Court File and Parties
Court File No.: 32-2762268 and 32-2762282 Date: 2021-12-06 Superior Court of Justice – Ontario (Commercial List)
Re: In the Matter of the Proposal of 1242318 Ontario Inc. o/a Edgemount Manor of the City of Hamilton, in the Province of Ontario And: In the Matter of the Proposal of 1583187 Ontario Inc. o/a Sheridan Lodge of the City of Brantford, in the Province of Ontario
Before: Penny J.
Counsel: Rosemary A. Fisher and Bart Sarsh for BDO Canada Limited, Proposal Trustee Daniel Waldman for Communications Technologies Credit Union Limited Tim Duncan for the Retirement Homes Regulatory Authority John Alousis for the Purchasers Robert S. Brown for the Debtors Paul J. Daffern for the Estate of Alan Coulter
Heard (by videoconference in Toronto): November 26, 2021
Endorsement
1In a short endorsement of November 29, 2021, I granted a motion, and issued an order, sought by the Proposal Trustee, in the context of a pending proposal under the BIA, approving the sale of two properties under s. 65.13 of the BIA, with reasons to follow. These are the reasons.
2The subject properties are licensed retirement homes for the elderly, one of which has almost 30 residents. The matter was urgent because: a) the debtor is insolvent and deeply in arrears. Sheridan has a monthly shortfall of about $20,000 per month, financed by the first mortgagee, Comtech. The first mortgagee gave notice that no more deficit financing would be advanced and the second mortgagee declined to fund any operating deficit; b) the notice period for the debtors’ proposal was about to expire, which would trigger an immediate bankruptcy; and c) the existing retirement home licence issued by the Retirement Homes Regulatory Authority was about to expire and, as stated by the RHRA, would not be extended or renewed.
3The motion turned on a consideration of the factors in s. 65.13(4) of the BIA, which include:
(a) whether the process leading to the proposed sale or disposition was reasonable in the circumstances;
(b) whether the Trustee approved the process leading to the proposed sale or disposition;
(c) whether the Trustee filed with the Court a report stating that in their opinion the sale or disposition would be more beneficial to the creditors than a sale or disposition under a bankruptcy;
(d) the extent to which the creditors were consulted;
(e) the effects of the proposed sale or disposition on the creditors and other interested parties; and
(f) whether the consideration to be received for the assets is reasonable and fair, taking into account their market value.
4The proposed purchasers of the two properties are owned by entities with existing licenses and have, to the extent possible, indications from the RHRA they will be granted licenses for these properties if the sales are concluded.
5Under the terms of the proposed sale, the purchase price is, in effect, the amount owed to the first mortgagee, Communications Technologies Credit Union Limited. Under the proposal, therefore, the second mortgagee would get nothing.
6The proposed sales are supported by the Proposal Trustee, the debtors, Comtech and the RHRA and opposed by the second mortgagee, which is the Estate of Alan Coulter.
7The basis of the second mortgagee’s opposition is, essentially, that: a) the proposed sales result from an inadequate or flawed process; b) the amounts to be paid by the proposed purchaser are below market value; and c) a further and better sales process would result in returns on the sales that might be sufficient to pay some or all of the outstanding second mortgage debt.
8The Estate’s principal argument involves a sustained attack on the integrity of the Martino family, which owns the debtors, and the firm they hired to solicit interest in the sale of what was originally a total of 12 properties owned at the time. Successful transactions have occurred for most of the other properties. The subject properties are the only remaining assets ion the portfolio.
9The Estate’s complaint focuses on the Sheridan Lodge property. It argues that:
(g) the sales process leading up to the proposed transactions was flawed in that:
(i) the person who carried out that process had prior association with the debtors;
(ii) the properties were never listed for sale through MLS or a real estate broker; and
(iii) during the sales process there was no attempt to sell the subject properties separately – they were bundled together.
(h) the proposed sale price is below market; and
(i) their appraiser, Mr. Carruthers, although he prepared a report on the value of the ship of Sheridan Lodge, had inadequate time and information do so.
10I am unable to accept any of arguments.
Was the Sales Process Sufficient?
11The affidavit of Mr. Wolfe sets out a lengthy and involved process of seeking out and making presentations to retirement home operators in southern Ontario. There is no dispute that the highest and best use of the Sheridan Lodge is as a retirement home. Retirement homes are specialized niche in the real estate market. They must be operated by an entity with a license issued the RHRA. The evidence is that applying for a license, with no prior licence or experience in the retirement home market, is a lengthy and involved process.
12There is no evidence that an MLS listing would have generated more interest or a better offer. Further, neither the Estate nor Mr. Carruthers have identified any other potential buyers who are, or would have been, willing to come forward with a better offer.
13Nor is there any evidence that marketing these two properties in particular on a stand-alone basis would have produced any better offer. Although it is true that Mr. Wolfe’s marketing efforts focused on a portfolio of retirement home properties, that is not how it actually turned out. Another lender brought receivership proceedings in respect of three other properties. Those properties were sold in the course of that receivership. Other sales occurred as well. At this point, Edgemount and Sheridan Lodge are the only remaining assets.
14Although the Estate has cast aspersions on the Martinos and Mr. Wolfe, there is no evidence that the debtors’ interest or motivation was not in maximizing value. There is no evidence, for example, that any prospects approached were not at arm’s length; the proposed purchaser is clearly independent.
15The Proposal Trustee also had to weigh, against the prospect of a further, more involved sales process and the chance of finding a better offer, the risks and direct and indirect costs that an entirely new sales process would involve. In this case those risks and costs were considerable. As noted above, the debtors were insolvent. There was no cash to fund another process. The first mortgagee, which had been funding an ongoing deficit of over $20,000 per month at Sheridan Lodge as well as other expenses, had given notice that no more funding would be advanced. The second mortgagee was asked to finance the ongoing deficit but declined to do so. In addition, the existing retirement home licence issued by the RHRA was about to expire and, as stated by the regulator, would not be extended or renewed. This had significant implications for Sheridan Lodge. Without a licence, it could not operate; the residents would have to be moved out. All revenue would cease. Bankruptcy would be inevitable. The prospect of a sale in bankruptcy netting a higher return than that currently on offer was slim indeed. The Estate’s argument gives no recognition, much less offering a solution, to this problem. Further, as discussed below, the Proposal Trustee was aware of appraisals, conducted by independent real property appraisers, with values which supported the conclusion that the proposed sale was within the range of market value. The Proposal Trustee’s decision not to engage in a further sales process, therefore, was not only reasonable; it was essentially the only prudent course available in the circumstances.
Was the Proposed Sale Price Below Market?
16Multiple appraisals have been filed in confidence in this case. Those from 2021 are the most relevant. Because of the need to maintain confidentiality around these appraisals, I will not outline or analyze the details in these reasons.
17What I will say is that the appraisal of Mr. Carruthers, submitted by the Estate, is the outlier, being higher than at least three other appraisals prepared by independent appraisers retained by the debtors and the first mortgagee. The proposed purchase price to be paid by the Philp group compares favourably to the latter three appraisals. Importantly, however, the actual price being paid under the proposed sale is very close to the valuation proposed even by Mr. Carruthers.
18For these reasons, I am satisfied that the proposed sale price is not below market value.
Was the Estate Denied the Opportunity to Properly Value the Properties?
19The Estate argues that there was a delay in delivering financial information needed for the Carruthers appraisal, and that the most up to date information was not provided at all. This, it says, deprived it of the ability to present fully informed appraisal evidence.
20I am not satisfied that the Proposal Trustee delayed or withheld relevant information. The record indicates that the Estate itself contributed to some of the alleged “delay” in the time it took to complete the necessary agreements for the exchange of confidential information.
21Further, it must be pointed out that the mortgages in issue here had been in default for a lengthy period of time prior to the delivery of the Notice of Intention to make a proposal under the BIA. There was ample time for the second mortgagee to take enforcement action on its mortgage but it did not do so. The second mortgagee, in effect, is now arguing that the Proposal Trustee should embark on an entirely new marketing campaign in pursuit of what can only be described as a speculative search for a better deal, yet at the same time is willing to take none of the financial risks associated with the further delays and costs that would be attendant on that process. The Estate does not acknowledge the financial consequences of further delay and is certainly unwilling to take any responsibility for those consequences.
22I am unable to conclude the Estate was deprived of the ability to put forward evidence of value.
Conclusion
23In conclusion, I find that the process leading to the proposed sale was reasonable in the circumstances; the Proposal Trustee reasonably approved the process leading to the proposed sale; the Proposal Trustee filed with the court his opinion that the sale is more beneficial to the creditors than a sale or disposition under a bankruptcy; the creditors have had input into the process and the approval process; the effect of the proposed sale, while it does not benefit the second mortgagee, is the best realization reasonably available in the circumstances; and, the consideration to be received for the assets is reasonable and fair, taking into account their market value.
Sealing Order
24The confidentiality of the appraisal information is necessary to enable the Proposal Trustee to continue to maximize value in the unlikely event that the proposed sale does not close. This meets the Sherman Estate test. There shall be a sealing order over the appraisal exhibits, which shall last until the proposed sale closes.
Costs
25The Proposal Trustee’s cost submissions were not uploaded to CaseLines until after release of my Reasons in this matter, which included my disposition as to costs. As a result, my endorsement had to be revised to reflect the Proposal Trustee’s costs submissions. This is my revised endorsement.
26The Proposal Trustee seeks $22,542.55 in each application (by which I assume he means one award of costs in that amount covering to both matters) and $2,525.39 for the November 25, 2021 proposal extension motion (again, this amount is sought in both matters, which I assume to mean one award of $2,525.39 covering both matters). The Estate, if successful, sought $10,000 in partial indemnity costs. Comtech, if successful, sought $11,000. In the circumstances, I award costs of the main motion to the Proposal Trustee by the Estate in the all inclusive amount of $10,000 and costs of the proposal extension motion payable by the Estate in the all inclusive amount of $2,525.39. I award Comtech costs payable by the Estate in the all inclusive amount of $7,500.
Penny J.
Date: 2021-12-06