Appendices Receivership Order... A Receiver s Third Report to Court (without appendices)... B Reserve Agreement... C

Transcription

1 Ninth Report of Duff & Phelps Canada Restructuring Inc. as Court-Appointed Receiver of Priszm Income Fund, Priszm Canadian Operating Trust, Priszm Inc., KIT Finance Inc. and Priszm LP June 26, 2014

2 Contents Page 1.0 Introduction Purposes of this Report Currency Restrictions Background Sysco Dispute Denial of Coverage of the Sysco Claim Distributions and Holdbacks Cash Position Security Opinion and Distributions to Date Proposed Distribution Supplier Charge Holdback Receiver s Charge Holdback HST Holdback Holdback for Sysco D&O Claim and the Reduction of D&O Charge Holdback for Reserve with Respect to KEYreit Holdback for Non-assigned Leases re: HFFI Transaction Contingency Conclusion Overview of the Receiver s Activities Conclusion and Recommendation...12 Appendices Receivership Order... A Receiver s Third Report to Court (without appendices)... B Reserve Agreement... C Duff & Phelps Canada Restructuring Inc. Page i of i

3 ONTARIO SUPERIOR COURT OF JUSTICE IN BANKRUPTCY AND INSOLVENCY (COMMERCIAL LIST) Court File No.: CV CL THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, PRUCO LIFE INSURANCE COMPANY AND PRUDENTIAL RETIREMENT INSURANCE AND ANNUITY COMPANY -and- PRISZM INCOME FUND, PRISZM CANADIAN OPERATING TRUST, PRISZM INC., KIT FINANCE INC. AND PRISZM LP NINTH REPORT OF DUFF & PHELPS CANADA RESTRUCTURING INC. IN ITS CAPACITY AS COURT-APPOINTED RECEIVER 1.0 Introduction June 26, Pursuant to an order of the Ontario Superior Court of Justice (Commercial List) ( Court ) made on March 31, 2011 ( Filing Date ), as amended and restated pursuant to an order of the Court made on April 29, 2011 ( CCAA Order ), Priszm Income Fund, Priszm Canadian Operating Trust, Priszm Inc., Kit Finance Inc. and Priszm LP (collectively, Company ) commenced proceedings ( CCAA Proceedings ) under the Companies Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended ( CCAA ). FTI Consulting Canada Inc. was appointed as the monitor ( Monitor ) in the CCAA Proceedings. 2. Pursuant to an application of The Prudential Insurance Company of America, Pruco Life Insurance Company and Prudential Retirement Insurance and Annuity Company (collectively, Prudential ), the Court made an order on September 14, 2011 ( Receivership Order ) which provided that following the closing of the FMI Transaction (as defined below), RSM Richter Inc. ( Richter ) was to be appointed as receiver ( Receiver ) of the assets, undertakings and properties of the Company. 3. The termination of the CCAA Proceedings and the commencement of the receivership proceedings became effective on September 21, A copy of the Receivership Order is attached as Appendix A to this report. Duff & Phelps Canada Restructuring Inc. Page 1

4 4. Pursuant to a Court order made on December 12, 2011 ( Substitution Order ), Duff & Phelps Canada Restructuring Inc. ( D&P ) was substituted in place of Richter as Receiver as a result of D&P s acquisition of the Toronto restructuring practice of Richter Purposes of this Report 1. The purposes of this report ( Report ) are to: a) Provide background information about the Company and these proceedings; b) Provide an update regarding a claim made by Sysco Canada Inc. ( Sysco ) against the Company and its Directors and Officers ( D&Os ) in respect of payments made to it by the Company immediately prior to the commencement of the CCAA proceedings, which payments did not clear the Company s bank account because of the commencement of the CCAA proceedings; c) Detail a proposed distribution to Prudential in the amount of $2.174 million (the Proposed Distribution ) and provide the rationale for the Proposed Distribution; d) Detail the reasons that the Receiver is recommending that the Directors and Officers Charge ( D&O Charge ) be eliminated and that a related holdback for the legal costs of the Company s D&Os be reduced from its present balance to $75,000; and e) Recommend that this Honourable Court make an order: Directing the Receiver to make the Proposed Distribution; Eliminating the D&O Charge and reducing the holdback established to fund the costs of the D&Os legal counsel from its present balance to $75,000; and Approving the Receiver s activities as set out in this Report. 1 On December 9, 2011, the assets used by Richter in its Toronto restructuring practice were acquired by D&P. Pursuant to the Substitution Order, D&P was substituted in place of Richter in certain ongoing mandates, including acting as Receiver in these proceedings. The licensed trustees/restructuring professionals overseeing this mandate prior to December 9, 2011, remain unchanged. Duff & Phelps Canada Restructuring Inc. Page 2

5 1.2 Currency 1. Unless otherwise noted, all currency references in this Report are to Canadian dollars. 1.3 Restrictions 1. In preparing this Report, the Receiver has relied upon the Company s books and records. The Receiver has not performed an audit or other verification of such information. 2. Future oriented financial information relied upon in this Report is based on assumptions regarding future events; actual results achieved may vary from this information and these variations may be material. 2.0 Background 1. The Company was a franchisee of Yum! Restaurants International (Canada) LP. 2. At the time the CCAA Order was made, the Company was the largest operator of KFC franchises in Canada. 3. In addition to operating KFC franchises, the Company operated a limited number of multi-branded restaurants that included a KFC restaurant and either a Taco Bell or Pizza Hut restaurant. 4. During the CCAA Proceedings, the Company completed the following transactions: the sale of the majority of its locations in British Columbia and Ontario to Soul Foods Canada Inc. ( Soul Transaction ). Stores in British Columbia and Ontario that were excluded from the Soul Transaction have been closed; and the sale of the majority of its locations in Nova Scotia and New Brunswick to FMI Atlantic Inc. ( FMI Transaction ). Stores in Nova Scotia and New Brunswick that were excluded from the FMI Transaction have been closed. Duff & Phelps Canada Restructuring Inc. Page 3

6 5. During the receivership proceedings, the Receiver completed transactions for: the sale of the majority of the Company s locations in Alberta and Manitoba to Hi-Flyer Food (Canada) Inc. ( HFFI ) ( HFFI Transaction ). Stores in these provinces that were excluded from the HFFI Transaction have been closed; and the sale of the majority of the Company s locations in Quebec to Olympus Food (Canada) Inc. ( Olympus Transaction ). Stores in Quebec that were excluded from the Olympus Transaction have been closed. 6. Additional information concerning the Company and these proceedings is provided in the application materials filed in the Receivership Proceedings and in the CCAA Proceedings, including: the affidavit of Paul Procyk, a Vice-President of Prudential Investment Management, Inc., sworn September 9, 2011, filed in the context of the receivership application; the Receiver s reports to Court, which are available on the Receiver s website at and motion materials and reports filed by the Monitor in the CCAA Proceedings, which are available on the Monitor s website at Sysco Dispute 1. In the days preceding the commencement of the CCAA proceedings (March 14 to March 28, 2011), the Company issued eleven cheques totalling approximately $1.386 million to Sysco ( Sysco Cheques ). The Sysco Cheques were not honoured as a result of the commencement of the CCAA proceedings. 2. Sysco asserted that the D&Os issued the Sysco Cheques notwithstanding they knew that the cheques would not be honoured and therefore Sysco submitted a D&O Claim for $1.4 million (the Initial Sysco Claim ) in the process established to solicit claims against the Company s D&Os pursuant to a Court order dated June 29, 2011 (the D&O Claims Solicitation Procedure ). 3. In anticipation of making a distribution to Prudential, as of the date of the Receiver s third report to Court dated June 28, 2012 ( Third Report ) and as noted therein, the Receiver, counsel to Sysco and counsel to the D&Os agreed to a holdback in the amount of $1.4 million pending resolution of the Sysco issue (the Sysco Holdback ). Duff & Phelps Canada Restructuring Inc. Page 4

7 4. As detailed in the Receiver s sixth report to Court dated April 18, 2013 ( Sixth Report ), on December 20, 2012, after discussions with counsel to Sysco who expressed concern about the impending expiry of the limitation period, the Receiver wrote to counsel to Sysco to advise that the Receiver did not intend to seek an adjudication process to deal with the Initial Sysco Claim and suggested that Sysco file a statement of claim with respect to the matter. 5. On February 28, 2013, Sysco served materials in respect of a motion seeking an order lifting the stay of proceedings so that Sysco could issue its statement of claim to preserve its rights given the limitation period to advance a claim was approaching. 6. The draft statement of claim of Sysco included the Initial Sysco Claim in the amount of approximately $1.4 million, plus a further punitive damages claim for $5 million (the Damages Claim ). 7. On November 29, 2014, the Court granted an Order withdrawing and abandoning the Damages Claim and the Damages Claim was barred pursuant to the terms of the D&O Claims Solicitation Procedure Order dated June 29, On April 22, 2014, the Receiver and Sysco finalized a settlement of the Sysco Dispute by executing minutes of settlement and release ( Minutes of Settlement ) in respect of the Initial Sysco Claim. 9. Pursuant to the Minutes of Settlement, a payment of $200,000 was made to Sysco in consideration of, among other things: (i) the release and discharge of the Sysco Holdback in the amount of $1.4 million in respect of the Initial Sysco Claim; and (ii) acceptance by the Receiver of $2.6 million as an unsecured claim of Sysco in the receivership 2. The Receiver sought and obtained the approval of the D&Os to enter into the Minutes of Settlement. 4.0 Denial of Coverage of the Sysco Claim 1. As detailed in the Receiver s eighth report to Court dated February 4, 2014 ( Eighth Report ), Great American Insurance Company ( Insurer ) denied coverage on behalf of the D&Os for the Sysco Claim on the basis that, pursuant to an endorsement to the policy, the Insurer is not liable to make payment for loss in connection with any claim arising out of, directly or indirectly, the franchise operations of the Priszm Entities. 2 No distributions to unsecured creditors are expected. Duff & Phelps Canada Restructuring Inc. Page 5

8 2. The Insurer took the position that since all of the restaurant locations operated by the Priszm Entities were franchise locations and that the Priszm Entities operated no homegrown restaurants, the cheques that are the subject of the Sysco Claims were issued in purported payment to Sysco for the supply of goods to franchise restaurant locations, and therefore involve the franchise operations of the Company. The Receiver objected to the Insurer s position. 3. Since the date of the Eighth Report, the Receiver has reached an agreement with the Insurer whereby the Insurer will pay the Receiver $125,000, and in consideration, the Receiver and each of the D&Os will release and discharge the Insurer from any and all actions, causes of action, claims and demands of every nature or kind. 4. The D&Os have executed minutes of settlement and release formalizing terms reached with the Insurer. 5.0 Distributions and Holdbacks 5.1 Cash Position 1. As at June 24, 2014, the estate cash balance totalled approximately $4.14 million, including monies invested in short-term GICs and net of $38,000 of known accrued post-filing liabilities. 5.2 Security Opinion and Distributions to Date 1. As detailed in the Third Report, the Monitor obtained Opinions (as defined in the Third Report) providing that, subject to the assumptions, qualifications and limitations contained therein, the security granted by the Company to Computershare Trust Company of Canada, as agent for Prudential, is valid and that, except for the collateral charges in respect of certain leasehold interests described in the Third Report, the necessary registrations have been made in the relevant jurisdictions in order to perfect or evidence such security. As noted in the Third Report, the Receiver obtained opinion reliance letters from each of the firms that provided the Opinions confirming that the Receiver may rely on the Opinions as of the date upon which the Opinions were issued. A copy of the Third Report is attached (without appendices) as Appendix B to this Report. 2. Pursuant to the terms of three Distribution Orders previously made in these proceedings, approximately $ million has been distributed to Prudential. Duff & Phelps Canada Restructuring Inc. Page 6

9 5.3 Proposed Distribution 1. The Receiver recommends that it be directed to distribute a further $2.174 million to Prudential and that it continue to hold back the balance of the funds in its possession, as detailed in the table below. Current Suggested Reduction Net $000 Funds in estate account and short term deposits 3 4,178 Less: Accrued expenses (38) Net funds available 4,140 Supplier Charge Holdback Receiver s Charge Holdback 600 (200) 400 GST/HST/QST (estimated accrued obligations) 250 (250) - Holdback for Sysco D&O Claim 1,400 (1,400) - Holdback for Reserve with respect to KEYreit Holdback for Costs re: D&O Claims 149 (74) 75 Holdback for non-assigned leases re: HFFI Transaction 1,012 (1,012) - Contingency 800 (500) 300 Total reserves 5,402 (3,436) 1,966 Proposed Distribution 2,174 A discussion of each of holdback is provided in the following sections. 5.4 Supplier Charge Holdback 1. A small portion of the Supplier Charge Holdback is for amounts potentially owing to suppliers for goods or services provided to the Company during the restructuring proceedings. The balance of this holdback is to likely to be necessary to fund the costs of destroying the very large number of books and records that the Receiver will not require for these proceedings and which are not required to be maintained. 3 Balance as at June 24, Duff & Phelps Canada Restructuring Inc. Page 7

10 5.5 Receiver s Charge Holdback 1. The Receiver s Charge Holdback (for the Receiver and its counsel) has been reduced from $600,000 to $400,000. Several issues remain outstanding in these proceedings, including administration of an agreement entered into among the Receiver, KEYreit (formerly Scott s Real Estate Investment Trust), Scott s Real Estate Limited Partnership, Scott s Trustee Corp. and Scott s GP Trust (each being a KEYreit Entity, and collectively, the KEYreit Entities ) and Prudential in respect of post-filing insurance claims arising at the KEYreit Entities locations during the receivership period (the Reserve Agreement ). The KEYreit Entities were formerly the Company s largest landlord. 5.6 HST Holdback 1. The Company is current in respect of its Goods and Services ( GST )/Harmonized Sales Tax ( HST ), and provincial sales tax (for Manitoba and Quebec) remittances and filings. 2. During the receivership proceedings, Company representatives advised the Receiver that a Quebec Sales Tax ( QST ) audit was completed for the year ended December 31, 2009 and that they believe an Ontario Retail Sales Tax audit was also completed through that date. 3. The Company requested that new sales tax audits be performed by the respective government agencies. Manitoba Finance responded to the request with a letter dated October 1, 2012 stating that the Company s tax account had been closed. Revenu Quebec and Canada Revenue Agency ( CRA ) did not respond to the request. 4. On April 1, 2013, the Receiver left follow-up voic messages with Revenu Quebec and CRA. As of the date of this Report, the Receiver has not received a response from Revenu Quebec or CRA. This issue was previously raised in the Third Report, the Sixth Report and the Receiver s seventh report to Court dated November 22, 2013 ( Seventh Report ). The Seventh Report noted the Receiver s intention to seek an order at the next distribution motion permitting it to distribute the balance being held back for this purpose ($250,000). CRA and Revenu Quebec were both served the Third Report, Sixth Report and Seventh Report and as at the date of this Report, neither has advised the Receiver of a claim for HST/QST. Accordingly, the Receiver is seeking an order permitting it to distribute the balance of these monies. 5. It should be noted that the other provinces in which the Company previously operated had provincial taxes administered by CRA. Duff & Phelps Canada Restructuring Inc. Page 8

11 5.7 Holdback for Sysco D&O Claim, Holdback for Costs re: D&O Claims and Reduction of D&O Charge 1. The Sysco Claim has been resolved, as detailed in Section 3 above. Accordingly, the Receiver recommends that the amounts previously heldback in respect of the Sysco Claim, being $1.4 million, be made available for distribution to creditors in accordance with their priorities, meaning that the monies available for distribution would be paid to Prudential. 2. In addition to the previous $1.4 million holdback, a reserve of $175,000 4 was established to fund the legal costs of the parties covered by the D&O Charge. Since that reserve was established, a total of $97,692 has been paid to Minden Gross LLP ( Minden Gross ), counsel to the Company s Chief Restructuring Officers. The Receiver is in receipt of one additional invoice from Minden Gross in the amount of $5,350 and one invoice from Blake, Cassels & Graydon LLP, counsel to the Company s independent directors, in the amount of $66,106. These invoices will be paid imminently. 3. As a result of the settlement of the Sysco Claim, the Receiver proposes to eliminate the D&O Charge and reduce the Holdback for Costs re D&O Claims from its present balance of $149,000 to $75,000, with this amount being used to fund the legal costs noted in paragraph 2 above. 5.8 Holdback for Reserve with Respect to KEYreit 1. The Company operated 188 stores across Canada where KEYreit was the landlord (the Locations ). 2. To address the possibility that KEYreit may have insurance claims for post-filing operations of the Company in the Locations, the Receiver and KEYreit negotiated the Reserve Agreement. A copy of the Reserve Agreement is attached as Appendix C to this Report. 3. The Reserve Agreement establishes a mechanism to deal with insurance claims that may be asserted against the Company and/or the KEYreit Entities in respect of the Company s post-filing operations at the Locations (the Claims ). It also provides that the Receiver will hold $941,363 (the Reserve Amount ) to satisfy deductibles owing in respect of Claims that are covered by insurance and that relate to the post-filing operations of the Company at the Locations. 4 See line item in the table in Section 5.3 entitled Holdback for Costs re: D&O Claims. This line item was originally $175,000 but was reduced to $149,000. Duff & Phelps Canada Restructuring Inc. Page 9

12 4. As at the date of this Report, no distributions have been made pursuant to the terms of the Reserve Agreement and the Receiver continues to hold the Reserve Amount. It should be noted, however, that in accordance with the terms of the Reserve Agreement, the Receiver intends to distribute to Prudential approximately $146,000 forthwith and the Reserve will then be adjusted accordingly. 5.9 Holdback for Non-assigned Leases re: HFFI Transaction 1. As at the date of this Report, the Receiver has obtained lease assignments for all locations subject to the HFFI Transaction. These monies have been distributed to Prudential in accordance with an order of the Court dated July 31, Accordingly, no further holdback with respect to the HFFI Transaction is required Contingency 1. The contingency reserve has been reduced from $800,000 to $300,000. This reserve is recommended to cover off any items not contemplated above Conclusion 1. The Receiver is seeking an order of the Court to make the Proposed Distribution to Prudential. The Receiver is of the view that there are sufficient holdbacks to address potential claims that may need to be funded, and that an order should be issued directing it to pay forthwith $2.174 million to Prudential. 2. Due to the resolution of the Sysco Claim, the Receiver is also seeking an order of the Court eliminating the D&O Charge and reducing to $75,000 the Holdback for Costs re the D&O Claim. 3. The Receiver is of the view that any monies which become available for distribution resulting from a reduction in the holdbacks detailed in Section 5 of this Report, or any further recoveries (if any), should be distributed by the Receiver to Prudential without further order of the Court. 6.0 Overview of the Receiver s Activities 1. In addition to the activities detailed above and related thereto, since February 4, 2014, the date of the Eighth Report, the Receiver s activities have included: Monitoring and reviewing all receipts and disbursements and signing all cheques and wire transfers; Reviewing monthly bank statements; Duff & Phelps Canada Restructuring Inc. Page 10

13 Corresponding with the Company s insurance brokers and insurance adjusters regarding post-filing insurance claims arising at the Locations; Corresponding with KEYreit, the insurance adjuster, Osler, Hoskin & Harcourt LLP ( Osler ), the Receiver s counsel, and Miller Thompson LLP, counsel to KEYreit, regarding the Reserve Agreement; Reviewing and executing extensions to occupation agreements between the Receiver and HFFI and corresponding with counsel to HFFI regarding same; Reviewing and executing lease assignments in respect of the HFFI Transaction; Corresponding with Osler, HFFI, and Dickinson Wright LLP, counsel to Olympus and HFFI, regarding lease assignments; Preparing schedules of monthly occupancy costs to be paid by the Receiver on behalf of HFFI and providing same to HFFI for reimbursement; Accessing information from the Company s IT equipment and systems required for the administration of the estate, including responding to employee information requests in the context of records of employment and T4 slips; Corresponding with Osler and Sysco Canada regarding the claim filed by Sysco Canada in the D&O Claims Solicitation Procedure; Reviewing various iterations of the Minutes of Settlement and discussing same with Osler; Reviewing the Company s books and records as they pertain to the Sysco pre-filing claim; Corresponding with Lenczner Slaght Royce Smith Griffin LLP, Osler and Minden Gross regarding the Minutes of Settlement; Preparing, in the context of the Sysco settlement, a summary of professional fees paid to counsel to the former directors and officers of the Company; Reviewing on a daily basis the Company s mail; the mail has been redirected to the Receiver s office; Duff & Phelps Canada Restructuring Inc. Page 11

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