COURT FILE NO.: CV-21-00661144-00CL DATE: 2023-10-31 SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)

RE: IN THE MATTER OF Section 207 of the Business Corporations Act, R.S.O. 1990, C. B.16, As Amended AND IN THE MATTER OF A Winding-Up of Morrison Laurier Mortgage Corporation APPLICATION UNDER Section 207 of the Business Corporations Act, R.S.O. 1990, c. B.16.

BEFORE: Penny J.

COUNSEL: Kyla Mahar and Patrick Corney for the Liquidator, HPI Advisory Inc. Gideon Forrest for Fiera Capital Corporation David Morrison for Morrison Financial Mortgage Corporation and on his own behalf

HEARD: October 24, 2023

REASONS FOR DECISION

Overview

[1] The Court-appointed liquidator of Morrison Laurier Mortgage Corporation brought a motion to approve a sale of the remaining non-cash asset of the Corporation – an office building in Barrie, Ontario called the Lakeview Corporate Centre owned by a wholly-owned subsidiary of the Corporation. On October 24, 2023, I granted the motion, and issued the related orders, with reasons to follow. These are the reasons.

[2] The sole opposition to the motion was advanced by Mr. Morrison, a preferred shareholder and a founder of the business. Mr. Morrison argued that he had a better proposal, which would result in preferred shareholders being as well off, or better off, than they would be if the proposed sale were approved.

Background

[3] As a result of ongoing governance disputes and litigation, in 2021 the Corporation brought an application for an order winding the Corporation up. The order was granted by Pattillo J. The order provides that the Corporation “shall be wound up pursuant to section 207 of the OBCA”. The winding up order appointed two inspectors. As well, HPI Advisory Inc. was appointed liquidator (it was styled the Marketing and Mortgage Agent or MMA) over the estate of the Corporation. The liquidator was empowered to “take possession of and exercise control over” the estate and affects of the corporation including “all the assets, undertakings and properties of Lakeview Corporate Centre Inc.”, a wholly owned subsidiary of the Corporation which owns the Barrie office building. The liquidator’s powers include: to market for sale and sell any of the property; apply to the court for any vesting order or other orders necessary to convey the property; disclaim or enter into leases; subject to approval of the court, to distribute the property or proceeds among the Corporation’s creditors and shareholders according to their relative priorities, rights and interests; and, after the affairs of the Corporation have been wound up, to make application to the Court for an order dissolving the Corporation.

[4] When the liquidator took over, the Corporation had about $17 million in cash. The only remaining asset other than cash, was its interest in the Lakeview Centre [1]. At that time, the Lakeview Centre was built but required up to $11 million of further base building work to be ready for leasing, even before considering the costs of tenant improvements and landlord’s work that would be required for specific units to be leased. There were no binding leases for office space and there was only about 16,000 sf of retail space leased. By late 2022, base building work was sufficiently complete to permit tenant occupancy. That process, however, involved ongoing expenditures in excess of revenues, necessitating depletion of available cash on hand. In addition, the liquidator determined that it would cost an additional $15 million to fully release the remaining vacant space.

[5] For this and other reasons, following consultation with real estate advisors and the preferred shareholders, the liquidator decided to bring a motion to approve the initiation of a sales process, with ongoing efforts to lease the property continuing in a parallel process.

[6] The sales process approval order was made on February 7, 2023 by Justice McEwen. That order approved a process for the sale of the Lakeview Centre and approved the selection of Avison Young as the broker to undertake the marketing and sale functions of the sale process. The preferred shareholders were given notice of the motion; none objected.

[7] A full account of the marketing and sales efforts undertaken is set out in the liquidator’s third report and in its factum on this motion. In brief, the process ran from March 8, 2023 to August 16, 2023. All the milestones set out in the sales process order were met. Thousands of email solicitations were sent out to targeted potential buyers. Potential strategic or financial buyers were identified and approached. A comprehensive data room was made available to interested parties who executed a confidentiality agreement. The property was marketed through MLS listings, Globe and Mail notices and other social media.

[8] Mr. Morrison was specifically advised of process and invited to submit a bid proposal. He declined to do so.

[9] A total of 26 perspective purchasers signed confidentiality agreements and were granted access to the data room. Of those, 21 parties actually used the data room and eight of them conducted a tour of the Lakeview Centre. Notice of the August 16 bid deadline was provided to all interested parties, again including Mr. Morrison.

[10] Avison received two qualified bids. The liquidator engaged in negotiations with each qualified bidder, following which each of them improved their bid. The liquidator, in consultation with Avison and the inspectors, considered whether an extension or termination (to be continued at a later date) of the sale process might be in the best interests of the Corporation and the preferred shareholders. The liquidator concluded, with the inspectors’ and Avison’s concurrence, that an extension or termination of the sale was not appropriate. This was because:

(a) the sales process had been comprehensive, involving five months of marketing. The consensus was that further marketing of the Lakeview Centre would not result in additional bids;

(b) termination of the sale process was not regarded as appropriate because (i) real estate market conditions were not expected to improve over the following year, and (ii) the lease pipeline was uncertain and did not appear strong, as evidenced by the fact that the liquidator had not been able to enter into a binding offer to lease since April 2022 notwithstanding the significant efforts of leasing brokers to find new tenants; and

(c) each qualified bidder had the financial wherewithal to close the proposed transaction.

[11] Ultimately, the liquidator chose the higher bid. The preferred shareholders were advised of the results of the sale process and that the liquidator would be seeking approval of the court to conclude the sale on October 24, 2023.

[12] At a September 13, 2023 Q&A session, Mr. Morrison voiced objections to the sale and proposed an alternative transaction. His proposal was, rather than sell Lakeview Centre, to provide the preferred shareholders with the option of holding on to their shares or having their shares redeemed.

[13] Mr. Morrison’s affidavit sets out the general terms of his proposed transaction. His proposal includes the following steps:

(i) A NNAV would be determined, using the recommended bid as the starting point, with various adjustments recommended by Mr. Morrison;

(ii) preferred shareholders would be canvassed and given an election either to be redeemed at the NNAV or remain preferred shareholders of the Corporation;

(iii) redemptions would be financed from the $17 million cash already in the possession of the Corporation. If additional capital were required, Mr. Morrison’s company, Morrison Financial, would make up the shortfall. If necessary, the redemption obligation would be secured by a first charge on the assets of the Corporation; and

(iv) once all redemptions were paid, the Corporation would apply to the court for an order terminating the winding up proceeding. The remaining preferred shareholders would take the risks associated with, and derive the benefits from, further efforts to maximize and realize upon the value of the Lakeview Centre.

[14] Mr. Morrison was the only stakeholder to attend the sale approval motion and oppose approval of the sale transaction.

Issue

[15] The issue on this motion is whether the transaction which resulted from the court-approved sale process, and which is recommended by the liquidator and the inspectors, should be approved.

[16] In Christian Brothers of Ireland in Canada, Re, [2003] OJ No 4249 at para. 25, the Court of Appeal for Ontario established three important “first principles” germane to assessing the recommendations of a court-appointed liquidator.

First -- the business decisions of court-appointed liquidators are afforded the “same deference as are the business decisions of court-appointed receivers”;

Second – “the court should place confidence in the liquidator’s decision and assume it has acted properly unless the contrary is shown”; and

Third – “the court should recognize that by appointing a liquidator, it ‘intends to rely upon the [liquidator’s] expertise and not upon its own’… Although the court should not rubber-stamp a liquidator’s decision, it should nonetheless be reluctant to second-guess it.”

[17] The grant of approval of a proposed transaction requires the court to determine whether the proposed sale meets the test set out by the Court of Appeal in Royal Bank of Canada v Soundair Corp., [1991] OJ No 1137. In Sound Air, the Court identified several factors to be applied when considering a motion by a court officer to approve the sale of property. While Soundair involved the sale of property by a receiver, the factors are equally applicable in the context of a motion by a court-appointed liquidator under the OBCA. Those factors are:

(a) whether sufficient effort has been made to obtain the best price and that the applicant has not acted improvidently;

(b) the efficacy and integrity of the process by which offers have been obtained;

(c) whether the interests of all parties have been considered; and

(d) whether there has been unfairness in the working out of the process.

Analysis

Sufficient Efforts

[18] In my view, the liquidator has made every effort to obtain the best price for the Lakeview Centre and has acted in good faith and with due diligence. The proposed transaction results from a court-approved process. There was a marketing phase of five months prior to the bid deadline, conducted by sophisticated real estate brokers.

[19] The process was designed to allow for flexibility, including the sale of either the Lakeview Centre land and building or the shares of Lakeview Centre corporation. Over 4,000 parties were given notice of the opportunity, 26 parties executed confidentiality agreements, 21 parties utilized the data room and eight parties conducted a tour of the Lakeview Centre. Two bids were received.

[20] Mr. Morrison was invited to tender a proposal to acquire the Lakeview Centre opportunity. He declined to do so.

[21] Mr. Morrison believes that sufficient efforts to lease up the property were not undertaken. There is, however, no real evidence to back up this criticism. Nor can I accept Mr. Morrison’s assertion that this was a “fire sale”. Mr. Morrison’s views simply stem from a different tolerance for balancing the risks of undertaking further extensive investments in the Lakeview Centre and the associated additional processes and sales efforts that would be required to fully lease it up, weighed against the timing and likelihood of a better result at the end of the day. The liquidator viewed the sale approach more favourably, given the cost of ongoing management, improvements and promotion of the Lakeview Centre (costs have exceeded revenues to date resulting in a significant reduction in the available cash on hand every month) and the difficulties of attracting new tenants in the current office-space environment.

[22] The liquidator invited commentary from the preferred shareholders as to whether they supported or opposed the proposed sale transaction. Of those who expressed an opinion, 49% were in favour of the transaction and 8% were opposed. Translating these numbers to the preferred shareholders as a whole, this represents 86% in support of the transaction and 14% opposed.

[23] Mr. Morrison says this straw poll does not reflect a considered assessment of the two available alternatives. That may or may not be so (there is no evidence on the point) but it is at least some indication of where the vast majority of the preferred shareholders stand on this risk/reward spectrum. Effectively, 86% have concluded that a bird in the hand is worth two in the bush.

Integrity of the Process

[24] As mentioned, Mr. Morrison’s opposition to a sale was known to the liquidator. Mr Morrison was specifically invited to put in a bid but declined to do so. His affidavit says this was because his proposal did not involve a “buyer” as such, since he wanted to keep the Corporation as it was and buy out the preferred shareholders who elected to be redeemed. Also, a purchase of the property would, among other things, involve payment of land transfer tax. Finally, Mr. Morrison felt that the bid requirements did not reflect his desire to use the Corporation’s own cash on hand to make the redemption payments and that any transaction in accordance with the bid requirements would have impaired the favourable tax treatment afforded to mortgage investment corporations.

[25] I am not satisfied that these are sufficient justifications for the failure to submit a proposal in the sale process. I agree with the liquidator. Mr. Morrison’s proposal could, and should, have been submitted within the sale process so that it could be properly evaluated to determine whether it should be the successful bid under that process. The sale process document specifically contemplated “structured” bids. Paragraph 15 of the bid requirements makes it clear that the liquidator would consider bids, where some or all of the preferred shareholders of the Corporation would receive a security that entitles them to a portion of the future upside of the Lakeview Centre. It seems to me that this is precisely what Mr. Morrison’s proposal is doing – it is a proposed transaction under which the non-redeeming preferred shareholders will maintain their preferred shares entitling them to participate in the future potential upside of the Lakeview Centre. A share deal also could have avoided the necessity of paying land transfer tax.

[26] In Rose-Isli Corp. v. Smith, 2023 ONCA 548, the Court of Appeal approved the reasoning of the motion judge in which she held that if a court-approved sales process has been carried out in a manner consistent with the principles set out in Sound Air, the court should normally not permit a later, after-the-fact attempt to interfere with the completion of the sales process. The Court of Appeal also adopted the earlier reasoning of this court from B&M Handelman Investments Limited v. Mass Properties Inc. (2009), 55 C.B.R. (5th) 271 (Ont. S.C.), in which the court held, at para. 22, that:

A mockery would be made of the practice and procedures relating to receivership sales if redemption were permitted at this stage of the proceedings. A receiver would spend time and money securing an agreement of purchase and sale that was, as is commonplace, subject to court approval, and for the benefit of all stakeholders, only for there to be a redemption by a mortgagee at the last minute. This could act as a potential chill on securing the best offer and be to the overall detriment of stakeholders.

[27] In my view this logic applies equally to a sale approval in the context of a winding up proceeding where the process has been conducted by a court-appointed liquidator.

Interests of All Parties

[28] Now that outstanding claims have been resolved, the preferred shareholders are the economic stakeholders in this liquidation. The liquidator has engaged with the preferred shareholders at every stage of the sale process.

[29] Preferred shareholders had the opportunity, individually or as a group, to participate in the sales process. As noted above, they chose not to do so.

[30] Further, the liquidator’s canvas of the preferred shareholders’ support and opposition to approval of the proposed sale discloses overwhelming support for the sale and for the liquidator’s recommendation that it be approved.

Fairness of the Process

[31] All interested parties were treated equally under the sale process. The procedures were not modified to favour any interested party. The process was run in accordance with the milestones set out by the sales process approval order. The liquidator evaluated the qualified bids and selected the highest bid under the criteria established by the process. Moreover, as noted above, the liquidator considered whether to extend or terminate the sales process. For reasons which I regard as entirely satisfactory, the liquidator, in consultation with the inspectors and expert real estate brokerage advisors, decided not to do so. There is no evidence to suggest this was not an entirely bona fide and reasonable choice.

[32] And, as also noted above, the bid procedures permitted a structured bid involving a restructuring of the equity holders’ positions in Lakeview Centre. It was open to the preferred shareholders to make a proposal in the sale process.

Mr. Morrison’s Proposal

[33] Apart from the fact that Mr. Morrison’s proposal was not made in the court-approved sale process, there are other reasons why this court ought not to wade in, evaluate the successful bid and Mr. Morrison’s proposal on their merits, and second guess the business judgment of the liquidator.

[34] First, Mr. Morrison’s proposal depends on working out an appropriate NNAV for the Corporation. This has not yet been done. Further, as revealed in Mr. Morrison’s proposal document and in his affidavit, the NNAV recalculation involves a notional reversal of a redemption already made to the largest single preferred shareholder, Fiera. Given Fiera’s support of the sale, opposition to Mr. Morrison’s proposal and other factors, it is safe to assume that Fiera would vigorously oppose any attempt to meddle with its existing rights and obligations in the context of a recalculation of the NNAV of the Corporation for redemption purposes. This is a significant open issue involving the potential risks of further delay and litigation.

[35] Second, Mr. Morrison states that his company, Morrison Financial, has the financial wherewithal to fund the redemption of those preferred shareholders who elect to take their money out now. But, apart from this claim, there is no documentary or independent support showing that Morrison Financial has access to the requisite amount of cash. There is likewise no evidence about what the cost or other terms of that financing would be.

[36] Finally, and perhaps most importantly, I agree with the liquidator that Mr. Morrison’s scheme to redeem all preferred shareholders who elect to do so, likely requires a court-approved plan of arrangement under s. 182 of the OBCA. Mr. Morrison’s proposal seems to be “a reorganization of the shares of any class or series of the corporation or of the stated capital of any such class or series”. Under s. 182 of the OBCA, a corporation proposing an arrangement must prepare a statement sent to the shareholders setting out in detail what is proposed to be done and the manner in which it is proposed to be done. The shareholders are entitled to vote on such a proposal. The proposal is then submitted to the court for approval. None of this has been done. Neither the timing nor the cost of such an undertaking are before the court. And, based on the preliminary indications of the shareholders’ preferences, the proposal is likely to be rejected in any event.

Conclusion

[37] For the foregoing reasons, the liquidator’s motion is granted. The sale transaction recommended by the liquidator is approved.

Penny J. Date: October 31, 2023

[1] The Corporation took over this project following the mortgagor’s default under the mortgage. There is about 100,000 sf each of retail and office space in the building.