Court File and Parties
Citation: Redstone Investment Corporation, 2016 ONSC 513 Court File No.: CV-14-10495-00CL Date: 2016-01-21 Superior Court of Justice - Ontario
Re: In the Matter of the Receivership of Redstone Investment Corporation and Redstone Capital Corporation. And in the Matter of a Motion Pursuant to Section 101 of the Courts of Justice Act, R.S.O. 1990, C.43, as Amended
Before: Regional Senior Justice G.B. Morawetz
Counsel: Grant B. Moffat and Kyla E. M. Mahar, Representative Counsel for the Investors of Redstone Capital Corporation Harvey Chaiton and Doug Bourassa, Representative Counsel for Redstone Management Services Investors Justin R. Fogarty and Pavle Masic, Representative Counsel for the Redstone Investment Corporation Investors
Heard: In-writing
Reasons: January 21, 2016
Endorsement
[1] Representative Counsel for the investors of Redstone Capital Corporation (“RCC”) brought this motion for an Order seeking leave to deliver the Affidavit of Frederick Bach, sworn November 24, 2015 (the “Bach Affidavit”) as evidence in the continuing motion, brought at the request of Grant Thornton Limited, in its capacity as the court appointed receiver (the “Court Receiver”) of Redstone Investment Corporation (“RIC”), RCC and 1710814 Ontario Inc. o/a Redstone Management Services (“RMS”) to determine whether the estates of RIC, RCC and RMS should be substantively consolidated (the “Substantive Consolidation Hearing”), which hearing commenced on October 30, 2015.
[2] The hearing is currently adjourned pending the determination of this motion.
[3] The Bach Affidavit states that Mr. Bach received an Offering Memorandum and reviewed it before choosing to invest in RCC and he then purchased Series A bonds from RCC, specifically because of what he understood to be their preferred position in the event of failure of the Redstone Group.
[4] RCC Representative Counsel submits that because the Substantive Consolidation Hearing has not yet concluded, the applicable test for the admissibility of the Bach Affidavit is in Rule 39.02(2) of the Rules of Civil Procedure. Counsel submits that despite the fact that there has not been cross-examination on any evidence, the present circumstances are most akin to the situation set out in Rule 39.02(2).
[5] The test under Rule 39.02(2) is set out in First Capital Realty Inc. Centrecorp Management Services Ltd., (2009) O.J. No. 4492 (Div. Ct.), at para 13:
(1) Is the evidence relevant?
(2) Does the evidence respond to a matter raised in cross-examination, not necessarily raised for the first time?
(3) Would granting leave to file the evidence result in non-compensable prejudice that could not be addressed by imposing costs, terms, or an adjournment?
(4) Did the moving party provide a reasonable or adequate explanation for why the evidence was not included at the outset?
[6] RMS Representative Counsel and RIC Representative Counsel submit that Rule 39.02(2) is not applicable as no parties have cross-examined, though they have the opportunity to do so. Further, RMS Representative Counsel submits that having delivered the bulk of his arguments on October 30, 2015, his clients would be at a disadvantage if leave was now granted to introduce the Bach Affidavit. Counsel cites case law emphasizing the “fundamental unfairness” of accepting further evidence once submissions have commenced and condemning the attempts of parties to “repair damage” to their positions by submitting new evidence.
[7] On the issue as to whether Rule 39.02(2) is applicable, the submissions of RMS and RIC Representative Counsel are supported by the jurisprudence. The referenced cases each involve an attempt by a party to introduce a new affidavit following cross-examination. There is one case in which the use of Rule 39.02(2) was challenged on the grounds that the moving party’s counsel did not cross-examine any of the opposing party’s deponents: Lihou v. Via Rail Canada Inc. (2006) O.J. No. 4451 (Master). However, Master Sprout permitted the use of Rule 39.02(2) since the moving party’s counsel had exercised her right of cross-examination within the meaning of Rule 39 as she had attempted but had not completed any cross-examinations. Thus, it is not clear from the case law that Rule 39.02(2) applies in the present context.
[8] For the purposes of determining this motion, I need not determine this point. I will proceed on the basis that Rule 39.02(2) does apply.
[9] There is a high threshold for admissibility under Rule 39.02(2).
[10] In Shah v. LG Chem, Ltd., 2015 ONSC 776 at para. 23, Perell J. summarized the principles that have emerged in Rule 39.02(2) jurisprudence:
Leave under Rule 39.02(2) should be granted sparingly.
The moving party has a very high threshold to meet.
The rule about the delivery of subsequent affidavits should not be used as a “mechanism for correcting deficiencies in the motion materials”
The rule is designed to fairly regulate and provide closure to the evidence gathering process for motions and applications.
[11] RCC Representative Counsel submits that the evidence in the Bach Affidavit is relevant as it shows Mr. Bach’s motivation for investing in RCC and the actual prejudice he will suffer in the event of substantive consolidation.
[12] The test for substantive consolidation was recently summarized in Bacic v. Millennium Educational and Research Charitable Foundation, 2014 ONSC 5875, 19 C.B.R. (6th) 286 at para 113.
It requires the balancing of interest of the affected parties and an assessment whether creditors will suffer greater prejudice in the absence of consolidation and the debtors or any objecting creditors will suffer from its imposition. Regard must be had to the:
a) Difficulty in segregating assets;
b) Presence of consolidated Financial Statements;
c) Profitability of consolidation at a single location;
d) Commingling of assets and business functions;
e) Unity of interests in ownerships;
f) Existence of intercorporate loan guarantees; and,
g) Transfer of assets without observance of corporate formalities.
in order to assess the overall effect of the consolidation. (Atlantic Yarns Inc., Re, 2008 NBQB 144, 2008 NBQB144; Northland Properties Ltd., Re, (1988) 1988 CanLII 2924 (BC SC), B.C.J 1210 (B.C.S.C.), affirmed in Northland Properties Ltd., Re, (1989) 1989 CanLII 2672 (BC CA), B.C.J. No. 63 (B.C.C.A.) and PSINET Ltd, Re (2002), 33 CBR (4) 284 (Ont. S.C. [Commercial List]).
[13] In PSINET, supra, Farley J. held, at para. 11 that consolidation by its very nature will benefit some creditors and prejudice others and, as a result, it is appropriate to look at the overall general effect. This approach was affirmed in Atlantic Yarns, supra. In J.P. Capital Corp., Re (1995), 31 CBR (3d) 102 (Ont. S.C.) Chadwick J. expressed concern about the consolidation of actions without knowing the effect it will have on all creditors. Chadwick J. wrote, “Although expediency is an appropriate consideration, it should not be done at the possible prejudice or at the expense of any particular creditor.” In considering the relevance of JP Capital to this matter, I note that the J.P. Capital involved an “extremely complex bankruptcy” touching on a number of companies and assets, the parties were in the midst of cross-examination, and there were issues raised with respect to the actual corporate structure of the various companies and the tracing of the assets in relationship to the parties (para.17).”
[14] In my view, Mr. Bach’s motivation for investing in RCC is not relevant to any of the considerations set out in the test for substantive consolidation. As a result, in determining the overall general prejudice to both sets of creditors, it seems to me that if the evidence is not relevant, refusing leave cannot be prejudicial to Mr. Bach, as an individual creditor. The second part of the Rule 39.02(2) is not applicable as no cross-examination took place and since I have determined that the content of the affidavit is not relevant to the determination of the Substantive Consolidation Hearing, the fourth part of the test need not be considered.
[15] Accordingly, since I have concluded that the Bach Affidavit does not meet the relevance criteria of the Rule 39.02(2) test, the motion seeking leave to deliver the Bach Affidavit as evidence in the Substantive Consolidation Hearing is dismissed.
[16] The costs of this motion will be addressed on the disposition of the Substantive Consolidation Hearing.
Regional Senior Justice G.B. Morawetz
Date: January 21, 2016