SUPERIOR COURT OF JUSTICE – ONTARIO
COMMERCIAL LIST
RE: IN THE MATTER OF AN Application under the Bulk Sales Act, R.S.O. 1990, c. B.14 in respect of a sale of assets by Mayfield Suites Hotel Mississauga Limited Partnership by its General Partner, Mayfield GP No. 1 and 722496 Ontario Limited
BEFORE: D. M. Brown J.
COUNSEL: V. DaRe, for the Mayfield Suites Hotel Mississauga Limited Partnership
K. Page, independent counsel for creditors
M. Mazzuca, for two creditors, Esposito and Ivey
A. Scotchmer, for Local 149 of the Canadian Federation of Musicians and the Musicians’ Pension Fund of Canada
HEARD: December 16, 2013
REASONS FOR DECISION
I. Motion for directions concerning a claims and distribution process under the Bulk Sales Act for residual net sales proceeds of $5,458.91
[1] The parties to this motion under the Bulk Sales Act for directions regarding the creation of a creditor claims and distribution process either consented to or did not oppose the relief sought. So why bother writing an endorsement when no party opposed? Because I query the use to which the applicant put the Bulk Sales Act in this case. For a statute designed to protect creditors “in full”, in this case the Bulk Sales Act did not do its job because trade creditors will end up getting virtually nothing.
[2] Since the horse long ago bolted out of the barn and scampered over the horizon and because no party opposes the relief sought, as I said in open court, I will hold my nose and approve the order sought. But, let me explain my judicial discomfort.
II. Background to this motion
[3] Mayfield Suites Hotel Mississauga Limited Partnership, Mayfield GP No. 1 Inc. and 722496 Ontario Limited (collectively “Mayfield”) owned and operated the Stage West All-Suite Hotel and Theatre Restaurant in Mississauga. As of this past June, Mayfield, according to its main affiant, John Pennington, was in “financial difficulty”. It owed its single secured creditor, Roynat Inc., $11.3 million, the federal and provincial Crowns about $643,000 in unremitted taxes, and unsecured creditors about $5.6 million. Roynat had commenced power of sale proceedings. To avoid the costs of a power of sale process, Mayfield came to this Court seeking exemption under the Bulk Sales Act for a proposed sale of its business as a going concern to Northland Properties Corporation. Pennington, in his June 18, 2013 affidavit, deposed that the sale would pay out fully the claims by Roynat and the Crown, leaving approximately $400,000 to $600,000 for the unsecured creditors. He asserted: “It is generally recognized that going concern sales are more beneficial to all stakeholders than power of sale or receivership sales”. Elsewhere he deposed: “there will be excess net sale proceeds in the approximate amount of $400,000 to $600,000 for unsecured claims”. Pennington contended that it would be “unduly onerous to give notice to and obtain consent from the approximate 237 trade and unsecured creditors of the Vendor and because Roynat, by issuing its power of sale notice, has asserted real time pressure in closing the sale transaction”.
[4] Pennington swore that an order permitting the sale pursuant to the Bulk Sales Act “will enhance the Vendor’s ability to pay its creditors in the circumstances”. He emphasized that avoiding the costs of a power of sale or receivership would benefit the unsecured creditors:
…after Roynat and the Crown Claims are fully paid and the Closing Costs of the sale deducted, there will be some excess or surplus funds for unsecured claims in the approximate amount of $400,000 to $600,000. These excess or surplus funds would have been “eaten away”, reduced or eliminated by the professional costs in a power of sale or receivership sale. The unsecured creditors are therefore potentially better off (and certainly not worse off) under this “going concern” sale of the Hotel.
[5] This Court initially dismissed the application, without prejudice to Mayfield applying again. In his July 31, 2013 affidavit in support of the new application, Pennington deposed that a going concern sale of the hotel under the Bulk Sales Act would result in net proceeds “in the approximate amount of $100,000 to $200,000 for the unsecured creditors of the Vendor”. By reasons dated August 6, 2013, this Court granted the exemption under the Bulk Sales Act. Noting that Mayfield was insolvent, the Court concluded that while unsecured creditors will not be paid in full, the sale, based on proceeds generated, could be said to be beneficial to creditors. The August 6 Bulk Sale Order provided, in part, as follows:
THIS COURT ORDERS that after the payout of Roynat Inc. and closing costs from the proceeds of the Bulk Sale, the distribution of the proceeds from the Bulk Sale (the “Net Sale Proceeds”) shall be subject to a court supervised process.
THIS COURT ORDERS that the Net Sale Proceeds shall be paid into Court and that interested parties can make submissions as to what distribution process should be implemented with respect to the distribution of the Net Sales Proceeds.
[6] That is not the way the story unfolded.
[7] The sale closed on August 12, 2013. Roynat was paid out. Mayfield’s counsel, Fogler Rubinoff LLP was paid out for its outstanding account in the amount of $225,000. Assuming those legal costs all amounted to “closing costs” (going back as they did to April 23, 2013), the Net Sale Proceeds should then have been paid into Court, at least as I read paragraph 6 of the Bulk Sale Order. They were not. The Canada Revenue Agency was paid $1.13 million under August 15, 2013 Requirements to Pay. Now, those Requirements may well have accurately stated the CRA’s priority claim to some of the Net Sales Proceeds, but when a court order says that certain amounts are to be paid into court, the court order trumps a CRA requirement to pay.
[8] However, of more importance to those creditors which lacked any statutory priority, what is relevant is that the remaining proceeds of sale amounted to the grand sum of $67,876.33.
[9] Even that amount was illusory. On October 17, 2013, Mayfield initiated this motion seeking permission to pay the $67,876.33 into Court and scheduling a return date so that interested parties could make submissions about “what distribution process should be implemented with respect to the distribution of the Net Sale Proceeds, as directed by the Bulk Sale Order”. On October 24, 2013, this Court authorized the payment into Court of the sum of $66,181.33 – Mayfield’s counsel was allowed to carve out from the Net Sale Proceeds its fee of $1,695.00 – and directed a hearing of a claims distribution motion on November 7, 2013.
[10] When the matter came on before me on November 7, I adjourned it because not all counsel for the creditors were available that day, and I directed any party who intended to appear or take a position on the new December 16 return date to file a brief affidavit stating its position.
[11] Four creditors filed affidavits: (i) R+1 Design ($69,035.00); (ii) Butler Operations Inc. ($25,000); (iii) Ersilia Esposito (about $85,000 by way of an “employee super-priority”); and, (iv) Local 149 of the Canadian Federation of Musicians (about $35,000).
[12] Last Friday applicant’s counsel informed the Court that the parties had reached an agreement on the distribution process. The draft order presented by counsel at the hearing would authorize the following distributions:
Claimant
Amount paid to claimant
Amount paid to claimant’s lawyer
The Local 149 claims
$33,722.42
$4,000.00
Esposito
$10,000.00
$4,000.00
R+1 Design
$0
$3,000.00
Butler Operations
$0
$1,500.00
Totals to be paid out
$43,722.42
$12,500.00
[13] So, out of the initial Net Sales Proceeds of $67,876.33, lawyers receive $14,195.00 and two creditors who have persuaded other creditors that they enjoy some priority receive $43,722.42. After deducting $4,500.00 for the costs of advertising the claims process, one is left with the grand total of $5,458.91 to be distributed in accordance with the 5-paragraph claims process set out in the unopposed order.
[14] At the end of the day unsecured claimants will receive no more than $50,000 from an exempted sale which Mayfield originally represented to the Court would put some $200,000 to $400,000 into the pockets of unsecured, later reduced to $100,000 to $200,000.
[15] To date professional costs of this Bulk Sales Act process have amounted to 21% of the Net Sales Proceeds.
[16] Is that a better result than the “eating away” of surplus funds in a power of sale or receivership sale which led Mr. Pennington to pitch the Bulk Sales Act exemption route as the better way to go for unsecured creditors? One cannot say. But, it is difficult to see how ending up with a process to distribute less than $7,000 amongst unsecured creditors with claims north of $5 million comes close to satisfying the statutory requirement that exempt sales “will not impair the seller’s ability to pay creditors in full”, as stated by section 3 of the Bulk Sales Act.
[17] Perhaps the lesson to be drawn from this case is that the Bulk Sales Act should remain a tool limited to situations where creditors will be paid in full, with existing insolvency legislation picking up the slack in those cases where they will not. Otherwise, I am not sure what protection the Bulk Sales Act would continue to offer to creditors if insolvent companies could resort to it as a means by which to effect quick, shortfall sales outside of a bankruptcy or receivership.
[18] I have signed the draft order. Applicant’s counsel can pick it up from the Commercial List Office.
D. M. Brown J.
Date: December 16, 2013