Court File and Parties

Liberty Assisted Living Inc., 2011 ONSC 4704

Court File No: 348/11

Date: 20110810

SUPERIOR COURT OF JUSTICE - ONTARIO

DIVISIONAL COURT

Re: General Electric Canada Real Estate Financing Holding Company and General Electric Canada Holdings Company

Applicants

• and -

Liberty Assisted Living Inc., 729285 Ontario Limited, Amir Kassam, Rahim Bhaloo and Meyers Norris Penny Limited in its capacity as Receiver and Trustee in Bankruptcy of the Estates of 2008777 Ontario Inc., 2004631 Ontario Inc., 912087 Ontario Limited and 2007383 Ontario Inc.

Respondents

Before: The Honourable Mr. Justice S.N. Lederman

Counsel: Timothy Pinos, for the Moving Party, 729285 Ontario Limited

Clifton Prophet & Nicholas Kluge, for the Respondents, Meyers Norris Penny Limited in its capacity as Trustee in Bankruptcy of the Estates of 2008777 Ontario Inc., 2004631 Ontario Inc., 912087 Ontario Limited and 2007383 Ontario Inc.

Lou Brzezinski & Grace J. Kim, for the Applicants

S. Mitra & D. Reiter, for the Receiver, Albert Gelman Inc.

Heard at Toronto: August 4, 2011

Endorsement

[1] The Moving Party, 729285 Ontario Limited (“729”) seeks leave to appeal to the Divisional Court from the Order of Brown J. whereby he appointed an investigative receiver over 729, and seeks a stay of the Order if leave is granted.

[2] Mr. Pinos, on behalf of 729, submitted that Brown J.’s decision is in conflict with the established case law with respect to the appointment of receiver (including an investigative receiver) in that it was incumbent upon the court to first find evidence of fraud, dissipation of assets or other improper activities that threaten the ability of a creditor to obtain recovery. In the instant case, 729 was not subject to any security agreement or contractual rights allowing for the appointment of a receiver. The sole claim here is in debt and there is no allegation of fraud or improper conduct. Mr. Pinos submits that although Brown J. cited the appropriate principles, he misapplied them and in effect provided an unlimited scope for the appointment of an investigative receiver where a party is dissatisfied with discovery or cross-examination answers. Accordingly, he submits that there is good reason to doubt the correctness of the decision.

[3] 729 is a majority shareholder of a holding company that controls 2008777 Ontario Inc., 2004631 Ontario Inc., 912087 Ontario Limited and 2007383 Ontario Inc., (the “bankrupt respondents”) that operated a number of retirement residences.

[4] The GE Group of Companies are secured lenders of the bankrupt respondents and are owed approximately $20 million.

[5] The trustee in bankruptcy of the bankrupt respondents obtained certain financial information in a piecemeal way and learned of the transfer of funds that took place between the interconnected entities, including 729, during a time that the bankrupt respondents were insolvent.

[6] Brown J. looked at all the circumstances surrounding these transactions and the less than candid disclosure by the respondents about these matters and concluded that:

a) the respondents were not completely forthcoming to the trustee about these transactions;

b) there were serious concerns about the flows of money between the bankrupt respondents and 729 and the use that 729 made of those funds; and

c) there were misrepresentations made to the trustee and the court about the true state of the Royalton proceeds held in the law firm’s trust account and there were serious questions whether 729’s investment in the Royalton Residences was by way of debt or equity.

[7] Brown J. considered the principles applicable to the appointment of a receiver under s. 101 of the Courts of Justice Act, as recently summarized in Anderson v. Hunking, 2010 ONSC 4008 (S.C.J.). He applied a comparable RJR-MacDonald test for interlocutory injunctions and determined that in all the circumstances it was just inconvenient to appoint a limited investigative receiver over 729. Of importance in this case was that the mandate of the trustee was thwarted and made ineffective by the conduct of the respondents.

[8] In his Order it is clear that the receiver is to have limited powers and is not to operate the business or take possession of the assets of 729; that 729 is to remain in possession of its current and future assets and is to continue to carry on business in a manner consistent with the preservation of its business and property.

[9] The receivership is to last for a period of 120 days and the receiver is to provide the court with a comprehensive report on the business and affairs of 729.

[10] Appointment of an investigative receiver over a company has taken place in circumstances where the company is intricately involved with companies already in receivership, and it is necessary to review and ascertain the transactions that have taken place within the network of companies: West Lbag v. Rosseau Resort Developments Inc., [2009] O.J. No. 4285 (S.C.J.).

[11] Moreover, the Divisional Court has pointed out that the remedy of an investigative receiver is not as intrusive or drastic as a receiver who is put in possession of assets: Stroh v. Millers Cove Resources Inc. (1995), 85 OAC26 (Div Court).

[12] 729 serves as a conduit for investments. It does not carry on an active business enterprise and, as stated in Stroh, supra, paragraph 7:

In the first place, the company is not an operating company and the impact of the receivership will not be the same as it would be if it was engaged in active business. In the second place, the main thrust of the order is to make sure, as far as it will be possible to do so, that the assets of the company and the various arrangements can be fully examined and considered so that future actions can be then planned.

[13] Brown J. held that the circumstances stated above justified that appointment of an independent third party:

a) to look into the transactions that took place between the bankrupt companies and 729;

b) to determine the true state of 729’s interest in the Royalton proceeds, i.e. whether they were held in trust for others, or whether 729 had a beneficial interest in them; and

c) to determine who actually received the Royalton proceeds.

[14] Brown J. was alive to the correct test in appointing an investigative receiver and his decision does not conflict in principle with other cases.

[15] I have no good reason to doubt the exercise of Brown J.’s discretion under s. 101 of the Courts of Justice Act, having regard to the factual context in which his decision was made and particularly the strong interconnection between 729 and the bankrupt companies and his finding that monies flowed around this group of companies on a regular basis. The appointment of an investigative receiver in these circumstances was just and convenient to assist the trustee in fulfilling his mandate to ascertain the true state of affairs.

[16] Moreover, the factors upon which Brown J. based his decision are fact specific and do not give rise to issues of general public importance to the administration of justice which transcend the immediate interests of the parties involved.

[17] In the end, neither the test for leave to appeal under rule 62.02(4)(a), nor (4)(b) has been met.

[18] The motion is, therefore, dismissed. There is no need to consider the motion for a stay.

[19] I trust that the parties will come to an agreement with respect to the costs of these motions, failing which they may make written submissions within 30 days.

Lederman J.

Released: August 10, 2011