SUPERIOR COURT OF JUSTICE – ONTARIO
COMMERCIAL LIST
RE: COMPUTERSHARE TRUST COMPANY OF CANADA (in its capacity as Note Trustee of the Maple NHA Mortgage Trust)
Applicant
And
MONTREAL TRUST COMPANY OF CANADA (in its capacity as Issue Trustee of the Maple NHA Mortgage Trust) et al
Respondents
BEFORE: Justice Newbould
COUNSEL: Peter W.G. Carey, for the applicant
Matthew P. Gottlieb and Shannon Beddoe, for Blackrock Asset Management Canada Limited
Harvey Chaiton, for Canadian Imperial Bank of Commerce
Samuel Rickett, for Montreal Trust Company of Canada
E N D O R S E M E N T
[1]
Overview
This motion is brought by Computershare Company of Canada (“Computershare”) in its capacity as trustee for the secured note holders (the “Note Trustee”) of the Maple NHA Mortgage Trust (the “Maple Trust”) for an order approving a marketing and sale process in respect of assets of the Maple Trust. The notice of motion states that in light of the dispute among the stakeholders with respect to the validity of the payment to CIBC of its Notes, as will be discussed, the Note Trustee is seeking the opinion, advice or direction of the court with respect to the prayer for relief. The motion was brought at the request of BlackRock Asset Management Canada Limited ("BlackRock"). CIBC is the only party that has appeared to contest the issue. It does not oppose the marketing and sale of the assets but requests certain terms, particularly a term that any sale must obtain court approval before it is closed.
[2]
Background
The Maple Trust is an investment vehicle established by a declaration of trust dated February 2, 1994 (the “Declaration of Trust”). Its principal business is to maintain, as mortgagee, a portfolio of residential real estate mortgages insured by Canada Mortgage and Housing Corporation (“CMHC”) under the National Housing Act (Canada) and the financing thereof by the issuance of debt. The Declaration of Trust appointed the Montreal Trust Company as trustee of the Maple Trust (the “Issuer Trustee”).
3An additional trust indenture was also made as of February 2, 1994 for the issuance of secured notes (the “Note Indenture”), including the Series 53 Notes and the Series 54 Notes. Computershare is Note Trustee pursuant to the Note Indenture.
4TAO Administration Inc. (“TAO”) was appointed by the Note Trustee as the Maple Trust’s administrator and advisor on October 21, 2011, pursuant to the terms of the Administration and Advisory Agreement, approved by order of Mesbur J. on consent. Under the Agreement, TAO’s principal duty is to assist the Note Trustee with a sale process in connection with the Event of Default, Acceleration and Enforcement. Another party, Maple Mortgage Trust Advisors Inc. (“Maple Advisors”), was the administrator when the Maple Trust was formed; however, when Maple Advisors effectively ceased administering the Maple Trust’s assets at some point prior to an Event of Default occurring in the Maple Trust, the administrator was replaced.
5BlackRock is the administrator of Master Asset Vehicle (“MAV”) I and MAV II, each an Ontario special purpose trust vehicle created for the purpose of facilitating the Plan of Arrangement and Compromise, dated January 12, 2009, in respect of the restructuring of the $34 billion third party (non-bank) asset backed commercial paper market in Canada. The restructuring involved numerous stakeholders, including the federal and several provincial governments. The Plan was approved by Campbell J. in a decision affirmed by the Court of Appeal. The Notes issued by the MAVs are widely held by both individual and institutional investors including pension plans.
6MAV I and MAV II are the beneficial owners of 100% of the Pioneer Notes Series 17, which are secured by the Maple Trust Series 53 Notes. Maple Trust Series 53 Notes are the only Notes outstanding under the Note Indenture, although this action was commenced to contest whether the Series 54 Notes were properly repaid to CIBC.
7CIBC was the beneficial owner of the Series 54 Notes, which were repaid in the full amount of $112 million on June 20, 2011.
8BlackRock, on behalf of the Pioneer Trust, contests the circumstances of this payment. In the pending application, BlackRock and others have asserted that the $112 million payment to CIBC is properly the subject of a clawback as it was made contrary to the terms of the Note Indenture. CIBC’s position is that the payment it received is immune from clawback and that it is no longer an owner of the Senior 54 Notes.
[9]
The Event of Default
The Note Indenture contains provisions intended to protect the interests of the holders of the senior Notes of the Maple Trust (the “Senior Noteholders”) when there is an Event of Default, as that term is defined in the Note Indenture.
10An Event of Default occurred in the Maple Trust on July 31, 2011. BlackRock, as representative of the current remaining Senior Noteholder (holders of the Series 53 Notes), delivered a Noteholders’ Request (as that term is defined in the Note Indenture) to the Note Trustee, wherein BlackRock:
(a) notified the Note Trustee of the Event of Default; and
(b) directed the Note Trustee, pursuant to section 6.03 of the Note Indenture, to declare July 31, 2011 an Acceleration Date and, by notice in writing to the Issuer Trustee, declare the Acceleration Amount calculated as at July 31, 2011 and the other Secured Obligations then outstanding to be immediately due and payable in accordance with the Default Waterfall.
11By letter dated August 2, 2011, the Note Trustee notified the Issuer Trustee of the Event of Default (the “Note Trustee’s Notice”). In the letter, the Note Trustee declared the full principal amount of the Series 53 Notes, together with all other amounts owing thereunder including accrued interest not yet paid, to be immediately due and payable (the “Acceleration Amount”).
12As a result of the Note Trustee’s Notice, the aggregate Acceleration Amount of $75,075,825.08 due on the Series 53 Notes has been due and payable since July 31, 2011. Aside from a partial repayment of $750,000 made on August 8, 2011, the Acceleration Amount remains outstanding.
13Pursuant to Section 6.02 of the Note Indenture, upon an Event of Default, the security granted by the Issuer Trustee to the Note Trustee over all of the Maple Trust’s property and assets, including all mortgages and related security, (the “Charged Property”) becomes enforceable.
14Following an Event of Default, all authority for dealing with, and all the rights in the assets of the Maple Trust, are transferred from the Issuer Trustee to the Note Trustee. By the terms of the Enforcement Provisions found in Article 7 of the Note Indenture, this authority includes the explicit right to sell or dispose of all or part of the Charged Property.
15Specifically, section 7.01(1) of the Note Indenture provides that subject to section 6.04, if an Event of Default occurs and is continuing, or if the Issuer Trustee has failed to pay the Note Trustee such amounts as are due and unpaid on the Notes then outstanding, the Note Trustee “may in its discretion and will, upon receipt of a Noteholders’ Request…” enforce the rights of the Note Trustee and of the Noteholders by any action, suit, remedy or proceeding authorized or permitted by the Note Indenture or by law. CIBC says that if the litigation against it is successful and it is held to be a Noteholder of the Series 54 notes, it would under section 6.04 as the holder of not less than 51% of the Notes then outstanding have the ability to instruct the Note Trustee to waive the Event of Default. It may be unlikely that it would do so, however.
16Section 7.02 further provides that the Noteholders may, by Noteholders’ Request, direct and control the action of the Note Trustee in any proceedings under Article 7.
17On August 4, 2011, BlackRock sent a letter directing the Note Trustee, pursuant to section 7.01 of the Note Indenture, to proceed expeditiously to further enforce the rights of the Note Trustee and of the holders of the Notes, by action, suit, remedy, or proceeding authorized or permitted by the Note Indenture or by law or by equity, and consented to by BlackRock as representative of the Senior Noteholder (the “Noteholders’ Direction of Enforcement”).
[18]
The Administration and Advisory Agreement
The Administration and Advisory Agreement between TAO and Computershare specifically contemplates a sale process in Annex A, including court approval of transactions. Annex A provides that the services to be provided by TAO include:
In consultation with the Note Trustee and the Senior Noteholder, preparing, for court approval, a marketing and sale process to sell the Mortgages, the Contracts and the Trust Property (the “Sale Process”)
Performing tasks in the course of the Sale Process as approved by the court, which tasks are anticipated to include, preparing due diligence packages, initial and final bidding packages, reviewing and analyzing bids, advising on the agreement of purchase and sale and assisting the Note Trustee in all matters relating to the closing of the sale transaction (s) after court approval of same.
19This Administration and Advisory Agreement was approved by Mesbur J. Both BlackRock and CIBC consented to the order.
20On January 4, 2012, counsel to BlackRock required the Note Trustee to obtain an order, in accordance with the Note Indenture and the court-ordered agreement with TAO, approving a marketing and sale process in respect of the assets of the Trust, including all mortgages and related Security, such that the aggregate Acceleration Amount of $75,075,825.08 due on the Series 53 Notes could be repaid. Counsel to BlackRock provided a proposed draft sale process order.
[21]
Positions of the Parties
The position of BlackRock is that the Note Trustee’s authority is unconditional and imposes a duty on the Note Trustee to enforce the security as requested by BlackRock. It takes the position that the mandatory duty on the Note Trustee is not conditional upon obtaining the consent of any other party such as CIBC. It takes the position that CIBC is not currently a Noteholder, as it has been paid on its notes.
22This position of BlackRock is somewhat simplistic. Its position in the outstanding litigation is that CIBC was not entitled to be paid on its notes and the relief claimed includes claims that that CIBC should be held to be a Noteholder and should be required to repay all or some of the amount paid to it. Thus it is apparent that CIBC has some contingent exposure which gives it some standing. The amount outstanding on the Series 53 Notes is approximately $75 million. If less than that is fetched from a sale of the assets to be sold, which consists of a portfolio of CMHC insured multi-residential unit mortgages, CIBC would be exposed to repaying some amount of what it collected. It is complete speculation at this stage is to what amount might be obtained on the sale of the mortgage portfolio or other assets, but it can perhaps safely be assumed that BlackRock would not be engaging in this litigation and taking the steps that it is if it was comfortable that it would be paid out from the sale of the secured assets.
23BlackRock takes the position that there is no need to have pre-court approval for the sale of any particular mortgage once the sale process has been approved and is concerned that the requirement for any such approval will hamper the sales process. It points out that there is comfort in that TAO, the administrator and advisor for the sale process, was approved by CIBC and that the Note Indenture does not require any court approval. The only reason why this matter is before the court is because of the outstanding litigation, but it is asserted that that does not change the economic circumstances underlying the Note Indenture.
24CIBC points out that Annex A to the Administration and Advisory Agreement made between TAO and Computershare, and approved by court order, expressly provides in paragraph 6 for prior court approval for any sale transaction and asserts there is no reason now for the court to approve a sales process that does not include any such prior court approval. CIBC also asserts that Maple Trust estate is insolvent and that normal insolvency practice involves prior court approval to any particular sale, with court approval being determined on the well known Soundair principles.
[25]
Analysis
I have some concerns with the position being taken by CIBC. Mr. Chaiton began his submissions by stating that CIBC holds the view that it is premature to engage in a sales process at this time. Mr. Chaiton said that while CIBC agrees to the sales process as contemplated by the draft sales process order, subject to a requirement that there be prior court approval to the sale of any mortgage or mortgage portfolio, it would like to be able to argue when any particular sale transaction is before the court for approval that it is premature. It is also stated in the memorandum of argument of CIBC that if there is a shortfall in the sale of the mortgages, it should be borne by BlackRock, which is the only party seeking to have the mortgages liquidated before maturity, and that it is not necessary for the court to determine this issue before any motion is brought to approve a sale of the mortgages.
26If there is to be a sale process, it would make little sense to go through it and then have argument that the sale should be postponed to some later date in the hopes that the ultimate amount that the mortgage portfolio will bring, including payments in the interim before any particular mortgage is sold, will exceed what would be obtained in the sale process now. Ordinarily, a security holder such as a mortgagee seeking to sell the security in order to recover the outstanding debt is not required to put off the sale to some later date because someone thinks that a better price will be achieved later. The security holder is required to take proper and reasonable steps to sell the assets in such a way as to obtain the best possible price at the time, but no more. This principle is recognized in the Note Indenture. It is also implicitly recognized in the terms of the Administration and Advisory Agreement which contemplate a marketing and sales process to now sell the mortgage security. CIBC has consented to that process, and continues to say that it has no objection to it proceeding.
27In any event, there is no cogent evidence that delaying the sales process will result in a better recovery. There is an affidavit from Shelley Bloomberg, an authorized signatory for Computershare, which asserts that the sale process proposed by BlackRock will result in the Trust having less assets than if the mortgages held by the Trust were allowed to mature. There is no indication at all of what qualifications Shelley Bloomberg has to make such a statement. There is no evidence as to the strength of the mortgages themselves. In the circumstances, I put little weight on the statement in the Bloomberg affidavit.
28In light of the provision in the Administration and Advisory Agreement that contemplates prior court approval for any transaction, I am reluctant not to require such a provision in the sales process to be approved, and I order that such a provision be included. If it turns out that such a provision is not workable, any interested party is entitled to return to court to seek to set aside or vary the provision. I am mindful, for example, of the advice provided by TAO that as the mortgage sale process gets underway, it should expect to receive proposals for pre-payments from current mortgagors and brokers which, with appropriate pre-payment provisions or yield maintenance premiums, would provide a better recovery than would be yielded through third-party sales. Whether such transactions would be impeded by court approval remains to be seen, as perhaps can be said too for relatively small transactions.
29It may be impractical or not worth the cost to have each transaction receive prior court approval, but without evidence as to how the sale process is expected to play out and whether there will be a lot of small transactions, it is difficult to say at this stage whether prior court approval is not required.
30I am concerned that on any motion to approve any particular transaction, the issues to be argued should be restricted to whether the sale should be approved taking into account the principles enunciated in Royal Bank v. Soundair Corp.
[31]
Disposition
To that end, therefore, I order that the sales process shall include a provision requiring any transaction to receive prior court approval before being concluded on the following terms:
(a) TAO is to be considered in the same capacity as a court-appointed receiver so that the Soundair principles will be applicable to TAO.
(b) No party may contend that if there is any shortfall, the loss should be borne by BlackRock or any other party. If there is to be any such contention, it is not to be made in the sales approval process, but is to be left for another day in the litigation.
(c) No party may contend that the transaction for which court approval is sought should not proceed because the asset might fetch a higher amount if the sale is postponed.
(d) It will be open to the court to consider awarding costs in favour of or against any particular party on any motion to approve any particular transaction.
(e) It is open to any party, if so advised, to apply to vary the terms of this order if the circumstances warrant a change.
[32]
Costs
None of the parties have requested costs. There shall be no costs of the motion.
Newbould J.
DATE: March 5, 2012