Court File and Parties

COURT FILE NO.: 17-73320 DATE: 23/04/2020 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: BANK OF MONTREAL Applicant – and – GOLDEN DRAGON HO 5 INC. Respondent

Counsel: André Ducasse, as agent for Timothy C. Hogan, for the Applicant Martin Diegel for the Respondent

HEARD: February 24 and March 11, 2020

Endorsement on Receiver’s Fees

Justice Sally Gomery

[1] On March 11, 2020, I approved the proposed sale of real property owned by Golden Dragon Ho 5 Inc. (the “Debtor”) by the Receiver Rosen Goldberg Inc. (the “Receiver”) and issued an approval and vesting order with respect to that transaction. I reserved my decision on the approval of the proposed fees payable to the Receiver and its counsel and the balance of the relief requested.

Background

[2] An order appointing the Receiver was issued on August 17, 2017 on the application of its first-ranked secured creditor, Bank of Montreal (“BMO”). The Debtor’s debt to BMO as of January 2, 2020 was $384,669, consisting of the principal and interest owed on a mortgage loan. The loan was secured by three residential real-estate properties in Brockville owned by the Debtor (the “Property”). All but one of the rental units in the Property are currently occupied by tenants.

[3] In March 2017, the Debtor had listed the Property for sale with a commercial real estate broker. The list price was originally $999,000 but was later reduced to $899,000. There is no evidence that any offers were made for the Property prior to the receivership.

[4] In January 2018, five months after the receivership began, the Receiver obtained listing proposals from two commercial real estate brokers. It chose a broker who recommended re-listing the Property at $900,000. The Property was put back on the market in February 2018 at that price. The list price was reduced three more times over the following 18 months. During this time, the Receiver obtained two appraisals that indicated that the Property had a lower value than it had initially believed.

[5] An offer to purchase was made by third party in July 2018, but the Receiver rejected it because the price was too low. A company called M.Y. Commercial Inc. (“MY”), which holds a second mortgage on the Property, made offers in August 2018 and February 2019. These offers fell through for a myriad of reasons, most notably a lack of financing.

[6] In August 2019, another third party, Wen Tong, made an offer. After negotiating over price and other conditions over several weeks, the Receiver accepted Tong’s final offer in October 2019, conditional on obtaining the Court’s approval. The price was well below the list price and the appraised value of the Property, although higher than the offer refused in July 2018. The price ultimately accepted by the Receiver reflected both deficiencies identified in an inspection report obtained by the Receiver in September 2019, and the amount of time (22 months) that the Property had remained on the market without another viable offer.

[7] The Receiver initially presented its motion to approve its first report and the proposed sale of the Property on February 24, 2020. After hearing submissions, I was not satisfied, on the evidence filed, that the proposed sale met the test in Royal Bank of Canada v. Soundair Corp., 4 O.R. (3d) 1 (ONCA). In my view, the Receiver had not adequately explained what had been done to market the Property. I adjourned the motion for two weeks to allow the Receiver to file additional evidence.

[8] On March 11, 2020, after reviewing the Receiver’s supplementary report, I approved the proposed sale. Subtracting the agent’s commission and municipal taxes owed at closing, the net proceeds of sale are $397,544.

Fees proposed by the Receiver

[9] The Receiver has asked that the Court approve the following amounts, inclusive of fees, disbursements and HST, and rounded to the nearest dollar:

Receiver’s fees to January 10, 2020: $86,752 Counsel fees: $ 41,435 Subtotal: $128,187 Additional fees estimated to close out the file: $16,950 Total: $145,137

[10] The Debtor takes the position that the Receiver’s fees ought to be reduced by 50%. [1]

[11] BMO has approved both the proposed Receiver fees and counsel fees.

Analysis

[12] The Receiver bears the burden of proving that its fees, as well as the fees charged by its counsel, are fair and reasonable: Re Bakemates International Inc. (2002), 164 O.A.C. 84, at para. 31; and HSBC Bank Canada v. Lechier-Kimel, 2014 ONCA 721, at paras. 16 and 32.

[13] In Bakemates, at para. 51, the Court of Appeal endorsed a non-exhaustive list of factors that may be relevant to the assessment of whether receiver’s costs were fair and reasonable. I find that the following factors are relevant in this case:

The nature, extent and value of the assets

[14] The only asset of any significance in this receivership is the Property. Its market value was far less than initially believed. The proposed fees are more than a third of the net price ultimately obtained for the Property.

The complications and difficulties encountered

[15] The Receiver did the work typically involved in a receivership involving residential real estate. This included communications with the tenants, oversight of and directions to the property manager, securing appropriate insurance for the Property, retaining and instructing counsel, obtaining listing proposals, and retaining and interacting with a real estate broker.

[16] The Receiver also had to take steps that were not necessarily routine, such as obtaining an environmental site assessment, and commissioning additional appraisals and property inspection once it became evident that there were issues affecting the Property’s marketability and value.

[17] The time that the Receiver and its counsel had to spend on the receivership was also inflated by negotiations with MY between September 2018 and August 2019.

[18] In early September 2014, 2018, the Receiver learned that the Debtor’s principal, Chi Ho, had purported to accept an offer to purchase the Property, even though he had no legal authority to do so given the receivership order. The Receiver followed up with correspondence with Martin Diegel, counsel for MY, who is coincidentally the same counsel who represents the Debtor. Emails continued to be exchanged until late November 2018, but Mr. Diegel could not confirm that MY had the financing necessary to complete the purchase.

[19] In early February 2019, Mr. Diegel confirmed to the Receiver’s counsel that MY’s earlier offer had fallen through but said that the company remained interested in the Property and had a commitment from a lender. Another lengthy exchange of emails ensued, with the Receiver repeatedly giving Mr. Diegel chances to prove that MY had the means to carry out the purchase. This continued until early August 2019, when Mr. Diegel admitted that he did not see the 2019 offer going anywhere in the immediate term.

[20] Before accepting Tong’s last offer to purchase, the Receiver’s counsel contacted Mr. Diegel again. Mr. Diegel advised that MY was no longer interested in purchasing the Property.

[21] I find that the fruitless discussions with MY over the course of a year contributed significantly to the cost of the receivership. It was not however unreasonable for the Receiver to continue these discussions with Mr. Diegel. In fact, for a long period of time, MY appeared to be the only potential purchaser for the Property. It therefore made sense for the Receiver and its counsel to continue to seek confirmation that it could obtain the financing required to close.

[22] The Debtor’s actions and inactions also contributed to the fees.

[23] For example, after the receivership started in 2017, the Receiver learned that the Debtor had let the insurance policy over the Property lapse. Obtaining coverage was obviously necessary and required some time and effort.

[24] Another example was the decision in May 2018 by the Debtor’s principal, Ho, to apply to subdivide the Property into four lots. He took this step without the Receiver’s knowledge or consent. When the Receiver advised the United Counties of Leeds and Grenville that the application to subdivide was unauthorized, the Counties took the position that they were nonetheless obliged to process it. The application was granted unopposed and the Property was re-zoned into three separate parcels in August 2018. Although an appraiser retained to assess the impact of the re-zoning concluded that it had no impact of the value of the Property, Ho’s actions increased the costs of the receivership.

The degree of assistance provided by the Debtor

[25] The Receiver does not allege that the Debtor failed to co-operate but, as already mentioned, its costs increased due to Ho’s unauthorized subdivision application and the lapse of insurance coverage.

The Receiver’s skill and the results obtained

[26] The Debtor argues that the Receiver failed to manage the Property competently, because the price obtained for it was far below the initial estimate of its market value.

[27] When the Receiver’s motion was first heard in February 2020, I expressed concern about the price it proposed to accept for the Property. That is why I directed the Receiver to provide further evidence of the efforts made to market the Property. Based on the additional evidence filed, I was satisfied that the Receiver made all reasonable efforts to obtain an offer within a higher range. It appears that the condition of the Property was not as good as the Receiver first perceived, or that the market for such properties in Brockville had cooled down.

[28] Based on the additional evidence provided, I find that the Receiver exercised appropriate skill and diligence in the way it managed the Property.

The time spent

[29] The Receiver recorded a total of 212.50 hours of work to early January 2020. The vast majority of this time was recorded by Steven Goldberg, a senior vice-president with the firm. His billable rate, exclusive of HST, was $400 an hour. The Receiver’s affidavit indicates that this was a discounted rate negotiated with BMO but does not indicate the discount applied. Two employees of the Receiver, an estate manager and an estate technician, recorded a total of less than 30 hours, at rates far lower than that of Mr. Goldberg.

[30] The detailed time charges submitted by the Receiver are not perfect. Mr. Goldberg’s descriptions of his activities are sometimes vague and do not allow me to ascertain what he was doing to advance the file. A random sample includes a .70 entry on September 7, 2017 that states “Emails re property”, with no indication of what the emails were about or with whom they were exchanged; an entry for .70 in May 2018 that says “Amended listing agreement” without further detail; and an entry of .90 in September 2019 that consists of a single word (“Offer”). The estate technician’s dockets similarly consist of multiple entries each accompanied by a single word (“Banking”).

[31] Despite these issues, I have no basis on which to conclude that the time dockets were padded or that they included any unnecessary tasks. The Debtor complains that there are no entries for less than .2 hours, “contrary to the historical practice of .1 in and .2 out”. I am not aware of such a practice. The amount of time required to deal with any given email depends on its contents.

[32] Mr. Diegel points out that some of the time entries for interactions between counsel and Mr. Goldberg do not correlate and, in some instances, an email or a discussion recorded by the Receiver is not matched by any corresponding entry by its counsel. There are two potential explanations for this. The first is that neither the Receiver nor its counsel kept a record of every trivial or short interaction they had in this matter. The second is that one or both of them fabricated time entries for the purpose of padding their accounts. I reject the second hypothesis as offensive and unsupported by any evidence.

[33] The Debtor also contends that some of the work done by Mr. Goldberg could have been performed by a more junior member of staff. Some savings might have been achieved by involving other staff at a lower hourly rate. The question is not however whether the services could conceivably have been provided at a lower cost, but whether the time actually recorded is reasonable.

[34] The receivership began in August 2017 and, as of January 2020, had lasted 28 months. During this time, the Receiver recorded just over 212 hours of time. Mr. Goldberg therefore spent less than eight hours a month, on average, in administering the Property. This strikes me as reasonable given the description of the services performed. I do not agree with the Debtor that the Receiver’s services represented a duplication of the services provided by the property manager and real estate broker. The Receiver had a fiduciary duty to actively oversee the management of the Property and this included supervision of the activities of these individuals. I conclude that it acted appropriately.

[35] Counsel recorded a total of 144 hours over this same period. Reviewing its dockets, I find that the legal work was delegated appropriately. The average rate was $287 an hour. On my review, the time recorded by the Receiver’s counsel to January 10, 2020 was reasonable, given the work that it performed, including its protracted negotiations with MY.

[36] In my view, however, the estimated fees of almost $17,000 to close the file are unreasonable. These fees, which presumably include the cost of two court attendances, must be discounted to reflect that re-attendance was only required because the Receiver’s original motion record did not contain the evidence required to satisfy the test in RBC v. Soundair. I conclude that reasonable fees to close out the file would be more than $10,000 inclusive of disbursements and HST.

Conclusion

[37] Weighing all of the relevant factors, I conclude that the fees generated by the Receiver and its counsel as of early January 2020 were fair and reasonable but that the estimated amount to close out the file must be reduced. I therefore approve the following amounts, inclusive of fees, disbursements and HST, and rounded to the nearest dollar:

Receiver’s fees to January 10, 2020: $86,752 Counsel fees: $ 41,435 Subtotal: $128,187 Additional fees estimated to close out the file: $10,000 Total: $138,187

[38] Counsel for the Receiver should submit a final order for my signature reflecting this conclusion, after obtaining approval on form and content from the Debtor.

[1] In its factum, the Debtor also sought an order either that the Receiver pay the costs of its counsel personally or that the costs have the same priority as any fees payable to the Receiver or its counsel. This relief was not addressed at the hearing, and no evidence was filed with respect the Debtor’s legal costs.

Released: April 23, 2020 Justice Sally Gomery