COURT FILE NO.: 13-10362-00CL DATE: 20180918 SUPERIOR COURT OF JUSTICE – ONTARIO – COMMERCIAL LIST

IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, as amended

IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF SILVER STREAMS HOMES INC., SILVER STREAMS HOMES (PUCCINI) INC., 2148893 ONTARIO INC., 2148990 ONTARIO INC., 2147681 ONTARIO INC. and 2146750 ONTARIO INC.

BEFORE: Wilton-Siegel J.

COUNSEL: J. Spiegelman, for the Moving Party, Bank of Montreal M. Drudi, for the Respondent Parties, Pucinni Mortgage Corp., 53 Pucinni Mortgage Corp., 388242 Ontario Limited, Da Paul Management Limited, Nastell Investments Limited and Castle Lane Design Group (the “Private Mortgagees”)

HEARD: May 1, 2018

Endorsement

[1] The applicant Bank of Montreal (“BMO”) opposes the confirmation of a report/award of Referee Duncan W. Glaholt (the “Referee”) dated September 28, 2016 (the “Report”) pursuant to r. 54.09(2) of the Rules of Civil Procedure. The Referee provided reasons for the Report dated August 11 and September 28, 2016, with supplementary reasons dated March 6, 2017 pertaining to the costs awarded in favour of BMO (collectively, the “Reasons”).

Standard on Appeal

[2] The test on an opposition to confirmation of a report, and the onus of proof, is addressed in para. 62 of D&M Steel Ltd. v. 51 Construction Ltd. and Jing Yin Temple, 2018 ONSC 2171 as follows:

Rule 54.09 permits a party to a reference to oppose the confirmation of the Master’s report. The case law establishes that the review of the decision or report is in the nature of an appeal with the onus on the party opposing confirmation to demonstrate that the Master’s decision is wrong. The court hearing a motion to oppose the confirmation of a report on a reference ought not to interfere with the results unless there has been some error in principle demonstrated by the Master’s reasons, some absence or excess of jurisdiction, or some patent misapprehension of the evidence, and the award should not be disturbed unless it appears to be unsatisfactory on all the evidence.

The Award

[3] In his reasons dated September 28, 2106, the Referee held that “no more than 20% of [BMO’s] claim [for costs] related to achieving the overall settlement in this matter justifying an award of costs.” BMO’s claim for costs on a full indemnity basis was $426,125.72. After finding that recovery should be on a partial indemnity basis, the Referee fixed BMO’s costs at $50,000 on an all-inclusive basis.

[4] In reaching this conclusion, the Referee made the following findings:

(1) it was the lien claimants who brought BMO into the litigation and kept them in it;

(2) for the most part, BMO simply supported the priority position taken by the lien claimants;

(3) all possible costs claimable by or against the lien claimants were settled and must be excluded from any costs as between BMO and the Private Mortgagees; and

(4) there was no occasion on which the Private Mortgagees caused BMO to incur costs unrelated to the claims advanced by the lien claimants.

[5] In summary, the Referee effectively concluded that none of BMO’s costs attributable to the reference could be claimed in respect of claims or potential claims asserted by the Private Mortgagees but were instead referable to the litigation commenced by the lien claimants or were otherwise related to the CCAA proceedings. It appears that any costs included in the BMO claim attributable to the CCAA proceedings are negligible. Accordingly, almost all of the BMO costs were considered to be related to the lien claimant litigation. As BMO had consented to the settlements with the lien claimants on a no-costs basis, the Referee considered that the only costs that could be awarded to BMO were costs related to facilitating the settlements, being “salvage costs”.

[6] In his supplementary reasons dated March 6, 2017 (the “Supplementary Reasons”), the Referee provided a further explanation of his costs award. As the general principle, the Referee considered that costs should be awarded to BMO solely for “salvage costs” taking into consideration s. 86 of the Construction Lien Act, R.S.O. 1990, c. C.30 for the reasons set out above.

[7] The Referee’s determination of the quantum of such costs involved the following steps. First, the Referee expressly rejected BMO’s position “that they were somehow drawn in as pawns in a game played by the Private Mortgagees to put pressure on the Lien Claimants to settle.” Second, he found that a reasonable amount of costs for participation in the reference was $130,000 on a substantial indemnity basis. This finding was based on the fees of counsel for the Private Mortgagees, which approximated this amount on a substantial indemnity basis. The Referee noted that this amount was approximately 35% of BMO’s substantial indemnity costs, net of taxes and disbursements. Third, the Referee then derived a 21% factor, which he rounded down to 20%, to be applied against BMO’s gross claim on a substantial indemnity basis. This calculation resulted in the amount of $85,000, which he characterized as the “maximum all-inclusive partial indemnity expectation”. The 21% factor was the product of (1) a 60% factor for partial indemnity costs as a proportion of full indemnity costs; and (2) a 35% factor, being the proportion that the Private Mortgagee’s substantial indemnity costs of $130,000 represented of BMO’s substantial indemnity costs of $375,855. Lastly, he applied s. 86(2) of the Construction Lien Act which provides that, where a party does not take the “least expensive course”, the costs allowed to that party must not exceed that which would have been incurred if the “least expensive course” had been taken. The Referee concluded that, if BMO’s counsel had taken the “least expensive course” in respect of their participation in the settlements, the resulting costs would have approximated one-half of the latter amount, which he rounded up to $50,000.

[8] I note that the foregoing calculation was not expressed in the reasons dated August 11 and September 28, 2016. However, I am not persuaded that the alternative expression of the process in arriving at the costs award of $50,000 is, on its own, an error in principle that justifies setting aside the costs award.

Positions of the Parties On BMO’s Principal Ground of Opposition

[9] BMO’s principal ground of opposition to confirmation of the Report is that the Referee erred in concluding that BMO’s participation in the lien claimant litigation contributed little to that litigation and was unnecessary. The following summarizes the positions of the parties on this issue.

The Position of the Private Mortgagees

[10] The Private Mortgagees submit that there were no issues in dispute between them and BMO. They say that the lien claimants sued BMO, that the Private Mortgagees did not cause or contribute to any costs incurred by BMO, and that any costs incurred by BMO should have been sought against the lien claimants. They say they worked co-operatively with BMO to reduce the amount that would be determined to be the deficiency in the holdback in respect of the lien claimants.

[11] The position of the Private Mortgagees is summarized in the following paragraph taken from their costs submission:

In conclusion, as the Private Mortgagees and the lien claimants settled their claims on a without costs basis, and as the lien claimants settled their actions against BMO on a without cost basis, and as the Private Mortgagees did not cause or contribute to any costs incurred by BMO in the circumstances, much of which was caused by BMO itself, and in accordance with paragraph [27] of [the Referee’s reasons dated August 11, 2016], it would be just and reasonable in the circumstances that there be no costs awarded to any party in the Reference including BMO.

The Position of BMO

[12] The position of BMO is more complicated. The Private Mortgagees had postponed and subordinated their mortgage security to the BMO position. BMO says, however, that it was obligated to participate in the lien claimant proceedings so long as: (1) the Private Mortgagees were also asserting a priority over the lien claimants as non-construction financing; and (2) the Private Mortgagees were not formally acknowledging the priority of the BMO position over their mortgage security. The Private Mortgagees did not concede the issue of priority relative to the lien claimants until the eve of the hearing of the reference. BMO argues that the Private Mortgagees asserted a priority over the lien claimants as a pressure tactic to force the lien claimants into the settlements. BMO argues that, therefore, the strategy of the Private Mortgagees was the direct cause of BMO’s costs as it forced BMO to participate fully in the litigation for the following reasons.

[13] It is undisputed that the Monitor held more than sufficient funds to pay the likely maximum claim for the deficiency in the holdback, plus the costs, of the lien claimants. If the Private Mortgagees had been found to rank prior to the lien claimants for the $11 million they claimed to be owed, however, BMO would have been required to reimburse the lien claimants for the deficiency in the holdbacks as determined by the Referee and then to litigate with the Private Mortgagees regarding the entitlement to the $11 million otherwise payable to the Private Mortgagees.

[14] BMO says that it would have had no interest in the lien claimant litigation, however, if the Private Mortgagees had conceded that the lien claimants had a priority over the mortgage security of the Private Mortgagees for any deficiency in the holdback and that the only outstanding issue between the Private Mortgagees and the lien claimants was the validity and quantum of the individual lien claims. Alternatively, BMO would have had no interest in the lien claimant litigation if the Private Mortgagees had advised BMO that they accepted that the priority and subordination agreements in BMO’s favour were valid and would be recognized to the extent the Private Mortgagees were held to have a priority over the lien claimants’ claims in respect of the holdback deficiency. However, until these priorities were established, BMO says that it was required to participate in the reference.

Preliminary Matters

[15] Before setting out my analysis and conclusions, I will address two alleged errors of the Referee raised by BMO that are rejected for the following reasons.

[16] First, while the calculations are not altogether straightforward, the Referee did not conclude that BMO’s partial indemnity costs were $130,000. Although he did not make this calculation, it is clear that the Referee considered BMO’s partial indemnity costs, net of taxes and disbursements, to be 60% of $375,855, or $225,513.

[17] Second, in concluding that BMO should be awarded salvage costs of 20% of its partial indemnity costs, the Referee did not implicitly conclude that the remaining 80% of BMO’s costs were attributable to the CCAA proceedings. To the contrary, he considered that such costs were incurred in relation to the lien claimant proceeding but were not incurred in respect of any claim that the Private Mortgagees asserted against BMO for which it should be reimbursed out of monies to which the Private Mortgagees were otherwise entitled.

Analysis and Conclusions Regarding the Grounds of Opposition

[18] I will address each of BMO’s grounds of opposition in turn.

BMO’s Principal Ground of Objection

[19] For the reasons set out above, BMO argues that it incurred its costs in the reference as a result of the actions of the Private Mortgagees. The Referee disagreed and limited BMO’s costs to its “salvage costs”.

[20] While I have considerable sympathy for the position of BMO and its desire to protect itself against an eventuality it believed to be of reasonable concern, I cannot say that there has been a patent misapprehension of the evidence, or an error in principle, by the Referee in reaching his decision.

[21] The Referee’s determination was based on his findings set out above. While it is arguable that the Referee’s third finding fails to capture the nature of BMO’s participation in the lien claimant litigation, the Referee’s decision is grounded in the three other findings. Given the evidence before the Court, I cannot conclude that the Referee patently misapprehended the evidence in making those findings.

[22] The Referee’s decision, in effect, required that BMO seek its costs from the lien claimants or have put the Private Mortgagees on notice of its claim for costs against them as discussed below. BMO says that it could not reasonably have held up the settlements with the lien claimants by seeking BMO’s costs of the reference from them. Whether or not this is correct, the Referee reached his decision on the basis of a more fundamental assessment of the merits of BMO’s participation in the lien claimant litigation.

[23] The Referee implicitly concluded that BMO was not required to participate in the proceeding and that it was unreasonable for BMO to have done so. The Referee also implicitly concluded that BMO should have relied instead on the postponement and subordination agreements between BMO and the Private Mortgagees. Put another way, the Referee held that, if BMO was concerned regarding the position of the Private Mortgagees in respect of the postponement and subordination agreements in its favour, BMO ought to have sought comfort from the Private Mortgagees and put the Private Mortgagees on notice of its claim for costs in the lien claimant litigation if such comfort was not forthcoming. Not having done so, BMO cannot now assert that the Private Mortgagee’s actions in the lien claimant litigation caused or contributed to its costs.

[24] As set out above, the test on an opposition to the confirmation of a referee’s report requires considerable deference. In this case, the Referee had the costs submissions of both parties before him. They set out their respective views very clearly as to the need for BMO’s participation in the lien claimant litigation and the cause of BMO’s costs. Moreover, the Referee is a highly experienced expert in this type of litigation and had carriage of the reference to the point of the settlements. He was, therefore, in a significantly better position than the Court to understand and assess the circumstances in an informed manner notwithstanding the fact that the reference did not proceed to a trial. In this regard, conflicting priorities among lien claimants, a construction lender and an alleged non-construction lender are not unusual, even if the circumstances giving rise to such situation in this case are unique.

BMO’s Alternative Ground of Objection

[25] As an alternative argument, BMO also asserts that, notwithstanding the award in the Reasons, it is entitled to tack its costs of the lien claimant litigation onto its security in priority to the claims of the Private Mortgagees in reliance on paragraph 9 of the debtors’ debentures in favour of BMO (the “BMO Debentures”). Paragraph 9 of the BMO Debentures reads as follows:

The Company agrees to pay to the Bank forthwith upon demand all reasonable expenses incurred by the Bank in taking this Debenture or in recovering or enforcing payment of moneys owing hereunder or realizing upon this Debenture or any other security for such moneys including reasonable expenses of taking possession, protecting and realizing upon any property comprised in any such security, together with interest at the rate provided herein for this Debenture from the date of such expenditures.

[26] This raises the relationship between the Referee’s award of costs and the provisions of paragraph 9 of the BMO Debentures in respect of costs of the lien claimant litigation.

[27] BMO is clearly entitled to its costs of protecting and preserving its security, including its priority position relative to the Private Mortgagees, pursuant to paragraph 9 of the BMO Debentures. However, BMO is only entitled to its reasonable costs of such actions.

[28] The Referee effectively determined that BMO’s reasonable costs of the lien claimant litigation were limited to $50,000. BMO does not suggest that it incurred any other costs for which it is entitled to reimbursement pursuant to paragraph 9 of the BMO Debentures. Given the Court’s determination in this proceeding on BMO’s principal ground of opposition, I do not think that BMO has an alternative route to a priority over the Private Mortgagees in respect of its remaining costs of the lien clamant litigation pursuant to the terms of the BMO Debentures. Put another way, I think that this matter is res judicata between the parties although it was not expressly addressed in this manner by either party before the Court.

Disposition of this Proceeding

[29] Based on the foregoing, the Report is confirmed in its entirety. Costs of this proceeding in the agreed amount of $10,000 on an all-inclusive basis are also awarded in favour of the Private Mortgagees.

Wilton-Siegel J.

Date: September 18, 2018