One of Pride Group Holdings Inc.’s major lenders is suing the trucking company’s co-founders, Sam and Jasvir Johal, and alleging fraud, complicating the brothers’ legal woes since Pride filed for creditor protection late last month.
Mitsubishi HC Capital Canada Inc., which lent money to Pride for the purposes of buying and leasing trucks, has filed multiple lawsuits against the Johals in Canada and the United States. In the American lawsuits, Mitsubishi alleged Pride has defaulted on its loans. In an Ontario suit, Mitsubishi alleged the same – but added allegations of fraud.
Late last year, Pride alerted Mitsubishi to some registration issues, such as multiple trucks being assigned as collateral to multiple lenders, but claimed it was the result of bookkeeping issues and promised governance reforms. In the Ontario lawsuit, Mitsubishi says it has since done more due diligence and found a systemic problem.
“Through further investigation following Pride’s initial admissions, Mitsubishi has learned that Pride and the defendants have employed various related methods of fraudulently defeating or diminishing Mitsubishi’s ownership and security interests in leases, trucks and equipment in a manner known as ‘double VINing,’” the lender alleged. VINs are vehicle identification numbers.
Mitsubishi is suing the Johal brothers because they personally guaranteed some of the money borrowed from Mitsubishi. In total, Mitsubishi is owed $93-million in Canada for direct loans to Pride and another $255-million for financing leases that are packaged and sold off. Mitsubishi is also one of Pride’s senior lenders, which means it is supposed to be one of the first to be repaid.
Pride owes a total of $1.6-billion to its lenders in Canada, and another US$637-million to lenders in the United States. Pride has defaulted on more than 40 loans, and 31 law firms have been hired to protect all of the different lenders’ interests.
Along with Mitsubishi, Royal Bank of Canada is one of Pride’s major lenders, as is Daimler Truck Financial. RBC is owed $346-million through Pride’s securitization arm, where it packages leases, and RBC is also the lead lender for a syndicated loan worth $213-million. (The bank’s exact exposure among the syndicate of lenders is not disclosed.)
Daimler is owed $196-million in Canada, and another US$77-million in the United States.
In the Ontario lawsuit, Mitsubishi alleges Pride double VINed a variety of ways. In some cases, Pride would acquire a truck using money borrowed from Mitsubishi and then lease the truck to a third party, such as a truck driver. Pride regularly securitized its leases, which means packaging them in bundles and selling them for a discounted cash price upfront, and the buyer would make a profit if all the leases were repaid at full value.
“However, rather than informing Mitsubishi that the truck and its lease had been sold and using the proceeds of sale to repay Mitsubishi,” the lawsuit alleges, “Pride instead withheld this information and kept the proceeds for its own account.”
In other cases, Mitsubishi alleges that Pride sometimes sold it truck leases in a packaged deal, and would not inform Mitsubishi when the person who leased one of the trucks in the package had defaulted. Under the terms of the package deal, Mitsubishi is supposed to have the right to repossess the truck, “however, rather than informing Mitsubishi of the default and repossession, Pride would simply bring the truck back into its inventory, and use that truck as collateral to secure further financing,” the lawsuit alleges.
In other words, Pride would allegedly keep the truck and find a new person to lease it to.
“Mitsubishi and its financial advisors are continuing to investigate the full extent and nature of the unlawful scheme perpetrated by Pride and the defendants,” the lender wrote in its lawsuit.
Mitsubishi’s allegations have not been proven in court.
Pride’s lawyers did not respond to a request for comment for this story, but Sam Johal addressed some allegations of financial irregularities in an affidavit as part of Pride’s creditor protection filing.
Acknowledging that in some cases as many as three lenders may find they’re all using the same truck as collateral for a loan to Pride, Mr. Johal wrote that the company had some bookkeeping deficiencies that had arisen, in part, from “strains” on its human resources.
Starting in late 2022 through 2023, Pride Group dealt with higher-than-normal default rates on truck leases, and therefore had to repossess “an ever-increasing number of trucks.” Mr. Johal said this contributed to delays in transferring assets and liabilities across business lines.
An Ontario judge recently approved Pride’s request for creditor protection and appointed Ernst & Young as the company’s monitor. Pride has two months to craft a restructuring plan, but it is a complex task because the industry is reeling from oversupply.
Based in Mississauga, Pride typically leases trucks to independent operators, and this segment of the sector has been one of the hardest hit by the continuing slump in freight shipments. In a strong market, Pride’s trucks could be sold or re-leased to a competitor, but that isn’t very feasible for any operator in the current environment.
Not only have freight shipments plummeted from their peak levels during the pandemic, but too many available trucks are bidding for shipments.
Tim Kiladze