SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: Royal Bank of Canada, Applicant

AND:

Atlas Block Co. Limited, Atlas Block (Brockville) Ltd. and 1035162 Ontario o/a Atlas Block Trucking, Respondents

BEFORE: D. M. Brown J.

COUNSEL: S. Babe, for the Applicant, Royal Bank of Canada

R. Fisher, for the Business Development Bank of Canada

S. Friedman, for the Receiver, KPMG Inc.

HEARD: February 13, 2014

REASONS FOR DECISION

I. Receiver’s motion to allocate sales proceeds and its costs between two secured creditors

[1] By order made October 4, 2013, KPMG Inc. was appointed receiver of all of the assets and undertakings of Atlas Block Co. Limited, Atlas Block (Brockville) Ltd. and 1035162 Ontario Inc. o/a Atlas Block Trucking (the “Debtors”). Pursuant to orders of this Court the Receiver has sold most of the Debtors’ assets. The Receiver moved for the approval of the distribution of the net sales proceeds from certain of the Debtors’ assets between the two main secured creditors, the Royal Bank of Canada and the Business Development Bank of Canada, as well as the approval of its allocation of fees and costs as between RBC and BDC.

II. Background

[2] The Debtors manufactured a range of brick and concrete building and landscaping products for sale to industrial and commercial construction contractors. The head office of Atlas Block was located in Midland, Ontario, at what was called the Victoria Harbour Plant. Atlas operated manufacturing facilities at (i) the Victoria Harbour Plant, (ii) the Hillsdale Plant, and (iii) the Brockville Plant.

[3] The Hillsdale Plant was the major asset of Atlas Block. Its construction and equipping was financed with $17.5 million in loans from BDC, $4.8 million from the Ontario government, and $2.2 million in equipment financing from RBC.

[4] RBC and BDC provided other financing to Atlas Block.

[5] Production at the Brockville Plant ceased about two weeks prior to the appointment of the Receiver. The Receiver continued production at the Hillsdale and Victoria Habour Plants for a short period of time until the end of November, 2013.

[6] As a result of a sales and marketing process, the Receiver entered into two asset purchase agreements to sell the equipment, inventory and real estate of Atlas Block to Brampton Brick Limited (“BBL”). Those agreements received court approval on December 20, 2013. In my endorsement approving the BBL sale I wrote, in part:

This motion is not opposed, however BDC reserves its rights with respect to distribution and my order is made subject to that reservation…

[7] The sales to BBL were completed on January 6, 2014, however they did not include the sale of the real property at the Victoria Harbour Plant. On January 14, 2014, BBL informed the Receiver it that it would not be acquiring the real property at Victoria Harbour.

III. The BBL Asset Purchase Agreement

[8] Under the November 29, 2013 Asset Purchase Agreement (the “Atlas Block APA”) BBL purchased the following land and equipment:

(i) Hillsdale: (a) the Hillsdale Real Property, (b) certain molds and forklift equipment; (c) manufacturing equipment; and (d) inventory;

(ii) Victoria Harbour: (a) office furniture and equipment; (b) certain manufacturing equipment; and, (c) inventory; and,

(iii) The interest of Atlas Block in RBC Equipment Leases, which included some leased equipment at the Hillsdale Plant, as well as at the Brockville Plant.

[9] Section 2.7 of the Atlas Block stated that the purchase price would be allocated amongst the purchased assets as set forth on Schedule “K” to the APA, in part, as follows:

Asset

Allocated Amount

Hillsdale Real Property

$1,000,000

RBC Equipment Leases

$2,611,539

Hillsdale and Victoria Harbour Equipment

$7,638,458

[10] In the Atlas APA BBL agreed to assume the obligations under the RBC Equipment Leases and the allocated $2.61 million represented the remaining obligations due under those leases.

[11] Under the December 12, 2013 Asset Purchase Agreement (the “Brockville APA”), BBL agreed to purchase from the Receiver (i) the Brockville Real Property, (ii) the Brockville Equipment, (iii) the Brockville office furniture and equipment, and (iv) the Brockville Inventory. The purchase price of $600,000 was allocated pursuant to section 2.6 of the Brockville APA amongst the purchased assets, in part, as follows:

Asset

Allocated Amount

Brockville Real Property

$100,000

Brockville Equipment and office equipment

$100,000

Brockville Inventory

$400,00

IV. The Receiver’s proposed distribution of the sales proceeds

A. The Receiver’s proposal

[12] In its Third Report dated January 31, 2014 the Receiver stated that under the two APAs BBL had allocated about $8.2 million of the purchase price to assets subject to the security held by BDC. It continued:

The Receiver has no basis on which to consider the allocation by BBL to be unreasonable and therefore has used the BBL allocation set out in the Purchase and Sale Agreements as the basis for determining the proceeds to be paid to BDC and RBC.

Observing that it had incurred certain costs and fees on behalf of BDC during the Receivership, the Receiver proposed to deduct those costs from the Gross BDC Proceeds to arrive at a net figure payable to BDC. Appendix “O” to the Third Report set out the Receiver’s calculations. Based on those calculations, the Receiver proposed to distribute to BDC proceeds of $7.7 million.

[13] The Receiver reported that the majority of the remaining funds in its receivership accounts related to proceeds from RBC’s security. The Receiver proposed to make a distribution to RBC of $3.46 million.

[14] RBC supported the distribution proposed by the Receiver.

B. BDC’s position

[15] BDC objected to the Receiver’s proposed distribution on the grounds set out in the February 5, 2014 affidavit of Lori Matson, Director, BDC Business Restructuring Unit. As of October, 2013, the Debtors owed BDC approximately $17.39 million.

[16] Matson confirmed that BDC had received from the Receiver a draft of the Atlas APA as early as November 7, 2013, some three weeks prior to its execution, and BDC had understood at that time that part of the purchase price involved BBL assuming about $2.6 million in RBC Equipment Leases. According to Matson, BDC did not take issue with the BBL purchase price, but did have concerns about the allocation of the purchase price:

(i) Matson alleged that RBC had engaged in discussions with BBL before the execution of the APAs which had influenced the allocation of the purchase price;

(ii) BDC contended that by assuming the remaining obligations under the RBC Equipment Leases, BBL was “factoring in the transaction structure (i.e.: assumption of capital leases), into its allocation rather than the value of the assets being obtained thereunder. The result is a purchase price allocation that is not reflective of the value of the various assets being acquired based upon appraisals…the allocation becomes arbitrary as it does not distinguish the financing aspect from the underlying value of the assets being acquired”. BBL allocated the purchase price based on the amount of the debt being assumed which bore no relationship to the value of the underlying assets. Matson described the situation as an “over-allocation relative to the capital leased assets”; and,

(iii) BBL’s allocation of the purchase price did not reflect historic appraised values of the purchased assets.

It was Matson’s evidence that the Receiver should distribute $10,644,360 to BDC based upon appraised values, not the $7.7 million it proposed based on the purchase price allocation in the APAs.

[17] At my request, the Receiver filed a supplementary document which compared the calculation of its proposed distributions to the distributions proposed by BDC.

V. Analysis: Allocation of sales proceeds

A. Allegation of pre-execution discussions between BBL and RBC

[18] Matson alleged that “negotiations took place between the Purchaser and RBC as part of the Purchaser’s due diligence process in advance of the bidding that had the effect of creating an opportunity for the Purchaser to finance part of this purchase and as well creating expectations relative to the allocation of the sale proceeds on the part of RBC”.

[19] Matson did not disclose in her affidavit any source or basis for her allegation.

[20] Mark Swanson, a Manager in RBC’s Special Loans and Advisory Services Department, deposed, in his February 6, 2014 affidavit, that RBC had no communication with BBL prior to being told by the Receiver that BBL’s offer included, amongst its terms, the assumption of the RBC Equipment Leases on an undiscounted basis. Swanson stated that the Receiver had asked RBC whether it would support a motion to approve a transaction under which BBL assumed the leases, rather than paying cash for them, but Swanson deposed that there had been no discussion between RBC and the Receiver of a discount or reduction of payments under the leases.

[21] In the Second Supplement to its Third Report the Receiver responded to Matson’s allegations:

…BDC suggests that negotiations took place between BBL and RBC prior to the submission of BBL’s offer. The Receiver provided all potential purchasers who signed the Receiver’s confidentiality agreement with information on Atlas’ various leases and fixed assets through the Receiver’s online data room so that they could perform their due diligence. BDC was also provided access to the Receiver’s data room and was therefore aware of the information available to all purchasers. The Receiver is not aware of any other information supplied to BBL nor any negotiations between RBC and BBL prior to the submission of BBL’s offer. The Receiver notes that BDC has not provided any evidence to support their allegations.

[22] Given the failure of BDC to disclose the evidence upon which it based its allegation of the pre-execution negotiations between BBL and RBC and in light of the strong direct evidence to the contrary from the Receiver and RBC, I give no effect whatsoever to BDC’s allegation that RBC had engaged in discussions with BBL before the execution of the APAs which had influenced the allocation of the purchase price. BDC’s allegation was without any evidentiary foundation foundation.

B. The RBC Equipment Leases

[23] There was no dispute that part of the consideration offered by BBL under the Atlas APA was its agreement to assume the obligations of Atlas Block under the RBC Equipment Leases. The amount allocated for that consideration under the Atlas APA was the amount of the remaining obligations under those leases.

[24] I do not accept BDC’s submission that such an allocation of consideration was somehow arbitrary or unfair. To the contrary, the consideration allocated for BBL’s assumption of that liability corresponded exactly to the monetary amount of the remaining obligations under those leases. There was nothing arbitrary about such an allocation. The crux of BDC’s complaint really related to the amount of the purchase price allocated to other assets, in particular the Hillsdale Real Property, so I turn now to that issue.

C. The relationship between allocations of the purchase price to the Hillsdale Real Property and the appraised values of that asset

C.1 The positions of the parties

[25] The crux of BDC’s complaint about the proposed distribution of sales proceeds was that in the APAs BBL’s allocation of the purchase price did not reflect historic appraised values of some of the purchased assets, in particular the Hillsdale Real Property.

[26] In section 1.1.7 of its Second Report dated December 12, 2013, the Receiver observed that “the construction of the Hillsdale Plant unfortunately coincided with the start of the 2008/2009 economic downturn…” Schedule “K” to the Atlas APA allocated $1 million of the purchase price to the Hillsdale Real Property. BDC submitted that $3 million should have been allocated to that property.

[27] Matson attached to her affidavit extracts from two appraisals of the Hillsdale Real Property performed in 2008 and 2011. The first extracts were from a June, 2008 appraisal that had been prepared by Katchen Appraisals Inc. for BDC. By its terms the Katchen Appraisal was intended to assist for financing purposes only and was “to serve as a benchmark for establishing the projected value of the property as improved with a completed concrete block manufacturing facility, in fee simple, assuming a market exposure of twelve months prior to sale under forced sale conditions on June 17, 2008…” Katchen valued the property at $4.5 million.

[28] Matson also attached extracts from a second appraisal, one prepared by Appraisers Canada Inc. with an effective date of December, 2011. The appraisal stated that it was intended only “for an accounting function and for no other use” and that its purpose was “to estimate a current hypothetical market value of the subject property, as if unimproved, as at the effective date”. Appraisers estimated that value as in a range between $2.162 to $2.883 million, with a “value tendency” of $2.5 million.

[29] Pointing to the extracts from both appraisals, Matson deposed that BBL’s price allocation “seriously undervalues the land and building” and “allocating $1,000,000 to the real property is not reasonable”.

[30] In its Second Supplement to the Third Report the Receiver noted that the appraisals relied upon by BDC were prepared at different dates and used different appraisal assumptions:

The Receiver does not believe that this amalgamation of estimated values is a superior method of allocating the purchase price as compared to the allocation of a third party purchaser of assets.

The Receiver also observed that the Hillsdale Plant was a special purpose asset, remotely located, which was difficult and perhaps cost prohibitive to relocate.

[31] Although RBC did not comment directly on the valuations, Swanson did depose that back in August, 2013, just after RBC had commenced this application, it had been asked by the Debtors’ financial advisor to adjourn the application to enable the Debtors to work out a refinancing with BDC. A signed memorandum of understanding between the Debtors and BDC provided to RBC disclosed that BDC’s existing loan in excess of $17 million would be replaced by a $5 million loan to a Newco which would acquire the Debtors’ assets and business. Newco would issue preferred shares to BDC. In the result, that transaction did not proceed and a receiver was appointed. Swanson deposed:

The history of this matter therefore shows that the Receiver, who RBC drove to appoint, successfully increased BDC’s anticipated recovery by over $3 million and reduced BDC’s risk by even more. The Receiver has therefore significantly reduced the shortfall that BDC was otherwise willing to incur.

C.2 Analysis

[32] In Bank of America Canada v. Willann Investments Ltd.[^1] Farley J. commented that when examining a receiver’s proposed sale of assets in light of the principles set out in Royal Bank of Canada v. Soundair,[^2] a court might well refrain from approving a sale that proposed an allocation of the purchase price which was significantly different from the latest valuation of the assets because such an allocation would not fairly consider the interests of all creditors.[^3] From that it follows that the time for objecting to an allocation of the purchase price in a proposed sale is when the sale is brought before the Court for approval. If the Court agrees with the objection, it can decline to approve the sale, which may or may not result in further negotiations with the proposed purchaser, depending upon the significance to it of the purchase price allocation.

[33] Once a court approves a sale agreement, however, as occurred here, it becomes more difficult for a creditor to advance an objection about the fairness of the term of the sales agreement allocating the purchase price because such an objection, in essence, constitutes an objection to a material term of the now-approved sale agreement. Put another way, not having opposed the approval of a sales transaction, thereby securing the benefit of that sale of the debtor’s assets, a creditor faces difficulty in objecting subsequently to a material term of the agreement which it did not oppose.

[34] In the present case BDC did not oppose the approval of the BBL APAs – no doubt because the BBL offers were far, far superior to any other offer obtained by the Receiver – but BDC did put a “reservation of rights” on the record, without filing evidence at the time about the nature of its objections. A receiver’s distribution motion should not turn into a debate about the fairness of the term in the approved sale agreement which allocates the purchase price to particular assets. The proper time for such a debate is at the hearing of the approval motion. I will consider the objections made by BDC, but their timing weakens the weight to be given to them.

[35] Turning to the submission of BDC that the allocated purchase price for the Hillsdale Real Property was far below its appraised value, I have five comments. First, any appraisal must be read in its entirety to understand the methodology used and the assumptions employed. On this motion BDC only filed portions of the reports from which it was not possible to ascertain the methodologies and information used by the appraisers to arrive at their estimates. Failing to file the entire reports significantly undermined their evidentiary value. Second, the reports gave opinion values as of June, 2008 and December, 2011. The reports therefore were quite dated, the last expressing a value some two years prior to the appointment of the Receiver. Since the actions of the Receiver must be assessed at the time taken, stale valuation reports are of little assistance in ascertaining how the market perceived the value of the Hillsdale Real Property as of November, 2013, the date of the Atlas APA.

[36] Which leads me to my third point. In the December 12, 2013 Supplement to its Second Report the Receiver stated:

BDC also has a mortgage on the real property at Hillsdale…Both the Receiver and BDC agreed that an appraisal of the Hillsdale Real Property would not be cost beneficial as the value of the Hillsdale Real Property is intrinsic to the manufacturing plant and could not be separately assessed. It was agreed that an appraisal of the market value of the Hillsdale Real Property on a standalone basis would be theoretical at best, and not provide useful information in assessing offers.

It is difficult to understand how BDC now relies on stale valuation reports to support its submissions on the allocation of net sale proceeds in light of that agreement.

[37] Fourth, the material deficiencies in the evidentiary utility of the two appraisal reports referred to by Matson brings one back, then, to the general principle that where a receiver markets a property, appraisals cease to have much significance in the valuation process[^4] – a sale is always a better indication of value of a particular property than a valuation. In the present case, the Receiver contacted 83 different interested parties, 36 of which signed confidentiality agreements, and 8 of which submitted offers. The BBL offer accepted by the Receiver was far, far superior to any other offer.

[38] Fifth, and finally, in the Second Supplement to its Third Report the Receiver provided the following evidence:

[T]he Hillsdale building was a sole purpose building, built for the purpose of block production only. Accordingly, it is likely that the building would only have value in a going concern sale. If the assets were liquidated and removed, the building would at best have scrap value and may have been a liability for a purchaser of the real property as it would likely have to be demolished. Therefore, the allocation of the $1.0 million to the real property is likely superior to liquidation value.

I accept that evidence.

[39] Accordingly, I see no reason to interfere with the Receiver’s recommendation to distribute the net sales proceeds using a methodology based on the allocation of the purchase price found in the approved Atlas APA and Brockville APA. I therefore grant the relief sought in paragraph (g) of the Receiver’s February 3, 2014 notice of motion.

VI. Allocation of the Receiver’s costs

[40] The Receiver sought approval of its fees and disbursements of $196,882.73 for the period December 1, 2013 to January 15, 2014, as well as for those of its counsel for the same period in the amount of $147,503.13. Recognizing the competing security interests in the receivership, the Receiver and its counsel had tracked their time and expenses in three separate categories: (i) those directly related to BDC asset realization activities; (ii) those directly related to RBC asset realization activities; and, (iii) those shared between BDC and RBC realization activities.

[41] BDC took no issue with the direct expenses attributed by the Receiver to BDC assets ($67,598). The Receiver tracked shared expenses totaling $510,782. It proposed allocating $357,159 of those expenses to BDC on the basis that BDC recovered 69.92% of the total sales proceeds. RBC supported the Receiver’s proposed allocation. BDC objected to the amount of the fees and to their allocation, contending that only 50% of the shared costs should be allocated to it, or the sum of $255,391. BDC complained that “a significant portion of these costs were expended in the collection of accounts receivable and the production and sale of inventory which clearly solely benefitted RBC. In addition, there are significant Receiver and legal fees relative to the trust claims of Holcim and Tackaberry”.

[42] This Court approved the Receiver’s fees and legal fees for the period up to November 30, 2013 in its December 20, 2013 order. As to the fees incurred after that date, in paragraph 21 of her affidavit Matson “sought clarification” of certain work performed by the Receiver and its counsel. In section 3.1 of the Second Supplement to its Third Report the Receiver provided detailed clarification. In light of that clarification, I conclude that the fees for which the Receiver sought approval were reasonable in the circumstances.

[43] As to the allocation of the fees, the general principles governing the allocation of receiver’s costs can be briefly stated:

(i) The allocation of such costs must be done on a case-by-case basis and involves an exercise of discretion by a receiver or trustee;

(ii) Costs should be allocated in a fair and equitable manner, one which does not readjust the priorities between creditors, and one which does not ignore the benefit or detriment to any creditor;

(iii) A strict accounting to allocate such costs is neither necessary nor desirable in all cases. To require a receiver to calculate and determine an absolutely fair value for its services for one group of assets vis-à-vis another likely would not be cost-effective and would drive up the overall cost of the receivership;

(iv) A creditor need not benefit “directly” before the costs of an insolvency proceeding can be allocated against that creditor’s recovery;

(v) An allocation does not require a strict cost/benefit analysis or that the costs be borne equally or on a pro rata basis;

(vi) Where an allocation appears prima facie as fair, the onus falls on an opposing creditor to satisfy the court that the proposed allocation is unfair or prejudicial.[^5]

[44] The Receiver responded to BDC’s complaint about the allocation of certain time by reporting that it had only charged time for accounts receivable collections and the Holcim/Tackaberry claims to RBC. That addressed that complaint.

[45] As to the allocation methodology for shared fees, the Receiver reported that as early as October 18, 2013, it had provided BDC with its allocation method for professional fees and expenses incurred in the estate. Its email to RBC of that date stated:

The shared time will be allocated on realizations of the secured creditor assets so the exact breakdown of those fees will not be known until the assets are realized.

The Receiver provided BDC with requested weekly reports allocating those fees amongst the three time categories. The Receiver responded to periodic inquiries about the fees and their allocation from BDC, and it was not aware that BDC took issue with the allocation until February 4, 2014.

[46] I find it difficult to place must credence in an “11th hour” objection by a creditor to the receiver’s proposed allocation of fees when the Receiver disclosed the proposed methodology at the start of the administration of the receivership estate, the creditor did not object, and the Receiver provided on-going, transparent reporting to the creditor of the fees incurred.

[47] The Receiver also stated:

The Receiver believes that BDC derived a significant benefit from the Receiver’s operations and eventual sale to BBL. As discussed previously the DSL Appraisal makes it clear that the realizable values of Atlas’ assets would have been significantly impaired absent a going concern sale when one compares the appraised value of $6.5 million in a going concern type sale versus a value of $1.5 million in a liquidation sale…The Receiver agrees with BDC that BBL paid more for all of the Atlas assets, and most notably the Hillsdale Equipment (as the Hillsdale plant is the only plant of the two sold in the First BBL Sale that BBL is operating), because of the Receiver’s preservation of the Atlas customer base through continued operations during the receivership. This was of great benefit to BDC, perhaps more so than to RBC.

[48] The allocation methodology proposed by the Receiver for shared costs based pro rata on realizations was prima facie reasonable in the circumstances of this case. The Receiver disclosed that methodology to BDC at the start of its administration, and BDC did not object until the 11th hour. BDC has not demonstrated any unfairness in the methodology proposed by the Receiver.

[49] Consequently, I grant the orders sought by the Receiver in paragraphs (h) and (i) of its notice of motion dated February 3, 2014.

VII. Costs

[50] I would encourage the parties to try to settle the costs of this motion. If they cannot, any party seeking costs may serve and file with my office written cost submissions, together with a Bill of Costs, by March 21, 2014. Any party against whom costs are sought may serve and file with my office responding written cost submissions by March 28, 2014. The costs submissions shall not exceed three pages in length, excluding the Bill of Costs.

D. M. Brown J.

Date: March 10, 2014

[^1]: 1992 CarswellOnt 1743 (Gen. Div.)

[^2]: (1991), 1991 2727 (ON CA), 4 O.R. (3d) 1 (C.A.)

[^3]: Bank of America Canada, supra., para. 5.

[^4]: B & M Handelman Investments Ltd. v. Mass Properties Inc. (2009), 2009 41349 (ON SC), 56 C.B.R. (5th) 313 (Ont. S.C.J.), para. 13; Bank of America Canada v. Willann Investments Ltd., 1992 CarswellOnt 1743 (Gen. Div.), para. 5.

[^5]: See the cases cited by C. Campbell J. in Re Hunjan International Inc. (2006), 2006 63716 (ON SC), 21 C.B.R. (5th) 276 (Ont. S.C.J.) and Cameron J. in JP Morgan Chase Bank N.A. v. UTCC United Tri-Tech Corp. (2006), 2006 25352 (ON SC), 25 C.B.R. (5th) 156 (Ont. S.C.J.).