Third-party vendors push back on endless TSAs

Wallace & Carey Inc. (Re), 2025 ABKB 750
When does “transition” end under a transition services agreement?

Summary: In this case, the Alberta Court of King’s Bench considered how long a purchaser can rely on third-party vendors under a court-approved transition services agreement before the restructuring objective gives way to ordinary commercial bargaining, and held that, on the facts, the transition period had not yet run its course. The case arose after 7-Eleven Canada acquired certain assets of Wallace & Carey and related companies in a CCAA sale that included a Transition Services Agreement intended to ensure continuity of logistics operations, which depended on software licensed from Digiflex. Although the Digiflex licence agreements were excluded contracts and Digiflex argued that 7-Eleven was improperly using the CCAA process to avoid negotiating new licence fees, the Court found that continued access to the software was objectively contemplated as part of the transition and that Digiflex had not met the heavy onus required to lift the CCAA stay. Balancing prejudice, good faith, and the remedial objectives of the CCAA, the Court maintained the status quo to allow the transition to be completed, while fixing a firm end date and ordering that the stay be lifted as against Digiflex at 11:59 pm on February 15, 2026.

Wallace & Carey Inc. (W&C), Loudon Bros Limited (Loudon), and Carey Management Inc. (CMI) (collectively, the Companies) operated one of Canada’s largest independent wholesale distribution and logistics businesses servicing more than 7,000 customers across Canada. The Companies’ largest customer, by far, was 7-Eleven Canada, Inc. (7-Eleven). On June 22, 2023, the Court granted an initial order under the Companies’ Creditors Arrangement Act with respect to the Companies.

Given the importance of W&C to 7-Eleven’s retail business, 7-Eleven quickly became directly involved in the CCAA proceedings. It negotiated an agreement with the Companies and their secured creditor to provide cash collateral to increase W&C’s liquidity, to provide a limited recourse guarantee of W&C’s credit obligations to its secured creditor, and to provide 7-Eleven the right to be a stalking horse purchaser of W&C’s assets when they were sold.

Following a sale and investment and sales process (SISP) for the Companies’ assets or business, on November 17, 2023, the Court granted an Approval and Vesting Order (AVO) approving a transaction with 7-Eleven (the Transaction), including among other things, approving a Transition Services Agreement (TSA) between W&C, CMI, 7-Eleven and the Monitor. One of the commercial purposes of the TSA was to maintain W&C’s services to 7-Eleven to facilitate the transition of the Purchased Assets and the 7-Eleven-related logistics operations from W&C to 7-Eleven. It also provided 7-Eleven time to decide whether there were additional assets it wanted to purchase, and how it was going to structure its Canadian distribution and logistics needs.

Under a long-standing business relationship with Digiflex Information Systems Inc. (Digiflex), W&C and Loudon used the Digiflex Software, including a number of modules and software programs, which handled purchasing, inbound control and receiving, warehouse management and inventory control, order processing and billing, logistics, shipping control, and consolidated reporting. For that purpose, W&C and Loudon had several agreements with Digiflex related to the Digiflex Software, including the Licence Agreements and associated Maintenance Agreements. The Licence Agreements were not part of the Purchased Assets or Assigned Contracts acquired by 7-Eleven in the Transaction, and they are not expressly referenced in the TSA.

Following the closing of the Transaction in November 2023, Digiflex advised that a new company would require a new software licence. On December 3, 2024, Digiflex took the position that 7-Eleven had effectively taken over operations for more than a year, and that it had been hiding behind the CCAA proceedings to try to set up the 7-Eleven Distribution Canada business inside the existing W&C infrastructure to avoid paying licensing and maintenance fees to Digiflex. Digiflex initially advised that it would not provide services beyond January 1, 2025, but later agreed to a consent Order, on terms that included that Digiflex would continue to provide services until the later of the expiration of the stay period (which, at the time, was set to expire on April 30, 2025) and the expiration of the “Western Business” term provided in the TSA.

Following repeated requests to Court by the CCAA Applicants to extend the stay period and the TSA, most recently to February 15, 2026, Digiflex commenced an application seeking a declaration that it had no obligations to provide the 7-Eleven companies with access to its software, either directly or indirectly through the CCAA applicants. Digiflex also sought to lift the stay so that it could immediately terminate its Licence Agreements with the CCAA applicants. The Monitor asserted that W&C continued to provide services to 7-Eleven pursuant to the TSA, including by using the Digiflex software, and that W&C will remain in business until all its obligations under the TSA are satisfied. It argued that granting the Digiflex application would undermine that approval and the sanctity of the Transaction with 7-Eleven, which greatly benefited the Companies’ stakeholders, and would cause harm to 7-Eleven. 7-Eleven argued that it would be impossible for it to continue logistics operations required for its retail stores without using the Digiflex software.

The Court has the discretion to lift or vary a stay of proceedings under the CCAA in accordance with the procedure set out in the court’s stay order. The onus is on the party seeking to lift the stay, which has been described as a “heavy” onus, because lifting a stay is not routine. Courts have described various non-exhaustive factors, including:

1. whether the applicant has “serious grounds” or “sound reasons” or lifting the stay;

2. the merits of the proposed action or step, where relevant;

3. whether the prejudice caused by the stay is material and unique to the applicant;

4. the relative prejudice of affected parties;

5. the balance of convenience;

6. the status of the CCAA proceedings and the impact lifting the stay will have on them;

7. whether the debtor company, the applicant seeking the stay, and any other relevant stakeholders have acted in good faith and with diligence;

8. whether lifting the stay is consistent with the remedial objectives of the CCAA; and

9. whether it is in the interests of justice, or would be equitable, to lift the stay.

The commercial context of the Transaction and the TSA included that 7-Eleven was not acquiring all the Companies’ assets, but rather a specific set of assets for the future logistics operations required for 7-Eleven’s retail store operations. To obtain the benefit of the purchase for the Companies’ and its stakeholders, the Debtors were to continue to provide services to 7-Eleven during the transition. The obvious commercial purpose of this was to ensure continuity of distribution and logistics operations necessary to minimize disruption to 7-Eleven’s retail operations during the transition. The Licence Agreements were Excluded Contracts and, although the Companies did not own the Digiflex software, they had licences to access it and use it. Access to and use of the Digiflex software formed a part of the Companies’ information technology systems which they were obligated to maintain access to and use to provide services to 7-Eleven during the term of the TSA. In the commercial context of the APA and TSA, it was not objectively intended by the parties to exclude access to software required to operate the Companies’ logistics business when they all knew that business was integral to avoid disruption to 7-Eleven’s retail operations during the anticipated transition.

Although the Court found that the APA and the TSA contemplate the Companies’ continued use of the Digiflex Software under the TSA during the transition, Digiflex was not given notice of the application to approve the Transaction, the APA and the TSA. Digiflex was already restrained by the stay imposed by the ARIO. In that context, the formal approval of transactions that expressly required Digiflex’s ongoing performance of services and access to its software, for a potentially indefinite time dependent on the diligence and resource allocation of a third-party purchaser in a major transition, clearly affected Digiflex. Third-party counterparties to agreements with debtors under CCAA protection must be treated fairly and equitably.

Notwithstanding the above, the Court found that in agreeing to the consent Order, Digiflex agreed to have the length of time that the status quo access to and maintenance of its software would be maintained to be out of its control. The Court gave Digiflex’s argument that it agreed to the Digiflex Consent Order on the assumption the Stay Period would end in April 2025 little weight. The Court noted that what Digiflex really lamented was the potential loss of a new and significant licence fee that it may have had an entitlement to, but for the insolvency of the Companies. Digiflex was pre-paid for the Licence Agreements and so had not received further licence fees since the CCAA proceedings started, but had continued to be paid for its Maintenance Services and General Helpdesk Services.

The Court concluded that Digiflex had not met its burden to establish that it was appropriate to grant the Digiflex application on the terms requested, including the declarations sought. The balance of convenience, equity, and interests of justice supported maintaining the status quo until February 15, 2026, to allow the Companies, the Monitor and 7-Eleven to complete the transition process by that date. However, the Court ordered that the stay be lifted vis-à-vis Digiflex at 11:59 pm on February 15, 2026.

Judge: The Honourable Justice M.A. Marion

Professionals involved:

• Jeffrey Oliver of Cassels Brock & Blackwell LLP for KSV as Monitor

• Chelsea Nimmo and Bruna Kalinsoki of Burnet, Duckworth & Palmer LLP for Digiflex Information Systems Inc.

• Carole Hunter and Edmond Lamek of DLA Piper LLP for 7-Eleven Canada, Inc. and 7-Eleven Distribution Canada Corporation