Court File and Parties
COURT FILE NO.: CV-16-11424-00CL DATE: 20160912 SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL LIST
BETWEEN:
EMMANUEL VILLAGE RESIDENCE INC. Applicant
- and -
ATTORNEY GENERAL OF ONTARIO Applicant
- and -
1250 WEBER STREET EAST, KITCHENER, ONTARIO OR THE PROCEEDS OF THE SALE THEREOF (IN REM) Respondent
BEFORE: Newbould J.
COUNSEL: Jennifer A. Whincup and Bruce Darlington, for the applicant Emmanuel Village Residence Inc. Jonathan Bell and Joseph N. Blinick, for the plaintiffs in action CV-10-8547-00CL Gary Valiquette and Jennifer Malabar, for the Attorney General of Ontario Leanne M. Williams, for BDO Canada Inc. the receiver R. Brendan Bissell, for Sure Mortgage Capital Inc. L. Joseph Latham, for Revera Inc.
HEARD: September 6, 2016
Endorsement
[1] Emmanuel Village Residence Inc. (“EVR”) is the owner and operator of Emmanuel Village in Kitchener, Ontario. Emmanuel Village is a retirement community that houses between 110 and 130 residents and employs approximately 50 individuals. Bryan Hunking is the President of EVR and the sole shareholder of 1553748 Ontario Inc., which owns all of the shares of EVR. Mr. Hunking pleaded guilty to a single count of fraud over $5,000 on or about April 22, 2015. On June 10, 2016 Mr. Hunking was sentenced to five years imprisonment and is now serving that sentence.
[2] Largely as a result of Mr. Hunking’s conviction, the Retirement Homes Regulatory Authority revoked EVR’s licence to operate a retirement home. The current effective date for the revocation of EVR’s licence is October 3, 2016. This required EVR to take steps to sell its business as a going-concern or risk displacing its residents at the expiry of its licence.
[3] On June 10, 2016, EVR commenced an application in the Commercial List in Toronto to appoint a receiver for the limited purpose of completing a going concern sale of EVR’s business to a purchaser who is licensed to carry on the business as a retirement home.
[4] Also on June 10, 2016, the Attorney General of Ontario (the “AGO”) commenced an application in Kitchener under section 3(1) of the Civil Remedies Act (“CRA”) to forfeit property municipally known as 1250 Weber Street East, Kitchener, Ontario, a portion of which is owned by EVR (the “EVR Property”). Pursuant to the forfeiture application, the AGO sought and obtained a temporary preservation order under section 4 of the CRA that placed a “No Dealings” notation on title to the EVR Property on an ex parte basis (the “Preservation Order”).
[5] On June 24, 2016 BDO was appointed Receiver of all of the assets of EVR (the “Appointment Order”). Under the terms of the Appointment Order, the Receiver did not take possession and control of the EVR Property. The Receiver was appointed to review EVR’s out-of-court sales process under which EVR received a letter of intent from a potential purchaser for substantially all of EVR’s assets. An Administration Charge of $350,000 was contained in the Appointment Order to secure the costs of the Receiver and lawyers for the Receiver and EVR.
[6] Both the EVR and AGO applications dealt with the same piece of property and the parties were required to make appearances in both Kitchener and Toronto to speak to the issues involving potential conflicts in orders generated by either Court. To streamline the process, the parties agreed to have the Forfeiture Application transferred to the Commercial List and consolidated so that the matters might be consolidated and proceed together, and a consolidation order was made on July 22, 2016.
[7] On July 27, 2016 a revised Preservation Order was made in the Commercial List on the motion of the AGO with the consent of all other parties that permitted the EVR Property to be sold by the Receiver with Court approval. The order provided that the proceeds of sale are to be held by the Receiver pending further order of the Commercial List court. It further provided that the Receiver was entitled to place on title an encumbrance up to $350,000 to secure the professional fees and disbursements incurred in accordance with the Appointment Order.
[8] On August 12, 2016, EVR executed an agreement for the sale of substantially all of EVR’s assets to Revera Inc. The agreement required court approval and a vesting order.
[9] EVR brought a motion for (i) an approval and vesting order; and (ii) ancillary relief, including approving the Receiver’s fees and activities and an increase to the Administration Charge. On August 26, 2016 Justice Hainey approved the sale and made a vesting order which vests title in the purchaser of the EVR Property free and clear of all encumbrances upon the filing of a certificate of the Receiver confirming that all of the closing conditions have been met. The closing date of the Transaction is set for October 3, 2016. Hainey J. also approved the fees and disbursements of the Receiver and its counsel.
[10] The issue of the increase of the Administration Charge was adjourned. The AGO opposes the increase of the Administration Charge. The AGO also opposes certain confidential material from continuing to be sealed. This decision deals with those issues.
[11] The Appointment Order granted the Receiver, counsel to the Receiver (Thornton Grout Finnigan LLP), and counsel to EVR (Madorin, Snyder LLP and DLA Piper (Canada) LLP) (collectively, the “Professional Group”) the benefit of a priority Administration Charge in the aggregate amount of $350,000 as security for their professional fees and disbursements incurred at the standard rates and charges of the Professional Group, both before and after the making of the Appointment Order. The receiver and its counsel are required to have their accounts approved by a judge of the Commercial List. The Administration Charge ranked in priority to all other encumbrances up to a maximum of $200,000, the remainder being subordinate only to the primary secured lender, HMT Holdings Inc.
[12] EVR has been unable to pay any of the accounts of the Professional Group from its free cash-flow and as a result none of the Professional Group has received any payments in respect of this matter.
[13] In the Receiver's report of August 22, 2016 the Receiver reported that the fees and expenses of the Professional Group are already in excess of the Administration Charge set out in the Appointment Order:
3.5 The Receiver is also aware that the fees and disbursements of EVR's counsel are approximately $250,000. Thus, the fees and expenses of the Professional Group are approximately $380,000, which exceeds the Administration Charge of $350,000, as defined in the Appointment Order. The numerous issues and competing parties involved in this receivership have increased the complexity and therefore the cost of the receivership beyond the originally anticipated fees and expenses of the Professional Group as estimated in June. Accordingly, the Receiver requests that the Administrative Charge be increased to $700,000 to account for the increased fees and the additional anticipated fees and expenses to the closing of the sale contemplated by the APA.
3.6 The Receiver supports the Company’s request that the priority of the increase to the Administrative Charge be an increase to the amount set out in paragraph 29(b) of the Receivership Order, increasing the amount from $150,000 to $500,000.
[14] The evidence filed in this matter on behalf of EVR, and there is no evidence to the contrary, is that the Professional Group have incurred fees and disbursements higher than originally anticipated in the Appointment Order for a number of reasons, including the following:
a. The complexity of the proceedings, mainly due to the commencement of the Kitchener Application for forfeiture of the same property at issue in the Toronto Application; b. The increased time monitoring and responding to the needs of the parties in each of the proceedings, and in particular the AGO as a non-commercial party; c. The increased number of steps required to complete the sale transaction as a result of the commencement of the Kitchener Application; d. The additional time that the Professional Group was required to spend preparing materials and appearing at various motions in these proceedings (including both before and after the proceedings were consolidated); e. The additional time spent finalizing the sale transaction given the complexity of the transaction; and f. The additional time spent dealing with the RHRA in relation to the requests to extend the Licence.
[15] Counsel to the AGO made a number of points in opposition to the increase in the Administration Charge.
[16] The first objection was the fact that the notice of motion of EVR asking for an increase in the Administration Charge did not expressly ask that the Preservation Order be amended to permit the increase. This objection is not befitting the AGO. The two proceedings have been consolidated in the Commercial List and the notice of motion clearly requested an increase in the Administration Charge. Counsel for the AGO conceded that the AGO would not oppose an amendment to the notice of motion. The amendment is granted.
[17] The next objection is that there is no rule in the rules of practice permitting a variance. This too is not befitting the AGO. A receivership ordered under section 101 of the Courts of Justice Act is a continuing matter and come-back motions are an everyday matter in the Commercial List. Paragraph 37 of the Appointment Order, taken from the standard receivership order, provides that any interested party may apply to the Court to vary or amend the order. There is no need for a rule to expressly permit such a motion. See DBDC Spadina Ltd. v. Walton, 2013 ONSC 5971.
[18] The next objection is that there is no mechanism under the CRA for payment of legal fees. I find that argument hard to credit in light of the motion made by the AGO for the revised Preservation Order of July 17, 2016 that contained the provision entitling the Receiver to place on title an encumbrance up to $350,000 to secure the professional fees and disbursements incurred in accordance with the Appointment Order. The AGO must have considered that there was authority in the CRA for such an order to be made.
[19] In any event, counsel for the AGO conceded in argument that arguably an order could be made in an application by the AGO under section 4 of the CRA which provides in part:
4 (1) On motion by the Attorney General in a proceeding or intended proceeding under section 3, the Superior Court of Justice may make any or all of the following interlocutory orders for the preservation, management or disposition of any property that is the subject of the proceeding:
An order restraining the disposition or encumbrance of the property or its use as collateral under the Personal Property Security Act or otherwise.
An order appointing a receiver or receiver and manager for the property.
An order for the sale or other disposition of the property if it is perishable or of a rapidly depreciating nature.
Any other order for the preservation, management or disposition of the property that the court considers just.
[20] If under the CRA a receiver can be appointed over property and an order can be made for its sale, subparagraph 8 permitting any other order for the disposition of the property surely must include an order that those persons selling the property are to be compensated for their work and that an administration charge may be made to that end. I realize that the section applies to a motion by the AGO, but the clear purpose of the CRA permitting property to be sold and those doing the selling to be paid must inform the interpretation of other provisions of the CRA.
[21] Counsel for the AGO next contends that the AGO has a concern that the fees and disbursements be reasonable. So far as the Receiver and its counsel are concerned, their fees are required by the Appointment Order to be approved by the Court and their accounts were passed and approved by the Court without objection of the AGO on August 26, 2016. Counsel for EVR in argument said that EVR was willing to have their fees and disbursements also approved by the Court. That had not been required by the AGO when it provided in the revised Preservation Order obtained on its motion that the Administration Charge could be registered on title for the fees of the Professional Group. In the circumstances, I think it appropriate to amend the Appointment Order to require the fees and disbursements of EVR to be approved by the Court.
[22] The next objection raised on behalf of the AGO is that permitted legal expenses are covered in section 5 of the CRA and that there has been no request made by EVR under section 5 and no evidence to support such a request. I think it clear, however, that section 5 has no relevance to the request for an increase in the Administration Charge. It provides:
- (1) Subject to the regulations made under this Act, a person who claims an interest in property that is subject to an interlocutory order made under section 4 may make a motion to the Superior Court of Justice for an order directing that reasonable legal expenses incurred by the person be paid out of the property.
[23] This section applies to a person who claims to have an interest in the property. It is argued on behalf of the AGO that a request for an administration charge is a claim by a person for an interest in the property. I cannot read that section to apply to a request for an administration charge and counsel for the AGO conceded that there is no case saying otherwise. The section in my view clearly applies to someone who claims to already hold an interest in the property against which a preservation order has been made and it does not apply to a receiver seeking to have a administration charge recognized. Section 5(2) provides:
- (2) The court may make an order under subsection (1) only if it finds that,
(a) the moving party has, in the motion,
(i) disclosed all interests in property held by the moving party, and
(ii) disclosed all other interests in property that, in the opinion of the court, other persons associated with the moving party should reasonably be expected to contribute to the payment of the legal expenses; (Underlining added)
(b) the interests in property referred to in clause (a) that are not subject to the interlocutory order made under section 4 are not sufficient to cover the legal expenses sought in the motion.
[24] Under section 5(2)(a)(i), the moving person must disclose all interests held, not sought to be held, in the property. That would not apply to an administrative charge sought by a receiver.
[25] In any event, EVR is in no position to pay the legal and receivership expenses required to sell the property. It is using its funds to pay the ongoing regular bills and expenses of the business prior to the closing, as required by the amended Preservation Order of July 27, 2016. That order prohibits EVR from dealing with the property except as provided in the order and it does not expressly permit legal expenses relating to the receivership or sale to be paid other than to permit the Administration Charge to be registered on title. If there is any cash available at the time the sale closes, it is covered by the security of the secured creditors.
[26] EVR contends that an exception to a preservation order may be recognized under section 3(1) of the CRA if the order clearly would not be in the interests of justice. The section provides:
- (1) In a proceeding commenced by the Attorney General, the Superior Court of Justice shall, subject to subsection (3) and except where it would clearly not be in the interests of justice, make an order forfeiting property that is in Ontario to the Crown in right of Ontario if the court finds that the property is proceeds of unlawful activity.
[27] The phrase “proceeds of unlawful activity” is defined in the CRA to mean property acquired, directly or indirectly, in whole or in part, as a result of unlawful activity.
[28] The AGO contends that the exception in section 3(1) is a narrow one and ought not to be applied to permit the increase in the Administration Charge. I again have some difficulty with that position in light of the provision in the revised Preservation Order obtained by the AGO on its motion that the Administration Charge could be registered on title.
[29] In Ontario (Attorney General) v. 1140 Aubin Road, Windsor and 3142 Halpin Road, Windsor (In Rem), 2011 ONCA 363 the Ontario Court of Appeal dealt extensively with the exception in section 3(1) of the CRA. The case involved contests between property owners wanting to keep their properties and the AGO who contended the properties had been obtained from the proceeds of crime.
[30] Doherty J.A. stated that the word “clearly” in the exception required a finding that the forfeiture order would be manifestly harsh and inequitable. He also stated that it was not possible to catalogue all of the factors that could properly be taken into account in relieving from forfeiture under section 3(1) of the CRA and that the section invited a case-by-case consideration of the specific circumstances. He further stated that the phrase "interests of justice" in s. 3(1) is a broad one and includes maintaining public confidence in the civil justice process that is promoted by orders that are, broadly speaking, in accord with the community's sense of fairness and not by orders that any reasonable person would regard as excessive. He stated:
93 There are several similarities between a relief from forfeiture provision like s. 98 of the Courts of Justice Act and the "clearly not in the interests of justice" exception in s. 3(1) of the CRA. Both accept that the unqualified enforcement of one party's legal right to take the property of another, whether under contract or statute, is not always in the best interests of justice and that exceptions should be made based on specific circumstances. The discretion in s. 3(1), like the discretion in s. 98, is framed in broad terms that invite a case-by-case consideration of the specific circumstances. Finally, the power to relieve from forfeiture under s. 3(1), again like the power in s. 98, will not be routinely exercised to allow a party to avoid prescribed statutory or contractual consequences. Relief from forfeiture is very much the exception and will be granted only where the party seeking that remedy clearly makes the case that forfeiture would be an inequitable and unjust order in all of the circumstances.
94 While I regard the "interests of justice" exception in s. 3(1) as a relief from forfeiture provision that has much in common with the more generic form of that remedy, I acknowledge that s. 3(1) does not operate in exactly the same way as does relief from forfeiture in the realm of private law. Relief from forfeiture in the contractual context pits competing private rights against each other. Those rights are generally quantifiable in economic terms. A forfeiture claim under the CRA engages important public concerns. The interests of justice in s. 3(1) encompass both public and private interests.
95 I agree with counsel for the AG that forfeiture orders under the CRA are intended to further the purposes of the Act as set out in s. 1. It follows that in deciding whether to grant relief from forfeiture under s. 3(1), the court must consider the effect of granting relief on the achievement of those purposes. The power to relieve from forfeiture cannot be allowed to subvert the purposes of the CRA.
96 I do not, however, agree that the "interests of justice" in s. 3(1) are limited to the purposes of the CRA identified in s. 1. Those purposes are part of, but cannot be equated with, the "interests of justice". That phrase is a broad one and includes maintaining public confidence in the civil justice process. That confidence is promoted by orders that are, broadly speaking, in accord with the community's sense of fairness. A forfeiture order made in circumstances where any reasonable person would regard the order as excessive, while perhaps serving the purposes of the CRA in the narrow sense, would do a real disservice to the administration of justice and thereby undermine rather than promote the "interests of justice".
97 A court asked to grant relief from forfeiture under s. 3 must consider all factors that are relevant to the "interests of justice". It is not possible to catalogue all of the factors that could properly be taken into account in evaluating the interests of justice in any given case. Those factors certainly include the closeness of the connection between the property and the illegal activity: see, for example, Ontario (Attorney General) v. 170 Glenville Road, King (In Rem), 2010 ONSC 2865 at para. 72 (S.C.).
[31] In my view, it is inconceivable that any reasonable person would think it fair or just that the professionals engaged to sell the EVR Property would not be paid for their work which is what would happen if the Administration Charge was not in a sufficient amount to pay their reasonable fees and disbursements. It is in the interests of the victims of the fraud of Mr. Hunking to have the asset monetized so that they can be compensated from the proceeds and in their interests to see that a sale is properly conducted that achieves the most available funds. A properly conducted sale requires professional assistance.
[32] This is not a typical case of a contest between an owner of property wanting to maintain rights of ownership to property that has been obtained from the proceeds of crime and the AGO on behalf of victims of the fraud. I find the position of the AGO completely untenable in this situation. In the revised Preservation Order that the AGO obtained on its motion, the sale of the EVR Property by the Receiver was permitted to continue. To then say that the Receiver and its counsel, and EVR and its counsel, should not be paid their reasonable fees and expenses for undertaking the work necessary for the sale makes no sense.
[33] Further, if such an order could be made under section 4 of the CRA on a motion by the AGO, which in my view could be made, then such an order ought to be available on a motion by an interested party under section 3 which does not limit motions to those made by the AGO so long as the proceedings were brought by the AGO in the first place, as occurred in this case.
[34] The AGO has referred to cases in which it has been said that at the preservation stage of a proceeding under the CRA, the court is only being asked to protect the property pending a determination of the case on the merits and that it follows that the “clearly not in the interests of justice” exception should be even more narrowly applied than on the later determination on the merits. See Ontario (Attorney General) v. $51,000 in Canadian Currency (In Rem), 2012 ONSC 1000 at para. 38. Whether or not the statement is a correct statement of the law, and however one wants to narrowly look at the phrase “clearly not in the interests of justice”, in my view it would clearly not be in the interests of justice to deny an increase to the Administration Charge contained in the revised Preservation Order. It would be inequitable and unjust.
[35] The fees and disbursements that the Professional Group seek to protect under the increased Administration Charge are the fees and expenses incurred in the course of the receivership. These include the fees and disbursements of the Receiver and its counsel, who passed their accounts without objection on August 26, 2016. The Professional Group, as a whole, now seek an increase to that charge which will necessarily cover some of the already-approved activities and the activities of the Professional Group through to the closing of the transaction.
[36] Administration charges are routinely granted under receivership orders made under the Bankruptcy and Insolvency Act and in Companies' Creditors Arrangement Act proceedings. This receivership is neither. It is a receivership under the Courts of Justice Act and now permitted under the consolidated CRA proceedings. There is no reason not to consider factors often considered in BIA and CCAA proceedings, which factors relevant to this case include: the size and complexity of the business being restructured, whether there is unwarranted duplication of roles, whether the quantum of the proposed charge appears to be fair and reasonable and the position of the secured creditors likely to be affected by the charge.
[37] In this case, the sale has been made more complex by the fact that EVR operates a licensed retirement home that involves numerous stakeholders that are wholly unconnected with the alleged proceeds of unlawful activity. This has increased the complexity of the proceedings above and beyond the sale transaction of a regulated business to include issues surrounding the continued operations of the business and post-closing requirements. The CRA proceedings taken by the AGO has also greatly increased the amount of work involved.
[38] There does not appear to be any unwarranted duplication of roles. Madorin, Snyder LLP is local, Kitchener-based corporate counsel to EVR and has been primarily involved in dealing with transactional issues throughout the sales process, including reviewing and responding to letters of intent, engaging in negotiations related to the sale agreement, overseeing due diligence by the purchaser, and addressing RHRA licence extension issues. DLA Piper (Canada) LLP of Toronto has primarily been involved in the receivership application, the approval of the sale and litigation issues flowing from these proceedings.
[39] At this stage, it would not appear that the quantum of the charge appears to be unreasonable. The value of the work done to date already exceeds the amount of the Administration Charge originally set. The work of the Receiver and its counsel to August 26, 2016 has already been approved by the Court. The increased Administration Charge does not ipso facto mean that the amount sought by the Professional Group that has not already been approved by the Court will be paid. Those fees and disbursements will be subject to Court approval.
[40] The secured creditors likely to be affected by the increased Administration Charge have not taken any position against the increase. The Receiver joins with EVR in requesting the increase.
[41] In the circumstances, the motion by EVR to increase the Administration Charge from $350,000 to $700,000 is granted and paragraphs 27 and 29(b) of the Appointment Order are amended accordingly. The Appointment Order is further amended to require the fees and disbursements of EVR to be approved by the Court.
[42] EVR requests an order sealing the transcripts of the cross-examination of Judy Hunking, conducted on August 24, 2016 along with the attached exhibits and answers to undertakings. Justice Hainey made an interim order sealing the material and EVR requests an order that it continue.
[43] The material sought to be sealed does not contain an agreement of purchase and sale which routinely is sealed pending completion of a sale to protect the vendor in case the sale falls through and a further sales process is required. EVR contends however that the material contains sensitive banking records that if released could be detrimental to the value of EVR in the event that the current sale agreement does not for some reason close. The concern is that the information could prove valuable to competitors on EVR. In the sale process it was only prospective bidders who signed non-disclosure agreements that were permitted access to the financial records of EVR. Counsel to the purchaser supports the request for the continuation of the sealing order. In this case the sale has obtained Court approval and is scheduled to close shortly. The AGO says that if the sealing order is continued, it should survive only until the EVR Property has been sold.
[44] I am satisfied that the Sierra Club tests have been met in this case to seal the material that EVR seeks to have sealed. The order shall continue until the EVR Property has been sold, either to the current purchaser or, in the event that the purchase falls through, to some other purchaser.
Newbould J. Date: September 12, 2016