Lenders' allocation methodology prevails in Pride Group proceeds fight

Re Pride Group Holdings Inc.
How do you allocate the proceeds of sale in an insolvency?

Summary: In this case, the Court considered the question of which allocation methodology it should adopt when distributing the proceeds of a sale approved in the CCAA proceedings of the Pride Group, a dispute that turned on whether vehicle values should follow the purchaser’s assigned prices or an independent liquidation analysis prepared by Hilco. The applicants advanced the purchaser’s allocation, which attributed higher values to trucks and lower values to trailers, while several equipment lenders argued for an allocation based on a liquidation analysis prepared by Hilco, which reversed that weighting and tended to ascribe higher values to trailers. After finding no evidentiary basis to explain or justify the purchaser’s methodology and identifying inconsistencies in how identical vehicles were valued, the Court determined that Hilco’s objective and transparent desktop appraisal provided the only defensible foundation for a fair inter creditor allocation. The Court therefore adopted the Hilco allocation for distributing the vehicle proceeds.

The Applicants sought, among other things, a PGL Vehicle Proceeds Distribution Order approving an interim distribution of a portion of the net proceeds of the PGL Going Concern Transaction in accordance with the 32^nd Report of the Monitor and authorizing the Monitor to pay from the proceeds of the PGL Going Concern Transaction the 2025 PGL Direct Costs. No party opposed the PGL Vehicle Proceeds Distribution Order, but a number of Equipment Lenders and other parties objected to the allocation methodology for the proposed distribution.

The PGL Going Concern Transaction was previously approved by this Court and subsequently enforced by recognition order in the United States. In February 2025, the Applicants proposed to make an interim distribution of a portion of the net proceeds in respect of vehicle sales. The then-proposed PGL Interim Distribution Order allocated the PGL Vehicle Proceeds among the relevant sold Vehicles on the basis of the purchase price allocated to each Vehicle by the PGL Purchaser. Certain PGL Lenders opposed the proposed interim distribution, and the Court granted an adjournment of the Applicants motion at that time.

The Applicants and the Monitor subsequently attempted to come to an agreement with the PGL Lenders on the proposed distribution. The PGL Lenders supported the distribution, but submitted that the distribution methodology should be based on a liquidation analysis prepared by Hilco. The Monitor prepared a detailed comparison on a VIN by VIN basis of the two competing allocation methodologies, but took the position that the allocation of the PGL Vehicle Proceeds was an inter-creditor issue.

The Applicants returned to Court seeking a form of the PGL Vehicle Proceeds Distribution Order that provided for a distribution based on largely the same allocation contemplated in the February 2025 Order (i.e. the “Purchaser Allocation”). The principal difference between the two competing allocations was that the Purchaser Allocation generally ascribed higher values to trucks, and lower values to trailers, while the Hilco Allocation generally ascribed higher values to trailers and lower values to trucks. The Equipment Lenders who financed more trucks than trailers favoured the Purchaser Allocation, while those who financed more trailers than trucks favoured the Hilco Allocation.

The Court accepted the initial attraction of applying the Purchaser Allocation on the basis that it reflected a “real world” or actual market transaction (i.e. not simply an estimate of what a willing purchaser might pay and how that purchaser would allocate the overall purchase price). Further, the purchaser was an entity controlled by the principals of the Applicants, who know the fleet, the vehicles and the relative value of each vehicle probably better than anyone else. The difficulty was that there was no evidence about why, how or according to what methodology the purchaser arrived at the Purchaser Allocation.

There was no basis in the evidence for the Court to determine what the methodology was, let alone whether it was reasonable, fair and whether it ought to be applied as the best proxy for an allocation between and among creditors. While it was possible that the purchaser anticipated it would need more trucks than trailers, or vice versa, or that it intended to keep trucks longer and sell trailers sooner, or vice versa, there was no evidence on these points. The Purchaser Allocation reflected discrepancies in value for seemingly identical vehicles, and the only distinguishing feature was the identity of the corresponding PGL Lender. There was no basis on the record to explain those value differentials.

On the other hand, Hilco was independent and had no self-interest in any particular allocation. Hilco estimated the value of each Vehicle based solely on the information provided, combined with its own expertise in monetizing such assets. While Hilco conducted no physical inspections and its appraisal was described as a “desktop appraisal”, the Court preferred it over the Purchaser Allocation in these circumstances where there was no evidence that it was erroneous, unreasonable or inaccurate. While there were no physical inspections of the vehicles, there was an objective analysis as to the value of the Vehicles provided by an “impartial and independent” party retained by two court officers, resulting in what was admitted and acknowledged to be a “rational and defensible” estimate of value.

Hilco’s relevant experience and industry expertise was set out in the materials and was recognized by the Monitor and CRO in the first place when Hilco was retained. Hilco maintains a dedicated specialty group focused on transportation-related mandates, works with a wide range of clients in the transportation and logistics sector and its related engagements include liquidations of trucks and trailers and the acquisition and continued operation of truck/trailer sales and leasing businesses. The Hilco Allocation was more objective and more transparent than the Purchaser Allocation. The Court was also comforted by the fact that the estimated values reflected in the Hilco Allocation were not wildly divorced from the market, as reflected in the Purchaser Allocation. The Court noted that Canadian courts routinely allocate an aggregate purchase price for a group of assets or businesses (often with the advice and recommendation of their Court officers - monitors or receivers) differently than does a purchaser.

The Court held that the Hilco Allocation should be applied.

Judge: Justice Osborne

Professionals involved:

• Fasken for the Syndicate/DIP Lender

• TGF for the Applicants

• Blakes for EY as Monitor

• Pallett Valo for Meridian OneCap Credit Corp.

• Dentons for Daimler Truck Financial Services Canada Corporation and BMO

• McCarthy Tetrault for Bennington Financial Corp.

• Osler for Mitsubishi HC Capital Canada, Inc. and Mitsubishi HC Capital America Inc.

• McMillan for BNS

• Aird & Berlis for TD Equipment Finance

• BLG for RBC (Bilat)/HSBC