Urbancorp Cumberland 2 GP Inc., (Re), 2017 ONSC 7649

COURT FILE NO.: CV-16-11541-00CL

DATE: 20171220

ONTARIO SUPERIOR COURT OF JUSTICE

B E T W E E N:

IN THE MATTER OF THE COMPANIES CREDITORS’ ARRANGEMENT ACT, RSC 1985, c. C-36, AS AMENDED AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF URBANCORP CUMBERLAND 2 GP INC., URBANCORP CUMBERLAND 2 L.P., BOSVEST INC., EDGE ON TRIANGLE PARK INC., AND EDGE RESIDENTIAL INC.

BEFORE: F.L. Myers J.

COUNSEL: Robert J. Drake and Lori Goldberg, counsel for The Fuller Landau Group Inc., Monitor

Mark van Zandvoort and Timothy Jones, counsel for Cooltech Air Systems Ltd., Cooltech Home Comfort Ltd., Genesis Home Services Inc., AEM Capital Corp., and Icarus Holdings (Milton) Inc.

Clifton P. Prophet, counsel for Alvarez & Marsal Canada Inc., receiver, manager and construction lien trustee of Urbancorp (Leslieville) Developments Inc., Urbancorp (Riverdale) Developments Inc., and Urbancorp (The Beach) Developments Inc.

HEARD: December 13, 2017

ENDORSEMENT

Outcome

[1] The Monitor moves for advice and directions on whether payments in kind made by the CCAA debtors Edge on Triangle Park Inc. and Edge Residential Inc. to creditors of other Urbancorp affiliates were oppressive. The Monitor argues that using the currency of condominium units owned by Edge to satisfy debts of the other affiliates to their trade creditors amounts to oppression that should result in a monetary award against the trade creditors who received the units.

[2] In my view, even if the Monitor had been empowered to bring this proceeding and if it is entitled to discretionary recognition as a complainant under the oppression remedy provisions of the OBCA, it still has not proved that, at the time that Edge transferred its property, any creditor or “the creditors,” collectively, had any particular expectations, that any such expectations as might have been held were reasonable, or that anyone relied on any such reasonable expectations as he, she, it, or they might have held. Neither has the Monitor proved that the breach of any such reasonable expectations met any of the three qualitative assessments of oppression.

[3] The motion is therefore dismissed.

The Basic Facts

[4] The responding parties, whom I will refer to collectively for convenience as Cooltech, were creditors of Edge on Triangle Park Inc., other Urbancorp affiliates, and Urbancorp’s owner Alan Saskin personally. Cooltech was a plumbing and HVAC contractor on several Urbancorp projects. It had a long history of satisfactory business dealings with Mr. Saskin and his businesses.

[5] The Monitor challenges approximately $2.3 million paid by Edge to Cooltech, in July and August 2015, by means of the transfer of condominium units, parking spots, and storage lockers, transferred at or near fair market value, to pay off debts of other Urbancorp entities and a debt of $500,000 owed to Cooltech by Alan Saskin personally.

[6] The transfers were made more than one year prior to the commencement of insolvency proceedings by Urbancorp. The Monitor does not challenge the transfers as fraudulent conveyances. It does not rely on any badges of fraud surrounding the transactions.

[7] The Monitor no longer challenges the payments in kind made by Edge to Cooltech in respect of Edge’s own debts. It does not challenge them under even the enhanced powers available in insolvency proceedings to remedy unjust preferences or transfers at undervalue for example.

[8] In return for paying Cooltech, Edge received intercompany book entries from the affiliates whose loans it paid and other inter-company credits to account for the payment of Mr. Saskin’s personal debt. The Monitor says that replacing hard assets with what have subsequently turned out to be impaired loans from insolvent entities prejudiced creditors’ recovery in these proceedings and therefore was oppressive.

The Position of Cooltech

[9] Cooltech was am arm’s length, third party creditor with a cash-flow strapped customer with whom it had dealt for 20 years. Mr. Saskin approached it and offered to pay Urbancorp’s bills by transferring property in kind. Cooltech knew Mr. Saskin to run asset-rich but cash-poor businesses. When Mr. Saskin offered units in kind to pay Cooltech’s outstanding invoices, Cooltech agreed.

[10] Tthe Monitor does not claim that the value of the units was amiss. Cooltech received value commensurate with what it was owed. There was no gift component to the transaction. Rather, the source of the Monitor’s complaints is not the sales per se, but the fact that the inter-company loans advanced to compensate Edge have subsequently turned out to be impaired. That had nothing to do with Cooltech. There is no basis in the evidence to suggest that it did anything wrong for which it should be held liable for recovery under an oppression remedy aimed at Triangle or Urbancorp. Cooltech is not alleged in this proceeding to have induced or procured a tort or a breach of fiduciary duty for example.

The Evidence

[11] The Monitor has been able to show, from the books and records of various Urbancorp entities, that in mid-2015, when the transfers in kind occurred, Cooltech had been owed money by various Urbacorp entities for many months. There is no evidence as to whether this was unusual for these parties. There was no discussion in the evidence of the implication, if any, of the timing in the condominium development business cycle - just before the buildings were completed - when a developer’s cash and credit might be expected to be near exhaustion perhaps. Was this normal for these parties? Was anyone particularly fussed? Payments in kind are not unknown in the industry. Were they unusual between these parties? Without knowing some of these answers, I cannot draw any inference about what Cooltech might have known about the state of Urbancorp’s finances if anything.

[12] I also do not know what Mr. Saskin thought or knew about the status of his business at the time. There is simply no evidence before me other than (a) the fact that Urbancorp had outstanding debts to Cooltech for many months on different projects or loans; and (b) Urbancorp failed in late 2016. The financial statements are not particularly instructive. A snapshot of a moment in time based on depreciated book values does not provide a real time assessment of cash flows and realizable values or allow an inference that the business had failed or inevitably would be failing shortly so as to suggest that other creditors’ interests ought to have been top-of-mind at the time.

[13] In fact, in January, 2016, many months after the property transfers occurred, Urbancorp raised a very substantial amount of money by issuing bonds in Israel. That transaction may be challenged by the Israeli bondholders and their legal representative. I am not suggesting that it was not also problematic. But, the simple fact that Urbacorp was having cash flow problems that were then followed by a successful public financing also does not lead to any ready inference that Urbancorp or Cooltech knew or ought to have known that, in the summer of 2015, Urbancorp was so near failure that by accepting units in kind Cooltech was stealing a march on other creditors - some of whom (e.g. the Israeli bondholders) did not even exist as yet.

[14] Apparently, Mr. Saskin offered units to other creditors too. Some took them and others did not. Cooltech’s principal spoke to some of the other creditors prior to agreeing to take units. That fact, on its own, does not allow me to infer anything nefarious or any particular state of knowledge in Cooltech.

[15] Neither does the fact that Cooltech accepted units from Edge on indebtedness from other entities establish any entitlement to relief against Cooltech. A creditor is indifferent as to which entity pays the bills in a wholly-owned group. Absent complicity in a tort or breach of trust, the pocket from which Mr. Saskin chooses to pay is no business of Cooltech. Mr. Saskin owned the whole outfit 100%. Absent insolvency, you are not robbing Peter to pay Paul if you are Peter.

The Role of the Monitor

[16] Trustees in bankruptcy can be recognized as complainants in oppression proceedings. Olympia & York Developments Ltd (Trustee of) v Olympia & York Realty Corp. (2001), 2003 25511 (ON CA), 68 OR (3d) 544 (CA). The recognition is discretionary. At para. 45 of Olympia & York, Goudge JA explained:

…s. 245(c) confers on the court an unfettered discretion to determine whether an applicant is a proper person to commence oppression proceedings under s. 248. This provision is designed to provide the court with flexibility in determining who should be a complainant in any particular case that accompanies the court's flexibility in determining if there has been oppression and in fashioning an appropriate remedy. The overall flexibility provided is essential for the broad remedial purpose of these oppression provisions to be achieved. Given the clear language of s. 245(c) and its purpose, I think that where the bankrupt is a party to the allegedly [page 556] oppressive transaction, the trustee is neither automatically barred from being a complainant nor automatically entitled to that status. It is for the judge at first instance to determine in the exercise of his or her discretion whether in the circumstances of the particular case, the trustee is a proper person to be a complainant.

[17] In Ernst & Young Inc. v Essar Global Fund Ltd., 2017 ONSC 1366, the CCAA court specifically empowered the Monitor to bring oppression proceedings against a party whom the Monitor alleged was impairing the company’s ability to restructure by its oppressive conduct. See paras. 34 and 37.

[18] In the case at bar, the Monitor has not been empowered to bring proceedings on behalf of the CCAA debtors. Mr. Drake points to the Monitor’s authority to seek advice and directions in its initial order. In my view, that power ought to have been used before the Monitor purported to act on behalf of the debtor corporations in claiming relief against a creditor. Until empowered to sue, the Monitor is a neutral with duties to all interested parties. See Essar, at para. 30.

[19] The Monitor is not truly seeking advice and directions in this motion. It has sued Cooltech for monetary relief under the banner of a motion for advice and directions. It seeks judgment holding Cooltech liable. It is not asking for the court’s input or advice other than to adjudicate the complaint.

[20] Monitors can certainly be empowered to bring legal proceedings and to act on behalf of CCAA debtors in appropriate circumstances. Under s. 23 (1)(k) of the CCAA the court has broad discretion to empower the Monitor to take steps to facilitate the restructuring or to advance the goals of the CCAA. Century Services Inc. v. Canada (Attorney General), 2010 SCC 60 at para. 70. Mr. Drake submits that when the court appointed a creditors’ committee in this case, a sealed report from the Monitor made reference to the Monitor bringing proceedings in the interests of creditors. However, the order itself grants no such authority to the Monitor. A reference in a Monitor’s report that is not adopted into an order is not approval for the Monitor to take steps. There are no steps delineated. There are no parameters for the exercise established.

[21] The Monitor is not a trustee in bankruptcy. The creditors know how to bankrupt a debtor if they believe doing so is appropriate. In the interim, I do not see how, in this liquidating CCAA process, the Monitor bringing proceedings in place of the creditors who stand to gain from it can be said to facilitate the restructuring. In Essar there was a particular roadblock to a fair and proper restructuring affecting all interested parties. Here, by contrast, the Monitor pits the current creditors against a group of creditors who were paid over one year before the proceedings commenced. Why is this a fight for the Monitor rather than the creditors who stand to benefit from the claim? There is no evidence before me concerning the existing creditor body. Perhaps there are tens of thousands of powerless or involuntary creditors who need representation as in the CCAA proceedings for Nortel Networks Limited. Or is there, perhaps, one legal representative of a body of similarly situated creditors who is well able to bring proceedings if he should wish to do so?

[22] I accept that if proceedings are available, they can be brought summarily within the procedural context of this case as was done in Essar and as approved expressly in Stelco Inc., Re, 2006 16526 (ON CA). But, I am not convinced in the utility of empowering the Monitor to drop its cloak of neutrality to bring what are really inter-creditor proceedings or that doing so facilitates this restructuring process.

[23] Moreover, the Monitor asserts that the creditors generally held a reasonable expectation that they would be treated fairly and lawfully by Edge. It asks to be recognized as a complainant under the oppression remedy on the creditors’ behalves. However, in Lord v Clearspring Spectrum Holdings L.P., 2017 ONSC 2246, I explained:

…before a person can claim an oppression remedy, he or she must actually, subjectively, i.e. personally, hold an expectation. For example, at para. 63 of [BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 SCR 560] the Court wrote:

[63] Particular circumstances give rise to particular expectations. Stakeholders enter into relationships, with and within corporations, on the basis of understandings and expectations, upon which they are entitled to rely, provided they are reasonable in the context: see 820099 Ontario; Main v. Delcan Group Inc. (1999), 1999 14946 (ON SC), 47 B.L.R. (2d) 200 (Ont. S.C.J.). These expectations are what the remedy of oppression seeks to uphold.

[56] That is, a stakeholder must personally (i.e. subjectively) have an expectation and actually rely on it before it even gets to the question of whether that expectation is also objectively reasonable.

[24] I accept that the Monitor does not have to hold the expectation that it asserts. Moreover, as discussed in Lord at para. 56, the expectation may be proved by inference. In this case though, I know absolutely nothing about the creditors in existence in July and August 2015 or what they might have known or expected. I have no facts on which to assess whether any expectation that they might have held was reasonable. I have no evidence that anyone relied or ought reasonably to have relied on whatever expectation they may have held or from which to infer that fact. It is trite to say that any creditor expects fair and legal treatment. In the summer of 2015, did they receive fair and legal treatment? There is no suggestion that the payments made by Edge were unlawful. How do I know if they were fair? Were they offered to all equally? What effect did the payments have on the company when made? Did the payments, perhaps, stave off a group failure for long enough to allow the refinancing of the enterprise to occur in January, 2016? Was that refinancing a good, bad, or indifferent thing vis-à-vis Edge and its creditors as at mid-2015?

[25] In short, there is no evidence before me to allow me to assess whether there is a reason for the Monitor to be entitled to the exercise of discretion to (a) allow it to sue; or (b) allow it to qualify as complainant. Absent evidence that can lead to an inference of the existence of reasonable expectations, reliance, and oppression, the Monitor is unsuited to act for creditors in this case.

[26] If there is no actual creditor with a sufficient stake to sue or to support the Monitor with evidence in a suit, then I again question the utility of empowering the Monitor to bring a claim that pits creditors against each other. It is not the Monitor’s role to “try one on” to see if it can increase recovery for the current creditor body. Creditors are free to spend their money and face the consequences. The Monitor, by contrast, acts with the imprimatur the Court. It is far more constrained in its activities and ought typically to consider seeking court approval before undertaking litigation on behalf of particular interests.

Costs

[27] The Monitor initially brought the case challenging the value of the transferred units and also challenging the transfers of units by Edge in respect of its own debt. It trimmed back its allegations as it realized it lacked evidence and a legal basis to make those claims. That should have been determined before the Monitor put the respondents to the cost of responding to those broad, meritless claims. Mr. Drake agreed that the respondents’ request for $40,000 was a reasonable quantum for costs if they succeeded.

Order

[28] The motion for advice and directions is dismissed. The Monitor shall pay costs to the respondents fixed at $40,000 all-in forthwith.

F.L. Myers J.

Date: December 20, 2017