COURT FILE NO.: CV-20-00642928-00CL
DATE: 20200727
SUPERIOR COURT OF JUSTICE – ONTARIO
(COMMERCIAL LIST)
RE: IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF THE CLOVER ON YONGE INC. AND THE CLOVER ON YONGE LIMITED PARTNERSHIP
Applicants
BEFORE: Koehnen J.
COUNSEL:
David Gruber for the CCAA Applicants and Concord Land Developments Limited
Steven Graff and Jeremy Nemers for the CCAA Applicants
Geoff R. Hall, Heather L. Meredith and Alexander Steele for the Monitor, PWC
Matthew P. Gottlieb, Andrew J. Winton and Zain Naqi for a group of unit purchasers
Kenneth Kraft for a group of unit purchasers
Karen Groulx for Altus Group Limited
Aaron Grossman for certain brokers
Mark Dunn for Maria Athanasoulis
Jonathan Rosenstein for Aviva Insurance Company of Canada
Fred Tayar for OTB Capital Inc
Nick Stanoulis for Stancorp Properties Inc. and certain unit purchasers
Christopher Henderson for the City of Toronto
HEARD: July 22, 2020
ENDORSEMENT
[1] This motion arises in the context of a CCAA proceeding involving a condominium project known as The Clover on Yonge. I will refer to the project in these reasons as either Clover or the debtor. Clover has approximately 522 residential units plus commercial and parking units and is in the course of being built on Yonge St. in Toronto. Clover has scheduled a motion to disclaim the agreements of purchase and sale that it had entered into with approximately 496 purchasers. Clover says it is economically unfeasible to complete the project with the pricing contained in the purchase agreements because construction prices have increased dramatically since the contracts were entered into in 2015.
[2] Clover commissioned a cost report and an appraisal report, from Altus Group, a consultant, quantity surveyor and appraiser specializing in real estate.
[3] Counsel for the unit purchasers have received a complete copy of the cost report and a redacted copy of the appraisal report. On this motion, the purchasers seek production of an unredacted appraisal report. In addition, Maria Athanasoulis seeks production of only the cost report and a number of real estate brokers seek production of both the cost and appraisal reports.
[4] Clover resists further production to any of the moving parties. It submits that the redacted portions of the appraisal report contain sensitive information which would be detrimental to the debtor if it became public, particularly if the CCAA plan fails and the project has to be sold. In those circumstances, dissemination of the information contained in the appraisal report would be prejudicial to the ability to sell the project. Counsel for the purchasers have signed non-disclosure agreements in respect of the cost report and are prepared to do the same for the appraisal report. The non-disclosure agreements restrict the availability of the reports to counsel, experts and a two-person steering committee. The debtor nevertheless is of the view that there is too much risk involved in the production of the unredacted appraisal report. The Monitor shares this view.
[5] For the reasons set out below, I grant the purchasers’ motion for production of the unredacted appraisal report and dismiss the motions of Ms. Athanasoulis and the brokers for production of the cost and appraisal reports.
A. The Purchasers’ Motion
[6] The purchasers point out that the debtor’s deponent, Mr. McCracken, referred to the Altus reports in his affidavit supporting the disclaimer motion as a result of which they say production of the report must be ordered. The purchasers rely on rule 30.04 (2) which provides:
(2) A request to inspect documents may also be used to obtain the inspection of any document in another party’s possession, control or power that is referred to in the originating process, pleadings or an affidavit served by the other party.
[7] The purchasers submit that this is a mandatory provision that applies in all circumstances without exception. In support of this proposition they rely on language of D.M. Brown J. (as he then was) in Timminco v. Asensio, (2009), 2009 CanLII 9431 (ON SC), 95 O.R. (3d) 547 (Sup. Ct.) at para. 28, where he noted that a request to inspect must lead to “immediate and mandatory” production. There are no “[c]arve-outs” for “certain types of documents.” Indeed, “[e]ven where a party has referred to an otherwise privileged document in its pleading, it must be produced if inspection is requested.”
[8] Nordheimer J. (as he then was) articulated similar views in R. v. Vijaya, 2014 ONSC 1653 at para. 35:
It is a basic principle that a party who files an affidavit as evidence in a proceeding is obliged to produce any material referred to in that affidavit at the request of any other interested party. Normally, any such material should properly be marked as an exhibit to the affidavit, and therefore be automatically available to any other interested party, but the failure to mark the material as an exhibit does not shield it from production. The entitlement to see such material is codified for civil proceedings in rule 30.04 (2)…
[9] The debtor and the Monitor submit that those cases did not involve CCAA applications and that a judge within the context of a CCAA proceeding has more discretion than the language of Timminco and Vijaya suggest. I am inclined to agree with the debtor and the Monitor in this regard. It strikes me that a federal statute that permits a court to disclaim contracts based on discretionary considerations and to develop a process for the resolution of litigious disputes within the CCAA proceeding that departs significantly from the Rules of Civil Procedure, also affords the court the discretion to depart from other “mandatory” provisions of the rules such as rule 30.04 (2).
[10] The question then becomes whether I should exercise my discretion in favour of production or maintain the more limited production that the debtor and the Monitor advocate.
[11] Although I have found that I have the ability to exercise discretion and am not absolutely bound by rule 30.04 (2), the rule remains a relevant factor in the exercise of my discretion. One factor relevant to the exercise of discretion is to consider the way in which a party has used the contested document in its affidavit. A passing, incidental reference to a document may lead a court to exercise its discretion against production. Reliance on the document for a material issue before the court may incline the court towards production. Reference to the Altus appraisal in the debtor’s materials tends more in the latter direction.
[12] In Mr. McCracken’s affidavit sworn July 8, 2020, he deposes in paragraph 8 that the project cannot be built with the original contracts in place “because the available revenue would be insufficient to repay the financing required; but it would be a viable project if the Pre-Sale Contracts were not in place.” He goes on in paragraph 19 to state that if the original purchase agreements remain in place, the developer would need to generate approximately $2,125 per square foot from the unsold commercial units and parking units just to break even which, in his view, is impossible.
[13] Mr. McCracken goes on in paragraph 45 of his affidavit to say:
Altus Group is in the process of preparing an appraisal report providing their view of the anticipated market revenues of the various components of the Clover project, and which I anticipate will be generally in line with Concord's[^1] view. I understand it will become available to counsel for unit purchasers and their steering committees who have entered into non-disclosure agreements with the Monitor.”
[14] A number of factors emerge from Mr. McCracken’s affidavit. First, Mr. McCracken deposes that the revenues from the project make it unfeasible without disclaiming the original contracts. He supported that view by invoking the authority of the Altus appraisal. Thus, the Altus appraisal was not referred to inadvertently or incidentally, but as a means of according legitimacy to Mr. McCracken’s views about revenue. It would be unfair to permit a party to influence the court by referring to independent expertise but then decline to produce that expertise.
[15] Second, Mr. McCracken stated in his report that the appraisal report would be available to counsel for the unit purchasers and their steering committees. That affidavit was used in a hearing at which parties made submissions on the process to be followed for the disclaimer motion and I made rulings in that regard. The strategies that parties pursue in respect of a disclaimer motion could reasonably be expected to be influenced by the commitments that an opposite party makes. It would be unfair to have a party and the court be influenced by a statement of the sort Mr. McCracken makes in his affidavit only to have him resile from that commitment later. While it became clear on the scheduling motion that the debtor would not disclose the unredacted appraisal report without a court order, that hearing occurred on July 17, 2020. Mr. McCracken’s affidavit was delivered to counsel for the purchasers shortly after July 8, 2020. This is a real-time litigation. As set out in greater detail below, the debtor seeks a speedy determination of the disclaimer motion and of its proposed plan. In those circumstances, for the purchasers to be under a misunderstanding about whether they would get the appraisal for even a few days, can seriously prejudice their ability to mount an effective case.
[16] Third, the disclaimer motion has been scheduled for August 20, 2020. Even that date is several weeks later than the debtor had asked for. The debtor and its new owner, Concord, have been aware of the disclaimer issue since at least February 2020. It has taken them until late June or July to complete the Altus report. It submits, however, that the purchasers do not need production of the Altus appraisal because they can obtain their own appraisal. The unfairness in this approach is manifest. Although Concord is one of the most sophisticated development companies in the world and has had six months to prepare an appraisal, it suggests that a disparate group of 496 purchasers be given approximately one month to do the same.
[17] Fourth, the debtor seeks the protection of the court. In doing so it obtains substantial advantages. It has prevented creditors from commencing lawsuits against it, it has prevented creditors from assigning it into bankruptcy, all with the object of restructuring in the hope of creating a profitable enterprise out of what it says is now an insolvent one. As part of that process, the debtor wants to disclaim the contracts that it entered into with 496 purchasers without facing any liability.
[18] It strikes me that production of the unredacted appraisal report accompanied by a non-disclosure agreement is a fair price for the debtor to pay for: (i) the right to argue disclaimer of 496 contracts; (ii) on a real-time basis; (iii) that does not give the purchasers adequate time to commission their own appraisal; (iv) after giving those purchasers a false sense of security that they would receive the appraisal report. There is a price to pay for the extraordinary benefits that the debtor seeks. Here the price is merely transparency.
[19] The debtor and the Monitor submit that the issue of producing the appraisal does not require the court to balance the interests as I have done above because the appraisal is not relevant to the disclaimer motion. The debtor notes that, if it is successful on the disclaimer motion, it will offer the units back to the original purchasers on a cost plus formula. It is for that reason that they have produced the unredacted Altus cost report to the purchasers. Clover and the Monitor submit, that the cost report gives the purchasers sufficient information with which to make decisions.
[20] Section 32 (4) sets out the factors the court should consider when determining whether to disclaim contracts and provides:
(4) In deciding whether to make the order, the court is to consider, among other things,
(a) whether the Monitor approved the proposed disclaimer or resiliation;
(b) whether the disclaimer or resiliation would enhance the prospects of a viable compromise or arrangement being made in respect of the company; and
(c) whether the disclaimer or resiliation would likely cause significant financial hardship to a party to the agreement.
[21] It strikes me that, at a minimum, the appraisal is relevant to the factors (b) and (c). It may well also irrelevant to any other relevant factors that the court is permitted to consider by virtue of the reference to “among other things” in the opening passage of section 32 (4).
[22] When I asked counsel for the Monitor whether production of the appraisal report would not enhance the prospects of a viable arrangement by providing both parties with information that might enable them to reach a mutually acceptable compromise, he responded that this was not the issue on the disclaimer motion. The Monitor submits that the disclaimer motion is a threshold issue which is conceptually distinct from the negotiation or approval of a plan.
[23] While I agree with that in theory, the distinction here is somewhat artificial. Disclaimer cannot necessarily be decided in a vacuum. It strikes me that both the purchasers and the court need to know what range of alternatives is available to decide whether to agree to or permit disclaimer; especially when the debtor proposes to seek plan approval within weeks of the disclaimer motion.
[24] A more extreme example helps make the point. If the value of the property in a CCAA sale generated enough profit to pay the unitholders their full damages on the sale, that might lead a court to reject disclaimer because there was no particular benefit associated with it. If, however, sale without disclaimer left nothing for unit purchasers then disclaimer might be more acceptable because it does not put the unit purchasers into any worse position than they would otherwise be in. The commercial reality may be considerably muddier than those two extremes. The two ends of the spectrum do, however, at least demonstrate conceptually why appraisal information is relevant even on the disclaimer motion.
[25] Having appraisal information on the disclaimer motion will assist in determining whether disclaimer will enhance the chance of a compromise and whether it causes significant financial hardship to any party to the agreement.
[26] The debtor and the Monitor note that the Altus reports were commissioned to help obtain financing and help the sales process, if needed. While that may be, Mr. McCracken appeared to recognize its relevance to the purchasers when he stated that it would be disclosed to them.
[27] A further dynamic applies in this case. As noted earlier, the debtor was acquired by Concord in the course of this proceeding. In that light, this is not a situation of the debtor stakeholder having been victimized by economic circumstances beyond its control, but rather where the true stakeholder within the debtor is an entity that came into the situation with eyes wide open in the hope of making a profit with the benefit of the court protection that the CCAA affords. The disclaimer involves, as counsel for the purchasers put it, a transfer of wealth from the purchasers to Concord. There is nothing inherently wrong with that. If the project truly is economically unfeasible on its original pricing, Concord is entitled to a reasonable profit on its investment. That might be the only way to permit the purchasers to retain their units. At the same time, however, if a developer wants the court’s assistance in facilitating a wealth transfer to itself, the court should have the benefit of full information associated with that wealth transfer.
[28] Neither the Monitor nor the debtor submit that the purchasers would have some unfair advantage if they obtain the appraisal. Rather, their concern is that if recipients of redacted appraisal information inadvertently leaked it, creditors could suffer significant prejudice if the contracts were not disclaimed and the project had to be sold or if certain units had to be re-sold if their original purchasers did not participate in with whatever compromise may be negotiated. Those are valid concerns. It strikes me, however, that they can be addressed through appropriate non-disclosure mechanisms. By way of example, the debtor and Monitor have already agreed to disclose the cost report to purchasers with non-disclosure mechanisms that limit access to counsel, experts and a two-person steering committee. The purchasers agree that the appraisal report should be subject to the same type of restrictions. Neither the Monitor nor the debtor have identified any particular risks of doing so other than the general proposition that risk of disclosure increases as more people receive the information.
[29] Ms. Groulx stated on behalf of Altus, that the appraisal was prepared for a specific purpose and for a specific party. Altus is concerned about being exposed to liability if others use the report. That too is a fair concern. It can however be addressed by a provision in the production order to the effect that giving the purchasers access to the appraisal does not give them any right of action against Altus. Any use of the appraisal by any party for any purpose other than as originally contemplated when Altus was retained should not give rise to any liability against Altus
[30] For the reasons set out above I order that the Altus appraisal report be disclosed to counsel for the purchasers, their expert and their two-person steering committee in unredacted form. No such recipient is to communicate any of the contents of the appraisal report to anyone other than an authorized recipient of the appraisal report.
B. The Claim of Maria Athanasoulis
[31] Maria Athanasoulis is the former president of Cresford. She has a claim against Cresford and others for wrongful dismissal of $1,000,000. In addition she claims that she was entitled to 20% of the profits of the project.
[32] Ms. Athanasoulis seeks production of the Altus cost report that has already been delivered to counsel for the purchasers. She does not seek production of the appraisal because she agrees that she may be part of a purchaser group who may be interested in acquiring the project if the CCAA proceeding is not successful.
[33] Ms. Athanasoulis submits that she needs the cost report to help evaluate the debtor’s proposed plan. At this point, the debtor envisages presenting a plan that would offer unit purchasers new contracts, would pay out all secured debt, would pay out all trade creditors and leave remaining unsecured creditors with a dividend of 3% of their claim amount.
[34] Ms. Athanasoulis is in a different equitable position than the purchasers. Clover never agreed to share either of the reports with her. She has only a potential claim as a judgment creditor. Her claim has not been adjudicated. She is not a unit purchaser and has no particular interest in whether the purchase contracts are or are not disclaimed.
[35] Ms. Athanasoulis is the former President and Chief Operating Officer of Cresford, the holding company with overall control of Clover before Concord acquired it. She is clearly a sophisticated individual with inside knowledge about the project.
[36] Paragraph 61 of her statement of claim states:
By the fall of 2018, Ms. Athanasoulis, and the rest of Cresford’s senior management team, advised Mr. Casey that Clover would require an additional $50 million to complete construction. Though this additional funding requirement would mean that no profit would be earned on this project, all lenders, trades and costs would be paid in full and Cresford could continue as a going concern with a solid reputation. Cresford funded some of the Clover obligations using fees earned on other projects, but a shortfall of $37 million remains.
[37] In other words, she admits the project was losing money. As a result, as of the time she left Cresford her 20% profit share would have had no value.
[38] In addition, her wrongful dismissal claim of $1,000,000 is subject to some ambiguity. Ms. Athanasoulis admits in her statement of claim that she was not paid out of the Clover entities but from another corporation that formally employed Cresford employees. There are 13 corporate parties in her statement of claim against which she claims wrongful dismissal. There would appear to be an issue about how her claim should be allocated between Clover and the other defendants.
[39] As a result of the foregoing, Ms. Athanasoulis is a contingent creditor and a potential purchaser of the debtor in any sale of the property and a party without an economic interest in the disclaimer issue.
[40] Those factors make the cost report significantly less important for Ms. Athanasoulis to have than it is for the purchasers to have the cost and appraisal reports. Given that Ms. Athanasoulis is a potential purchaser of the project, the difficulties posed by her having the Altus cost report are significant. Ms. Athanasoulis admits that it would be improper for her to have the appraisal given that she is a potential bidder in any sale of the project. Giving her the cost report raises similar conflicts.
[41] Given the degree of need that Ms. Athanasoulis has for the cost report, the conflict created by giving her the cost report, her limited interest (if any) in the disclaimer motion and the absence of any commitment by Clover to share the report with her, I dismiss her motion for production of the Altus cost report.
C.
D. The Real Estate Brokers
[42] The real estate brokers at issue are those who are entitled to commissions under the original purchase agreements. They claim their commissions in the CCAA proceeding. If the contracts are disclaimed, they would lose their commissions and also be limited to a 3% dividend under the plan the debtor proposes. The brokers seek both the cost and appraisal reports.
[43] They too have a significantly lesser need for the reports than do the unit purchasers.
[44] Most significantly, the debtor has already agreed that, if the contracts are disclaimed and the original unit buyers re-purchase them, the brokers will be deemed to be the broker and will earn commissions under the new purchase. That significantly reduces the financial impact of a disclaimer to them. If the contracts are not disclaimed, the brokers would likely lose their right to commission in any event in a subsequent receivership or bankruptcy sale.
[45] Even if the contract(s) in respect of which a broker has a commission claim is/are not re-purchased, having cost and appraisal information from Clover would give that broker an advantage over others and over Clover when the unit is re-sold. That subsequent sale to another purchaser is one in respect of which the purchaser is not entitled to transparency because it is an ordinary, arm’s length purchase in respect of which Clover has not obtained any advantage vis a vis the new purchaser through the CCAA process.
[46] The brokers have articulated no particular reason for needing the reports other than the general proposition that they would be helpful when they are considering their position on the plan. Their claims to the reports are, like those of Ms. Athanasoulis, weaker given that the debtor never promised to produce the reports to them, arguments for and against disclaimer are already being advanced by highly qualified counsel and they stand to earn commissions even if the contracts are disclaimed. As a result, I dismiss the brokers’ motion for production of the cost and appraisal reports.
Other Relief
[47] The debtor also sought other relief on the hearing which was not contested and in respect of which I signed orders immediately after the hearing. The principal issue involved an increase to the DIP facility. The increase was clearly necessary. It provided funding to take out the previous secured lender. To that extend it does not prime any other stakeholders. The interest rate on the DIP loan is also more favourable to the debtor than the interest rate on the previous loan. To the extent that the DIP funds ongoing construction and does prime other stakeholders, that construction preserves the value of the project and is in all stakeholders’ interests. In approving the DIP I am not, however, deciding whether the conditions in the DIP that call for further court rulings or orders have been satisfied. Those will be issues for another day.
Conclusion
[48] For the reasons set out above, I grant the purchasers’ motion to have access to the unredacted Altus appraisal provided access is restricted to counsel, their expert and the two person steering committee and provided all those who receive access sign a satisfactory non-disclosure agreement. I am available to resolve any disagreements about terms of access or use. I dismiss the motions of Ms. Athanasoulis and the brokers for access to either the cost or appraisal reports.
Koehnen J.
Date: July 27, 2020
[^1]: Concord is the new owner of Clover. Concord acquired Clover in the course of the CCAA proceeding. When doing so it made clear that it would proceed with the CCAA only if it were permitted to disclaim the contracts. If not, it indicated that the CCAA proceeding could not succeed.