notice is attached
to the Fifth Reid Affidavit as Exhibit B;
(d)
XS Cargo’s counsel advised each Landlord of the September 29, 2014
Hearing by email, a copy of which is attached to the Fifth Reid Affidavit as
Exhibit E; and
(e)
Finally, on September 26, 2014, each Landlord received service of the
Fifth Reid Affidavit, as well as a confirmation that the September 29, 2014
Hearing will indeed be held on that date.
Fifth Reith Affidavit, at paras. 9, 13
(v)
31.
Whether Monetary Defaults will be Cured
All monetary defaults in respect of the Required Leases, other than those arising by
reason only of XS Cargo’s insolvency or failure to perform a non-monetary obligation, will be
remedied by XS Cargo, in accordance with the terms agreed upon in the APA. It is expected
that these costs associated with curing such defaults, if any, will be minimal given that the
#11140807
-
10 -
Applicants were current in the payment of their lease obligations as of the date of filing of the
NOI and have honored their lease payment obligations since that date.
Fifth Reith Affidavit, at para. 19.
32.
With respect to non-monetary defaults, Courts have ordered that although monetary
defaults must be remedied in order to allow the assignment contractual parties are deemed to
have waived all existing or previously committed non-monetary defaults under their contracts.
See Re White Birch Paper Holding Company (2010), 72 C.B.R. (5th) 63 (Que.
S.C.) at para. 16, Tab 4 of the BOA.; Re Sterling Shoes Inc. (30 April 2012),
Vancouver No. S117081 (B.C.S.C.) at para. 6, Tab 5 of the BOA.
PART V - ORDER REQUESTED
33.
For the reasons set forth above, XS Cargo believes it is both appropriate and necessary
that the relief being sought be granted.
ALL OF WHICH IS RESPECTFULLY SUBMITTED this 26th day of September, 2014.
6 tiflyna,„t_,
Stikeman Elliott LLP
Counsel to the Applicants
#11140807
Itio
SCHEDULE "A"
LIST OF AUTHORITIES
TAB
DOCUMENT
1
In the matter of the Notice of Intention to make a Proposal of Herbal Magic Inc., (July 30,
2014), Ont. No. 31-1890162 (Ont. S.C.J.)
2
In the Matter of a Plan of Compromise or Arrangement of Northstar Aerospace, Inc., (July
24, 2012), Ont. No. CV-12-9761-00CL
3
Ford Credit Canada Ltd. v. Welcome Ford Sales Ltd., 2011 ABCA 158
4
Re White Birch Paper Holding Company (2010), 72 C.B.R. (5th) 63 (Que. S.C.)
5
Re Sterling Shoes Inc., (30 April 2012), Vancouver No. S117081 (B.C.S.C.)
6
Re Nexient Learning Inc., 2009 CarswellOnt 8071
#11140807
SCHEDULE "B"
RELEVANT STATUTES
Bankruptcy and Insolvency Act
R.S.C. 1985, c. B-3
Act to apply
66. (1) All the provisions of this Act, except Division II of this Part, in so far as they are
applicable, apply, with such modifications as the circumstances require, to proposals
made under this Division.
Assignments
(1.1) For the purposes of subsection (1), in deciding whether to make an order under
subsection 84.1(1), the court is to consider, in addition to the factors referred to in
subsection 84.1(3), whether the trustee approved the proposed assignment.
Final statement of receipts and disbursements
(1.2) For the purposes of subsection (1), the trustee is to prepare the final statement of
receipts and disbursements referred to in section 151 without delay after
(a) the debtor files or is deemed to have filed an assignment;
(b) the trustee informs the creditors and the official receiver of a default made in
the performance of any provision in a proposal; or
(c) the trustee gives the certificate referred to in section 65.3 in respect of the
proposal.
Examination by official receiver
(1.3) For the purposes of subsection (1), the examination under oath by the official
receiver under subsection 161(1) is to be held — on the attendance of the person in
respect of whom a notice of intention is filed under section 50.4 or a proposal is filed
under subsection 62(1) — before the proposal is approved by the court or the person
becomes bankrupt.
Division to be applied conjointly with other Acts
(1.4) The provisions of this Division may be applied together with the provisions of an
Act of Parliament, or of the legislature of a province, that authorizes or provides for the
sanction of compromises or arrangements between a corporation and its shareholders
or any class of its shareholders.
Effect of Companies’ Creditors Arrangement Act
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-2(2) Notwithstanding the Companies’ Creditors Arrangement Act,
(a) proceedings commenced under that Act shall not be dealt with or continued
under this Act; and
(b) proceedings shall not be commenced under Part III of this Act in respect of a
company if a compromise or arrangement has been proposed in respect of the
company under the Companies’ Creditors Arrangement Act and the compromise or
arrangement has not been agreed to by the creditors or sanctioned by the court
under that Act.
…
Assignment of agreements
84.1 (1) On application by a trustee and on notice to every party to an agreement, a
court may make an order assigning the rights and obligations of a bankrupt under the
agreement to any person who is specified by the court and agrees to the assignment.
Individuals
(2) In the case of an individual,
(a) they may not make an application under subsection (1) unless they are
carrying on a business; and
(b) only rights and obligations in relation to the business may be assigned.
Exceptions
(3) Subsection (1) does not apply in respect of rights and obligations that are not
assignable by reason of their nature or that arise under
(a) an agreement entered into on or after the date of the bankruptcy;
(b) an eligible financial contract; or
(c) a collective agreement.
Factors to be considered
(4) In deciding whether to make the order, the court is to consider, among other things,
(a) whether the person to whom the rights and obligations are to be assigned is
able to perform the obligations; and
(b) whether it is appropriate to assign the rights and obligations to that person.
Restriction
#11140807
-3(5) The court may not make the order unless it is satisfied that all monetary defaults in
relation to the agreement — other than those arising by reason only of the person’s
bankruptcy, insolvency or failure to perform a non-monetary obligation — will be
remedied on or before the day fixed by the court.
Copy of order
(6) The applicant is to send a copy of the order to every party to the agreement.
Companies’ Creditors Arrangement Act
R.S.C. 1985, c. B-3
Assignment of agreements
11.3 (1) On application by a debtor company and on notice to every party to an
agreement and the monitor, the court may make an order assigning the rights and
obligations of the company under the agreement to any person who is specified by the
court and agrees to the assignment.
Exceptions
(2) Subsection (1) does not apply in respect of rights and obligations that are not
assignable by reason of their nature or that arise under
(a) an agreement entered into on or after the day on which proceedings
commence under this Act;
(b) an eligible financial contract; or
(c) a collective agreement.
Factors to be considered
(3) In deciding whether to make the order, the court is to consider, among other things,
(a) whether the monitor approved the proposed assignment;
(b) whether the person to whom the rights and obligations are to be assigned
would be able to perform the obligations; and
(c) whether it would be appropriate to assign the rights and obligations to that
person.
Restriction
(4) The court may not make the order unless it is satisfied that all monetary defaults in
relation to the agreement — other than those arising by reason only of the company’s
#11140807
-4insolvency, the commencement of proceedings under this Act or the company’s failure
to perform a non-monetary obligation — will be remedied on or before the day fixed by
the court.
Copy of order
(5) The applicant is to send a copy of the order to every party to the agreement.
#11140807
Court File No. 32-1896275
IN THE CONSOLIDATED MATTERS OF THE NOTICE OF INTENTION TO MAKE A PROPOSAL UNDER THE
BANKRUPTCY AND INSOLVENCY ACT, R.S.C. 1985, c. B-3 OF XS CARGO LIMITED PARTNERSHIP AND OF XS
CARGO GP INC.
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
Proceeding commenced at Toronto
FACTUM OF THE APPLICANTS
(MOTION RETURNABLE SEPTEMBER 29, 2014)
STIKEMAN ELLIOTT LLP
40th Floor
1155 René-Lévesque Blvd. West
Montréal, QC H3B 3V2
Guy P. Martel
Tel: (514) 397-3163
Fax: (514) 397-3222
5300 Commerce Court
199 Bay Street
Toronto, ON M5L 1B9
Maria Konyukhova LSUC#: 52880V
Tel: (416) 869-5230
Fax: (416) 869-0445
Counsels to the Applicants
#11140807