CITATION: The Superintendent of Financial Services v. Textbook Student Suites (525 Princess Street) Trustee Corporation, 2017 ONSC 6681
COURT FILE NOS.: CV-16-11567-00CL
DATE: 20171107
ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST)
B E T W E E N:
The Superintendent of Financial Services, Applicant
– and –
Textbook Student Suites (525 Princess Street) Trustee Corporation, Textbook Student Suites (555 Princess Street) Trustee Corporation, Textbook Student Suites (Ross Park) Trustee Corporation, 2223947 Ontario Limited, MC Trustee (Kitchener) Ltd., Scollard Trustee Corporation, Textbook Student Suites (774 Bronson Avenue) Trustee Corporation, 7743718 Canada Inc., Keele Medical Trustee Corporation, Textbook Student Suites (445 Princess Street) Trustee Corporation, and Hazelton 4070 Dixie Road Trustee Corporation, Respondents
BEFORE: F.L. Myers J.
COUNSEL: I. Aversa and J. Nemers counsel for Grant Thornton Limited as trustee of the respondents G. Benchetrit, representative counsel for the Investors Committee D. Jewitt in person
HEARD: November 2, 2018
Endorsement
The Motion
[1] This endorsement concerns the efforts by Grant Thornton Limited, as trustee of the respondents, to finalize the claims process to identify and quantify all valid claims against the respondents.
[2] The respondents are trustee corporations holding syndicated mortgage investments on behalf of approximately 1,400 individual investors with total investments of more than $116 million.[^1] The mortgages represent security for loans made by public investors to 16 or more related developers. The developers failed and have been alleged to have been engaged in a fraudulent scheme that bilked public investors of their funds in favour of the developers’ owners and their confederates who include mortgage brokers, trustees, agents, and advisors who are alleged to have participated in the scheme.
[3] This proceeding involves only the trustee corporations that are the formal mortgagees of the developers. Funds advanced by public investors were accumulated in the trustee corporations who then formally on-lent the funds to the developers in return for mortgage security encumbering the developers’ real estate development projects to be held in trust for the public investors.
[4] On October 27, 2016, the court appointed Grant Thornton Limited as trustee to take control of the mortgagees on the motion of the Superintendent of Financial Services. At about the same time, the Superintendent suspended the licenses of related mortgage brokers. Many of the developers have been placed in receivership under court orders obtained subsequently.
[5] By order dated August 23, 2018, the court approved a process recommended by the trustee for dealing with several unresolved claims against the respondents. That process has been carried out and the court accepted the trustee’s recommendation to resolve all but one of the remaining claims at the hearing on November 2, 2018.
[6] The sole remaining claim that is addressed in this endorsement is a claim against the respondents by Mr. Dennis Jewitt and his business Breakwall Financial Corp. As discussed below, Mr. Jewitt’s principal claim is against the Investors’ Committee. He claims to be entitled to fees for services that he performed for the committee. He then claims against the respondents on the basis that, like representative counsel for the Investors’ Committee and like Grant Thornton, his fees should be secured by a court ordered charge against the assets of the respondents. He says that as an insolvency professional who performed services for the benefit of the stakeholders of insolvent entities, he should be paid his fees ahead of any distributions to creditors. He argues that his work benefited creditors in their recovery and therefore he is entitled to be paid before the creditors are repaid any of the funds owing to them.
[7] I note that Mr. Jewitt is self-represented. He says that he has significant experience in the insolvency workout business generally. But he is not a lawyer and his claims suffer as a result as discussed below. As a starting point, Mr. Jewitt bases his claim on an unsigned contract alone. To assist him, the court raised the concept of quantum meruit (a doctrine that requires payment of fair value for services rendered even in the absence of a contract). Moreover, Mr. Jewitt points to no legal basis for the granting of security to him. He correctly notes that insolvency professionals generally know that since they are dealing with insolvent companies by definition, protection for their fees is important. However protection can be provided in a number of ways, including contract, third party indemnity, bilateral security, or court ordered security. There are certainly cases that hold that an insolvency professional who undertakes work without securing its fees does so at its own peril. However here, Mr. Jewitt relies on an oral agreement to grant him security corroborated by a draft contractual term that required the Investors’ Committee to try to obtain court ordered security for his fees. So, his claim for breach of contract is not only for his fees but also in relation to the claim for security.
[8] Although Mr. Jewitt has advanced no legal support for his claims, I assume that he relies on the court’s inherent jurisdiction to order security as discussed in such cases as Robert F. Kowal Investments Ltd. et al. v. Deeder Electric Ltd., 1975 681 (ON CA) and its progeny. As discussed below however, a claim for breach of an obligation to try to obtain court ordered security does not avail Mr. Jewitt in the circumstances.
[9] For the reasons that follow, taken at their best and allowing for gaps in Mr. Jewitt’s legal positioning, his claims cannot succeed. Accordingly, Mr. Jewitt’s claim against the Investors’ Committee is dismissed and his claim against the respondents is dismissed.
The Principal Issue
[10] The law is well-settled that in determining whether the parties entered into a binding contract, the court will consider whether they reached agreement on all of the material terms. One term that can be material is whether an agreement needs to be signed or whether an oral agreement will suffice. There are many cases where, for example, parties settle a lawsuit agreeing to exchange signed release documents, in which courts have held that the signing of the releases is not a material term and therefore the agreement is effective despite the fact that signed releases have not been exchanged. In other cases, the parties agree that until they sign the formal written agreement there is no agreement. The question is whether the parties agreed to a requirement for a formal written document to evidence their agreement and whether that term is a material term of the parties’ deal.
[11] In order to determine whether there was an agreement reached between Mr. Jewitt and the Investors’ Committee therefore, there is a need to review their dealings in some detail.
The Facts
The Investors’ Committee
[12] By order dated January 24, 2017, the court recognized the formal existence of a committee to represent the interests of the 1,400 investors whose interests were engaged in these proceedings. The order also recognized the position of representative counsel to the Investors’ Committee. Under para. 5 of the order, the fees and disbursements incurred by representative counsel “will form part of the indebtedness owing [by the respondents] to the…Investors.” Para. 11 of the order authorized the Investors’ Committee to retain advisors. Those advisors’ fees too would form “part of the indebtedness owing to the …Investors.” Para. 14 of the order provided a court ordered second priority charge over the assets of the respondents to secure the fees and disbursements of representative counsel. The charge stands behind the first charge that was granted to the trustee on its appointment. As the order stands, other advisors who might be retained under para. 11 do not have a charge and, barring a further order, their claims will rank only with the unsecured, general claims of the investors.
[13] The trustee accepts that whatever claim Mr. Jewitt has against the Investors’ Committee will rank pari passu with the claims of the investors. As investors’ claims now exceed $116 million, and recovery has been modest in comparison to the total amount outstanding, this concession provides very little likelihood of any significant payment being made to Mr. Jewitt.
[14] In the endorsement dated May 2, 2017, referred to in the footnote above, the court discussed some of the activities of Mr. Jewitt during and shortly after the Investors’ Committee was being formed. He advanced the positions that, among other things: (a) the trustee ought to be subject to votes of investors on each separate development project; (b) a court appointed receiver was not required as its work would be duplicative of his; and (c) the Investors’ Committee should consult counsel only on an ad hoc basis as needed rather than ceding control of the process to its counsel. The court came to the following conclusion concerning his involvement at that time:
[30] Mr. Jewitt’s conduct is quite fairly described as conduct which “undermines the fair administration of justice.” His efforts to malign court officers tasked with protecting the interests of a large body of public investors are aimed at undermining confidence in the court’s process. Whether he is doing so for potential personal gain or due to some connection with [a principal engaged in the allegedly fraudulent scheme] or perhaps just out of a misguided sense of propriety, his ongoing efforts to become engaged in the trustee’s process by disseminating misinformation and making unsupported allegations of misconduct against the court’s officers has increased the costs of the process and undermined the fair administration of justice by deflecting court officers from their tasks as discussed above.
Steps prior to the Order Recognizing the Investors’ Committee
[15] In early January, as the Investors’ Committee was just being formed, the chair and secretary of the committee were in communication with Mr. Jewitt concerning the manner of proceeding. No documents have been produced indicating that the Investors’ Committee had authority to retain advisors at that stage or that it had done so in any formal capacity. Mr. Jewitt prepared a draft report to the investors to introduce the Investors’ Committee and to outline some of its early progress. He used the draft to help define the role that he was seeking. In providing the draft report to committee members, Mr. Jewitt wrote, in part,
I should probably mind my own business but I couldn’t resist.
With respect to Breakwall’s involvement I didn’t know what to say but I wanted something to at least acknowledge I have some authority to speak to the developers and Grant Thornton pertaining to a working protocol.
[16] In the draft report, Mr. Jewitt described his proposed engagement as follows:
• Breakwall Financial has been authorized to work, with the developers and Grant Thornton, to help develop a listing of information requirements and designate the roles of the various parties in obtaining the information.
• Breakwall will analyze the information on the Committee’s behalf on terms and conditions to be negotiated. Breakwall has already agreed that any fees can be paid out of the proceeds of sale or fresh financing. Breakwall will also consider a partial contingency fee arrangement if it is engaged to oversee any development on the investors’ behalf.
[17] By email dated January 9, 2017, the secretary of the nascent Investors’ Committee discussed having Mr. Jewitt attend a meeting with the principal of the developers in face of his request to have specific authority to speak on behalf of the committee. She wrote:
Hi Dennis, just got off the phone with Rob and Peter and were discussing the dilemma you are faced with while we sort out an arrangement with you and get the engagement letter in place
[18] It is clear that prior to the order recognizing the Investors’ Committee on January 24, 2017, there was no agreement between the committee and Mr. Jewitt. He asked for formal recognition while understanding that, until he had a position, his efforts to engage in committee issues were none of his business. He described his authority to list and analyze information as being “on terms and conditions to be negotiated.” He noted that Breakwall had already offered to be paid on a contingency fee basis “if it is engaged.” For its part, the representatives of the committee acknowledged a dilemma asking Mr. Jewitt to attend a meeting while he was not yet engaged.
Negotiations of the Engagement Letter
[19] Once the Investors’ Committee was formally recognized by the court on January 24, 2017, Mr. Jewitt provided a draft engagement letter to the committee on January 29, 2017. He noted that the draft was sent “for discussion purposes.” He invited revisions as the committee “deem necessary.”
[20] Some negotiations ensued to the point where, on February 5, 2017, the secretary noted that she did not disagree with anything proposed. At that time, Mr. Jewitt was proposing approaches that differed from those being suggested by representative counsel. The secretary therefore invited Mr. Jewitt to participate in a conference call with the committee.
…to address the Committee and the need to pursue other options for investors to increase the return of their investments and provide them with some examples of what you’re working on. I would also like them to have an opportunity to ask you questions. You can drop off and the Committee members can vote.
[21] It is apparent that Mr. Jewitt and the secretary were still engaged in a marketing effort before the committee determined what to do.
[22] On February 6, 2017, Mr. Jewitt confirmed that he would meet with the principal of the developers on the following Thursday. He then raised a concern with a proposal as to how he was to be paid from funds raised by the Investor’s Committee. He asked that representative counsel be instructed to obtain an order that his fees rank ahead of investors’ recovery.
[23] Despite previously saying that she had no disagreements with Mr. Jewitt’s proposal, later that day, the secretary wrote an email that appears to forward to Mr. Jewitt a comment written to her by another committee member:
I have reviewed the draft agreement carefully. I am struck by the fact it does not set out what Breakwall will do for $40K/ month plus HST plus out of pocket expenses. As I see it the only statement of what Breakwall will actually do is in paragraph 13 on page 4 “Breakwall is prepared to assist the Committee in fulfilling its role as described in paragraph 1 above subject to the terms and conditions described below.” There is simply nothing at all in the agreement to say what Breakwall is, what qualifications it has, how it intends to go about its work, or what work of any value it intends to produce. As a lawyer, I find the draft agreement wholly inadequate. I would want far more detail as to why we would want to retain Breakwall and what Breakwall can offer and what it proposes to do. Otherwise how can the Investors’ Committee measure any value of what it does for its very substantial fee.
[24] Mr. Jewitt responded to the secretary as follows:
See para 12 and 13. Short and sweet. The truth is I am going to do whatever is required to enhance the recovery to the investors. That involves a wide range of possibilities that I don’t have time or patience to explain.
Unfortunately my role is difficult to explain to investors that have no insolvency or real estate experience. They should realize however they have already spent $700k with inadequate reporting and absolutely no creative solutions. Anyone can simply suggest the properties should be sold and to let the market dictate recovery. If that is what they want they are already in good hands.
I appreciate you are in a difficult position and the Committee might be difficult to control. Notwithstanding we will try to convince them they need help on Wednesday. If they don’t want help I think I will go to Florida.
[25] Once again the documents show that there was a negotiation under way. Mr. Jewitt is clear that he wanted to bring what he saw as a creative approach to the process. He noted expressly that the Investors’ Committee did not need him if it was content to simply liquidate the mortgaged properties. Moreover, his statement that if not wanted on Wednesday, he would go to Florida rather than going to the meeting with the principal of the developers on Thursday, clearly establishes that there was no retainer yet in place under which Mr. Jewitt was already bound to attend the meeting. He was willing to put some time and effort into being retained, but he was drawing a line in the negotiating sand and saying that he had to be retained if he was to do further work. I am not critical of the negotiating strategy. I simply note that it is apparent that a negotiation was underway.
[26] On February 8, 2017 after further discussion, the Investors’ Committee voted to engage Mr. Jewitt subject to two further negotiating points. By email dated February 14, 2017 the secretary of the Investors’ Committee says “I guess I owe you an agreement in return. #1 on my schedule tomorrow.” Mr. Jewitt’s evidence is that the secretary was referring to his draft engagement letter and the fact that the final two points had been agreed upon orally between the secretary and him by that time. Reading the email exchange between them that day, it appears that they may actually have been talking about an agreement concerning a proposed transaction for a project known as Vaughan Crossings. However, I accept, for the purposes of this endorsement, that there was oral agreement between the secretary of the Investors’ Committee and Mr. Jewitt on the two outstanding points.
[27] Assuming that there was oral agreement between the secretary and Mr. Jewitt, the Investors’ Committee still did not sign the engagement letter. There is no evidence indicating that the Investors’ Committee itself agreed to the two remaining terms. The chair says that the outstanding terms were never resolved. It was apparent to Mr. Jewitt that the secretary did not speak for the committee. Although she was apparently an ally, Mr. Jewitt had already acknowledged that she did not control the committee.
[28] While these negotiations were under way, it emerged that Mr. Jewitt had some previously undisclosed relationship with a principal of the developer and mortgage brokers. This potential for conflict of interest concerned members of the Investors Committee. Mr. Jewitt had apparently been retained by the developers to assist them on the Vaughan Crossings transaction. This project also involved public investors but it was not one of the projects that was the subject of these proceedings. Mr. Jewitt tried to prevent representative counsel from reviewing the transaction on behalf of investors and from incurring fees on the project as he said there was no financial room in the deal for more fees. Representative counsel responded that it could allocate its fees elsewhere. Mr. Jewitt questioned how fees from one project could be allocated to another given that different investors were involved in each project. Representative counsel responded that how it allocates its fees was none of Mr. Jewitt’s concern. Mr. Jewitt argued that representative counsel was engaged in wrongdoing. This issue prompted a high volume of email traffic among all parties including significant allegations of impropriety.
[29] During the back and forth, as Mr. Jewitt was trying to keep representative counsel away from the Vaughan Crossings transaction, he wrote to the secretary of the Investors’ Committee, that “Without clarification of everyone’s roles, I don’t think this is going to work.” This statement is not consistent with Mr. Jewitt’s position that he had been engaged on agreed terms just days earlier.
[30] On February 22, 2017 the chair of the Investors’ Committee resigned. He provided a detailed memo in which he raised numerous concerns regarding the prospect of retaining Mr. Jewitt including his requirement that he be provided with a priority for his fees ahead of investors.
[31] In a memo dated February 23, 2017, Mr. Jewitt advised the Investors’ Committee that representative counsel “are suggesting that Breakwall not be retained or, if so, on a very limited basis.” Once again, this statement establishes that Mr. Jewitt understood that the terms of any retained had yet to be agreed upon.
[32] Up to that point, Mr. Jewitt had been pushing for a retainer on all projects. Mr. Jewitt rejected a proposal that he be retained in respect of particular development projects for which his input might be sought. As prospects for the full retainer dimmed, on March 2, 2017, Mr. Jewitt proposed a retainer for $3,000 per project per month until each property is sold. With 15 files in issue in February, Mr. Jewitt proposed a fee of $45,000 for that month with fees declining as properties were sold over time. He proposed that his engagement include a six month minimum term. He wrote, “The contract commences Feb 1st and must be 6 months in duration.” Mr. Jewitt was still negotiating price and term which are fundamental terms of any engagement of services.
[33] The most telling document, in my view, is Mr. Jewitt’s email to the new chair of the Investors’ Committee dated March 3, 2017 which I reproduce in full:
It was agreed that, if the Committee didn’t have sufficient funds, I would wait and be paid out of the proceeds of sale for the related property ahead of any payment to the investors. [Representative counsel] were suppose [sic] to get a registered charge on the properties to secure any outstanding invoices to ensure I was paid on closing. [Representative counsel] conveniently only got the charge to cover their fees.
I believe that I could get comfort from Grant Thornton and probably could fall under their security. For now, I will rely on the Committee assurance that I will be paid from the process of sale. If I decide to apply to court to register the charge I will pay for the costs.
Rob I need a signed contract. I have had to tell people that I have no authority to make any representations because I have not yet been formally retained. I have had to cancel meetings because of this and it is hurting my reputation.
With respect to [representative counsel] you should formally instruct them that they are not to do any work without specific instructions from the Committee.
Rob I need an answer today. [Emphasis added.]
[34] It is perfectly apparent from this email that Mr. Jewitt knew and intended that he was not retained unless or until he had a signed agreement in hand. He was not acting as if he was already bound as he was cancelling meetings and declining to make statements on behalf of the Investors’ Committee. His reference to an agreement concerning contingency fees was but a partial agreement concerning the manner of payment that was not a freestanding agreement. No amount of fees had yet been agreed. He provided a revised fee offer just the day prior. Moreover, his offer to pay for a motion to seek a court ordered charge to secure his fees was yet another offer that is not consistent with there having been a full and binding agreement reached previously.
[35] Mr. Jewitt says that after oral agreement on all outstanding issues had been reached with the secretary of the committee on February 14, 2017, his subsequent communications were just offers to amend the agreed upon terms to meet concerns expressed by the Investors’ Committee. I do not find that explanation consistent with the contemporaneous words used by the parties including, especially, Mr. Jewitt. Mr. Jewitt expressly complained about a lack of a written retainer as preventing him from acting. If there had been oral agreement with the written retainer being a mere formality he could not have said those things.
The Investors’ Committee ends the Process
[36] On March 6, 2018, the Investors’ Committee met and voted not to retain Mr. Jewitt. On being advised by the new chair that the vote was to be taken that afternoon, Mr. Jewitt wrote that “Breakwall’s engagement was approved unanimously back in January @ $40,000 per month and I worked in good faith based on that commitment.” However, that is not quite accurate. The engagement was approved subject to two outstanding items and subject to signing the formal contract. The two items seem to have been agreed as between Mr. Jewitt and the secretary of the committee, but not by the committee. The Investors’ Committee raised the issue of Mr. Jewitt’s possible conflict of interest and negotiations continued with Mr. Jewitt insisting on receiving an agreement signed by the chair on behalf of the Investors’ Committee before he would recognize being formally retained.
[37] The parties disagree on the characterization of the Investors’ Committee decision to end its dealings with Mr. Jewitt. The Investors’ Committee says it did not agree to the engagement letter as proposed by Mr. Jewitt. Mr. Jewitt argues that the Investors’ Committee was already bound to pay him $40,000 per month and to give him a 30 day termination notice. He sees the wording of the decision as a colourable device to mask a breach of his agreement. As such, he seeks payment of approximately $103,000 plus HST representing five weeks’ work plus a 30 day notice period.
Settlement is not asserted by either side
[38] Mr. Jewitt hoped to be retained on an ad hoc basis after the engagement was rejected (or breached). However, before considering one-off assignments, he asserted a right to be paid fees for February, the first week of March, and a one month notice period. The Investors’ Committee made two offers to settle the claim for fees with Mr. Jewitt that he rejected. It voted to make a third offer to him that he purported to accept. However, the third offer was never actually made to him. He heard about it through friendly members of the committee and accepted. The Investors’ Committee denies making an offer that was capable of acceptance. In any event, Mr. Jewitt submits that his acceptance was based on the premise that he was still going to be retained on a development-by-development basis after that time. That did not happen. As such, he submits that he is not bound by a settlement and he asserts the full amount of his claim. Both sides agree therefore, that there was no settlement.
Contract Analysis
[39] It follows from the foregoing facts that there was never a meeting of the minds on all material terms so as to complete a contract. There was much too and fro. Some issues were settled. Agreement was close in mid-February. But no agreement was reached as Mr. Jewitt’s March 3 memo lays bare. The agreement was always “subject to contract.” That is, it was a material term of the offers and counter-offers that there had to be a written engagement letter duly authorized and executed by both sides in order to bind and grant necessary authority to Breakwall.
Quantum Meruit
[40] Counsel for the Investors’ Committee argues that the doctrine of quantum meruit cannot apply in this case. On the facts, Mr. Jewitt required a signed agreement to be bound. He knew and intended therefore to be spending time with the hope of being retained. It is not open to him to negotiate terms with the kind of ultimatum that he put to the chair in his March 3 email and then claim to have been engaged throughout based on a prior ill-formed or inchoate agreement.
[41] More fundamentally, counsel for the Investors’ Committee argues that not only did Mr. Jewitt provide no value to the Investors’ Committee, his conduct actively impaired the workings of the committee and made it incur significant costs dealing with his mischief.
[42] Mr. Jewitt argues that it was representative counsel who interfered with his ability to complete his engagement. He points to a number of documents in his record that he said he prepared that provided helpful advice to the Investors’ Committee. However, he conceded that when requested to conduct analyses of each of the development projects in order to show the Investors’ Committee how in each project he might be able to offer valuable services, he declined. He fairly submitted that he could not be expected to do the work analyzing each project before he was retained. That would have given the Investors’ Committee the benefits of his analyses for free. I agree with him. He should not have been and was not expected to produce works of value before being retained. He was quite clear on the limits that he placed on his own involvement prior to an engagement letter being signed. The work that he did perform. as he noted, was intervening where, perhaps, it was not his business to do so.
[43] There is no evidence to assist me to quantify any value Mr. Jewitt may have bestowed upon the Investors’ Committee. As best as I can tell, the bulk of his efforts were made to criticize the trustee and representative counsel so as to pitch for his own retainer. I summarized his involvement in my prior endorsement:
[25] By his own words, it is clear that Mr. Jewitt was looking to be retained on all projects – not just Vaughan Crossings in which he had been involved by former management. It is also clear that Mr. Jewitt sees his role as essentially replacing the strategic planning performed and to be performed by [the court appointed receiver]. He is not a licensed trustee in bankruptcy. His independence is very much in issue. He lacks experience and understanding as to the roles of court officers in court proceedings such as this one. He conceded that he did not know that it is wholly contrary to the nature of these proceedings for the trustee to be bound by the votes of investors as he demanded. Yet he lashes out in a caustic manner, requiring professionals to spend precious time, and therefore investor money, defending themselves and their reputations from his freely volunteered conspiracy theories and baseless allegations of wrongdoing and bad faith.
[44] In all, there is no evidence before me that Mr. Jewitt provided services other than gratuitously. He was marketing and negotiating. He expressly declined to particularize his proposed services to allow quantification of the value of his services on any objective metrics. He quite fairly placed limits on his willingness to proceed unpaid. Services provided with the hope of being retained are not a basis to claim quantum meruit in my view. Moreover, there is no evidence before me that establishes that Mr. Jewitt’s services bestowed quantifiable value on the Investors’ Committee and certainly none that exceeded the costs to which he put all concerned.
The Claim against the Trustee for Priority
[45] In light of the foregoing findings, there is no fee due to Mr. Jewitt or Breakwall by the Investors’ Committee. Therefore there is no basis to claim over against the mortgagees under the January 24, 2017 order appointing the Investors’ Committee. If I am wrong in the foregoing conclusions however, the question of priority remains to be considered.
[46] The trustee was appointed under s. 37 of the Mortgage Brokerages, Lenders and Administrators Act, 2006, SO 2006, c 29. That section allows for the appointment of a trustee or receiver in the public interest. The person appointed is provided with unenumerated powers to be specified by the court. There is no authority granted in the statute for an order granting a charge over the assets of the insolvent companies over whom a trustee is appointed to secure the fees of the trustee and representative counsel as has been done in this proceeding. One might argue that, at least in respect of the trustee, the power is implicit in the power to appoint or flows from the statutory discretion to appoint. However, I do not see any argument that the power to appoint a trustee over a company implicitly includes the authority to encumber its assets to pay for counsel or a financial advisor to represent an ad hoc committee of its creditors.
[47] Absent statutory discretion to grant charges to secure the payment of those who advance funds or who perform services for an insolvent party, the court’s entitlement to make these orders flows from the residual inherent jurisdiction of the court. In MEI Computer Technology Group Inc., Re, 2005 CarswellQue 3675, Gascon J. (as he then was) discussed the continued recognition of the court’s inherent jurisdiction to grant priority charges against assets of an insolvent debtor in the absence of an express statutory power to do so. I note that he refers to “DIP” charges which are charges in favour of lenders to a “debtor in possession” which is not this case. However he refers as well to the creation of other priority charges as follows:
That said, the review of the jurisprudence and doctrine on this issue of the exercise of the Courts' inherent jurisdiction to allow a DIP financing or create priority charges point out to the following factors, while not necessarily exhaustive, as applicable guidelines:
Allowing a DIP financing or creating a priority charge is an extraordinary measure that should be used sparingly and only in clear cases;
Before allowing a DIP financing or creating a priority charge, a court should be satisfied with proper evidence that the benefits to all creditors, shareholders and employees clearly outweigh the potential prejudice to some creditors;
It is not sufficient for the debtor to establish that the charge would be merely beneficial. It must rather establish that it is critical for the business to continue operating and to successfully restructure its affairs;
The debtor should normally establish an urgent need for the creation of the charge;
For a court to decide to create such a priority charge, there must be a reasonable prospect of a successful restructuring;
As it is an extraordinary remedy, the charge should only be available in limited amounts, for a brief period during the workout process, for what is enough to allow the debtor to "keep the lights on";
As the creation of such priority charge involves the use of its inherent jurisdiction powers, before drawing upon it, a court should be satisfied that it is just and equitable to do so in the given circumstances.
[48] It is apparent that the creation of a court ordered charge in an insolvency proceeding is not simply a matter for agreement of the parties. Before ordering that Mr. Jewitt’s fees are to be paid in priority to the claims of investors who have already suffered losses, the court will review relevant facts closely to ensure that a charge is clearly required and benefits all of the creditors and investors more than it risks prejudicing them or their claims.
[49] Counsel for the Investors’ Committee analogizes to section 11.2 (4) of the Companies’ Creditors Arrangement Act RSC 1985 c C-36 that provides the following factors to be considered when the court is asked to grant a priority charge in favour of a lender to an insolvent company in restructuring proceedings under that statutory scheme:
(4) In deciding whether to make an order, the court is to consider, among other things,
(a) the period during which the company is expected to be subject to proceedings under this Act;
(b) how the company’s business and financial affairs are to be managed during the proceedings;
(c) whether the company’s management has the confidence of its major creditors;
(d) whether the loan would enhance the prospects of a viable compromise or arrangement being made in respect of the company;
(e) the nature and value of the company’s property;
(f) whether any creditor would be materially prejudiced as a result of the security or charge; and
(g) the monitor’s report referred to in paragraph 23(1)(b), if any.
[50] As is the case when the court’s inherent jurisdiction is engaged, in granting priority charges under the CCAA, the court balances the necessity for the charge, the benefits obtained, and the risk of prejudice to the creditors’ whose claims will be primed by (or subordinated to) the proposed charge.
[51] In deciding whether to grant a charge, the court is guided by the submissions of the interested parties including, especially, officers of the court appointed with protective mandates. The submissions of the trustee, the receiver of the developers, and representative counsel for the Investors’ Committee would have loomed large in any motion to grant a charge in favour of Mr. Jewitt or his company. The trustee and the representative counsel object to a charge being granted currently for obvious reasons based on the discussion above. But had the matter been brought under a signed engagement, presumably representative counsel would have been the proponent and the trustee likely would have been either supportive or taken no position.
[52] Under the terms of the draft engagement letter dated February 6, 2017, Mr. Jewitt relies upon clause 14.6 that provides, in part, “The Committee will instruct their legal counsel, Chaitons LLP, to undertake to get a charge granted…in favour of Breakwall, in the event that the Committee is unable to raise the appropriate funds.” The law firm never provided the undertaking sought. Nor could it realistically have done more than agree to exercise reasonable effort to try to obtain a charge. It could not positively undertake to obtain an order that requires the exercise of a judge’s discretion.
[53] In my view, even had I recognized a claim for Breakwall there is no basis on the factors set out by Gascon J. to grant a charge in favour of Breakwall retroactively as at this date. I do not see how Breakwall can claim that it was “entitled” to a charge at an earlier date when no charge was ultimately sought and, in any event, the granting of a charge is a matter of discretion that is granted sparingly. The investors’ interests were represented by a court-appointed trustee, a court-appointed receiver, a recognized committee, and a court-appointed representative counsel. All were duty-bound to give primacy to the goal of maximizing the value of the investors’ recoveries. I see no benefit gained by adding Breakwall to the mix.
[54] At best, in my view, if Breakwall was engaged, it could have a claim against the Investors’ Committee for breach of an agreement to seek a charge for its fees. That might give Breakwall an unsecured claim for “loss of chance” against the committee. But the unsecured claim would exactly parallel the claim for fees that would already lie against the trustee. That is, Breakwall would argue that but for the breach it could have had a charge and been paid in full. By not being paid, its claim is for the full amount of its fees. But it would already have a claim for its fees in this circumstance. The rule against double-proof prevents it from having a second claim for the same fees. As such, there is no separate claim for damages or any basis for additional compensation for the loss of chance to obtain a priority charge. In any event, the claim for breach of an agreement to seek a charge against the Investors’ Committee does nothing to provide Breakwall or Mr. Jewitt with an actual priority claim against the assets of the respondents realized by the trustee.
Outcome
[55] The trustee’s motion to dismiss Breakwater’s claim against the respondents is granted. The court also holds that Breakwater has no valid claim against the Investors’ Committee.
[56] The trustee and the Investors’ Committee are presumptively entitled to costs of the respective claims. The costs are presumptively to be assessed on a partial indemnity basis absent reprehensible conduct in the manner in which these claims were carried. The parties are free to advance grounds for a different outcome. Each of the trustee and the Investors’ Committee may deliver no more than three pages of submissions on costs plus a Costs Outline by November 14, 2018. Mr. Jewitt and Breakwall may respond by November 21 with no more than six pages in total submissions. All submissions are to be delivered in OCR searchable PDF format as attachments to an email to my Assistant. No case law or statutory material is to be delivered. Rather, any reference to case law or statutory material shall be made as hyperlinks to case law in parties’ submissions.
F.L. Myers J.
Date: November 7, 2018
[^1]: For other relevant background, see my endorsement dated May 2, 2017 reported at 2017 ONSC 2694.