Court File and Parties

Court File No.: CV-16-11409-00CL Date: 2017-07-20 Superior Court of Justice - Ontario

Re: Canadian Imperial Bank of Commerce, Applicant And: Urbancorp (Leslieville) Developments Inc., Urbancorp (Riverdale) Developments Inc., Urbancorp (The Beach) Developments Inc., Respondents

Before: Regional Senior Justice Morawetz

Counsel: Clifton Prophet, for the Canadian Imperial Bank of Commerce, as Agent Pamela Huff and Kelly Peters, for Alvarez & Marsal Canada Inc., Construction Receiver Barbara Green, for Terra Firma Capital Corporation Philip Horgan, for Commercial Two, Lien Claimant (Leslieville)

Heard: May 30, 2017 Endorsed: July 20, 2017

Endorsement

[1] Alvarez & Marsal Canada Inc. (“A&M”), as receiver and manager (in such capacity, the “Receiver”), and as construction lien trustee (in such capacity, the “Construction Lien Trustee”), (the Receiver, together with the Construction Lien Trustee, the “Construction Receiver”) of all the assets, undertakings and property (the “Property”) of Urbancorp (Leslieville) Developments Inc., (“UC Leslieville”), Urbancorp (Riverdale) Developments Inc. (“UC Riverdale”), and Urbancorp (The Beach) Developments Inc. (“UC Beach”), together with UC Riverdale, the “Guarantors”, and the Guarantors, together with UC Leslieville, the “Debtors” brought this motion for, among other things, approval of various court orders: the Purchaser Package Approval Order, the Settlement Approval Order, the Beach Project Order, and the Receivership Administration Order.

[2] As part of the Receivership Administration Order, the Construction Receiver sought approval of the fees and disbursements of the Construction Receiver and its counsel Gowling WLG (Canada) LLP (“Gowling or Construction Receiver’s Counsel”), Blake, Cassels & Graydon (“Blakes” or “Independent Counsel”) and Miller Thomson LLP (“MT” or “Construction Receiver’s Real Estate Counsel”) (the “Fee Approval Motion”).

[3] On May 2, 2017, the Construction Receiver sought and obtained approval of the various agreements and arrangements that give effect to the proposed settlement (the “Settlement”) agreed to among Canadian Imperial Bank of Commerce (“CIBC”) in its capacity as Administrative Agent (the “Administrative Agent”) to the senior secured lending syndicate consisting of CIBC, Canadian Western Bank, and Laurentian Bank of Canada (collectively, the “Syndicate”), Terra Firma Capital Corporation (“Terra Firma”), the ad hoc Leslieville Purchasers, and CRAFT Development Corporation (“CRAFT”) as the contractor proposed by Terra Firma to complete construction of the Leslieville Project (collectively, the “Settlement Parties”).

[4] Justice Newbould granted the Purchaser Package Approval Order, the Settlement Approval Order, the Beach Project Order, and the Receivership Administration Order with one exception. The Fee Approval Motion was adjourned. The unofficial endorsement of Newbould J. of May 2, 2017 reads as follows:

No other party but Terra Firma has indicated an objection to the motion for approval of professional fees. The objections of Terra Firma are to be advanced as follows:

1. By Wednesday, May 10th, counsel for Terra Firm to provide a letter setting out the grounds and nature of each objection to the fees and disbursements, including particulars of any specific fee and/or disbursement amounts that are objected to and any additional evidence proposed to be filed;
2. By Monday, May 15th, counsel for the professionals subject to the objection to provide a response to each objection and particulars of any additional evidence proposed to be filed;
3. Terra Firma and the professionals subject to the objections will schedule a 9:30 appointment the week of May 15th to establish a timetable for the hearing and objections; and
4. The Construction Receiver will be seeking to have the matter heard before May 30th.

[5] On May 16, 2017, Newbould J. ordered that the fee dispute be heard on May 30, 2017.

[6] The Construction Receiver is seeking approval of its fees and those of its counsel in connection with the performance of their duties in the Receivership Proceedings in the following amounts:

(i) The Construction Receiver in the amount of $1,390,042.50, plus HST and disbursements, for the period from May 30, 2016 to March 31, 2017; (ii) The Construction Receiver’s Independent Counsel in the amount of $1,328,389.60, plus HST and disbursements, for the period from May 19, 2016 to May 31, 2017; (iii) The Construction Receiver’s Counsel in the amount of $629,161.50, plus HST and disbursements, for the period from June 2, 2016 to March 31, 2017; and (iv) The Construction Receiver’s Real Estate Counsel in the amount of $44,562.00, plus HST and disbursements, for the period from March 2, 2017 to March 31, 2017.

[7] Terra Firma is the junior general secured creditor of the Debtors. Terra Firma objects to the magnitude of the fees being sought and, more specifically, seeks a reduction in the fees sought by the Construction Receiver and Blakes, by at least 30%. Terra Firma does not oppose the fees being sought by Construction Receiver’s Counsel and Construction Receiver’s Real Estate Counsel. The position of Terra Firma was supported by Commercial Two.

[8] Terrra Firma objects to the A&M fees and the Blakes fees for the following reasons:

1. The hourly rates charged are unreasonable in light of the nature of the work involved and the amounts in issue;
2. The time spent by multiple time keepers is unreasonable and disproportionate; and
3. The Construction Receiver and Blakes failed to minimize duplication or effect efficiencies.

[9] The Second Report of the Construction Receiver is fifty-eight pages in length. Approximately twenty-eight pages are devoted to UC Leslieville. Six pages are devoted to UC Beach and two pages are devoted to UC Riverdale. The Second Report also covers a review of security and other potential prior ranking claims and these issues cover some ten pages. A summary of the Construction Receiver’s activities covers another four pages and is followed by commentary related to the Construction Receiver’s Statements of Receipts and Disbursements and estimated funding requirements, approval of fees and activities and conclusions and recommendations.

[10] The Supplementary Report to the Second Report contained in the Supplementary Motion Record of the Construction Receiver contains extensive detail relating to the Fee Approval Motion. Attached to this Supplementary Report as appendices are:

(i) the Affidavit of Douglas R. McIntosh, President of Alvarez & Marsal; (ii) the Affidavit of Milly Chow, Partner at Blakes; (iii) the Affidavit of Lilly A. Wong, Partner at Gowling; and (iv) the Affidavit of Ronald Fairbloom, Partner at Miller.

[11] The affidavits of Mr. McIntosh, Ms. Chow, Ms. Wong and Mr. Fairbloom disclose, in detail, the name of each person who rendered services, the dates on which services were rendered, the time expended and the rate charged.

[12] There was no suggestion that, in discharging its mandate, the Construction Receiver exceeded its authority.

[13] In response to the preliminary objections raised by Terra Firma, the Construction Receiver submitted the Third Report dated May 23, 2017 and a Supplement to the Third Report dated May 29, 2017.

[14] Terra Firma submitted a Responding Motion Record, a Supplementary Responding Motion Record, a Second Supplementary Responding Motion Record and a Third Supplementary Responding Motion Record. Affidavits were sworn by Glenn Watchorn, President of Terra Firma and Rachel Puma, a law student at Robins Appleby LLP., counsel to Terra Firma.

[15] The Construction Receiver complained about the timelines of the filing of Terra Firma’s materials. However, all of the materials were accepted for filing and have been considered by the court.

[16] In his affidavits, Mr. Watchorn states that he has not had sufficient time to prepare a detailed response to the position put forward by the Construction Receiver in support of its claims for its fees and for those its counsel, nor did he have time to review all of the estimates provided to the Construction Receiver related to its estimated fees.

[17] No affiant was cross-examined.

[18] The timetable for the hearing of this matter was set by Newbould J. in his endorsements of May 2, 2017 and May 16, 2017. The matter proceeded, as scheduled, on May 30, 2017 and I must take the record as it was placed before the court on that date.

[19] I do not propose to recite, in detail, the respective positions taken by the Construction Receiver and Terra Firma. In summary:

(i) the Construction Receiver is of the view that its hourly rates and those of its counsel, are reasonable. Terra Firma disagrees; (ii) the Construction Receiver is of the view that the time spent by the Construction Receiver and its counsel was reasonable, Terra Firma disagrees; and (iii) the Construction Receiver is of the view that the Construction Receiver and its counsel minimized duplication and operated efficiently in discharging their mandates. Terra Firma disagrees.

[20] A&M was appointed as Construction Receiver, by order on May 31, 2016.

[21] Terra Firma submits that the receivership involved three small residential projects of which the main project was the build out of a partially constructed fifty-five unit condominium townhouse development, which was 90% complete in terms of its construction at the time of this receivership. Terra Firm submits that it would be grossly excessive and unreasonable if the Receiver recovered its fees and those of its lawyers in the sum of $3.41 million on account of such a small project. Terra Firma also references that the actual Construction Receiver’s and Independent Counsel’s fees incurred dramatically exceeded earlier estimates provided by the Construction Receiver to Terra Firma, upon which it relied. Terra Firma concludes that the Construction Receiver and Independent Counsel failed in their obligation to perform their tasks in an economic fashion.

[22] The Reports of the Construction Receiver recite a very different state of affairs in the Receivership process. The history of the settlement negotiations is set out in detail in the Second Report. The Receiver notes that negotiations among the parties were protracted; however, through the perseverance of the settlement parties, Tarion, Travellers, and the efforts of the Construction Receiver and its counsel, after over eight months of negotiations, resulted in the approval of the settlement definitive documents that give effect to the settlement agreed to among the settlement parties.

[23] The Receiver comments that the settlement provides an opportunity for existing Leslieville purchasers to purchase their respective townhome units at a higher purchase price and on terms and conditions set out in a new agreement of purchase and sale following the completion of construction of the Leslieville Project. Financing is provided by the Syndicate and Craft, and guaranteed by Terra Firma. The Receiver notes that to date, thirty-nine fully completed opt-in packages have been received by the Construction Receiver, representing a 72% participation rate.

[24] The Receiver contends that the settlement represents a successful resolution to the extensive negotiations for the benefit of stakeholders, including Terra Firma. The potential recoveries are set out in a Confidential Appendix to the Third Report.

[25] From the standpoint of Terra Firma, the Receivership may have appeared to be straightforward. However, the fact that the physical state of the construction project was well advanced does not, in itself, have any correlation to the complexity of the issues involved in the Receivership Proceedings or indeed to the quantum of issues.

[26] Furthermore, the interest of Terra Firma is, by definition, far narrower than the interests of the Construction Receiver. The Second Report and the Third Report detail a number of activities in which the Construction Receiver and its counsel were involved with, including:

(i) conservatory and security measures; (ii) asset and construction lien review; (iii) review of Syndicate, Travellers and Terra Firma security positions; (iv) court/administrative and regulatory matters; (v) municipal issues; (vi) tax related issues; and (vii) Tarion negotiations in respect of the status of completion of the Leslieville Project.

[27] The general involvement of the Construction Receiver in these matters may have been known to Terra Firma, but indeed, there is no indication that Terra Firma was fully aware of the specifics and extent of the involvement of the Construction Receiver and its counsel.

[28] The affidavit of Mr. Watchorn, sworn May 26, 2017 principally raises objections relating to the negotiation and finalization of the Settlement. It does not comment on many of the other issues which the Construction Receiver has referred to in its Report.

[29] In Mr. Watchorn’s second affidavit, sworn May 30, 2017, Mr. Watchorn responds to a statement of the Construction Receiver to the effect that Terra Firma’s principle objection relates to the negotiation and finalization of the Settlement. Mr. Watchorn states that that is simply not true and that Terra Firma objected to the duplication of services, fees too high relative to the size of the project, and poor effectiveness and efficiency. He states that it simply should have not have taken such a long time to finalize matters and he draws the conclusion that the Construction Receiver was not managing the process well.

[30] Mr. Watchorn makes a number of generalized complaints with respect to the conduct of the Construction Receiver and its counsel, but the issues raised by Mr. Watchorn have been, in my view, fully addressed in the Reports submitted by the Construction Receiver. Furthermore, the Reports comment on a number of issues that arose in the Receivership Proceedings that would have no impact on Terra Firm and thus there would be no reason for Terra Firma to have intimate knowledge of the issues addressed by the Construction Receiver’s counsel.

[31] It is understandable that Mr. Watchorn would focus on issues involving Terra Firma, but at all times it must be recognized that the Construction Receiver has a mandate to take into account the interests of all stakeholders as well as its obligations to the court.

[32] Having had the opportunity to review the Reports filed by the Construction Receiver, I have concluded that this was not a straightforward engagement. In arriving at this conclusion, I have specifically taken into account paragraphs 19 – 42 of the Third Report.

[33] In particular, I note the comments at paragraph 39 which reads as follows:

[39] To put this in context, the Terra Firma Motion was met with significant resistance and proceeded on a contested litigation path against a subset of forty-six (46) Ad Hoc Leslieville Purchasers. If the Ad Hoc Leslieville Purchasers had been successful on the Terra Firma Motion, the Construction Receiver would likely have been forced to sell the Leslieville Project subject to the pre-existing agreements of purchase and sale executed in 2011, at significant lower value than the then current market prices. As acknowledged by Terra Firma in the Terra Firma Motion, the gross purchase price (less deposits) under the 54 existing agreements of purchase and sale would not have been sufficient to generate any recovery to Terra Firma.

[34] At paragraph 43 of the Third Report, the Construction Receiver concludes that the settlement represents a successful resolution of extensive negotiations for the benefit of the stakeholders, including Terra Firma.

[35] There is no doubt that this receivership process has been expensive and the requested fees are beyond an amount expected by Terra Firma. However, the results achieved by the Construction Receiver, with the assistance of both Construction Receiver’s Counsel and Independent Counsel have translated into a tangible recovery for Terra Firma.

[36] The legal test for reviewing a receiver’s fees and the fees of its counsel was recently restated by Newbould J. in Re Nortel Networks Corporation, 2017 ONSC 673 at paras. 14 and 15:

So far as the test for reviewing a receiver’s fees is concerned, the New Brunswick Court of Appeal in Belyea v. Federal Business Development Bank (1983), 44 N.B.R. (2d) 248 (C.A.) referred to a number of factors to be considered. These factors have been accepted in Ontario as being a useful guideline but not an exhaustive list as other factors may be material in any particular case. See Re Confectionately Yours Inc. (2002), 36 C.B.R. (4th) 200 at para. 51 (Ont. C.A.) (“Bakemates”) and Bank of Nova Scotia v. Diemer, 2014 ONSC 365 at para. 5 (S.C. J.), aff’d (2014), 2014 ONCA 851, 20 C.B.R. (6th) 292 (Ont. C.A.). In Diemer, Pepall J.A. listed the factors as follows:

33 The court endorsed the factors applicable to receiver's compensation described by the New Brunswick Court of Appeal in Belyea: Bakemates, at para. 51. In Belyea, at para. 9, Stratton J.A. listed the following factors:

• the nature, extent and value of the assets; • the complications and difficulties encountered; • the degree of assistance provided by the debtor; • the time spent; • the receiver's knowledge, experience and skill; • the diligence and thoroughness displayed; • the responsibilities assumed; • the results of the receiver's efforts; and • the cost of comparable services when performed in a prudent and economical manner.

These factors constitute a useful guideline but are not exhaustive: Bakemates, at para. 51.

[15] Justice Pepall further stated:

45 … That said, in proceedings supervised by the court and particularly where the court is asked to give its imprimatur to the legal fees requested for counsel by its court officer, the court must ensure that the compensation sought is indeed fair and reasonable. In making this assessment, all the Belyea factors, including time spent, should be considered. However, value provided should pre-dominate over the mathematical calculation reflected in the hours times hourly rate equation. Ideally, the two should be synonymous, but that should not be the starting assumption. Thus, the factors identified in Belyea require a consideration of the overall value contributed by the receiver's counsel. The focus of the fair and reasonable assessment should be on what was accomplished, not on how much time it took. Of course, the measurement of accomplishment may include consideration of complications and difficulties encountered in the receivership.

[37] The legal test has to be considered in the context of the facts.

[38] One of the complaints raised by Terra Firma in its factum is that the nature of this receivership did not require the “large resources and correspondingly higher rates of large firms such as A&M and Blakes”. Terra Firma takes the position that there were other options of firms with good reputations and experience in development projects with far more reasonable rates. Terra Firma provided examples of receivership firms as well as firms with experienced insolvency counsel, who, in other mandates, have charged a lower hourly rate.

[39] A&M was appointed Construction Receiver pursuant to the Appointment Order. There have been no subsequent motions by Terra Firma to substitute another receiver in place of A&M.

[40] Terra Firma contends that, pursuant to a subordination agreement with CIBC, it was prohibited from opposing CIBC’s appointment of A&M as a matter of contract law. Notwithstanding the provisions of subordination agreement, the appointment of A&M as Construction Receiver flows from the court order. The subordination agreement is a contract as between the parties. It does not fetter the discretion of the court on the issue of the appointment of a receiver. A&M is the Construction Receiver.

[41] The Appointment Order authorized the Construction Receiver to engage counsel and I am not prepared to second guess the decision of the Construction Receiver to engage Blakes as its counsel of choice. The ability of a receiver to retain its choice of counsel was recognized by the Court of Appeal for Ontario in Bank of Nova Scotia v. Diemer, 2014 ONCA 851 at para. 44.

[42] In my view, the complaint of Terra Firm with respect to the appointment of A&M as Construction Receiver and Blakes as its counsel is without foundation.

[43] Terra Firma also objects to the hourly rates being charged by A&M and Blakes, but Terra Firma does not object to the hourly rates of Gowling. I fail to understand how, on a principled basis, Terra Firma can object to the hourly rates of the Construction Receiver and Independent Counsel and at the same time accept the rates charged by the Construction Receiver’s Counsel. As pointed out in Blakes factum at paragraph 29(i) the average hourly rate for the Construction Receiver’s professional team is $537.71. The average hourly rate of Independent Counsel is $630.94, which is lower than the average hourly rate of Construction Receiver’s Counsel which is $766.44.

[44] Terra Firma has a direct economic interest in the Fee Approval Motion. The projections of the Construction Receiver are such that it is uncertain as to whether Terra Firma will achieve full recovery of its outstanding debt. If Terra Firma does suffer a shortfall, every dollar charged by the Construction Receiver and Independent Counsel will reduce the recovery to Terra Firma. Likewise, every dollar charged by Construction Receiver’s Counsel has a corresponding effect on the economic position of Terra Firma. Logically, if Terra Firma was concerned about hourly rates, it would also object to rates charged by Construction Receiver’s Counsel. By being selective in its attack on hourly rates, Terra Firma has undermined its argument.

[45] In my view, there is no principled basis on which the position of Terra Firma can be sustained. The affidavits filed in support of the fee requests establish that the rates being charged by both A&M and Blakes are consistent with market rates for receivership proceedings in Toronto. I am satisfied that the Construction Receiver’s professional rates and disbursements, as well as those of its counsel, are comparable to the rates charged by other professional firms in the Toronto market for the provision of similar services in a commercial receivership of this type. I am not prepared to reduce the hourly rates of either A&M or Blakes.

[46] Terra Firma also takes the position that the time spent by multiple time keepers is unreasonable and disproportionate and that A&M and Blakes failed to minimize duplication or effect efficiencies.

[47] Two sets of counsel were involved in this receivership acting on behalf of the Receiver. Gowling and Blakes.

[48] As noted in the Third Report, the Construction Receiver was specifically authorized, pursuant to the Appointment Order, to retain counsel to the Syndicate, Gowling, as counsel to the Construction Receiver, save and except on matters upon which the Construction Receiver in its judgment, determined it requires independent advice, in which case the Construction Receiver was authorized to retain Independent Counsel.

[49] Counsel to the Construction Receiver submits that given the realization options available, the competing interests of stakeholders, and the participation of its Syndicate represented by Gowling in the assessment of options and pursuant to the Settlement, the engagement of Independent Counsel to the Construction Receiver became critically important.

[50] I am not prepared to second-guess the basis upon which the Receiver allocated the various tasks to Gowling and to Blakes. As a court officer, the Receiver is expected to obtain independent legal advice and, as noted above, was specifically authorized to obtain independent counsel. Likewise, the Receiver was authorized to retain Gowling for certain matters. I am satisfied, based on the facts set out in the Second Report and the detail set out in the invoices that the Construction Receiver and its counsel played an active role in negotiating the Settlement. I am also satisfied that the Construction Receiver, with the assistance of its Independent Counsel, combined to design a realization strategy that balanced the competing interests of the stakeholders while maximizing recoveries.

[51] There were occasions when both Gowling and Blakes were involved. The Construction Receiver has addressed this issue at paragraph 35 of its Third Report as well as in the accompanying chart. I am not prepared to second-guess the decisions of the Construction Receiver on the allocation of legal services as between the two law firms. I also accept the explanations provided by the Construction Receiver in the Third Report which detail what firm was doing what work and at what time.

[52] Terra Firma criticizes A&M and Blakes for failing to minimize duplication or effect efficiencies. With respect to the Receiver, Terra Firma points out that the work was, in some instances, duplicitous and, therefore, unduly expensive. Terra Firm submits that it was completely unnecessary to have two senior representatives of the Receiver attend at various meetings with their combined hourly rate of $1,525.00. In directing its criticism towards Blakes, Terra Firma states that it would be fair to assume that given that Blakes had twenty-five time keepers on the receivership file with sixteen of them being lawyers, there was at least some amount of duplication, such as ramp-up time for the lawyers getting up to speed on various assigned tasks.

[53] With respect to the criticism levelled at the Construction Receiver for having two senior representatives attend at various meetings, at first glance, there may be occasion where this criticism may appear to be justified. However, it is reasonable, in my view, to assume that the representatives did not work in tandem on all aspects of the file and that each individual would have specific areas of responsibility. In addition, it is difficult to ascertain, in advance, what issues will be raised at a particular meeting, especially when negotiations are involved. Although it is inevitable that there is a degree of duplication, I am not prepared, in these circumstances, to second-guess the Construction Receiver on its staffing model. Accordingly, I do not give effect to this aspect of Terra Firma’s opposition.

[54] With respect to the criticism levelled at Blakes, I do not take issue with the time spent by the lawyers who were intensively involved in the file. These individuals would have significant knowledge of the engagement and would contribute accordingly. However, I do find that the number of time keepers who were involved to be excessive. Certain time keepers, who were involved in the file for a relatively insignificant time period, would likely have a difficult time trying to discern what specific contribution they made to the file. It is inevitable that a portion of their time would be devoted to learning the file prior to addressing the specific issue assigned to them.

[55] In my view, there is little to be gained by conducting a minute docket-by-docket examination of the accounts. I have concluded that a minor reduction in Blake’s account is appropriate to reflect a degree of duplication arising from having sixteen lawyers involved on the file. In this respect, it seems reasonable in the circumstances to discount the time spent by lawyers and students who contributed fewer than thirty hours of docketed time to the file. In my view, a reduction of the Blakes’ fee of $35,000, plus HST is appropriate.

[56] I consider this reduction to be fair and reasonable in the circumstances.

[57] In arriving at my conclusions, on the fee requests of all parties, I have considered the non-exhaustive list of factors that courts have relied on to determine whether a court officer’s fees are fair and reasonable. These factors include:

(a) The nature, extent and value of the assets handled; (b) The complications and difficulties encountered; (c) The degree of assistance provided by the company, its officers or employees; (d) The time spent; (e) The receiver’s knowledge, experience and skill; (f) The diligence and thoroughness displayed; (g) The responsibilities assumed; (h) The results of the receiver’s efforts; and (i) The cost of comparable services when performed in a prudent and economical manner.

[58] These factors have been recognized in Re Nortel Networks Corporation et al., 2017 ONSC 673 at para. 15, quoting Bank of Nova Scotia v. Diemer, 2014 ONSC 365 at para. 19, affirmed 2014 ONCA 851, quoting Belyea v. Federal Business Development Bank, (1983) Carswell NB 27. The specific application of the facts in this case to the list of factors is set out in the Blakes factum at para. 29.

[59] In the final analysis, it cannot be overlooked that the settlement in which the Construction Receiver and Construction Counsel and Independent Counsel played a necessary role, placed Terra Firma in a position where it will achieve a significant recovery. In my view, the professional fees incurred were necessary to achieve such a result.

[60] In the result, the fee requests of the Construction Receiver, Construction Receiver’s Counsel (Gowling), Independent Counsel (Blakes) and Construction Receiver’s Real Estate Counsel (Miller Thomson) are approved, subject to the modification referenced at paragraph [55] above with respect to the fees of Independent Counsel.

[61] The parties have requested that the appendix consisting of projections respecting the potential recoveries for Terra Firma be sealed pending further order. I am satisfied that, having taken into account the principles set out in Sierra Club of Canada v. Canada (Minister of Finance), 2002 SCC 41 that the disclosure of this information could be harmful to stakeholders. The appendix is to be sealed pending further order.

Regional Senior Justice G.B. Morawetz Date: July 20, 2017