NorthWest Value Partners Inc. v. Bell, 2010 ONCA 409
CITATION: NorthWest Value Partners Inc. v. Bell, 2010 ONCA 409
DATE: 20100607
DOCKET: C51092
COURT OF APPEAL FOR ONTARIO
Feldman, Juriansz and LaForme JJ.A.
BETWEEN
NorthWest Value Partners Inc.
Applicant (Appellant)
and
John H. Bell, Robert C. Coffey, Maurice Kagan, Bryan Knebel, James W. McClintock, G. Michael Newman, Victor Stone, and Sheldon Wiseman, personally and in their capacities as trustees of the InterRent Real Estate Investment Trust, CLV Group Inc., Mike McGahan, and all undisclosed parties to a private placement transaction involving InterRent Real Estate Investment Trust publicly announced on July 28, 2009
Respondents
David Hausman, Scott M.J. Rollwagen and Shelley Babin, for the appellant
Kelley McKinnon and Scott Kirkpatrick, for the respondents
Heard: February 24, 2010
On appeal from the order of Justice F. Marrocco of the Superior Court of Justice dated September 28, 2009, with reasons reported at (2009), 2009 CanLII 51266 (ON SC), 97 O.R. (3d) 511.
Juriansz J.A.:
[1] This is an appeal from the order of Marrocco J. dated September 28, 2009 dismissing the appellant’s application for a declaration that the trustees of the InterRent Real Estate Investment Trust (“InterRent”) had been removed from office by the delivery of the written consents of unitholders holding a majority of the units. For the reasons that follow, I would dismiss the appeal.
A. FACTS
[2] The appellant, NorthWest Value partners Inc. (“NorthWest”), claims to be the largest holder of units in InterRent, a publicly traded real estate investment trust. InterRent was formed by a Declaration of Trust dated October 10, 2006 and amended and restated on June 29, 2007 (the “Declaration”). It is in the business of investing in income-producing multifamily residential properties and owns some 4000 apartment suites. Its units, of which there are over 19 million, are traded on the Toronto Stock exchange.
[3] In November 2008, InterRent was experiencing cash flow problems. It retained Scotia Capital Inc. as a financial advisor and struck a special committee to explore options. NorthWest made a proposal to the trustees that would have raised $6 million and would have required changes in the Declaration to permit higher debt levels. However, Scotia Capital Inc. recommended that the trustees accept a proposal from CLV Group Inc. (“CVL”) that would result in a private placement raising between $8 and $14 million through the sale of units, a reconstituted board of trustees and a new property management agreement. The trustees accepted the CLV proposal on July 23, 2009, and on July 27, 2009 ratified the execution of the CLV Term Sheet which reflected CLV‘s proposal.
[4] It is not necessary to set out all the various efforts of NorthWest to forestall the implementation of the private placement. I summarize only the efforts that are important to this proceeding.
[5] In order to prevent the trustees from closing the private placement, on August 13, 2009 NorthWest delivered written consents of unitholders removing all of them from office. It relied on s. 9.6 of the Declaration, which provides that trustees may be removed from office “by the written consent of the Unitholders holding in the aggregate not less than a majority of the outstanding Units entitled to vote thereon.” The respondents disputed the validity of NorthWest’s delivery of written consents. In order to meet those objections, NorthWest delivered written consents again on August 18, 2009 and on September 1, 2009.
[6] To support its efforts to obtain written consents representing a majority of outstanding units, NorthWest requested an updated list of unitholders from InterRent. It alleges that InterRent and its trustees improperly refused to provide the list.
[7] NorthWest applied for an injunction on August 26, 2009 to restrain the closing of the private placement. Strathy J. dismissed that application on September 3, 2009, and the private placement closed later that day.
[8] This application proceeded before Marrocco J. on September 24, 2009. The appellant requested the following relief:
(i) a declaration that the trustees of InterRent were removed as of August 13, 2009 or August 18, 2009 or September 1, 2009;
(ii) a declaration that the trustees did not have the authority to close the private placement which was the subject of the three earlier proceedings;
(iii) a declaration that the private placees cannot vote at a meeting of the unitholders scheduled for September 30, 2009;
(iv) an order convening an annual and special meeting of the unitholders on September 30 excluding the respondents and the private placees;
(v) a declaration that the trustees and the current management not take any steps out of the ordinary course of business except to facilitate an annual and special meeting of the unitholders;
(vi) a declaration that the trustees breached their fiduciary duty by interfering with the applicant’s efforts to obtain updated unitholder lists;
(vii) a declaration that the trustees are not entitled to any indemnity for their costs;
(viii) an order approving the appointment of an interim trustee;
(ix) an order setting aside double up compensation units; and finally,
(x) an order that the trustees pay $10 million in compensation to the applicant.
B. APPLICATION JUDGE’S REASONS
[9] The application judge found that the trustees’ decision to accept the CLV proposal instead of the NorthWest proposal was made in good faith and reflected their business judgment as to which proposal was better. He also found that by accepting the CLV proposal and ratifying the execution of the CLV Term Sheet, the trustees had explicitly agreed that the private placees would be entitled to vote at the next annual meeting. Both of these decisions were made prior to NorthWest’s first delivery of written consents to remove trustees. When these decisions were made, on July 27, 2009 at the latest, there was no question about the power of the trustees to make them.
[10] The application judge found it unnecessary to resolve the quarrel as to which written consents were valid and effective. He concluded that, even if the consents were valid, they did not immediately remove the trustees from office. He reasoned that if there were no trustees then no one would legally own the trust property and no one could conduct any activities on behalf of the trust. This would create particular problems because InterRent’s units were publicly traded. He observed that “[c]ourts should interpret constating documents such as Declarations of Trust in a way that avoids illogical results.” The application judge read the Declaration to contemplate only one situation where there could be no trustees, and that was where all the trustees have resigned. Therefore, assuming that the written consents were valid, the application judge found that the effect was that the trustees were not immediately removed but continued in office until new trustees were elected by the unitholders.
[11] The application judge added, however, that if unitholders holding a majority of the outstanding units had indeed consented to remove all the trustees, “those Trustees should, until they are replaced, confine themselves to making decisions arising in the ordinary course of business and should do whatever is necessary to facilitate the holding of a meeting of the Unitholders intended to clarify those persons who are Trustees of InterRent.”
[12] Continuing his analysis on the assumption that the consents were valid, the application judge concluded that the trustees had only made decisions in the ordinary course of business since their status was first called into question. Their decision fixing a Record Date was a decision made in the ordinary course of the business of the trust. More importantly, the application judge concluded that the closing of the private placement on September 3, 2009 was also an action in the ordinary course of business. When the trustees closed the private placement they were merely carrying out their July 27 decision to ratify the CLV Term Sheet.
[13] Though not necessary for his analysis, the application judge then commented on the parties’ dispute as to whether the written consents delivered by NorthWest were valid. He was inclined to the view that the August 13 consents were not valid. He then remarked that the trustees had provided no satisfactory explanation for the failure to provide an updated list of unitholders to NorthWest. Noting that the failure to provide the list had prejudiced NorthWest’s efforts to deliver an effective consent to the removal of the trustees, the application judge stated that he would have concluded that InterRent and its trustees were estopped from asserting that the number of units outstanding on August 18, 2009 differed from the figure outstanding on August 13, 2009. He stressed, though, that he was not making a finding that the trustees had breached a fiduciary duty by not producing the list. Whether the trustees had breached a fiduciary duty by not producing the list was an issue for trial.
[14] The application judge next decided that he would not appoint an interim trustee. On the assumption he had the necessary jurisdiction, he saw no reason to do so because of his conclusion that the trustees had acted within the ordinary course of InterRent’s business throughout the period that their status was in question.
[15] The application judge directed a trial of all remaining issues.
[16] In summary, the application judge refused the applications for declarations that the trustees were removed by the written consents, did not have the authority to close the private placement on September 3, 2009, or may not take any steps outside the ordinary course of business. He also refused the application for a declaration that the private placees could not vote at the unitholders meeting on September 30, 2009, refused to appoint an interim trustee, and refused to order the convening of an annual and special meeting of the unitholders on September 30, 2009 excluding the respondents and the private placees. He directed a trial of the following issues: whether the trustees breached their fiduciary duties by interfering with NorthWest’s efforts to obtain an updated unitholder list, whether the trustees were entitled to be indemnified for their costs, and regarding the double up compensation units and Northwest's claim of $10 million in compensation.
C. ISSUE
[17] The appellant suggests that the only issue that needs to be determined on appeal is whether the written consents, if valid, had the effect of immediately removing the trustees from office. The question of the validity of the consents, it suggests, can be left for trial.
[18] However, the primary issue to be considered is whether it is suitable or necessary for this court to determine this question. For the reasons below, I conclude that it is not.
D. ANALYSIS
[19] The position of the appellant is that the written consents had the effect of immediately removing the trustees from office. The appellant points out that s. 9.6 of the Declaration provides that the trustees may be removed from office “by the written consent of the Unitholders holding in the aggregate not less than a majority of the outstanding Units entitled to vote thereon”, and that s. 9.5(a)(ii) provides that a trustee ceases to hold office when “he or she is removed in accordance with Section 9.6”.
[20] I do not find the Declaration quite so straightforward. Section 9.6, which bears the heading “Removal of Trustees”, sets out the three ways in which trustees may be removed: first, unitholders may remove trustees by resolution at a meeting of unitholders by a majority of votes cast at a meeting; second, trustees may be removed by the written consent of a majority of unitholders; and third, trustees may be removed for cause by resolution passed by not less than two-thirds of the remaining trustees.
[21] After setting out the three ways in which trustees can be removed from office, s. 9.6 then goes on to provide that “[a]ny removal of a Trustee shall take effect immediately following the aforesaid vote or resolution”. The only “vote” aforesaid in the section is the vote of a majority of unitholders cast at a meeting. The only “resolution” aforesaid in the section is the resolution of two-thirds of remaining trustees removing a trustee for cause. While the removal of trustees by written consents is mentioned earlier in the section, this sentence does not state that such removal has immediate effect. The ordinary literal construction of s. 9.6 is that it provides that the removal of trustees by vote or resolution takes effect immediately, but s. 9.6 does not deal explicitly with the question when removal by written consents takes effect.
[22] Section 9.5(a)(ii) does indeed provide that a trustee ceases to hold office when removed under s. 9.6. However, one could also observe that s. 9.5(a)(i) provides that a trustee ceases to hold office when he or she resigns. Yet s. 9.5(b) makes perfectly clear that resignation of a trustee is not effective immediately. A trustee must give a minimum of 30 days notice of resignation. And a resignation that would destroy a quorum does not become effective until the resigning trustee is replaced.
[23] It seems to me that the provisions on which the appellant places the greatest reliance do not, by themselves, dictate the conclusion that written consents removing trustees from office take effect immediately. A careful consideration of the Declaration as a whole would be necessary to determine that question.
[24] Such a consideration is neither necessary nor suitable in this case.
[25] It is not suitable because the question whether written consents under s. 9.6 of the Declaration have the legal effect of immediately removing trustees from office is hypothetical. There is as yet no factual finding that written consents of unitholders holding a majority of units purporting to remove all trustees were indeed filed. The appellant does not suggest that the application judge erred by leaving that issue to be determined at the trial of issues that he directed. It is not the role of this court to determine questions that may or may not arise at an impending trial, depending on the findings of fact that will be made.
[26] It is not necessary because the real point of contention in this appeal is whether the trustees acted within the ordinary course of business when they closed the private placement on September 3, 2009. That is the real point of contention because the appellant argued in this court that the trustees, after being immediately removed from office by the written consents, would continue to hold legal title to the trust assets with the limited power to act only in the ordinary course of business. In advancing this argument, the appellant recognized the central aspect of the application judge’s reasoning – that it is necessary that someone hold title to the trust property. That necessity prompted the application judge to interpret the Declaration so that any trustees removed by written consents would continue to occupy office until they were replaced. He went on to state that the removed trustees, until they were replaced, should confine their decisions and acts to the ordinary course of business. The common ground between the appellant’s contention and the findings of the application judge is that, after the delivery of valid written consents, the trustees should confine their decisions and acts to the ordinary course of business.
[27] The application judge found that when the trustees decided on September 3, 2009 to close the private placement, they were simply implementing a decision that had been made earlier. He also found that the implementation of a decision already made constituted acting within the ordinary course of InterRent’s business. This conclusion of the application judge is amply supported by the record. The CLV Term Sheet which the trustees ratified on July 27, 2009 provided that the “closing is not subject to further approval of the board of trustees of [InterRent]”. None of the other provisions in the private placement documentation relied on by the appellant persuade me that the application judge erred in determining that the trustees were contractually bound to close the private placement. In good faith they had contractually bound themselves to close the transaction before their authority was attacked by the written consents. Their good faith decision is deemed to be “final and conclusive and…binding upon the Trust and all Unitholders” by section 10.9 of the Declaration.
[28] It is worth adding that, at the very least, failing to close the private placement would have exposed InterRent, already in a precarious financial position, to a potentially devastating law suit. Preserving the trust assets from the risks inherent in such litigation would fall within the scope of the ordinary course of business.
[29] I conclude that the written consents, assuming they were valid, did not prevent the trustees from closing the private placement on September 3, 2009.
[30] The same reasoning applies to the trustees’ decision to permit the new private placees to vote at the unitholder meeting scheduled for September 30, 2009. The decision of the trustees to permit them to vote was taken prior to the delivery of the first batch of written consents to remove trustees.
[31] For these reasons I would decline to embark on an unnecessary construction of the Declaration to determine when written consents to remove trustees under s. 9.6 of the Declaration become effective in removing the trustees from office.
E. CONCLUSION
[32] I would dismiss the appeal and award the respondents costs fixed in the amount of $25,000 inclusive of disbursements and GST.
“R.G. Juriansz J.A.”
“I agree K. Feldman J.A.”
“I agree H.S. LaForme J.A.”
RELEASED: June 07, 2010