Court File and Parties
COURT FILE NO.: CV-22-689631
DATE: 20230202
SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)
RE: In the Matter of CannaPiece Group Inc. et al.
BEFORE: Osborne J.
COUNSEL: David S. Ward, Larry Ellis, Sam Massie and Monica Faheim, for the Applicants Clifton Prophet, Heather Fisher, Haddon Murray, for 2125028 Ontario Inc. David Preger, Lisa S. Corne and David Seifer, for Carmela Marzilli and 1000420548 Ontario Inc. Jeremy Dacks, for Dream Industrial (GP) Inc. Edward Park, Ministry of Finance Robert Kennedy and Daniel Loberto, Monitor Rory McGovern, Cardinal Advisory Services Limited
HEARD: January 31, 2023
ENDORSEMENT
[1]. The Applicants move for an approval and vesting order that would, among other things:
a. Extend the stay up to and including February 17, 2023;
b. approve the Share Purchase Agreement (“SPA”) entered into between CannaPiece Group Inc. as Vendor, CPC, and 1000420548 Ontario Inc. (“548” or the “Purchaser”) and the transaction contemplated therein;
c. authorize and direct the Applicants to perform their obligations under the SPA and complete it;
d. vest all of Applicants’ right, title and interest in the Excluded Assets, Excluded Contracts and Excluded Liabilities in a newly formed entity, 14707117 Canada Inc. (“Residualco”);
e. vest in the Purchaser the Purchased Shares free and clear of Encumbrances other than Permitted Encumbrances upon the filing of the Monitor’s Certificate;
f. approving a distribution to Cardinal Advisory Services Limited (“Cardinal”) in respect of amounts owing pursuant to the DIP Term Sheet and Deposit Facility;
g. approving certain requested releases and expanding the powers and the duties of the Monitor to effectively perform those remaining steps in order that this proceeding might be concluded.
[2]. In the circumstances in which the Applicants find themselves, particularly from a cash flow position, this motion was heard on an urgent basis yesterday and the parties have implored the Court to release a decision on the motion as quickly as possible. Accordingly, these reasons have been prepared in the very limited time available. Defined terms in these reasons have the meaning given to them in the motion materials, the Second Report of the Monitor or the relevant agreements, unless otherwise indicated.
[3]. I indicated at the conclusion of the hearing yesterday that I was satisfied that the requested extension of the stay of proceedings (which was due to expire imminently) was appropriate in the circumstances. That relief was unopposed. Accordingly, I extended the stay to and including February 17, 2023. I took under reserve my decision with respect to the balance of the relief sought, all of which is opposed.
[4]. In short, the Applicants seek a reverse vesting order to transfer ownership of the Purchased Shares to the Purchaser free and clear, while transferring the Excluded Assets and Excluded Liabilities to Residualco.
[5]. For the reasons that follow, I decline to grant the reverse vesting order.
Background and Context
[6]. The Applicants operate a cannabis manufacturing business in Pickering, Ontario. There are two principal creditors or groups of creditors, and it is in many respects the competing priorities of those two groups that give rise to the motion today.
[7]. The first relevant creditor is 2125028 Ontario Inc. (“212”),. It advanced funds for manufacturing and processing equipment used by the Applicants in their day-to-day operations. The funds were advanced under two finance facilities, each for $3 million. According to the Monitor, the 212 debt owing as of November, 2022 is approximately $4 million.
[8]. 212 holds a first priority security interest over that equipment pledged as collateral. It registered that priority over that equipment on May 19, 2020.
[9]. The second relevant creditor is Carmela Marzilli (“Marzilli”). Marzilli entered into a loan agreement with CPC as of February 10, 2022 in connection with which and pursuant to related general security agreement, obtained a first ranking security interest in all of the present or after‑acquired property of CPC, excluding certain excluded assets. Those excluded assets, in turn, carve out the 212 security over its equipment collateral. The debt owed to Marzilli is approximately $6.8 million as of November 2022, according to the Monitor.
[10]. The result is that 212 has a first position security interest over its equipment collateral but nothing else, while Marzilli has a first position security interest over effectively all other assets. The security interest of 212 over the equipment collateral was registered more than a year prior to the security interest of Marzilli.
[11]. It should be noted that Marzilli is related to 548, the Purchaser, which is an entity incorporated for the purpose of completing the transaction for which approval is sought today.
Relevant Events
[12]. The Applicants sought and received protection under the CCAA on November 3, 2022. Pursuant to the initial order of Penny J., interim DIP financing advanced by Cardinal was approved in the amount of $500,000. The typical charges were also approved. The relief sought and granted was unopposed.
[13]. The Applicants returned to Court one week later on November 10, 2022 at which time Penny J. extended the stay of proceedings and, among other things, approved a sales and investment solicitation process (the “SISP”), a central feature of which was a stalking horse agreement dated as of November 8, 2022 between CannaPiece Group Inc. as vendor, CPC, and Cardinal (or its nominee) as purchaser (the “Stalking Horse SPA”). That Stalking Horse SPA included an approved break fee and priorities for professional fees.
[14]. In addition, Cardinal, in its capacity as Stalking Horse Bidder, was granted a priority charge. Other charges previously granted or increased to an aggregate total of $3,500,000, of which most ($3 million) was a Deposit Facility that ranked in priority to all other claims against the Applicants.
[15]. The relief sought and granted on November 10, 2022, was also unopposed, although what occurred behind the scenes literally during that hearing is in part the beginning of the chronology giving rise to the opposition today.
[16]. However, as is not atypical in real time CCAA proceedings, the hearing in court was not the only event that occurred on November 10, 2022. 212 submits today that it indicated that it intended to oppose the relief sought on November 10, and particularly the increase in the priority charges, unless its debt was assumed by Cardinal, the Stalking Horse Bidder.
[17]. While there is a dispute among the parties today about the extent to which 212 indicated (to the Applicants and other parties, if not to the Court) its intended opposition absent the assumption of its debt by Cardinal, there is no dispute that ultimately the relief was granted on an unopposed basis.
[18]. 212 submits that the reason for its ultimate lack of opposition on November 10 was the fact that, literally as the hearing before Penny, J. was underway, it entered into an assumption agreement (the “Assumption Agreement”) with Cardinal pursuant to which Cardinal agreed to assume the 212 debt, pay to 212 the sum of $500,000 within six months of the stalking horse transaction closing, and issue to 212 certain shares in the Applicants.
[19]. The Monitor, as authorized and directed by the order made on November 10, 2022, then set about to implement the SISP, with the Stalking Horse SPA as the floor or minimum.
[20]. The Stalking Horse SPA, as approved, contemplated a purchase price of $3,500,000, together with “Assumed Liabilities” that, once finalized, would be made available to Potential Bidders. This feature flowed from the fact that, as of November 10 when the SISP was approved, Cardinal, as Stalking Horse Bidder, had not yet determined which liabilities of the Applicants it would be prepared to assume. Not surprisingly, featured in those negotiations were the liabilities comprised of the debt owed to the two principal creditors described above - 212 and Marzilli.
[21]. The SISP procedures are set out in a Schedule to the November 10, 2022 order, and included those steps generally applicable to such a sales process approved by this Court. Those steps included the following:
a. The Monitor would host a virtual data room with all relevant information made available to potential bidders;
b. the Monitor would evaluate, with the assistance of a Sales Agent and in consultation with the Applicants, all bids received to determine whether or not each bid was a Qualified Bid; and
c. the Monitor would then conduct an auction between or among Qualified Bidders and identify, in consultation with the Applicants and the Sales Agent, the highest or otherwise best bid received which would in turn be identified as the Successful Bid.
[22]. Qualified Bids were to be evaluated by the Monitor in consultation with the Applicants considering the factors set out in [the procedure approved in the order]. Those factors included: the amount of consideration being offered, and if applicable, the proposed form, composition and allocation of same; and the value of any assumption of liabilities or waiver of liabilities.
[23]. The sales process required the repayment of $3.7 million to Cardinal at closing, in the event another Qualified Bid was selected over the Stalking Horse Bid.
[24]. Ultimately, only one Qualified Bid was received despite extensive efforts by the Monitor to generate and maximize interest in the auction.
[25]. Marzilli submitted a bid comprised of the cash component of $4 million plus assumed liabilities. The assumed liabilities in the Marzilli Bid included the assumption of the Marzilli debt of the Applicants described above. It did not, however, include an assumption of the 212 debt.
[26]. The bid submitted by Marzilli provided, as required, for the repayment of $3.7 million to the DIP lender and Stalking Horse Bidder, Cardinal.
[27]. Since, according to the terms of the Marzilli Bid, the 212 debt would not be assumed by the Purchaser, it would be transferred to Residualco. There is no evidence in the record as to what, if any, assets or value Residualco will have.
[28]. The Monitor, in consultation with the Applicants, selected the Marzilli Bid as the Successful Bid. It is the Marzilli Bid that is the subject of the proposed transaction and reverse vesting order relief sought today.
Analysis
[29]. The primary issue is whether the approval and vesting order (which is a reverse vesting order) should be granted.
[30]. 212 submits that the requested relief should not be granted for a number of reasons, the principal ones of which are these:
a. the test for the extraordinary remedy of a reverse vesting order cannot be met here;
b. the test for determining whether a third party interest should be extinguished in a vesting order cannot be met here;
c. the Marzilli Bid was not the Superior Bid; and
d. neither the CCAA nor the doctrine of equitable subordination should apply so as to defeat the regime established by the Personal Property Security Act, which would be the effect of granting the order since the security interest of 212 over its equipment collateral ranks first and was registered more than a year before the registration of the security interest of Marzilli over what is effectively the balance of the assets.
[31]. Perhaps most fundamentally, 212 acknowledges that it did not oppose the approval of the SISP process, but argues that it took that course of action in express reliance on the Assumption Agreement entered into that same day with the Stalking Horse Bidder pursuant to which its debt was agreed to be assumed, and that when that debt assumption is considered to be part of the Stalking Horse Bid, it is clearly superior to the Marzilli Bid.
[32]. The Applicants submit that the Monitor ran a fair and transparent sales process and concluded that the Marzilli Bid was the Superior Bid and that 212 simply gambled on a bidder that was not ultimately successful. They argue that 212 supported the SISP process and that the bid requirements preserved “optionality” for bidders in terms of which liabilities would be assumed and which would not.
[33]. The Applicants further submit that the reverse vesting order is required to maintain the going concern value of the Applicants’ business, and is in the best interests of stakeholders generally, whether or not 212 is in a less favourable position than it would be had the Stalking Horse Bid been determined to be the Superior Bid.
[34]. The Applicants submit in their factum and in argument that “the Transaction provides for the seamless continuity of the Applicants’ business operations, preserves CPC’s structure of perations, maintains its licences, and preserves the economic activity of supplier and customer relationships…. it secures enterprise value and preserves the jobs of approximately 150 employees.” They state that “the Monitor believes that the transaction will be more beneficial to creditors than a bankruptcy”.
[35]. The Applicants agree that the 212 debt would, together with other liabilities not assumed by the Purchaser, be vested out and transferred to Residualco, and claims against Residualco (which would include the claim of 212 for its debt) could then be addressed through “a distribution order, a bankruptcy or other similar process”. They submit that the Purchase Price stands in place of the assets and is available to satisfy creditor claims, in whole or in part, in accordance with their pre-existing priority.
[36]. As noted, Cardinal fully supports the relief sought by the Applicants. It submitted a factum and made submissions at the hearing of the motion, both to the effect that it has been a critical part of this restructuring by providing interim financing, as a result of which “a transparent and fair sales and investment solicitation process resulted in the cannabis business of the Applicants living to see better days”.
[37]. At paragraph 26 of its factum, Cardinal states that 212 initially opposed the SISP and took issue with the Purchaser’s Charge. It goes on to state that subsequent to learning of 212 sought opposition to the SISP, Cardinal entered into negotiations with 212 to assume the debt owing to 212 by the Applicants ….. under the Assumption Agreement, but that its obligation to assume the 212 debt was subject to a condition precedent - namely, that Cardinal would be the successful bidder.
[38]. Cardinal submits that 212 “was aware or should have been aware” that there was a possibility that Cardinal would not be the successful bidder and there were no guarantees that any other bidder would assume the 212 debt.
[39]. Finally, if oddly in my view, Cardinal submits that the equities favour Cardinal and that “if the relief requested by 212 is granted, Cardinal will suffer irreparable financial and reputational harm” (factum, para. 60).
[40]. Naturally, Marzilli/548 support the motion.
[41]. The Monitor has filed the Second Report dated January 28, 2023 in connection with this motion and as noted at paragraph 7, it is filed for the purpose of providing information to the Court with respect to, among other things, its recommendations with respect t
[42]. Beginning at paragraph 24, the Monitor describes the SISP process undertaken pursuant to which potential purchasers were identified, marketed to, and given an opportunity to acquire or invest in CPC.
[43]. At paragraph 27, the Monitor describes the initial key dates in the process, including November 30, 2022 as the deadline to finalize the schedule of Assumed Liabilities in the Stalking Horse SPA and the bid deadline of January 9, 2023. The steps conclude with the motion before me now - the hearing of the sale approval motion. I observe that last step only to highlight the obvious; namely that the process is not complete unless and until a sale is approved by the Court.
[44]. The Monitor reports that of 14 potential bidders who executed non-disclosure agreements, only three were, according to the terms of the SISP, ultimately granted access to the data room upon providing their Statement of Qualifications.
[45]. Ultimately, however, and notwithstanding extensions to the SISP timetable (further described below), the only bid received was the Marzilli Bid.
[46]. The Monitor, the Sales Agent and the Applicants then evaluated the Marzilli Bid, clarified certain points, confirmed that it was a Qualified Bid, and determined on January 24, 2023 that it was the lead bid in the process.
[47]. The Marzilli Bid contemplated a cash purchase price of $4 million (being $500,000 higher than the Stalking Horse Bid) and other terms including that the Assumed Liabilities were composed of the Marzilli debt. It did not include assumption of the 212 debt.
[48]. The Monitor summarized the key differences between the Marzilli Bid in the Stalking Horse Bid in the c
[49]. The Monitor then inquired of Cardinal, as the Stalking Horse Bidder, whether it wished to increase the Stalking Horse Bid “by topping up (at minimum) the cash consideration portion”. Cardinal advised the Monitor that it declined to participate in the auction, with the result that the Marzilli Bid was determined to be the Successful Bid.
[50]. The Monitor recommends approval of the Marzilli Bid and that the transaction be completed pursuant to a reverse vesting order. Part of the ancillary relief requested by the Applicants and recommended by the Monitor is the expansion of the Monitor’s powers to, among other things, assign Residualco into bankruptcy and act if it wishes as a trustee in such bankruptcy and otherwise facilitate or assist the winding down of that entity.
The Applicable Tests
[51]. All parties are in general agreement about the legal tests to be applied here where the relief sought includes a reverse vesting order that has the additional feature of affecting third party rights (in this case, those of 212) as part of that vesting order.
[52]. This Court has jurisdiction to make a vesting order pursuant to section 100 of the Courts of Justice Act.
[53]. Beyond the general jurisdiction of the Court found in s. 11 of the CCAA to make any order that it considers appropriate in the circumstances, s.36(3) of the CCAA sets out the factors the Court is to consider in deciding whether to grant authorization to dispose of assets:
(3) In deciding whether to grant the authorization, the court is to consider, among other things,
(a) whether the process leading to the proposed sale or disposition was reasonable in the circumstances;
(b) whether the monitor approved the process leading to the proposed sale or disposition;
(c) whether the monitor 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.
[54]. Moreover, the well-known Soundair factors to be considered for approval of a transaction following a Court-supervised sales process, not surprisingly track many of the same principles. (see Royal Bank of Canada v. Soundair Corp., (1991), 1991 CanLII 2727 (ON CA), 4 O.R. (3d) 1 (Ont. C.A.) at para. 16):
(a) whether the party made a sufficient effort to obtain the best price and to not act improvidently;
(b) the interests of all parties;
(c) the efficacy and integrity of the process by which the party obtained offers; and
(d) whether the working out of the process was unfair.
[55]. The Court of Appeal for Ontario considered in Third Eye Capital Corporation v. Dianor Resources Inc., 2019 ONCA 508 (“Third Eye”) what it described as a “cascading analysis” of the factors to be considered when determining whether a third party interest should be extinguished in a vesting order:
(a) first, the nature and strength of the interest that is proposed to be extinguished;
(b) second, whether the interest holder has consented to the vesting out of their interest either in the insolvency process itself or in agreements reached prior to the insolvency; and
(c) third, if the first two steps proved to be ambiguous or inconclusive, a consideration of the equities to determine if a vesting order is appropriate in the circumstances.
(see paras. 102-110)
[56]. A consideration of the equities contemplated in the third step includes consideration of the prejudice, if any, to the third party interest holder; whether the third party may be adequately compensated for its interest from the proceeds of the disposition are sale; whether, based on evidence of value, there is any equity in the property; and whether the parties are acting in good faith (Third Eye, para. 110).
[57]. Finally, Penny, J. considered the factors applicable to a determination of whether a reverse vesting order should be approved, in Harte Gold Corp. (Re), 2022 ONSC 653. In that case, the Court considered the s.36(3) factors set out above, “making provision or adjustment, as appropriate, for the unique aspects of a reverse vesting transaction” since the very nature of a reverse vesting order is such that it does not contemplate a typical sale of assets.
[58]. Justice Penny observed that a reverse vesting order was both an equitable and an extraordinary remedy, and one that ought not to be regarded as the “norm” and concluded that the following factors are applicable to consideration of whether a reverse vesting order is appropriate in the circumstances:
(a) Why is the RVO necessary in this case?
(b) Does the RVO structure produce an economic result at least as favourable as any other viable alternative?
(c) Is any stakeholder worse off under the RVO structure then they would have been under any other viable alternative? and
(d) does the consideration being paid for the debtor’s business reflect the importance and value of the licenses and permits (or other intangible assets) being preserved under the RVO structure?
(see Harte Gold, para. 38).
The Approvals Sought
[59]. In considering what relief is appropriate here, I recognize that I must address the art of the possible rather than a theoretical perfect outcome which is antithetical to the very fact of the insolvency of the Applicants in the first place. Here, an analysis of the possible outcomes necessarily recognizes that not all stakeholders will enjoy a perfect result, and not all creditors will recover 100% of their debt.
[60]. If the Marzilli Bid and resulting transaction is approved, the 212 debt will not be assumed by the Purchaser and will be transferred to Residualco. If the Marzilli Bid is not approved, the SISP process yields the result that the Stalking Horse Bid of Cardinal will be the Successful Bid since there were no other bids, with the opposite result: the Marzilli debt will be transferred to Residualco.
[61]. The fact that this motion is so vigorously contested, the fact that the expanded powers sought for the Monitor contemplate a possible bankruptcy and winding down of Residualco, and the economics of either bid, are all indicative of the expectation that there will be little if any recovery through Residualco. There is no evidence before me that there will be any significant assets in that entity available for distribution.
[62]. That said, the prejudice to any one creditor is obviously not itself a determinative factor of whether a transaction should be approved. That is clear from the tests set out above. The effect on creditors, and other stakeholders, is certainly a factor to be taken into account, but it is only one of several factors.
[63]. All parties agree in this case that a reverse vesting order structure is necessary and appropriate since there is no other way to preserve the going-concern value of the business and particularly the continuity of the relevant cannabis licenses that are central to its operation and therefore the maximization of recovery for stakeholders. I accept that. Both the Stalking Horse Bid and the Marzilli Bid contemplate a reverse vesting order structure.
[64]. The SISP process approved by Penny J. on November 10, 2022 set out the steps to be followed to test the market and yield a bid that represented the best possible outcome for stakeholders in difficult circumstances. It contemplated an auction between or among competing bidders, although ultimately, only one bid was received.
[65]. Importantly, however, the SISP was carried out against a minimum, or floor, in the form of the Stalking Horse Bid. That provided certainty to stakeholders that even if the SISP did not yield a single bid, there was still a viable transaction that provided for a going concern outcome through a reverse vesting order structure.
[66]. Considering the Third Eye factors, I find they favour the position advanced by 212.
[67]. First, the nature and strength of 212’s interest is significant, although limited to the equipment to which its security interest applies. It ranks in first position. The PPSA registration is first in time as compared to the registration of the security for the Marzilli debt, although the two interests are not competing in the sense that the latter carves out the former.
[68]. I recognize that the 212 interest that would be vested out is a security interest, and further one that is limited only to certain assets, unlike the interests in land being considered by the Court of Appeal in Third Eye (mineral rights and surface rights). However, in my view, the same analysis applies since a third party interest is being extinguished. It cannot be that the Third Eye factors apply only to an interest in land or another proprietary right: the nature and quality of the right sought to be extinguished is exactly the first of the three factors to be considered.
[69]. Moreover, I reject the submission of the Applicants that the rights of 212 are not being extinguished, as occurred in Third Eye, but rather they are merely being transferred to Residualco. For the reasons noted above in respect of the evidence before me as to the assets in that entity, it cannot be argued on this motion that the rights of 212 are not being extinguished but rather continue on albeit through a new entity. That is not the practical reality here.
[70]. Second, 212 has not consented to the vesting out of its interest either in the insolvency process itself or in agreements reached prior to the insolvency. It is urged upon me by the Applicants and those parties who support them that by ultimately not opposing approval of the SISP process, 212 accepted and agreed to the vesting out of its interest in the event that the Successful Bid did not include an assumption of its debt.
[71]. They submit that the Assumption Agreement entered into between 212 and Cardinal as the Stalking Horse Bidder was a bilateral agreement between those two parties that effectively amounted to a wager on the part of 212 that the stalking horse bid would ultimately be the Successful Bid. It follows, they say, that since the Assumption Agreement was conditional upon the stalking horse bid being the Successful Bid, it was of no effect if that did not occur.
[72]. The Applicants, Marzilli and Cardinal all disagree with 212 that, fundamentally, the assumption of the 212 debt became an Assumed Liability as contemplated in the Stalking Horse SPA with the result that it became one component of the floor or minimum that other bids would be evaluated against.
[73]. I do not accept this submission. The SISP process was predicated on the Stalking Horse SPA. When both of those were approved on November 10, 2022, the ultimate value represented by the Stalking Horse SPA was not yet determined. It had a minimum value of $3.5 million (and other terms) but the Assumed Liabilities had not yet been agreed by Cardinal. The relevant schedule in the Stalking Horse SPA was blank.
[74]. The timetable of key milestones in the SISP process recognized this and set a deadline of November 30 for the finalization of the quantum of Assumed Liabilities if any. Accordingly, I find that all stakeholders and potential bidders knew that the ultimate value of that Stalking Horse Bid could not be determined until the time.
[75]. Cardinal, as the Stalking Horse Bidder, agreed on November 10, 2022 to assume the 212 debt. I do not find persuasive the submission by the Applicants to the effect that this commitment is irrelevant since it was of no force or effect if Cardinal was ultimately not the Successful Bidder. That is an accurate statement, considering the terms of the Assumption Agreement. However, it does not advance the analysis at all since, naturally, Cardinal had no obligation to close the transaction at all unless and until it was determined to be the Successful Bidder.
[76]. I do not have to address the hypothetical issue of whether the intended objections of 212 to the approval of the SISP in November would have been successful or whether the SISP would have been approved in any event. It was approved, and the Assumption Agreement was entered into.
[77]. Moreover, the chronology of how the SISP process in fact unfolded over the subsequent weeks supports, in my view, the position of 212 that the assumption of its debt became a component of the Stalking Horse Bid.
[78]. The Second Report of the Monitor sets out the SISP Results beginning at paragraph 33. Importantly, it states at paragraph 38 that on November 30, 2022, the Stalking Horse Bidder confirmed that it was assuming the 212 debt, and further, that it was in ongoing negotiations regarding the Marzilli debt. For that reason, it requested that the deadline to finalize the schedule of Assumed Liabilities be extended from November 30 to December 7, 2022.
[79]. The Monitor, in consultation with the Applicants and Sale Agent, approved this. Its website was updated and potential bidders were updated by the Sales Agent.
[80]. Then, on December 7 (the new deadline), the Stalking Horse Bidder requested a further extension to finalize the assumption of the Marzilli debt for an additional two days, and this also was approved. On December 12, the Stalking Horse Bidder confirmed to the Monitor that the Stalking Horse SPA was now inclusive of the $3,500,000 cash, and the assumption of the debt of both 212 and Marzilli. The website and potential bidders were updated accordingly.
[81]. However, that was not to be the ultimate result, since on December 23, 2022, the Stalking Horse Bidder informed the Monitor that the debt assumption agreement with Marzilli had been terminated and accordingly, the Marzilli debt no longer formed part of the consideration contained in the Stalking Horse SPA. As a result, the final consideration to be paid by the Stalking Horse Bidder was $3,500,000 in cash and the assumption of the 212 debt (Second Report, para. 41).
[82]. A copy of the final executed Stalking Horse SPA dated November 8 and revised January 9, 2023 to account for the removal of the Marzilli debt, was provided and included in the data room, reflected on the Monitor’s website and again, the Sales Agent informed potential bidders.
[83]. Necessarily and appropriately given the turn of events, the Monitor extended the bid deadline until January 18, 2023, to provide additional time for this information to be disseminated to the market and bidders.
[84]. I pause here in the chronology to observe that as against these events, I have no difficulty in concluding that the assumption of the 212 debt was a component of the Stalking horse SPA consideration and further that it was recognized as such by all stakeholders and the Monitor. As to whether then, 212 could be said to have consented to the vesting out of its interest as contemplated in the second factor of the Third Eye analysis, I find that it did not.
[85]. However, further relevant events were yet to occur. On January 9, 2023, new counsel for Marzilli advised the Monitor, for the first time, that Marzilli wished to participate in the SISP. Marzilli ultimately requested another extension to the bid deadline to finalize due diligence and allow it to submit a bid. This too was agreed by the Monitor and conveyed to potential bidders. As set out above, Marzilli then submitted its bid which is sought to be approved today.
[86]. The third factor in the Third Eye analysis contemplates an evaluation of the equities, to the extent it is applicable here at all since it is to be considered if there is ambiguity resulting from a consideration of the first two factors.
[87]. For the above reasons, and in particular its first ranking security interest, the fact that the assumption of its debt was, to the knowledge of all stakeholders (importantly including but not limited to Marzilli) and Assumed Liability as part of the consideration of the Stalking Horse Bid, I find that the equities favour 212.
[88]. 212 relied on the SISP procedures. Those contemplated a finalization of Assumed Liabilities and that was both agreed to by Cardinal and conveyed through the Monitor to all stakeholders so that they could act accordingly. The sales process was extended repeatedly to accommodate exactly that. Marzilli participated in and benefited from this process and the extensions, the final extensions being sought by, and granted for, it.
[89]. The effect on 212, as a creditor, is of course also a factor to be considered under both the applicable CCAA test for the sale of assets (see s.36(3)(e)) and the reverse vesting order factors enumerated by Penny J. (i.e., is any stakeholder worse off?). As noted, it is certainly not the only factor, but it is one of the factors to be considered. Here, 212 is clearly and materially worse off.
[90]. I find that the process here was fair and reasonable, and indeed the Monitor did the best it could in a shifting landscape to maintain the integrity of the process but yield the best recovery for stakeholders. The process was fair and reasonable, however, only if it is understood that the assumption of the 212 debt is part of the consideration payable pursuant to the Stalking Horse Bid.
[91]. In the Second Report, the Monitor sets out the key terms of each of the Stalking Horse Bid and the Marzilli Bid and summarizes the differences between the two, ultimately recommending approval of the Marzilli Bid. It recognizes the fact that the Marzilli Bid contemplates an additional $500,000 as part of the Purchase Price as against the $3.5 million amount contemplated in the Stalking Horse Bid.
[92]. However, there is no real analysis of whether and how that compares to the consideration payable pursuant to the Stalking Horse Bid enhanced by the assumption of the $3.5 million value of the 212 debt. This makes the conclusion that the Marzilli Bid is a Superior Bid, challenging in the circumstances.
[93]. Finally, it was urged upon me that the overall equities of the situation, and indeed the best interests of the stakeholders, favour approval of the Marzilli Bid since it represents an outcome materially more favourable for all stakeholders than a bankruptcy with the consequent loss of all that is dependent upon the Applicants continuing as a going concern. Consideration of the benefits of an asset sale as against the alternative of a bankruptcy is one of the factors specifically enumerated in s.36(3).
[94]. I reject this submission also. Bankruptcy is not the alternative here. It was precisely to guard against this potential (catastrophic) outcome that the SISP process included the Stalking Horse Bid. As recognized throughout - by the Applicants, by Penny J. in his November 10, 2022 endorsement approving the Stalking Horse SPA, and by the Monitor as reaffirmed in its Second Report, the whole point of the Stalking Horse SPA was to provide a minimum outcome for stakeholders.
[95]. The SISP was conducted against the backdrop of that minimum. Stakeholders knew that even if the SISP yielded no bids, they had the certainty of the knowledge that at least there would be a going concern through completion of the stalking horse transaction.
[96]. Similarly, other potential bidders knew that the consideration in the Stalking Horse SPA (which, as I have found, included the assumption of the 212 debt), was the minimum against which there potential bids would be measured and evaluated as part of the overall economics of any proposed transaction. Clearly, the quantum of consideration was not the only factor to be considered but it certainly was a significant factor.
[97]. Cardinal provided interim DIP financing. It was entitled to a break fee in the event that it was not the Successful Bidder.
[98]. The entire premise of the SISP process, and the expectation of this Court as well as the stakeholders, was and is that if no other bid is determined to be the Successful Bid, Cardinal will complete and perform the Stalking Horse SPA.
[99]. Accordingly, the stakeholders ought not to be left with the only alternative being a bankruptcy.
[100]. Considering both the process by which the Marzilli Bid was ultimately selected, as well as the original priority of the 212 security interest, all of which is referred to above, I cannot conclude that it is equitable in all the circumstances to approve this asset sale pursuant to a reverse vesting order.
[101]. For all of the above reasons, I decline to grant the proposed reverse vesting order vesting the assets of the Applicants in the Marzilli purchaser entity (548) and transferring the 212 debt to Residualco.
[102]. The motion is dismissed, save for the requested stay extension which as noted above is granted on the consent of all parties.
[103]. If the parties are unable to agree on the costs of this motion, any party seeking costs may provide to the other parties and to me written submissions not exceeding two pages in length within five days. Responding submissions, also not exceeding two pages in length, will be due five days thereafter.
Osborne, J.
Date: February 2, 2023