COURT FILE NO.: CV-22-682959-00CL
DATE: 20220714
ONTARIO
SUPERIOR COURT OF JUSTICE
APPLICATION under section 248 of the Business Corporations Act, R.S.O. 1990, c. B. 16, as amended, section 101 of the Courts of Justice Act, R.S.O. 1990, c. C.43, as amended, and section 243(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended
B E T W E E N:
ROSE-ISLI CORP., 2631214 ONTARIO INC., SEASIDE CORPORATION, and 2735440 ONTARIO INC.
Applicants
FRAME-TECH STRUCTURES LTD., MICHAEL J. SMITH, FRANK SERVELLO, CAPITAL BUILD CONSTRUCTION MANAGEMENT CORP., and 2735447 ONTARIO INC.
Respondents
Jason Wadden and Carlos Sayao, for the Applicants
David P. Preger and Mordy M. Mednick, for the Respondents Frame-Tech Structures Ltd., Michael J. Smith, Frank Servello and Capital Build Management Corp.
Thomas Gray, for the Trez Capital Limited Partnership (Secured Creditor)
HEARD: JULY 8, 2022
REASONS FOR DECISION
Osborne j.
[1] This motion by the Applicants for an order appointing a receiver over the assets and property of 2735447 Ontario Inc. (“273”) and for related relief in this oppression remedy Application was originally returnable before me on June 22, 2022.
[2] The Notice of Application commencing this proceeding was issued on June 21, 2022.
[3] The Respondents had been served with the motion materials only the day before, with the result that I adjourned the motion to permit the Respondents a reasonable opportunity to respond.
[4] In the interim, the Respondent Frame-Tech Structures Inc. (“Frame-Tech”) commenced a new Application, which is effectively a “counter application”, for an order appointing a signing officer (rather than a receiver) and other relief.
[5] The motion of the Applicants for a receiver in the first Application, and the prayer for relief for the appointment of a signing officer in the second Application, were heard together today and as they are effectively competing motions and this Endorsement is therefore made in both proceedings.
[6] The balance of the relief sought in both Applications is adjourned. As a housekeeping matter, these two Applications should proceed and be case managed together, and I so order, in the event that either or both proceed.
Background and Context
[7] The Applicants seek an order appointing Ernst & Young Inc. (EY) as receiver and manager over 273 (aka “Rosehill”) pursuant to section 248 of the Ontario Business Corporations Act and section 101 of the Courts of Justice Act.
[8] The Respondent in the first Application, and the Applicant in the second Application, Frame-Tech, seeks an order appointing MNP Ltd., (“MNP”) as signing officer of 273, also pursuant to section 248 of the OBCA.
[9] For ease of reference, I refer to the two competing groups as the Applicants and the Respondents. The Applicants include those parties who are both applicants in the first application V-22-00682959-00CL) and respondents in the second application (CV-22-682959-00CL). The Respondents include those parties who are respondents in the first application and the applicant, Frame-Tech, in the second application.
[10] Rosehill was the entity through which the parties and their principals were developing a residential condominium project in Woodbridge, Ontario known as The Rosehill Project.
[11] It is common ground that the relationship between and among the parties has irrevocably broken down. Allegations of oppressive conduct are made by each group against the other, and a determination of whether any or all of those allegations can be established is for another day. Indeed, the fact that the relationship has broken down is reflected in the relief sought, one way or the other, by all parties today: they all agree that the Rosehill Project should be sold, and that the sale process should be undertaken by a court-appointed officer.
[12] The principal issue is how, and by whom, that sale should be conducted (i.e., by EY as a receiver with the rights and responsibilities typically held by such a party, or by MNP as a signing officer with the capacity to effect a transfer of the Rosehill Project, but with limited powers beyond that).
[13] Given the consensus of the parties that the Rosehill Project should be sold, much of the chronology relevant to a determination of what relief should be granted today is not in dispute. Many of the other disputed events and issues will be determined as part of the balance of these two application proceedings.
[14] Accordingly, while this Court must still determine whether it is just and convenient to appoint a receiver, and if so on what terms, the following facts do inform at least the initial stages of that analysis since they are agreed by the parties for the purposes of the two motions before the Court today:
(a) in January, 2020, Rosehill acquired the Property by way of power of sale in an unrelated insolvency proceeding. Rosehill holds title to the lands on which the project is located;
(b) in June, 2021, Frame-Tech, 273 and 2631214 Ontario Inc. (“263”) entered into a joint venture agreement (the “JVA”) in respect of the Property to develop and build a residential condominium project and to market and sell the units;
(c) Rose-Isli is a 50% shareholder of Rosehill;
(d) Kasia Pikula (“Pikula”) is the sole director and officer of Rose-Isli, 263 and Seaside Corporation (“Seaside”);
(e) The Respondent Capital Build Construction Management Corp. (“Capital Build”) is the construction manager for the project;
(f) the Respondent Michael Smith is the sole officer and director of Frame-Tech;
(g) the Respondent Frank Servello is a senior executive of Capital Build;
(h) Pikula and Smith became equal shareholders of Rosehill through their respective corporations, Rose-Isli and Frame-Tech;
(i) the ownership and voting interests in the joint venture provide for majority control of the project in the Applicants:
(i) the Applicants 263 and 273 control 62%;
(ii) the Respondent Frame-Tech controls 37%; and
(iii) Rosehill controls 1%;
(j) the JVA establishes a Management Committee to consider and vote on Major Decisions (as defined in the JVA). Major Decisions, which can be made by parties having 50% or more of the votes, include a decision to sell the lands before the project is fully completed;
(k) Trez Capital Limited Partnership (“Trez”) holds the secured first priority mortgage on the Property;
(l) The Trez mortgage, in the principal amount of $6,900,000, matures in September, 2022. Trez has not issued a notice of intention to enforce its security pursuant to section 244 of the BIA;
(m) Trez takes no position on the relief sought by any party today and reserves its rights, whatever they may be, under its security in particular when that facility matures in September;
(n) the Applicant 273 holds a second priority mortgage, with the Applicant Seaside Corporation (“Seaside”) holding the beneficial interest in the second mortgage which has a current principal amount outstanding of $7,658,751 due in July, 2023;
(o) the relationship has irrevocably broken down;
(p) the Property should be sold, now, by a third party;
(q) EY consents to act as receiver, and MNP consents to act as signing officer;
(r) the Applicants and the Respondents would be content with EY being appointed, but the Respondents take the position that a full receivership is unnecessary and unwarranted; and
(s) EY is unwilling to take on the more limited role of a signing officer.
[15] Beginning in late 2020, the management of the project, and therefore the relationship between and among the parties, began to break down. Metric Realty Inc. was engaged to conduct a sales process for the project. Ultimately, one party, J’Adore, made an offer to purchase the project on April 1, 2022. The offer was approved by the Management Committee of the JV with 263 and 273 (i.e., 62% of the votes) being cast in favour of accepting the offer. Frame-Tech voted against the sale as did Rosehill (although only 1% of the votes). Ultimately, the sale did not proceed.
[16] The parties disagree on why the J’Adore transaction collapsed. The Applicants allege interference and indeed sabotage on the part of the Respondents. The Respondents allege concealment by the Applicants of an interest in one of the mortgages.
[17] The Respondents delivered to the Applicants in June, 2022 two offers from another third-party to acquire the project. Allegations are made by the Applicants about the bona fides of these offers and the arms-length relationship between the prospective purchaser and the Respondents. Confidential materials concerning offers received were filed by the Applicants but not shared with the Respondents until they confirmed the lack of any relationship with the prospective purchasers.
[18] The Applicants then brought this Application for various relief related to the alleged oppression and seek the appointment of EY as receiver. They submit that a stay of proceedings is appropriate to maintain the status quo pending the resolution or adjudication of the competing claims and issues.
[19] The Respondents take the position that a sale should be achieved through a “narrower, more surgical appointment of a court officer as a signing officer, with authority to bind Rosehill to, and complete, a sale.” They argue that a full receivership and a stay of proceedings are neither necessary nor appropriate, and that the appointment of a receiver will stigmatize the property with the result that any sale will yield a lower price to the detriment of all stakeholders. Finally, they argue that liquidity pressures on Pikula unrelated to this project were in fact the genesis of this Application in the first place.
[20] It is also common ground between the Applicants and the Respondents that section 248(3) of the OBCA, on which all parties rely, provides that the Court may make any interim order it thinks fit in connection with an oppression application, and has broad discretion.
[21] The parties also agree that section 101 of the CJA gives the Court the power to appoint a receiver or receiver and manager by interlocutory order, where it appears to a judge of the court to be just or convenient to do so. Such an order may include such terms as are considered just.
[22] In all the circumstances, I am satisfied that it is just and convenient to appoint a receiver to conduct a sales process in respect of the project.
[23] Much argument was advanced by both the Applicants on the one hand and the Respondents on the other hand as to the alleged oppressive conduct of the other, and the reasons why such conduct disentitled the other parties to any equitable relief they sought, including the appointment of a court officer with the power to effect a sale (whether labelled a receiver or a signing officer).
[24] The fact that both the Applicants and the Respondents allege oppressive conduct and seek an order appointing an independent third-party to sell the project strongly supports the conclusion that it is just and convenient to do so.
[25] In my view, the jurisprudence as to whether, and on what terms, a receiver should be appointed, requires the Court to consider substantively whether any third party should be appointed by the court and given the power to manage the affairs of private parties (including the power to sell their property), and if so on what terms.
[26] Less important is what that court-appointed officer is called. The gravamen of the issue to be determined is whether a court-appointed officer should be appointed at all, and if an appointment is appropriate, the terms and powers associated with that appointment.
[27] Here, the parties are in agreement that the court-appointed officer should be mandated to conduct the sales process and sell the property. As noted above, the Respondents take the position that this officer, whatever it is labelled, essentially needs no further powers and that since the project has no employees and no ongoing business, no further powers nor any stay of proceedings is warranted.
[28] In my view, the terms and powers for the court-appointed officer proposed by the Applicants are appropriate, just and convenient in the circumstances. Again, the very fact that there are two competing applications and motions before the Court today, with materially divergent versions of events and positions of the parties both corporate and individual, support the conclusion that the relief sought by the Applicants should be granted.
[29] The fact that the Applicants control almost two thirds (62%) of the votes in the joint venture, according to the terms of the agreement already between and among the parties, is not determinative of whether a court-appointed officer should be appointed, but it does lend support for the relief they seek.
[30] Here, a court-appointed officer should be appointed to conduct the sales process and, ideally, yield the maximum proceeds for the benefit of all stakeholders. That sales process should be undertaken in the context of maximum stability, and that in turn supports the conclusion that a stay of proceedings is appropriate at this time.
[31] The Applicants submit that a stay is appropriate and necessary to maintain the status quo and provide the stable environment with which to conduct a sale of the property. The Respondents submit that a stay is not necessary since there is, effectively, no third-party or trade litigation and the disputes are largely as between and among those individuals and entities who are already parties to these proceedings. That may be so, but the events that have transpired so far persuade me that some supervision and control in the form of a court-appointed officer, is appropriate and will be to the benefit of all parties and stakeholders.
[32] Having concluded that a court-appointed officer is appropriate, as is the wish of all parties, I need to consider the title given to that court-appointed officer. Receivers, and receiver-managers, are commonly appointed by this Court. In some circumstances, they are granted broad powers. In other circumstances, the scope of their mandate and powers is extremely limited and tracks the proposed terms in the draft order submitted by the Respondents, which would effectively limit the powers of the court-appointed officer to completing those steps necessary to effect a sale and transfer of the property to a third party.
[33] I am not persuaded on the basis of the Record before the Court that there is a stigma or negative inference attached to the property to be sold here because a receiver is involved. The property in question here is a condominium development project of significant value, and prospective purchasers can reasonably be expected to be sophisticated, knowledgeable and capable of understanding the nature and extent of the involvement of a court-appointed officer. So too can their competing prospective purchasers, with the result that I am not prepared to conclude on the Record before the Court that the sale process will be impaired and yield a lower purchase price for the benefit of all stakeholders than it otherwise might.
[34] Moreover, it is common ground (and indeed the wish of all parties here) that the sales process will be overseen by a court-appointed officer. I am even less prepared to conclude that the market will react more negatively if that officer is called a receiver, rather than a signing officer. In either case, the counterparty to the transaction, the vendor, is a party whose authority derives from a court order. This will provide some certainty, confidence and finality to a prospective purchaser that the party with which it is dealing has the legal capacity to complete the transaction being contemplated.
[35] As a result, I am not persuaded that the reference to this court-appointed officer as a receiver will be materially or at all detrimental to the sales process. As stated above, what is important is the scope of powers granted to that officer.
[36] The order sought by the Applicants largely tracks the Model Receivership Order approved by the Commercial List Users Committee. Without question, the Court must consider in any case what powers, rights and obligations should be given to a court-appointed officer such as a receiver. While the Model Order was intended and designed to provide a common denominator or starting point to increase the efficiency of this Court, it represents a tool of convenience and not a substitute for a consideration as to what powers of the receiver may be appropriate in any particular case.
[37] The draft order proposed here appoints EY as a receiver, without security, of all of the assets, undertakings and properties of 273. It authorizes EY to take possession and control over the property, to preserve and protect the property, and to complete the other steps and fulfil the duties all as set out in the draft order.
[38] In particular, the draft order authorizes EY to market any or all of the property and importantly, to take into account any offers to purchase lands or assets of 273 that have been received and/or accepted to date, as part of the sales process. This is important as it not only empowers, but directs, EY to consider the current and active offers and/or transactions. This may have the effect of truncating and significantly limiting both in time and scope the activities of EY, thereby mitigating to a very large degree the concerns raised by the Respondents today.
[39] The sale, conveyance, transfer, lease or assignment of the property can be completed only with the approval of this Court.
[40] All of the joint venture partners under the JVA, all current and former directors, officers, employees of 273 and others shall assist and cooperate with EY in the execution of its duties.
[41] EY is required to hold all funds to be paid in accordance with the terms of the order or any further order of this Court.
[42] I recognize that the order provides, as is typical, for the funding of the receivership and the payment of the fees of EY. I further recognize that the Respondents are concerned about costs. I am satisfied that these terms are appropriate, not because the Applicants who seek the order represent almost two thirds of the voting control of the joint venture, but because the scope of the activities of EY are prescribed and limited by the terms of the order.
[43] Moreover, as is usual and provided for in the Model Order, the draft order provides the fundamentally important ability of any interested party to this Court to vary or amend the order on seven days’ notice. In short, if the Respondents or any other affected party are of the view, depending on events as they transpire, that the terms of the receivership should be varied or amended, they have the ability to seek that relief.
[44] In short, the relief sought by the Applicants is appropriate, just and convenient in all the circumstances.
[45] Order to go in the form signed by me today, which shall be effective without the necessity of issuing and entering.
[46] The parties relied upon information provided to the Court for consideration on these motions but designated as confidential. I direct all parties who submitted confidential information to file physical hard copies of that information with the Commercial List office in sealed envelopes marked “Confidential” and such materials shall be preserved but shall not form part of the public Court file in this matter. I am satisfied that the factors to be considered by this Court as set out in Sierra Club and Sherman Estate have been met and the confidential material should remain sealed until the completion of the sales process contemplated to be conducted by EY and/or further order of this Court.
[47] Counsel for the applicants in the second application proceeding (Court File No. CV-22-682959-00CL) advised the Court during the hearing of these motions that it had been the intention to name as a party Respondent in that proceeding the entity referred to in this Endorsement as 273 (2735447 Ontario Inc.). They sought leave to amend title of proceedings to add that party as a Respondent. If necessary, and on being advised that such amendment is not opposed by any other party, leave is granted. To be clear, the granting of leave or the adding of 273 as a party respondent in the second application does not affect the relief granted today.
[48] Costs of today are reserved to the applications judge hearing both applications on the merits, or as this Court may otherwise direct.
Osborne J.
Released: July 14, 2022
COURT FILE NO.: CV-22-682959-00CL
DATE: 20220714
ONTARIO
SUPERIOR COURT OF JUSTICE
APPLICATION under section 248 of the Business Corporations Act, R.S.O. 1990, c. B. 16, as amended, section 101 of the Courts of Justice Act, R.S.O. 1990, c. C.43, as amended, and section 243(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended
B E T W E E N:
ROSE-ISLI CORP., 2631214 ONTARIO INC., SEASIDE CORPORATION, and 2735440 ONTARIO INC.
Applicants
And
FRAME-TECH STRUCTURES LTD., MICHAEL J. SMITH, FRANK SERVELLO, CAPITAL BUILD CONSTRUCTION MANAGEMENT CORP., and 2735447 ONTARIO INC.
Respondents
REASONS FOR DECISION
P. Osborne J.
Released: July 14, 2022