COURT FILE NO.: CV-14-10543-00CL
DATE: 20150928
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
RE: BETWEEN:
8527504 CANADA INC.
Applicant
- and –
LIQUIBRANDS INC.
Respondent
Court File No. CV-13-10331-00CL
AND BETWEEN:
8527504 CANADA INC.
Applicant
- and -
SUN PAC FOODS LIMITED
Respondent
APPLICATIONS UNDER Section 243 of the Bankruptcy and Insolvency Act, R.S.C 1985, c. B-3, and Section 101 of the Courts of Justice Act, R.S.O. 1990, c. C.43.
BEFORE: Newbould J.
COUNSEL:
Harvey Chaiton and Sam Rappos,, for the Applicant
David E. Wires and Krista Bulmer, for the for Csaba Reider
Anthony J. O’Brien, for BDO Canada Limited, receiver of Sun Pac Foods Limited and Liquibrands Inc.
HEARD: June 22, 2015
ENDORSEMENT
[1] The history of this matter is set out in my previous endorsement of December 4, 2014 and need not be repeated here. In that decision I ordered that a sales process be undertaken by the Receiver for an action previously commenced by Liquibrands and Sun Pac under the Forbearance Agreement against Bridging Canada Inc. (“Bridging”) and 8527504 Canada Inc. (“852”) (the “Action”).
Csaba Reider motion
[2] Mr. Reider is the sole officer, director and shareholder of Liquibrands. Reider was the sole officer and director of Sun Pac. He moves for an order that would permit him to control and advance the Action. In particular, he requests an order (i) that he, as the sole director of Liquibrands be granted leave to vote Liquibrands shares in Sun Pac to elect him as a director of Sun Pac for the purpose of advancing the Action, and (ii) that he is entitled to control the Action on behalf of Liquibrands and Sun Pac under the residual authority of the directors of the companies.
[3] Mr. Reider relies on authority that a receiver of a debtor is not authorized to be involved in litigation by the debtor against the secured creditor that caused the receivership as there would be a conflict of interest on the part of the Receiver and that control of such litigation is one of the residual powers remaining in the directors of the debtor. See Maple Leaf Foods Inc. v. Markland Seafoods Limited 2007 NLCA 7 and Inyx Canada Inc. (Re), [2007] O.J. No. 3846.
[4] Mr. Reider also relies on an obiter statement of Ground J. in 1239745 Ontario Ltd. v. Bank of America Canada, [1999] O.J. No. 3178 that security that gives a secured creditor the right to pursue actions brought by the debtor should not be interpreted to cover actions of the debtor against the secured creditor. Ground J. stated:
74 I accept the submissions of the plaintiff that security agreements must be interpreted in accordance with general principles of contractual interpretation and, as commercial contracts, must be interpreted so as to avoid commercial absurdity. … In keeping with this principle, if a security agreement gives the lender the right, upon default, to pursue causes of action belonging to the debtor, it should be interpreted to apply to causes of action against third parties and not causes of action against the lender itself. To interpret it as including causes of action against the lender itself would be absurd and manifestly unfair as it would grant lenders an absolute shield in their dealings with debtors with whom they have entered into a general security agreement and would have the effect of precluding virtually all lender liability actions where the lender holds a general security agreement.
[5] The difficulty with these submissions is that the order sought by Mr. Reider is directly contrary to the order of December 4, 2014 in which the Receiver was authorized to conduct a sale process for the Action. That order was upheld by Feldman J.A. who denied leave to appeal from that order. The arguments now made by Mr. Reider were not advanced on the motion leading to the order of December 4, 2014 or in the motion for leave to appeal to the Court of Appeal. Mr. Reider has been involved in these proceedings as an active participant. He is a privy to both Liquibrands and Sun Pac. What Mr. Reider seeks amounts to an impermissible collateral attack on the order of December 4, 2014. See Garland v. Consumers' Gas Co., [2004] 1 SCR 629, 2004 SCC 25, para. 72 and R. v. Litchfield, 1993 44 (SCC), [1993] 4 S.C.R. 333, para. 19. The order of December 4, 2014 is a final order and is a matter of res judicata and issue estoppel to the parties and their privies, one of whom is Mr. Reider.
[6] Mr. Reider says that the order of December 4, 2014 directing a sales process for the Action was not a head of relief sought by 852 in its motion material leading to that order. It was, however, raised in the supplementary factum filed on behalf of 852 and it was thoroughly argued. No request for an adjournment was made at the time by Mr. Wires on behalf of Liquibrands and Sun Pac to deal with the point. The point was raised by Liquibrands and Sun Pac in their factum on their application to the Court of Appeal for leave to appeal from the December 4, 2014 order, but leave to appeal was denied. I see no basis for the point to be argued now.
[7] Mr. Reider was aware that the Receiver was interested in selling the Action. In its second report, the Receiver stated:
The Receiver neither has the funding nor sufficient knowledge of the history or allegations to pursue [the Action].
The Receiver has contacted Liquibrands through its counsel, Wires Jolly LLP, to enquire about Csaba Reider and/or Liquibrands’ interest in purchasing the [Action]. To date, the Receiver has not received a response.
[8] In argument, Mr. Wires conceded that his client never expressed to the Receiver an interest in pursuing the litigation. Whether or not this was a tactical decision, it is now too late to be seeking control of the Action other than by way of a bid in the sales process previously ordered.
[9] In all of the circumstances, the motion by Mr. Reider is dismissed.
Sale approval motion
[10] The Receiver moves to approve the sale of the Action to 852, which made a credit bid. Mr. Reider opposes the approval and takes the position that 852 was not entitled to bid for the Action in the sale process directed by the December 4, 2014 order.
[11] In my endorsement of December 4, 2014, I held that the Receiver should be permitted to market the Action in a marketing process. I further stated that no specific marketing process had been proposed and that the receiver should propose a marketing process and Sun Pac and Liquibrands could consider whether it was agreeable to the marketing process proposed. If there was agreement to the marketing process, it could be included in the order to be signed. If there was no agreement, a further attendance to settle it could be arranged at a 9:30 a.m. conference. In the end, the order was settled at a 9:30 a.m. conference.
[12] The parties were in agreement with the terms of the order directing a sales process for the Action except with respect to subparagraph 9(e), which as drafted stated that 852 could be an offeror and could make its offer by way of a credit bid or otherwise. Mr. Wires for Liquibrands and Sun Pac objected to that provision. In the end, it was agreed to make an addition to the subparagraph to make it without prejudice to the parties’ rights. The subparagraph read:
(e) 8527504 Canada Inc. may be an offeror and may make its offer by way of a credit bid or otherwise, without prejudice to any party to oppose the right of 8527504 Canada Inc. to make an offer or to oppose any offer made.
[13] In accordance with the order, the Receiver notified all parties on the service list of the sales process and the opportunity to purchase the Action. Two bids were received. One was a cash bid for $100 from a company named Liquid Brands Inc. signed by Mr. Reider as president of that company. The other was from 852 with a purchase price of $1 million by way of a credit bid. The Receiver stated in its report:
Given that 852’scredit bid offer was substantially higher than the offer received from Liquid Brands Inc., it is the Receiver’s recommendation that this Honourable Court approve 852’s offer…
[14] Mr. Reider relies on a passage from the decision of Feldman J.A. refusing leave to appeal the order of December 4, 2014 in which she stated:
[15] Before concluding these reasons, I add the following. On the motion as argued, I did not understand Liquibrands to be objecting to the procedure for the marketing of the lawsuit, in the event that its request that a separate receiver be appointed to pursue the lawsuit was rejected. I raised some issues in oral argument regarding the propriety of that procedure, particularly with respect to who should be permitted to bid and how to fairly determine the value of the lawsuit. Counsel for the receiver advised the court that all issues regarding the propriety of any proposed sale of the action could be raised at the approval hearing. In the circumstances of this case, the denial of leave to appeal is not to be taken as an endorsement of all aspects of the procedure for marketing the lawsuit against the creditor.
[15] The authorities in Ontario are to the effect that a trustee in bankruptcy has the power to sell to a defendant an action commenced by the bankrupt against that defendant. In Re Almadi Enterprises, 2014 ONSC 1020 (S.C.J. [Commercial List]), RBC was an assignee from the defendant in an action commenced by the debtor before its bankruptcy. RBC made an offer to pay the trustee $65,000 in return for an assignment of the trustee’s interest in the action. The effect of the offer if accepted would mean the end of the litigation. The trustee informed all creditors of the offer. No other offer was received. Brown J. (as he then was) approved the actions of the trustee and the sale to RBC, and in so doing stated:
The Trustee was required to maximize the realization of the assets of the bankrupt’s estate for the benefit of all interested parties. Its interest in the AEI action was one such asset. When faced with an offer by one entity to purchase that asset, though what, in effect, would be a settlement of AEI’s claim in that action, the Trustee put in place a bidding process which would enable any other person to acquire its interest in the AEI Action. By exposing that chose in action to a larger market, the Trustee sought to maximize the amount it secured for that asset.
[16] In Re Katz (1991), 6 C.B.R. 3d 211, the trustee invited sealed tenders for an action commenced by the bankrupt. The purchaser of the lawsuit was a company owned by one or more defendants in the action. The trustee accepted the offer of the company, which essentially resulted in a settlement of the lawsuit in the amount of the purchase price. In dismissing the bankrupt’s motion to set aside the sale, Farley J. stated:
While Katz may complain that the purchaser in this case merely wants to eliminate the action, I do not see this as improper on their part. It is a legitimate business consideration to resolve a lawsuit (which may or may not have merit and which may, if meritorious, expose the defendants to financial risk of some degree but will involve some unrecoverable expense in the litigation process, some imposition on the time of witnesses and the uncertainties of litigation) at the least cost.
[17] In Watt v. Beallor Beallor Burns Inc.(2004), 2004 18877 (ON SC), 1 C.B.R. (5th) 141, the bankrupt commenced an action against various Beallor interests. The trustee applied for directions as to whether he could assign the action to Beallor under section 38 of the BIA. Farley J. held that he could, stating:
When a creditor is proceeding under s. 38, even if the creditor is a defendant in the action, the creditor can join in as a plaintiff and participate, even though this will mean that the creditor will be both a plaintiff and defendant in the action: see Carex Distributors Inc., Re (1981), 43 C.B.R. (N.S.) 209 (Ont. C.A.).
[18] In this case, there is no bankruptcy but rather a receiver. I see no reason however not to apply the principles from these bankruptcy cases to a receivership case. The duty of a receiver to maximize the assets for the benefit of all interested stakeholders is no different from the duty of a trustee in bankruptcy to maximize the assets for the benefit of all creditors. I see no reason why 852 as a creditor of Liquibrands and Sun Pac cannot be a bidder for the Action brought by those debtors against 852.
[19] Mr. Reider contests the right of 852 to make a credit bid.
[20] Credit bids by secured creditors are widely used now in Canadian insolvency proceedings. In Elleway Acquisitions Ltd. v. 4358376 Canada Inc., 2013 ONSC 7009, Morawetz J. (as he then was) stated:
- It is well established in Canada insolvency law that a secured creditor is permitted to bid its debt in lieu of providing cash consideration.
[21] In this case, after the distribution of funds to 852 pursuant to the order of December 4, 2014, 852 is still owed in excess of $3.5 million. The reduction of the indebtedness owed to 852 by the $1 million credit bid will still leave a shortfall. If the bid by 852 were a cash bid of $1 million, that money would be required to be paid by the Receiver to 852. In Elleway, the situation was the same and Morawetz J. stated:
… The reduction of the indebtedness owed to Elleway will be less than the total amount of indebtedness owed to Elleway under the Credit Agreement. As such, if cash was paid in lieu of a credit bid, such cash would all accrue to the benefit of Elleway.
Therefore, it seems to me the fact that a portion of the purchase price payable under the APAs is to be paid through a reduction in the indebtedness owed to Elleway does not preclude approval of the Orders.
[22] I do not see in this case any argument that a credit bid should not be allowed. It cannot be said that the credit bid by 852 had a chilling effect on would-be bidders deterring potentially interested parties from submitting a bid. The person most knowledgeable of the Action, Mr. Reider, made a bid on only a nominal amount. It could not be expected that unconnected and unrelated third parties would be interested in bidding on the litigation since they would need the full cooperation and participation of the principals of the company to successfully pursue it, and the agreed sales process that provided for notice to be given just to parties on the service list was a reflection of that reality.
[23] Mr. Reider raises an issue regarding the value of the underlying asset being sold, i.e. the value of the Action in which $100 million has been claimed by Liquibrands and Sun Pac against 852 and Bridging. He contends that the Action should be valued in order to compare its value to the bid by 852, taking into account the Soundair principles to be applied in considering the approval of a sale of an insolvent’s assets by a receiver, and that the only way to value it is to permit the action to proceed to a trial. If that were the case, the sales process ordered on December 4, 2014 could not proceed as it would require the action to be prosecuted by someone such as Mr. Reider, a result that I have rejected.
[24] The Soundair principles deal with the steps taken by a receiver to market the assets being sold in order to be satisfied that the sale for which approval is sought was fair and reasonable. In this case, the sales process was agreed. There is no suggestion that the time given to respond was insufficient. As a practical matter, the only party that had an interest in the Action apart from 852 was Mr. Reider, and he made a bid which was lower than 852’s bid. He was the person who had the most knowledge of the merits of the Action and he could have chosen to bid higher than $100. His bid may have been tactical in the hope that the bid of 852 would be knocked out on legal grounds, but whether that is so, Mr. Reider has to live with the consequences.
[25] In the circumstances, the sale to 852 is approved. The Receiver may execute any further documentation required to complete the sale. There shall be a vesting order vesting all right, title and interest of Sun Pac and Liquibrands in the Action to 852 in the form provided.
Other issues
[26] The Receiver’s activities set out in its report dated June 2, 2015 are approved, as are the fees and disbursements of the Receiver and its counsel as set out in that report.
[27] The Receiver and 852 are entitled to their costs. If costs cannot be agreed, brief written submissions may be made within 10 days along with appropriate cost outlines and Mr. Reider shall have 10 days to deliver brief written submissions in reply.
Newbould J.
Date: September 28, 2015