COURT OF APPEAL FOR ONTARIO

CITATION: 8527504 Canada Inc. v. Sun Pac Foods Limited, 2015 ONCA 916

DATE: 20151223

DOCKET: M45642 & M45643

van Rensburg J.A. (In Chambers)

BETWEEN

M45642

8527504 Canada Inc.

Responding Party (Applicant)

and

Sun Pac Foods Limited

Respondent

Application under Section 243 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 and Section 101 of the Courts of Justice Act, R.S.O. 1990, c. C. 43

AND BETWEEN

M45643

8527504 Canada Inc.

Responding Party (Applicant)

and

Liquibrands Inc.

Respondent

Application under Section 243 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 and Section 101 of the Courts of Justice Act, R.S.O. 1990, c. C. 43

David E. Wires and Krista Bulmer, for the moving party, Csaba Reider.

Harvey Chaiton, for the responding party, 8527504 Canada Inc.

Anthony J. O’Brien, for the responding party, BDO Canada Limited, court-appointed receiver of Sun Pac Foods Limited and Liquibrands Inc.

Heard: December 1, 2015

ENDORSEMENT

A. Overview

[1] This is a motion for leave to appeal two orders of Newbould J. (the “motions judge”) dated September 28, 2015 (“the September 2015 Orders”) in two related receiverships – of Sun Pac Foods Limited (“Sun Pac”) and of Liquibrands Inc. (“Liquibrands”). The applicant, Csaba Reider, also seeks leave to appeal the costs order of November 5, 2015, if leave is granted in respect of the September 2015 Orders.

[2] The motion is brought under s. 193(e) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”). Leave to appeal is discretionary and the court must take a flexible and contextual approach. In deciding whether to grant leave, the court must consider (a) the general importance of the issues for appeal to the practice in bankruptcy and insolvency matters or to the administration of justice as a whole; (b) whether the proposed appeal is prima facie meritorious; and (c) whether proceeding with the proposed appeal would unduly hinder the progress of the bankruptcy or insolvency proceedings: Business Development Bank of Canada v. Pine Tree Resorts Inc., 2013 ONCA 282, 115 O.R. (3d) 617, at para. 29.

[3] For the reasons that follow, the motion for leave to appeal the September 2015 Orders is dismissed.

[4] Essentially, I have concluded that the main issue that the moving party Csaba Reider wishes to put before this court – whether the receiver was entitled to market and sell a court action commenced by Sun Pac and Liquibrands prior to their receiverships (the “Action”) – was already determined by an earlier order of Newbould J., the judge case managing the receiverships. This court previously denied leave to appeal that earlier order.

[5] The fact that the challenge is now made by Mr. Reider, as the director of Liquibrands and former director of Sun Pac, and not by Liquibrands itself, raising new arguments as to why the Action does not form part of the lenders’ security and cannot be sold by the receiver, is immaterial. Mr. Reider was privy to the receivership proceedings throughout and is bound by the earlier determination that the receiver was empowered to deal with, and to market and sell, the Action.

[6] To the extent that Mr. Reider raises a new issue that was not decided by the earlier orders – whether the credit sale of the Action to a defendant to that action ought to have been approved by the court – he has not met the test for leave to appeal that decision to this court.

B. The Companies, the Action and the Receiverships

[7] Sun Pac was a manufacturer of beverages, croutons and breadcrumbs. In November 2011, Sun Pac was acquired by Liquibrands Inc. (“Liquibrands”), a company owned by Mr. Reider.

[8] 8527504 Canada Inc. (“852”) is Sun Pac’s senior secured lender and was owed approximately $4 million when the Sun Pac receivership proceedings were commenced.

[9] Sun Pac’s debt to 852 was guaranteed up to the amount of $1 million by Liquibrands. Liquibrands is also a secured creditor of Sun Pac, and is owed approximately $2.6 million.

[10] On 852’s application, which was not opposed, BDO Canada Limited (“BDO”) was appointed receiver of Sun Pac on November 12, 2013.

[11] Earlier on the day that the order appointing the receiver was granted, Sun Pac and Liquibrands commenced the Action in the Superior Court of Justice, against 852 and Bridging Capital Inc. (together, the “Lender Defendants”).

[12] The Action alleges, essentially, that the Lender Defendants were in breach of their obligations to Sun Pac and Liquibrands under a forbearance agreement, and caused the failure of Sun Pac and its inability to pay the Lender Defendants and other creditors. The Action claims more than $100 million in damages.

C. The December 2014 Orders

[13] On December 4, 2014, Newbould J. made three orders (the “December 2014 Orders”). The orders:

• approved the reports of BDO as receiver of Sun Pac, and permitted the receiver to pay the amount realized on the assets of Sun Pac to 852, on account of its first ranking security interest, rejecting the argument by Liquibrands that the funds should be paid into court pending the determination by trial of the issues raised in the Action;

• appointed BDO as receiver of all of the property, assets and undertaking of Liquibrands following its default on the $1 million guarantee of Sun Pac’s debt to 852, rejecting Liquibrands’ argument that no receiver should be appointed pending the outcome of the Action; and

• refused the request by Liquibrands that a different receiver be appointed over the “remaining assets” of Sun Pac for the purpose of advancing the Action.

[14] Pursuant to the motions judge’s December 4th endorsement, the receiver was to propose a marketing process for the sale of the Action that would be settled by the court absent agreement. Counsel for 852, the receiver and Liquibrands negotiated and agreed to the terms for the marketing process which were included in an order in the Sun Pac receivership as well as the order appointing BDO as receiver of Liquibrands. The terms included the following:

(d) the Action is being offered for sale subject to the terms and conditions set out in the [Asset Purchase Agreement prepared by BDO]…;

(e) [852] may be an offeror and may make its offer by way of credit bid or otherwise without prejudice to any party to oppose the right of [852] to make an offer or to oppose any offer made;

(g) the sale of the Action shall be conditional upon [court] approval of same…

D. The First Motion for Leave to Appeal

[15] Liquibrands’ motion for leave to appeal the December 2014 Orders was dismissed on April 2, 2015.

[16] In its motion for leave, Liquibrands asserted, among other things, that the motions judge erred “in finding that the Action was collateral [under 852’s security] and “in ordering BDO to conduct a marketing process for the sale of the Action”.

[17] Feldman J.A., sitting in chambers, noted in her endorsement that the issue of importance asserted for appeal was “whether the lender should be entitled to profit from its breach of the forbearance agreement by creating a fait accompli of the receivership and the disposal of the litigation against it”. She noted that Liquibrands wanted to see the Action continued and concluded before the rights of the parties to the proceeds of the receivership were finally determined.

[18] Feldman J.A. concluded that to proceed as proposed by Liquibrands would turn the process inside out, allowing the debtors, through a funded receiver, to use the funds realized in the receivership to fund their action rather than to pay 852. She found that the December 2014 Orders were grounded in law and reason, and were based on the facts and the documents presented. She concluded that the orders were owed deference.

[19] After noting that Liquibrands was not objecting to the procedure for marketing the Action in the event that its request that a separate receiver be appointed to pursue the lawsuit was rejected, Feldman J.A. observed, at para. 15:

…I raised some issues in oral argument regarding the propriety of [the marketing] procedure, particularly with respect to who should be permitted to bid and how to fairly determine the value of the lawsuit. Counsel for the receiver advised the court that all issues regarding the propriety of any proposed sale of the action could be raised at the approval hearing. In the circumstances of this case, the denial of leave to appeal is not to be taken as an endorsement of all aspects of the procedure for marketing the lawsuit against the creditor.

E. The Sale Process

[20] The receiver then marketed the Action, following the process set out in the December 2014 Orders. The deadline for receipt of offers was May 15, 2015. Two offers were received: a cash offer for $100 from “Liquid Brands Inc.”, signed by Mr. Reider as president, and a credit bid from 852 for $1 million. The receiver accepted 852’s offer, subject to court approval.

F. The Next Set of Motions

[21] After making his offer, but before the bids were opened, Mr. Reider served a notice of motion seeking an order permitting him to advance the Action under the “residual authority” of the directors of the companies. He proposed to pledge the assets of Liquibrands not covered under the receivership order as security for costs of the Action. In the alternative, he sought an order prohibiting 852 from bidding to purchase the Action.

[22] Mr. Reider argued that it would be a conflict of interest for a receiver of a debtor to be involved and in control of litigation by the debtor against the secured creditor that caused the receivership, and that such litigation can be pursued under a director’s residual powers: see Maple Leaf Foods Inc. v. Markland Seafoods Limited, 2007 NLCA 7, 279 D.L.R. (4th) 682, and Re Inyx Canada Inc. (2007), 36 C.B.R. (5th) 154, [2007] O.J. No. 3846 (S.C.).

[23] The receiver moved for court approval of the sale of the Action to 852, and the motions were argued together on June 22, 2015.

G. The September 2015 Decision and Orders

[24] In the September 2015 Orders, the motions judge dismissed Mr. Reider’s motion, and approved the sale of the Action to 852.

[25] The motions judge held that the order sought by Mr. Reider was directly contrary to the December 2014 Orders which authorized the receiver to conduct a sale process for the Action, and in respect of which leave to appeal was denied. Having been involved in the proceedings as an active participant and as a privy to both Liquibrands and Sun Pac, Mr. Reider was bound by the earlier orders.

[26] The motions judge also dismissed Mr. Reider’s argument that he was not bound because the December 2014 Order directing a sale process for the Action was not a head of relief sought by 852 in its motion material leading to that order. The receiver’s right to sell the Action had been raised in 852’s supplementary factum and thoroughly argued before the motions judge and in the earlier leave to appeal motion. Nothing in the decision refusing leave to appeal preserved any right to challenge the sale process that had been agreed on, and approved by the court.

[27] The motions judge then considered Mr. Reider’s objection to 852 as a purchaser. He referred to various cases recognizing the power of a trustee in bankruptcy to sell to a defendant an action commenced by the bankrupt against that defendant, even where it meant that the sale would end the litigation: see Re Almadi Enterprises, 2014 ONSC 1020, 12 C.B.R. (6th) 162; Re Katz (1991), 6 C.B.R. (3d) 211, [1991] O.J. No. 1369 (Ont. Gen. Div.), Watt v. Beallor Beallor Burns Inc. (2004), 2004 CanLII 18877 (ON SC), 1 C.B.R. (5th) 141, [2004] O.J. No. 450 (Ont. S.C.) He saw no reason not to apply the principles from these bankruptcy cases to a receivership, concluding that the duty of a receiver to maximize the assets for the benefit of all interested stakeholders is no different from the duty of a trustee in bankruptcy to maximize the assets for the benefit of all creditors.

[28] The motions judge approved the sale of the Action to 852 by credit bid. It could not be said that the credit bid by 852 deterred potentially interested parties from submitting a bid. The person most knowledgeable about the Action, Mr. Reider, bid only a nominal amount, and it could not be expected that unconnected and unrelated third parties would be interested in bidding on the litigation since they would need the full cooperation and participation of the principals of the company to pursue it successfully. The agreed sale process that provided for notice to be given just to parties on the service list was a reflection of that reality. The credit bid was acceptable, as whether 852 bid cash or credit, it would sustain a shortfall in the receivership.

[29] After receiving written submissions, the motions judge awarded costs against Mr. Reider and in favour of 852 in the amount of $27,500, and in favour of the receiver in the sum of $6,000, plus HST. He rejected Mr. Reider’s argument that costs should not be awarded against him personally but against Liquibrands, for whose benefit he claimed to be acting in bringing his motion and opposing the receiver’s motion.

H. Analysis

[30] The applicant acknowledges that the motions judge’s orders made in the course of the receiverships are entitled to deference. The applicant asserts that the proposed appeal raises important legal questions, and is prima facie meritorious. I note that in this case, the third part of the Pine Tree Resorts test is not at issue, as there is no question of delaying the progress of the substantially completed receiverships.

[31] The applicant asserts that the proposed appeal raises two important issues of interest to insolvency practitioners and the administration of justice in general. The first concerns a director’s “residual right” to pursue an action that belongs to a company in receivership. The second is whether a court-appointed receiver can sell an action by the company in receivership to a defendant to that action.

(1) The First Issue

[32] In order to advance an appeal on the issue respecting the residual authority of a director to pursue an action by a company in receiver, the applicant must overcome the conclusion that the receiver’s right to sell the Action was res judicata, as the December 2014 Orders were binding on him. That he cannot do. As such, there is no prima facie merit in Mr. Reider’s proposed appeal on this issue.

[33] The receiver’s right to sell the Action was determined by the December 2014 Orders, and provided for a specific and agreed upon sale process. The only issue left open was court approval of any sale, including the right to challenge 852 as a bidder and purchaser of the Action.

[34] There is no merit to Mr. Reider’s argument that the December 2014 Orders are not binding because the receiver never moved before the court for authority to sell the Action.

[35] That argument, as well as several other points advanced by Mr. Reider, were addressed in the earlier motion for leave to appeal, including: that the Action could not be collateral or property used in the business of Sun Pac for the purposes of the receivership, that an action by a debtor against a lender does not form part of the lender’s security, and whether the court erred in directing BDO to sell the Action.

[36] Further, I agree with the motions judge’s rejection of Mr. Reider’s argument based on the passage noted above from the decision refusing leave to appeal from the December 2014 Orders. Feldman J.A. noted that the parties (including Liquibrands) had agreed to the sale process, and that the dismissal of leave to appeal should not be interpreted as the court’s endorsement of all aspects of the sale process. Her order refused leave to appeal the orders authorizing the receiver to deal with and to sell the Action. What was left open was not a further challenge to the entire sale process, but, a challenge to court approval of the sale (as per the terms agreed between the parties), including 852 as a bidder or purchaser.

[37] Mr. Reider relies on provisions in the receivership orders that permit “any interested party” to apply to the court to vary or amend the orders, as well as the general ability of the court to review, rescind or vary any order under its bankruptcy jurisdiction, pursuant to s. 187(5) of the BIA.

[38] What Mr. Reider is seeking goes far beyond the variation of an order, and amounts to an attempt to relitigate what was already decided. Mr. Reider is bound by the December 2014 Orders. He was fully involved in the receivership proceedings and had notice of everything that occurred. He had the opportunity to challenge the receiver’s right to sell the Action on whatever basis he saw fit to advance. As the company’s only director, he was the deponent of the affidavits filed by Liquibrands in the earlier motions. Whatever the potential merits of Mr. Reider’s new argument respecting his rights as a director in relation to an action commenced by a company in receivership, he lost the opportunity to make such arguments when the motions judge ordered the sale of the Action, and approved a sale process agreed to between the parties.

(2) The Second Issue

[39] The second proposed issue for appeal is whether a receiver can sell the debtor’s action to a defendant to that action, and whether the sale can be by way of credit.

[40] The issue, as raised in this case, has no prima facie merit.

[41] First, once the motions judge determined that the receiver had the right to sell the Action, the parties agreed to the sale process – essentially, they agreed that the Action would be auctioned after notice to the companies’ creditors. Mr. Reider does not object to the process, but only to the approval of a sale to 852.

[42] The motions judge relied on case law that authorizes a court officer to sell a cause of action by a debtor against a creditor to such creditor, whether by credit bid or otherwise. Mr. Reider offers no principled reason why the motions judge erred in applying bankruptcy cases to the sale in a receivership of a court action to a defendant.

[43] In this case, the sale process was agreed upon and approved in the December 2014 Order. The question then was whether the court should approve the sale. No issue is taken by Mr. Reider to the motions judge’s consideration of the sale under the governing principles articulated in Royal Bank of Canada v. Soundair Corp.(1991), 1991 CanLII 2727 (ON CA), 4 O.R. (3d) 1 (C.A.). The motions judge supported the receiver’s recommendation as a proper business decision. He considered the potential effect of 852 being a bidder, and the net benefit to the receivership resulting from a credit bid.

[44] Further, Mr. Reider did not demonstrate any real interest in pursuing the Action. As early as April 2014, the receiver had inquired whether Liquibrands or Mr. Reider was interested in purchasing Sun Pac’s interest in the Action, and had received no response. Likewise, for more than a year after the Action was commenced, and before BDO was appointed receiver of Liquibrands, Mr. Reider had done nothing to advance the Action. As such, there was nothing to suggest that Mr. Reider’s bid for $100 was anything other than a reflection of his presumed value of the Action. For any different result, the court would have to be satisfied that there was some value to the Action beyond what 852 was owed.

[45] In any event, the bulk of the arguments Mr. Reider raises in objecting to 852’s purchase of the Action simply reiterate the earlier objections to the receiver dealing with and selling the Action. No other reasons are advanced for why a sale to 852 should not be approved.

I. Disposition

[46] For these reasons, the motion for leave to appeal the September 2015 Orders is dismissed.

[47] As leave to appeal the September 2015 Orders is refused, there is no need to address Mr. Reider’s request for leave to appeal the costs order dated November 5, 2015. This too is dismissed.

[48] The moving party, Mr. Reider, shall pay 852 its costs fixed at $15,000, and BDO’s costs fixed at $10,000, both amounts inclusive of disbursements and applicable taxes.

“K. van Rensburg J.A.”