PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Marcus Leung, Lead Associate, Banking & Finance Claudia Merritt, Responsible Partner, Banking & Finance
FROM: Sophie Tremblay, Working Associate, Banking & Finance
DATE: April 10, 2023
RE: Collateral Perfection Analysis — $300,000,000 Senior Secured Asset-Based Revolving Credit Facility; Cascade Retail Holdings Inc. and Cascade Retail Operating Company LLC as Borrowers
Matter No.: 1038-00002
CLIENT: Cascade Retail Holdings Inc. ("CRH" or "Cascade")
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I. Executive Summary
The purpose of this memorandum is to analyze and summarize the Uniform Commercial Code ("UCC") filing strategy, deposit account control agreement ("DACA") requirements, lien search results, required terminations of existing liens, and the treatment of registered intellectual property in connection with the $300,000,000 Senior Secured Asset-Based Revolving Credit Facility (the "Facility" or the "Credit Facility"). This memorandum is intended to provide the deal team with a comprehensive overview of all perfection-related matters, identify open items requiring resolution prior to closing, and set forth recommendations for ensuring that the collateral package is properly perfected on a first-priority basis as of the anticipated closing date.
The Facility is being provided by a syndicate of lenders led by Crescent Harbor Bank, N.A. ("CHB") in its capacity as Administrative Agent and Collateral Agent, together with Northgate Capital Bank ("NCB") and Bridgevale Financial Corporation ("Bridgevale") as syndicate lenders. The proceeds of the Facility will be used to refinance the existing $175,000,000 revolving asset-based lending facility provided by Harborview Lending Group, LLC ("Harborview") and for general corporate purposes, including working capital needs and permitted acquisitions.
The collateral securing the Facility consists of first-priority liens on substantially all personal property of the Loan Parties, including all accounts receivable, inventory (including in-transit inventory and distribution center inventory), deposit accounts, supporting obligations, chattel paper, instruments, letter-of-credit rights, commercial tort claims (to the extent identified in the Perfection Certificate), general intangibles, and all proceeds and products of the foregoing. The breadth of this collateral package reflects the asset-based nature of the Facility, in which the borrowing base is principally composed of eligible receivables and eligible inventory.
Certain categories of assets are excluded from the collateral package under the terms of the Security Agreement. Specifically, the excluded assets comprise: (a) real property and interests therein (other than fixtures), which are not encumbered under this Facility; (b) equity interests in foreign subsidiaries exceeding 65% of the voting stock of such subsidiaries — in practice, this exclusion applies to Cascade Retail Canada ULC ("CRC"), a British Columbia unlimited liability company, of which only 65% of the voting equity interests are pledged; and (c) intellectual property registered with the United States Patent and Trademark Office ("USPTO") or the United States Copyright Office ("USCO"), which is subject to a negative pledge covenant rather than a direct security interest, as discussed in greater detail in Section VII below.
The Grantors under the Security Agreement dated as of May 4, 2023 (the "Security Agreement") are as follows: (i) Cascade Retail Holdings Inc. ("CRH"), as parent company and Borrower; (ii) Cascade Retail Operating Company LLC ("CROC"), as the principal operating subsidiary and Co-Borrower; (iii) Cascade Digital Commerce Inc. ("CDC"), as a Guarantor; (iv) Cascade Outlet Stores LLC ("COS"), as a Guarantor; and (v) Cascade Fulfillment Services Inc. ("CFS"), as a Guarantor.
As Borrower's counsel, our firm, Calderwood & Harkness LLP ("C&H"), is responsible for preparing and filing all UCC-1 initial financing statements, coordinating the negotiation and execution of DACAs with the applicable depository banks, overseeing the lien search process, and confirming that all perfection steps are completed on or before the closing date. Lenders' counsel, Whitfield, Greer & Holloway LLP ("WGH"), is reviewing all perfection deliverables and will render its closing opinion as to the validity and perfection of the security interests created under the Security Agreement and Pledge Agreement.
Summary Conclusion. Based on our analysis, perfection of the Collateral Agent's security interests in the collateral will be achieved through the following principal steps:
(a) Three UCC-1 initial financing statements filed in the States of Delaware and Washington, covering CRH, CROC, and COS, respectively, as described in Section III;
(b) Four deposit account control agreements with the applicable depository banks (Meridian Trust Company, N.A., Crescent Harbor Bank, N.A. (two accounts), and Northgate Capital Bank), as described in Section VI;
(c) Three UCC-3 termination statements to terminate Harborview Lending Group, LLC's existing UCC-1 financing statements on file in Delaware and Washington, as described in Section V; and
(d) A negative pledge covenant in the Credit Agreement covering registered intellectual property of the Loan Parties, as described in Section VII.
In addition, perfection of security interests in pledged equity interests will be achieved through (i) the UCC-1 filings (for membership interests constituting general intangibles) and (ii) delivery of original stock certificates, together with undated stock powers executed in blank, to CHB as Collateral Agent (for certificated equity interests), as described in Section VIII. Certain post-closing perfection deliverables remain outstanding as of the date of this memorandum, including landlord waivers, insurance endorsements, and Canadian counsel confirmation regarding perfection of the CRC equity pledge, as detailed in Section XI.
II. Loan Parties — Organizational Details Relevant to Perfection
A. Table of Loan Parties
The following table sets forth the organizational details of each Loan Party that are relevant to determining the proper UCC filing jurisdiction and confirming the accuracy of debtor name information for purposes of UCC-1 financing statement filings. The entity names listed below have been verified against the respective Certificates of Formation, Certificates of Incorporation, and good standing certificates obtained from the applicable Secretaries of State, as well as the Perfection Certificate executed by authorized officers of each Loan Party and dated May 4, 2023.
It is critical that the debtor name on each UCC-1 financing statement match exactly the name of the debtor as set forth on the public organic document filed in the debtor's jurisdiction of organization. Under UCC § 9-503(a)(1), a financing statement filed against a "registered organization" must provide the name of the debtor indicated on the public organic record most recently filed with or issued by the debtor's jurisdiction of organization. Any deviation, however minor, from the official name may render the financing statement "seriously misleading" under UCC § 9-506 and therefore ineffective. We have confirmed that the debtor names set forth in the UCC-1 financing statements prepared for this transaction match precisely the names reflected in the applicable Certificates of Incorporation and Certificates of Formation on file with the Delaware Secretary of State and the Washington Secretary of State.
B. CRH Registered Agent in Delaware
CRH's registered agent in Delaware is Northwest Registered Agents, Inc., located at 1209 Orange Street, Wilmington, Delaware 19801. This information has been confirmed through the Delaware Division of Corporations online records as of April 5, 2023. The registered agent information is relevant for purposes of service of process and confirmation of entity status, though it does not bear directly on the UCC filing location or debtor name analysis.
C. Excluded Foreign Subsidiary
Cascade Retail Canada ULC ("CRC") is an unlimited liability company organized under the laws of the Province of British Columbia, Canada. CRC operates Cascade's Canadian retail business, consisting of approximately 11 retail locations in British Columbia, Alberta, and Ontario. CRC is excluded from the collateral package as a Grantor — that is, CRC's assets are not encumbered under the Security Agreement. However, pursuant to the Pledge Agreement dated as of May 4, 2023, CROC (as the holder of 100% of the equity interests in CRC) has pledged 65% of the voting equity interests of CRC to CHB as Collateral Agent. The limitation to 65% of voting equity is consistent with standard practice in cross-border secured lending transactions and reflects the tax considerations arising under Section 956 of the Internal Revenue Code, which could result in adverse deemed-dividend consequences to U.S. corporate shareholders if more than 66⅔% of voting stock of a controlled foreign corporation were pledged. Although CRC is organized as an unlimited liability company rather than a corporation with stock, the parties have treated the equity interests in CRC as certificated securities for purposes of the Pledge Agreement. The perfection requirements applicable to the pledge of CRC equity under British Columbia law are discussed in Section VIII.C below and have been identified as a post-closing deliverable.
III. UCC Filing Strategy
A. Governing Law for UCC Filing Location
Under UCC § 9-301(1), as adopted in both Delaware and Washington, the law of the jurisdiction in which the debtor is located governs the perfection and priority of security interests in personal property (other than certain categories of collateral subject to specialized rules, such as deposit accounts, which are governed by the law of the depository bank's jurisdiction, and goods covered by a certificate of title). For purposes of Article 9, a "registered organization" — defined to include corporations and limited liability companies formed by filing with a governmental authority — is deemed to be located in its jurisdiction of organization. See UCC § 9-307(e).
Application of these rules to the Loan Parties yields the following filing jurisdictions:
• CRH (Delaware corporation): filing jurisdiction is Delaware.
• CROC (Delaware LLC): filing jurisdiction is Delaware.
• CDC (Delaware corporation): filing jurisdiction is Delaware.
• COS (Washington LLC): filing jurisdiction is Washington.
• CFS (Delaware corporation): filing jurisdiction is Delaware.
It is important to note that the UCC filing jurisdiction is determined solely by reference to the debtor's jurisdiction of organization, regardless of where the debtor's principal office, place of business, or assets are physically located. Accordingly, CDC's UCC filing is properly made in Delaware notwithstanding that CDC's principal office is located in Portland, Oregon, and CFS's UCC filing is properly made in Delaware notwithstanding that CFS operates distribution centers in Washington, Nevada, and Ohio with significant inventory located at each site. The physical location of collateral is relevant for certain purposes under Article 9 — for example, in determining priority between a security interest perfected by filing and a possessory lien arising under other law — but it does not affect the proper filing jurisdiction for purposes of a financing statement covering the types of collateral at issue here.
B. UCC-1 Filing Plan
The filing plan for this transaction contemplates three UCC-1 initial financing statements, rather than five separate filings (one for each Loan Party). This approach reflects the following considerations:
Four of the five Loan Parties — CRH, CROC, CDC, and CFS — are organized in Delaware, which means that a single filing office (the Delaware Secretary of State) is the proper office for UCC filings against all four of those entities. COS is organized in Washington, requiring a separate filing with the Washington Secretary of State.
However, notwithstanding the fact that all Delaware-organized entities share a common filing jurisdiction, we are filing separate UCC-1s for the two Borrowers — CRH and CROC — rather than attempting to combine multiple debtors on a single financing statement. This approach ensures maximum clarity and searchability in the public filing records, minimizes the risk of any confusion regarding the identity of the debtor, and is consistent with standard market practice in asset-based lending transactions of this size and complexity. Each UCC-1 financing statement names a single debtor and identifies CHB as Collateral Agent as the sole secured party.
With respect to the two Delaware-organized Guarantor subsidiaries — CDC and CFS — the Security Agreement creates a security interest in all of their respective assets, and each entity is a "Grantor" thereunder. However, the three filings described below do not include separate UCC-1s for CDC and CFS. These entities are covered by the blanket lien created under the Security Agreement, and their assets constitute "Collateral" as defined therein. The question is whether separate UCC-1 filings naming CDC and CFS as debtors should be made on a "belt-and-suspenders" basis to provide additional comfort to the Agent. We address this question in Section III.C below and recommend that the matter be discussed with WGH prior to closing.
The three UCC-1 financing statements contemplated for filing are as follows:
1. Delaware Filing — Cascade Retail Holdings Inc.
Debtor: Cascade Retail Holdings Inc.
Secured Party: Crescent Harbor Bank, N.A., as Collateral Agent
Filing Office: Delaware Secretary of State, Division of Corporations, UCC Section, 401 Federal Street, Suite 4, Dover, Delaware 19901
Filing Number: 2023-1947291 (assigned upon submission)
Collateral Description: All assets of the Debtor described in the Security Agreement dated as of May 4, 2023, by and among the Grantors party thereto and Crescent Harbor Bank, N.A. as Collateral Agent, including but not limited to: all accounts, inventory, deposit accounts, chattel paper (whether tangible or electronic), instruments, general intangibles (including payment intangibles), supporting obligations, letter-of-credit rights, commercial tort claims (as described in Schedule 5.16 to the Security Agreement), and all proceeds and products of the foregoing.
This filing employs a broad-form "all assets" collateral description, which is permissible under UCC § 9-504 for purposes of a financing statement (as distinguished from a security agreement, which requires a more specific description under UCC § 9-108). The use of an "all assets" description, supplemented by enumeration of the principal collateral categories, is standard practice in ABL transactions and ensures that the financing statement covers the full scope of the security interest granted under the Security Agreement.
2. Delaware Filing — Cascade Retail Operating Company LLC
Debtor: Cascade Retail Operating Company LLC
Secured Party: Crescent Harbor Bank, N.A., as Collateral Agent
Filing Office: Delaware Secretary of State, Division of Corporations, UCC Section, 401 Federal Street, Suite 4, Dover, Delaware 19901
Filing Number: 2023-1947283 (assigned upon submission)
Collateral Description: All assets of the Debtor described in the Security Agreement dated as of May 4, 2023, by and among the Grantors party thereto and Crescent Harbor Bank, N.A. as Collateral Agent, including but not limited to: all accounts, inventory, deposit accounts, chattel paper (whether tangible or electronic), instruments, general intangibles (including payment intangibles), supporting obligations, letter-of-credit rights, commercial tort claims (as described in Schedule 5.16 to the Security Agreement), and all proceeds and products of the foregoing.
This filing is of particular significance because CROC holds substantially all of the operating assets of the Cascade enterprise, including the accounts receivable and inventory that comprise the core borrowing base under the ABL Facility. As of the date of the most recent borrowing base certificate and the field examination report prepared by Ridgeline Asset Advisors LLC (Patricia Holbrook, Engagement Lead) dated March 31, 2023, CROC's eligible receivables were valued at approximately $187,000,000 and CROC's eligible inventory (at net orderly liquidation value, or "NOLV") was appraised at approximately $294,000,000. The aggregate borrowing base availability is therefore principally derived from assets owned by CROC, which underscores the importance of the UCC-1 filing against CROC as a debtor.
3. Washington Filing — Cascade Outlet Stores LLC
Debtor: Cascade Outlet Stores LLC
Secured Party: Crescent Harbor Bank, N.A., as Collateral Agent
Filing Office: Washington Secretary of State, Corporations and Charities Division, 801 Capitol Way South, Olympia, Washington 98501
Filing Number: 2023-204-8176 (assigned upon submission)
Collateral Description: All assets of the Debtor described in the Security Agreement dated as of May 4, 2023, by and among the Grantors party thereto and Crescent Harbor Bank, N.A. as Collateral Agent, including but not limited to: all accounts, inventory, deposit accounts, chattel paper (whether tangible or electronic), instruments, general intangibles (including payment intangibles), supporting obligations, letter-of-credit rights, commercial tort claims (as described in Schedule 5.16 to the Security Agreement), and all proceeds and products of the foregoing.
COS is a Washington limited liability company and is therefore a registered organization in the State of Washington. Under UCC § 9-307(e), COS is deemed to be located in Washington, making the Washington Secretary of State the proper filing office. COS operates 64 outlet retail locations across the western and southwestern United States, with inventory held at each location. Although COS's principal office is co-located with CRH's headquarters in Seattle, Washington, the filing jurisdiction is determined by reference to the state of organization, not the state of the principal office. In COS's case, both the state of organization and the state of the principal office are Washington, so no jurisdictional conflict arises.
C. Additional Delaware Filings for Guarantor Subsidiaries
As noted above, the current filing plan does not include separate UCC-1 financing statements for CDC (Delaware corporation) or CFS (Delaware corporation). Both entities are Grantors under the Security Agreement and have granted security interests in all of their respective assets to CHB as Collateral Agent. The question is whether additional UCC-1 filings naming CDC and CFS as debtors should be made in Delaware.
We recommend that this question be discussed with WGH, specifically with Bernard Ashford, who is the lead associate on the lender's side, to determine whether the Agent requires separate filings. The arguments in favor of additional filings are as follows:
CFS operates three distribution centers — in Kent, Washington (18700 72nd Avenue South, Kent, WA 98032); Reno, Nevada (4500 Logistics Parkway, Reno, NV 89506); and Columbus, Ohio (7200 Alum Creek Drive, Columbus, OH 43217). Significant inventory is located at these sites, and while the inventory is predominantly owned by CROC (and therefore covered by the CROC UCC-1 filing), certain assets held by CFS in its own right — including equipment, general intangibles related to its logistics operations, and accounts receivable owed to CFS by CROC under intercompany arrangements — would be most clearly covered by a separate filing naming CFS as debtor. A separate filing would eliminate any ambiguity and provide a clear public record of the security interest in CFS's assets.
CDC operates the Cascade e-commerce platform from its Portland, Oregon office and generates a material portion of the enterprise's accounts receivable. Although the majority of CDC's receivables are generated on behalf of CROC under intercompany arrangements and are therefore CROC receivables for borrowing base purposes, CDC holds certain assets in its own right, including general intangibles related to the e-commerce platform (excluding registered intellectual property, which is subject to the negative pledge), deposit accounts (addressed through the NCB DACA), and various contractual rights.
The cost of additional UCC-1 filings in Delaware is nominal — approximately $204 per filing under the current Delaware Secretary of State fee schedule — and the additional filings would provide meaningful "belt-and-suspenders" comfort. We recommend that these filings be made unless the Agent expressly determines that they are unnecessary.
D. Timing
All three UCC-1 financing statements have been prepared and are ready for submission. The filings will be submitted to the Delaware Secretary of State and the Washington Secretary of State on or before the closing date, which is currently anticipated to be May 19, 2023. We intend to submit the filings on the closing date itself, or one business day prior if instructed by the Agent, to ensure that the financing statements are on file and effective as of the date of the initial funding under the Facility.
Filing fees for the three UCC-1s are as follows: Delaware filings (two filings × $204 per filing) = $408; Washington filing (one filing × $20) = $20. The total UCC-1 filing fees of $428 will be included in the overall closing costs, fees, and expenses, which are estimated at $3,175,000 in the aggregate (inclusive of legal fees for both C&H and WGH, appraisal fees, field examination fees, title search fees, and other transaction expenses).
Upon filing, we will obtain stamped acknowledgment copies from the applicable Secretaries of State and distribute them to the deal team, WGH, and CHB's collateral management department. We will also update the matter filing log and the closing checklist to reflect the filing numbers and dates of filing.
IV. Lien Search Results
A. Scope of Lien Searches Conducted
In connection with the perfection analysis and in compliance with the conditions to closing set forth in the Credit Agreement, C&H ordered comprehensive lien searches against each Loan Party. The scope of the searches is summarized below:
UCC Searches. UCC lien searches were ordered against each of the five Loan Parties in their respective jurisdictions of organization, as follows:
• CRH: Delaware Secretary of State
• CROC: Delaware Secretary of State
• CDC: Delaware Secretary of State
• COS: Washington Secretary of State
• CFS: Delaware Secretary of State
The UCC searches were conducted by Penrose Software and cover all active UCC financing statements and amendments on file as of the search date. The searches were conducted as of March 28, 2023 (for Delaware filings) and April 3, 2023 (for Washington filings), and the results were reported to C&H by April 7, 2023.
Federal Tax Lien Searches. Federal tax lien searches were conducted against each Loan Party in the following jurisdictions: (a) King County, Washington (Seattle), which is the location of CRH's and CROC's principal office; and (b) New Castle County, Delaware (Wilmington), which is the state of organization and registered office location for the Delaware-organized entities. Under the Federal Tax Lien Act (26 U.S.C. § 6323), federal tax liens are filed in the county of the taxpayer's principal place of business (for entities) and are effective as notice only in the filing jurisdiction.
Judgment Lien Searches. Judgment lien searches were conducted in the same jurisdictions (King County, Washington and New Castle County, Delaware) to identify any outstanding judgment liens that could affect priority of the Collateral Agent's security interests.
All searches were conducted in the exact legal names of the Loan Parties, as well as common variations and trade names disclosed in the Perfection Certificate.
B. Summary of Search Results
1. Existing Harborview Lending Group, LLC Filings
The lien searches identified three existing UCC-1 financing statements on file against the Loan Parties, all of which were filed by Harborview Lending Group, LLC as the secured party in connection with the existing $175,000,000 revolving ABL facility. The details of these filings are as follows:
Filing Against CRH (Delaware). A UCC-1 financing statement is on file with the Delaware Secretary of State, filed by Harborview Lending Group, LLC as secured party, against Cascade Retail Holdings Inc. as debtor. The filing covers accounts, inventory, chattel paper, instruments, general intangibles, supporting obligations, letter-of-credit rights, and proceeds — substantially the same categories of collateral as the new Facility. This filing was originally filed on or about June 15, 2018, and has been continued by UCC-3 amendment. As of the search date, this filing remains active and effective.
Filing Against CROC (Delaware). A UCC-1 financing statement is on file with the Delaware Secretary of State, filed by Harborview Lending Group, LLC as secured party, against Cascade Retail Operating Company LLC as debtor. The collateral description mirrors that of the CRH filing and covers the same categories of ABL collateral. This filing was originally filed on or about June 15, 2018, and has been continued. As of the search date, this filing remains active and effective.
Filing Against COS (Washington). A UCC-1 financing statement is on file with the Washington Secretary of State, filed by Harborview Lending Group, LLC as secured party, against Cascade Outlet Stores LLC as debtor. The collateral description is substantially identical to the Delaware filings. This filing was originally filed on or about June 15, 2018, and has been continued. As of the search date, this filing remains active and effective.
These three Harborview filings must be terminated in connection with the payoff and discharge of the existing Harborview facility on the closing date. The outstanding balance under the Harborview facility as of the anticipated closing date is $112,450,000, which will be paid in full from the initial borrowing under the new Facility. The required UCC-3 termination statements are discussed in Section V below.
2. Other Filings
The lien searches did not reveal any other UCC financing statements on file against any of the Loan Parties that would create a conflicting lien on the ABL collateral. Specifically:
Purchase Money / Equipment Financing Filings. No purchase money security interest ("PMSI") filings or equipment financing filings were identified against any Loan Party. This is consistent with our understanding that Cascade has not entered into any material equipment financing arrangements, as the distribution center equipment is owned outright by CFS and was acquired using internally generated funds. To the extent any PMSI filings were to be made in the future, such liens would be "permitted liens" under the Credit Agreement only to the extent they do not exceed $15,000,000 in aggregate and are limited to the specific equipment financed.
Precautionary Filings by Lessors or Consignors. The searches did not identify any precautionary UCC filings by lessors or consignors. We understand from the Perfection Certificate that none of the Loan Parties currently hold any consigned goods and that all operating leases for retail locations and distribution centers are true leases rather than disguised financing arrangements. Accordingly, no precautionary filings by landlords or lessors were expected or found.
Federal Tax Liens. The federal tax lien searches in King County, Washington and New Castle County, Delaware revealed no outstanding federal tax liens against any Loan Party. This result is consistent with the representations made by the Loan Parties in the Perfection Certificate and the Credit Agreement.
Judgment Liens. The judgment lien searches in the same jurisdictions revealed no outstanding judgment liens against any Loan Party. This result is consistent with the representations in the Credit Agreement regarding the absence of material litigation or pending judgments.
C. Analysis and Conclusion on Lien Priority
Based on the lien search results, the only existing liens on the ABL collateral are those held by Harborview Lending Group, LLC under its existing financing statements. Upon (a) the payoff and discharge of the Harborview facility in the amount of $112,450,000, (b) the filing of UCC-3 termination statements terminating each of the three Harborview financing statements, and (c) the filing of the three new UCC-1 financing statements in favor of CHB as Collateral Agent, the Collateral Agent will hold first-priority perfected security interests in all ABL collateral of the Loan Parties.
No intervening filings, tax liens, or judgment liens were identified that would prime or otherwise adversely affect the priority of the Collateral Agent's security interests. Accordingly, assuming timely execution of the termination and filing steps described in this memorandum, the Collateral Agent's liens will be first-priority, subject only to (i) permitted liens expressly set forth in the Credit Agreement (including, without limitation, purchase money liens not to exceed $15,000,000 in aggregate, which by their nature would be limited to the specific equipment financed and would not encumber accounts or inventory) and (ii) any liens arising by operation of law that are afforded priority under applicable state or federal law (e.g., certain statutory liens of warehousemen, carriers, or mechanics, to the extent they arise and are not contested in good faith).
V. UCC-3 Termination Statements — Harborview Lending Group, LLC
A. Required Terminations
Three UCC-3 termination statements are required to terminate the existing UCC-1 financing statements filed by Harborview Lending Group, LLC against the Loan Parties. Specifically:
1. Delaware — CRH: A UCC-3 termination statement terminating Harborview's UCC-1 financing statement on file with the Delaware Secretary of State against Cascade Retail Holdings Inc. as debtor.
2. Delaware — CROC: A UCC-3 termination statement terminating Harborview's UCC-1 financing statement on file with the Delaware Secretary of State against Cascade Retail Operating Company LLC as debtor.
3. Washington — COS: A UCC-3 termination statement terminating Harborview's UCC-1 financing statement on file with the Washington Secretary of State against Cascade Outlet Stores LLC as debtor.
Each UCC-3 termination statement will reference the original filing number of the UCC-1 being terminated and will indicate that the secured party (Harborview) has authorized the termination of the financing statement in its entirety. Draft forms of the UCC-3 termination statements are attached hereto as Attachment C.
B. Process
Pursuant to the Payoff Letter dated May 17, 2023, issued by Harborview Lending Group, LLC (attention: Steven Calloway, Vice President, Portfolio Management), Harborview has agreed to deliver executed UCC-3 termination statements and related lien release documents to C&H upon receipt of the payoff amount of $112,450,000 in immediately available funds by wire transfer. The Payoff Letter specifies that the payoff amount is good through 2:00 p.m. Eastern Time on May 19, 2023 (the anticipated closing date), after which per diem interest of $24,986.11 will accrue.
The process for the termination filings is as follows:
1. Pre-Closing Escrow. C&H will request that Harborview's counsel deliver executed UCC-3 termination statements to C&H in escrow prior to the closing date. The UCC-3s will be held in escrow by C&H, with instructions that they may be filed only upon confirmation that the payoff wire has been sent and received by Harborview.
2. Payoff Wire. On the closing date (May 19, 2023), the payoff wire in the amount of $112,450,000 will be sent to Harborview's designated account in accordance with the wire instructions set forth in the Payoff Letter and the Funds Flow Memorandum prepared by CHB.
3. Release from Escrow and Filing. Upon confirmation from Harborview (or Harborview's counsel) that the payoff wire has been received in full, C&H will be authorized to release the UCC-3 termination statements from escrow and submit them for filing with the Delaware Secretary of State and the Washington Secretary of State.
4. Filing. The UCC-3 termination statements will be filed promptly upon release from escrow — ideally on the closing date itself or the next business day thereafter.
This escrow arrangement is standard market practice and ensures that the Collateral Agent does not fund into a situation where Harborview's liens remain on file after the new Facility is closed. Conversely, it protects Harborview's interests by ensuring that the termination statements are not filed until the payoff has been received.
C. Confirmation
Following the closing, C&H will confirm the filing of each UCC-3 termination statement by obtaining stamped acknowledgment copies from the Delaware Secretary of State and the Washington Secretary of State. The stamped copies will be distributed to the deal team, WGH, CHB's collateral management department, and Derek Tanaka, General Counsel of CRH. We will also order updated lien searches (to be conducted approximately ten days after the closing date) to confirm that the Harborview filings have been terminated and that the CHB filings are the only active financing statements on record against the Loan Parties.
VI. Deposit Account Control Agreements (DACAs)
A. Overview of DACA Requirement
Perfection of a security interest in deposit accounts is governed by UCC § 9-312(b)(1) and § 9-104. Under UCC § 9-312(b)(1), a security interest in a deposit account may be perfected only by "control," and not by filing. This means that a UCC-1 financing statement alone is insufficient to perfect a security interest in a deposit account (except to the extent that proceeds of other collateral are deposited into such account and identifiable as proceeds). To achieve "control" over a deposit account, the secured party must satisfy one of the methods set forth in UCC § 9-104:
(a) The secured party is the depository bank maintaining the account (UCC § 9-104(a)(1));
(b) The debtor, the secured party, and the depository bank have entered into a control agreement (commonly referred to as a "DACA") under which the depository bank agrees to comply with instructions originated by the secured party directing disposition of funds in the account, without further consent from the debtor (UCC § 9-104(a)(2)); or
(c) The secured party becomes the customer of the depository bank with respect to the account (UCC § 9-104(a)(3)).
In this transaction, the Credit Agreement requires the Loan Parties to execute and deliver DACAs with respect to all deposit accounts maintained by the Loan Parties, other than certain excluded accounts (e.g., payroll accounts, tax withholding accounts, and petty cash accounts, each subject to a de minimis threshold of $250,000). The DACAs must be in form and substance satisfactory to the Administrative Agent.
In addition, the Credit Agreement includes "cash dominion" provisions that are triggered when Availability (as defined in the Credit Agreement) falls below the greater of (a) 12.5% of the lesser of the Aggregate Commitments ($300,000,000) and the Borrowing Base, and (b) $37,500,000 — which, based on the current borrowing base and commitment levels, results in a trigger threshold of $37,500,000. Upon a cash dominion trigger (or the occurrence and continuance of an Event of Default), the Collateral Agent is authorized to issue a "notice of exclusive control" to each depository bank, at which point all funds on deposit in the controlled accounts will be swept daily to a concentration account maintained at CHB, and the Loan Parties will have no further right to direct disposition of funds without the Collateral Agent's consent.
B. DACA Schedule — Four Accounts
Based on the account information provided in the Perfection Certificate and confirmed through discussions with CRH's treasury department (Vanessa Liu, Treasurer), four DACAs are required for the accounts described below.
1. DACA — Meridian Trust Company, N.A. (CRH Operating Account)
Account Holder: Cascade Retail Holdings Inc.
Depository Bank: Meridian Trust Company, N.A., 1001 Fourth Avenue, Suite 500, Seattle, Washington 98154
Collateral Agent: Crescent Harbor Bank, N.A.
Account Type: Operating / disbursement account — this account is used by CRH for corporate-level disbursements, including payroll for corporate employees, rent payments, vendor payments, and intercompany transfers to subsidiaries.
Status: C&H circulated a draft DACA (based on the CHB standard form) to Meridian Trust Company, N.A. on March 22, 2023. Meridian Trust's in-house legal department (contact: Janet Eriksson, Vice President and Associate General Counsel) acknowledged receipt and indicated that the DACA is under review. As of the date of this memorandum, Meridian Trust has not yet provided comments. We have followed up with Ms. Eriksson's office on April 6, 2023 and April 10, 2023 and have been advised that comments are forthcoming.
Cash Dominion Provisions: The DACA includes cash dominion provisions consistent with the Credit Agreement. Upon the Collateral Agent's issuance of a notice of exclusive control (triggered when Availability falls below $37,500,000 or during an Event of Default), Meridian Trust will be required to sweep all available funds in the CRH operating account to the concentration account at CHB on a daily basis, and CRH will have no further right to direct disposition of funds without the Collateral Agent's prior written consent.
Governing Law: New York.
2. DACA — CHB Operating Account (CROC Collections)
Account Holder: Cascade Retail Operating Company LLC
Depository Bank: Crescent Harbor Bank, N.A. (also the Collateral Agent)
Account Type: Collections account — this account receives collections on CROC's accounts receivable, including payments from wholesale customers, credit card processors, and other obligors.
Status: Because CHB is both the depository bank and the Collateral Agent, a simplified form of DACA is sufficient. Under UCC § 9-104(a)(1), a secured party that is itself the depository bank maintaining the deposit account has "control" over the account automatically, without the need for a separate control agreement. Nevertheless, standard ABL practice calls for execution of a DACA even in this circumstance, in order to document the cash dominion mechanics and the respective rights and obligations of the parties. CHB's collateral operations team (contact: Allison Vega, Vice President, Collateral Services) is coordinating the execution of this DACA internally. Execution is expected on or before the closing date.
Governing Law: New York.
3. DACA — CHB Concentration Account
Account Holder: Cascade Retail Holdings Inc.
Depository Bank: Crescent Harbor Bank, N.A. (also the Collateral Agent)
Account Type: Concentration account — this account serves as the central aggregation point for collections from all Loan Party accounts. During a cash dominion period, funds from the Meridian Trust account, the CROC collections account, and the CDC collections account will be swept to this concentration account on a daily basis. Funds in the concentration account will be applied to reduce the outstanding borrowings under the Facility in accordance with the cash application waterfall set forth in the Credit Agreement.
Status: Same as the CHB Operating Account DACA above — internal CHB coordination. Execution is expected on or before the closing date.
Governing Law: New York.
4. DACA — Northgate Capital Bank (CDC Collections)
Account Holder: Cascade Digital Commerce Inc.
Depository Bank: Northgate Capital Bank, 400 Lexington Avenue, 18th Floor, New York, New York 10170
Collateral Agent: Crescent Harbor Bank, N.A.
Account Type: Collections account — this account receives collections on CDC's e-commerce receivables, including payments from credit card processors (Visa, Hollowell Partners LLC, Pinnacle Partners LLC), digital payment platforms, and direct customer payments for online orders.
Status: NCB circulated its standard form DACA to C&H on April 3, 2023. C&H is currently reviewing NCB's form and expects to provide comments by the week of April 17, 2023. Key issues under review include the scope of NCB's reserved set-off rights, the timing of compliance with the Collateral Agent's instructions, and certain indemnification provisions that may require negotiation. NCB's contact for purposes of the DACA negotiation is Mark Feinberg, Vice President, Deposit Account Services.
Governing Law: New York.
C. Key DACA Negotiation Points
The following are the principal negotiation points that we expect to arise (or have already arisen) in connection with the four DACAs:
Scope of Depository Bank Set-Off Rights. Depository banks typically insist on retaining the right to set off against the deposit account for certain categories of obligations owed to the depository bank, including (a) customary account maintenance fees, service charges, and returned item charges, and (b) overdraft amounts. The Collateral Agent's position, consistent with market practice, is that set-off rights should be limited to fees, returned items, and overdrafts that arose prior to the issuance of a notice of exclusive control, and that after a notice of exclusive control has been issued, the depository bank's set-off rights should be fully subordinated to the Collateral Agent's control. We expect this issue to be the primary point of negotiation with Meridian Trust and NCB.
Timing of Compliance with Collateral Agent's Instructions. The DACAs should specify the time frame within which the depository bank must comply with the Collateral Agent's instructions after issuance of a notice of exclusive control. The CHB standard form provides for compliance "promptly, and in any event within two (2) business days." Certain depository banks may seek a longer compliance period, which should be resisted to the extent practicable.
Indemnification Provisions. Depository banks will seek broad indemnification from the account holder (and, in some cases, from the Collateral Agent) for any losses, claims, or liabilities arising from the depository bank's compliance with the Collateral Agent's instructions. The scope of the indemnification should be carefully reviewed to ensure that it does not impose unreasonable obligations on the Loan Parties or the Collateral Agent.
Consistency of Cash Dominion Trigger. All four DACAs should incorporate a uniform cash dominion trigger threshold of $37,500,000, consistent with the Credit Agreement. Any deviation in the trigger language across the DACAs could create operational confusion and should be avoided.
Governing Law. All four DACAs will be governed by New York law, for consistency with the Credit Agreement and the Security Agreement. This approach ensures uniformity of legal framework and avoids potential conflicts-of-law issues that could arise if different DACAs were governed by different state laws.
D. Open Items
The following DACA-related items remain open as of the date of this memorandum:
1. Meridian Trust Company, N.A. DACA. The Meridian Trust DACA remains under review by Meridian's legal department. Follow-up is needed to obtain comments and advance the negotiation to execution. Given that the closing date is approximately five weeks away, timely completion of this DACA is critical and should be prioritized.
2. NCB DACA. C&H is reviewing NCB's standard form DACA. Comments are expected to be circulated to NCB by the week of April 17, 2023. We anticipate at least one round of negotiation after comments are exchanged before the form is finalized.
3. CHB DACAs (Two Accounts). The two CHB DACAs (for the CROC collections account and the CRH concentration account) should be relatively straightforward to finalize given CHB's dual role as both depository bank and Collateral Agent. Allison Vega at CHB is coordinating execution. We do not anticipate material negotiation issues, but execution should be confirmed well in advance of the closing date.
VII. Intellectual Property — Negative Pledge Analysis
A. Excluded Asset Treatment
Registered intellectual property — specifically, trademarks, service marks, and trade dress registrations filed with the USPTO; patents and patent applications filed with the USPTO; and copyrights and copyright registrations filed with the USCO — is excluded from the definition of "Collateral" under Section 1.01 of the Security Agreement. This exclusion means that the Collateral Agent will not hold a direct security interest in any registered intellectual property of the Loan Parties.
The rationale for this exclusion is both practical and legal. Under the Lanham Act (15 U.S.C. § 1060) and the Copyright Act (17 U.S.C. § 205), the recording of security interests in registered trademarks and copyrights with the USPTO and USCO, respectively, is either required or strongly recommended to ensure effective notice and perfection against third parties. The interplay between federal IP recording requirements and UCC Article 9 is complex and has been the subject of ongoing judicial and scholarly debate. In particular, the question of whether a UCC-1 filing alone is sufficient to perfect a security interest in a federally registered trademark (as opposed to the unregistered goodwill associated with a mark) remains unsettled in certain circuits.
Given the ABL nature of the Facility — where the borrowing base is principally composed of accounts receivable and inventory, and the Agent's primary remedies in a distress scenario would focus on liquidation of receivables and inventory rather than intellectual property — CHB elected not to require the preparation and filing of IP-specific security agreements and USPTO/USCO recordations. This approach is consistent with market practice in ABL transactions, where the administrative burden and expense of IP-specific filings are often viewed as disproportionate to the collateral value added, particularly where the borrower's IP portfolio consists primarily of trade names and retail brand marks that derive their value from the ongoing operations of the business.
B. Negative Pledge Covenant
In lieu of a direct security interest in registered intellectual property, the Credit Agreement includes a negative pledge covenant. Under Section 7.02(m) of the Credit Agreement, each Loan Party has covenanted that it will not create, incur, assume, or suffer to exist any lien on any of its registered intellectual property (whether trademarks, service marks, trade names, patents, patent applications, copyrights, or copyright registrations registered with the USPTO or the USCO) without the prior written consent of the Administrative Agent (acting at the direction of the Required Lenders).
This negative pledge provides the Agent with contractual protection against the risk that the Loan Parties could grant a competing security interest to a third-party lender or other creditor in their registered IP, which would effectively subordinate the value of the collateral package by carving out a significant category of assets. While the negative pledge does not create a property interest in the registered IP and would not prevent a bona fide purchaser or secured party from acquiring rights in the IP if the covenant were breached, it does provide the Agent with (a) a contractual basis for declaring an Event of Default if the covenant is violated, (b) grounds for equitable relief (including a temporary restraining order or preliminary injunction) to prevent the consummation of a transaction that would violate the covenant, and (c) a basis for claiming breach-of-contract damages.
The scope of the negative pledge covers all trademarks, service marks, trade names, patents, patent applications, copyrights, and copyright registrations of each Loan Party that are registered with the USPTO or the USCO as of the closing date or at any time during the term of the Credit Agreement. The negative pledge also applies to any applications for registration filed during the term.
C. Unregistered IP and General Intangibles
It is important to distinguish between registered intellectual property (which is excluded from the collateral and subject to the negative pledge) and unregistered intellectual property and general intangibles (which are included in the collateral).
Unregistered intellectual property — including trade secrets, proprietary know-how, customer lists, supplier lists, marketing data, domain names (other than those covered by trademark registrations), software code (to the extent not separately registered with the USCO), and unregistered copyrights — falls within the UCC Article 9 definition of "general intangibles" under UCC § 9-102(a)(42). General intangibles are included in the "all assets" collateral description in both the Security Agreement and the UCC-1 financing statements, and security interests therein are perfected by the UCC-1 filings described in Section III above.
The distinction between registered and unregistered IP is therefore critical to the scope of the collateral package. All IP that is not subject to a federal registration requirement (or for which no federal registration has been obtained) is part of the collateral and is perfected by filing. This includes, for example, unregistered trademarks, common-law trade names, trade secrets, proprietary business methods, and unregistered copyrights in works of authorship. The "all assets" UCC-1 filing is the proper and sufficient method of perfection for these categories of intangible property.
VIII. Pledge Agreement — Equity Interests
A. Summary
The Pledge Agreement dated as of May 4, 2023 (the "Pledge Agreement"), by and among CRH, CROC, and CHB as Collateral Agent, provides for the pledge of the following equity interests:
(a) CRH pledges 100% of its equity interests in CROC (consisting of 100% of the membership interests in CROC, a Delaware limited liability company).
(b) CROC pledges 100% of its equity interests in each of CDC, COS, and CFS — specifically:
(i) 100% of the issued and outstanding shares of common stock of CDC (a Delaware corporation);
(ii) 100% of the membership interests in COS (a Washington LLC); and
(iii) 100% of the issued and outstanding shares of common stock of CFS (a Delaware corporation).
(c) CROC pledges 65% of the voting equity interests in Cascade Retail Canada ULC (a British Columbia unlimited liability company).
The Collateral Agent under the Pledge Agreement is Crescent Harbor Bank, N.A., in its capacity as Collateral Agent for the benefit of the Secured Parties (as defined in the Credit Agreement). The Pledge Agreement is governed by New York law.
B. Perfection of Pledged Equity Interests
The method of perfection for each category of pledged equity interests varies depending on the nature of the interest and the form in which it is evidenced:
CROC (Delaware LLC — Membership Interests). CROC's membership interests are uncertificated interests in a limited liability company. Under UCC Article 9, LLC membership interests that are not represented by certificates are classified as "general intangibles" (UCC § 9-102(a)(42)). A security interest in general intangibles is perfected by filing a UCC-1 financing statement in the debtor's jurisdiction of organization. Here, CRH is the debtor (as the owner and pledgor of the CROC membership interests), and CRH is organized in Delaware. Accordingly, the security interest in the CROC membership interests will be perfected by the UCC-1 filing against CRH in Delaware (Filing No. 2023-1947291), which includes general intangibles within its "all assets" collateral description.
CDC (Delaware Corporation — Stock). CDC is a Delaware corporation and its equity interests are represented by stock certificates. Under UCC § 9-313 and § 8-301, a security interest in a certificated security is perfected by "delivery" — i.e., by the secured party's obtaining possession of the stock certificate. Accordingly, perfection of the security interest in CDC's stock requires the delivery of the original stock certificate(s) representing 100% of the issued and outstanding shares of CDC common stock to CHB as Collateral Agent, together with undated stock powers executed in blank by CROC (as the registered holder). The stock powers must be undated to allow the Collateral Agent to complete the transfer at any time following an Event of Default without requiring further action by CROC.
COS (Washington LLC — Membership Interests). COS's membership interests are uncertificated interests in a Washington limited liability company. For the same reasons as described with respect to CROC above, COS membership interests are classified as "general intangibles" under UCC Article 9. The debtor/pledgor of these interests is CROC (which owns 100% of the membership interests in COS), and CROC is organized in Delaware. Accordingly, the security interest in the COS membership interests will be perfected by the UCC-1 filing against CROC in Delaware (Filing No. 2023-1947283).