Court File and Parties

COURT FILE NO.: BK-17-2321808-0032 DATE: 20190530 ONTARIO SUPERIOR COURT OF JUSTICE COMMERCIAL LIST

IN THE MATTER OF the Notice of Intention to Make a Proposal of Bella Senior Care Residences Inc.

BEFORE: L. A. Pattillo J.

COUNSEL: David Ward and Erin Craddock, for the Moving Party, Bella Senior Care Residences Inc. Sharon Kour, for the Respondents, The Canada Life Assurance Company and Stonebridge Financial Corporation

HEARD: April 17, 2019

Endorsement

[1] Bella Senior Care Residences Inc. (“Bella”) seeks a declaration that the correspondence between it and the Respondents, The Canada Life Assurance Company (“Canada Life”) and Stonebridge Financial Corporation (“Stonebridge”) between May and December 2017 and the evidence concerning the discussions between the parties during that period as set out in the Affidavit of Inga Gelfand (“Gelfand”) sworn February 7, 2019 are properly admissible and may be considered by the court in its pending motion against Canada Life.

[2] Bella is the operator of a senior care facility in Niagara Falls, Ontario which is licensed by the Ministry of Health under the Long-Term Care Homes Act, 2007. Its principal at the relevant times was Gelfand. Canada Life is a lender and secured creditor of Bella’s pursuant to a Credit Agreement between it, Bella and Stonebridge, Canada Life’s agent, dated January 22, 2002 (the “Credit Agreement”).

[3] On December 1, 2017, Bella filed a Notice of Intention to Make a Proposal to its creditors. The stated purpose of the filing was to effect a sales process to repay creditors, including Canada Life. On April 4, 2018, Bella entered into an agreement to sell the Niagara Falls facility. The sale has received court approval and will close once regulatory approval is received. Upon closing, Canada Life will receive full repayment of the principal and interest owing under the Credit Agreement.

[4] The pending motion which gives rise to this motion concerns the issue of whether Bella has an obligation under the Credit Agreement to pay, in addition to principal and interest, Redeployment Costs, which are triggered upon repayment of the loan.

[5] In response to this motion, Canada Life asserts that the correspondence and evidence in issue are prevented from production on the basis of settlement privilege.

[6] Canada Life has filed a Compendium setting out 14 pieces of correspondence it submits are protected by settlement privilege. It contains nine letters, and five email strings written between April 18, 2017 and November 28, 2017, between Bella/Gelfand and/or their counsel and Canada Life/Stonebridge and their counsel.

[7] Canada Life also asserts privilege over the evidence communicated in paragraphs 9; 50 to 58; 65 to 71; 72 to 78; 80; 82 to 83; 84 to 91; 103 to 107; and 116 to 117 of the Gelfand Affidavit although counsel concedes that the evidence is secondary to the correspondence and if settlement privilege does not attach to the correspondence, it does not attach to the evidence in the Gelfand Affidavit.

[8] The purpose of settlement privilege is to promote settlements, with the rationale for an exclusionary rule being to prevent any attempt to use settlement discussions as evidence of an admission of liability or a weak case. See: Sable Offshore Energy Inc. v. Ameron International Corp., 2013 SCC 37; {2013} 2 S.C.R. 623.

[9] There is a three-part test to establishing litigation privilege: 1) a litigious dispute must be in existence or within contemplation; 2) the communication must have been made with the intention that it would not be disclosed to the court in the event that the negotiations failed; and 3) the purpose of the communication must be an attempt to effect a settlement. In applying the test, the court must examine the communications between the parties as a whole, in context, to determine whether or not the rationale for settlement privilege exists in the circumstances: East Guardian SPC v. Mazur, 2014 ONSC 6403 (S.C.) at para. 24.

[10] Bella concedes that on the facts before the court, the first part of the test is met. It submits, however, that the remaining two parts of the test are not present.

[11] The letters in the Compendium at Tabs 1, 2, 4, 6 and 9 are all letters from Stonebridge to Bella or Gelfand or their counsel dated April 18, 2017, April 28, 2017, June 5, 2017, June 15, 2017 and July 6, 2017. Apart from the July 6, 2017 letter, all letters have at the outset the heading “Without Prejudice” along with the words personal or private and confidential.

[12] The Stonebridge letters, written on behalf of Canada Life, are all in response to either letters from Bella or its counsel or meetings with them which Canada Life does not claim privilege over. They assert that the Credit Agreement is in default in a number of ways. They are generally couched in the form of an offer to remedy the defaults and/or forbearance by Canada Life of its remedies. They set forth a number of terms along with timelines that must be met by Bella while at all times reserving all of Canada Life’s rights and remedies under the Credit Agreement.

[13] The terms sought by Canada Life initially included amendment to the Credit Agreement, repayment of approximately $900,000 to the Maintenance Reserve Account, greater and timelier financial reporting, access to Ministry of Health information and restrictions on distributions from operating income or by dividend. Subsequently, as Canada Life’s concerns regarding Bella increased over time, the letters raised further terms, in addition to the earlier ones including the immediate provision of additional security, the appointment of a manager of the facility acceptable to Canada Life, appointment of a financial advisor by Canada Life with control over Bella’s finances and waiver of all time periods for notice under the Credit Agreement or the Bankruptcy and Insolvency Act.

[14] While the Stonebridge letters are couched in the form of an offer, they are not. The terms proposed do not offer any form of compromise by Canada Life whatsoever. Rather than seeking settlement of the issues, Canada Life seeks to greatly expand its entitlements under the Credit Agreement without in any way releasing or relinquishing any of its rights and remedies under it. In my view, any offer of forbearance is effectively meaningless given the stringent terms which are attached to the offer. Further, and coming as they do with the warning that if not accepted, Canada Life will pursue its remedies under the Credit Agreement, the terms proposed are effectively an ultimatum. As a result, they cannot be objectively viewed as a genuine attempt by Canada Life to negotiate a settlement.

[15] Canada Life submits that its proposal to amend the Credit Agreement to revise the calculation of the debt service ratio in Bella’s favour and allow inter-company loans reflected compromise on its part. The problem is that that offer was in 2015 when what was being proposed by Canada Life was just the amendments to the Credit Agreement. In order to effect those changes, Canada Life required production of certain financial information from Bella which was not forthcoming. By the time of the April 2017 correspondence that “compromise” had long since been eclipsed by Canada Life’s subsequent demands (and Bella’s continuing defaults).

[16] Further, the fact that Stonebridge has marked all but one of the letters with “Without Prejudice” has no bearing on whether they are privileged or not. It is well settled that it is the substance of the letters and the context in which they are written which determines whether the privilege attaches, not the label placed on the letter.

[17] The email string at Tab 3 of the Compendium between Bella and Canada Life’s counsel on May 31 and June 1, 2017, seeks production of a document and the arranging of a meeting between counsel. There is no reference to an offer or settlement.

[18] The email strings at Tabs 5, 7 and 8 of the Compendium between counsel in June 2017 deal with Bella’s response to Canada Life’s proposals without agreeing to the terms sought. Tab 8 from Canada Life’s counsel lists the names and contacts of managers that Canada Life would agree to. Given that I do not consider that the Stonebridge letters contain any offer of settlement giving rise to privilege, it follows Bella’s response to those letters cannot be privileged either. Further, Canada Life does not claim privilege over Bella’s earlier letters responding to Canada Life’s position. It cannot pick and choose only those letters which it does not like to exclude.

[19] The letters at Tabs 10, 11 and 12 of the Compendium are between counsel for Bella and Canada Life and are dated July 19, 2017, July 28, 2017 and September 1, 2017. The letters, apart from the last paragraph on page 1 of the July 19, 2017 letter which was redacted, were produced and relied on by Canada Life in a motion it brought in the proceedings in November 2017. To the extent they were produced in the litigation by Canada Life, any purported settlement privilege has been waived. Nor do I consider that the redacted portion in the July 19, 2017 letter is subject to settlement privilege. It reflects Bella’s view of the terms being offered by Canada Life for forbearance which I have held do not constitute a settlement proposal.

[20] I also do not consider that settlement privilege attaches to the documents at Tabs 13 and 14 of the Compendium. Tab 13 is an email string between Bella’s counsel and Canada Life’s counsel on September 19 and 20, 2017 concerning a meeting with representatives of the company selected by Bella to manage its business through to its sale. There is no discussion of settlement. Tab 14 is a letter from Bella’s counsel to Canada Life’s counsel dated November 28, 2017, summarizing Bella’s response to Canada Life’s concerns over the past seven months and taking issue with Canada Life’s opposition to Bella’s securing of additional financing and specifically its threat of litigation against its Chief Restructuring Officer. The letter raises a dispute, not an offer of settlement.

[21] Finally, the overall context of the dispute between Bella and Canada Life, confirms, in my view, that the rationale for settlement privilege does not exist in this case. The dispute concerns a lender seeking to enforce its rights against its borrower in default.

[22] Canada Life submits that the Credit Agreement has been in default since 2008. Bella submits that beginning around the second half of 2014 a series of fundamental disagreements and disputes arose between it and Canada Life concerning Bella’s performance of its obligations under the Credit Agreement. In April 2015, Canada Life issued the first in a number of notices of default and demands, including to amend the Credit Agreement. Canada Life’s actions throughout were designed not to compromise any of its rights under the Credit Agreement but rather to bring Bella into compliance with its terms and subsequently to amend it to provide for stricter controls. In the absence of being able to accomplish that and as Bella’s financial situation worsened, Canada Life’s demands increased. The documents over which Canada Life asserts privilege are but a small sample of the correspondence between the parties concerning issues arising from Bella’s performance or lack thereof under the Credit Agreement. No privilege is claimed over the earlier letters and discussions between the parties. Canada Life’s claim for privilege over the latter communications is selective. In the overall context of the dispute between the parties, I am satisfied that the rationale for settlement privilege does not exist.

[23] For the above reasons, therefore, I am satisfied that settlement privilege does not attach to any of the documentation in the Compendium. While the evidence is inconclusive regarding the second part of the test, in my view the third part of the test has clearly not been met. In light of that conclusion and Canada Life’s counsel’s concession, settlement privilege also does not apply to those portions of the Gelfand Affidavit identified by Canada Life in its factum.

[24] Bella’s motion is allowed and a declaration shall issue that the correspondence between Bella and Canada Life and Stonebridge on its behalf between April and December 2017 is not the subject of privilege. Whether it is otherwise admissible on the pending motion is up to the judge hearing that motion.

[25] Bella is entitled to its costs of the motion on a partial indemnity basis. At the conclusion of argument, counsel agreed on costs of $7,500 which, in my view, given the issues, is fair and reasonable.

[26] Costs to Bella fixed at $7,500 in total.

L. A. Pattillo J. Released: May 30, 2019