Court File and Parties

COURT FILE NO.: CV-18-595577-00CL DATE: 20180525

SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL LIST

APPLICATION UNDER SUBSECTION 243(1) OF THE BANKRUPTCY ACT, R.S.C. 1985, C. B-3, AS AMENDED AND SECTION 101 OF THE COURTS OF JUSTICE ACT, R.S.O. 1990, C. C.43, AS AMENDED

RE: American Iron & Metal Company Inc., Applicant AND: 1340923 Ontario Inc. and Waxman Realty Company Inc., Respondents

BEFORE: L. A. Pattillo J.

COUNSEL: Wael Rostom and Stephen Brown-Okruhlik, for the Applicant Matt Moloci, for the Respondents Steven Graff, for the proposed Receiver, A. Farber Group A. Winton, for NASG Canada Inc. Robert Brush and Clarke Tedesco, for American Iron & Metal, 134 Ontario and Waxman Realty Company Inc. T. VanKlink, for the Business Development Bank

HEARD: April 20, 2018

ENDORSEMENT

[1] This is an application by American Iron & Metal Company Inc. (“AIM”) for an order appointing A. Farber & Partners Inc. (“Farber”) as receiver over all the property and assets of the Respondents, 1340923 Ontario Inc. (“134”) and Waxman Realty Company Inc. (“Waxman Realty”). AIM also seeks approval of a stalking horse sale process “proposed by the proposed receiver” for the marketing and sale of the Respondents’ respective ownership interests in certain real property, together with ancillary orders.

[2] The application is consented to by the Respondents. It is opposed, however, by NASG Canada Inc. (“NASG”) on the grounds that approval of the stalking horse sale process and in particular the requested vesting order would remove its proprietary interest in the properties in question.

[3] AIM is part of a group of companies that carry on business in the scrap metal and recycling industry across North America and elsewhere.

[4] Waxman Realty was incorporated in July 2010 for the purpose of acquiring property located at 4350 Harvester Road, Burlington, Ontario (the “Burlington Property”) which it acquired in the same month. The acquisition was financed by a loan from Roynat Capital Inc. pursuant to a loan agreement dated July 30, 2010. Waxman Realty issued a debenture in favour of Roynat granting it security over certain of Waxman Realty’s assets, including its ownership interest in the Burlington Property.

[5] In December 2012, AIM purchased a 50% ownership interest in the Burlington Property from Waxman Realty. Since then, AIM and Waxman Realty have co-owned the Burlington Property as tenants in common pursuant to a joint venture agreement.

[6] 134 was incorporated in June 2007 for the purpose of acquiring property located at 143 Adams Boulevard, Brantford, Ontario (the “Brantford Property”) which it acquired in the same month. In December 2012, AIM purchased a 50% interest in the Brantford Property from 134. Since then, AIM and 134 have co-owned the Brantford Property as tenants in common pursuant to a joint venture agreement.

[7] Both the Burlington Property and the Brantford Property have been operated as scrap yards.

[8] On October 12, 2012, both Waxman Realty and 134 issued demand debentures in favour of AIM, each in the amount of $3,000,000. Further, in July 2013, pursuant to a letter agreement with Waxman Realty, AIM paid $1,414,313.08 to Roynat on behalf of Waxman Realty and assumed the debt owed by it to Roynat on substantially the same terms as attached to the Roynat loan.

[9] AIM is owed $2,057,152.61 by Waxman Realty, as a result of advances made under the letter agreement, the Burlington Property joint venture agreement and the Waxman Realty demand debenture.

[10] AIM is owed $278,854.49 by 134 pursuant to advances made to 134 under the terms of the Brantford Property joint venture agreement and the 134 demand debenture.

[11] Waxman Realty and 134 (together the “Debtors”) have acknowledged, among other things, their respective indebtedness and the validity of AIM’s security over both the Burlington Property and the Brantford Property pursuant to a forbearance agreement dated December 22, 2017.

[12] On December 22, 2017, AIM, through its legal counsel, demanded payment of both Waxman Realty and 134’s respective indebtedness and provided each of the companies with notice of intention to enforce its security in accordance with section 244 of the Bankruptcy and Insolvency Act, R.S.C. 1985. C. B-3, as amended (the “BIA”).

[13] The purpose behind AIM’s application to appoint a receiver is to facilitate a sale to itself of the Debtor’s interests in both the Burlington Property and the Brantford Property. The proposed sale process contemplates the receiver marketing the two property interests based on a stalking horse bid by AIM. The stalking horse bid is set out in a stalking horse agreement and is comprised of a cash deposit in the amount of $360,000; a credit in the amount of $2,336,007.10, representing all the secured debt and accrued interest thereon outstanding on the loans provided by AIM to the Debtors; a further credit in an amount to be determined by the proposed receiver or the court as recoverable under a mortgage in favour of the Business Development Bank of Canada in the principal amount of $2,050,000 and an accompanying notice of assignment of rents in respect of the Brantford Property; and the balance to be paid in cash on closing.

[14] The stalking horse bid is supported by confidential valuations of both Waxman Realty and 134’s interests in the respective properties. The terms of the bid include a $500,000 “break fee” plus a minimum overbid of $150,000. Finally, the proposed sale process seeks vesting orders that vest the Debtors’ interests in the two properties “free and clear of any claims” in light of “separate ongoing litigation”.

[15] Farber has filed a Report in its capacity as “proposed receiver” of Waxman Realty and 134 in which it outlines the proposed sale process, the stalking horse agreement and the break fee. It recommends that the sale process be approved and requests that the proposed Receiver be authorized to conduct the sale process, execute the stalking horse agreement and perform the receiver’s obligations thereunder.

NASG

[16] The “separate ongoing litigation” referred to by AIM in its material in respect of the vesting orders, involves a claim by NASG against, among others, AIM, Waxman Realty, 134 and other Waxman parties including Camile Bouliane, commenced in the Superior Court on the Commercial List by Notice of Action dated June 25, 2014 (the “Action”). In the Action, NASG claims that the Defendants are liable for the theft of over 42 million pounds of carbon scrap metal from NASG which took place between January 2007 and May 2014. NASG states that the value of the carbon scrap stolen amounted to $7,384,524.99.

[17] NASG’s statement of claim alleges numerous causes of action including negligence, negligent misrepresentation, unjust enrichment and/or breach of contract, oppression, theft and conversion and sets out multiple headings of relief including damages and “the imposition of a resulting and/or constructive trust over the funds and assets improperly acquired by the Waxman Defendants, the AIM Defendants and Bouliane, due to the conversion of or unjust enrichment relating to NASG Canada’s carbon scrap metal.”

[18] On June 26, 2014, NSAG obtained an ex parte Mareva Order requiring, among other things, that Waxman Realty and 134 (part of the Waxman Defendants) disclose their assets and provide a sworn statement with respect thereto. NASG’s material filed in support stated that AIM was joined as a necessary party given its ownership interests in, among other things, the Burlington and Brantford Properties and expressly stated that no allegation of wrongdoing was being made against AIM.

[19] NASG’s factum on the Mareva motion sought, among other things, a certificate of pending litigation (“CPL”) against the Burlington and Brantford Properties on the basis of the allegation that the proceeds of the theft were used by the Waxman Defendants to purchase and/or improve the two properties and NASG was claiming a tracing order and constructive trust over the funds and assets improperly acquired by the Waxman Defendants.

[20] In granting the Mareva Order, Newbould J. refused to grant a CPL against the two properties. In the endorsement, he stated: “With respect to the two Waxman properties, I think that the request for a CPL should be dealt with after the material and today's order has been served. AIM has an interest in these properties and it is unlikely that the properties could be sold or financed before the return of the matter.”

[21] When the matter returned to the court on July 4, 2014, the Defendants requested an adjournment. The June 26th order was extended to July 14, 2014. In respect of NASG’s CPL request, Newbould J. wrote: “If there is any intent to deal with the Waxman/AIM properties before then, 48 hours’ notice are to be given to the plaintiff’s counsel.”

[22] The matter came back before Newbould J. on December 2, 2014, at which time the parties agreed to a consent order which varied the June 26th order by, among other things, requiring that the Waxman Defendants provide 7 days’ notice of intent to dispose or encumber either the Burlington or Brantford Properties.

[23] It was pursuant to the December 2, 2014 order that NASG was given notice of this application and have appeared by counsel to oppose it. It submits, given its propriety claim to the two properties (constructive trust), the court does not have the authority to vest off NASG’s interest without due process which in the present case requires the trial of the Action. No trial date has been set for the Action.

[24] Initially, NASG requested a brief adjournment in order to complete the evidentiary record supporting its propriety claim. It subsequently withdrew that request and indicated that it was prepared to proceed on the basis of the record before the court.

[25] The court’s authority to issue a vesting order is contained in section 100 of the Courts of Justice Act, R.S.O. 1990 c. C. 43 (“CJA”). That authority, however, does not extend to extinguishing third party proprietary rights: Third Eye Capital Corporation v. Resources Dianor Inc./Dianor Resources Inc., 2018 ONCA 253.

[26] The question for determination, therefore, is whether NASG’s contingent claim for a constructive trust in the Action gives it a proprietary interest in the two properties.

[27] A constructive trust is an equitable remedial remedy for certain forms of unjust enrichment. It does not automatically follow from a finding of unjust enrichment. In order for a constructive trust to be found, monetary compensation must be inadequate and there must be a link between the plaintiff’s contributions and the property in which they claim an interest. Further, the extent of the constructive trust interest is proportionate to the claimant’s contributions. See: Peter v. Beblow, 1993 CanLII 126 (SCC), [1993] 1 S.C.R 980, at para. 26; Kerr v. Baranow, 2011 SCC 10, [2011] 1 S.C.R 269 at pars. 47 to 53.

[28] In determining whether a monetary award is insufficient, the court may take into account the probability of recovery as well as whether there is a reason to grant the plaintiff the additional rights that flow from recognition of property rights: Kerr at para. 52.

[29] AIM submits that NASG’s claim for a constructive trust is contingent and it has not established that it has any rights to the properties. In addition, it submits monetary damages are a sufficient remedy for NASG’s claims. In that regard, it proposes that the net funds received from the sale of the two properties (after payment of encumbrances and costs) be held by the receiver pending a determination of NASG’s claims in the Action.

[30] In my view, AIM’s proposal is appropriate. Merely claiming a constructive trust does not create a proprietary interest. In my view, given AIM’s proposal that the receiver hold the net sale proceeds pending the determination of NASG’s claim coupled with the fact that AIM, who is a Defendant in the Action, continues to own the other ½ interest in the properties, I do not consider an award of monetary compensation to be inadequate. NASG agrees that AIM is a substantial company.

[31] Further, as there is no evidence of a link between the monies stolen from NASG and the properties, NASG’s claim may only result in monetary damages. I recognize that NASG has had little time to prepare a complete record before me. Nevertheless, I am satisfied that even if NASG establishes that some of the funds for purchase or improvement of the properties came from funds obtained from the stolen scrap, in the circumstances, a monetary award would not be inadequate.

[32] Finally, there is no evidence that NASG seeks additional rights that may flow from potential property rights in the properties.

[33] Accordingly, I am satisfied that, based on AIM’s proposal to have the receiver hold the net sale proceeds from the properties, vesting orders can issue upon the sale of both properties. To the extent that NASG has any rights in the properties arising from the Waxman Defendants’ actions, those rights are protected.

[34] NASG’s request to dismiss the AIM’s application is denied.

The Stalking Horse Bid

[35] As noted, the proposed sale process with the stalking horse bid includes a $500,000 break fee to AIM together with a minimum overbid amount of $150,000. I consider those amounts to be excessive in the circumstances.

[36] A “break fee” in the context of a receivership sale with a credit bid, is an amount which is intended to compensate the unsuccessful credit bidder for the costs it has incurred in carrying out the due diligence necessary to enter into the credit bid agreement in the event that another offer to purchase becomes the successful purchaser.

[37] Where break fees and overbid fees are reasonable, such that they do not jeopardize the ability of a competing bidder to make a bid, they have been approved by this court: Re Parlay Entertainment, 2011 ONSC 3492; Re MPH Graphics Inc., 2014 ONSC 947.

[38] In this case, AIM has provided no evidence to justify the break fee of $500,000, apart from the Stalking Horse Agreement of Purchase and Sale which provides in section 6.1:

In consideration for the Purchaser’s expenditures of time and money in acting as the initial bidder in the Stalking Horse Bid and the preparation of this Agreement, and in performing due diligence pursuant to this Agreement, the Sale Process Orders shall also provide for liquidated damages in the amount of the Break Fee, payable by the Receiver to the Purchaser in the event that a materially higher offer than the Purchase Price advanced by the Purchaser pursuant to the terms herein is obtained for the Purchased Assets through the Sale Process and, as a consequence, the Receiver sells all or substantially all the Purchased Assets to a person or entity other than the Purchaser.

[39] Farber deals with the break fee at paragraph 17(k) of its Report and concludes, based on the underlying complexity of AIM’s roles in negotiating the Stalking Horse Agreement as well as its ongoing requisite involvement and negotiation with any successful third party purchaser, that the break fee “represents a fair and reasonable estimate of the costs and damages which would be incurred by AIM if the Stalking Horse Bid is not consummated.” Apart from its comments on complexity, Farber provides no analysis of how it arrived at that conclusion.

[40] Nor has Farber provided any information or recommendation concerning the proposed overbid fee of $150,000.

[41] I am not satisfied that the proposed break fee and the overbid fee are reasonable based on the material before me.

[42] With respect to the break fee, there is no evidence of what AIM’s costs were in undertaking due diligence in respect of the transaction. I suspect that there was very little due diligence given that AIM has been a 50% owner of the properties with the Debtors since December 2012 and must be intimately familiar with them and their encumbrances. Nor, in my view is it appropriate to include in the break fee, as Farber has done, an amount in respect of future negotiations with the purchaser of the properties. While there will no doubt be negotiations with a third party purchaser of the Debtor’s interests in the properties, it is not appropriate to require such purchaser to pay AIM’s costs of such negotiations.

[43] As noted, there is no information concerning the overbid fee and why it is reasonable in the context of the proposed sale, particularly when it is viewed together with the proposed break fee.

[44] The purpose of the sale process in a receivership is to obtain the highest and best price for the property for the benefit of all creditors. It is important in approving the sale process to ensure that it is open to competing bidders. While there is a place for both break fees and overbid fees, they must be reasonable in the circumstances in that they must not jeopardize the ability of a competing bidder to make a bid. Given the property interests to be sold and the proposed credit bid in this case, I am not satisfied that the proposed break fee and the overbid fee, individually and combined, are reasonable.

[45] For the above reasons, therefore, I do not approve the Stalking Horse Agreement and the proposed sale process.

Conclusion

[46] Based on the material filed and the reasons set out herein, I am satisfied that it is just and convenient to appoint Farber as the receiver for both Waxman Realty and 134. As indicated, however, I am not prepared to approve the proposed stalking horse agreement or the sale process, without prejudice to the receiver and AIM revising them to address my concerns as noted herein and reapplying for approval.

[47] Given the commercial sensitivity of the valuations of both the Burlington Property and the Brantford Property in the context of the proposed sale, I am satisfied that the test set out in Sierra Club of Canada v. Canada (Minister of Finance), 2002 SCC 41 at para. 41 has been met and accordingly the Confidential Exhibits shall be sealed pending the completion of any sale.

[48] At the conclusion of the argument, AIM indicated that it may want to reconsider its request for the receiver pending my decision. Upon receipt of these reasons, AIM should arrange a 9:30 am appointment before me to advise how it wishes to proceed.

[49] Costs, if not agreed, can also be dealt with at the 9:30 appointment.

L. A. Pattillo J.

Released: May 25, 2018