SUPERIOR COURT OF JUSTICE - ONTARIO

COMMERCIAL LIST

COURT FILE NO.: CV-13-9991-00CL
DATE: 20130402

RE: BUSINESS DEVELOPMENT BANK OF CANADA, Applicant

A N D:

PINE TREE RESORTS INC. and 1212360 ONTARIO LIMITED, Respondents

BEFORE: MESBUR J.

COUNSEL:
George Benchetrit, for the Applicant

Milton Davis, for the Respondents

David Preger, for Romspen Investment Corporation

HEARD: March 27, 3013

E N D O R S E M E N T

The application:

[1] Business Development Bank of Canada (BDC) applies for the appointment of a Receiver over the assets of the respondents. The respondents own and operate the Delawana Inn in Honey Harbour Ontario. The Inn has experienced financial difficulties over the years, particularly since the economic downturn of 2008.

[2] BDC has lent the respondents just over $3.3 million advanced in two loans, the first for $3 million and the second for $325,000. The two loans are secured by first mortgages against the bulk of the properties forming the Inn’s premises. In addition, BDC holds additional security by way of general security agreements granted by each of the respondents over all of their assets. Mr. Fischtein, the principal of the respondents, has also provided his personal guarantee of 15% of the outstanding balance on the larger loan. Both the mortgages and the GSAs give the bank the right to appoint a receiver if the respondents default.

[3] The respondents’ ongoing financial difficulties resulted in their loans being transferred to the bank’s special accounts department in April of 2011. The respondents then failed to make the scheduled principal and interest payments due in July and August, 2011. They also failed to pay realty taxes. They were thus in default under their loan agreements and the mortgages.

[4] The bank demanded payment of the outstanding arrears in August 2011. The respondents failed to pay. In October of 2011, the bank demanded payment of the outstanding balances of the loan. The loan agreements and mortgages provide for acceleration of payment in the event of default. At the same time, the bank issued a notice of intention to enforce security (NITES) under s. 244 of the Bankruptcy and Insolvency Act.

[5] The respondents then asked BDC to postpone principal payments due under the loans, so they could put forward a turnaround proposal. The bank agreed, and the parties worked toward a forbearance agreement. They did not reach an agreement, but the respondents did pay all principal and interest arrears under the loans in January 2012.

[6] Under the loans, the respondents were required to make a large principal payment in July 2012. Just before the payment was due, the respondents advised BDC they would not make the payment. BDC then issued a demand for payment of the loan arrears.

[7] The respondents asked BDC to restructure the loan, since they were hoping to redevelop the Inn into a condominium/time-share resort.

[8] The respondents and BDC then entered into a letter agreement in September of 2012 amending the loan agreement. This amendment stretched principal payments, and the term of the loans, out to October of 2031. Even though the loan was restructured in this way, the respondents still did not pay. They requested further extensions.

[9] Finally, BDC reached the end of its patience. It issued a demand letter on November 23, 2012 declaring the balances of the loans were immediately due and payable. BDC also sent a NITES pursuant to the BIA.

[10] A few days later, BDC wrote the respondents advising that if and only if they paid all loan principal arrears together with all loan interest arrears and outstanding fees by January 7, 2013, BDC would withdraw the demand for payment and would then confirm that the repayment terms under the amendment letter would continue to apply.

[11] The respondents asked for more time, and sought an extension to January 31, 2013. BDC agreed to an extension to January 31 for principal payments, but only if the respondents paid the outstanding interest arrears, fees and legal fees by January 11, 2013.

[12] On January 11 the respondents advised BDC the money would not be available until the following week. BDC then requested the payment be received on January 16, 2013.

[13] January 16 came and went. The respondents never paid. In sum, they have paid nothing on account of the BDC loans since June of last year, a period of over nine months. As of January 31, 2013 the respondents owed BDC a total of $2,583,257.45 for principal, interest, additional interest, costs, disbursements and expenses, being the total amount of the debt secured under the mortgages and GSAs.

[14] There is no question the respondents are in default under the BDC mortgages and GSAs. Both the mortgages and the GSAs give BDC the right to appoint a receiver pursuant to its security. It could appoint a private receiver if it wished. Instead, BDC moves for a court appointed receiver to sell the security. BDC takes the position this is the most transparent, cost effective and sensible way to proceed. While it could have pursued power of sale proceedings under the terms of its mortgages, it views a receivership as a better, more just and convenient way to maximize value for all stakeholders.

[15] Both the respondents and second mortgagee, Romspen Investment Corporation oppose the application. Romspen holds the second mortgage on the property secured by BDC’s first mortgage. It also holds additional security on some of the respondents’ other properties. Romspen is owed about $4.3 million. The respondents are also in default under the Romspen mortgages. Romspen wishes to pay the current arrears under the BDC mortgages, along with arrears of taxes and costs, and then take control of the sale of the Inn under the notices of sale it has already delivered pursuant to its mortgages.

[16] Romspen takes the position that under s. 22 of the Mortgages Act[^1] it is entitled to put the BDC mortgages into good standing, and relieve against acceleration of the full amounts due under the mortgages. This is what it proposes to do, while pursuing its rights to sell the properties under the power of sale provisions of its own mortgages.

[17] Romspen says that under these circumstances it would not be just or convenient to appoint a receiver. It suggests that a receivership will be a more expensive and time consuming process than simply letting it put BDC’s mortgages into good standing and maintain them in good standing while it sells the properties.

[18] The respondents support Romspen’s position. They agree the Inn should be sold to satisfy the outstanding debts. Mr. Fischtein, the principal of the respondents, and guarantor, says he is at the greatest risk of loss, and has a particular interest in obtaining the highest and best price for all the properties as a whole. He says the entire property should be sold, not just the portion over which BDC holds security. He says with his many years of operating the Inn, he can assist in ensuring the sales process is operated effectively and efficiently. He goes even further and says that if Romspen sells the property (with his cooperation, presumably) he would have no objection to a Monitor, acceptable to both mortgagees, reporting to BDC on the progress of a sales process.

The law:

[19] BDC asks the court to appoint a receiver under both s. 101 of the Courts of Justice Act and s. 243(1) of the Bankruptcy and Insolvency Act. Both statutes provide the court may do so if it is “just or convenient”.

[20] In general the parties do not disagree on the appropriate legal principles to apply here. All agree that the overarching criterion in considering whether to appoint a receiver is whether it is “just and convenient” to do so.[^2]

[21] While appointing a receiver is generally viewed as an “extraordinary remedy”, it is less so when, as is the case here, a debtor has expressly agreed to the appointment of a receiver in the event of default.[^3]

[22] In assessing whether it is just and convenient to appoint a receiver, the question is whether it is more in the interests of all concerned to have the receiver appointed or not.[^4] In order to answer the question the court must consider all the circumstances of the case, particularly:

a) The effect on the parties of appointing the receiver. This includes potential costs and the likelihood of maximizing return on and preserving the subject property;

b) The parties’ conduct; and

c) The nature of the property and the rights and interests of all parties in relation to it.[^5]

[23] The Mortgages Act also has an impact on this case. Romspen wishes to avail itself of the provisions of section 22(1) of the Mortgages Act which says:

Despite any agreement to the contrary, where default has occurred in making any payment of principal or interest due under a mortgage or in the observance of any covenant in a mortgage and under the terms of the mortgage, by reason of such default, the whole principal and interest secured thereby has become due and payable,

a) At any time before sale under the mortgage; or

b) Before the commencement of an action for the enforcement of the rights of

the mortgagee or of any person claiming through or under the mortgagee, the mortgagor may perform such covenant or pay the amount due under the mortgage, exclusive of the money not payable by reason merely of lapse of time, and pay any expenses necessarily incurred by the mortgagee, and thereupon the mortgagor is relieved from the consequences of such default.

[24] Section 1 of the Mortgages Act defines “mortgagor” as including “any person deriving title under the original mortgagor or entitled to redeem a mortgage.” Thus Romspen, as second mortgagee is, by definition, a “mortgagor” entitled to the benefits of section 22(1).

[25] Simply put, Romspen says that since BDC has not brought an action to enforce its mortgage within the meaning of the Mortgages Act it has an unequivocal right to put the BDC mortgage into good standing under s. 22.

[26] It is against this legal framework I turn to the facts of the case to decide whether in these circumstances it would be just and equitable to appoint a receiver, or whether, if Romspen exercises its rights under s. 22 of the Mortgages Act, it would not be just and equitable to do so.

Discussion:

[27] What is unusual about this application is that all the interested parties before the court support an immediate sale of the property. Each, particularly Mr. Fischtein, has an interest in obtaining the highest and best price for the property. They disagree, however, on who should manage the process, and what the process should be.

[28] With that in mind, I will consider each party’s plan, and determine what would be most just and convenient in all the circumstances, having regard to the criteria set out above.

BDC’s plan

[29] BDC proposes to appoint Ernst & Young (E&Y) as receiver. The rates E&Y quotes for its services range from $200 or $225 per hour for support staff, to $350 per hour for managers, up to $475 per hour for the partner who will manage the file. BDC says E&Y would market the property itself, without using a real estate agent. The receiver does not propose to open and operate the Inn, but rather to attempt to sell it before it would otherwise open in June. Because BDC holds security over the real estate and the respondents’ personal property, all the Inn’s non-real estate assets could also be sold in the receivership.

[30] The respondents and Romspen suggest BDC’s plan is flawed because BDC does not hold mortgage security over the entire property and could therefore not sell it en bloc. BDC’s mortgage covers all but Royal Island (which Mr. Fischtein is already marketing separately as a residential family property), and three very small cottages. With the respondents’ consent, these properties could be included in a sale. Even without these properties, the receiver would still be able to sell what appears to be more than 90% of the Inn’s holdings.

[31] BDC also points out that a receivership would provide the added benefits of a stay of proceedings, as well a vesting order in favour of any purchaser. It also suggests this is a case where the court’s overall supervision of the process, coupled with the receiver’s obligations as the court’s officer, would be in the best interests of all stakeholders.

Romspen’s plan

[32] Romspen tells me that pursuant to s. 22 of the Mortgages Act, it will pay the principal arrears under the BDC mortgage forthwith, (i.e., within a day), and will bring all interest payments up to date, including interest on interest, together with BDC’s costs and expenses, and outstanding realty taxes. It undertakes to continue to make all payments of principal and interest due under the mortgage as amended by the September 2012 agreement between the respondents and BDC. It does not, however, propose to pay outstanding HST.

[33] Romspen says it will market the whole of the property quickly with a view to selling all of it, within a reasonable period of time. It is prepared to keep BDC apprised of its efforts on an ongoing basis. It also agrees that if I dismiss the receivership application, it could be without prejudice to BDC’s renewing the application at a later date.

[34] Romspen is quite candid that by using s. 22 of the Mortgages Act it can reap the benefit of the very favourable terms of the respondents’ mortgages with BDC, and particularly the terms of the September 2012 amending agreement. It says BDC will not be prejudiced, because it will have received exactly what it bargained for in its agreements with the respondents, particularly the letter agreement amending the mortgage terms in September of 2012.

[35] Romspen argues that under its plan, BDC will be in the same position it would have been had the respondents’ not defaulted. Under those circumstances, it argues it would not be just and convenient to appoint a receiver.

The respondents’ plan

[36] The respondents prefer the Romspen plan. That said, they acknowledge the Inn must be sold, and Mr. Fischtein says he is “prepared to cooperate with the secured lenders in having the Delawana marketed and sold in an orderly fashion, through the appointment of an agreed upon agent, and, if necessary, with the supervision of a monitor who is acceptable to both lenders.”[^6] He says he can assist in ensuring that the sale process is operated effectively and efficiently.

[37] From these statements I infer that Mr. Fischtein, and thus the respondents, would cooperate with either mortgagee on a sale, and would do his utmost to see that value is maximized.

The risks and benefits of the proposed plans.

[38] Everyone agrees the Inn must be sold. They simply disagree on how the sale should be accomplished.

[39] The respondents suggest that this is a case like Chung v. MTCC 1067[^7] where I denied a mortgagee’s application for the appointment of a receiver. In my view, this is not a case like Chung. There, the real estate was a simple parking garage, without cross collateralized debt from different creditors. There, unlike here, there was no specific provision for a receiver in any security document.

[40] The respondents argue that appointing a receiver now will affect the 165 reservations that have been made for the Inn this summer. They say this represents 830 room nights. Fifteen family reunions have been booked. The Inn provides 110 summer jobs, which the respondents say will be imperilled if a receiver is appointed.

[41] The respondents want the Inn to open in June, and be listed for sale without the “stigma” of a receivership. It seems to me that selling the property under power of sale is just as much of a stigma as having a receivership sale. If Romspen is candid in its stated intention to sell the property immediately, I fail to see how opening in June bears on the issue one way or the other. BDC suggests that since the Inn does not operate in the winter months, a receiver would be in a good position to conduct a quick sales process now that could result in a going concern sale. That outcome would provide the respondents’ existing employees with employment with the Inn’s purchaser in time for the 2013 season.[^8]

[42] If the property can be sold quickly, new owners may honour the reservations and take on the employees. If the property is put on the market now, but not sold quickly, those who have reservations can be advised so they can make other arrangements, since the receiver has no plans to open and operate the Inn this season.

[43] With a power of sale (Romspen’s plan), the properties will be sold. I am told there is sufficient equity to pay out BDC regardless of who sells it. The difficulty with Romspen’s plan, however, is that its interests may run contrary to those of BDC and other creditors and stakeholders. For example, a sale that other stakeholders might support could be unacceptable to Romspen for any number of reasons. The advantage of a receivership is that the process will be subject to the court’s supervision, coupled with the receiver’s obligations to act in the interests of all creditors and stakeholders.

[44] I must consider the interests of all stakeholders. Although Romspen’s plan could put the BDC mortgage into good standing, it does not remedy the default under the GSAs. For example, Romspen has no intention of paying the HST arrears. These alone come to about $250,000 for 2011 and 2012. The existence of those arrears constitutes a default under the GSA. The respondents are in default under the Romspen mortgages. That, too, constitutes default under the BDC GSAs.

[45] BDC points out that since Romspen holds security over more of the properties than does BDC, it is not unlikely that if Romspen sold the properties, there could be conflicts over allocation of the purchase price among the properties. BDC is not the only other creditor. There are third party equipment lessors, arrears of realty taxes, outstanding HST obligations, and the usual unsecured creditors. Mr. Fischtein himself, through companies he controls, also holds mortgages over all the properties. All have an interest in maximizing value, and having some input in the allocation of any global purchase price.

[46] I recognize that as a mortgagee, Romspen has an obligation in power of sale proceedings to sell at market value. I am not satisfied that that obligation alone is sufficient to protect the interests of all stakeholders.

[47] What about cost? Romspen and the respondents suggest that a receivership will be much more costly and cumbersome than a simple sale with an agent. They also say that only Romspen is in a position to sell all the land en bloc. I am not persuaded these considerations are sufficient to carry the day.

[48] I do not know how or when Romspen actually intends to market the Inn. I do not know how it will arrive at a listing price, nor do I know what rate of commission it will incur, or what the listing terms might be. I also have no idea of the likely time frame for soliciting offers. All I know is that Romspen intends to sell the property using a commercial agent, with whom I assume there would be the usual commission arrangement.

[49] Mr. Fischtein already has the island portion of the property, Royal Island, up for sale, along with a couple of the cottage properties. Royal Island is being marketed as a “family property”, rather than as part of the Inn. It is listed on MLS as a residential property with commission payable at 5%. Although I have no real indicator of value for the property covered by the BDC mortgage, its MPAC value is stated to be more than $4 million. If it sold at this price, a commission of $200,000 or more would likely be payable.

[50] When I look at Romspen’s plan as a whole, they would propose to incur immediate costs to put the BDC mortgage into good standing,[^9] and then spend another $200,000 on commission and other expenses. Their plan is hardly inexpensive.

[51] I am told the receiver would market the property itself, without the interposition of an agent. BDC’s counsel suggests that any marketing process would be court approved prior to the receiver embarking on it. In this way, the court could monitor the cost issue. The court would also have to approve any proposed sale, thus providing an open and transparent forum to protect the interests of all stakeholders.

[52] I find it interesting that Mr. Fischtein suggests the supervision of a monitor as an alternative to appointing a receiver. I do not see that as providing any cost savings. The advantage of a receiver, of course, is that the receiver is the court’s officer, with duties and obligations to both the court and to all the stakeholders. If stakeholders disagree about the appropriate marketing process, the court can determine what is in the interests of all of them. Similarly, if allocation issues arise concerning how sales proceeds should be allocated among assets, each with different security against them, this is something a receiver can explore, and on which it can make recommendations to the court. Ultimately, the court can decide the issue if necessary.

[53] Other advantages of a receiver’s sale include both a stay of proceedings, and the fact that any purchaser will obtain a vesting order, thus protecting it against any potential claims from other creditors. In a receivership, the receiver can also sell the other assets over which BDC holds security. This includes all the contents and equipment in the Inn.

[54] Courts have held that in circumstances where there was disagreement among stakeholders about how the property should be marketed, it was appropriate to appoint a receiver.[^10] The same concern arises here.

[55] BDC has the right under both its GSAs and mortgages to appoint a receiver. Even if Romspen were to invoke the provisions of s. 22 of the Mortgages Act the respondents would still be in default under the BDC GSAs. They are in arrears of HST, which Romspen does not propose to pay. They are also in default under the Romspen mortgage and Romspen is pursuing a power of sale. All of these constitute default under the BDC security. Under those circumstances, BDC is still contractually entitled to the appointment of a receiver.

[56] If I appoint a receiver, Romspen will not be put to the immediate expense of paying the arrears of principal, interest and other costs (as well as the ongoing obligations) under the BDC mortgages. As I see it, a receivership will benefit Romspen overall.

[57] A receivership is the best way to protect the interests of all stakeholders, with a view to maximizing value for all. I therefore exercise my discretion and grant the application to appoint a receiver.

[58] I note that the proposed receivership order has a borrowing power for the receiver of up to $250,000. First, I am not obliged to approve borrowings at that level, and second, I do not know what the receiver will really need in order to conduct its duties. I am not prepared to approve the borrowing provisions in the draft order BDC has provided. This receivership should be conducted efficiently and quickly. For that reason, I will reduce the receiver’s borrowing powers to $175,000 without further order. Given the receiver’s hourly rates for the partner, managers and support staff it would assign (none of which exceed $475 per hour), this amount should be ample. If it is not, the receiver can return to court to seek an increase. If it does, it will have to justify an increase to the court’s satisfaction.

[59] In that regard, if the receiver moves to increase the receiver’s borrowings, the court hearing the motion should be made aware that one of the reasons I have made the receivership order is because of the submissions BDC has made that the receiver can accomplish the sale quickly, efficiently, and without the need to incur the cost of commission that would be attendant to a listing arrangement for the properties.

Conclusion:

[60] The application is therefore granted, and a receivership order will issue in terms of the draft order submitted, with the exception of the amount of $250,000 referred to in paragraph 20 of the draft order. The figure of $250,000 will be replaced with the figure of $175,000.

[61] Given my disposition of the application, I assume there is no necessity to deal with any issue of costs, other than as set out in the draft receivership order. If I am incorrect, I invite counsel to provide me with brief written costs submissions (no more than 2 pages long), within two weeks of the release of these reasons, failing which there will be no further order as to costs.

MESBUR J.

Released: 20130402

[^1]: R.S.O.1990, c. M.40, as amended
[^2]: S. 101, Courts of Justice Act
[^3]: See, for example, United Savings Credit Union v. F&R Brokers Inc. (2003) 2003 BCSC 640, 15 B.C.L.R. (4th) 347 (B.C.S.C.); Chung v. MTCC 1067, 2011 ONSCC 3187 (S.C.J.)
[^4]: Bank of Nova Scotia v. Freure Village on Clair Creek, 1996 8258 (ON SC), 1996 CarswellOnt 2328, 40 C.B.R. (3d) 274 (S.C.J.)
[^5]: Bank of Montreal v. Carnival Leasing Limited, 2011 ONSC 1007
[^6]: Debtors’ factum at paragraph 32
[^7]: 2011 ONSC 3187 (S.C.J.)
[^8]: See paragraph 46 of the affidavit of Ruth Thomson, Senior Account Manager, Special Accounts, with BDC, sworn February 4, 2013, filed in support of the application
[^9]: Romspen has offered to pay $164,634.94 to BDC to put the mortgage into good standing. BDC takes the position that payment would not represent all the money BDC is owed.
[^10]: Bank of Nova Scotia v. Freure Village on Clair Creek, (1996), 1996 8258 (ON SC), 40 C.B.R. (3d) 274 (S.C.J.)