





CITATION:
Schembri v. Way, 2011
          ONCA 528



DATE:  20110721



DOCKET: C53911



COURT OF APPEAL FOR ONTARIO



Doherty, Laskin and Simmons JJ.A.



BETWEEN:



Gordon Schembri,
          Schembri Financial Limited, Leaf Construction Management Inc. and 1784652
          Ontario Inc.




Plaintiffs (Appellants)



and



Al Way, Jamesway
          Construction Corporation, Kingsley Financial Inc., Triumph Financial
          Holdings Inc., 1725030 Ontario Inc., Premier Project Consultants Ltd.,
          National Rent-All Inc., Terra-Tec Excavating,Oxford &       First St. Inc., Simcoe & Eastwood Avenue Inc. and 359 King Ontario Inc.




Defendants (Respondents)



James M. Wortzman, for the appellants



Heath Whiteley, for the respondents



Lorne S. Silver and Joseph
          Bellissimo, for the Receiver, Schwartz, Levitsky, Feldman Inc.



Heard:
July 11, 2011



On appeal from the order of Justice
          Ruth E. Mesbur of the Superior Court of Justice, dated June 24, 2011.



By the Court:



I

[1]

The appellant, Gordon Schembri, and the respondent, Al
    Way, were joint venturers in the purchase and development of certain
    properties.  They had a falling out and Mr.
    Schembri sued Mr. Way for misappropriation of jointly held assets.  A Receiver was appointed in that litigation
    and pursuant to court order directed to sell two of the properties acquired by
    the joint venture.  Those properties were
    located in Waterloo and London.  A third property
    in Oshawa was the subject of a separate motion.  Depending on the outcome of that motion, it would also be sold by the
    Receiver.

[2]

The properties were not sold under the initial sales
    process order made in January 2011.  Eventually the Receiver recommended an amended sales process that
    involved Mr. Way making a stalking horse offer on each property, an opportunity
    for both Mr. Way and Mr. Schembri to make a superior offer on the properties
    and in respect of Waterloo and London, a break fee payable to Mr. Way if he was
    not the ultimate purchaser of the property.

[3]

The Receivers proposal reflected the offer put forward
    by Mr. Way.  That offer was made after
    the Receiver had recommended acceptance of an earlier offer made by Mr. Schembri
    on the Waterloo property.  Mr. Schembris
    offer had been made in response to the initial sales order.  The Receiver changed his recommendation after
    receiving Mr. Ways offer and after Mr. Way had brought a motion to remove the
    Receiver.  Mr. Way abandoned that motion
    after the Receiver supported his offer.

[4]

Mr. Schembri opposed the Receivers recommendation.  He argued that the court should order the
    Waterloo property sold to him under the terms of the offer he had submitted in
    response to the initial sales process established in January 2011 and, that
    subject to the resolution of an outstanding issue relating to the Oshawa
    property, both Oshawa and London should be sold on the open market.

[5]

The motion judge accepted the recommendation of the
    Receiver and directed that the properties should be sold according to the
    amended sales process outlined by the Receiver in his fourth report.  Mr. Schembri appeals from that order.

II

[6]

The motion judges reasons are a model of clarity and
    concision.  We adopt and will not repeat,
    except as is necessary to these reasons, her description of the relevant events
    and her factual findings.

[7]

We accept the respondents and the Receivers submission
    that the motion judges decision to approve the recommendation of the Receiver
    and order the property sold according to the amended sale process was a
    discretionary one that attracts substantial deference in this court.  Applying that standard of review, we see no
    reason to interfere with the motion judges order as it relates to the Oshawa
    and London properties.

[8]

The Waterloo
    property, however, raises different considerations.  With respect to the motion judge, we are
    satisfied that she erred in exercising her discretion exclusively on the basis
    that the sales process recommended by the Receiver would maximize the financial
    return for the estate.  The motion judge
    was required to consider the entirety of the circumstances and, in particular,
    the conduct of the parties.

[9]

On the motion judges findings, the conduct of Mr. Way
    had a negative impact on the integrity of the court supervised sales
    process.  Mr. Way stood to gain from
    whatever financial benefit flowed to the estate from the sale of the Waterloo
    property.  His conduct, as it impacted on
    the integrity of the sales process, should have been given significant weight when
    deciding whether the Receivers recommendation to accept Mr. Ways proposal
    should be approved by the court.  Instead, the motion judge expressly stated that she was giving Mr. Ways
    conduct no weight.

III


[10]

It is common ground that Mr. Ways offer on the
    Waterloo property was financially more attractive than Mr. Schembris.  It would have returned significantly more to
    the estate than would Mr. Schembris offer.  If financial concerns were the only relevant factor there could be no
    questioning the motion judges exercise of her discretion.

[11]

In the course of her reasons, the motion judge made
    strong findings about Mr. Ways conduct.  She concluded that he had brought an entirely unwarranted motion to
    remove the Receiver for purely tactical reasons.  She further concluded that his conduct had
    given him a distinct and unfair competitive advantage over Mr. Schembri.  The relevant passages of her reasons are set
    out below.

[46]     Removing
    a Receiver is a serious matter.  Mr. Way
    had called the Receivers integrity into question, and this issue had to be determined.
From Mr. Schembris point of view, the
    removal motion was tactical, and designed to derail the sales process so that
    Mr. Way could gain an advantage in it.  To some extent, I tend to agree.

[47]     Before
    he moved to remove the Receiver, Mr. Way had learned in the settlement
    conference that Mr. Schembri wanted to buy the Waterloo property and had no
    real interest in the London property.  As
    Mr. Schembri explains it, he disclosed this information to Mr. Way because he
    thought the original sales process was underway, and since the Receiver had
    rejected his bid, Waterloo and London would be sold to the public under the
    terms of the original sales order.  Because the Receiver was obliged under the terms of the original sales
    order to discuss each partys offer with the other, Mr. Way also knew what Mr.
    Schembri was prepared to pay for Waterloo.

[48]
When
    I look at the timing of the removal motion, coupled with Mr. Schembris later
    unsolicited bids for the three properties, I see a tactical move to wrest
    control of the process from the Receiver, and to prevent Mr. Schembri from
    purchasing Waterloo or to force him to pay significantly more for it than its
    appraised value.

[49]     By
    the time Mr. Way launched his removal motion, he knew that Mr. Schembri wanted
    Waterloo, and knew what he was prepared to pay for it.  He also knew that Mr. Schembri was less
    interested in the other two properties.
With
    this knowledge, he was able to structure his unsolicited offers so that he
    would usurp Mr. Schembri from purchasing Waterloo, and would acquire the other
    two properties for less than he was originally prepared to pay, at least
    notionally.

[50]     While
    the Receiver is adamant its current recommendations are not tied to Mr. Ways
    withdrawing the removal motion, the optics of the two events occurring
    virtually simultaneously give one pause.  I have no reason to disbelieve the Receiver, particularly since the
    Receiver did not accept Mr. Ways original proposal but negotiated a far better
    outcome, both in terms of the costs of the removal motion and the issue of
    break fees.  That said, however, I
    understand Mr. Schembris feelings about motivations and process.  The issue, as I see it, is whether those
    feelings should outweigh the Receivers duty to maximize recovery for the
    stakeholders. [Emphasis added.]

[12]

Mr. Schembris conduct in the course of the sale
    process could not be criticized.  He had
    submitted a bid that complied with the terms of the original sale order made in
    January 2011.  That bid was higher than
    the two reliable appraisals (the first and third) that the Receiver ultimately
    obtained.  In all likelihood, the
    Receiver would have recommended acceptance of Mr. Schembris bid at the close
    of the first phase of the process authorized under the January court order but
    for an appraisal (the second) that suggested Mr. Schembris bid was well below
    market value.  That appraisal was
    ultimately discredited by both Mr. Way and Mr. Schembri.  Indeed, after the appraisal was discredited,
    the Receiver recommended acceptance of Mr. Schembris original bid, albeit
    outside the time limits imposed by the original order.  The Receiver changed his position only after
    Mr. Way moved to have him removed and made an offer on all the properties.

[13]

Mr. Way did not submit any bid for the Waterloo
    property under the timetable set out in the original court order.  He offered no explanation for his failure to
    bid and did not suggest that the original sale process that generated Mr. Schembris
    bid operated unfairly against him.

[14]

In summary, Mr. Schembri made a commercially reasonable
    offer on the Waterloo property in response to the first sale order and Mr. Way
    chose not to participate in that process.

[15]

Having determined that Mr. Schembri had acted in
    compliance with the process ordered by the court and that Mr. Way had effectively
    gained control over that process through the combined effect of a last minute
    offer and a meritless motion to order the Receiver removed, the motion judge
    went on to hold at para. 54:

But this is not about Mr. Schembri and Mr.
    Way.  Their bitterness and ill will
    toward one another is palpable and will no doubt continue and colour all their
    future decisions.  It is not the courts
    function to facilitate or enable their bitterness and anger.  Instead, the court must determine whether the
    Receivers proposal is in the overall interest of the estate and is
    commercially reasonable.  As an overall
    comment, I am satisfied the Receiver has made sufficient effort to get the best
    price for the properties.  There is no
    suggestion that the Receivers proposal would result in an improvident sale.

[16]

The motion judge indicated that both Mr. Schembri and Mr.
    Way had legitimate complaints (para. 57) about the sales process.  She did not identify Mr. Ways legitimate
    complaints.  We can see none.  The motion judge ultimately concluded at
    para. 76:

I recognize that Mr. Schembri takes the position
    Mr. Ways conduct should preclude the court from exercising its discretion in
    favour of his stalking horse proposals.
In
    looking at the overall benefits to the estate, however, I disregard this
    conduct in exercising that discretion.
I do, however, consider his conduct as a potentially relevant factor
    when it comes to exercising my discretion on the issue of costs of this
    motion.  I expect the parties costs
    submissions will address that conduct in the context of the courts expectation
    that parties will follow court orders scrupulously.  [Emphasis added.]

[17]

It may be appropriate to disregard Mr. Ways conduct
    if the proceeds of the sale were destined for independent third party
    creditors.  In that circumstance, the
    maximization of financial return could trump all other considerations.  However, in this case, the beneficiaries of
    the sale would be Mr. Way and Mr. Schembri, not independent third party
    creditors.  Subject to Mr. Schembris
    ability to succeed in the underlying litigation, Mr. Way had a much greater
    beneficial interest in the sale proceeds than Mr. Schembri.  To the extent that Mr. Ways bid on the
    Waterloo property produced a better financial result for the estate, it would put
    more money back into Mr. Ways pocket.

[18]

In our view, where the ultimate beneficiaries of a
    court ordered sale are the parties competing in that sale, their conduct in the
    course of the court ordered sale process may be a significant factor in
    determining what process should be followed.  The conduct of one or more parties becomes especially significant where
    it undermines the integrity of the court ordered process either by giving the
    offending party an unfair advantage in the process, or by compromising the
    appearance of the neutrality of the Receiver.  Mr. Ways conduct as described by the motion judge had both adverse effects.  It could not be disregarded in determining
    whether a sales process that favoured Mr. Way should be implemented by the
    court.

[19]

Giving due effect to Mr. Ways conduct, we would order
    that the Waterloo property be sold to Mr. Schembri in accordance with his
    bid.  The sale can be consummated without
    delay and the costs associated with that delay.  As Mr. Ways conduct is not relevant to the integrity of the process as
    it relates to the London and Oshawa properties, we would affirm the order of
    the motion judge in respect of those properties.  We agree that the process recommended by the
    Receiver and approved by the motion judge in respect of those properties has
    the advantages described by her.

[20]

The appeal is allowed and para. 1 of the Amended Sales
    Process attached to the order of Mesbur J. dated June 24, 2011 is varied in
    accordance with these reasons.

[21]

If the parties cannot agree on costs, they may file
    written submissions of less than five pages.  The appellants submissions should be filed within 14 days of the
    release of these reasons and the respondents submissions filed within 14 days
    of receipt of the appellants submissions.

RELEASED:  DD  JUL 21 2011

Doherty J.A.

John I. Laskin J.A.

Janet Simmons J.A.


