CITATION: Schembri v. Way, 2011 ONCA 528

DATE: 20110721

DOCKET: C53911

COURT OF APPEAL FOR ONTARIO

Doherty, Laskin and Simmons JJ.A.

BETWEEN:

Gordon Schembri, Schembri Financial Limited, Leaf Construction Management Inc. and 1784652 Ontario Inc.

Plaintiffs (Appellants)

and

Al Way, Jamesway Construction Corporation, Kingsley Financial Inc., Triumph Financial Holdings Inc., 1725030 Ontario Inc., Premier Project Consultants Ltd., National Rent-All Inc., Terra-Tec Excavating, Oxford & First St. Inc., Simcoe & Eastwood Avenue Inc. and 359 King Ontario Inc.

Defendants (Respondents)

James M. Wortzman, for the appellants

Heath Whiteley, for the respondents

Lorne S. Silver and Joseph Bellissimo, for the Receiver, Schwartz, Levitsky, Feldman Inc.

Heard: July 11, 2011

On appeal from the order of Justice Ruth E. Mesbur of the Superior Court of Justice, dated June 24, 2011.

By the Court:

I

[1] The appellant, Gordon Schembri, and the respondent, Al Way, were joint venturers in the purchase and development of certain properties. They had a falling out and Mr. Schembri sued Mr. Way for misappropriation of jointly held assets. A Receiver was appointed in that litigation and pursuant to court order directed to sell two of the properties acquired by the joint venture. Those properties were located in Waterloo and London. A third property in Oshawa was the subject of a separate motion. Depending on the outcome of that motion, it would also be sold by the Receiver.

[2] The properties were not sold under the initial sales process order made in January 2011. Eventually the Receiver recommended an amended sales process that involved Mr. Way making a stalking horse offer on each property, an opportunity for both Mr. Way and Mr. Schembri to make a superior offer on the properties and in respect of Waterloo and London, a break fee payable to Mr. Way if he was not the ultimate purchaser of the property.

[3] The Receiver’s proposal reflected the offer put forward by Mr. Way. That offer was made after the Receiver had recommended acceptance of an earlier offer made by Mr. Schembri on the Waterloo property. Mr. Schembri’s offer had been made in response to the initial sales order. The Receiver changed his recommendation after receiving Mr. Way’s offer and after Mr. Way had brought a motion to remove the Receiver. Mr. Way abandoned that motion after the Receiver supported his offer.

[4] Mr. Schembri opposed the Receiver’s recommendation. He argued that the court should order the Waterloo property sold to him under the terms of the offer he had submitted in response to the initial sales process established in January 2011 and, that subject to the resolution of an outstanding issue relating to the Oshawa property, both Oshawa and London should be sold on the open market.

[5] The motion judge accepted the recommendation of the Receiver and directed that the properties should be sold according to the amended sales process outlined by the Receiver in his fourth report. Mr. Schembri appeals from that order.

II

[6] The motion judge’s reasons are a model of clarity and concision. We adopt and will not repeat, except as is necessary to these reasons, her description of the relevant events and her factual findings.

[7] We accept the respondents’ and the Receiver’s submission that the motion judge’s decision to approve the recommendation of the Receiver and order the property sold according to the amended sale process was a discretionary one that attracts substantial deference in this court. Applying that standard of review, we see no reason to interfere with the motion judge’s order as it relates to the Oshawa and London properties.

[8] The Waterloo property, however, raises different considerations. With respect to the motion judge, we are satisfied that she erred in exercising her discretion exclusively on the basis that the sales process recommended by the Receiver would maximize the financial return for the estate. The motion judge was required to consider the entirety of the circumstances and, in particular, the conduct of the parties.

[9] On the motion judge’s findings, the conduct of Mr. Way had a negative impact on the integrity of the court supervised sales process. Mr. Way stood to gain from whatever financial benefit flowed to the estate from the sale of the Waterloo property. His conduct, as it impacted on the integrity of the sales process, should have been given significant weight when deciding whether the Receiver’s recommendation to accept Mr. Way’s proposal should be approved by the court. Instead, the motion judge expressly stated that she was giving Mr. Way’s conduct no weight.

III

[10] It is common ground that Mr. Way’s offer on the Waterloo property was financially more attractive than Mr. Schembri’s. It would have returned significantly more to the estate than would Mr. Schembri’s offer. If financial concerns were the only relevant factor there could be no questioning the motion judge’s exercise of her discretion.

[11] In the course of her reasons, the motion judge made strong findings about Mr. Way’s conduct. She concluded that he had brought an entirely unwarranted motion to remove the Receiver for purely tactical reasons. She further concluded that his conduct had given him a distinct and unfair competitive advantage over Mr. Schembri. The relevant passages of her reasons are set out below.

[46] Removing a Receiver is a serious matter. Mr. Way had called the Receiver’s integrity into question, and this issue had to be determined. From Mr. Schembri’s point of view, the removal motion was tactical, and designed to derail the sales process so that Mr. Way could gain an advantage in it. To some extent, I tend to agree.

[47] Before he moved to remove the Receiver, Mr. Way had learned in the settlement conference that Mr. Schembri wanted to buy the Waterloo property and had no real interest in the London property. As Mr. Schembri explains it, he disclosed this information to Mr. Way because he thought the original sales process was underway, and since the Receiver had rejected his bid, Waterloo and London would be sold to the public under the terms of the original sales order. Because the Receiver was obliged under the terms of the original sales order to discuss each party’s offer with the other, Mr. Way also knew what Mr. Schembri was prepared to pay for Waterloo.

[48] When I look at the timing of the removal motion, coupled with Mr. Schembri’s later unsolicited bids for the three properties, I see a tactical move to wrest control of the process from the Receiver, and to prevent Mr. Schembri from purchasing Waterloo or to force him to pay significantly more for it than its appraised value.

[49] By the time Mr. Way launched his removal motion, he knew that Mr. Schembri wanted Waterloo, and knew what he was prepared to pay for it. He also knew that Mr. Schembri was less interested in the other two properties. With this knowledge, he was able to structure his unsolicited offers so that he would usurp Mr. Schembri from purchasing Waterloo, and would acquire the other two properties for less than he was originally prepared to pay, at least notionally.

[50] While the Receiver is adamant its current recommendations are not tied to Mr. Way’s withdrawing the removal motion, the optics of the two events occurring virtually simultaneously give one pause. I have no reason to disbelieve the Receiver, particularly since the Receiver did not accept Mr. Way’s original proposal but negotiated a far better outcome, both in terms of the costs of the removal motion and the issue of break fees. That said, however, I understand Mr. Schembri’s feelings about motivations and process. The issue, as I see it, is whether those feelings should outweigh the Receiver’s duty to maximize recovery for the stakeholders. [Emphasis added.]

[12] Mr. Schembri’s conduct in the course of the sale process could not be criticized. He had submitted a bid that complied with the terms of the original sale order made in January 2011. That bid was higher than the two reliable appraisals (the first and third) that the Receiver ultimately obtained. In all likelihood, the Receiver would have recommended acceptance of Mr. Schembri’s bid at the close of the first phase of the process authorized under the January court order but for an appraisal (the second) that suggested Mr. Schembri’s bid was well below market value. That appraisal was ultimately discredited by both Mr. Way and Mr. Schembri. Indeed, after the appraisal was discredited, the Receiver recommended acceptance of Mr. Schembri’s original bid, albeit outside the time limits imposed by the original order. The Receiver changed his position only after Mr. Way moved to have him removed and made an offer on all the properties.

[13] Mr. Way did not submit any bid for the Waterloo property under the timetable set out in the original court order. He offered no explanation for his failure to bid and did not suggest that the original sale process that generated Mr. Schembri’s bid operated unfairly against him.

[14] In summary, Mr. Schembri made a commercially reasonable offer on the Waterloo property in response to the first sale order and Mr. Way chose not to participate in that process.

[15] Having determined that Mr. Schembri had acted in compliance with the process ordered by the court and that Mr. Way had effectively gained control over that process through the combined effect of a last minute offer and a meritless motion to order the Receiver removed, the motion judge went on to hold at para. 54:

But this is not about Mr. Schembri and Mr. Way. Their bitterness and ill will toward one another is palpable and will no doubt continue and colour all their future decisions. It is not the court’s function to facilitate or enable their bitterness and anger. Instead, the court must determine whether the Receiver’s proposal is in the overall interest of the estate and is commercially reasonable. As an overall comment, I am satisfied the Receiver has made sufficient effort to get the best price for the properties. There is no suggestion that the Receiver’s proposal would result in an improvident sale.

[16] The motion judge indicated that both Mr. Schembri and Mr. Way had “legitimate complaints” (para. 57) about the sales process. She did not identify Mr. Way’s “legitimate complaints”. We can see none. The motion judge ultimately concluded at para. 76:

I recognize that Mr. Schembri takes the position Mr. Way’s conduct should preclude the court from exercising its discretion in favour of his stalking horse proposals. In looking at the overall benefits to the estate, however, I disregard this conduct in exercising that discretion. I do, however, consider his conduct as a potentially relevant factor when it comes to exercising my discretion on the issue of costs of this motion. I expect the parties’ costs submissions will address that conduct in the context of the court’s expectation that parties will follow court orders scrupulously. [Emphasis added.]

[17] It may be appropriate to “disregard” Mr. Way’s conduct if the proceeds of the sale were destined for independent third party creditors. In that circumstance, the maximization of financial return could trump all other considerations. However, in this case, the beneficiaries of the sale would be Mr. Way and Mr. Schembri, not independent third party creditors. Subject to Mr. Schembri’s ability to succeed in the underlying litigation, Mr. Way had a much greater beneficial interest in the sale proceeds than Mr. Schembri. To the extent that Mr. Way’s bid on the Waterloo property produced a better financial result for the estate, it would put more money back into Mr. Way’s pocket.

[18] In our view, where the ultimate beneficiaries of a court ordered sale are the parties competing in that sale, their conduct in the course of the court ordered sale process may be a significant factor in determining what process should be followed. The conduct of one or more parties becomes especially significant where it undermines the integrity of the court ordered process either by giving the offending party an unfair advantage in the process, or by compromising the appearance of the neutrality of the Receiver. Mr. Way’s conduct as described by the motion judge had both adverse effects. It could not be disregarded in determining whether a sales process that favoured Mr. Way should be implemented by the court.

[19] Giving due effect to Mr. Way’s conduct, we would order that the Waterloo property be sold to Mr. Schembri in accordance with his bid. The sale can be consummated without delay and the costs associated with that delay. As Mr. Way’s conduct is not relevant to the integrity of the process as it relates to the London and Oshawa properties, we would affirm the order of the motion judge in respect of those properties. We agree that the process recommended by the Receiver and approved by the motion judge in respect of those properties has the advantages described by her.

[20] The appeal is allowed and para. 1 of the “Amended Sales Process” attached to the order of Mesbur J. dated June 24, 2011 is varied in accordance with these reasons.

[21] If the parties cannot agree on costs, they may file written submissions of less than five pages. The appellants’ submissions should be filed within 14 days of the release of these reasons and the respondents’ submissions filed within 14 days of receipt of the appellants’ submissions.

RELEASED: “DD” “JUL 21 2011”

“Doherty J.A.”

“John I. Laskin J.A.”

“Janet Simmons J.A.”