1117387 Ontario Inc. v. National Trust Company, 2010 ONCA 340
CITATION: 1117387 Ontario Inc. v. National Trust Company, 2010 ONCA 340
DATE: 20100510
DOCKET: C49609 and C50315
COURT OF APPEAL FOR ONTARIO
Moldaver, Juriansz and Epstein JJ.A.
BETWEEN
DOCKET: C49609
1117387 Ontario Inc. and Antonios (“Tony”) Ishac
Applicants (Appellants/Respondents by way of cross-appeal)
and
National Trust Company
Respondent (Respondent/Appellant by way of cross-appeal)
AND BETWEEN
DOCKET: C50315
National Trust Company
Applicant (Respondent/Appellant by way of cross-appeal)
and
1117387 Ontario Inc. and Antonios (“Tony”) Ishac
Respondents (Appellants/Respondents by way of cross-appeal)
Earl A. Cherniak, Q.C. and Brian Radnoff, for the appellants, 1117387 Ontario Inc. and Antonios Ishac
John P. O’Toole, for the respondent, National Trust Company
R. Aaron Rubinoff and Joël M. Dubois, for the respondent Deloitte & Touche Inc.
Heard: November 30, 2009
On appeal from the order of Justice W.J.L. Brennan of the Superior Court of Justice dated October 10, 2008.
EPSTEIN J.A.:
OVERVIEW
[1] In this action, the mortgagor and guarantor of the mortgage debt challenge the fairness of the conduct of the court-appointed receiver appointed by the mortgagee under the terms of the mortgage in relation to its actions pertaining to the mortgaged property.
[2] The appellant, 1117387 Ontario Inc. (the “company”), owns property (the “property”) in Bells Corners, Ottawa. The property contains a 12,000 square foot building divided into two restaurant facilities. The appellant, Antonios Ishac, is the chief executive officer of the company. He personally guaranteed a portion of the first mortgage on the property given by the respondent, the National Trust Company.
[3] In 2001, contamination was discovered on the property. Petro-Canada, the owner of the adjoining land, admitted responsibility for the contamination. Ultimately the parties entered into an agreement (the “remediation agreement”) under which Petro-Canada would pay for the remediation of the property and for other losses the company suffered as a result of the contamination. The remediation did not proceed as planned and the company sued to enforce Petro-Canada’s obligations under the remediation agreement and for damages.
[4] By this time, the mortgage had fallen into arrears and National Trust obtained a court order appointing Deloitte & Touche as receiver and manager. Eventually, the receiver was given authority over the claim against Petro-Canada and gave National Trust permission to try to resolve the matter directly with Petro-Canada. In September 2005, these two parties negotiated an agreement (the “settlement agreement”) whereby the damage claim would be settled, the property sold to Petro-Canada, and the company’s mortgage debt partially recovered and partially forgiven. The receiver issued a report recommending the sale and settlement and moved for court approval.
[5] The appellants appeal the motions judge’s order of October 10, 2008, in which, among other things, he approved the report and thereby the sale of the property to, and the settlement of the damage claim with, Petro-Canada. The appellants’ primary contentions are that the property will be sold for less than the “best price” that could have been obtained, and that the settlement is improvident because it would settle the company’s claims for a fraction of its actual entitlement under the remediation agreement. The receiver cross-appeals that part of the order granting the appellants leave to commence an action against the receiver based on its handling of the sale and settlement. National Trust adopts and supports the receiver’s position in the appeal from the judicial approval of the sale and settlement.
[6] The appellants are clearly unhappy with how matters pertaining to the property have played out. However, the issues raised on appeal involve an analysis of the motions judge’s findings of fact applied to well-established legal principles applicable to the exercise of his discretion. In my view, this analysis discloses no reviewable error on the part of the motions judge. Accordingly, I would dismiss the appeal. For the reasons set out in paras. 93 and 94, I would allow the cross-appeal.
[7] The appellants also move to introduce fresh evidence concerning events that took place during the period that the decision was under reserve by the motions judge. While, in the particular circumstances of this case, I would admit the fresh evidence, in my view, it does not assist the appellants.
FACTS
[8] The company purchased the property in 1995, in part with money borrowed from National Trust. The loan was secured by a first mortgage in the amount of $650,000, registered against the property. In 1997, additional funds were advanced for renovations and the mortgage was increased to $905,000. This work was necessary as deficiencies in the building and equipment were interfering with the company’s ability to attract sufficient rental income to keep the mortgage in good standing.
[9] The mortgage fell into arrears in 1999 after the renovations were completed. As a result of these difficulties, National Trust exercised rights under the mortgage that allowed it to appoint an agent to collect and remit rents. At that time, the approximate principal balance of the mortgage was $884,000.
[10] In February 2001, National Trust served a notice of intention to enforce security. On October 30, 2001, the parties entered into a six-month forbearance agreement, crystallizing the obligations of the mortgagor and mortgagee as of that date. By agreement, for the purposes of the forbearance agreement, the debt was fixed at $1,095,909.89, with the mortgage maturing on April 30, 2002.
[11] The property had not been properly maintained and the company was having difficulty attracting sufficient rent to meet expenses. As a result, the company decided to sell the property. The company received a conditional offer of $1,450,000 with a closing date of February 1, 2002. The offer was conditional, in part, on a satisfactory environmental assessment. This assessment, completed in December 2001, demonstrated that the property was contaminated by petroleum hydrocarbons that had escaped from a neighbouring property owned by Petro-Canada. When the purchaser learned of the contamination, the sale was lost.
[12] For some time after the contamination was found, commercial tenants continued to lease the property. Under the terms of the forbearance agreement the company agreed to lease the property to Vox Lounge. In March 2002, Vox renewed its lease for five years but only for part of the premises. In April 2002, the remainder of the building was leased to Dianne Dang, carrying on business as Buffet Place. Vox vacated in October 2003 and Ms. Dang, despite having been granted several reductions in rent, left in March 2004. Since then, the building has been empty and has fallen into disrepair.
[13] The parties agreed to arbitrate the company’s claims arising from Petro-Canada’s acceptance of responsibility for the contamination. On February 3, 2003, just prior to the arbitration, the parties entered into the remediation agreement, the terms of which are as follows:
[Petro-Canada] will proceed with the remediation action plan set out in its report at a time convenient to both [the company] and [Petro-Canada’s] consultants, but in any event not later than June, 2003, for the commencement of such work;
All work and investigations will be carried out in a manner so as to minimize to the greatest extent possible any interference with [the company’s] lands and the ongoing operations by its tenants thereon;
The remediation of [the company’s] lands is to be at no cost whatsoever to [the company] and all reasonable costs incurred by [the company] in the context of, or as a result of, the clean-up will be paid by [Petro-Canada];
Where the remediation interferes with the ongoing tenant businesses such that the tenant is required to either vacate the premises or is justified in not paying full rental during such remediation operations, then [Petro-Canada] will reimburse [the company] for any reasonable loss of tenant revenue including all costs incurred in obtaining alternative tenants, if a tenant is lost as a result of ongoing remediation operations;
[Petro-Canada] will pay [the company’s] reasonable consultant costs incurred by its consultants in supervising the remediation and testing to determine that appropriate remediation levels have been reached;
All work forces and equipment will be employed in such a manner and in such a way as to minimize the visual impact of the ongoing clean-up operation to the greatest extent possible.
[14] For the purposes of the arbitration, the parties agreed that the fair value of the property was $1,735,000 based on a compromise between appraisals prepared by the appellants’ valuator, Ron Juteau, and the receiver’s valuator, David Atlin.
[15] The arbitration continued on issues unresolved in the remediation agreement. On March 10, 2003, the arbitrator, the Honourable Mr. Rosenberg, awarded the company $208,200 to compensate for potential devaluation of the property due to stigma and $100,000 for future development costs. Petro-Canada paid the total award of $308,200 to the company.
[16] On June 19, 2003, Mackinnon J., on consent of all parties, appointed Deloitte & Touche as the receiver over all matters relating to the property except for Petro-Canada’s remediation obligations. These were left to the company.
[17] In August 2003, because Petro-Canada had not started remediation in accordance with the agreed-upon schedule, the company sued Petro-Canada for breach of the remediation agreement. This claim was dismissed for want of prosecution and subsequently reinstated at the request of the appellants.
[18] Various disputes arose between the parties over the remediation and related issues. As a result, by order dated October 9, 2003, Morin J. transferred the claim against Petro-Canada to the receiver and ordered the company to pay the $308,200 it received from Petro-Canada to the receiver on the basis that this money formed part of National Trust’s security. The company has not complied with that order.
[19] On November 6, 2003, the receiver listed the property for sale at a price of $1,380,000.
[20] The remediation finally started in December 2003. It was anticipated that the process would take approximately three months. Exterior remediation was completed in March 2004. However, contamination was discovered under the building, necessitating excavation through the floor of the building and underpinning of the structure. This interior excavation started in August 2004 but was delayed later in the month as a result of the Ministry of Labour’s concern about work-safety conditions. Excavation resumed on September 20 but was again suspended a month later over a dispute about which Ministry of Environment guidelines applied.
[21] The clean-up came to a complete halt in December 2004. The principal dispute at that time involved whether the building had to be demolished to facilitate remediation or whether the structure could remain in place while remediation - more costly remediation - could be carried out.
[22] On December 8, 2004, the receiver wrote to Petro-Canada demanding that it complete the remediation work and pay the damages owed under the remediation agreement. The receiver sought payment of $488,000 in compensation for lost revenues, property taxes and insurance incurred as a result of the remediation delay. The receiver also took the position that damages for ongoing delay were accruing at $35,000 per month. Petro-Canada took the position that these claims were “completely unrealistic”.
[23] On February 10, 2005, a meeting was held at Mr. Ishac’s request. Representatives of National Trust and the receiver concluded that their differences with Mr. Ishac were too great to continue attempting to find a resolution acceptable to all parties. Beginning in February 2005, with the concurrence of the receiver, direct settlement discussions began between National Trust and Petro-Canada.
[24] By August 31, 2005, the outstanding amount owed under the mortgage was just over $2,000,000. In September 2005, the settlement agreement was reached between National Trust and Petro-Canada.
[25] The receiver provided three reports to the court; two within the first six months of the receivership. The third was provided on November 29, 2005. It was in this report that the receiver recommended the approval of the settlement agreement that contained the following terms:
Petro-Canada would purchase the property from National Trust for $1,187,500.
Petro-Canada would demolish the building and complete the remediation of the property in accordance with current Ministry of the Environment standards.
Petro-Canada would pay the receiver an additional $200,000 in full satisfaction of its claims for lost rent and delay costs in the remediation.
The remaining mortgage debt owed by the company and Mr. Ishac to National Trust, approximately $600,000, would be forgiven.
Petro-Canada would offer the property to the company or its nominee at fair market value once the remediation has been completed.[^1]
[26] The report also states that the receiver will not seek to recover the $308,200 that Morin J. ordered the company to pay to the receiver.
[27] With the exception of the appellants, all parties supported the proposed settlement agreement. This state of affairs generated three motions before the motions judge. The appellants sought orders prohibiting the sale of the property, permitting the appellants to prosecute the action against Petro-Canada and for leave to commence an action against the receiver arising out of the administration of the receivership. As an alternative, the appellants sought an order replacing the receiver and instructing the new receiver to prosecute all claims of the appellants “with dispatch”. National Trust brought a cross-motion to approve the settlement agreement. The receiver brought a cross-motion for the same relief and for approval of its third report.
THE REASONS OF THE MOTIONS JUDGE
[28] The motions judge approved the settlement agreement on the basis that the materials provided were sufficient to determine that the settlement was reasonable. He did not find it necessary to address the appellants’ alternative request to replace the receiver.
[29] Specifically, the motions judge found that the value proposed by the respondents for Petro-Canada’s purchase of the land was reasonable. There was substantial evidence before the court, expert and otherwise, concerning the value of the property at the relevant times. The motions judge expressed specific concerns about the evidence upon which the appellants relied. He ultimately concluded that he preferred the receiver’s evidence that the property, in a completely remediated state, was properly valued between $600,000 and $1,200,000. Based on that finding, the motions judge held that the price Petro-Canada agreed to pay for the property actually exceeded its value.
[30] In terms of the other major contentious area, the claim against Petro-Canada for damages resulting from the contamination, there were two issues. First, the parties were divided over who should bear the responsibility for the loss of revenue and additional costs associated with the delay in the remediation work. Second, the appellants argued before the motions judge, as they did before this court, that the remediation agreement required Petro-Canada to remediate the property despite the difficulties arising from excavating beneath the floor of the building.
[31] With respect to delay, the motions judge noted that Petro-Canada, citing difficulties in obtaining access to the property and in obtaining permission to remove soil through the building floor, blamed the company and the receiver for the delays. The receiver blamed the company for interfering with both the commencement and the scope of the remediation work. The appellants blamed the receiver for generally failing to take all proper steps to protect their rights under the remediation agreement. The motions judge did not make a direct finding with regard to the ultimate cause of the delay.
[32] In terms of complexity of the remediation work, the discovery of contamination under the building gave rise to a dispute over how to deal with it. After reviewing the evidence and arguments on that issue, the motions judge concluded that the building was beyond financially reasonable repair and had to be demolished to effect remediation of the contamination that had migrated through much of the property.
[33] Against the background of the recommendations of the receiver in its third report, the parties’ submissions, his findings, and the applicable law, the motions judge concluded that the process followed by the receiver in the complicated circumstances leading up to the request for approval of the sale and settlement was prudent and that the terms of sale and settlement recommended by the receiver were reasonable.
[34] Having approved the settlement agreement, the motions judge dismissed the appellants’ motion for an order returning the claim against Petro-Canada to their control, and declared the claims to be extinguished by the settlement agreement.
[35] However, the motions judge did, somewhat curiously, grant the appellants leave to commence or continue proceedings against the receiver for “negligence or a failure to act with a fiduciary’s due regard to the interests of a debtor” on the basis that if the allegations contained in Mr. Ishac’s affidavits were proven, it would not be “perfectly clear that there was no foundation for the claim or the action is frivolous and vexatious”. He made clear that he was “not deciding the merits of the owner’s claims that the receiver failed to win all of the benefits the owner believes he could have won from Petro-Canada”, despite his explicit finding that the “settlement is reasonable.”
THE APPLICATION TO INTRODUCE FRESH EVIDENCE
[36] The proposed fresh evidence discloses the following.
[37] The motions were argued over a period of four days between November 21, 2006 and April 5, 2007, at which point, the motions judge took the matter under reserve. He released his decision on October 10, 2008.
[38] On May 28, 2008, counsel for the receiver unilaterally contacted the motions judge requesting that he expedite the release of his decision. On July 15, 2008, a meeting among counsel and the motions judge took place in the motions judge’s chambers. Several months later, counsel for the receiver, again unilaterally, contacted the motions judge and the Regional Senior Justice in another attempt to expedite the release of the decision. Shortly thereafter, the reasons were released.
[39] At the meeting in his chambers, the motions judge indicated that he was not prepared to approve the settlement. Then, eighteen months following argument and three months following the chambers meeting, the motions judge released his decision in which he approved the recommended settlement and, at the same time, gave leave to the appellants to commence an action against the receiver.
[40] Counsel for the appellants submits that the proposed fresh evidence will demonstrate that the receiver brought pressure to bear upon the motions judge to release his decision. Relying on this court’s decisions in R. v. Rajaeefard (1996), 1996 404 (ON CA), 27 O.R. (3d) 323, at 325, and in Leader Media Productions Ltd. V. Sentinel Hill Alliance Atlantis Equicap Limited Partnership (2008), 2008 ONCA 463, 90 O. R. (3d) 561, at 571, counsel for the appellants argues that this evidence should be admitted as it demonstrates that the judicial process was fundamentally unfair and brings the administration of justice into disrepute.
[41] I agree with the appellants that in these circumstances the fresh evidence ought to be admitted. The authorities the appellants cite make it clear that where the proposed fresh evidence raises issues of the validity of the process of the hearing, the interests of justice require its admission. In such cases, the traditional criteria for the admission of fresh evidence, found in R. v. Palmer, 1979 8 (SCC), [1980] 1 S.C.R. 759, do not apply. Here, the issues raised in the proposed fresh evidence implicate the integrity of the administration of justice.
ISSUES
[42] The issues raised in the appeal and cross-appeal can be grouped into the following two main categories:
Whether the motions judge erred in approving the sale of the property to Petro-Canada and the settlement of the company’s claim for breach of the remediation agreement.
Whether, in the light of what is contained in the fresh evidence, the process involving the motions judge’s decision was compromised.
STANDARD OF APPELLATE REVIEW OF ORDERS APPROVING RECEIVERS’ REPORTS
[43] The principles to be applied in reviewing a sale or proposed sale by a court-appointed receiver are set out in this Court’s decision in HSBC Bank of Canada v. Deloitte & Touche (2004), 2004 206 (ON CA), 71 O.R. (3d) 355. A court-appointed receiver has a fiduciary duty to act honestly and fairly on behalf of all who have an interest in the debtor’s property. The receiver, as an officer of the court, is obliged to make full and fair disclosure to the court in all of its applications: HSBC at para. 26. The court should rely on the receiver’s expertise in arriving at its recommendations and is entitled to assume that the receiver is acting properly unless the contrary is clearly shown.
[44] Particularly where, as in this case, the receiver is dealing with an "unusual or difficult asset", the court will only interfere in special circumstances: HSBC at para. 23. While the court must carefully scrutinize the procedure the receiver followed, it must be remembered that the receiver must act “with meticulous correctness, but not to a standard of perfection”: HSBC at para. 26.
[45] Finally, I note that the orders appealed from are discretionary in nature. As in the case of all discretionary decisions, this court will only interfere where the judge has erred in law, seriously misapprehended the evidence, or exercised discretion based on irrelevant or erroneous considerations or failed to give any or sufficient weight to relevant considerations: HSBC at para. 22.
[46] In Royal Bank v. Soundair Corp. (1991), 1991 2727 (ON CA), 4 O.R. (3d) 1 (C.A.), at p. 6, four factors are identified as considerations for the court in considering “whether a receiver who has sold a property acted properly”. In my view, with appropriate modifications, the same factors can be applied in considering the providence of this settlement, where the values of both a property and a claim for damages are in issue:
(a) Whether the receiver has made a sufficient effort to get the best price and has not acted improvidently;
(b) The interests of all parties;
(c) The efficacy and integrity of the process by which offers are obtained; and
(d) Whether there has been unfairness in the sale process.
[47] Finally, at p. 7., Soundair affirmed the principle first stated in Crown Trust v. Rosenberg (1986), 1986 2760 (ON SC), 60 O.R. (2d) 87 (H.C.J.), that a court “ought not sit as on appeal from the decision of the receiver, reviewing in minute detail every element of the process by which the decision is reached.”
ANALYSIS
- Whether the motion judge erred in approving the sale of the property to Petro-Canada and the settlement of the company’s claim for breach of the remediation agreement.
A. The Receiver’s Efforts to Obtain a Good Price
[48] I turn to the first Soundair factor, whether the receiver has made sufficient efforts to obtain the best price, both for the property and the claim against Petro-Canada. Counsel for the appellants submits that the settlement agreement substantially undervalues not only the property but also the company’s claim arising out of Petro-Canada’s breach of the remediation agreement. What the receiver should have done, say the appellants, is force Petro-Canada to honour its obligations under the remediation agreement, both in terms of the remediation itself and the compensation that it agreed to pay as a result of the contamination, and then sell the remediated property at fair market value. This course of action, according to the appellants, would have resulted in National Trust’s recovering its mortgage debt, with leftover equity value for the appellants. The motions judge’s approval of the settlement agreement as reasonable, according to the appellants, is unsupportable. Rather, they argue, the settlement agreement is improvident.
[49] I disagree. In my view, the motions judge’s conclusion that the receiver met its obligations, both in terms of the value of both components of the proposed settlement and in terms of the process by which it was arrived at, is amply supported by the application of the relevant legal principles to the motions judge’s findings of fact.
[50] The law requires the receiver to pursue the debtor’s rights. It is up to the receiver to carefully consider the available information and use its expertise to determine how to maximize the value of those rights. In relation to a cause of action, this responsibility can be met by settling the matter as long as the proposed compromise is commercially reasonable.
i. The sale of the property
[51] In terms of the proposed sale of the property, the appellants take issue with the fact that the motions judge approved the receiver’s recommendation of a sale at a price, which assumed the land was remediated, but was determined when the property was in an unremediated state. They contend that the receiver should have sought specific performance of Petro-Canada’s obligations to remediate the property, or damages in the alternative, and then sell the property for fair market value in a remediated state.
[52] I do not accept that argument.
[53] First, it is highly unlikely that the receiver would have been successful in obtaining an order against Petro-Canada for specific performance of its remediation obligations. As the considerations set out in Semelhago v. Paramadevan, 1996 209 (SCC), [1996] 2 S.C.R. 415 at para. 14, demonstrate, the principles of specific performance are mainly related to the transfer of property (either personal or real) and even then only when the property is unique in some way. As Estey J. wrote in Asamera Oil Corp. v. Seal Oil & General Corp., 1978 16 (SCC), [1979] 1 S.C.R. 633, at p. 668, “[b]efore a plaintiff can rely on a claim to specific performance…some fair, real and substantial justification for his claim to performance must be found.” There was nothing unique about this property. Indeed, the only reason the company wanted it remediated was for the purpose of immediately selling it. There is no justification for forcing Petro-Canada to go to the expense of remediating the land, when the appellants’ only interest is in the value of the land rather than the land itself.
[54] The alternative remedy for breach of contract is damages such that the affected party is put in a position as though the contract had been fulfilled. To establish these so-called “expectation damages”, the appellants relied on an affidavit of Philip Augustine, an experienced civil litigator.
[55] Counsel for the appellants argues that the damage claim, (putting aside for the moment the claim for loss of rental income) is either $1,735,000, using the “reduction in value” method, or $3,980,468, using the “cost of performance” method. The “cost of performance” method of valuing damages from breach of contract, which Augustine takes to include the cost of destroying the building, remediating the property, and reconstructing the building, raises substantially the same issues as specific performance. I have already explained why this basis for damages is unavailable to the appellants. Since the purpose of damages is to recover value that the appellants would have obtained under the contract, and since it is known that they intended to sell the property in order to pay their mortgage debt, the proper valuation method of damages is the "reduction in value" method. See Swan, A., Canadian Contract Law, 2nd ed., (Markham: LexisNexis Canada, 2009), at pp. 370 – 379.
[56] The question of the value of the land in a pristine state is critical for measuring the reduction in value of the property caused by the contamination. The appellants are wrong, however, to argue that the only way to determine this value is to remediate the land and try to sell it on the open market. The receiver utilized a commercially reasonable alternative method; it requested and received appraisals from several appraisers for the property, appraisals that assumed the property to be in an uncontaminated state. The motions judge approved this method as legitimate and I agree.
[57] So much for the method of determining value. As for the value itself, based on his preference of the receiver’s evidence concerning the value of the property over that of the appellants, the motions judge found that the proposed sale price of $1,187,000 represented a fair value for the property. This finding is sound.
[58] The motions judge rejected the property value the appellants advanced through the Augustine affidavit – and properly so. The Augustine analysis in support of a “reduction in value” of $1,735,000 was deficient. Augustine accepted the 2003 Juteau valuation of the property notwithstanding its obvious flaws. The motions judge noted that Mr. Juteau acknowledged on cross-examination that he was “unaware of serious deficiencies in the premises and substantial rent reductions (and vacancies) resulting from them.” The valuation was therefore based on a capitalization of rental income that did not take into account existing rental arrears or the high turnover in tenants.
[59] I note that Mr. Augustine made no attempt to reconcile or otherwise address the receiver’s expert and market evidence that supported the receiver’s position that the property in a remediated state, at the time it recommended the comprehensive settlement, had a value of between $900,000 and $1,050,000. I refer to the receiver’s four comprehensive market value appraisals, the listing price recommended by real estate agents and the results of the listing agent’s attempts to sell the property.
[60] The appellants also argued that, by reason of its mismanagement, the receiver was responsible for the property’s low value. This is not supported by the evidence. The evidence before the motions judge, including the appraisal reports, demonstrated that when the receiver was appointed in June 2003, it inherited a rundown property struggling to attract and maintain tenants willing to pay rent sufficient to cover operating costs.
[61] The appellants’ position is not assisted by the tender of an offer to purchase the property for $1,320,000 that the company received in January 2006, after the receiver sought approval of the proposed sale and settlement. The offer, never delivered to the receiver, was unsigned and contained conditions unfavourable to the vendor concerning remediation and the nature of the tenants. As well, the receiver had no obligation to consider this offer, given its timing. Moreover, the offer does not show that the price the receiver was recommending was so unreasonably low as to demonstrate that the receiver was acting improvidently in recommending it: see Soundair, at p. 9.
[62] I conclude that the motions judge’s decision to approve the sale to Petro-Canada for $1,187,500, on the basis of the receiver’s recommendation is unassailable. The receiver made appropriate efforts to obtain reliable information as to the value of the property. It secured an agreement with Petro-Canada based on this value that was provident and in fact advantageous to the creditors and the appellants. The fact that this agreement is with the polluter of the property, is, in my view, of no relevance.
ii. The acceptance of $200,000 in damages
[63] I will now turn to the settlement of the loss of rental income claim for $200,000.
[64] Counsel for the appellants forcefully argues that the $200,000 does not come close to adequate compensation for the loss of rent, asserted to be $838,000, based on $488,000[^2] to December 2004, plus $35,000 per month after that to the date of Petro-Canada’s acceptance of the offer.
[65] Once again, I would not agree with this argument. It completely ignores the weaknesses of the claim, and the risks and costs associated with pursuing it.
[66] The appellants approach the claim from the perspective that the receiver will be successful in demonstrating that the contamination was the sole cause of the loss of rental income. As previously indicated, the record demonstrates quite clearly that this is not the case. Before the further contamination was discovered in the spring of 2004, Vox Lounge had abandoned the property and was in arrears of rent in the amount of $70,000, and the Buffet Palace’s rent arrears, part of which Mr. Ishac had forgiven due to its complaints about the state of the building, had reached $140,000.
[67] Further, the delay in the commencement of the remediation and the conflict over the reasons for that delay, added to the uncertainty over the amount that might be awarded against Petro-Canada. The receiver claimed loss of rent from October 2003 to December 2004 in the amount of $214,262 and carrying costs including property management fees, property taxes, property insurance, legal fees and the receiver’s fees and utilities. However, Petro-Canada denied many of these claims on the basis that the appellants bore responsibility for some, if not all, of the delay in the commencement of the remediation work from May until November 2003.
[68] Then, there was further delay resulting from the dispute over how to remediate the soil under the building. The remediation agreement did not address who would be required to bear the burden of the loss of rental income caused by that delay.
[69] Finally, Petro-Canada not only resisted the claim for loss of rental income, but also indicated it was going to launch a counter-claim for the costs caused by the appellants’ delay.
[70] The evidence available to the receiver about the claim for loss of rental income demonstrated that the amount of Petro-Canada’s ultimate liability for damages was far from certain. Furthermore, the receiver was well aware of the other costs associated with litigation of this complexity such as ongoing carrying costs and unrecoverable legal costs. The receiver did not know, therefore, the exact value of this claim. What it did know was that Petro-Canada and National Trust supported a comprehensive resolution of the mortgage debt, in addition to the $200,000 Petro-Canada agreed to pay. Petro-Canada had already paid $318,000 to the company for damages arising from the contamination of the property pursuant to the arbitration award, and the receiver agreed to leave that amount with the company.[^3] National Trust had also agreed to forgive the remaining mortgage debt of $600,000 owed by the appellants to National Trust.
[71] Against this background the receiver made a realistic appraisal of value of the company’s ancillary claims against Petro-Canada. It had to evaluate the risks and costs associated with litigation. This court must defer to the assessment and judgment of its independent receiver and to the exercise of discretion of the motions judge. In my view, the receiver’s appraisal and the motions judge’s review of the receiver’s recommendations based on that appraisal are, in all of the circumstances, perfectly sound.
B. The Interests of All the Parties
[72] The next part of the Soundair test requires that the judge conduct an examination of the interests of all the parties.
[73] The secured creditor, National Trust, supports the settlement. It does so with the knowledge that it will realize a significant shortfall. Petro-Canada also supports the settlement, and the interests of a party that has negotiated a settlement with a court-appointed receiver are very important: see Soundair at p. 12.
[74] It is only the appellants, the debtors, who opposed the proposal. They argue that the receiver’s dereliction of duty has deprived them of equity they had in the property at the time of the receivership. They will recover nothing from this settlement.
[75] The appellants contend that the acceptance of the receiver’s recommendations results in a loss to the company of approximately $400,000 in equity. They base their argument on an alleged offer to purchase the property for $1,500,000 submitted before the contamination was discovered.
[76] However, the offer is not in evidence and the respondent argues that it was far from certain. The reliable evidence that is in the record places the value of the property in an uncontaminated state between $900,000 and $1,200,000, roughly the amount of the mortgage debt at that time. In my view, the record does not support the appellants’ position that the company had equity in the property at the time the contamination was discovered.
[77] Clearly, the receiver owes a duty to the appellants to treat them fairly. However, its primary task is to ensure that the highest value is received for the assets so as to maximise the return to the creditors: Soundair at p. 12. The duty of fairness also requires that it maximize the return to the debtors, but such a return is not always commercially feasible. As Farley J. recognized in Royal Bank v. Rose Park Wellesley Investments Ltd., [1995] O.J. No. 147 (Ont. C.J. Gen. Div.), at para. 9, there will frequently be a point below which certain interested parties will be adversely affected by the receiver’s decision. If the receiver’s decision is otherwise reasonable, it is entitled to determine, in the words of Farley J. “where the cusp will lie”.
[78] Here, the cusp lies at a place that is to no party’s clear advantage; the amount satisfies neither the appellants nor National Trust. I further note that given that $2,016,466 was owing under the mortgage at the time the settlement was reached, the appellants would only stand to benefit if a purchaser could be found that was willing to pay almost twice the value of the property, or if Petro-Canada consented to pay out several times the amount it has indicated a willingness to pay in response to the damage claim for loss of rental income.
[79] The losses these parties will suffer are unfortunate but are the reality of the circumstances that plagued this property with these issues in this market. Also, it is important to bear in mind that no payments had been made under the mortgage since 2001. As time goes by, the receiver’s costs constitute a priority charge on the property and therefore continue to reduce the amount available to pay National Trust and ultimately the appellants.[^4] In this case, Petro-Canada was the only purchaser that would be reasonably expected to purchase the property in its current state as though it were pristine. Without the sale, it would have been impossible for National Trust otherwise to recover any significant portion of the debt. The value of the claims against Petro-Canada was, as I have explained, uncertain, and the receiver could not have relied solely upon them in the discharge of its duties. In considering the interests of those involved, and especially the receiver’s primary duty to recover the mortgage debt from the appellants, the balance is clearly in favour of endorsing the settlement, and the motions judge considered these factors in making his ruling.
C. The Process Through Which the Sale and Settlement were Obtained
[80] I now turn to Soundair factors (c) and (d) - the efficacy and integrity of the process and the fairness in the implementation of the process. The motions judge was required to consider the integrity of the process by which the receiver determined the fair value of the sale and the settlement and the fairness in the working out of that process.
[81] The process under which the sale agreement is arrived at should be consistent with commercial efficiency and integrity. See Selkirk (Re) (1986), 58 C.B.R. (N.S.) 245, at p. 286.
[82] The appellants’ complaint about the process appears to be that National Trust and Petro-Canada negotiated the price between them, essentially behind closed doors. However, the receiver gave National Trust and Petro-Canada permission to negotiate a sale, if one could be reached, only after it proved impossible to continue with the appellants’ involvement. The receiver’s conduct until this point was open and transparent. It obtained various professional opinions as to the market value of the property independent of the contamination. These values were tested through the results of the listing and marketing initiatives. The appellants sought and obtained a meeting for the purposes of negotiating a settlement. They participated in that process until their demands threatened to interfere with any possibility that the negotiations would be successful. The receiver was entitled to make the determination that, as the motions judge put it, “[the respondents’] differences with Mr. Ishac were too great to continue attempting to find a resolution acceptable to all parties.”
[83] The motions judge clearly put his mind to the difficulty the receiver faced in valuing the property including the costs of remediation to current standards and the law suit with all of its costs and risks. In the light of the evidence before him and due consideration to the uncertainties, the motions judge quite properly held that “the process [of arriving at the settlement] was reasonable and prudent”.
2. Whether, in the light of what is contained in the fresh evidence, the process involving the motions judge’s decision was compromised.
[84] Counsel for the appellants argues that the fresh evidence of events that took place while the matter was under reserve, together with the decision itself, give his clients a legitimate reason to doubt that they have been fairly treated within the context of the judicial process. The submission is based on the letters the receiver wrote to the motions judge asking about the status of the release of his reasons and on the decision itself in relation to comments the motions judge is alleged to have made in the course of the in-chambers meeting. On the basis of the pressure brought to bear on the motions judge by the receiver and the contradictions in the motions judge’s thinking between the meeting and the decision and within the decision itself, there is good reason to be concerned that the process was not fair.
[85] I disagree with this submission.
[86] Concerning the letters, I agree that it may have been preferable for the receiver to have consulted with counsel for the appellants before writing the two letters inquiring about the status of the release of the decision. However, I am not persuaded that these letters, which were purely of an administrative nature, are any cause for concern about the integrity of the judicial process. I also note that the appellants’ stated concern about those letters in the context of this appeal was not brought to the attention of the motions judge.
[87] This takes me to the appellants’ other argument that the fresh evidence demonstrates uncertainty in the motions judge’s mind about whether to approve the receiver’s recommendations. This uncertainty is demonstrated, they say, by the length of time the matter was under reserve, the comments the motions judge made during the in-chambers meeting and the contradiction in the decision itself of approving the receiver’s recommendations and granting the appellants leave to commence an action against the receiver for breach of duty relating to its recommendations.
[88] First, as this court has said in Dusk v. Malone (2003), 2003 57384 (ON CA), 167 O.A.C. 333, at para. 3, “a lengthy delay in…releasing reasons, without more, will not automatically amount to a denial of a fair trial. The fairness of a trial must be determined by the particular circumstances of each case so that generally some evidence of active prejudice must be shown.”
[89] Second, the evidence of what was said at the meeting, namely the notes produced by lawyers who attended the meeting, is inconclusive in terms of what the motions judge said or was thinking. He may have indicated some ambivalence about his view of the case at the time. Regardless, he was entitled to go off and wrestle further with the decision. He was entitled to make up his mind after that meeting and prepare reasons that support his decision to approve the settlement.
[90] Despite approving the receiver’s third report, the motions judge granted leave to the appellants to commence an action against the receiver on the basis that the receiver failed to perform its obligations in relation to the property, including recommending the sale and settlement. The appellants submit that granting leave to bring such an action cannot be reconciled with approving the receiver’s third report. It therefore shows the motions judge’s doubts about whether the receiver had acted properly in relation to the sale.
[91] The motions judge was very clear in his reasons that he did not think the receiver had acted improperly. He granted leave because “[h]owever difficult, [the appellants] might succeed in demonstrating negligence…” He later reiterated that he was granting leave because it was not “perfectly clear that that there is no foundation for the claim or that the action is frivolous or vexatious.” It would appear that this concern motivated the motions judge to grant leave to the appellants to take proceedings against the receiver, in the light of the possibility that the receiver may not have acted “with a fiduciary’s due regard to the interests of the debtor”. However, he obviously thought this was a long shot.
[92] In my view, the motions judge, in granting leave, applied the wrong test. Rather than applying the low threshold he did, he should have been satisfied that the appellants had established a strong prima facie case, before granting leave. The conduct that the appellants wish to impugn is exactly the same conduct approved by the motions judge: see Bank of America Canada v. Willan Investments Ltd. (1993), 23 C.B.R. (3d) 98. As Blair J. put it at paras. 9 - 10:
In my opinion the "normal" test referred to above sets a threshold which is too low in cases where the activities of the Receiver, including the conduct sought to be impugned by the creditor seeking leave to proceed, have already been approved by the Court…Were it otherwise there would be little point in a receiver or receiver/manager seeking an Order approving its conduct and activities in the exercise of its duties as an officer of the Court. The very purpose of the granting of such an Order is to afford the receiver some measure of judicial protection. To say that that shield may be readily pierced unless the receiver can show that "it is perfectly clear" there is no foundation to the proposed claim, or that it is frivolous or vexatious, is to render such protection virtually meaningless in situations where the approved conduct and the conduct subject to the proposed attack are in substance the same.
[93] The motions judge thought that this case did not apply because the receiver’s actions had not been the subject of previous court approval. He did not consider that he had just approved the receiver’s actions in this very instance, and that the Bank of America rationale applies here as well. It is contradictory and provides meaningless protection to a receiver, to grant an order approving its recommendations and simultaneously granting leave to bring an action for negligence or breach of fiduciary duty in arriving at these recommendations.
[94] No matter which test the motions judge used, granting leave in these circumstances does not necessarily reflect an uncertainty in his mind regarding the receiver’s recommendation of the overall appropriateness of the comprehensive settlement.
[95] Based on this analysis, there is nothing in the evidence that supports the conclusion that there was any unfairness in the judicial process.
CONCLUSION REGARDING THE APPEAL
[96] In the circumstances of this case and given the principles courts must apply when reviewing the receiver’s recommendations, I can find no error on the part of the motions judge in the exercise of his discretion when granting the orders under appeal.
THE CROSS-APPEAL
[97] As discussed above, the motions judge used the wrong test in granting leave to commence an action against the receiver. For the reasons given there, I would allow the cross-appeal.
DISPOSITION
[98] For the foregoing reasons, I would dismiss the appeal from the order approving the receiver’s third report approving the sale of the property and the settlement. I would allow the cross-appeal and set aside the order granting leave to sue the receiver.
[99] At the conclusion of the hearing, it was agreed that the parties would make submissions as to costs following the release of this decision. Failing agreement as to costs both of the appeal and the cross-appeal, submissions are to be made according to the following timetable. The receiver and National Trust may make written submissions, no longer than three pages, to be received by the senior legal officer, no later than May 17. The appellants will make their submissions, again, no longer than three pages, to be received no later than May 25. The receiver and National Trust may deliver a brief reply, no longer than two pages, to be received no later than May 28.
RELEASED:
“MAY 10 2010” “Gloria Epstein J.A.”
“MJM” “I agree M. J. Moldaver J.A.”
“I agree Russell Juriansz J.A.”
[^1]: The forgiveness of the mortgage and the offer of the property to the company post-remediation (items 4. and 5.) were offered in exchange for the company’s support of the settlement agreement upon presentation to court for approval.
[^2]: Adjusted for a mathematical error made by the appellants.
[^3]: Given that the property would ultimately be sold to Petro-Canada on a pristine basis, the damages paid to the company for stigma and loss of future development costs were no longer warranted and could properly be considered additional consideration.
[^4]: This court was informed, though it was not in evidence, that as of July 2009, the amount owing under the mortgage exceeded $3.1 million, including principal, interest, property taxes and other receivership expenses.