Court File and Parties

COURT FILE NO.: CV-21-00658033-00CL DATE: 20210618

SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)

RE: BANK OF MONTREAL, Applicant AND: 2592931 ONTARIO INC., W.G.K. FITNESS INC., 2039675 ONTARIO INC., WGWINDSOR 2 FITNESS INC., WG BRAMPTON FITNESS INC., WGH FITNESS INC., CFC WELLAND INC., W.G.C. FITNESS INC., 2014595 ONTARIO INC., CFC BRANTFORD INC., CFC WATERDOWN INC., CFC LONDON SOUTH INC., W.G.G. FITNESS INC., WGWINDSOR FITNESS INC., W.G.W FITNESS INC., WGLONDON FITNESS INC., and WG ORILLIA INC., Respondents

APPLICATION UNDER Section 243(1) of the Bankruptcy and Insolvency 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

BEFORE: S.F. Dunphy J.

COUNSEL: David Ward, Erin Craddock and Tony Van Klink, for Applicant, Bank of Montreal Clifton Prophet and Thomas Gertner for the Monitor, Richter Advisory Group Inc. David Ullmann, for 2839203 Ontario Inc. Jason Squire, Earl Cherniak QC and Domenico Magisano for 2592931 Ontario Inc., et al Matthew Gottlieb and Crystal Li, for 2837083 Ontario Inc. Chenyang Li, for 6917194 Canada Inc. Sandra Johnston, for ALK Limited Partnership Aiden Nelms, for McCowan & Associates Ltd. Max Prince, for N&D Supermarket Limited Chris Burr, for Johnson Health Technologies Canada Commercial Inc.

HEARD at Toronto: June 8, 2021

REVISED REASONS FOR DECISION

[1] These motions were heard and decided on June 8, 2021. I issued written reasons that evening that were subject to non-substantial revision and correction. I have made minor clerical changes – correcting a typographical error or inserting an obviously missing word – in the text of the reasons below. Such amplification as I have thought necessary to these reasons are contained at the end to make it clear what parts of these reasons were the “original” and what part was “supplementary”.

[2] There are three motions before me, all concerning the fate of a related group of companies that I shall identify as the Crunch Group. The Crunch Group operate fitness clubs at a variety of locations in Ontario. It will escape the attention of none that fitness clubs have been among the hardest hit businesses by the variety of lock-downs and closure orders issued by the Government of Ontario in connection with the pandemic. These motions come just as it appears that a thaw in the lockdown may permit cautious optimism that the fitness clubs will be given permission to open and help Ontarians shed their Covid pounds.

[3] Following a series of defaults on approximately $12 million in credit facilities and various refinancing discussions throughout the second half of 2020, Bank of Montreal applied to the Court for a Receiver pursuant to the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 on March 2, 2021. As often happens in such cases, the Bank’s application gave rise to a flurry of negotiations and activity. As happens much less often in such cases, that activity actually resulted in something of a deal emerging to avoid receivership.

[4] When the Bank’s receivership application came on for a hearing on March 4, 2021, it was adjourned sine die on the terms set forth in the order. A Monitor was appointed to monitor the debtors’ affairs and finances but not to take control of them. The debtors were to remain in possession of their property, to carry on business in the usual and ordinary course and not to dissipate their property. The Monitor was given a number of enumerated powers incidental to its role. Among them was the authority “as agent for the [Bank]” to undertake a sale and investment solicitation process (a “SISP” as these things are commonly called). The debtors and their officers and directors were ordered to cooperate with the Monitor in carrying out the SISP but little more was provided in the order of March 4, 2021 regarding the actual details of the SISP. This was left to the Monitor “as agent of the Bank” to determine.

[5] While the receivership application remained adjourned sine die, a stay of proceedings was put in place.

[6] What was the nature of the deal that caused this about-face? On March 3, 2021 the debtor companies signed a letter agreement drafted by the Bank confirming the following details among others:

a. The debtors or their nominee would make an irrevocable offer to the Bank for the sale by the Bank of the indebtedness of the companies at a stipulated minimum price without conditions beyond standard ones which offer must be open for acceptance until 5:00pm on April 29, 2021;

b. The debtors would consent to an order adjourning the receivership application and appointed the Monitor to run the SISP;

c. The debtors would provide their full co-operation in the SISP;

d. The SISP would run until to April 16, 2021 subject to possible extension on the recommendation of the Monitor to April 29, 2021; and

e. The companies would consent to a receivership order in the form provided by the Bank’s lawyers to be held in escrow.

[7] The irrevocable offer mentioned in the Bank’s letter was provided and was also dated March 3, 2021. For convenience sake, I shall refer to the Bank’s counterparts in that agreement – entitled “Assignment of Debt and Security” - as the “purchaser”. The purchaser is in fact two individuals and a corporation. It is sufficient to note that the purchaser is not at arm’s length to the debtors.

[8] The recitals to this agreement mention the amount of the debt, the security held for it and that BMO “has agreed to assign and transfer the Loan Agreements (including the Indebtedness), together with its interest in the Collateral….to the Assignee on the terms set forth herein” (emphasis added). Among other features of this agreement to be noted (emphasis added to quotes by me where italics appear):

a. S. 1.1 – the parties agree that the recitals are true and correct and an integral part of the Agreement;

b. S. 1.2 “in consideration of the sum of [redacted] paid by the Assignee to BMO by the end of business on April 30, 2021 (the Closing Date), BMO hereby does sell, assign and transfer” the debt and security;

c. S. 1.4 the parties “shall, from time to time, take all reasonable steps necessary to execute, acknowledge and deliver…such further instruments, transfers and other documents to give effect to this Agreement”.

[9] The Agreement was amended on April 19, 2021. The recitals to that amending agreement note that the Agreement of March 3, 2021 had been signed by the purchaser and that it was “open for acceptance by BMO up to April 29, 2021 at 5:00pm”. The amending agreement increased the purchase price, amended the Closing Date from April 30 to the end of business on May 14, 2021 and added a requirement for the payment by the purchaser of a material deposit that would be non-refundable should the purchaser fail to close.

[10] The bank got exactly what it bargained for. The Monitor ran a full SISP. A number of interested parties participated in it. The debtors cooperated fully including to the point of assisting potential competitors to kick tires and look inside the operation.

[11] One potential bidder was involved in last minute negotiations with the Monitor right up until minutes before the 5:00pm expiry of the purchaser’s offer – an expiry time, it might be recalled, that the Bank itself had inserted in the March 3, 2021 letter agreement the debtors and purchaser agreed to abide by.

[12] On April 29, 2021 the Bank accepted the offer of the purchaser as amended. The bank was not obliged to accept it – it could have continued to negotiate with the other potential purchaser if it wished, but it would have lost the backstop that the Agreement provided. The Bank’s acceptance technically came half an hour late via a lawyer’s email that asked for confirmation that the small delay would not be objected to (it was not).

[13] The Bank took two steps in the following days that have caused the purchaser and debtor companies to question the Bank’s good faith, particularly in the context of growing pressure being applied by a disappointed bidder in the SISP. Unfortunately, I am persuaded that their fears are not without foundation. One of the two incidents created a distraction but did not in and of itself prevent a successful closing. The other one undeniably did.

[14] The March 3, 2021 letter agreement contained undertakings of the Bank regarding the operation of the debtors’ bank accounts during the SISP period. Since the transaction was originally slated to be closed the day after the expiry of the SISP period (prior to the amendment on April 19, 2021 that extended Closing), this was originally of no particular moment. For whatever reason, nobody had thought to extend the assurances regarding the ordinary course operation of the banking accounts after April 29, 2021 when the Closing Date was extended to May 14, 2021. A number of the debtors’ bank accounts were closed for a period of time with little warning on April 30, 2021. This was eventually sorted out but the debtors and purchaser contend (and I agree) a degree of confusion and distraction was caused by this issue arising as it did when the purchaser and management were expecting to be focused on closing. Given the continued court-ordered stay of proceedings, the presence of the Monitor and an agreed deal less than 24 hours old, some consultation and discussion before peremptory action might have been the preferable course for the Bank to adopt. Some accounts were re-opened the next day – one was not re-opened until May 6, 2021.

[15] I cannot find that the account closure incident is the reason why the purchaser failed to close on May 14, 2021 but it was certainly a contributing factor.

[16] Viewed in isolation, I should be loathed to attribute bad faith to actions of a bank for which clumsiness, ham-fistedness or obduracy are available and normally adequate explanations. However there was more at work here.

[17] The purchaser had raised money from a variety of sources to fund the purchase price. The assignment agreement was not conditional on financing but that does not mean that the purchaser had funds sitting in a dark bank vault waiting to be summoned. Financing had been arranged but like all financing it had some conditions.

[18] One material tranche of the financing had a condition that the purchaser provide a fully executed copy of the underlying agreement prior to the advance of funds. That condition strikes me as neither rare nor unreasonable. Whatever my opinion may be, it was the investor’s condition and it was one that ought not to have been difficult to satisfy.

[19] On May 4, 2021, the purchaser requested a copy of the fully executed assignment agreement. It will be recalled that this agreement – and the amendment to it – had been fully executed on the part of the purchaser and debtors while waiting for the Bank to accept it by the deadline the Bank stipulated and agreed to.

[20] Later that same day, the Bank’s lawyer wrote back saying that he “was planning on having the agreement signed and delivered on closing” and that he did “not want a fully signed copy floating around if the assignment doesn’t actually proceed”.

[21] The Bank’s position was both mystifying and wrong. The agreement as amended had a fixed closing date: May 14, 2021. By the terms of the amending agreement, it was open for acceptance by BMO no later than fifteen days prior to the Closing Date and acceptance of a written contract is normally signified by signing in the place provided below the line “in witness whereof the parties have set their hand on the day and year first above written”. Although s. 1.1 of the agreement uses language of present conveyance (“hereby does sell”), this language is found in a sentence which itself is future looking – referencing as it does the future payment of the purchase price by the end of business on the Closing Date. The Closing Date, it will be recalled, is necessarily later than the last day for acceptance of the agreement. The “consideration clause” does not reference actual receipt of the purchase price on or before signature but “the promises and mutual agreements and premises herein”.

[22] Read as a whole – for that is how contracts are read – the agreement was unambiguously an executory contract rather than a simple present conveyance. The suggestion that the Bank might somehow be held to have agreed to waive receipt of the purchase price by delivering a fully executed copy of the agreement when acceptance was intended to precede closing is far-fetched. Were that distant prospect to have been a significant and bona fide concern, a party acting in good faith and actually desirous of closing the transaction it had just accepted might have addressed the concern in any one of a hundred ways. Belts and suspenders have never been in short supply in the desks of commercial solicitors. Faced with the choice of being reasonable and flexible or crossing its arms and saying “No”, the Bank chose the latter course.

[23] The purchaser wrote back to the Bank’s lawyer on May 6, 2021 and explained why this refusal to deliver up an executed counterpart of the agreement already signed by the purchaser was proving problematic. They explained that some of the investors in the assignee required a fully executed agreement before advancing and offered to hold the fully executed agreement in escrow subject to being returned should the agreement fail to be completed. The same request was repeated via a telephone call on Monday May 10, 2021. The Bank’s lawyer wrote back the next day acknowledging that the Bank understood that the “agreements signed by BMO are being requested as part of the efforts to secure the necessary funds to complete the assignment” but repeating that the agreement as amended would not be provided prior to closing and that the agreement “is not conditional on financing” adding (wrongly) that the “agreements are the operative assignment documents”.

[24] The purchaser lost the commitment of the financier who had requested to see the executed copy of the agreement between the purchaser and the Bank instead of a mere lawyer’s email before funding. That loss was not necessary had the Bank been acting in good faith to compete the transaction and was the proximate cause why the transaction failed in fact to close by the close of business on May 14, 2021. The purchaser tried to cobble together a Plan B that has given rise to some controversy that I shall address below. Ultimately that too failed to get the job done.

[25] Just before 2pm on May 14, 2021, the Bank’s counsel wrote to the purchaser’s counsel indicating that the Bank was ready willing and able to close by 5:00 pm but that the “closing funds must be received by 5:00 pm today”. This email was written after the purchaser’s counsel wrote to indicate that funds were arriving but they were having administrative difficulties in getting them all cleared on time. A short extension of time to Monday to allow the funds to clear was requested.

[26] I have reviewed purchaser’s counsel’s trust ledger and I am satisfied that the difficulties mentioned were real. The funds were being gathered from a number of sources. One investor, for example, tendered a bank draft but the actual deposit of it did not show up in the firm’s trust ledger until the following business day (in this case, Monday morning).

[27] There is significant dispute as to how ready willing and able to close the purchaser was by the close of business on May 14, 2021. A big part of that dispute has to do with the debtors’ funds that were loaned to the purchaser in what was intended to be an overnight loan to facilitate closing following the loss of an investor on the theory that the investor would fund post-closing once satisfied that the Bank had indeed gone through with the transaction.

[28] I am satisfied that including the disputed funds loaned on a short-term basis by the debtor, the purchaser had the funds on hand and in the trust account ready to transfer by the next business day (Monday the 17th). There is however no getting round the fact that the funds required to press “send” and close the transaction were not deposited and cleared in the solicitor’s trust account of the purchaser by 5:00pm on Friday May 14, 2021. The loan from the debtors is thus something of a red herring here.

[29] It is also undisputed that the Bank never delivered an executed copy of the assignment agreement that it purported to accept via lawyer’s email on April 29,2021. The Bank advised through its lawyers that it finally signed the document on April 29, 2021 at approximately 1:30pm on May 14, 2021 but would not deliver it until after the purchaser was in funds and in a position to transfer same prior to 5:00pm on that day. It is not clear that the Bank ever indicated that it did not intend to sign the document - that on its face (as amended) required acceptance by a date and time well in advance of closing - until a few hours before closing. It does not appear that the purchaser learned of that position before May 4, 2021.

[30] Time is short and a decision needs to be rendered in a time frame that makes it relevant. I find that the Bank bears the responsibility for this agreement failing to close on May 14, 2021.

[31] I was urged to find that the Bank set about to sabotage the agreement drawn by the prospect of a richer deal from the bidder with whom it negotiated until the 11th hour on April 29, 2021. It was also suggested that there had perhaps been some leaking of information to a bidder. I do not find any need to infer the tiniest breach of protocol or duty in the bidder having become convinced that it potentially held a winning hand. Mr. Gottlieb was not born yesterday and if his client was in the running up until the very last second, it took no great leap of intuition on his part to infer that his client’s offer – even if not fully finalized – was one the Bank found attractive enough to try to massage into a binding format right up to the wire. His interventions in the days that followed – and they were in my view entirely proper and above-board – did have an effect. They were effective in applying just enough pressure on the Bank to dampen its enthusiasm towards working to complete the agreement it had bound itself to close.

[32] The Bank was not of course required to be enthusiastic. The common law requirement of good faith in the execution of contractual agreements, the explicit requirement in the contract to “take all reasonable steps necessary” to give effect to the Agreement and the recent addition of s. 4.2(1) of the BIA under which statute the receiver was appointed and the Notice of Application was initiated all provide me with ample grounds to hold the Bank to a higher standard than passive resistance to completing a deal it has agreed to and entered into under the protection of a process at least partly supervised by the Court.

[33] In assessing the Bank’s conduct, I attach some weight to the Bank’s surprising and abrupt decisions with regard to closing the operating bank accounts. As I have said, these steps were not decisive in preventing closing but they were an utterly unnecessary irritant that might easily have been talked through and resolved short of unilateral damaging actions followed by negotiated resumption of activities.

[34] I attach far more weight to the baffling decision to leave the agreement unsigned and undelivered until hours before closing after the Bank unambiguously signified its acceptance of it via email. The tiniest degree of flexibility in maintaining a position that was as stubbornly held to as it was clumsily advanced would have prevented the purchaser’s loss of critical financing from which all else flows. The Bank knew full well that the purchaser’s financing hung in the balance and chose not to lift a finger to prevent it from being lost. It stuck to its guns holding to a position that it must objectively have understood to be at least debatable when solutions at zero cost and risk to the Bank could be had with the application of a few minutes thought and a modicum of common sense and good will.

[35] Our courts are still wrestling with the boundaries of what “good faith” in the execution of obligations means in practice. Whatever the boundaries may be, I am satisfied that this conduct is well outside of them. The Bank’s lack of flexibility and willingness to compromise on an issue that could easily be addressed with no risk whatsoever to the Bank leads me to conclude that the Bank was consciously or unconsciously trying to free itself from the Agreement it made.

[36] I reach that conclusion without casting any stones in the direction of a party I was urged to call a bitter bidder. Mr. Gottlieb did not have all of the information the parties had and as I have said, I don’t find the positions he took to have crossed any lines. His client’s interest lay in exploring the opportunities to have a new process take place with only partial information about all that had in fact taken place to which his client was not privy. I find no fault in the way he pursued that interest nor can any have failed to appreciate what his client’s interests were at every step of the way.

[37] The purchaser and debtors would have been able to close on time on May 14, 2021 but for the Bank’s unreasonable actions when it should have been working in good faith towards closing.

[38] The commercial necessity for a resolution now rather than months from now – from the perspective of all of the parties- is quite clear. The status of the agreement between the Bank and the purchaser must be resolved before any consideration of a second SISP or any other process can be fairly considered. Further delay when these businesses are on the cusp of reopening could have unforeseen risks.

[39] The purchaser and debtors advise that they are ready willing and able to close if I so order. I do so order. I am ordering the Bank to be ready, willing and able to close the transaction by Friday June 11, 2021 at 3:00pm and to do so if the purchaser tenders the stipulated purchase price in readily available funds. The parties had already identified the documents needed and steps to be taken for closing on May 14, 2021 so I do not think that I need to provide paint by number instructions. Should further direction by me be needed, I am prepared to provide it.

[40] The parties shall close on June 11 precisely as they were preparing to close on May 14 but for the funds transfer issues that arose at that time. There shall be no adjustment to the purchase price to account for the small delay – whatever order I may make on costs will not fully compensate for the loss of this last few weeks in preparing to re-open as the lock-down is ending and I find the delay was caused by the Bank. The equities divide reasonably evenly on that score.

[41] If and only if the transaction fails to close on June 11, 2021, I shall address the other two motions that were before me today (the matter of the transfer to Blaney McMurtry and the matter of approving the “run-off” SISP). There will be no excuses for failure to close – I require only a binary “yes or no” answer on June 11, 2021 as to whether I am required to address the other two motions or not. This is a simple transaction with sparse terms. I expect it to close if the money is there and I am taking the purchaser at its word that it will be.

[42] The parties will understand that these reasons have been assembled in a very short time frame following argument which itself was preceded by extensive evidence and facta. I invite them to provide me with a consolidated list of the nits, gremlins and typos that slipped through my fingers as I put this together. I shall issue any necessary corrections next week. I shall not alter the substance, but I reserve the right to supplement my reasons or to clarify the wording.

[43] I have not addressed costs and I do not intend to until after the matter has either closed or failed to close. I am not thereby encouraging anyone to start inflating their expectations nor indeed have I determined to award any costs to anyone – more the normal outcome of Commercial Court motions. I shall advise of the procedure if any to be followed after I am notified of the fate of the closing.

[44] The Monitor has kindly volunteered to take on the distribution of this endorsement. I ask the Monitor to assume the responsibility of reporting to me whether closing occurs on Friday on time as per my order.

[45] I thank the parties for their ably focused submissions in the best “real time litigation” traditions of the Commercial List.

[46] The following paragraphs are supplementary or clarifying remarks that go beyond clerical clean-up of the reasons as originally issued by me.

[47] My description of the facts was deliberately general so as not to disclose information regarding purchase price that might prove deleterious should the transaction fail to close. Among the figures that I did not disclose was the amount of the deposit paid by the purchaser in trust following the April 19, 2021 amending agreement. I do not wish it to be supposed that I did not take the fact that the Bank stood to retain – at least potentially – a quite material deposit amount into account in assessing the actions of the bank against the standard of good faith that the common law, s. 4.2 of the BIA and the further assurances of the Agreement itself all impose.

[48] It is not necessary for me to attribute lack of good faith to any particular motive and I do not. I mentioned three background facts as supplying an indication that lack of good faith may be at play. These were (i) the potentially non-refundable deposit; (ii) the intense negotiations with another bidder up until the last minute prior to acceptance of the Agreement; and (iii) the pressures exerted by that same bidder in the following days which provided some assurances of continuing interest of that same bidder regarding terms the Bank had clearly indicated its interest in. Lack of good faith (a term that should not be casually equated with “bad faith”) is an assessment made regarding actual objective facts of things done or not done and is not premised solely on questionable motives. I have had regard to the circumstances suggesting motive, but I do not purport to be reading the Bank’s corporate mind. I can however infer that the three factors mentioned may have played a role in hindering the Bank from focusing on the first order of business which was to work in good faith to close the Agreement that it had voluntarily agreed to without being distracted by visions of what might be were it not to close.

[49] Regarding the closure of the bank accounts, as indicated above, this was eventually sorted out but it contributed to the overall problem. It should not have happened, particularly where there was a court-ordered stay of proceedings in effect at the Bank’s request and which the Bank evidently thought did not apply to its own actions.

[50] As regards the executed Agreement issue, I have expressed my views regarding the executory nature of the Agreement on acceptance and prior to Closing. I do not wish to be taken as finding fault with counsel for adopting a position that had at least some foundation in the awkward wording of the Agreement itself simply because a judge subsequently disagreed with that position. These things happen. Where I found that the good faith standard came into play was in the failure of the Bank to address the issue reasonably when it arose. At the very least, it should have been clear that there was at least some chance that the Bank was wrong in its insistence that it had no obligation to deliver the executed Agreement after an unambiguous acceptance of it. Clinging to that position in the face of objectively reasonable doubt as to its correctness coupled with clear indications that it was needlessly placing the completion of the Agreement in jeopardy is where I found the behaviour veered past the boundaries of good faith conduct. The means of satisfying the Bank’s concerns about delivery of an executed Agreement were numerous and risk-free. The purchaser’s counsel immediately offered one of them to accommodate the Bank. In the world of good faith, some discussion about how to resolve the concern ought to have followed.

[51] Since writing this supplement, I have been advised that the Agreement was closed per my order on June 11, 2021. I withheld release of these reasons in the event the parties had noticed errors that escaped my attention. Evidently, they did not, a fact more likely due to their being busy with getting the deal done rather than any tribute to my typing accuracy.

S.F. Dunphy J.

Date: June 8 and June 18, 2021