COURT FILE AND PARTIES

COURT FILE NO.: CV-11-9452-00CL

DATE: DATE: 20140718

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Romspen Investment Corporation, Applicant

AND:

Edgeworth Properties et al, Respondents

BEFORE: J. Thorburn J.

COUNSEL: Lisa Corne and M. Brzezinski for the Applicant Romspen, Responding Party on this Motion

Seema Aggarwal and J. Dietrich, for the Respondent Edgeworth Group, Moving Party on this Motion

Steven Weisz for the Monitor Grant Thornton Limited

Craig Mills for the Receiver MNP Ltd

HEARD: June 17, 2014

ENDORSEMENT

1. Relief Sought

[1] Edgeworth Properties Inc. is the primary holding and operating company of the Edgeworth Group.

[2] The Edgeworth Group applied to the court to commence proceedings under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36. Campbell J. approved the CCAA proceedings and appointed a Receiver.

[3] The Edgeworth Group holds the residual interest from the sale of the Receivership properties after satisfaction of any charges granted under the Receivership Order and the discharge of the security interest of the third party mortgagees.

[4] Romspen acquired the first priority position of certain of the third party mortgagees and is the lender in respect of the Receiver’s borrowings.

[5] To date, Romspen has applied the proceeds from the sale of the Receivership properties as follows,

a) first, to the total amounts secured by the Receiver’s charges and borrowing charges in respect of the Receivership property sold;

b) second, to any first mortgage related to such Receivership property (which was acquired by Romspen from the third party mortgagee in question); and

c) third, to Romspen’s cross-collateralized mortgage in respect of all of the Receivership properties (the blanket mortgage).

[6] Edgeworth Group seeks to vary the Receivership Order so that the proceeds from the sale of the Receivership properties are applied as follows,

a) first to the total amounts secured by the Receiver’s charges and the Receiver’s borrowing charges in respect of the Receivership property sold;

b) second to the total amounts secured by any first mortgage related to the Receivership property sold;

c) third to the total amounts secured by the Receiver’s borrowing charges in respect of the other Receivership properties;

d) fourth to the total amounts secured by the mortgage held by Romspen that is cross-collateralized across all of the Receivership properties (the blanket mortgage); and

e) last to the Monitor in the concurrent CCAA proceeding for application in the concurrent proceeding.

[7] In the alternative, Edgeworth seeks an order pursuant to section 248 of the Bankruptcy and Insolvency Act, RSC 1985, c B-3, as amended, directing Romspen and the Receiver to apply proceeds and deeming the proceeds to have been applied in the manner set out in paragraph 4 above.

[8] Edgeworth claims this would be consistent with the overarching reason for having both a CCAA proceeding and a Receivership, which is to maximize the recovery for all creditors.

[9] Edgeworth claims that applying the surplus proceeds available after payment in full to the third party mortgagees, to Romspen’s blanket mortgage (which bears interest at 12%) before applying them to the Receiver’s other borrowings (which bear interest at 24%) will result in fewer funds flowing from the Receivership proceeding to the CCAA proceeding.

2. The Issue

[10] Edgeworth and Romspen do not agree on the order of the payment of proceeds. Romspen’s blanket mortgage bears interest at 12% while the Receiver’s other borrowings bear interest at 24%.

[11] Romspen claims the Receivership Order requires that the blanket mortgage be repaid first. Romspen relies on sections 22 and 25 of the Receivership Order.

[12] Edgeworth claims the only commercially reasonable result is for the Receiver’s other borrowings to be repaid before the blanket mortgage. Edgeworth claims Romspen’s proposed allocation of proceeds creates a result that was not intended by the parties.

[13] The key issues to be determined are whether,

a) the Receivership Order finally determined the order of the allocation of proceeds,

b) whether the Receivership Order creates a result that was not intended by the parties, and

c) whether the Receivership Order should be varied to take into account new evidence and /or the fact that it would result in an allocation of proceeds that is not commercially reasonable as required by section 248 of the Bankruptcy and Insolvency Act.

3. Background Facts

[14] Romspen opposed the initial application for CCAA proceedings and brought a cross motion for foreclosure proceedings based on the Model Receivership Order. The third party mortgagees objected to Romspen’s proposal because they did not want the Receiver’s borrowings in respect of one property to enhance the third party mortgagee’s position with respect to another Receivership property.

[15] Prior to the Receivership Order, Romspen was critical of Edgeworth management for being “slow and ineffective in achieving sales of units in the Spruce Ridge condominium project.”

[16] On November 10, 2011, the Court issued an Order, which was subsequently amended, granting the Companies the protection of a stay of proceedings until December 12, 2011, appointing Grant Thornton Limited as the Companies’ Monitor under the CCAA, appointing Eagle Ridge Capital Corporation as the Companies’ Chief Restructuring Organization, and appointing MNP Ltd as Receiver of the Companies’ 16 properties.

[17] Paragraph 22 of the Receivership Order grants to the Receiver certain charges on the Receivership properties to secure the Receiver’s fees and disbursements. It provides that, “the Receiver shall be entitled to and are hereby granted a charge on each Debtor’s Receivership Property in respect of the Debtor Specific Expenses for such Debtor’s Receivership Property and a proportional share of the General Expenses, which share shall be allocable to the Receivership Property according to the proportion which the first-ranking Third Party Mortgagee’s individual principal outstanding loan in relation to such Debtor’s Receivership Property represents of the principal amount outstanding to the Third Party Mortgagees in the aggregate, as of the date of this Order. Each Debtor Specific Charge shall form a first charge on the Receivership Property to which it relates, in priority to all security interest, trust, liens, charges and encumbrances, statutory or otherwise, in favour of any Person…”

[18] Paragraph 25 grants to the Receiver certain charges on the Receivership properties to secure the Receiver’s borrowings to fund the Receivership provided the amount does not exceed $1 million for all of the properties except Spruce Drive and $1 million for Spruce Drive. “… each Receivership Property shall be and is hereby charged by way of a fixed and specific charge as security for the payment of the monies borrowed in relation to such Receivership Property together with interest and charges thereon, in priority to all security interests, trust, liens, charges and encumbrances, statutory or otherwise, in favour of any Person but subordinate in priority to the Receiver’s Charge and the charges as set out in subsections 14.06(7), 81.4(4) and 81.6(2) of the BIA.”

[19] In accordance with paragraph 6 of the Receivership Order, the Edgeworth Group holds the residual interest from the sale of the Receivership properties after satisfaction of any charges granted under the Receivership Order and the discharge of the security interests of the third party mortgagees.

[20] On April 13 and August 3, 2012, the Court issued orders permitting Romspen and Firm Capital Mortgage Inc. to commence judicial sale or foreclosure proceedings in respect of certain of Edgeworth’s properties subject to their respective security.

[21] Romspen acquired the first priority position of certain of the third party mortgagees and is the lender in respect of the Receiver’s borrowings.

[22] The Receiver received two offers for one of the significant properties, the Spruce Ridge property: the first offer was received in late 2011 and rejected by the Receiver, and the second offer was approved by the Court and the closing is pending. In the 12th Report, the Receiver states that, “the Receiver’s remediation efforts increased recoveries by approximately $2.3 million over the CPIV [first] Offer.” This report was prepared before taking into account the cost of borrowing.

[23] The Spruce Ridge Drive condominiums were not sold for approximately two years due to the need for extensive remedial work and further delays occasioned through dealings with the Canadian Mortgage and Housing Corporation.

4. The Effect of the Order

[24] Applying the surplus proceeds to the blanket mortgage (with an interest rate of 12% per annum) before applying them to the Receiver’s borrowings in the respect of the other Receivership properties (with an interest rate of approximately 24% per annum) results in fewer residual funds flowing from the Receivership proceeding to the CCAA Proceeding and the subordinate creditors.

[25] If by contrast, the surplus proceeds are applied to the Receiver’s other borrowings before the blanket mortgage, (as Edgeworth suggests) the Monitor estimates that this would result in as much as $875,000 becoming available in the CCAA proceeding to the benefit of the subordinate creditors. Romspen would still recover interest owing in respect of the Receiver’s borrowings and the blanket mortgage.

[26] The Monitor notes that with the benefit of hindsight, the Edgeworth Group’s estate “would have been in a marginally better financial position had the Receiver pursued the [first] CPIV Offer in late 2011…This is the case as the [second] Platinum offer, while resulting in a $2.3 million higher gross realization, required the Receiver to borrow funds from Romspen for a longer period of time, such that the net realization from the [second] Platinum offer is slightly less than the estimated net realization that might have been achieved from the CPIV Offer.” The Monitor goes on to say that, “[a]ssuming the ‘interest dispute’ is decided in favour of the Applicants, the [second] Platinum offer would have likely yielded a marginally better net realization than the [first] CPIV Offer.”

5. The Positions of the Parties

[27] Edgeworth claims that,

a) at the time the Receivership Order was granted, it was not envisaged or intended that the surplus proceeds would be applied first to the blanket mortgage and then to the Receiver’s other borrowings;

b) it took much longer to dispose of the Spruce Ridge properties than the parties envisaged and the Receiver was therefore required to borrow funds from Romspen for a longer period that originally contemplated;

c) Edgeworth did not delay in bringing this motion. The Monitor’s counsel corresponded several times with the Receiver’s counsel to request an accounting of Romspen’s debt and the application of funds. A motion was brought to require Romspen to provide such information. In the Monitor’s November 7, 2013 report, the Monitor notes that the information is required to “assess and analyze the appropriateness of the application of funds from the Receivership and Foreclosure Proceedings and assess and analyze the fees and interest charged”;

d) if Edgeworth’s request is granted, Romspen will still recover interest at the agreed rate; and

e) Section 247 of the Bankruptcy and Insolvency Act requires the Receiver to deal with the property of an insolvent person in a commercially reasonable manner and Romspen’s proposal is not commercially reasonable.

[28] Edgeworth therefore seeks an Order that the surplus proceeds of the Receivership be applied first to the Receiver’s other borrowings (for which the interest is 24%) and then to the blanket mortgage (which bears interest at 12%). Edgeworth suggests that this should be done by varying the Receivership Order, by making an Order pursuant to section 248 of the Bankruptcy and Insolvency Act, or by invoking the equitable doctrine of unjust enrichment to grant restitution.

[29] Romspen takes the position that the Receivership Order is clear. There is no error or omission and there are no new facts that would require reconsideration of the Receivership Order. Romspen claims there are important policy reasons for holding that absent an error or omission, orders should be enforced. Romspen further claims it would be unfair, after the parties came to an agreement, for the court to impose changes to the agreement merely because the risk taken by Romspen turned out to benefit it.

[30] Romspen claims that Edgeworth is effectively seeking consolidation of its estates and it claims that consolidation affects the substantive rights of debtors and creditors. This should not be done where it unfairly prejudices one particular creditor. (Ashley v. Marlow Group Private Portfolio Management Inc. 2006 31307 (ON SC), 2006 CarswellOnt 3449, [2006] O.J. No. 1195 at para 78.)

[31] Finally, Romspen claims that Edgeworth’s motion should be denied because it has known for 14 months that Romspen has been accruing interest and took no action until it became apparent that there was surplus income and potential for Romspen to benefit at the expense of Edgeworth.

[32] The Monitor supports the position taken by Edgeworth.

[33] The Receiver takes no position on this motion.

6. The Law

The Importance of Finality

[34] Absent exceptional circumstances, orders are final as it is in the interests of the parties and the community that there be definite and discernible ends to legal disputes. (Tsaoussis (Litigation guardian of) v. Baetz, 1998 5454 (ON CA), [1998] O.J. No. 3516, 41 O.R. (3d) 257 (C.A.), leave to appeal to S.C.C. refused, [1998] S.C.C.A. No. 518.)

[35] The court in Indalex Ltd., Re, 2013 SCC 6, [2013] 1 S.C.R. 271, at para. 240, held that, “[a] judicially ordered constructive trust, imposed long after the fact, is a remedy that tends to destabilize the certainty which is essential for commercial affairs and which is particularly important in financing a workout for an insolvent corporation.”

[36] In Shire International Real Estate Investments Ltd., Re, 2011 ABQB 654, [2012] A.W.L.D. 163, at paras. 1-3, Kent J. held that, “once some properties had been sold and their portion of DIP financing crystallized, trying to readjust the DIP allocation to make it more fair, would make it even less fair for the remaining unsold properties.” As such, he refused to make any reallocation.

The Process by which an Order Can be Amended or Set Aside

[37] The Rules of Civil Procedure, R.R.O. 1990, Reg. 194, provide a limited set of circumstances where an order can be varied or set aside. Rule 59.06(1) provides that,

An order that contains an error arising from an accidental slip or omission or requires amendment in any particular on which the court did not adjudicate may be amended on a motion in the proceeding.

Rule 59.06(2) provides that a party who seeks to have an order set aside on the basis of facts arising or discovered after it was made may bring a motion.

Setting Aside an Order on the Basis of New Facts

[38] New facts will only justify setting aside an order where the evidence might well have altered the judgment and could not with reasonable diligence have been discovered sooner. (Hall v. Powers (2005), 2005 23121 (ON SC), 80 O.R. (3d) 462 (S.C.), at para 12.) If that hurdle is cleared, the court will then consider whether there is prejudice to other parties who may have relied on the order.

[39] The onus is on the party who seeks to vary the order to establish that another creditor will not be adversely affected. (Ashley v. Marlow Group Private Portfolio Management Inc., 2006 31307 (ON SC), 2006 CarswellOnt 3449, 270 D.L.R. (4th) 744 (S.C.), at para 78.).

The Receiver’s Obligations as Provided for in the Bankruptcy and Insolvency Act

[40] Section 247 of the Bankruptcy and Insolvency Act provides that the Receiver “shall deal with the property of the insolvent person or the bankrupt in a commercially reasonable manner.”

[41] Section 248 provides that,

Where the court, on the application of the Superintendent, the insolvent person, the trustee (in the case of a bankrupt), a Receiver or a creditor, is satisfied that the secured creditor, the Receiver or the insolvent person is failing or has failed to carry out any duty imposed by sections 244 to 247, the court may make an order, on such terms as it considers proper,

(a) directing the secured creditor, Receiver or insolvent person, as the case may be, to carry out that duty, or

(b) restraining the secured creditor or Receiver, as the case may be, from realizing or otherwise dealing with the property of the insolvent person or bankrupt until that duty has been carried out, or both.

[42] Section 250 provides that an application may be made under section 248 notwithstanding any order of a court. Where there is any inconsistency between an order made under the Act or a court order, the order made under the Act prevails to the extent of the inconsistency.

7. Analysis and Conclusion

[43] The Court appoints Receivers to manage the affairs of a company in a commercially reasonable manner.

[44] The Receivership Order provides that charges be granted on a Receivership property by Receivership property basis such that the position of first mortgagees of one Receivership property is not enhanced by the Receiver’s borrowing in respect of another Receivership property. This would seem to indicate that the court did not intend that Romspen’s blanket mortgage would be repaid before the Receiver’s other borrowings.

[45] Rule 59 of the Rules of Civil Procedure enables a party to vary an order where there is a matter upon which the court did not clearly adjudicate or where there is an error or omission.

[46] The following points, taken together, satisfy me that Romspen’s interpretation of the allocation of proceeds is not what the parties intended when the Receivership Order was granted and that new facts have arisen since the Receivership Order was issued which make it apparent that Romspen’s proposed allocation is not commercially reasonable.

[47] Firstly, Romspen’s affiant states that,

[T]he allocation method expressed in the Receivership Order made eminent good sense as each landowning Debtor was a separate, single purpose company with distinct assets, liabilities and stakeholders … and the notion of levering assets of one estate to benefit stakeholders of a separate estate was understandably unworkable and it is for that reason that the Receivership Order did not provide for a blanket, consolidated borrowing charge against all of the Edgeworth Group’s assets. (emphasis added)

[48] Secondly, prior to the issuance of the Receivership Order, the third party mortgagees made it clear that they did not agree with the proposed Romspen order because they did not want the Receiver’s borrowings in respect of one property to prime another.

[49] Thirdly, as noted by the Monitor, if Romspen is entitled to have the monies borrowed at 12% interest paid back before the monies borrowed at a 24% interest rate, the Edgeworth Group’s estate, “would have been in a marginally better financial position had the Receiver pursued the [first] CPIV Offer in late 2011 … This is the case as the [second] Platinum offer, while resulting in a $2.3 million higher gross realization, required the Receiver to borrow funds from Romspen for a longer period of time, such that the net realization from the Platinum offer is slightly less than the estimated net realization that might have been achieved from the [first] CPIV Offer.” The Receiver’s decision to reject the first offer and accept the second is commercially reasonable only if the proceeds are allocated as proposed by Edgeworth.

[50] Fourthly, if the surplus proceeds are applied to the Receiver’s other borrowings before the blanket mortgage, (as Edgeworth suggests) the Monitor estimates that this will result in as much as $875,000 becoming available in the CCAA proceeding to the benefit of the subordinate creditors.

[51] Fifthly, at the time the Receivership Order was rendered, no one knew there would be a lengthy delay in selling the Spruce Ridge Condominium units. On the contrary, Romspen was critical of Edgeworth management for being, “slow and ineffective in achieving sales of units in the Spruce Ridge condominium project.” The fact that it took the Spruce Ridge property two years to sell was not and could not have been anticipated at the time of the Receivership Order.

[52] Sixthly, the objective in approving CCAA proceedings and appointing a Receiver is to maximize the value of the company's assets and sell the properties. The allocation of proceeds proposed by Romspen is inconsistent with this objective.

[53] These factors are consistent with Edgeworth’s interpretation that the Receivership Order was not intended to operate so that the blanket mortgage would be repaid before the Receiver’s other borrowings.

[54] Moreover, Edgeworth did not delay in bringing this matter forward. Romspen failed to comply with the Monitor’s repeated written requests for information, which required a motion to compel Romspen to provide the information. Once the information was obtained, the Monitor and Edgeworth brought the issue to the court’s attention without delay.

[55] Finally, Romspen will not be prejudiced as it will still recover interest owing in respect of the Receiver’s borrowings and the blanket mortgage at the proposed lending rate.

[56] I appreciate the general need for certainty and finality in the issuance of court orders. However, in this case, the allocation of proceeds was not finally decided, Romspen’s proposed allocation is inconsistent with the evidence available as to the intention of the parties at the time the Receivership Order was issued, and new facts are available regarding the timing of the sale of significant proceeds which was not available at the time the Receivership Order was issued.

[57] Therefore, in accordance with Rule 59.06 of the Rules of Civil Procedure, the Receivership Order of November 10, 2011 is amended to provide as follows:

The proceeds from the sale of the Receivership properties shall be applied,

(a) first to the total amounts secured by the Receiver’s charges and the Receiver’s borrowing charges in respect of the property sold;

(b) second to the total amounts secured by any first mortgage related to the Receivership property sold;

(c) third to the total amounts secured by the Receiver’s borrowing charges in respect of the other Receivership properties;

(d) fourth to the total amounts secured by the mortgage held by Romspen that is cross-collateralized across all of the Receivership properties; and

(e) last to the Monitor in the concurrent CCAA proceeding for application in the concurrent proceeding.

[58] I note that section 247(a) of the Bankruptcy and Insolvency Act requires the Receiver to deal with the property of an insolvent person, “in a commercially reasonable manner”. Repaying the blanket mortgage at the rate of 12% interest before repaying the other borrowing costs at 24% interest is not commercially reasonable.

[59] Section 250 of the Bankruptcy and Insolvency Act enables the court to make an order under section 248 notwithstanding that the Receivership Order has been made. In the event I am incorrect that the Receivership Order can and should be amended, an Order shall be granted to apply to proceeds in a commercially reasonable manner as set out in paragraph 57.

[60] If the parties are unable to agree on costs, they may provide written submissions of no more than three pages, within fifteen days.

Thorburn J.

Date: July 18, 2014