1012-00005 · Stonefield Logistics Group · Insurance & Lender Notifications

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CONFIDENTIAL

STONEFIELD LOGISTICS GROUP INC. 4200 Commerce Parkway, Suite 800 Fort Worth, Texas 76102

July 10, 2023

VIA ELECTRONIC MAIL AND OVERNIGHT COURIER

Catherine Devereaux Senior Vice President, Loan Administration Lakeshore National Bank 135 South LaSalle Street Chicago, Illinois 60603

Re: Quarterly Litigation Status Update — Q2 2023 (April–June 2023) Vantor Holdings Corp. v. Stonefield Logistics Group Inc. Case No. 22-cv-07841 (S.D.N.Y.)

Credit Agreement dated October 12, 2017 (as amended and restated June 30, 2021) Reference No. LNB-SLG-2017-CA-4402 Section 6.03(b) — Material Litigation Reporting Obligation

Dear Ms. Devereaux:

I. Purpose of This Letter

This letter constitutes Stonefield Logistics Group Inc.'s ("Stonefield" or the "Company") quarterly litigation status update for the second quarter of 2023 (covering the period from April 1, 2023 through June 30, 2023), provided pursuant to the material litigation notification and reporting obligations set forth in Section 6.03(b) of that certain Credit Agreement dated as of October 12, 2017, by and among Stonefield Logistics Group Inc., as Borrower, Lakeshore National Bank, as Administrative Agent, and the lenders party thereto (as amended and restated as of June 30, 2021, and as further amended, supplemented, or otherwise modified from time to time, the "Credit Agreement," Ref. No. LNB-SLG-2017-CA-4402). The Credit Agreement governs the Company's $425,000,000 Senior Secured Credit Facility, consisting of a $175,000,000 revolving credit facility and a $250,000,000 term loan B facility, for which Lakeshore National Bank serves as Administrative Agent.

As you are aware, Stonefield initially notified Lakeshore of this litigation by letter dated August 24, 2022, promptly following the filing of the underlying complaint. Lakeshore acknowledged receipt of that notification and requested quarterly updates by correspondence dated August 30, 2022. This letter follows the Company's prior quarterly updates for Q4 2022 (dated January 12, 2023) and Q1 2023 (previously provided in accordance with the agreed reporting schedule), and provides a comprehensive summary of all material developments in the litigation during the second quarter of 2023.

As stated in each of our prior updates, Stonefield continues to vigorously defend against all claims asserted by Vantor Holdings Corp. ("Vantor") in the above-referenced action. The Company's management, in consultation with outside litigation counsel, continues to believe that the claims asserted against Stonefield lack merit and that the Company possesses strong legal and factual defenses. The assessment of the Company's exposure has not changed materially from the prior quarterly updates.

II. Case Summary and Background

For completeness and ease of reference, we provide below a brief summary of the case background, which has been set forth in greater detail in our prior correspondence.

Filing and Court Assignment. Vantor Holdings Corp. filed the original complaint in this action on August 12, 2022, in the United States District Court for the Southern District of New York. The case was assigned Case No. 22-cv-07841 and is currently pending before the Honorable Margaret T. Calloway, United States District Judge.

Underlying Contract. The dispute arises from a five-year Transportation Services Agreement dated March 15, 2019 (TSA Contract Reference No. SLG-VTS-2019-0315) (the "TSA"), entered into between Stonefield and Vantor Transport Services LLC ("VTS"), a wholly owned operating subsidiary of Vantor. Under the TSA, VTS was engaged to provide dedicated and regional truckload transportation services across multiple lanes in Stonefield's southeastern and mid-Atlantic distribution network.

Vantor's Claims. Vantor filed an Amended Complaint on December 2, 2022, which is now the operative pleading. The Amended Complaint alleges that Stonefield wrongfully terminated the TSA and asserts claims for breach of contract and related relief. Vantor claims total damages of approximately $95.4 million, broken down as follows:

Stonefield's Termination of the TSA. Stonefield terminated the TSA effective March 4, 2022, for Cause pursuant to Section 13.1(a) of the TSA. The termination followed documented and sustained service level failures by VTS across all five contractual performance categories during the fourth quarter of 2021, as well as VTS's failure to cure those deficiencies within the thirty (30) day cure period prescribed by Section 13.1(a)(ii) of the TSA. Stonefield provided written notice of the service level deficiencies, specified the required corrective actions, and afforded VTS the full contractual cure period before issuing the notice of termination.

Stonefield's Responsive Pleadings. Stonefield filed its Answer, Affirmative Defenses, and Counterclaim on January 13, 2023. In its Answer, Stonefield denied all material allegations of the Amended Complaint and asserted fourteen (14) affirmative defenses, including, among others, that the termination was a valid exercise of Stonefield's contractual rights, that Vantor and VTS committed prior material breaches of the TSA, that the liquidated damages provision constitutes an unenforceable penalty, that Vantor failed to mitigate its damages, and that Vantor's damages claims are speculative and unsupported. Stonefield also asserted a counterclaim seeking a declaratory judgment that the termination of the TSA was valid and proper under its terms.

Counsel. Stonefield is represented by Calderwood & Harkness LLP (Samuel Eklund, Responsible Partner; Patrick Gallagher, Lead Associate). Vantor is represented by Caldwell Royce & Shapiro LLP.

III. Litigation Status Update — Q2 2023 (April–June 2023)

The following is a detailed summary of the material developments in the litigation during the second quarter of 2023.

A. Discovery Phase — Overview

The Case Management Order entered by Judge Calloway on February 17, 2023 established the following key scheduling deadlines for this matter:

Discovery has been actively underway throughout the second quarter of 2023. Both parties have engaged in substantial document productions, served and responded to written discovery requests, and commenced expert proceedings. The discovery process during Q2 2023 has been intensive and has generated significant volumes of material relevant to the key issues in dispute. The following subsections detail each area of discovery activity during the quarter.

B. Document Productions

Stonefield's First Production. Stonefield completed its first document production on April 14, 2023. This production consisted of 42,387 documents totaling approximately 186,000 pages, bearing Bates range SLG-000001 through SLG-042387. The documents were hosted on and produced through the review platform maintained by Pinnacle Forensics LLC, a third-party electronic discovery vendor retained by Calderwood & Harkness LLP for purposes of this matter. Stonefield's production included, among other categories, internal communications relating to VTS's service level performance, service level reporting data, termination notices and related correspondence, contract administration files, carrier performance scorecards, and relevant business records from Stonefield's operations, carrier relations, and contract compliance departments.

Privilege Log. Concurrently with its first document production, Stonefield served a privilege log identifying 1,247 documents withheld from production on the basis of the attorney-client privilege and/or the work product doctrine. The privilege log was prepared in compliance with Rule 26(b)(5)(A) of the Federal Rules of Civil Procedure and Local Civil Rule 26.2 of the Southern District of New York, and describes each withheld document with sufficient detail to enable Vantor to assess the applicability of the asserted privileges. To date, Vantor has not formally challenged any entries on Stonefield's privilege log.

Vantor's First Production. Vantor completed its first document production on April 28, 2023, producing 28,914 documents totaling approximately 112,000 pages. Stonefield's litigation counsel is currently reviewing and analyzing Vantor's production. As discussed further below, counsel has identified certain gaps and deficiencies in Vantor's production, particularly with respect to documents relating to VTS's fleet redeployment decisions and mitigation efforts following the termination of the TSA.

Stonefield's Second Request for Production. In light of the deficiencies identified in Vantor's initial production, Stonefield served its Second Request for Production of Documents on May 5, 2023. This request targeted specific categories of documents relating to VTS's fleet redeployment decisions during the third and fourth quarters of 2021 — a period during which, as discussed further below, VTS appears to have unilaterally reduced the dedicated fleet capacity available to serve Stonefield's lanes. The specific categories of documents sought include fleet deployment schedules and utilization reports, driver assignment and reassignment records, equipment transfer orders, communications between VTS operations management and Vantor's corporate management regarding fleet allocation, and financial analyses relating to the reallocation of assets from Stonefield-dedicated service to other customers or operations.

C. Written discovery Responses

Stonefield served its responses to Vantor's First Set of Interrogatories (Nos. 1–25) and Vantor's First Request for Production of Documents (Nos. 1–35) on April 14, 2023, concurrent with its first document production. Stonefield's responses were served within the time periods prescribed by the Federal Rules of Civil Procedure and the Case Management Order, and were prepared with input from relevant Stonefield personnel and outside litigation counsel.

Analysis of Vantor's interrogatory responses and document production remains ongoing. Counsel at Calderwood & Harkness LLP has identified certain deficiencies in Vantor's responses, particularly with respect to interrogatories concerning Vantor's mitigation efforts following the termination of the TSA and VTS's fleet redeployment decisions during the period immediately preceding and following the termination. These deficiencies became the subject of the discovery dispute discussed below.

D. Discovery Dispute

Nature of the Dispute. A discovery dispute arose during Q2 2023 concerning Vantor's objections to Stonefield's Second Request for Production of Documents. Vantor objected to several of the requests on the grounds that they were overbroad, unduly burdensome, and not proportional to the needs of the case, and declined to produce the fleet redeployment records targeted by the requests. Stonefield's counsel determined that the requested documents were directly relevant to Stonefield's affirmative defenses, including its defenses that VTS committed a prior material breach of the TSA by unilaterally reducing its dedicated fleet capacity and that Vantor failed to mitigate its damages following the termination.

Meet-and-Confer. In accordance with Rule 37(a)(1) of the Federal Rules of Civil Procedure and the Court's individual practices, Stonefield's counsel sent a detailed meet-and-confer letter to Vantor's counsel on May 30, 2023, setting forth the basis for the discovery requests, explaining the relevance of the fleet redeployment records to the breach and mitigation issues in the case, and requesting that Vantor withdraw its objections and produce the responsive documents. The parties were unable to resolve the dispute through the meet-and-confer process.

discovery Conference and Court Order. Following the failure of the parties' meet-and-confer efforts, the matter was referred to Judge Calloway for resolution. A discovery conference was held before Judge Calloway on June 9, 2023. At the conference, Stonefield argued that VTS's fleet redeployment records were directly relevant to multiple issues in the case, including whether VTS's unilateral reduction of dedicated fleet capacity constituted an independent breach of the TSA, whether VTS's service level failures were attributable to its own management decisions rather than external factors, and the adequacy of Vantor's post-termination mitigation efforts. The Court agreed with Stonefield's position and ordered Vantor to produce fleet redeployment records responsive to Stonefield's Second Request for Production, subject to a reasonable confidentiality designation under the Stipulated Protective Order entered in the case.

Vantor's Supplemental Production. Pursuant to the Court's June 9, 2023 order, Vantor provided a supplemental production of 4,218 documents on June 22, 2023. Review and analysis of this supplemental production is underway. As discussed further in Section IV below, the supplemental production has already yielded documents that appear to support Stonefield's contention that VTS unilaterally reduced its dedicated fleet capacity during Q4 2021.

Significance. We consider the Court's ruling on this discovery dispute to be favorable to Stonefield's position. The Court's order implicitly recognized the relevance of VTS's fleet management decisions to the breach and mitigation issues that are central to this case, and compelled the production of documents that Vantor had sought to withhold. We expect this discovery to strengthen Stonefield's factual position on key contested issues as the case progresses toward depositions and dispositive motions.

E. Expert Proceedings

Vantor's Expert Report. Vantor served the expert report of Dr. Philip Trask of Trask Greystone & Associates on May 15, 2023. Dr. Trask's report opines on damages and purports to quantify Vantor's total claimed losses at approximately $95.4 million, consistent with the damages figures alleged in the Amended Complaint. Dr. Trask's analysis encompasses the full range of Vantor's claimed damages, including the liquidated damages claim, the lost profits claim, and the various consequential and incidental damage claims.

Stonefield's Rebuttal Expert. Stonefield has retained Kensington Analytics Group LLC as its rebuttal damages and economics expert. The engagement is being led by Dr. Evelyn Rosser, Managing Director of Kensington Analytics Group, who has extensive experience in transportation industry economics and commercial damages analysis. Dr. Rosser's rebuttal expert report is currently in preparation and is expected to be served in August 2023, in accordance with the deadlines established by the Case Management Order.

Preliminary Assessment of Dr. Trask's Report. Although Dr. Rosser's rebuttal report has not yet been finalized, preliminary analysis by Stonefield's litigation counsel and expert has identified what we believe to be significant methodological weaknesses and deficiencies in Dr. Trask's report. Without disclosing the privileged details of our litigation strategy, we note the following general areas of concern:

• Inflated Margin Assumptions. Dr. Trask's lost profits analysis relies on revenue and margin assumptions that appear to be materially inflated relative to VTS's actual historical financial performance in serving Stonefield's account, and that do not adequately account for the declining profitability trajectory of the VTS-Stonefield relationship during the eighteen months preceding the termination.

• Failure to Account for VTS's Own Contractual Breaches. Dr. Trask's damages model does not account for or make any adjustment based on VTS's own documented service level failures and contractual breaches, which Stonefield contends were the proximate cause of the termination and which independently reduced the value of the TSA to Vantor.

• Absence of Meaningful Mitigation Analysis. Dr. Trask's report lacks any rigorous analysis of Vantor's duty to mitigate its damages following the termination. In particular, the report does not adequately consider the favorable freight market conditions that prevailed in early-to-mid 2022 (a period of historically elevated spot and contract rates in the truckload sector), which would have afforded VTS ample opportunity to redeploy its assets and workforce to alternative revenue-generating activities.

We anticipate that Dr. Rosser's rebuttal report will address each of these deficiencies in detail and will present an alternative damages analysis that we expect will substantially undermine Vantor's claimed damages.

F. Depositions. Depositions have been scheduled and are expected to commence in July 2023. The parties have engaged in discussions regarding a deposition schedule and have identified the following key witnesses for depositions in the initial phase:

Vantor/VTS Witnesses:

• Derek Pruitt, Vice President, Business Development, Vantor Holdings Corp.

• Sandra Milescu, Chief Operating Officer, Vantor Holdings Corp. / Vantor Transport Services LLC

• Nikolai Vantorovich, Chief Executive Officer, Vantor Holdings Corp.

Stonefield Witnesses:

• Janet Kirkwood, Vice President, Carrier Relations, Stonefield Logistics Group Inc.

• Raymond Hess, Director, Contract Compliance, Stonefield Logistics Group Inc.

The depositions are anticipated to extend through August and September 2023, consistent with the September 29, 2023 fact discovery deadline established by the Case Management Order. Stonefield's counsel is preparing its witnesses for deposition and developing deposition outlines for the Vantor/VTS witnesses in light of the document productions completed to date. We expect the depositions of the Vantor/VTS witnesses to be particularly significant, as they will provide an opportunity to develop the factual record regarding VTS's fleet redeployment decisions and Vantor's post-termination mitigation efforts.

IV. Assessment of Claims and Exposure

Stonefield's management, in consultation with outside litigation counsel, continues to believe that the claims asserted by Vantor in this action lack merit and that Stonefield has strong defenses, both legal and factual, to each of Vantor's claims. The principal bases for this assessment are as follows:

Valid Termination for Cause. Stonefield maintains that the termination of the TSA effective March 4, 2022 was a valid and proper exercise of Stonefield's contractual right to terminate for Cause under Section 13.1(a) of the TSA. The termination was based on VTS's documented and sustained failure to meet Service Level Obligations ("SLOs") across all five contractual performance categories during the fourth quarter of 2021, as follows:

VTS failed to meet SLOs in all five categories, in many cases by substantial margins. Stonefield provided timely written notice of these deficiencies, specified the required corrective actions, and afforded VTS the full thirty (30) day cure period prescribed by the TSA. VTS did not cure the deficiencies within the cure period, and Stonefield thereafter issued its notice of termination in accordance with the contract. Stonefield believes this record provides a complete defense to Vantor's claim that the termination was wrongful.

VTS's Prior Material Breach — Fleet Redeployment. discovery conducted to date, including the supplemental production compelled by the Court's June 9, 2023 order, has produced evidence that VTS unilaterally reduced its dedicated fleet capacity by removing approximately eighty-five (85) tractors from Stonefield-dedicated lanes during the fourth quarter of 2021, without prior notice to or approval from Stonefield as required by the TSA. Stonefield contends that this unilateral fleet reduction constitutes an independent material breach of the TSA by VTS, that it was the primary cause of VTS's failure to meet its service level obligations during Q4 2021, and that it provides an additional basis for Stonefield's defense against Vantor's claims. This evidence also has the potential to undermine Vantor's damages narrative by demonstrating that VTS itself was the architect of the service level failures that led to the termination.

Unenforceability of Liquidated Damages Clause. Stonefield further contends that the liquidated damages clause in Section 13.3 of the TSA, upon which Vantor's largest single damages claim ($67.23 million) is based, constitutes an unenforceable penalty under New York law. The liquidated damages formula in the TSA produces a damages amount that is grossly disproportionate to any reasonable estimate of actual harm at the time of contracting and does not bear a reasonable relationship to Vantor's probable loss. Stonefield intends to challenge the enforceability of this provision on summary judgment.

Failure to Mitigate. Stonefield contends that Vantor failed to mitigate its damages following the termination of the TSA, notwithstanding the availability of highly favorable freight market conditions in early-to-mid 2022. The truckload freight market during this period was characterized by historically elevated spot and contract rates, robust shipper demand, and tight carrier capacity — conditions that would have enabled VTS to redeploy its assets and drivers to alternative revenue-generating lanes and accounts with relative ease. Vantor's apparent failure to take reasonable steps to mitigate its losses is expected to be a significant issue in the damages analysis.

Overall Exposure Assessment. There has been no change in the overall exposure assessment from the prior quarterly updates. Based on the preliminary analysis conducted by Stonefield's litigation counsel and the work of Kensington Analytics Group LLC to date, the maximum reasonably possible adverse outcome, in the event of an unfavorable ruling on all contested issues, is estimated at a level significantly less than the $95.4 million claimed by Vantor. We will continue to refine this assessment as discovery progresses, and we will promptly notify you of any material change in our view of the Company's exposure.

V. Financial Impact

Reserves and Accruals. Consistent with the Company's assessment that Vantor's claims lack merit and that Stonefield has strong defenses, no reserves or accruals have been established with respect to this litigation as of the date of this letter. The Company has evaluated the matter in accordance with ASC 450-20 (Contingencies — Loss Contingencies) and has determined that a loss is not probable at this time. Stonefield's independent auditor, Clarendon Partners LLP (Robert Farraday, Engagement Partner), has been advised of the litigation and the Company's assessment, and has been provided with access to relevant information for purposes of the audit of the Company's financial statements.

Legal Fees and Costs. Legal fees and costs incurred in connection with the defense of this matter through approximately June 30, 2023 total approximately $2,306,490. A breakdown by quarter is as follows:

The increase in legal fees and costs during Q2 2023 relative to prior quarters reflects the intensive document review and production activities, expert retention and engagement, and the discovery dispute proceedings described above. We anticipate that legal fees and costs will remain elevated during Q3 2023, given the anticipated deposition schedule and expert report preparation activities.

Insurance Coverage. No insurance coverage is available for the claims asserted in this litigation. Graymark Insurance Company declined coverage under the Company's directors' and officers' liability insurance policy (Policy No. GLG-DO-2022-04871) in October 2022, on the grounds that the claims in this action do not fall within the insuring agreement of the D&O policy. The Company's commercial general liability policy with Brindoval Mutual Insurance Co. (Policy No. CGL-SLG-2022-11902) does not cover breach of contract claims and is therefore inapplicable to this matter. No other insurance policies maintained by the Company provide coverage for the claims at issue.

VI. Anticipated Next Steps

The following are the key anticipated next steps and milestones in this matter:

1. Fact Depositions (July–September 2023). Depositions of the key fact witnesses identified in Section III.F above are expected to commence in July 2023 and to continue through August and September 2023. These depositions will be a critical phase of discovery, and Stonefield's counsel is actively preparing.

2. Rebuttal Expert Report (August 2023). Stonefield anticipates serving the rebuttal expert report of Dr. Evelyn Rosser of Kensington Analytics Group LLC in August 2023, in accordance with the deadlines established by the Case Management Order.

3. Completion of Fact discovery (September 29, 2023). Fact discovery is scheduled to close on September 29, 2023. Stonefield's counsel is on track to complete all necessary fact discovery within this deadline.

4. Expert discovery (through January 12, 2024). Expert discovery, including expert depositions, is scheduled to proceed through the January 12, 2024 deadline established by the Case Management Order.

5. Dispositive Motions (March 1, 2024 Deadline). Stonefield anticipates moving for summary judgment on or before the March 1, 2024 deadline. Based on the current record and the anticipated development of the factual record through depositions and expert analysis, Stonefield's counsel believes there are strong grounds for summary judgment on multiple issues, including the validity of the termination for Cause, the unenforceability of the liquidated damages clause, and the adequacy of Vantor's mitigation efforts.

VII. Covenant Compliance Confirmation

Pursuant to Section 6.03(b) of the Credit Agreement, we confirm the following:

• This litigation does not currently affect Stonefield's ability to comply with any financial covenants under the Credit Agreement, including the Consolidated Total Net Leverage Ratio, the Consolidated Interest Coverage Ratio, or any other financial maintenance covenant set forth in Article VII of the Credit Agreement.

• No liens, judgments, orders, attachments, or other encumbrances have resulted from or been imposed in connection with this litigation.

• There has been no material adverse change in Stonefield's financial condition, business, operations, or prospects as a result of this matter.

VIII. Next Quarterly Update

Stonefield will provide its next quarterly litigation status update on or about October 2023, covering developments during the third quarter of 2023 (July–September 2023). In addition, Stonefield will promptly notify Lakeshore National Bank of any material changes in the status of this matter between quarterly updates, including, without limitation, the commencement of any settlement discussions or mediation, any adverse rulings or orders by the Court, any significant changes in the assessment of the Company's litigation exposure, and any other developments that could have a material impact on the Company's financial condition or its obligations under the Credit Agreement.

IX. Confidentiality and Privilege

We respectfully request that this letter and its contents be treated as confidential and that it be distributed only on a need-to-know basis within Lakeshore National Bank and among the lending syndicate as necessary for purposes of the Credit Agreement. To the extent that this letter reflects or is derived from privileged communications between Stonefield and its litigation counsel at Calderwood & Harkness LLP, Stonefield reserves and does not waive the attorney-client privilege or the work product doctrine with respect to such communications. This letter has been reviewed by Stonefield's litigation counsel at Calderwood & Harkness LLP (Patrick Gallagher, Lead Associate) prior to its transmittal.

Should you have any questions regarding this update, or if you require any additional information or documentation, please do not hesitate to contact me directly at (817) 555-4200 or at twren@stonefieldlogistics.com. We appreciate Lakeshore's continued engagement with and attention to this matter, and we remain committed to keeping you fully informed of all material developments.

Very truly yours,

STONEFIELD LOGISTICS GROUP INC.

By: ________

Tobias Wren General Counsel Stonefield Logistics Group Inc. 4200 Commerce Parkway, Suite 800 Fort Worth, Texas 76102

cc (via electronic mail):

Samuel Eklund, Esq. Calderwood & Harkness LLP 200 Park Avenue, 38th Floor New York, New York 10166

Priya Ramachandran Chief Financial Officer Stonefield Logistics Group Inc.

Alison Trang, Partner Ridgeline Capital Partners, LP 300 Crescent Court, Suite 1500 Dallas, Texas 75201

Damage Category	Amount Claimed
Liquidated damages pursuant to TSA Section 13.3	$67,230,000
Lost profits for the remaining contract term	$18,700,000
Stranded asset costs (equipment and facility)	$5,200,000
Workforce reduction and severance costs	$2,870,000
Mitigation and transition costs	$1,400,000
Total Claimed Damages	$95,400,000
Milestone	Deadline
Completion of fact discovery	September 29, 2023
Completion of expert discovery	January 12, 2024
Dispositive motions	March 1, 2024
Performance Category	Contractual SLO	VTS Actual Performance (Q4 2021)
On-time pickup rate	95%	78.2%
On-time delivery rate	93%	81.6%
Tender acceptance rate	90%	71.4%
Equipment availability (% of committed fleet)	85%	62.0%
Claims ratio (damage/loss per 1,000 shipments)	Per TSA Schedule C	Failed threshold
Period	Legal Fees	Disbursements and Costs	Total
Q4 2022 (October–December 2022)	$487,250	$42,180	$529,430
Q1 2023 (January–March 2023)	$612,400	$78,340	$690,740
Q2 2023 (April–June 2023)	$891,700	$194,620	$1,086,320
Cumulative Total	$1,991,350	$315,140	$2,306,490

CONFIDENTIAL
STONEFIELD LOGISTICS GROUP INC. 4200 Commerce Parkway, Suite 800 Fort Worth, Texas 76102
July 10, 2023
VIA ELECTRONIC MAIL AND OVERNIGHT COURIER
Catherine Devereaux Senior Vice President, Loan Administration Lakeshore National Bank 135 South LaSalle Street Chicago, Illinois 60603
Re: Quarterly Litigation Status Update — Q2 2023 (April–June 2023) Vantor Holdings Corp. v. Stonefield Logistics Group Inc. Case No. 22-cv-07841 (S.D.N.Y.)
Credit Agreement dated October 12, 2017 (as amended and restated June 30, 2021) Reference No. LNB-SLG-2017-CA-4402 Section 6.03(b) — Material Litigation Reporting Obligation
Dear Ms. Devereaux:
I. Purpose of This Letter
This letter constitutes Stonefield Logistics Group Inc.'s ("Stonefield" or the "Company") quarterly litigation status update for the second quarter of 2023 (covering the period from April 1, 2023 through June 30, 2023), provided pursuant to the material litigation notification and reporting obligations set forth in Section 6.03(b) of that certain Credit Agreement dated as of October 12, 2017, by and among Stonefield Logistics Group Inc., as Borrower, Lakeshore National Bank, as Administrative Agent, and the lenders party thereto (as amended and restated as of June 30, 2021, and as further amended, supplemented, or otherwise modified from time to time, the "Credit Agreement," Ref. No. LNB-SLG-2017-CA-4402). The Credit Agreement governs the Company's $425,000,000 Senior Secured Credit Facility, consisting of a $175,000,000 revolving credit facility and a $250,000,000 term loan B facility, for which Lakeshore National Bank serves as Administrative Agent.
As you are aware, Stonefield initially notified Lakeshore of this litigation by letter dated August 24, 2022, promptly following the filing of the underlying complaint. Lakeshore acknowledged receipt of that notification and requested quarterly updates by correspondence dated August 30, 2022. This letter follows the Company's prior quarterly updates for Q4 2022 (dated January 12, 2023) and Q1 2023 (previously provided in accordance with the agreed reporting schedule), and provides a comprehensive summary of all material developments in the litigation during the second quarter of 2023.
As stated in each of our prior updates, Stonefield continues to vigorously defend against all claims asserted by Vantor Holdings Corp. ("Vantor") in the above-referenced action. The Company's management, in consultation with outside litigation counsel, continues to believe that the claims asserted against Stonefield lack merit and that the Company possesses strong legal and factual defenses. The assessment of the Company's exposure has not changed materially from the prior quarterly updates.
II. Case Summary and Background
For completeness and ease of reference, we provide below a brief summary of the case background, which has been set forth in greater detail in our prior correspondence.
Filing and Court Assignment. Vantor Holdings Corp. filed the original complaint in this action on August 12, 2022, in the United States District Court for the Southern District of New York. The case was assigned Case No. 22-cv-07841 and is currently pending before the Honorable Margaret T. Calloway, United States District Judge.
Underlying Contract. The dispute arises from a five-year Transportation Services Agreement dated March 15, 2019 (TSA Contract Reference No. SLG-VTS-2019-0315) (the "TSA"), entered into between Stonefield and Vantor Transport Services LLC ("VTS"), a wholly owned operating subsidiary of Vantor. Under the TSA, VTS was engaged to provide dedicated and regional truckload transportation services across multiple lanes in Stonefield's southeastern and mid-Atlantic distribution network.
Vantor's Claims. Vantor filed an Amended Complaint on December 2, 2022, which is now the operative pleading. The Amended Complaint alleges that Stonefield wrongfully terminated the TSA and asserts claims for breach of contract and related relief. Vantor claims total damages of approximately $95.4 million, broken down as follows:
Stonefield's Termination of the TSA. Stonefield terminated the TSA effective March 4, 2022, for Cause pursuant to Section 13.1(a) of the TSA. The termination followed documented and sustained service level failures by VTS across all five contractual performance categories during the fourth quarter of 2021, as well as VTS's failure to cure those deficiencies within the thirty (30) day cure period prescribed by Section 13.1(a)(ii) of the TSA. Stonefield provided written notice of the service level deficiencies, specified the required corrective actions, and afforded VTS the full contractual cure period before issuing the notice of termination.
Stonefield's Responsive Pleadings. Stonefield filed its Answer, Affirmative Defenses, and Counterclaim on January 13, 2023. In its Answer, Stonefield denied all material allegations of the Amended Complaint and asserted fourteen (14) affirmative defenses, including, among others, that the termination was a valid exercise of Stonefield's contractual rights, that Vantor and VTS committed prior material breaches of the TSA, that the liquidated damages provision constitutes an unenforceable penalty, that Vantor failed to mitigate its damages, and that Vantor's damages claims are speculative and unsupported. Stonefield also asserted a counterclaim seeking a declaratory judgment that the termination of the TSA was valid and proper under its terms.
Counsel. Stonefield is represented by Calderwood & Harkness LLP (Samuel Eklund, Responsible Partner; Patrick Gallagher, Lead Associate). Vantor is represented by Caldwell Royce & Shapiro LLP.
III. Litigation Status Update — Q2 2023 (April–June 2023)
The following is a detailed summary of the material developments in the litigation during the second quarter of 2023.
A. Discovery Phase — Overview
The Case Management Order entered by Judge Calloway on February 17, 2023 established the following key scheduling deadlines for this matter:
Discovery has been actively underway throughout the second quarter of 2023. Both parties have engaged in substantial document productions, served and responded to written discovery requests, and commenced expert proceedings. The discovery process during Q2 2023 has been intensive and has generated significant volumes of material relevant to the key issues in dispute. The following subsections detail each area of discovery activity during the quarter.
B. Document Productions
Stonefield's First Production. Stonefield completed its first document production on April 14, 2023. This production consisted of 42,387 documents totaling approximately 186,000 pages, bearing Bates range SLG-000001 through SLG-042387. The documents were hosted on and produced through the review platform maintained by Pinnacle Forensics LLC, a third-party electronic discovery vendor retained by Calderwood & Harkness LLP for purposes of this matter. Stonefield's production included, among other categories, internal communications relating to VTS's service level performance, service level reporting data, termination notices and related correspondence, contract administration files, carrier performance scorecards, and relevant business records from Stonefield's operations, carrier relations, and contract compliance departments.
Privilege Log. Concurrently with its first document production, Stonefield served a privilege log identifying 1,247 documents withheld from production on the basis of the attorney-client privilege and/or the work product doctrine. The privilege log was prepared in compliance with Rule 26(b)(5)(A) of the Federal Rules of Civil Procedure and Local Civil Rule 26.2 of the Southern District of New York, and describes each withheld document with sufficient detail to enable Vantor to assess the applicability of the asserted privileges. To date, Vantor has not formally challenged any entries on Stonefield's privilege log.
Vantor's First Production. Vantor completed its first document production on April 28, 2023, producing 28,914 documents totaling approximately 112,000 pages. Stonefield's litigation counsel is currently reviewing and analyzing Vantor's production. As discussed further below, counsel has identified certain gaps and deficiencies in Vantor's production, particularly with respect to documents relating to VTS's fleet redeployment decisions and mitigation efforts following the termination of the TSA.
Stonefield's Second Request for Production. In light of the deficiencies identified in Vantor's initial production, Stonefield served its Second Request for Production of Documents on May 5, 2023. This request targeted specific categories of documents relating to VTS's fleet redeployment decisions during the third and fourth quarters of 2021 — a period during which, as discussed further below, VTS appears to have unilaterally reduced the dedicated fleet capacity available to serve Stonefield's lanes. The specific categories of documents sought include fleet deployment schedules and utilization reports, driver assignment and reassignment records, equipment transfer orders, communications between VTS operations management and Vantor's corporate management regarding fleet allocation, and financial analyses relating to the reallocation of assets from Stonefield-dedicated service to other customers or operations.
C. Written discovery Responses
Stonefield served its responses to Vantor's First Set of Interrogatories (Nos. 1–25) and Vantor's First Request for Production of Documents (Nos. 1–35) on April 14, 2023, concurrent with its first document production. Stonefield's responses were served within the time periods prescribed by the Federal Rules of Civil Procedure and the Case Management Order, and were prepared with input from relevant Stonefield personnel and outside litigation counsel.
Analysis of Vantor's interrogatory responses and document production remains ongoing. Counsel at Calderwood & Harkness LLP has identified certain deficiencies in Vantor's responses, particularly with respect to interrogatories concerning Vantor's mitigation efforts following the termination of the TSA and VTS's fleet redeployment decisions during the period immediately preceding and following the termination. These deficiencies became the subject of the discovery dispute discussed below.
D. Discovery Dispute
Nature of the Dispute. A discovery dispute arose during Q2 2023 concerning Vantor's objections to Stonefield's Second Request for Production of Documents. Vantor objected to several of the requests on the grounds that they were overbroad, unduly burdensome, and not proportional to the needs of the case, and declined to produce the fleet redeployment records targeted by the requests. Stonefield's counsel determined that the requested documents were directly relevant to Stonefield's affirmative defenses, including its defenses that VTS committed a prior material breach of the TSA by unilaterally reducing its dedicated fleet capacity and that Vantor failed to mitigate its damages following the termination.
Meet-and-Confer. In accordance with Rule 37(a)(1) of the Federal Rules of Civil Procedure and the Court's individual practices, Stonefield's counsel sent a detailed meet-and-confer letter to Vantor's counsel on May 30, 2023, setting forth the basis for the discovery requests, explaining the relevance of the fleet redeployment records to the breach and mitigation issues in the case, and requesting that Vantor withdraw its objections and produce the responsive documents. The parties were unable to resolve the dispute through the meet-and-confer process.
discovery Conference and Court Order. Following the failure of the parties' meet-and-confer efforts, the matter was referred to Judge Calloway for resolution. A discovery conference was held before Judge Calloway on June 9, 2023. At the conference, Stonefield argued that VTS's fleet redeployment records were directly relevant to multiple issues in the case, including whether VTS's unilateral reduction of dedicated fleet capacity constituted an independent breach of the TSA, whether VTS's service level failures were attributable to its own management decisions rather than external factors, and the adequacy of Vantor's post-termination mitigation efforts. The Court agreed with Stonefield's position and ordered Vantor to produce fleet redeployment records responsive to Stonefield's Second Request for Production, subject to a reasonable confidentiality designation under the Stipulated Protective Order entered in the case.
Vantor's Supplemental Production. Pursuant to the Court's June 9, 2023 order, Vantor provided a supplemental production of 4,218 documents on June 22, 2023. Review and analysis of this supplemental production is underway. As discussed further in Section IV below, the supplemental production has already yielded documents that appear to support Stonefield's contention that VTS unilaterally reduced its dedicated fleet capacity during Q4 2021.
Significance. We consider the Court's ruling on this discovery dispute to be favorable to Stonefield's position. The Court's order implicitly recognized the relevance of VTS's fleet management decisions to the breach and mitigation issues that are central to this case, and compelled the production of documents that Vantor had sought to withhold. We expect this discovery to strengthen Stonefield's factual position on key contested issues as the case progresses toward depositions and dispositive motions.
E. Expert Proceedings
Vantor's Expert Report. Vantor served the expert report of Dr. Philip Trask of Trask Greystone & Associates on May 15, 2023. Dr. Trask's report opines on damages and purports to quantify Vantor's total claimed losses at approximately $95.4 million, consistent with the damages figures alleged in the Amended Complaint. Dr. Trask's analysis encompasses the full range of Vantor's claimed damages, including the liquidated damages claim, the lost profits claim, and the various consequential and incidental damage claims.
Stonefield's Rebuttal Expert. Stonefield has retained Kensington Analytics Group LLC as its rebuttal damages and economics expert. The engagement is being led by Dr. Evelyn Rosser, Managing Director of Kensington Analytics Group, who has extensive experience in transportation industry economics and commercial damages analysis. Dr. Rosser's rebuttal expert report is currently in preparation and is expected to be served in August 2023, in accordance with the deadlines established by the Case Management Order.
Preliminary Assessment of Dr. Trask's Report. Although Dr. Rosser's rebuttal report has not yet been finalized, preliminary analysis by Stonefield's litigation counsel and expert has identified what we believe to be significant methodological weaknesses and deficiencies in Dr. Trask's report. Without disclosing the privileged details of our litigation strategy, we note the following general areas of concern:
• Inflated Margin Assumptions. Dr. Trask's lost profits analysis relies on revenue and margin assumptions that appear to be materially inflated relative to VTS's actual historical financial performance in serving Stonefield's account, and that do not adequately account for the declining profitability trajectory of the VTS-Stonefield relationship during the eighteen months preceding the termination.
• Failure to Account for VTS's Own Contractual Breaches. Dr. Trask's damages model does not account for or make any adjustment based on VTS's own documented service level failures and contractual breaches, which Stonefield contends were the proximate cause of the termination and which independently reduced the value of the TSA to Vantor.
• Absence of Meaningful Mitigation Analysis. Dr. Trask's report lacks any rigorous analysis of Vantor's duty to mitigate its damages following the termination. In particular, the report does not adequately consider the favorable freight market conditions that prevailed in early-to-mid 2022 (a period of historically elevated spot and contract rates in the truckload sector), which would have afforded VTS ample opportunity to redeploy its assets and workforce to alternative revenue-generating activities.
We anticipate that Dr. Rosser's rebuttal report will address each of these deficiencies in detail and will present an alternative damages analysis that we expect will substantially undermine Vantor's claimed damages.
F. Depositions. Depositions have been scheduled and are expected to commence in July 2023. The parties have engaged in discussions regarding a deposition schedule and have identified the following key witnesses for depositions in the initial phase:
Vantor/VTS Witnesses:
• Derek Pruitt, Vice President, Business Development, Vantor Holdings Corp.
• Sandra Milescu, Chief Operating Officer, Vantor Holdings Corp. / Vantor Transport Services LLC
• Nikolai Vantorovich, Chief Executive Officer, Vantor Holdings Corp.
Stonefield Witnesses:
• Janet Kirkwood, Vice President, Carrier Relations, Stonefield Logistics Group Inc.
• Raymond Hess, Director, Contract Compliance, Stonefield Logistics Group Inc.
The depositions are anticipated to extend through August and September 2023, consistent with the September 29, 2023 fact discovery deadline established by the Case Management Order. Stonefield's counsel is preparing its witnesses for deposition and developing deposition outlines for the Vantor/VTS witnesses in light of the document productions completed to date. We expect the depositions of the Vantor/VTS witnesses to be particularly significant, as they will provide an opportunity to develop the factual record regarding VTS's fleet redeployment decisions and Vantor's post-termination mitigation efforts.
IV. Assessment of Claims and Exposure
Stonefield's management, in consultation with outside litigation counsel, continues to believe that the claims asserted by Vantor in this action lack merit and that Stonefield has strong defenses, both legal and factual, to each of Vantor's claims. The principal bases for this assessment are as follows:
Valid Termination for Cause. Stonefield maintains that the termination of the TSA effective March 4, 2022 was a valid and proper exercise of Stonefield's contractual right to terminate for Cause under Section 13.1(a) of the TSA. The termination was based on VTS's documented and sustained failure to meet Service Level Obligations ("SLOs") across all five contractual performance categories during the fourth quarter of 2021, as follows:
VTS failed to meet SLOs in all five categories, in many cases by substantial margins. Stonefield provided timely written notice of these deficiencies, specified the required corrective actions, and afforded VTS the full thirty (30) day cure period prescribed by the TSA. VTS did not cure the deficiencies within the cure period, and Stonefield thereafter issued its notice of termination in accordance with the contract. Stonefield believes this record provides a complete defense to Vantor's claim that the termination was wrongful.
VTS's Prior Material Breach — Fleet Redeployment. discovery conducted to date, including the supplemental production compelled by the Court's June 9, 2023 order, has produced evidence that VTS unilaterally reduced its dedicated fleet capacity by removing approximately eighty-five (85) tractors from Stonefield-dedicated lanes during the fourth quarter of 2021, without prior notice to or approval from Stonefield as required by the TSA. Stonefield contends that this unilateral fleet reduction constitutes an independent material breach of the TSA by VTS, that it was the primary cause of VTS's failure to meet its service level obligations during Q4 2021, and that it provides an additional basis for Stonefield's defense against Vantor's claims. This evidence also has the potential to undermine Vantor's damages narrative by demonstrating that VTS itself was the architect of the service level failures that led to the termination.
Unenforceability of Liquidated Damages Clause. Stonefield further contends that the liquidated damages clause in Section 13.3 of the TSA, upon which Vantor's largest single damages claim ($67.23 million) is based, constitutes an unenforceable penalty under New York law. The liquidated damages formula in the TSA produces a damages amount that is grossly disproportionate to any reasonable estimate of actual harm at the time of contracting and does not bear a reasonable relationship to Vantor's probable loss. Stonefield intends to challenge the enforceability of this provision on summary judgment.
Failure to Mitigate. Stonefield contends that Vantor failed to mitigate its damages following the termination of the TSA, notwithstanding the availability of highly favorable freight market conditions in early-to-mid 2022. The truckload freight market during this period was characterized by historically elevated spot and contract rates, robust shipper demand, and tight carrier capacity — conditions that would have enabled VTS to redeploy its assets and drivers to alternative revenue-generating lanes and accounts with relative ease. Vantor's apparent failure to take reasonable steps to mitigate its losses is expected to be a significant issue in the damages analysis.
Overall Exposure Assessment. There has been no change in the overall exposure assessment from the prior quarterly updates. Based on the preliminary analysis conducted by Stonefield's litigation counsel and the work of Kensington Analytics Group LLC to date, the maximum reasonably possible adverse outcome, in the event of an unfavorable ruling on all contested issues, is estimated at a level significantly less than the $95.4 million claimed by Vantor. We will continue to refine this assessment as discovery progresses, and we will promptly notify you of any material change in our view of the Company's exposure.
V. Financial Impact
Reserves and Accruals. Consistent with the Company's assessment that Vantor's claims lack merit and that Stonefield has strong defenses, no reserves or accruals have been established with respect to this litigation as of the date of this letter. The Company has evaluated the matter in accordance with ASC 450-20 (Contingencies — Loss Contingencies) and has determined that a loss is not probable at this time. Stonefield's independent auditor, Clarendon Partners LLP (Robert Farraday, Engagement Partner), has been advised of the litigation and the Company's assessment, and has been provided with access to relevant information for purposes of the audit of the Company's financial statements.
Legal Fees and Costs. Legal fees and costs incurred in connection with the defense of this matter through approximately June 30, 2023 total approximately $2,306,490. A breakdown by quarter is as follows:
The increase in legal fees and costs during Q2 2023 relative to prior quarters reflects the intensive document review and production activities, expert retention and engagement, and the discovery dispute proceedings described above. We anticipate that legal fees and costs will remain elevated during Q3 2023, given the anticipated deposition schedule and expert report preparation activities.
Insurance Coverage. No insurance coverage is available for the claims asserted in this litigation. Graymark Insurance Company declined coverage under the Company's directors' and officers' liability insurance policy (Policy No. GLG-DO-2022-04871) in October 2022, on the grounds that the claims in this action do not fall within the insuring agreement of the D&O policy. The Company's commercial general liability policy with Brindoval Mutual Insurance Co. (Policy No. CGL-SLG-2022-11902) does not cover breach of contract claims and is therefore inapplicable to this matter. No other insurance policies maintained by the Company provide coverage for the claims at issue.
VI. Anticipated Next Steps
The following are the key anticipated next steps and milestones in this matter:
1. Fact Depositions (July–September 2023). Depositions of the key fact witnesses identified in Section III.F above are expected to commence in July 2023 and to continue through August and September 2023. These depositions will be a critical phase of discovery, and Stonefield's counsel is actively preparing.
2. Rebuttal Expert Report (August 2023). Stonefield anticipates serving the rebuttal expert report of Dr. Evelyn Rosser of Kensington Analytics Group LLC in August 2023, in accordance with the deadlines established by the Case Management Order.
3. Completion of Fact discovery (September 29, 2023). Fact discovery is scheduled to close on September 29, 2023. Stonefield's counsel is on track to complete all necessary fact discovery within this deadline.
4. Expert discovery (through January 12, 2024). Expert discovery, including expert depositions, is scheduled to proceed through the January 12, 2024 deadline established by the Case Management Order.
5. Dispositive Motions (March 1, 2024 Deadline). Stonefield anticipates moving for summary judgment on or before the March 1, 2024 deadline. Based on the current record and the anticipated development of the factual record through depositions and expert analysis, Stonefield's counsel believes there are strong grounds for summary judgment on multiple issues, including the validity of the termination for Cause, the unenforceability of the liquidated damages clause, and the adequacy of Vantor's mitigation efforts.
VII. Covenant Compliance Confirmation
Pursuant to Section 6.03(b) of the Credit Agreement, we confirm the following:
• This litigation does not currently affect Stonefield's ability to comply with any financial covenants under the Credit Agreement, including the Consolidated Total Net Leverage Ratio, the Consolidated Interest Coverage Ratio, or any other financial maintenance covenant set forth in Article VII of the Credit Agreement.
• No liens, judgments, orders, attachments, or other encumbrances have resulted from or been imposed in connection with this litigation.
• There has been no material adverse change in Stonefield's financial condition, business, operations, or prospects as a result of this matter.
VIII. Next Quarterly Update
Stonefield will provide its next quarterly litigation status update on or about October 2023, covering developments during the third quarter of 2023 (July–September 2023). In addition, Stonefield will promptly notify Lakeshore National Bank of any material changes in the status of this matter between quarterly updates, including, without limitation, the commencement of any settlement discussions or mediation, any adverse rulings or orders by the Court, any significant changes in the assessment of the Company's litigation exposure, and any other developments that could have a material impact on the Company's financial condition or its obligations under the Credit Agreement.
IX. Confidentiality and Privilege
We respectfully request that this letter and its contents be treated as confidential and that it be distributed only on a need-to-know basis within Lakeshore National Bank and among the lending syndicate as necessary for purposes of the Credit Agreement. To the extent that this letter reflects or is derived from privileged communications between Stonefield and its litigation counsel at Calderwood & Harkness LLP, Stonefield reserves and does not waive the attorney-client privilege or the work product doctrine with respect to such communications. This letter has been reviewed by Stonefield's litigation counsel at Calderwood & Harkness LLP (Patrick Gallagher, Lead Associate) prior to its transmittal.
Should you have any questions regarding this update, or if you require any additional information or documentation, please do not hesitate to contact me directly at (817) 555-4200 or at twren@stonefieldlogistics.com. We appreciate Lakeshore's continued engagement with and attention to this matter, and we remain committed to keeping you fully informed of all material developments.
Very truly yours,
STONEFIELD LOGISTICS GROUP INC.
By: ________
Tobias Wren General Counsel Stonefield Logistics Group Inc. 4200 Commerce Parkway, Suite 800 Fort Worth, Texas 76102
cc (via electronic mail):
Samuel Eklund, Esq. Calderwood & Harkness LLP 200 Park Avenue, 38th Floor New York, New York 10166
Priya Ramachandran Chief Financial Officer Stonefield Logistics Group Inc.
Alison Trang, Partner Ridgeline Capital Partners, LP 300 Crescent Court, Suite 1500 Dallas, Texas 75201
Damage Category | Amount Claimed
Liquidated damages pursuant to TSA Section 13.3 | $67,230,000
Lost profits for the remaining contract term | $18,700,000
Stranded asset costs (equipment and facility) | $5,200,000
Workforce reduction and severance costs | $2,870,000
Mitigation and transition costs | $1,400,000
Total Claimed Damages | $95,400,000
Milestone | Deadline
Completion of fact discovery | September 29, 2023
Completion of expert discovery | January 12, 2024
Dispositive motions | March 1, 2024
Performance Category | Contractual SLO | VTS Actual Performance (Q4 2021)
On-time pickup rate | 95% | 78.2%
On-time delivery rate | 93% | 81.6%
Tender acceptance rate | 90% | 71.4%
Equipment availability (% of committed fleet) | 85% | 62.0%
Claims ratio (damage/loss per 1,000 shipments) | Per TSA Schedule C | Failed threshold
Period | Legal Fees | Disbursements and Costs | Total
Q4 2022 (October–December 2022) | $487,250 | $42,180 | $529,430
Q1 2023 (January–March 2023) | $612,400 | $78,340 | $690,740
Q2 2023 (April–June 2023) | $891,700 | $194,620 | $1,086,320
Cumulative Total | $1,991,350 | $315,140 | $2,306,490

CONFIDENTIAL

VIA ELECTRONIC MAIL AND OVERNIGHT COURIER

STONEFIELD LOGISTICS GROUP INC.

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