SUPERIOR COURT OF JUSTICE – ONTARIO

(COMMERCIAL LIST)

COURT FILE NO.: CV-12-9919-00CL
DATE: 20130116

RE: CASCADES FINE PAPERS INC., Plaintiff

AND:

SUPERIOR FINE PAPERS INC., Defendant

AND:

DELOITTE & TOUCHE INC., Third Party

BEFORE: MORAWETZ J.

COUNSEL:
Norman Silver, for the Defendant, Superior Fine Papers Inc.

D. Robb English, for Deloitte & Touche Inc., in its capacity as Receiver of Thunder Bay Fine Papers Inc.

Lana Finney, for the Plaintiff, Cascades Fine Papers Inc.

HEARD: NOVEMBER 13 AND DECEMBER 11, 2012

ENDORSEMENT

[1] Deloitte & Touche Inc., in its capacity as court-appointed interim receiver and receiver (the “Receiver”) of Thunder Bay Fine Papers Inc. (“TBFP”) brought this motion to dismiss or permanently stay the Third Party Claim commenced by Superior Fine Papers Inc. (“Superior”) against Deloitte & Touche Inc. (“Deloitte”).

[2] Superior brought a cross-motion requesting leave to commence, continue and approve the commencement of the Third Party Claim.

[3] The motion and the cross-motion are clearly related. It seems to me logical to first consider the Superior cross-motion, as the outcome of the cross-motion impacts on the Receiver’s motion.

[4] Both the order appointing the Receiver and section 215 of the Bankruptcy and Insolvency Act (“BIA”) provide that no action lies against the Receiver except with leave of the court.

[5] The test for leave was set out by Karakatsanis J. (as she then was) in 1416088 Ontario Ltd., (c.o.b. Danbury Industrial) v. Deloitte & Touche [2010] O.J. No. 626 at para. 2:

[2] The threshold for granting leave is not a high one and is designed to protect the receiver or trustee only against frivolous or vexatious actions, or actions which have no basis in fact. The test is well settled. The action must not be frivolous or vexatious. The evidence filed in support of the motion, including the intended action as pleaded, must disclose a cause of action against the trustee and supply facts to support the claim. The Court is not required to make a final assessment of the merits of the claim; leave should be granted if the evidence filed on the motion is sufficient to establish there is a factual basis for the proposed claim. GMAC Commercial Credit Corp. – Canada v. T.C.T. Logistics Inc. 2006 SCC 35, [2006] S.C.J. No. 36 at paras. 55-61; Mancini (Trustee of) v. Falconi, [1993] O.J. No. 146 (C.A.).

[6] The Third Party Claim is based on allegations that the actions of Deloitte amount to wilful negligence and misrepresentation which gives rise to a claim in gross negligence and intentional misrepresentation.

FACTUAL BACKGROUND

[7] In December 2007, TBFP acquired a mill property in Thunder Bay, Ontario (the “Property”) from Cascades Fine Papers Inc. (“Cascades”) As part of the transaction, Cascades granted an indemnity in favour of TBFP with respect to certain environmental liabilities associated with the Property (the “Indemnity”).

[8] On July 10, 2008, TBFP entered into an agreement with Cascades whereby it accepted $500,000 and in return would “relieve Cascades from any further obligations monetary or otherwise relating to the dredging of the lagoon as set out in the Agreement” (the “Agreement”).

[9] On October 29, 2008, Deloitte was appointed Receiver.

[10] On November 10, 2008, the Receiver distributed a Sales Information Package to potential purchasers of the assets of TBFP.

[11] On December 11, 2008, the Receiver informed Cascades about its appointment and requested from Cascades a summary of its plans to complete its responsibilities under the Indemnity. There was no specific reference in this communication to the dredging of the lagoon.

[12] On January 12, 2009, Cascades informed the Receiver of the Agreement.

[13] On February 4, 2009, the Receiver entered into an Agreement of Purchase and Sale (the “Purchase Agreement”) with Superior that included clause 2.01(3) “No Assumed Liabilities”; clause 3.03(1) “As is Where Is”; and clause 6.05 (i) Vendor’s Closing Documents, which read:

2.01 Assets to be Sold and Purchased

(3) No Assumed Liabilities. In connection with the transaction contemplated by this Agreement, the Purchaser shall not assume, and shall not be liable for, any liabilities or obligations whatsoever of either of the Vendor or TBFP, including without limitation, relating in any way to the removal from the TBFP Premises and disposal of the Stuart Hunt Assets, any accounts payable, accrued liabilities, employee-related liabilities, environmental liability, and any other liabilities such as government income, employer, withholding or property taxes, any product liability or warranties, any customer charge backs and any and all costs associated therewith and any other similar or contingent liabilities of either of the Vendor or TBFP.

3.03 “As Is, Where Is”

(1) Notwithstanding any other provision of this Agreement, the Purchaser acknowledges and agrees that it is purchasing the Purchased Assets on an “as is, where is” basis and on the basis that the Purchaser has inspected or will have the opportunity to inspect the Purchased Assets and will accept the same at the Time of Closing in their then current state, condition and location and subject to all encumbrances set out in Schedule “E” attached hereto (the “Permitted Encumbrances”). Except as otherwise expressly provided in this Agreement, no representation, warranty or condition whether statutory (including under the Sale of Goods Act (Ontario), the International Sale of Goods Contracts Convention Act (Canada) and the International Sale of Goods Act (Ontario) or any international equivalent act which may be applicable to the subject matter pursuant to the provisions of this Agreement, including the United Nations Convention on Contracts for the International Sale of Goods), expressed or implied, oral or written, legal, equitable, conventional, collateral or otherwise has been or will be given by the Vendor as to title, outstanding liens or encumbrances, description, fitness for purpose, merchantability, quantity, condition, quality, suitability, durability, assignability, or marketability thereof or any other matter or thing whatsoever, and all of the same are expressly excluded. The Purchaser acknowledges and agrees that it has inspected or will have the opportunity to inspect the Purchased Assets pursuant to this Agreement. The description of the Purchased Assets contained herein (including in the Schedules hereto) is for the purpose of identification only and the inclusion of any item in the description of the Purchased Assets does not confirm the existence of any such items or that such item is owned by the Vendor.

6.05 Vendor’s Closing Deliveries

(i) such deeds, documents of title, conveyances, transfers, assignments, indentures and instruments necessary or desirable in the opinion of the parties hereto and their respective counsel, acting reasonably, to effect the assignment, transfer and sale of the Purchased Assets to the Purchaser and such other documents, instruments or indemnities as contemplated or required to be delivered by the Vendor pursuant to this Agreement.

[14] On February 9, 2009, a Vesting Order was granted which released and/or discharged the Receiver from any and all obligations and liabilities save and except for those arising pursuant to the Purchase Agreement.

[15] On March 25, 2009, the Receiver obtained a discharge for all matters with respect to the receivership, except as limited by the Vesting Order.

[16] On July 20, 2011, Cascades issued a Statement of Claim against Superior for damages arising from costs related to environmental issues.

[17] On May 25, 2012, Superior filed a Statement of Defence to the Cascades’ claim and on June 4, 2012, issued the Third Party Claim against Deloitte asking for payment to Superior of amounts which Superior may be obliged to pay to others.

POSITIONS OF THE PARTIES

[18] Superior takes the position that, pursuant to the terms of the Purchase Agreement, Superior, as purchaser, was to assume no liabilities and/or obligations, including environmental liability.

[19] Superior takes the position that any possibility of Superior being liable for environmental liabilities could only arise as a result of a wilful misrepresentation by the Receiver.

[20] Further, the Purchase Agreement indicated that the Vendor would deliver to Superior all legal, valid and binding obligations of the vendor enforceable and in accordance with the terms of the Purchase Agreement. Superior takes the position that the validity and enforceability of the Cascades’ environmental indemnity included in the Purchase Agreement is seriously questionable, which amounts to a wilful misrepresentation of facts by the Receiver.

[21] Superior also relies on the order which appointed the Receiver which provides that “the Receiver shall incur no liability or obligation as a result of its appointment for the carrying out of the provisions of the [the said] order, save and except for any gross negligence or wilful misconduct on its part”.

[22] Counsel to Superior submits that Superior relies on documents where it can be inferred that the Receiver:

(i) was aware that the Indemnity was questionable and/or unenforceable;

(ii) did not verify any information included in the Sales Information Package;

(iii) did not initiate any action to deliver an environmentally clean site to Superior as agreed in the Purchase Agreement; and

(iv) did not initiate any action against Cascades to enforce the Indemnity.

[23] Counsel also submits that the disclaimer statements in the Sales Information Package and the Purchase Agreement do not absolve the Receiver of its wilful negligence and misrepresentation and that the low threshold for claiming gross negligence and intentional misrepresentation has been met.

[24] Conversely, counsel to the Receiver submits that the Third Party Claim is fundamentally flawed such that leave should not be granted and the Third Party Claim should be dismissed.

[25] Some of the reasons supporting this position are as follows:

(a) the Sales Information Package which referenced the indemnification exempted out the current cost of dredging the lagoon;

(b) the Sales Information Package clearly provided that the Receiver was making no express or implied representation or warranty with respect to the accuracy or completeness of the information contained in the Sales Information Package;

(c) each party submitting an offer acknowledged and agreed that the Receiver had not performed and was not required to perform any inspection of the assets;

(d) the sale of the assets was on a “as is, where is basis”;

(e) the Receiver made no representations, warranties, terms, conditions, with respect to the title, merchantability, condition, description, fitness for purpose, quality, quantity, compliance with environmental law or any other thing affecting any of the assets;

(f) in all matters pertaining to the sales process, Deloitte was acting in its capacity as Receiver.

[26] Counsel to the Receiver also points out that the purchase price payable by Superior for the assets of Thunder Bay was $2.5 million of which $1.7 million was payable pursuant to a vendor-take-back mortgage that Superior has never paid the vendor-take-back mortgage and is in default of that obligation.

[27] Further, the Agreement released Cascades from obligations “relating to the dredging of the lagoon” while the Sales Information Package prepared by the Receiver refers to an indemnity for Cascades “except for the current cost of dredging the lagoon”, which, counsel submits, does not on its face appear to be inconsistent with the terms of the release.

[28] Counsel to the Receiver submits that there is no factual basis for the Third Party Claim in that the Purchase Agreement:

(a) contained no indemnity from the Receiver for environmental matters;

(b) specified that the assets were purchased on an “as is where is” basis;

(c) expressly provided that the Purchase Agreement was the entire agreement and that there were no collateral warranties or representations.

[29] It was also submitted by the Receiver that the proposed action is frivolous in that:

(a) it was clearly commenced beyond the applicable limitation period;

(b) Superior is clearly insolvent, in default of its obligations to the Receiver and unable to sustain or secure the costs of proceeding; and

(c) the proceeding seems to have been commenced by a person having absolutely no involvement, with no information relating to, the matters at issue.

[30] Counsel to the Receiver also challenged the evidence filed by Superior on the basis of a lack of knowledge of the affiant, Mr. Desmond Joseph.

DISCUSSION

[31] In my view, there are certain challenges associated with the Third Party Claim. They have been summarized in the submissions of counsel to the Receiver.

[32] However, the controlling authority makes it clear that the court is not required to make a final assessment of the merits of the claim and that leave should be granted if the evidence filed in the motion is sufficient to establish a factual basis for the proposed claim.

[33] Turning first to the challenge of lack of knowledge on the part of Mr. Joseph, this argument was addressed by counsel to Superior, who submits that the cross-motion is not based on the affiant’s knowledge, but rather on documentary facts evidenced in the Purchase Agreement and other contractual documents. For the purposes of this cross-motion, I accept this submission.

[34] In reviewing the Third Party Claim and the contractual documents, it appears that there may have been some confusion on the part of the Receiver at the critical time period when the assets were being offered for sale, up to the time of the execution of the Purchase Agreement. There does not appear to be clear communication to interested parties with respect to any limitations surrounding the Indemnity. Further, the Purchase Agreement contains Clause 2.01(3) “No Assumed Liabilities” and Clause 6.05(i) “Vendor’s Closing Documents”. It seems to me that these provisions do not necessarily absolve the Receiver from any and all liability that could arise if the allegations are proved.

[35] Further, the Vesting Order does not operate so as to release the Receiver for liability arising from the Purchase Agreement.

[36] With respect to the argument that the Third Party Claim is affected by the Limitations Act, it appears that an argument could be made that the claim may not have been discovered until the Cascades’ claim was issued in 2011. If so, the Third Party claim may not be affected by the Limitations Act.

DISPOSITION

[37] In my view, taking into consideration the low threshold mandated in the governing case law, the allegations raised by Superior could provide the foundation for the Third Party Claim. As such, leave must be granted to issue the Third Party Claim.

[38] However, it seems clear that the Third Party Claim raises allegations against the Receiver and not Deloitte. As such, the leave to proceed is granted with respect to a claim against the Receiver, as opposed to Deloitte.

[39] The Third Party Claim was issued without leave on June 4, 2012. It is well established that a claim filed without seeking leave under section 215 of the BIA is an irregularity and not a nullity; RoyNat Inc. v. Omni Drilling Rig Partnership No. 1 (Receiver of), 1988 3499 (AB KB), [1988] 6 W.W.R. 156 (Alta. Q.B.) at paras. 18 and 19. Under the circumstances, it seems to me to be appropriate to grant leave to issue the Third Party Claim nunc pro tunc; subject to amending the name of the Third Party from Deloitte to the Receiver.

[40] The cross-motion of Superior is granted in these proceedings. This endorsement also applies, as necessary, to the Receivership proceedings in Court File No. 08-CL-7819

[41] Superior has been successful in these motions and shall have its costs, as reviewed at the conclusion of argument, in the amount of $10,000 inclusive of disbursements and HST.

[42] As a consequence of the disposition of the cross-motion, the motion of the Receiver is dismissed.

MORAWETZ J.

Date: January 16, 2013