Court File and Parties
SUPERIOR COURT OF JUSTICE – ONTARIO
(COMMERCIAL LIST)
BETWEEN:
IN THE MATER OF THE COMPANIES CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED
- AND -
IN THE MATTER OF A PROPOSED PLAN OF COMPROMISE OR ARRANGEMENT WITH RESPECT TO DONDEB INC. and the ADDITIONAL APPLICANTS LISTED ON SCHEDULE "A" HERETO (collectively, the "APPLICANTS")
Applicants
Counsel:
David P. Preger, Lisa S. Corne, Michael Weinczok, for the Applicants
Jeffrey J. Simpson, A. Ronson, for Pace Savings & Credit Union Limited
Gary Sugar, for David Sugar, et al
D.R. Rothwell, for RMG Mortgage/MCAP Financial Corporation
Harry Fogul, for Regional Financial
Robin Dodokin, for Empire Life Insurance Co.
Beverly Jusko, M.R. Kestenberg, for TD Bank Canada Trust
Roger Jaipargas, for Faithlife Financial
R.B. Bissell, for Vector Financial Services Limited
Jeffrey Larry, for First Source Mortgage Corporation
Douglas Langley, for Virgin Venture Capital Corporation
David Mende, for Addenda Capital Inc.
J. Dietrich, W. Rabinovitch, for A. Farber & Partners Inc.
M. Church, for SEIU (Union)
HEARD: October 11, 15, 17 and 18, 2012
BEFORE: C. CAMPBELL J.
REASONS FOR DECISION
Reasons for Decision
1The applicants seeking an Initial Order under the Companies Creditors Arrangement Act are a group of companies owned and controlled by or through the main holding company Dondeb Inc. The proposed relief would include a stay of proceedings in respect of the various companies which own and or operate businesses and real property in Ontario.
2The application is vigorously opposed by numerous secured creditors which have mortgage or other security on property beneficially owned by one or more of the companies in the Dondeb "group".
3The applicants seek the protection of the CCAA to enable an orderly liquidation of the assets and property of the various companies to enable what is asserted to be the remaining equity after sale and expenses to accrue to the benefit of the Dondeb Group.
4It is urged that the flexible mechanism of the CCAA is appropriate as there are common expenses across some of the companies', common security across others and that any order in liquidation would prevent the incurrence of added cost should individual properties and companies placed in liquidation with the loss of remaining equity.
5The applications propose a Debtor in Possession (DIP) financing and administrative charge to secure the fees of professionals and expenses associated with CCAA administration. The application is opposed by approximately 75% in value of the secured creditors.
6The basis of the opposition can be summarized as follows:
i) That in many instances the properties over which security is held is sufficiently discrete with specific remedies including sale being more appropriate than the "enterprise" approach posed by the applicants.
ii) That the proposed DIP/financial and administration changes are an unwarranted burden to the equity of specific properties are evidence of the inappropriate application of the CCAA.
iii) That in the circumstances individual receivership orders for many of the properties is a more appropriate remedy where the creditors and not the debtor would have control of the process.
iv) That the creditors have lost confidence in the Dondeb family owners of the Dondeb group for a variety of reasons including for breach of promise and representation.
v) That it is now evident that the applicants will be unable to propose a realistic plan that is capable of being accepted by creditors given a difference in position with respect to value of various properties.
7Those who support the applicants in the main wish to see those businesses that are operating on some of the properties such as in one instance, a school, and others like retirement homes continue in a way that may not be possible in a bankruptcy.
8During the course of the submissions on the first return date an alternative was proposed by a number of secured creditors, namely a joint or consolidated receivership of the various entities to maximizing creditor control of the process and ensure that costs of administration be allocated to each individual property and company.
9The application was adjourned to be returnable October 15, 2012 to allow both the applicants and the opposing creditors to consider their positions hopefully achieve some compromise. In the meantime 4 notices of intention under the BIA were stayed.
10The return of the application on October 15, 2012 did produce some modification of position on both sides but not sufficient to permit a CCAA order to be agreed to.
11The applicants revised the proposed form of Initial Order to allow for segregation of accounts on the individual properties an entitlement.
12The rationale of the applicants for the original Initial Order sought was that if liquidated or otherwise operated in an orderly way by the debtor and a "super" monitor, greater value could be achieved than the secured debt owing in respect to at least a number of the properties which could be available (a) to other creditors in respect of which guarantees or multiple property security could enhance recovery and or (b) the equity holders.
13The second major reason advanced by a significant number of creditors appearing through counsel was that they no longer had any confidence in Mr. Dandy, the principal of Dondeb Inc. Significant examples of alleged misleading supported the positions taken.
Analysis
14I accept the general propositions of law advanced on behalf of the applicants that pursuant to s.11.02 of the CCAA the court has wide discretion "on any terms it may impose" to make an Initial Order provided the stay does not exceed 30 days [see Nortel Networks Corporation (Re) 2009, 39492 (ONSC) at para 35 and Lehndorff General Partners Ltd. (Re) (1993), 17 CBR (3d) 24 (Ont.Gen.Div. Commercial) CF 33.
15The more recent decision of the Supreme Court of Canada in Century Services Inc. v. Canada (Attorney General), (2010), (S.C.C.) 60 at para 15 confirms the breadth and flexibility of the CCAA to not only preserve and allow for restructuring of the business as a going concern but also to permit a sale process or orderly liquidation to achieve maximum value and achieve the highest price for the benefit of all stakeholders. See also Timminco Limited (Re) (2012), ONSC 506 at para 49-50 (leave to appeal denied 2012 ONCA 552).
16I also accept the general proposition that given the flexibility inherent in the CCAA process and the discretion available that that an Initial Order may be made in the situation of "enterprise" insolvency where as a result of a liquidation crisis not all of the individual entities comprising the "enterprise" may be themselves insolvent but a number are and to propose of the restructuring is to restore financial health or maximize benefit to all stakeholders by permitting further financing. Such process can include liquidation. See First Leaside Wealth Management (Re) (2012) (ONSC) 1299 and also Edgeworth Properties Inc. (Re) CV-11-9409-CL [Commercial List].
17I also accept that while each situation must be looked at on its individual facts the court should not easily conclude that a plan is likely to fail. See Azure Dynamics Corp. (Re) (2012), (BCSC) 781 at paras 7-10.
18In Cliffs Over Maple Bay Investments, Ltd. v. Fisgard Capital Corp. 2008 Carswell BC 1758 (BCCA), the British Columbia Court of Appeal overturned the decision of the chambers' judge extending a stay of proceedings and authorizing DIP financing under the CCAA in the case of a debtor company in the business of land development because:
Although the CCAA can apply to companies whose sole business is a single land development as long as the requirements set out in the CCAA are met, it may be that, in view of the nature of its business and financing arrangements, such companies would have difficulty proposing an arrangement or compromise that was more advantageous than the remedies available to its creditors. The priorities of the security against the land development are often straightforward, and there may be little incentive for the creditors having senior priority to agree to an arrangement or compromise that involves money being paid to more junior creditors before the senior creditors are paid in full. If the developer is insolvent and not able to complete the development without further funding, the secured creditors may feel that they will be in a better position by exerting their remedies rather than by letting the developer remain in control of the failed development while attempting to rescue it by means of obtaining refinancing, capital injection by a new partner or DIP financing.
19Similarly, in Octagon Properties Group Ltd. 2009 Carswell Alta 1325 (Q.B.) paragraph 17, Kent, J. made the following comments:
This is not a case where it is appropriate to grant relief under the CCAA. First, I accept the position of the majority of first mortgagees who say that it is highly unlikely that any compromise or arrangement proposed by Octagon would be acceptable to them. That position makes sense given the fact that if they are permitted to proceed with foreclosure procedures and taking into account the current estimates of value, for most mortgagees on most of their properties they will emerge reasonably unscathed. There is no incentive for them to agree to a compromise. On the other hand if I granted CCAA relief, it would be these same mortgagees who would be paying the cost to permit Octagon to buy some time. Second, there is no other reason for CCAA relief such as the existence of a large number of employees or significant unsecured debt in relation to the secured debt. I balance those reasons against the fact that even if the first mortgagees commence or continue in their foreclosure proceedings that process is also supervised by the court and to the extent that Octagon has reasonable arguments to obtain relief under the foreclosure process, it will likely obtain that relief.
20A similar result occurred in Shire International Real Estate Investments Ltd. (2010) CarswellAlta 234 even after an initial order had been granted.
21In Edgeworth, dealing with the specifics of that case I noted:
Were it not for the numerous individual investors (UDIs, MICs) and others who claim to have any interest in various of the lands as opposed to being general creditors of the Edgeworth companies, I doubt I could have been persuaded to grant the Initial CCAA Order.
Disposition
22At the conclusion of oral submissions which followed on a hearing of the application which commenced on Friday October 11, 2012 continued on October 15 with additional written material and concluded on Wednesday October 17, 2012 again with additional written material and oral submissions the following conclusions were reached.
(i) The application for an Initial Order under the CCAA based on the material filed be dismissed.
(ii) The issue of costs incurred by the proposed Monitor Farber and of counsel to the debtor be reserved for further consideration (if not resolved) basis on material to be provided to counsel for the creditors and their submissions.
(iii) The request for a more limited CCAA Initial Order which like the Original Application is opposed by a significant body of creditors is also rejected.
(iv) A Global Receivership Order which is supported by most of the creditors appearing to oppose the application and which has the support of Farber which will become Receiver of those companies and properties covered by the application will issue in a format to be approved by counsel and the court.
23For ease of administration the Global Receivership Order will issue in Court File No. CV-12-9794-CL and make reference to the various companies and properties to be covered by the Order.
24In order to further facilitate administration the following proceedings, each being Notices of Intention to make a proposal
Dondeb Inc. 31-1664344
Ace Sel/Storage & Business Centre 31-1664774
1711060 Ontario Ltd. 31-1664775
2338067 Ontario Ltd. 31-1664772
King City Holdings Ltd. 31-1671612
1182689 Ontario Inc. 31-1671611
2198392 Ontario Inc. 31-1673260
hereby stayed and suspended pending further order of the court.
25The request for an Initial Order under the CCAA was dismissed for the simple reason that I was not satisfied that a successful plan could be developed that would receive approval in any meaningful fashion from the creditors. To a large extent, Mr. Dandy is the author of his own misfortune not just for the liquidity crisis in the first place but also for a failure to engage with creditors as a whole at an early date.
26In his last affidavit filed Mr. Dandy explained why certain properties were transferred into individual corporations to allow additional financing that would permit the new creditors access to those properties in the event of default. To a certain extent this was perceived by creditors as "robbing Peter to pay Paul" and led to the distrust and lack of confidence the vast majority of creditors exhibit. Had there been full and timely communication both the creditors and the court may have concluded that a CCAA plan could be developed.
27Under the proposed Initial Order the fees of the proposed monitor and of counsel to the debtor were an issue as well as leaving the debtor in possession with the cost that would entail.
28Counsel for each of the various creditors represented urged that their client's individual property should not be burdened with administrative expenses and professional fees not associated with that property.
29Counsel for the debtor advised that to the extent possible his client and the monitor would keep individual accounts. This proposal did not appease the opposing creditors who did agree that their clients could accept what was described as a "global" receiver and that the Farber firm would be acceptable as long as the receiver's charge was allocated on an individual property basis. In other words, the opposing creditors are prepared to accept the work of the professionals of the receiver but not fund the debtor or its counsel.
30The issue of the fees of Farber incurred todate in respect of preparation of the CCAA application was agreed between the opposing creditors, Farber and its counsel and are not an issue. Counsel for the debtor requested that the court consider a request for fees and costs on the part of the debtor. In order to give an opportunity for the parties to consider the details of such request and possible resolution the issue was deferred to a later date.
31Following further submissions on behalf of the debtor I advised the parties that in my view the conditions necessary for approval of an Initial CCAA Order were not met but that a comprehensive Receivership Order should achieve an orderly liquidation of most of the properties and protect the revenue from the operating properties with the hope of potential of some recovery of the debtor's equity.
32Counsel are to be commended for the effort and success in reaching agreement on the form of order acceptable to the court.
33The CCAA is a flexible instrument, which with judicial discretion, is capable of permitting restructuring, including in appropriate situations, liquidation.
34In my view the use of the CCAA for the purpose of liquidation must be used with caution when liquidation is the end goal, particularly when there are alternatives such as an overall less costly receivership that can accomplish the same overall goal.
C. CAMPBELL J.
Released: November 22, 2012
Schedule "A"
Schedule "A"
- Dondeb Inc.
- Ace Self Storage and Business Centre Inc.
- 1182689 Ontario Inc.
- King City Holdings Inc.
- 1267818 Ontario Ltd.
- 1281515 Ontario Inc.
- 1711060 Ontario Ltd.
- 2009031 Ontario Inc.
- 2198392 Ontario Ltd.
- 2338067 Ontario Inc.
- Briarbrook Apartments Inc.
- Guelph Financial Corporation
COURT FILE NO.: CV-12-00009865-00CL
DATE: 20121122
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL)
BETWEEN:
IN THE MATER OF THE COMPANIES CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED
- AND -
IN THE MATTER OF A PROPOSED PLAN OF COMPROMISE OR ARRANGEMENT WITH RESPECT TO DONDEB INC. and the ADDITIONAL APPLICANTS LISTED ON SCHEDULE "A" HERETO (collectively, the "APPLICANTS")
Applicants
REASONS FOR DECISION
C. CAMPBELL J.
Released: November 22, 2012