SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

CV-11-9474-00CL

RE: Black Saxon QRC Inc., as General Partner for and on behalf of QRC Limited Partnership, Applicant

AND:

TBS Stores Inc., Respondent

CV-12-9611-00CL

RE: TBS Stores Inc., Applicant

AND:

Black Saxon QRC Inc., as General Partner for and on behalf of QRC Limited Partnership, Respondent

BEFORE: D. M. Brown J.

COUNSEL: D. Murdoch, for Black Saxon QRC Inc.

R. Morris, for TBS Stores Inc.

HEARD: May 16, 2012

REASONS FOR DECISION

I. Overview

[ 1 ] The dispute raised by these applications concerns when interest began to run on a promissory note issued as part of the consideration given on the sale of certain assets by a court-appointed receiver.

[ 2 ] The note holder, Black Saxon QRC Inc., as General Partner for and on behalf of QRC Limited Partnership, applied for a declaration that interest on the promissory note began accruing as of October 1, 2008, the Final Closing Date of the transaction.

[ 3 ] The issuer of the note, TBS Stores Inc., applied for rectification of the promissory note which it had issued or for a declaration that interest on the note began to accrue as of November 10, 2009, the date of issuance of the note.

[ 4 ] For the reasons set out below, I grant the application brought by TBS Stores and I dismiss the application of Black Saxon.

II. Basic chronology of the Receiver’s sale transaction

A. Receivership of SAAN and the August 11, 2008 Asset Purchase Agreement

[ 5 ] SAAN Stores Ltd. held leases on certain retail stores. In late 2007 SAAN made an application under the Companies’ Creditors Arrangement Act which, in June, 2008, was transformed into a receivership proceeding. Pricewaterhouse Coopers Inc. was appointed receiver of SAAN.

[ 6 ] On August 11, 2008, TBS Aquireco Inc. entered into an asset purchase agreement with the Receiver under which it purchased SAAN’s assets, primarily the retail store leases. Under the APA the consideration payable for SAAN’s assets consisted of (i) cash, (ii) the issuance of warrants to purchase shares of TBS Aquireco, and (iii) the issuance of $7 million of promissory notes to creditors of SAAN. More particularly, section 2.1(c) of the APA described the promissory note component of the purchase price as follows:

(c) promissory notes in the form set forth in Schedule 3 hereto issued by the Buyer in favour of those Persons as provided in Section 4.4 in an aggregate principal amount of $7,000,000 (the “Notes”).

Article IV of the APA contemplated that certain adjustments would be made to the face value of the Notes issued.

[ 7 ] Section 4.4 of the APA described the recipients of the Notes as follows:

The Buyer [1] and TBS acknowledge that the ultimate beneficiaries of the Notes…will be creditors of SAAN, as determined by an order of the Court. The Seller confirms that it will apply to the Court for the Priorities Order, and Seller shall direct the Buyer and TBS to issue the Notes…in favour of those Persons and in such percentages as set out in the Priorities Order. Notwithstanding anything in this Agreement, the Notes…shall not be issued until the date that is three (3) Business Days after the date of issuance by the applicable Court of the Priorities Order (the “Note/Warrant Issuance Date”).

The section continued by stipulating certain conditions a person must meet to become a holder of the Notes. The APA defined the “Priorities Order”, in part, as “a final order of the Court confirming the beneficiaries of the Notes and Warrants…”

[ 8 ] On August 18, 2008, the Court authorized the Receiver to enter into the APA, and the agreement specified a rolling series of four closing dates, the first falling three days following the making of the Approval and Vesting Order and the Final Closing Date being October 1, 2008. Final closing in fact occurred on that date.

[ 9 ] Black Saxon, which ultimately was named the holder of the Notes, operates in the areas of trade finance and real estate. In 2006 GMAC Commercial Finance Corporation – Canada had entered into a loan agreement with SAAN. In late 2007 and 2008 Black Saxon and GMAC entered into Loan Put Agreements with a combined put option price of $12.8 million. In May, 2008 GMAC delivered Put Option Notices to Black Saxon exercising the put options.

B. November 14, 2008 amendment to the form of Notes under the APA

[ 10 ] By order made November 14, 2008, Morawetz J. authorized the Receiver to enter into a November 14, 2008 Asset Purchase Agreement Amending Agreement (the “Amending Agreement”) which amended provisions of the APA dealing with the Notes in two respects. First, section 4.4 of the APA was amended to require the Person to whom the Notes were issued to sign a form of subordination agreement with each secured lender. Second, Schedule 3 to the APA, which contained the form of the Notes, was deleted and the parties agreed to a new form of Notes.

[ 11 ] Paragraph 5 of the November 14, 2008 Amending Order of Morawetz J. specifically addressed the amended form of the Notes. It provided:

THIS COURT ORDERS that the amended 2008 SAAN Creditor Notes and the 2008 SAAN Creditor Notes Subordination Agreement in the form attached hereto as Schedule “B” be and are hereby approved.

Schedule “B” to the Order attached the form of Note amended by the Amending Agreement.

[ 12 ] Counsel for both TBS Stores and Black Saxon attended the November 14, 2008 hearing before Morawetz J. Mr. Pace of Black Saxon acknowledged that his counsel did not object to the approval of the Amending Agreement by the Court, but he deposed:

I had limited time to review the Amending APA and the focus of my review was on the requirement for subordination agreements with TBS’s secured creditors. I have no recollection of noticing that changes had been made to the interest provisions in the Promissory Note. [2]

On cross-examination Mr. Pace acknowledged that Black Saxon had been served with the Receiver’s materials and had had the opportunity to review them, although he did not review the entire Amending Agreement. [3] He knew that an amended note was attached to the Amending Agreement, but he did not read it. [4] Mr. Pace testified that he did not compare the Amended Note with the initial one; had he noticed the changes he “would have made an issue about it”. [5] When asked whether Black Saxon could have objected to the Amending Order, Mr. Pace stated: “We were in the room and somebody could have stood up, yes, I agree”. [6]

C. Issuance of the Notes to Black Saxon

[ 13 ] As noted, section 4.4 of the APA provided that the Receiver would apply to court “for the Priorities Order, and Seller shall direct the Buyer and TBS to issue the Notes…in favour of those Persons and in such percentages as set out in the Priorities Order.” The Receiver did so, but in two steps. First, on motion by the Receiver Morawetz J. made a November 25, 2008 Order which stated, in paragraph 3:

THIS COURT ORDERS AND DECLARES that the distribution of the 2008 SAAN Creditor Notes and Warrants shall be issued pursuant to further order of this Court to Black Saxon and other parties, if any, who have an interest in the GMAC Facility and that no other creditors of SAAN outside of the GMAC Facility shall have any interest in the 2008 SAAN Creditor Notes and Warrants.

[ 14 ] As a result of an inter-creditor disagreement involving 167986 Canada Inc., GMAC and Black Saxon which required a separate court proceeding to determine, almost one year elapsed before the Receiver returned to Court on November 5, 2009 and obtained the Priorities Order from Morawetz J. on that date. (Black Saxon acknowledged that TBS Stores did not cause the inter-creditor dispute.) [7] Paragraph 2 of the November 5, 2009 Priorities Order stated:

2. THIS COURT ORDERS that TBS Stores Inc. and TBS Acquireco Inc. are hereby authorized, in accordance with the Asset Purchase Agreement (defined below), to issue to Black Saxon as assignee of GMAC Commercial Finance Corporation…pursuant to the loan agreement between GMAC and SAAN dated January 9, 2006, as amended, including the funding facility term sheet between the Receiver and GMAC dated June 6, 2008 and amended on August 12, 2008…the following:

(a) Promissory notes in the aggregate principal amount of $5,410,440 to be issued by TBS Stores Inc. in the name of Black Saxon (the “Promissory Notes”), representing part of the consideration obtained by the Receiver pursuant to the asset purchase agreement made as of August 11, 2008 between the Receiver and TBS Stores Inc. (the “Asset Purchase Agreement”)…

Paragraph 10 of the Priorities Order stated:

THIS COURT ORDERS AND DECLARES that upon issuance by TBS Stores Inc. of the Notes to Black Saxon, and the issuance by TBS Acquireco Inc. of the Warrants to Black Saxon, in accordance with section 2 of this order, the Receiver’s involvement and potential liability with respect to the Notes and Warrants will come to an end, and TBS Stores Inc. and TBS Acquireco Inc. will have satisfied their obligations and have no further liability under section 4.4 of the Asset Purchase Agreement with respect to the issuance of the Notes and Warrants.

[ 15 ] TBS Stores issued a promissory note dated November 10, 2009 in the amount of $5,410,440 to Black Saxon (the “Issued Note”). Mr. Pace deposed that Black Saxon’s counsel did not receive the form of Issued Note until March, 2010:

I reviewed the Promissory Note and confirmed that it was in satisfactory form, then instructed Mr. Carmona (an authorized signatory for Black Saxon) to sign the acknowledgement that Black Saxon would be bound by the terms of the note. He did so on March 12, [2010]. [8]

[ 16 ] TBS Stores issued the Issued Note in the form initially attached to the August, 2008 APA; it failed to issue the Note in the form as amended by the November, 2008 Amending Order. Mr. Clinton Wolff, who filed an affidavit on behalf of TBS Stores, deposed that the Issued Note was “inadvertently issued in the Initial Form of Promissory Note” and that “the Initial Form of Promissory Note was signed in error”:

Neither Mr. Haust [who had signed the Note], nor I, nor anyone else at TBS to my knowledge, was aware that the Initial Form of Promissory Note has been executed rather than the Amended Form of Promissory Note until after Black Saxon provided TBS with a draft version of its Application Record in this proceeding in October 2011. [9]

[ 17 ] Mr. Wilhelm Haust, the former General Counsel of TBS Stores, deposed that when he signed the Issued Note:

I was not aware that I was not signing the most up-to-date form of Promissory Note. Had I been aware of that fact, I would not have signed the Promissory Note and I would have required that the most up-to-date form approved by the Court be executed. Neither TBS nor I would have knowingly used the superseded form rather than the current Court-approved form.

I was not aware that I had signed the superseded form of Promissory Note until after Black Saxon commenced the companion proceeding to this application… [10]

[ 18 ] Black Saxon executed two subordination agreements in favour of TBS’s secured lenders. The execution of those agreements was a term of the Amending Agreement, not the initial APA.

[ 19 ] Payments by TBS Stores under the Note depended upon the availability of Free Cash Flow. Mr. Pace, of Black Saxon, deposed that as of the fall of 2011 he understood that no payments had been made under the Note because TBS Stores did not have Free Cash Flow. When in May, 2011 he requested from TBS Stores a calculation of the interest under the Issued Note, he learned that TBS Stores was accruing interest from the date of the issuance of the Issued Note. This dispute then emerged: Black Saxon took the position that interest should be accrued from the Final Closing Date, October 1, 2008; TBS took the position that interest accrued from the date of issuance of the Note, or November 10, 2009.

[ 20 ] In his first affidavit Mr. Pace summarized Black Saxon’s view of when interest began to accrue on the Note:

30. Due to a resulting dispute between creditors of SAAN, which was ultimately found in favour of Black Saxon and which had no connection whatsoever to TBS, TBS now claims that it is relieved of paying interest on a Promissory Note that otherwise would have been issued very shortly after closing of the APA. There is no logical or reasonable basis for effectively reducing the consideration payable by TBS under the APA because of a dispute involving SAAN creditors.

Mr. Pace put the amount of interest in dispute in excess of $500,000.

[ 21 ] With that by way of a basic chronology, let me turn to a description of the terms of the APA and the Amending Agreement on the issue of interest on the Note.

III. Interest on the Note under the APA and Amending Agreement

A. The Initial Note

[ 22 ] The Initial Note under the APA stipulated that the “Maturity Date” was “the tenth anniversary of the date this Note was issued” and “any unpaid Principal Amount of this Note, plus all accrued and unpaid interest thereon, shall be due and payable on the Maturity Date”. The Initial Note dealt with interest and payments of interest as follows:

3. Interest. The Principal Amount outstanding under this Note from time to time shall bear interest at a per annum rate equal to 10% both before and after maturity (whether by acceleration or otherwise), Default, demand and judgment. Such interest shall be calculated annually, not in advance. Interest on overdue interest shall be calculated at the same rate and is payable at the same time.

4. Payments of Interest. When not in Default, payments of interest on the Principal Amount from time to time outstanding at the rate set forth in Section 3 of this Note, shall be payable in cash by the Debtor to the Holder annually, on each Principal Payment Date commencing on the date that is the first anniversary of the Closing Date to and including the date the Principal Amount is paid in full to the Holder. After Default, interest shall be payable on demand. (emphasis added)

[ 23 ] The Initial Note provided for the later insertion of a specific sum for the “Principal Amount”. The Principal Amount was payable in four annual instalments “on each anniversary date of the Notes/Warrants Issuance Date (each a “Principal Payment Date”), commencing on the date that is the first anniversary of the Notes/Warrants Issuance Date”. Article XV of the APA provided that the “Note/Warrants Issuance Date has the meaning set forth in Section 4.4”, which, as noted above, provided that the “Notes and Warrants shall not be issued until the date that is three (3) Business Days after the date of issuance by the applicable Court of the Priorities Order (the “Note/Warrant Issuance Date”)”. Accordingly, under the Initial Note, the debtor would not be required to make the first repayment of the Principal Amount until one year after the issuance of the Note, following the making of the Priorities Order, and even then the amount due to the Note holder was limited by the amount of the debtor’s “Free Cash Flow”.

[ 24 ] In sum, the Initial Note stipulated that payments of the Principal Amount and interest were to be made on each Principal Payment Date. That date was defined as the Note/Warrant Issuance Date. However, whereas the Initial Note stated that the payment of the Principal amount was to commence “on the date that is the first anniversary of the Notes/Warrants Issuance Date”, section 4 of the Initial Note provided that payment of interest would commence “on the date that is the first anniversary of the Closing Date”. On its face the Initial Note stipulated different dates for the making of the first payment of principal and interest.

B. The Amended Note

[ 25 ] The Amended Note contained the same provisions as the Initial Note with respect to the Maturity Date and the payment of the Principal Amount. Like the Initial Note, the Amended Note approved by the Court on November 14, 2008 did not specify the Principal Amount.

[ 26 ] The Amended Note made no change to the rate or calculation of interest, but did amend section 4 of the Note dealing with the payment of interest:

4. Payments of Interest. When not in Default and subject to any restrictions in any Subordination Agreement , payments of interest on the Principal Amount from time to time outstanding at the rate set forth in Section 3 of this Note, shall be payable in cash by the Debtor to the Holder annually, on each Principal Payment Date commencing on the date that is the first anniversary of the Note/Warrant Issuance Date to and including the date the Principal Amount is paid in full to the Holder. After Default, interest shall be payable on demand. (amendments in italics)

[ 27 ] As can be seen, the amendments to the provisions of the Note concerning the payment of interest (i) made repayment subject to any restrictions in a subordination agreement and (ii) changed the date for the first payment of interest from the first anniversary of the Closing Date to the first anniversary of the Note/Warrant Issuance Date. The latter change brought the dates for the first payments of principal and interest into alignment on the same date.

[ 28 ] The Receiver filed its Fourteenth Report dated November 10, 2008 in support of its request for court approval of the Amending Agreement. Paragraph 20 of that Report stated:

20. In addition to the cash consideration payable under the TBS Agreement, TBS is obligated to issue promissory notes (the “2008 SAAN Creditor Notes”) and common share purchase warrants to those of the Company’s creditors who are entitled thereto, in accordance with the provisions of an order of the Court (the “Priorities Order”), which order the Receiver will seek in its next motion to this Honourable Court. Based on the Receiver’s calculations, the face amount of the 2008 SAAN Creditor Notes is $5,410,440.

[ 29 ] The Receiver’s Fourteenth Report explained that senior lenders were requiring that each Note holder execute a separate subordination agreement and therefore an Amending Agreement was required to include that as a term of the Note. In its Fourteenth Report the Receiver did not specifically refer to the other proposed change to the Note which would bring the first payment date for interest into alignment with the first payment date for the Principal Amount. The Receiver appended to its report the amended form of Note for which it sought court approval.

C. The Issued Note

[ 30 ] The Note issued by TBS Stores dated November 10, 2009 used the form of the Initial Note, not that of the Amended Note. Consequently, the Issued Note specified that the first payment of interest was to be made on the first anniversary of the Closing Date – i.e. on October 1, 2009, a date preceding the issuance of the Note.

IV. The Principal Amount of the Note

[ 31 ] The Initial Note appended to the APA did not specify the Principal Amount. Although counsel did not put in evidence the Court order approving the APA, I think I can safely assume that the copy of the APA appended to that order, if indeed one was appended, did not specify the Principal Amount. I say that because the form of Amended Note attached to the November 14, 2008 Amending Order did not specify the Principal Amount.

[ 32 ] The Issued Note specified a Principal Amount of $5,410,440.00. When was the amount of the debt set? Mr. Pace of Black Saxon deposed that the Receiver in its Thirteenth Report dated October 8, 2008 “noted that as a result of adjustments the principal amount of the Promissory Note was $5,410,440.00.” Mr. Pace was in error on that point, and he corrected his evidence to refer to a later Receiver’s Report.

[ 33 ] In its Fourteenth Report dated November 10, 2008 in support of the motion to obtain court approval for the Amending Agreement, the Receiver reported that based on its calculations “the face amount of the 2008 SAAN Creditor Notes is $5,410,440.” However, the Receiver went on to say:

24. …As indicated above, the Receiver has not yet sought an order of this Honourable Court with respect to either the determination of the Noteholders or the amount of the 2008 SAAN Creditor Notes that will be attributable to the Noteholders.

25. As indicated above, the Noteholders have not yet been determined. Accordingly, the Receiver has instructed [its counsel] to serve all parties included on the Receiver’s list with notice of the Receiver’s motion as described herein.

[ 34 ] The Order made November 25, 2008 did not specify the amount of the Notes to be issued, but stated that the “distribution of the 2008 SAAN Creditor Notes and Warrants shall be issued pursuant to further order of this Court to Black Saxon and other parties, if any…” It was not until the Priorities Order of November 5, 2009 that the Court authorized TBS Stores to issue Notes “in the aggregate principal amount of $5,410,440” to Black Saxon.

V. Analysis

[ 35 ] Black Saxon seeks a declaration that interest on the Issued Note began accruing as of October 1, 2008, the Final Closing Date. TBS Stores seeks an order rectifying the Issued Note so that it is in the form of the Amended Note or, alternatively, a declaration that interest on the Issued Note began to accrue as of November 10, 2009.

[ 36 ] Black Saxon advanced the following arguments in support of its position:

(i) The express terms of the Issued Note provide for interest to begin accruing as of the Final Closing Date or are ambiguous;

(ii) If the terms of the Issued Note are ambiguous, then: (i) there is evidence that the Receiver understood that any lapse of time in obtaining the Priorities Order would not reduce the consideration payable by TBS Stores, and (ii) the position of TBS Stores that interest did not begin to accrue until the issuance of the Note would lead to a commercial absurdity because the purchaser of SAAN’s assets would be granted an indeterminate interest-free period to the detriment of SAAN’s creditors for whom the receivership process was intended to maximize their recovery.

[ 37 ] The primary argument of Black Saxon is based on an interpretation of the language of the Issued Note. However, the note issued by TBS Stores was the wrong one. The Note comprised part of the consideration for the sale of certain assets by a court-appointed Receiver to TBS Stores. In accordance with standard practice the Receiver sought court approval to enter in the sale agreement. Court orders approved the APA and the subsequent Amending Agreement. Paragraph 5 of the November 14, 2008 Amending Order specifically approved the form of the Amended Note. Under the terms of the approved APA, that Note could not be issued by the purchaser/debtor until three Business Days after the making of the Priorities Order. That order was made on November 5, 2009. Under it the Court authorized TBS Stores to issue to Black Saxon the Note previously approved by the Court. That was the Amended Note. The Priorities Order stated that the issued Note would have an aggregate principal amount of $5,410,440; that was the amount previously calculated by the Receiver; that was the principal amount of the note actually issued. However, in view of the Amending Order TBS Stores had no authority to issue a note in the form of the Initial Note; it was required to issue the Amended Note. [11] It did not do so. Its witnesses testified that the issuance of the wrong form of Note was a mistake. I accept their evidence. The mistake was obvious. The Issued Note did not comply with that approved by the Amending Order. Therefore it must be rectified so as to conform to the form of Note previously approved by the Court; TBS Stores had no authority to issue any other form of note.

[ 38 ] This result is consistent with the proceedings which took place before the Court in the SAAN receivership. That Black Saxon now resists the application by TBS Stores to remedy the mistake it made by not issuing the Amended Note perhaps is explained by a brief comment made by Black Saxon’s counsel during the cross-examination of Mr. Pace. Counsel stated that at the time Mr. Pace swore his first affidavit “he did not know about the amending note”. [12] Mr. Pace acknowledged that while Black Saxon had received the Receiver’s materials in support of the Amending Order, he had not read the proposed Amended Note.

[ 39 ] One of the purposes of a receiver serving affected parties with materials explaining the actions for which it seeks court approval is to allow an affected party to perform its own due diligence on the receiver’s proposal and to voice any concerns which it may have on the return of the motion. I described at length earlier in these Reasons the court process which led to the approval to issue the Amended Note. Black Saxon had notice of the steps in that process and had ample opportunity to voice any concerns. Black Saxon did not take advantage of the opportunity afforded to it. Its corporate representative chose not to read all the documents, and although represented by counsel at the hearings which resulted in both the Amending Order and the Priorities Order, evidently counsel did not object to the form of the note. If Black Saxon thought that the passage of time which had occurred in obtaining the Priorities Order required the court to re-consider the issue of when interest started to run on the Amended Note, it was open to Black Saxon to raise that issue with the Court at the hearing which resulted in the Priorities Order; it did not do so. In those circumstances Black Saxon cannot expect a court to give much weight to concerns raised three years after the fact when it failed to make its concerns known at the court hearing specifically held to listen to any such concerns. By insisting that the Issued Note continue in force, Black Saxon, in effect, is seeking to vary the Amending Order of this Court made on November 5, 2009. Yet it has brought no motion seeking such a variation, nor can I see any evidence which would justify varying the Amending Order – all material information was known by or, with the exercise of reasonable care, could have been known by Black Saxon at the time the Amending Order and Priorities Order were made. It is too late in the day for Black Saxon to seek to unwind an order made close to three years ago when its only justification for its position was that it did not take the time to read all the Receiver’s materials provided to it in advance of the Amending Order.

[ 40 ] In any event, the language in the Initial Note to which Black Saxon points in support of its position about when interest started to run under the Note actually concerned the timing of the payment of interest. As noted above, the Initial Note contained different dates for the first payment of principal and interest. The Amended Note established common dates for both – the first anniversary of the Note/Warrant Issuance Date. Black Saxon argued that from the timing of the first interest payment under the Initial Note – i.e. one year after the Closing Date – one can infer when interest began to accrue under the Note. As I understand Black Saxon’s argument, if interest had to be paid one year after the Closing Date, then interest must have started to accrue before that time; Black Saxon argued that one should select the Closing Date as the starting point.

[ 41 ] There are three difficulties with that argument. I have already pointed out the first difficulty – that was not the term of the Note approved by the Court in the Amending Order. The second difficulty is that under Black Saxon’s interpretation the first interest payment under the Note was due on October 1, 2009, over one month before the Note had been issued. Black Saxon did not explain how interest could accrue on a promissory note not yet issued.

[ 42 ] Finally, Black Saxon’s use of the language in the Initial Note concerning the timing of the payment of interest ignored the express language of both the Initial Note and Amended Note dealing with the running of interest. Section 3 of both the Initial Note and Amended Note provided that interest was payable on “the Principal Amount outstanding under this Note ”. Given the specific circumstances surrounding the receivership of the SAAN business, the parties to the APA – the Receiver and TBS Stores – agreed, in section 4.4 of the APA, that the Note would not issue until after the Court had made the Priorities Order. So, notwithstanding that the promissory notes would form part of the purchase price, the identity of the Note holders was not specified at the time of the APA or the Amending Agreement and, instead, the APA contemplated that the Note holders would be identified through a court process which culminated in the making of the Priorities Order. Although by the time of its Fourteenth Report of November 10, 2008 the Receiver had calculated the amount of the Note, the Note holder had not been identified, in a definitive way, until a year later when the Court made the November 5, 2009 Priorities Order. Only after that order was made, stipulating the amount of the Note and the identity of the Holder, could the Note issue pursuant to the terms of the APA. Accordingly, no “Principal Amount outstanding under this Note” could be ascertained, with legal certainty, until the Priorities Order was made. In light of the terms of the APA and the orders made in the court process contemplated by those terms, interest on the Principal Amount could not start to run until the Note was issued three Business Days following the Priorities Order, or November 10, 2009.

[ 43 ] Black Saxon submitted that to permit the Note holder an interest-free period for an indeterminate time would result in a commercial absurdity. I do not agree. By its terms the APA contemplated that a period of time might elapse between the Final Closing Date and the Note/Warrant Issuance Date. The APA imposed on the Receiver/Seller the obligation to obtain the Priorities Order. The Receiver did so. The evidence revealed that the parties to the APA worked in a timely and good faith fashion to obtain the Priorities Order. That a delay of slightly over a year came to pass from the time of the Final Closing Date to the Priorities Order was no fault of the Receiver or TBS; an inter-creditor dispute involving GMAC, 167 and Black Saxon was the cause of the delay. [13] The APA contemplated that the Note/Warrant Issuance Date might not be the same as the Final Closing Date, so the possibility of the passage of time following the Final Closing Date to obtain the Priorities Order was contemplated by the terms of the APA. The position advanced by TBS Stores does not result in any commercial absurdity in light of those terms of the APA.

[ 44 ] Given that the Court approved and authorized the issuance of a specific form of Note, I see no merit to Black Saxon’s submission that one must go beyond the language of the Note and look at certain extrinsic evidence. In the present case the most important aspects of the “factual matrix” surrounding the issuance of the Note were the Court orders approving the form of the Note and authorizing its issuance. Other extrinsic evidence pointed to by Black Saxon simply is irrelevant, specifically the conduct of TBS Stores of calculating discount amortization on the debt following closing and how interest accrued on another promissory note to which Black Saxon was not a party. [14]

[ 45 ] Finally, in his first affidavit Mr. Pace deposed that he had spoken to Receiver’s counsel who informed him that “again to the best of his recollection, it was not intended that the requirement for a Priorities Order would in any way cause a reduction in the consideration to be payable by TBS and Acquireco under the APA”. The Receiver did not file any evidence on these applications; the Receiver was not examined as a witness on these applications. The statements contained in Mr. Pace’s affidavit are hearsay. If Black Saxon seeks to rely on hearsay evidence from Receiver’s counsel as evidence as to when interest began to accrue on the Note, then the statements proffered are so enigmatic that I place no weight on such hearsay. In any event, the principal amount of the note actually issued was for the amount of the consideration due under the APA as calculated by the Receiver.

VI. Summary

[ 46 ] For the reasons set out above, I order that the form of Issued Note be replaced by the Amended Note and I declare that interest on the Amended Note began to accrue as of November 10, 2009. Accordingly, I grant the application of TBS Stores and I dismiss the application of Black Saxon.

[ 47 ] I would encourage the parties to try to settle the costs of these applications. If they cannot, TBS Stores may serve and file with my office written cost submissions, together with a Bill of Costs, by September 17, 2012. Black Saxon may serve and file with my office responding written cost submissions by October 1, 2012. The costs submissions shall not exceed three pages in length, excluding the Bills of Costs.

D. M. Brown J.

Date : September 1, 2012

[1] The APA defined the “Buyer” as “a wholly-owned subsidiary of TBS to be incorporated prior to the first Closing”. Prior to the closing TBS Acquireco assigned its rights and obligations under the APA to TBS Stores Inc.

[2] Affidavit of Al Pace sworn March 5, 2012, para. 5.

[3] Transcript of the April 20, 2012 cross-examination of Al Pace, QQ. 135-6; 146.

[4] Ibid. , Q. 218.

[5] Ibid. , QQ. 148-151.

[6] Ibid ., Q. 158.

[7] Ibid., Q. 82.

[8] Affidavit of Al Pace sworn March 5, 2012, para. 8.

[9] Affidavit of Clinton Wolff sworn January 13, 2012, para. 27.

[10] Affidavit of Wilhelm Haust sworn April 9, 2012, paras. 5 and 7.

[11] In oral argument counsel for Black Saxon submitted that paragraph 2(a) of the Priorities Order did not refer to the Amending Agreement, but authorized the issuance of notes “representing part of the consideration obtained by the Receiver pursuant to the asset purchase agreement made as of August 11, 2008 between the Receiver and TBS Stores Inc.” The Amended Note represented precisely such consideration. If counsel was suggesting that the Priorities Order in fact varied the Amending Order to revive the Initial Note, I would observe that the Receiver’s notice of motion for the Priorities Order made no mention of a request to vary the Amending Order. I infer that it made no such request because that the Receiver understood that the APA had been changed by the Amending Order and the Amended Note therefore governed.

[12] Transcript of the April 20, 2012 cross-examination of Al Pace, Q. 185.

[13] See the Reasons of Morawetz J. in 167986 Canada Inc. v. GMAC Commercial Finance Corporation-Canada , 2009 24224 (ON SC) , leave to appeal granted 2009 38498 (ON SCDC) , appeal dismissed 2009 65819 (ON SCDC) .

[14] With respect to the so-called Pari Passu Note (Compendium of the Applicant, Tab 7), the evidence disclosed that the reason TBS Stores began to accrue interest on that note at the time of the Final Closing Date was apparent on the face of the Pari Passu Note - it was dated October 2, 2008.