Court File and Parties

Court File No.: CV-24-00713069-00CL Date: 2024-10-02 Ontario - Superior Court of Justice – Commercial List

In the Matter of the Companies' Creditors Arrangement Act, R.S.C. 1985, C. C-36, as amended And in the Matter of a Plan of Compromise or Arrangement of 2039882 Ontario Limited

Re: 2039882 Ontario Limited, Applicant

Before: Peter J. Osborne J.

Counsel: Domenico Magisano, for KHL Investments USA Inc., Proposed Purchaser Mike Shakra, for PricewaterhouseCoopers Inc., Monitor Kristi Ross, Adrienne Ho and Sanjeev Mitra, for Fuller Landau Group Inc., Receiver Wayne Scott, Creditor Patrick Corney, for Envirosearch

Heard: October 2, 2024

Endorsement

[1] There are two motions before the Court:

a. the Monitor seeks an order approving its Reports (First through and including Sixth); approving the fees and disbursements, activities and fee accrual of the Monitor and its counsel; terminating the CCAA Proceedings upon the filing of the Monitor’s certificate; releasing and discharging PWC as Monitor upon the filing of the Discharge Certificate; terminating the Administration Charge; and approving the Releases; and

b. the Receiver seeks an order approving the Sale Agreement and Transaction; authorizing the disclaimer of certain Homebuyer Contracts; approving the Pre-Filing Report dated July 18, 2024 and the First Report dated September 19, 2024, together with the actions, activities and conduct of the Receiver described therein; approving the fees and disbursements of the Receiver and its counsel; and sealing certain confidential exhibits.

[2] The unfortunate history of this matter is fully set out in the motion materials. Defined terms in this Endorsement have the meaning given to them in those materials unless otherwise stated.

[3] In short:

a. this proceeding relates to a modular home community in Selkirk Ontario;

b. the Applicant sought and obtained protection under the CCAA in January, 2024;

c. this Court approved a SISP in February, 2024 and that process commenced immediately thereafter;

d. no qualified Bids were received, but the Company and the Financial Advisor continued in good faith to engage with Phase 2 Participants;

e. pursuant to the terms of the SISP that provided that KHL, as existing lender, had the option to submit a credit bid if no Qualified Bid was received for the repayment of its obligations in full, and given that no Qualified Bids were received, KHL advised the Applicant and the Monitor of its intention to pursue a credit bid and it submitted a draft asset purchase agreement;

f. KHL thereafter undertook due diligence and during the same period the Company received LOIs from three parties who had previously participated in the SISP. None were capable of being consummated or could satisfy the KHL debt as fully set out and described in the Reports;

g. on July 19, 2024, this Court appointed the Receiver. At that time, the Monitor and KHL were negotiating the credit bid, but it did not have the support of the Applicant. In addition, KHL had lost faith in the Debtor’s ability to continue operations and the DIP financing was not extended beyond the maturity date of July 26, 2024. The CCAA stay expired, and the Receivership Order was granted before any purchase agreement could be finalized;

h. thereafter, the Monitor assisted with transition of the management and operations of the Applicant to the Receiver. The Receiver is now seeking approval of the Transaction (a credit bid by KHL) as described above;

i. as a result of the granting of the Receivership Order and pending approval of the Transaction, the Monitor’s role is complete, such that it seeks a discharge and termination of the CCAA Proceeding, and related relief as described above;

j. following its appointment, the Receiver continued negotiations with KHL as it has now done. There are no material conditions to the Sale Agreement beyond approval of this Court;

k. the Sale Agreement contemplates a credit bid by the Purchaser and to satisfy the purchase price, contemplates a payment in cash equivalent to the Cash Priority Payables as at the Time of Closing, and a set off against the amounts owing by the Debtor to KHL including under the DIP Facility;

l. the Sale Agreement contemplates various contracts to be assumed and encumbrances to remain on title to the Real Property, including registered Notice of Leases from the various residents and any third parties with registered leasing interests;

m. to be very clear, however, the Purchaser is not assuming the Homebuyer Contracts, such that the Receiver is required to disclaim those; and

n. the proposed closing date for the Transaction will be as soon as possible after the Transaction is approved.

[4] As set out in previous Endorsements in this proceeding, and in the Reports, the residents living in the community are relying on certain Treatment Plans for water and sewage services. Water has been and remains an issue for the community. Indeed, while certain water delivery system issues within the site have been resolved, water is still being trucked in, and sewage is still being trucked out. This is untenable for all.

[5] The Municipality will not issue any building permits for homes until the water treatment issues are sorted out. That means the houses contemplated under the Homebuyer Contracts cannot be built. KHL advises that the necessary work to remediate these issues will cost in excess of $1 million.

[6] The Homebuyer Contracts referred to above are agreements that the Debtor had entered into with prospective purchasers for homes to be built on lots that the Debtor had available to lease out. Those Homebuyer Contracts contemplated the purchase and sale of a dwelling, together with a tenancy agreement.

[7] I pause to observe that a significant number of the prospective purchasers under those Homebuyer Contracts were present in Court today, as they are very understandably concerned about steps. Also present were many existing residents of the community. All of these parties received the motion materials.

[8] The Homebuyer Contracts required prospective purchasers to pay deposits to the Debtor. Based on information provided by the Debtor to the Receiver, the Receiver understands that the Debtor collected over $1.6 million of deposits in the aggregate, prior to the CCAA filing. Given the books and records of the Debtor, however, the Receiver has not been able to independently verify those amounts.

[9] Given, as noted above, that the Purchaser is not prepared to assume these Homebuyer Contracts, in large part since the Municipality will not issue building permits to allow the homes to be built, the Receiver has no alternative but to disclaim all the Homebuyer Contracts. The counterparties to those contracts, the prospective purchasers, were specifically advised of this by the Receiver.

[10] Many of those prospective purchasers were relieved to hear this, as they have been waiting for years for their homes to be built and this result will allow them to move forward and consider living elsewhere.

[11] Very regrettably, however, those prospective purchasers who paid deposits to the Debtor will not have their agreements completed. Even more regrettably, it is the Receiver’s understanding, also conveyed to these prospective purchasers, that the Debtor did not place the deposit funds in a separate trust account and rather, the funds, when received, were placed into the operating bank accounts of the Debtor and then used to fund operations, all with the unfortunate result that any claims that those prospective purchasers would have related to their deposits would be unsecured claims in the receivership estate.

[12] Given the purchase price of the Transaction, even KHL as first priority secured creditor will not be paid out in full. Nor will the second secured creditor, all with the result that there will be no distributions to unsecured creditors in the receivership.

[13] With considerable sympathy for those prospective purchasers who paid deposits to the Debtor, I am granting the relief sought today by the Monitor and the Receiver.

[14] There is no opposition to any of the relief sought in respect of approval of fees and disbursements, including the fee accrual, the termination of the CCAA Proceeding, and the Releases. They are reasonable and appropriate. The activities are consistent with the mandate given to each of the Monitor and Receiver, in their respective original appointment orders, and the fees are reasonable and reflect those activities undertaken by those Court officers with the assistance of their counsel. There is nothing left to do within the CCAA Proceeding.

[15] There is also no opposition to the approval of the Transaction, which is recommended by the Receiver and supported, obviously by the prospective purchaser. I do note that I provided all of the residents and prospective purchasers who were present in court an opportunity to be heard. A few of them made submissions, more understandably in the nature of questions than opposition.

[16] The practical reality is that, unfortunately, but inevitably, there is no realistic alternative, and approval of the Transaction at least maintains the community for the existing residents.

[17] I am satisfied that the factors set out in Royal Bank of Canada v. Soundair Corp. have been satisfied here. The Receiver has made a sufficient effort to get the best price and has not acted improvidently; the efficacy and integrity of the process by which offers are obtained was maximized; there has been no unfairness in the working out of the process; and it is the best result available considering the interests of all parties. Simply put, there is no other viable offer available capable of being completed.

[18] It follows that the proposed vesting order is appropriate. Those parties whose interests will be extinguished are on notice of this motion. None appears today, and none has filed materials, opposing the relief sought.

[19] The Court has jurisdiction to disclaim pre-sale purchase contracts in a receivership: Firm Capital Mortgage Fund Inc. v. 2012241 Ontario Inc., 2012 ONSC 4816 at paras. 1 & 39. In determining whether to approve such disclaimers, the Court can consider the respective legal priority positions as between the competing interests; whether the disclaimer would enhance the value of the assets and if so whether a failure to disclaim would amount to a preference; and, if a preference would arise whether the party seeking to avoid a disclaimer has established that the equities support that result: Forjay Management Ltd. v. 0981478 B.C. Ltd., 2018 BCSC 527 at paras. 37, 44; affirmed 2018 BCCA 251.

[20] In the present case, there is no possibility of further development as the community cannot obtain building permits to allow the homes to be built, and the Purchaser is not willing to assume the Homebuyer Contracts, with the result that the disclaimer is necessary to facilitate the Transaction.

[21] I do pause to observe, as I noted at that hearing of these motions for the benefit of those prospective purchasers under the Homebuyer Contracts, that the proposed releases do not include the release of any claim against the principals, officers and directors of the Debtor. I have encouraged all of those prospective purchasers who were present in Court (and all others) to obtain legal advice to consider any options they may have.

[22] Finally, I am satisfied that the proposed sealing order should be granted. The Confidential Appendices include the unredacted purchase agreement, including the purchase price, which should be sealed until the transaction is closed or further order of the court.

[23] The other information included is personal information related to the names and contact coordinates for those prospective purchasers under the Homebuyer Contracts. I am satisfied that their privacy interest should be protected in the circumstances, and that no stakeholder would be materially prejudiced by granting this relief. Information regarding the Homebuyer Contracts, as well as the aggregate amount of the deposits paid, are all disclosed. Only the names of the parties are sought to be sealed.

[24] Considering all of the circumstances, I am satisfied that the test set out by the Supreme Court of Canada in Sierra Club of Canada v. Canada (Minister of Finance), 2002 SCC 41 and refined in Sherman Estate v. Donovan, 2021 SCC 25 has been met here. The Receiver is directed to file with the Commercial List office a copy of the Confidential Appendices in order that the record is complete, in a sealed envelope, marked “Confidential and sealed pursuant to court order”.

[25] For all of these reasons, both motions are granted.

[26] Orders to go in the form signed by me today which are effective immediately and without the necessity of issuing and entering.

Osborne J.

Following the release of this Endorsement on October 2, 2024, counsel for the Court-appointed Monitor drew to my attention a typographical error in sub-paragraph 3(d) consisting of the inadvertent omission of the word "no" at the commencement of that sub-paragraph. This Endorsement has been revised to correct that error. No other changes made. PJO 7/10/24