



COURT OF APPEAL FOR ONTARIO

CITATION: Downing Street Financial Inc. v. Harmony
    Village-Sheppard Inc., 2017 ONCA 611

DATE: 20170720

DOCKET: M48044 (C63937)

Tulloch J.A. (In Chambers)

BETWEEN

Downing Street Financial Inc., in Trust

Applicant (Respondent in Appeal)

and

Harmony Village-Sheppard Inc., as General Partner
    of Harmony Village-Sheppard LP, and City Core Developments Inc.

Respondents (Respondents in Appeal)

David P. Preger and Michael J. Brzezinski, for the
    moving party, Court-appointed Receiver, Rosen Goldberg Inc.

Barbara Green, for the responding parties, Fortress
    Shepard (2016) Inc., Fortress Real Developments and Derek Sorrenti

Raymond M. Slattery, for the responding party,
    Purchasers

Mitchell Wine, for the responding party, Jozef Zubrzycki

Sean Zweig, for the responding party, the Successful
    Bidders

David T. Ullmann, for the responding party, Downing
    Street Financial Inc., in Trust

Heard: June 29, 2017

Tulloch JA:

A.

Introduction

[1]

The moving party on this motion was Rosen Goldberg Inc., the receiver in
    the underlying insolvency proceedings (the Receiver). The Debtor is Harmony
    Village-Sheppard LP. The responding parties on the motion were Fortress Shepard
    (2016) Inc., Fortress Real Developments and Derek Sorrenti (collectively,
    Fortress).

[2]

The Receivers purpose in bringing this motion was to defeat Fortress
    appeal from a court order approving an asset sale (the Approval Order) and
    thereby to secure that sale, for which the closing date was June 30, 2017.
    Fortress had filed a Notice of Appeal in this court, dated June 21, 2017, in
    which it had sought to appeal the Approval Order, asserting that this court had
    jurisdiction solely based on s. 193(c) of the
Bankruptcy and Insolvency Act
,
    R.S.C. 1985, c. B-3 (the 
BIA
).

[3]

I heard the motion on June 29, 2017, and, given its urgency, I granted
    the motion orally and notified the parties that written reasons would follow.
    These are my written reasons.

B.

Background

(1)

The Property and the Stakeholders

[4]

Before its insolvency proceedings, the Debtor had been developing some
    real estate in Toronto (the Property) as a residential condominium project,
    marketed to seniors. At the time of the Receivers appointment, the Debtor had
    pre-sold 223 units in this project to various purchasers (the Unit
    Purchasers), although construction had not yet begun.

[5]

The Property is subject to three encumbrances. Downing Street Financial
    Inc. (DSFI) holds the first in priority, securing payment of approximately
    $20 million. The second in priority, held by JYR Capital Mortgage Investment
    Corp. and Li Ruixia as tenants in common, secures payment of approximately
    $1,395,000. The third encumbrance is a syndicated mortgage involving 542
    investors. According to Fortress, Sorrenti and a related company are the
    trustees of this syndicated mortgage.

(2)

The Approval Order

[6]

The Superior Court judge who reviewed the sale (the motions judge)
    made the Approval Order on June 19, 2017, and issued a brief endorsement on the
    same date. The Approval Order, granted in response to a motion by the Receiver,
    approved the Receivers sale of the Property to Pinnacle International One
    Lands Inc. (Pinnacle).

[7]

The sale to Pinnacle was the culmination of a court-approved sale process
    under the Receivers supervision in which Pinnacle and Fortress had competed
    for the Property.

(3)

The Stalking Horse Bid

[8]

Pursuant to the Receivers appointment order, dated January 20, 2017, the
    Receiver conducted a stalking horse sale process, in which a sale agreement
    between the Receiver and Fortress would constitute the stalking horse bid
    (the Stalking Horse Bid). The Stalking Horse Bid would have required Fortress
    to assume the Debtors agreements of purchase and sale with the Unit
    Purchasers. The Stalking Horse Bid also was a credit bid.  On closing, the
    first mortgagee, DSFI, would have been paid in full, while the purchaser would
    have assumed the existing debt secured under the second and third charges.

[9]

The Receiver and Fortress each provided different explanations for why
    Fortress repudiated the Stalking Horse Bid. However, the parties agreed in
    their submissions that, beyond the deal discussed in the next paragraph, the
    stalking horse process did not attract any offers for the Property.

[10]

According to Fortress, Fortress always had intended to find a developer
    to build the condo project, and it ultimately had negotiated a sale of the
    Property to Pinnacle (the Pinnacle-Fortress APS). The Pinnacle-Fortress APS
    required Pinnacle to assume the terms of the Stalking Horse Bid. Fortress
    advised the Receiver of its deal with Pinnacle, and the Receiver acquiesced on
    the condition that the sale price of the Pinnacle-Fortress APS would not exceed
    the Stalking Horse Bids sale price, so that Fortress intermediary role would
    not cost the Debtors estate any value.

[11]

However, in Fortress narrative, the Stalking Horse Bid failed because,
    on April 4, 2017, only three days before the court-approval hearing for the
    Pinnacle-Fortress APS, Pinnacle informed Fortress that it no longer was willing
    to assume the contracts with the Unit Purchasers. Fortress informed the
    Receiver of this problem, and the Receiver refused to save the deal by amending
    the requirements of the Stalking Horse Bid.

[12]

In the Receivers version, Fortress told the Receiver on April 6, 2017,
    the day before the hearing to approve the Pinnacle-Fortress APS, that Fortress would
    not complete the purchase of the Property pursuant to the Stalking Horse Bid
    because Fortress no longer was willing to assume the Unit Purchasers contracts.

(4)

Subsequent Offers and Negotiations

[13]

According to the Receiver, its subsequent efforts produced three offers
    for the Property. One of them, from an offeror whom the Receiver does not
    identify, which involved a price that the Receiver found unacceptably low. The
    other two offers were from Fortress and from Pinnacle, respectively. Fortress
    offer, dated April 13, 2017, involved the same price as the Stalking Horse Bid
    and similar financial terms. The important differences were that Fortress would
    not assume the contracts with the Unit Purchasers, but that Fortress deposit
    would be slightly higher. Pinnacle communicated its offer to the Receiver
    several days later. The Receiver accepted Pinnacles offer on May 2, 2017, and informed
    Fortress of this acceptance on May 3, 2017.

[14]

The Receiver asserts that it had legitimate concerns regarding Fortress
    financial capacity. The Receivers motion record includes some e-mail
    correspondence raising such concerns. The correspondence suggests that Fortress
    was unwilling to provide a deposit large enough to satisfy the Receiver.

(5)

Fortress Opposition to Pinnacles Offer

[15]

Fortress advised the Receiver on April 28, 2017 that it would oppose any
    deal between the Receiver and Pinnacle. Fortress alleged that Pinnacle had
    improperly exploited its earlier negotiations with Fortress to develop its own
    direct offer to the Receiver.

[16]

On June 16, 2017, several days before the scheduled hearing of the
    Receivers motion for approval of Pinnacles bid, Fortress submitted to the
    Receiver a new, third, offer to purchase the Property. This offer relied on a
    financing commitment from another party, MarshallZehr, to cover the cash
    component of Fortress offer, all closing costs, and the costs of the financing.
    During the hearing of this motion, counsel for Fortress conceded that the
    Receiver had correctly identified several conditions of the MarshallZehr
    financing that would limit Fortress ability to obtain additional financing
    from other parties. However, counsel for Fortress asserted that such formal
    conditions would not be a practical obstacle to the Fortress offers
    feasibility.

C.

Fortress Appeal

[17]

After the granting of the Approval Order on June 19, 2017, Fortress
    filed a Notice of Appeal in this court, dated June 21, 2017. The relief that
    Fortress seeks from this court is the following: an order setting aside the
    Approval Order, and an order directing the Receiver to accept Fortress June
    16, 2017 offer that would also serve as an approval and vesting order for a
    sale on that offers terms.

[18]

Based on the Notice of Appeal and Fortress submissions on this motion,
    the essence of Fortress planned argument on appeal would seem to be that the
    motions judge did not apply the right legal test when making the Approval
    Order; his brief endorsement said that he approved Pinnacles bid because it
    was the best offer to purchase the Property from the point of view of the
    majority of stakeholders. In oral argument for this motion, counsel for
    Fortress suggested that this language in the motions judges endorsement
    demonstrates that the motions judge did not correctly apply the relevant
    principles from
Royal Bank v. Soundair Corp.
(1991), 4 O.R. (3d) 1
    (C.A.).

[19]

The Notice of Appeal relies only on s. 193(c) of the
BIA
in support
    of this courts jurisdiction to hear the Appeal. Fortress explicitly disclaims
    reliance on s. 193(e), the provision for leave to appeal, by asserting in the
    Notice that it does not require leave to appeal. Rule 31 of the
Bankruptcy
    and Insolvency General Rules
, C.R.C., c. 368, precludes reliance by an
    appellant on s. 193(e) of the
BIA
when that appellants Notice of
    Appeal does not include the relevant application for leave to appeal.
    Therefore, jurisdiction pursuant to s. 193(e) is unavailable in this case.

[20]

Fortress chose to rely exclusively on s. 193(c) despite the clear
    direction in recent case law in favour of narrow construal of the rights to
    appeal in ss. 193(a) to (d) of the
BIA
:
Re Enroute Imports Inc.
,
    2016 ONCA 247, 35 C.B.R. (6th) 1, at para. 5. As Brown J.A. explained in his
    chambers decision in
2403177 Ontario Inc. v. Bending Lake Iron Group Ltd.
,
    2016 ONCA 225, 396 D.L.R. (4th) 365, at paras. 50-53, these automatic rights of
    appeal create disharmony between the
Companies Creditors Arrangement Act
,
    R.S.C. 1985, c. C-36 (the 
CCAA
) and the
BIA
because s. 13
    of the
CCAA
imposes a leave requirement for all appeals from orders
    made under that statute. Therefore, the goal of regulatory harmony between
    these two major insolvency statutes favours narrow construal of the
BIA
s
    automatic rights of appeal. This jurisprudential context, along with Fortress
    strategic decision not to seek leave to appeal, informed my decision on s.
    193(c).

D.

Analysis

(1)

Subsection 193(c) of the
BIA

[21]

Subsection 193(c) of the
BIA
provides a right to appeal to the Court of Appeal if
    the property involved in the appeal exceeds in value ten thousand dollars. As
    Blair J.A., in chambers, noted in
Business Development Bank of
    Canada v. Pine Tree Resorts Inc.
, 2013 ONCA
    282, 115 O.R. (3d) 617, at para. 17, a narrow construal of property involved
    in the appeal is necessary because otherwise the low quantum of this automatic
    right to appeal would make s. 193(e) practically redundant.

[22]

In
Bending Lake
, at para. 53, Brown J.A., summarizing prior case law,
    identified three kinds of order from which s. 193(c) would not grant a right to
    appeal: (i) orders that are procedural in nature; (ii) orders that do not bring
    into play the value of the debtors property; and (iii) orders that do not
    result in a loss. I will consider only the third category because doing so will
    suffice to resolve the s. 193(c) analysis.

(2)

Does the Approval Order Result in a Loss?

[23]

As Brown J.A. explained at para. 61 of
Bending Lake
, for an
    order to result in a loss in the relevant sense, the order in question must
    contain some element of a final determination of the economic interests of a
    claimant in the debtor.

[24]

Fortress is correct that, in
Bending Lake
, Brown J.A. relied on
    the fact that there was no competing bid for the disputed property, as well as
    the fact that there was an absence of any valuation of the debtors estate in
    the record before the motions judge:
Bending Lake
, at paras. 63-66.  In
    contrast, in this case, there were competing bids with different purchase
    prices.

[25]

Nevertheless, I do not accept that the Approval Order resulted in a loss
    in the relevant sense.

[26]

Although some of the factors on which Brown J.A. relied do not apply in
    this case, these distinctions do not defeat the broader reasoning of
Bending
    Lake
. I quote from para. 64 of
Bending Lake
at length:

The determination of whether the property involved in the
    appeal exceeds ten thousand dollars is a fact-specific one. In order to bring
    itself within s. 193(c), the [appellant] must do more than make a bald
    allegation of improvident sale. This is real-time insolvency litigation in
    which delays in the proceeding can prejudice the amounts fetched by a receiver
    on the realization process.
The [appellant] must
    demonstrate some basis in the evidentiary record considered by the motion judge
    that the property involved in the appeal would exceed in value $10,000, in the
    sense that the granting of the Approval and Vesting Order resulted in a loss of
    more than $10,000 because the Receiver could have obtained a higher sales price
    for the Debtors property.
Bald assertion is not sufficient, otherwise a
    mere bald allegation of improvident sale in a notice of appeal could result in
    an automatic stay of a sale approval order under
BIA
s. 195 as the
    appellant pursues its appeal. [Emphasis added.]

[27]

I focus here on the requirement for some basis in the evidentiary
    record to support an assertion that the impugned sale would cause a loss to
    the Debtors estate, as opposed to a bald assertion to that effect. In its
    submissions before me, the primary basis for Fortress assertion that the
    impugned order might result in a loss is the fact that the nominal purchase
    price in Fortress offer was higher than the nominal purchase price in
    Pinnacles offer.

[28]

The passage that I have quoted from
Bending Lake
casts the
    issue as whether the Receiver could have obtained a higher sales price for the
    Debtors property. However, given the diversity among financing structures for
    commercial sale agreements, I do not think that I betray the spirit of Brown
    J.A.s reasons by reading his comments to contemplate a more substantive
    assessment of competing offers than a mere comparison of formal prices.

[29]

On this motion, Pinnacle presented compelling evidence to suggest that
    the practical value of its offer exceeded that of Fortress offer.

[30]

First, the deposit in Pinnacles offer was much higher than the deposit
    in Fortress offer. This factor gains salience from the correspondence that
    demonstrates that, during the sale process, Fortress resisted the Receivers
    demands to increase the deposit in its offer substantially.

[31]

Second, the Pinnacle offer was entirely in cash, whereas only
    approximately 40% of the Fortress offer was in cash. Fortress planned to fund
    the rest of its offer through credit. This factor gains salience from the
    structure of the Debtors pre-existing secured debt. Fortress explains in its
    submissions that Fortress (more specifically, Sorrenti), along with a related
    company, is trustee for the 542 investors who collectively hold the beneficial
    interest in the Debtors third encumbrance, a syndicated mortgage. Fortress
    further submits that its ordinary business is in real estate consulting and
    arranging financing for real estate development projects. Fortress submissions
    before me did not assuage the concern that the effect of the Fortress offer, if
    accepted, would have been to allow Fortress to preserve its business interest
    in the Property as a development project at the risk of providing less recovery
    for other creditors, including the investors for whom Sorrenti acts as trustee.
    Indeed, Fortress explained in its submissions that it entered into a Joint
    Venture Agreement with another firm in the hope, based on anticipated profits,
    of providing full repayment of the second and third mortgages on the Property.

[32]

Third, Fortress conceded in its submissions that its offer would not
    have involved assuming the Unit Purchasers contracts. Instead, it promised a
    friends and family VIP event for the Unit Purchasers and opportunities for
    first access and special pricing. This concession undermines Fortress
    assertion that the Stalking Horse Bid would have succeeded had it not been for
Pinnacles
refusal to assume the Unit Purchasers
    contracts.

[33]

Fourth, the Receivers Report states that the highest-ranking secured
    creditor, DSFI, supported Pinnacles bid over Fortress, despite the fact that
    both offers purported to provide full recovery to DSFI.

[34]

Fifth, Fortress does not dispute the Receivers assertions that the
    stalking horse process attracted no bidders other than Fortress and Pinnacle
    and that the Receivers subsequent efforts procured only one other offeror, who
    offered a price that was unacceptably low and that caused concern that the
    markets valuation of the Property might be much lower than Pinnacles.

[35]

Although Fortress argument for the application of s. 193(c) is slightly
    more plausible than that of the appellant in
Bending Lake
, Fortress
    has not demonstrated a sufficient basis in the record that was before the motions
    judge for me to conclude that there is an arguable case that the Receiver could
    have obtained a better deal than Pinnacles.

[36]

Therefore, s. 193(c) did not grant a right of appeal to Fortress because
    the impugned order did not result in a loss or gain in the relevant sense.

(3)

Leave to Appeal (s. 193(e))

[37]

As I noted earlier in these reasons, Fortress did not meet the
    procedural requirements for consideration of an application for leave to
    appeal. Therefore, what follows is
obiter dicta
. However, since both
    parties made alternative submissions on s. 193(e), I will address the issue
    briefly.

[38]

Although leave to appeal pursuant to s. 193(e) is discretionary and
    must be exercised in a flexible and contextual way, the prevailing
    considerations are whether the proposed appeal :

(i) raises an issue of general importance to the practice in
    insolvency matters or the administration of justice as a whole;

(ii) Is it
prima facie
meritorious; and

(iii) Would it unduly hinder the progress of the insolvency
    proceedings:
Enroute
, at para. 7.

[39]

I will address the second criterion, i.e., the
prima facie
merit,
    first. As I mentioned above, the Notice of Appeal and Fortress submissions on
    this motion suggested that the primary ground for Fortress appeal was that the
    motions judge applied the law incorrectly when he approved Pinnacles bid
    because it was the best offer to purchase the Property from the point of view
    of the majority of stakeholders.

[40]

The allegation was that the motions judge misapplied the criteria from
Soundair
for judicial review of a receivers sale of property.
Soundair
, at p.
    6, identifies four duties of a judge reviewing a receivers sale. Those duties
    are to:

(1) consider whether the receiver has made sufficient effort
    to get the best price and has not acted improvidently;

(2) 
consider the interests of all
    parties
;

(3) consider the efficacy and integrity of the process by
    which offers are obtained; and

(4) consider whether there has been unfairness in the working
    out of the process. [Emphasis added.]

Furthermore, at p. 7,
Soundair
prescribes a
    deferential standard of review in this court.

[41]

Given this framework and the facts of the sale process that I summarized
    above, the argument that the motions judge misinterpreted or misapplied the
Soundair
test is implausible. The motions judges comment that the Pinnacle offer
    was best from the point of view of the majority of stakeholders does not
    indicate a failure to have
considered
Fortress
    interests. Therefore, the appeal was
prima facie
meritless.

[42]

I will address the other factors more briefly. This appeal did not raise
    any issue of general importance to insolvency practice or the broader
    administration of justice; it was a fact-specific dispute about the propriety
    of a receivers sale. Additionally, given the difficulty that the Receiver had faced
    in finding prospective purchasers other than Pinnacle and Fortress, a hearing
    of the appeal probably would have unduly hindered the Debtors insolvency
    proceedings.

E.

Disposition

[43]

These are my reasons for my granting of the Receivers motion on June
    29, 2017. The Receiver did not seek an order for costs of the motion.

Released: MT JUL 20 2017

M. Tulloch J.A.


