SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: Montrose Mortgage Corporation Ltd., Applicant

AND:

Kingsway Arms Ottawa Inc., 1168614 Ontario Limited, Kingsway Arms (Walden Village) Inc., Kingsway Arms (Carleton Place) Inc., Respondents

BEFORE: D. M. Brown J.

COUNSEL: J. Dietrich, for the Applicant

R. Jaipargas, for the proposed Receiver, Grant Thornton Limited

HEARD: November 5, 2013

REASONS FOR DECISION

I. Application for approval of a “pre-pack” credit bid sale in a proposed receivership

[1] Montrose Mortgage Corporation Ltd. applied for (i) an order appointing Grant Thornton Limited (“GTL”) as receiver and manager of all assets, undertakings and properties of Kingsway Arms Ottawa Inc., 1168614 Ontario Limited, Kingsway Arms (Walden Village) Inc. and Kingsway Arms (Carleton Place) Inc. (collectively the “Debtors”), as well as (ii) an order approving a purchase and sale agreement between the Receiver and 2391766 Ontario Inc. dated October 16, 2013, together with a related vesting order. The proposed sale essentially involved an indirect credit bid by the debtors’ main secured creditor, Montrose, which was acting on the loans to the Debtors as agent for GMF Nominee Inc. (“Greystone”).

[2] On November 5, 2013, I granted and signed the orders sought. These are my reasons for so doing.

II. Material facts

[3] The Debtors operated four retirement residences which werer home to about 351 residents and employed 220 employees. The Debtors were beneficially owned by several limited partnerships. Service of the application was made on those beneficial owners. Counsel for a number of the beneficial owners sent an email to applicant’s counsel on November 4, 2013, advising that he had no instructions to appear at the hearing to oppose the relief requested; no other beneficial owner appeared.

[4] The Debtors were operated by three related management companies: Kingsway Arms Management (Villa Orleans/St. Joseph) Inc., Kingsway Arms Management (at Walden Village) Inc. and Kingsway Arms Management (at Carleton Place) Inc. In its November 1, 2013 Supplemental Report Grant Thorton stated that the Property Managers had executed an agreement which contemplated the termination of the property management agreements upon the issuance of the Approval and Vesting Order.

[5] As of August 31, 2013, the Debtors owed Montrose close to $36 million. Montrose had made demands for payment and had given BIA s. 244 notices back in March and December, 2012. As well, Montrose delivered notices of sale under the PPSA and Mortgages Act. The evidence disclosed that the Debtors were unable to repay or service that debt and were in default of the terms of the loans. Independent counsel to GTL delivered opinions that Montrose’s security was valid and enforceable subject to the customary qualifications and assumptions.

[6] In February, 2012, Montrose appointed GTL as monitor to review and report on the financial and operational condition of the Debtors. With Montrose’s support, in March, 2012 one of the Debtors retained John A. Jenson Realty Inc. as listing agent to market, ultimately, each of the four retirement residences.

[7] The application materials described in detail the efforts Jenson undertook to market the properties, which included advertisements, direct contact with potential purchasers, the preparation of a confidential information memorandum and granting access to data to those who made serious expressions of interest. Few offers resulted. Most offers, if accepted, would have resulted in a significant shortfall on the debt. In the first half of this year a more substantial offer emerged which resulted in the execution of a letter of intent, but the transaction did not proceed because the purchaser was unable to secure adequate financing.

[8] Montrose obtained appraisals of the retirement residences from a professional appraiser, Altus Group Limited, and, in the case of the Carleton Place Retirement Residence, an additional appraisal from CBRE Limited. The Altus Group appraisals gave two valuation opinions for each property: one on an “as is” basis, and the other on a “stabilized” occupancy basis. I have reviewed those appraisals. Given that the occupancy rates for three of the residences were below the 80% level, with one at 57%, and Carleton Place was 88% occupied, I agreed with the submissions of the applicant that the “as is” basis valuations presented a more accurate picture of fair market value at this juncture.

[9] In light of the failure of the marketing process to elicit satisfactory offers for the properties, Montrose applied for the appointment of a receiver over the properties in order to effect a credit bid sale for them. Greystone incorporated the Purchaser who proposed to acquire each Debtor’s assets charged by Montrose’s security for an amount equivalent to the total amount of all indebtedness owing to Montrose and to assume the prior ranking Desjardins Prior Charge of the Villa Orleans Retirement Residence. In addition, the Purchaser would assume the leasehold interest of the land on which the St. Joseph Retirement Residence is located; the landlord is the National Capital Commission. At the time of the hearing neither Desjardins nor the NCC had provided their formal consents to the proposed assumptions, but both indicated that they were processing Montrose’s request. Under the terms of the proposed sale, the Purchaser assumed the risk of securing those consents.

III. Analysis

[10] “Quick flip” or “pre-pack” transactions are becoming more common in the Ontario distress marketplace. In certain circumstances, a “quick flip” involving the appointment of a receiver and then immediately seeking court approval of a “pre-packaged” sale transaction may well represent the best, or only, commercial alternative to a liquidation.[^1] In such situations the court still will assess the need for a receiver and the reasonableness of the proposed sale against the standard criteria set out in decisions such as Bank of Nova Scotia v. Freure Village on Clair Creek[^2] and Royal Bank v. Soundair Corp.,[^3] respectively. However, courts will scrutinize with especial care the adequacy and the fairness of the sales and marketing process in “quick flip” transactions:

Part of the duty of a receiver is to place before the court sufficient evidence to enable the court to understand the implications for all parties of any proposed sale and, in the case of a sale to a related party, the overall fairness of the proposed related-party transaction. As stated by Morawetz J. in the Tool-Plas case:

[T]he Court should consider the impact on various parties and assess whether their respective positions and the proposed treatment that they will receive in the quick flip transaction would realistically be any different if an extended sales process were followed.[^4]

The need for such a robust and transparent record is heightened even more where the proposed purchase involves a credit bid by one of the debtor’s secured creditors, the practical effect of which usually is to foreclose on all subordinate creditors.

[11] In the present case, I was satisfied from the evidence filed by Montrose that the appointment of a receiver was necessary to preserve the opportunity to continue to operate the retirement residences as going concerns, thereby ensuring a place to live for the residents and maintaining current levels of employment. The record revealed a professional and prolonged effort to elicit interest in the properties from third party purchasers, but it appeared that market conditions were such that interest could not be generated at a level which would cover the senior secured indebtedness. As to the reasonableness of the credit bid, the appraisals provided the independent evidence necessary to conclude that the proposed sale price was reasonable in the circumstances. Finally, the proposed sale agreement gave proper treatment to claims in priority to that enjoyed by Montrose.

[12] Given those circumstances, I concluded that it was just and convenient to appoint GTL as receiver of the Debtors and to approve the proposed sale.

[13] Montrose asked for an order sealing large portions of the applicant’s main affidavit and the confidential appendices to the GTL report on the basis of commercial sensitivity. I granted a sealing order which would remain in place until the earlier of the closing of the proposed sale or the further order of this court.

[14] Finally, Montrose filed a USB key containing an electronic copy of its application materials, for which I thank it. I would observe that although I was able to read the materials on the USB key, I was not able to edit them because they were in “imaged” form. I would remind counsel that the Commercial List’s Guidelines for Preparing and Delivering Electronic Documents requested by Judges require parties to perform Optical Character Recognition (OCR) within PDF to enable text searching. “Imaged”, rather than “OCR’d” documents are of much less use to judges. I would encourage the Commercial List Bar to continue their efforts to train their administrative staffs to follow the scanning directions contained in the Guidelines.

D. M. Brown J.

Date: November 6, 2013

[^1]: Tool-Plas Systems Inc., Re (2008), 2008 54791 (ON SC), 48 C.B.R. (5th) 91 (S.C.J.)

[^2]: (1996), 1996 8258 (ON SC), 40 C.B.R. (3d) 274 (Gen. Div., Commercial List)

[^3]: (1991), 1991 2727 (ON CA), 4 O.R. (3d) 1 (C.A.)

[^4]: 9-Ball Interests Inc. v. Traditional Life Sciences Inc. (2012), 89 C.B.R. (5th) 78 (S.C.J.), para. 30.