Fairmont Resort Properties Ltd. (Re), 2012 ABQB 39

Court of Queen ’ s Bench of Alberta Citation: Fairmont Resort Properties Ltd. (Re), 2012 ABQB 39 Date: 20120117 Docket: 0901 04199 Registry: Calgary In the matter of the Companies ’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended And in the matter of Fairmont Resort Properties Ltd., Lake Okanagan Resort Vacation

(2001) Ltd., Lake Okanagan Resort

(2001) Ltd. and LL Developments Ltd. _______________________________________________________ Reasons for Decision of the Honourable Madam Justice B.E. Romaine _______________________________________________________ Introduction [ 1 ] On April 27, 2010, the Northwynd Limited Partnership by its general partner Fairwynd Resort Properties Ltd. applied for an order approving the acceptance by a group of CCAA debtor companies of an offer to acquire all of the secured assets of the group.

This was in effect the final step in the restructuring and contemplated the sale of virtually all the CCAA debtors’ assets without a plan or formal vote by creditors and without a formal sales process. The order was granted. These supplemental written reasons have been prepared to set out the history of the restructuring and to explain why the application was successful. History of the CCAA Proceedings [ 2 ] On March 20, 2009, this Court granted an initial order under the CCAA with respect to Fairmont Resort Properties Ltd., Lake Okanagan Resort Vacation

(2001) Ltd., Lake Okanagan Resort

(2001) Ltd. and LL Developments Ltd. (the “Fairmont Group”). The Fairmont Group was in the business of acquiring, developing and operating resort-based real estate for sale on an interval or time- share basis. The group held properties in Alberta, British Columbia, Hawaii, Belize and Mexico, among other locations. [ 3 ] The Fairmont Group was also the parent company of certain subsidiaries that were engaged in the development and operation of resort properties that were not under CCAA protection but were nevertheless dependent on administration and some

financial support from the Fairmont Group to operate effectively. That support continued during the CCAA proceedings under the supervision of the Monitor Ernst & Young Inc., with appropriate security for advances made. [ 4 ] The Fairmont Group’s operations were able to continue under CCAA protection from the date of the initial order until April, 2010 with the retention of core employees, the continuation of services from suppliers and the support of a revolving DIP loan.

A Chief Restructuring Officer with experience in the resort business was appointed and managed the Fairmont Group with the aid of two senior management individuals. [ 5 ] Although it suffered from continued unfavourable economic conditions in the resort industry that affected normal course sales of time-shares and from the requirement of financial support to its non-CCAA subsidiaries, the Fairmont Group reduced costs and developed and implemented what was called a “Reversionary Program”.

Under this program, the group marketed its residual fee simple interests under time-share leases to time-share owners and engaged in a world-wide points exchange program. Thus, illiquid assets such as unsold time-share inventories and the retained fee simple interests in land subject to time-share leases were converted to cash or accounts receivable. [ 6 ] FRPL Finance Ltd. (“FRPL”) and a related corporation were major secured creditors of the Fairmont Group, and supported the CCAA proceedings. FRPL had issued bonds to many individual investors in order to provide capital to the group.

The majority of these investors, approximately 850 in total, had purchased bonds in amounts ranging from $10,000 to $60,000. The proceeds of the sale of the bonds were loaned to Fairmont Group in the years 2005 through 2007. The Fairmont Group had failed to make payments on the loans to FRPL and, as a consequence, FRPL was in default of payment obligations under the bonds. At the relevant time, FRPL owed bondholders approximately $41.5 million. [ 7 ] On April 15, 2010, in proceedings linked to the CCAA proceedings, FRPL applied for a final order in respect of a plan of arrangement pursuant to

section 193 of the Business Corporations Act , R.S.A. 2000, c. B-9. [ 8 ] Rather than opting for a liquidation of the Fairmont Group’s assets, FRPL proposed to its bondholders a reorganization plan involving the group’s Canadian and certain of its international business and assets.

The plan contemplated the development and exploitation of these assets over a period of six years within a new real estate investment trust, Northwynd Properties Real Estate Investment Trust (“Northwynd REIT”), which would be wholly owned by bondholders of FRPL. [ 9 ] The meeting materials provided to bondholders seeking approval of the plan of arrangement advised them that the options available for recovery of FRPL’s loans to the Fairmont Group were either the proposed reorganization plan developed by Fairmont management in conjunction with the Monitor or liquidation of the secured assets. [ 10 ] Under the proposed plan, bondholders would exchange their bonds for trust units in the newly established Northwynd REIT.

Northwynd REIT would acquire the Fairmont Group loans and security interest through a wholly-owned limited partnership, Northwynd Limited Partnership (“Northwynd”). The limited partnership would then take steps under the security to acquire ownership and control of the Fairmont Group assets. [ 11 ] The Northwynd REIT proposed to distribute at least 90% of the net income generated by these assets to holders of trust units, as well as proposing a return of capital distributions as cash became available.

Bondholders were advised that, if the Fairmont Group’s projections were correct, they potentially could recover cash distributions over the following five years equal to or greater than their original investment. [ 12 ] Bondholders were allowed by the meeting materials the option of authorizing the trustee that administered the bonds to instead take action under the FRPL security to liquidate the Fairmont Group assets.

They were advised that if the holders of 25% of the principal amount of each series of bonds signed such a direction, the trustee would appoint a receiver of the assets upon completion of the CCAA proceedings and liquidate the Fairmont Group assets. [ 13 ] The bondholders also were advised that the Monitor had prepared recovery analyses both under an orderly liquidation scenario and a forced liquidation scenario that showed recoveries pursuant to a liquidation ranging from 37% to 90% of total debt for the Series B bondholders and from 50% to 69% for the Series 1 and 2 bondholders.

In the meeting materials, FRPL offered the opinion that certain internal and external factors had the potential to cause a material decline in these estimated recoveries, and recommended the

reorganization plan as the better option. [14] An overwhelming majority of voting bondholders voted in favour of the proposed arrangement. Roughly 60 to 63% of totalbondholders were represented at the meeting in person or by proxy, a relatively high percentage. One Notice of Intention to Appear wasserved on counsel but withdrawn before the court application for final approval of the arrangement.

This investor, who heldapproximately $163,000 in bonds, later sent a letter to the Court directly, but by then the arrangement had been approved. [15] I found that the statutory procedures had been met, the application had been put forward in good faith, the arrangement had avalid business purpose and, on the basis of the strong bondholder support and the lack of opposition, the plan was fair and reasonable:Re Trizec Corp., 21 Alta. L.R. 435. [16] On April 19, 2010, the secured debt in the amount of approximately $52 million was assigned to Northwynd.

Northwynd thenapplied for an order under the auspices of the CCAA proceedings approving the acceptance by the Fairmont Group of its offer topurchase all of the assets of the Fairmont Group in consideration for the discharge of the DIP financing and the crediting of $43.8 millionagainst the secured debt owed to FRPL. Analysis [17] There are many examples of liquidating CCAA proceedings in situations similar to the one proposed in this restructuring. InAnvil Range Mining Corp. (2001), (ON SC), 25 C.B.R. (4th) 1, Farley, J. approved a plan that involved the sale ofthe debtor’s assets.

The applicant in that case, as in this one, framed the application in the alternative; for an order approving the saleunder the CCAA or through a receivership on substantially the same terms. Farley, J. noted that the CCAA may be used to effect a saleor liquidation of a company in appropriate circumstances, most particularly where to do so would “maximize the value of thestakeholders’ pie”: para. 11.

He also noted that, while the alternative of selling the assets through a receivership would be commerciallyequivalent, approval pursuant to the CCAA proceedings would be more efficient: para. 20. [18] Northwynd recognized in its application that the sale could be carried out in one of two ways; either pursuant to the existingCCAA proceedings or through the termination of such proceedings and the appointment of a receiver.

Northwynd submitted thatapproving the sale pursuant to the CCAA proceedings would be the most time efficient and cost effective method of proceeding. [19] The Monitor in its Ninth Report submitted at the hearing discussed two possible restructuring alternatives to the approval ofthe offer. One was to conduct a more formal sales process under the auspices of the CCAA proceedings or under a receivership and theother was to accept the offer through a new receivership, rather than the ongoing CCAA proceedings.

The length of time it would take toconduct a formal sales process (nine to twelve months, given the nature of the Fairmont Group’s assets), the ongoing requirement of DIPfinancing to continue the group as a going concern and the difficulty in retaining key employees through such a process were all cited asnegative factors with respect to a formal sales process. Also noted was the potential of regulatory restrictions with respect to the sale oftimeshare and reversionary interests if a receiver was appointed.

I accepted the opinion of the Monitor, supported by its liquidationanalysis, that the potential of achieving a sale price for the secured assets that was greater than the offer was very low, and that the costsof a sales process would be significant. In

summary, neither of these alternatives would improve the return to creditors, and requiring thedebtor companies to undertake either of them would be a triumph of form over substance. [20] A sale of substantially all of the assets of a debtor company is permitted in a CCAA proceeding, both pursuant to s. 36 of theCCAA if certain statutory criteria are met and in accordance with previous authority if such a sale is consistent with the purpose andpolicy of the CCAA and in the best interests of creditors generally: Re Lehndorff General Partner Ltd. (1993), 17 C.B.R. (3d) 24 at para.7; Re Olympia & York Developments Ltd. (1995), (ON SC), 34 C.B.R. (3d) 93 at para. 18. [21] With respect to such previous case authority, in Re 1078385 Ontario Ltd. (2004), (ON CA), 16 C.B.R.(5th) 152, at paras. 11 and 41, the Ontario Court of Appeal refused leave to appeal a sanction order that involved a liquidating plan,noting that the plan resulted in enhanced results for creditors and that, although the plan did not provide for the debtor companies tocontinue as going concerns, the enterprise would continue.

[ 22 ] In Pope & Talbot (oral reasons for judgment, May 20, 2008), Brenner, C.J. of the Supreme Court of British Columbia held that a CCAA liquidation is consistent with the purposes and policies of the CCAA where the assets are sold on an operating basis to the benefit of a wider constituency, commenting as follows: The decision by courts to extend the use of the CCAA to a liquidation is based on a recognition of the wider interests at stake in such a proceeding.

The purpose of a liquidating CCAA where the assets are to be sold on an operating basis, is to fairly have regard for the interests of not only the creditors and the stakeholders of the petitioner, but also the interests of employees, suppliers and others who will be affected by a complete shutdown. So provided that the objective is to dispose of assets on an operating basis, then even though it is a liquidation, the exercise is not designed to effect a recovery for solely the secured lenders as submitted by Canfor.

Clearly a continuation of operation will benefit a wider constituency. [ 23 ] Although these CCAA proceedings were commenced prior to the enactment of amendments to the CCAA in September, 2009, the amendments were in effect at the time this application was heard.

Section 36 permits the sale of a corporation’s assets outside the ordinary course of business without shareholder approval if authorized by the Court and upon notice to the secured creditors likely to be affected. [ 24 ] Under

Section 36, the Court is to consider certain non-exclusive factors. I had the benefit of the Monitor’s comments on these factors as follows: (

a) With respect to whether the process leading to the proposed sale was reasonable in the circumstances, the Monitor noted that it began in late summer of 2009 and that it included a review of the restructuring options by the Fairmont Group and the Monitor, a liquidation analysis by the Monitor, the development of a five year business plan, the input of the major secured stakeholders and an assessment of the time, costs and effort that would be necessary to initiate and complete asset sales. The Monitor noted that no credible unsolicited indications of interest were received during the course of the proceedings.

The Monitor advised that it considered the process to be reasonable in the circumstances, and I agreed; (

b) With respect to the Monitor’s approval, the Monitor, had extensive oversight and involvement in the restructuring and approved all aspects of the process; (

c) The Monitor in its Ninth Report offered its opinion that the offer would be more beneficial to the creditors than a sale or disposition under a bankruptcy; (

d) The major secured creditors and the largest unsecured creditor were consulted by the Monitor, and there was no opposition to the application; (

e) With respect to the effects of the sale on the creditors and other interested parties, it was clear that creditors subordinate to the secured debt of approximately $65 million would receive no recovery under the offer, but the claims of the other two major secured creditors would not be prejudiced by the offer.

It was also noteworthy that the roughly 5000 registered time-share owners in the Fairmont Group would not be affected by the offer and would continue to have the rights granted to them under their original timeshare agreements (other than with respect to certain alleged inducements or undocumented additional rights that were repudiated during the course of CCAA proceedings). Many of the full time employees would be retained by Northwynd; (

f) Finally, with respect to whether the consideration received for the assets was reasonable and fair, the Monitor offered the opinion that it was, taking into account their market value. [ 25 ] I agreed with the Monitor’s observations, and noted that the fact that there was no opposition to the motion was indicative of the fairness of the consideration compared to market value. I also considered the following benefits that would result from the implementation of the offer:

(

a) The major part of the business and operations of the Fairmont Group would continue as a going concern and the offer as a step inthe plan of arrangement would provide the bondholders with an opportunity to recover the funds they lost as result of Fairmont’sinsolvency; (

b) The management and administration of the Fairmont Group and the remaining Fairmont subsidiaries that were not part of theCCAA proceedings would continue without significant interruption; (

c) Timeshare operations and the management and administration of the Fairmont, Lake Okanagan, Belize and Mexico resortsoperated by Fairmont would also continue without interruption; and (

d) Northwynd would take the responsibility for the repair of a key facility which required foundation and structural repairs expectedto cost more than 2.5 million in excess of funds currently held in a trust account on behalf of timeshare owners. The repair was essentialfor the continued use of that facility. [26] Nothing in

Section 36 requires that a plan be filed as a condition of court approval or that there be a continuing entity afterliquidation, although in this case, the business of the CCAA debtors was to be continued through a new enterprise group. Thus

section 36by implication permits the sale of substantially all of the debtor’s assets even if a plan is not envisaged. [27] Even prior to the enactment of

section 36, however, CCAA courts have permitted liquidating CCAA in the absence of a plan,exercising inherent jurisdiction based on the determination that approval of such a restructuring served the purpose and policies of theCCAA in certain circumstances: Re Canadian Red Cross Society (1998), (ON SC), 5 C.B.R. (4th) 299(Ont.Gen.Div.). [28] I considered the obiter comment of Tysoe, J.A. in Cliffs Over Maple Bay Investments Ltd. v.

Fisgard Capital Corp. (2008), 46C.B.R. (5th) that it is questionable whether a court should grant a stay under the CCAA to permit a liquidating CCAA without requiringthe debtor company to present a plan of arrangement to its creditors.

Cliffs Over Maple Bay, however, is distinguishable in manyrespects, particularly given that the CCAA debtor had ceased to carry on business and the stay was opposed by the major creditors. [29] In this case, there would be a surviving business enterprise, the sale was supported by the major secured creditor withoverwhelming support from its affected creditors as expressed through a vote on the plan of arrangement and the sale and would giverise to the many benefits to creditors and stakeholders referred to previously in this decision. This application brought to mind thecomment of Blair, J.A. in ATB Financial v.

Metcalfe & Mansfield Alternative Investments II Corp, (2008) 2008 ONCA 587 , 45C.B.R. (5th) 163 (C.A.) at para. 61: The CCAA is a sketch, an outline, a supporting framework for the resolution of corporate insolvencies in the public interest.

Parliamentwisely avoided attempting to anticipate the myriad of business deals that could evolve from the fertile and creative minds of negotiatorsrestructuring their financial affairs. [30] While a liquidating CCAA without an accompanying plan of arrangement may well give rise to concern and the potential formisuse of the CCAA process in some situations, it was in this case a reasonable, fair and efficient resolution to the restructuring processand consistent with the purpose of the CCAA.

Requiring the Fairmont Group to take the offer to its creditors would have beenunnecessary, given the involvement and support of the major secured creditor owed amounts far in excess of the value of the securedassets. Conclusion [31] It made practical and commercial sense to allow the sale process to take place under the existing CCAA proceedings. The sale

was consistent with the purpose of the CCAA in that it allowed first place secured creditor whose outstanding debt significantly exceeded the value of the secured assets and the debtors’ various other stakeholders to maximize recovery. The commercial reality was that under a bankruptcy or a receivership, Northwynd would have collected all proceeds from a sale of assets. A bankruptcy or receivership would have been less efficient, both in respect of time and money. [ 32 ] I approved the acceptance of the offer, terminated the claims procedure process and approved a stay to complete the sale.

Dated at the City of Calgary, Alberta this 17th day of January, 2012. B.E. Romaine J.C.Q.B.A. Appearances: John L. Ircandia, Q.C., Patrick T. McCarthy, Q.C. and Robin Gurofsky of Borden Ladner Gervais LLP for Northwynd Limited Partnership Howard A. Gorman of Macleod Dixon LLP for Fairmont Resort Properties Ltd., Lake Okanagan Resort Vacation

(2001) Ltd., Lake Okanagan Resort

(2001) Ltd. and LL Developments Ltd. Kelly J. Bourassa of Blake, Cassels & Graydon LLP for the Monitor Ernst & Young Inc. Larry B. Robinson, Q.C. of Davis LLP for Resort Funding LLC David LeGeyt of Fraser Milner Casgrain LLP for FRPL Finance Ltd.