CITATION: Comstock Canada Ltd. (Re), 2013 ONSC 6043

COURT FILE NO.: CV-13-10181-00CL

DATE: 20130926

SUPERIOR COURT OF JUSTICE – ONTARIO

(COMMERCIAL LIST)

RE: IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED

AND:

IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF COMSTOCK CANADA LTD., CCL EQUITIES INC., AND CCL REALTY INC., Applicant

BEFORE: MORAWETZ J.

COUNSEL: Alex MacFarlane and Frank Lamie, for Comstock Canada Ltd., CCL Equities Inc., and CCL Realty Inc., Applicant

Aubrey Kauffman, for Honeywell Limited

Robin Schwill, for PricewaterhouseCoopers Inc., in its capacity as Monitor

Harvey Chaiton, for the Bank of Montreal

M. Kanter, for CNRL

Karen Groulx, for Cofely Adelt Ltd.

Michael McGraw, for EllisDon Corporation

HEARD: SEPTEMBER 16, 2013

ENDORSEMENT

[1] Honeywell Limited (“Honeywell”) brings this motion for:

(i) an order directing Comstock Canada Ltd. (“Comstock”) to disclaim the subcontract between Comstock and Honeywell made on June 1, 2010 (the “Honeywell Subcontract”) with respect to the Sick Kids Research Tower Project (the “Project”);

(ii) or, in the alternative, an order lifting the stay of proceedings contained in paragraphs 22, 23 and 24 of the Amended and Restated Initial Order dated July 9, 2013 in order to permit Honeywell to terminate the Honeywell Subcontract, in accordance with its terms based on the default of Comstock.

[2] Comstock has failed to pay Honeywell monthly progress draws in accordance with the Honeywell Subcontract since November 2012. Honeywell contends that EllisDon, the contractor, has paid approximately $831,000 to Comstock on account of Honeywell’s monthly progress draws for the period of November 2012 to March 2013. Honeywell alleges that these amounts have not been paid down to Honeywell.

[3] On June 21, 2013, Honeywell gave notice to Comstock of its breach of the Honeywell Subcontract. The cure of the breach was requested by June 27, 2011.

[4] On June 28, 2013, Comstock filed a Notice of Intention to make a proposal pursuant to the provisions of the Bankruptcy and Insolvency Act (Canada) (“BIA”).

[5] On July 9, 2013, the BIA proceedings were continued under the provisions of the Companies’ Creditors Arrangement Act (“CCAA”) pursuant to an Initial Order dated July 9, 2013. On July 26, 2013 the Initial Order was subsequently amended pursuant to an Amended and Restated Initial Order.

[6] Paragraphs 22, 23 and 24 of the Amended and Restated Initial Order contain broad stays of proceedings which affect Honeywell.

[7] As of August 16, 2013, Comstock alleges that the amount owing by EllisDon to Comstock in respect of the Project is approximately $9.6 million.

[8] Comstock further alleges that EllisDon has (a) refused to make payment to Comstock, its subtrades, and suppliers for the supply of materials, goods and services pursuant to the subcontract agreement dated June 4, 2010 made between Comstock and EllisDon in respect of the Project; and (b) without Comstock’s authorization and consent, transferred to another contractor for completion, specific items which were to be performed by Comstock on the Project.

[9] Comstock further alleges that on account of EllisDon’s refusal to honour its agreement with Comstock, Comstock was rendered unable to continue with its performance in respect of the Project.

[10] Honeywell takes the position that contracts for abandoned projects should be disclaimed forthwith. In this case, as a result of Comstock’s failure to provide a disclaimer, Honeywell submits that it is being prejudiced and that it should be put in a position where it can mitigate its damages by entering into a new contract for the completion of the scope of work under the Honeywell Subcontract. Honeywell does not want to be involved in two contracts at the same time.

[11] Comstock takes the position that it has not confirmed that it would disclaim the Honeywell Subcontract, nor could it, as neither the Monitor nor BMO, the major secured creditor and DIP Lender has approved such action by Comstock.

[12] Comstock submits that its estate, stakeholders, creditors, and BMO would suffer substantial prejudice if Honeywell were permitted to cause Comstock to disclaim or it were permitted to terminate the Honeywell Subcontract.

[13] Comstock further submits that its primary concern is that the warranty and indemnity obligations of Honeywell under the Honeywell Subcontract remain in place. This could possibly give Comstock and its creditors recourse against Honeywell for any claims that EllisDon is likely to advance against Comstock on the Project for which Honeywell could be liable under the Honeywell Subcontract with Comstock. This would include any claim for deficiencies. Consequently, Comstock submits that in the event that it is unable to advance a claim under the warranty and indemnification provisions of the Honeywell Subcontract, Comstock and its creditors will suffer substantial prejudice.

[14] Comstock takes the position that it has no issue with Honeywell entering into a new contract with the replacement contractor to Comstock in respect of the Project.

[15] The Monitor and BMO support Comstock’s position.

[16] This motion underscores the inherent difficulty which surrounds the attempted reorganization of certain entities, in particular, real estate companies and construction companies. By definition real estate companies and construction companies operate on a project by project basis. In many cases, each project is the subject of specific-purpose financing. In the case of real estate companies, secured creditors vary on a project-by-project basis. With respect to construction companies, creditors, including construction lien trust claimants, vary on a project-by-project basis and the assets or trust funds will also vary on a project-by-project basis. The legal rights of these creditors vary to such a degree that quite often they cannot be grouped in one class. The community of interest is often lacking, resulting in fragmented interests.

[17] The purpose of any stay of proceedings issued pursuant to section 11 of the CCAA is to maintain the status quo for a period of time so that proceedings can be taken under the CCAA for the wellbeing of the debtor company and of the creditors. See Re Northland Properties Limited (1988), 73 C.B.R. (NS) 141 (B.C.S.C.). The stay order is intended to prevent any creditor from obtaining an advantage over other creditors while the company is attempting to reorganize its affairs.

[18] Comstock has acknowledged that it is unable to continue with its performance in respect of the Project. It has also acknowledged that it has no issue with Honeywell entering into a new contract with the replacement contractor to Comstock in respect of the Project. In short, the Project will not form part of a restructured or reorganized Comstock. Comstock has acknowledged that a replacement contractor will be involved.

[19] With Comstock no longer being actively involved with the Project, many aspects of the CCAA proceedings will no longer involve the Project. The Sale and Investor Solicitation Process (the “SISP”), is intended to provide a platform by which the Monitor, in consultation with Comstock, is authorized to (i) market the assets of the Comstock Group for sale, and/or (ii) attract new investors. In these circumstances, it is apparent that the Project is not an asset that will form part of the SISP.

[20] Further, the Lien Regularization Order which is intended to re-establish the cash flow on Comstock projects is no longer relevant to the Project.

[21] Consequently, it seems to me that there is no principled basis on which a stay of proceedings, insofar as it affects Honeywell, should be maintained. Put another way, maintaining the stay could be prejudicial to Honeywell. At this time, Honeywell should not be precluded from considering its options. Insofar as the Project is concerned, there is no reorganization or liquidation process. The only outstanding issue is the quantum of Honeywell’s claims as against Comstock and Comstock’s claims as against Honeywell. These issues do not have to be resolved at this time. Rather, they can be resolved in the claims process.

[22] With respect to the specific relief sought by Honeywell, I accept the submission of Comstock to the effect that where the debtor company does not wish to disclaim a contract, there is no mechanism for such a disclaimer to be imposed upon it. Section 32 of the CCAA provides that the company may not give such notice unless the monitor approves the proposed disclaimer. In this case, the Monitor does not approve the disclaimer of the Honeywell Subcontract.

[23] With respect to the alternative relief, in my view, there is no principled basis upon which the CCAA stay of proceedings should continue to affect Honeywell. Comstock has acknowledged that it is unable to continue with its performance of the Project. Honeywell has indicated that it wishes to enter into a new contract for the completion of the scope of work under the Honeywell Subcontract.

[24] In view of the stated position of the parties, it seems to me to be appropriate to lift the stay of proceedings solely with respect to Honeywell. Honeywell is free to take actions it deems appropriate in the circumstances. However, I do not think it necessary or appropriate to give specific direction with respect to any purported termination of the Honeywell Subcontract.

[25] An order shall issue to give effect to the foregoing.

MORAWETZ J.

Date: September 26, 2013