Mamdani (Re), 2021 ABQB 632

Court of Queen’s Bench of Alberta Citation: Mamdani (Re), 2021 ABQB 0632 Date: 20210810 Docket: B201 710829 Registry: Calgary In the Matter of the Bankruptcy and Insolvency Act , RSC 1985, c B-3 , as amended - and – And In the Matter of the Notice of Intention to Make a Proposal of Riaz Mamdani - and – And In the Matter of the Proposal of Riaz Mamdani Between: A. Farber & Partners, Proposal Trustee Applicant - and - TELUS Core Investment Corporation and Related Entities, Creditors Cross-Applicant _______________________________________________________ Reasons for Decision of the

Honourable Mr. Justice James T. Neilson _______________________________________________________ [ 1 ] On July 28, 2021 I received written and oral submissions in relation to the Application for Court Approval of the Proposal of Riaz Mamdani, pursuant to s. 58 and 59 of the Bankruptcy and Insolvency Act .

On the same date, I received written and oral submissions in relation to an application by TELUS Core Investment Corporation and related entities, referred to collectively as TPMT, for an adjournment of the sanction hearing pending the result of an application by TPMT pursuant to s. 135(5) of the BIA , disputing the valuation of an office tower in Edmonton (“CN Tower”) that the trustee relied upon in calculating the value of the claim by another creditor, Trez Group (“Trez”). [ 2 ] Section 135(5) of the BIA provides as follows: “The court may expunge or reduce a proof of claim or a proof of security on the application of a creditor or the Debtor, if the trustee declines to interfere in the matter.” [ 3 ] I reserved my decision in respect of the adjournment application and sanction application and these are my reasons for decision.

The Mamdani Proposal [ 4 ] The Proposal Trustee is A. Farber & Partners Limited.

On February 9, 2021 Riaz Mamdani (“the Debtor”) filed a Notice of Intention to make a proposal pursuant to sec 50.4(1) of the BIA and Farber was appointed as Proposal Trustee. [ 5 ] The Court extended the stay period until April 26, 2021, when the Debtor filed its proposal with the Proposal Trustee. [ 6 ] Under the Proposal, upon sanction by the Court, the sum of $600,000.00 would be paid pro rata to the creditors with proven claims, and an additional $4.4 million over the next 5 years, for a total payment of $5 million. [ 7 ] The claims against the Debtor arise from mortgage loans made by the Strategic Group, the umbrella of several related entities, on commercial properties that had been personally guaranteed by the Debtor.

The amounts ultimately payable by the debtors pursuant to these guarantees would be contingent on the amounts recovered by the mortgagees in realizing on their security. Some security has been realized, some are in the process of Court proceedings, and some have not been proceeded upon at this time. Accordingly, in order to properly value the contingent claims faced by the Debtor, the Trustee implemented a Net Valuation Methodology.

The Trustee undertook an analysis of the value of the properties involved at the time of bankruptcy, the actual or potential realization value, leaving the net amount of contingent claims facing the Debtor pursuant to his personal guarantees. [ 8 ] At the meeting of creditors on May 7, 2021, twenty votes were cast by creditors, with 12 votes in favour of the Proposal representing 60 percent of debtor’s total creditors in number and 69.42 percent of the debtor’s creditors by dollar value. [ 9 ] The Trustee disallowed a claim by TPMT in the amount of $12,780,451 that had not conformed with the Net Valuation Methodology.

This disallowance was appealed and proceeded to court on June 25 and 26, 2021, when Dunlop J. confirmed the disallowance of $9,400,000 of the TPMT claim and directed that the remaining disputed amount required a fair market valuation determination by the court. A court date has not yet been set for that proceeding. [ 10 ] In addition, although not directly related to the issues before the court in these applications, an application was made before Shelley J. on July 15, 2021 by assignees of some creditors of the Debtor which had voted against the Proposal at the first meeting of creditors.

Shelley J. dismissed the application by these assignees to have the court declare that the votes by the assignors be changed in favor of the Proposal: Mamdani (Re), 2021 ABQB 586 . The Adjournment App l ication [ 11 ] At the meeting of creditors and following, TPMT raised a number of concerns with the Trustee concerning the valuation of several claims by creditors, and in particular, Trez. [ 12 ] However, the basis for the application for adjournment by TPMT relates to the valuation of the claim by Trez in relation to the Debtor’s guarantee of a mortgage of an office building in Edmonton, the CN Tower.

TPMT asserts that the valuation of the claim by Trez against the Debtor in relation to the CN Tower mortgage guarantee is substantially overvalued, prompting its application pursuant to s. 135(5) of the BIA . [ 13 ] TPMT asserts that if it is successful, or partially successful in reducing the claim by Trez against the Debtor in relation to the CN Tower, then it together with the other creditors that had voted against the Proposal, would have sufficient dollar value votes to defeat the Proposal.

TPMT therefore asserts that its s. 135(5) application ought to be heard in first instance before the Court rules on the Proposal Trustee’s sanction application. [ 14 ] In support of its application for the adjournment, TPMT submitted affidavits of David Lawson, Vice President, Investment Management at TELUS Corporation sworn on June 9 and July 20, 2021, and the affidavit of Chris Marlyn, Senior Managing Director, Valuation and Advisory, with CBRE Limited sworn on July 20, 2021.

[ 15 ] The application for the adjournment by TPMT rests on three submissions: A. a strong prima facie case that the Trez claim is overvalued; B. TPMT has been diligent in requesting relevant documents from the Trustee and commencing its application to challenge the Trez valuation pursuant to sec 135(5) of the BIA ; C. the prejudice to TPMT in disallowing the application for an adjournment would exceed any prejudice to the creditors that support the sanction application for the proposal, or to the Debtor.

Strong prima facie case [ 16 ] The Trez claim in relation to the CN Tower indebtedness was supported by an appraisal prepared by Colliers concluding that the CN Tower has a fair market value of $36 million employing a 10 percent capitalization rate which, if realized, would leave Trez with a claim against the Debtor pursuant to his personal guarantee in the amount of $30.6 million. [ 17 ] However, TPMT has led evidence of several valuations that differ markedly from the Colliers appraisal, as follows: A. In an April 2020 appraisal, CBRE Limted determined CN Tower had a value of $67.2 million; B.

On September 23, 2020, Trez’s counsel swore an affidavit of value stating that CN Tower had a value of approximately $64.1 million; C. Trez in consolidated financial statements, audited by KPMG LLP, for the year ending December 31, 2020 valued CN Tower at $64. 3 million based on valuation from an independent external appraiser, which used a capitalization rate of 6.5 percent; D. In a securities offering memorandum dated April 30, 2021, the accuracy of which was sworn by its officers, Trez represented to its investors that at $64.3 million valuation of CN Tower was accurate; E.

In an expert appraisal report dated July 9, 2021, CBRE Limited determined CN Tower’s value was $64.1 million. [ 18 ] Accordingly, TPMT has placed before the court evidence challenging the valuation of the Colliers appraisal that had been accepted by the trustee. In its application under section 135(5) TPMT makes out a prima facie case to challenge the value of the Trez claim against the Debtor. If accepted by the court, then it would substantially reduce the value of the Trez claim against the Debtor under the Trustee’s valuation methodology which, in turn, could alter the vote in favour or against the proposal.

In response to TPMT’s s. 135(5) application, Trez would have the opportunity to challenge the valuation evidence presented by TPMT and present evidence and submissions supporting its claim against the Debtor based on the Colliers valuation. The merits of that application would then be assessed by the court hearing that application. Due diligence [ 19 ] On May 20, 2021, the Trustee provided creditors with the minutes from the first meeting of creditors held on May 7, 2021. On that day, TPMT wrote to the Trustee expressing concern over the process by which Trez’s claims were accepted, and requesting documentation.

This request was repeated on June 1, 2021. [ 20 ] On June 17, 2021, TPMT wrote to the Trustee to request that the Trustee disallow portions of Trez’s proofs of claim including the valuation of the CN Tower claim. This letter also challenged the valuation of six other claims. TPMT requested a response by June 23, 2021, then agreed to extend the time of the response by the Trustee to June 30, 2021. [ 21 ] The Trustee did not provide a substantive response to the challenge letter. From the Trustee’s perspective, this was a dispute between two creditors.

The Trustee advised interested parties that it intended to seek court approval of the proposal in July 2021. [ 22 ] On July 5, 2021, TPMT informed the Trustee of the potential challenge to the CN Tower valuation which could influence the result of the vote. However, the Trustee scheduled its application to sanction the proposal for July 28, 2021.

On July 21, 2021 TPMT filed and served its application to disallow 28.1 million dollars from Trez’s CN Tower claim pursuant to sec 135(5) of the BIA . [ 23 ] Unlike s. 135(4) of the BIA , that requires a person to whom a notice of disallowance was provided under ss. (3) must appeal the Trustee’s decision within 30 days or such other period as the court may allow, the BIA does not set out a specific appeal period in relation to s. 135(5). It is submitted, however, that an application must be brought within a reasonable period of time.

In reviewing the chronology, I find that TPMT has been diligent in pursuing its remedy with respect to the CN Tower valuation and that its application has been brought in a reasonable period of time. Prejudice [ 24 ] TPMT asserts that, if the application for an adjournment is not granted and the court proceeds to rule on sanctioning the proposal, then its position will be prejudiced. In particular, if it proceeds with the section 135(5) application and is successful, in full or in part, this would impact the vote on the proposal.

It is a matter of fairness that it be permitted to pursue its application, given the strong prima facie case presented and evidence that it has been diligent in pursuing that remedy. [ 25 ] The Trustee takes the position that TPMT would not be prejudiced, in that it is free to pursue its application and, if successful, this would go to the distribution of funds under the proposal if accepted. It would not, however, change the vote if TPMT were successful in its application. The creditors in support of the proposal point out that they would be much better off if the proposal was

accepted and funds distributed as proposed, namely a total of $5 million dollars over 5 years. This is compared to the Trustee’s estimate that, in a bankruptcy, assets totalling only $580,250.00 may be realized for the benefit of creditors. The sum of $600,000.00 would be distributed upon approval of the proposal and the next installment would be due and payable on December 31, 2021. [ 26 ] The Debtor urges the court to refuse the adjournment and proceed with a determination of the sanction application, asserting the rehabilitative purposes of the proposal provisions of the BIA .

If approved, he would be allowed to carry on business and avoid the social and economic costs of liquidating his assets. An adjournment would result, at least, in a delay in this regard. [ 27 ] The Trustee, Trez and the other creditors which voted in favour, as well as the Debtor, submit that, if an adjournment is granted, then TPMT would embark on costly and time consuming litigation, contrary to the principles that apply to proposals under the BIA , which ought to be

summary in nature. [ 28 ] In response, TPMT submits that, if the adjournment is granted and it pursues its s. 135(5) application, then the delay to the creditor’s recovery could be measured in the time value of money, and may also be addressed with respect to costs, if the subsequent Court ruling so provides. TPMT asserts that it is prepared to pursue its application on an expedited basis in order to minimize delay. [ 29 ] Counsel cited the case of Northstone Power Corp v RJK Power Systems Ltd , 2002 ABQB 405 , affd 2002 ABCA 201 .

In that case, RJK had filed a large claim against the Debtor that had been disallowed pursuant to s. 135(3) of the BIA before the first meeting of creditors. RJK did not apply to challenge prior to the meeting and its vote was not valid as the court subsequently found. The court exercised its discretion to refuse RJK’s application and sanctioned the proposal in the face of RJK’s large disputed claim.

RJK could proceed with its appeal from the disallowance, but if successful, this would go to distribution under the proposal. [ 30 ] In the case at bar, the issue is not the validity of Trez’s vote, per se, but the valuation of its claim. In the Northstone case, RJK did not seek an adjournment of the sanction application, but rather relied on its outstanding s. 135(4) application to prevent the proposal being approved, which the court refused to do.

Also, all parties agreed in Northstone that RJK’s application could not be resolved promptly “as it would involve literally thousands of documents and extensive discovery of documents and of witnesses before the matter” could be decided: Northstone , 2002 ABQB 405 at para. 9 . [ 31 ] In this case, the s. 135(5) application by TPMT raises a more discrete issue, namely the proper valuation of the CN Tower. This will involve some delay and expense before it can be determined by the court. However, the process can be subject to strict guidelines to be set under Case Management.

Conclusion on the Application for an Adjournment [ 32 ] In conclusion, I find that, on the evidence before the court, TPMT has made out a prima facie case with respect to its application under section 135(5) of the BIA , that it has acted with diligence in seeking out and obtaining relevant documentation with respect to that application, and that in the interests of fairness, the prejudice to TPMT in denying the requested adjournment would outweigh the prejudice urged by the creditors in support of the proposal, and the Debtor. [ 33 ] Accordingly, I grant the adjournment as requested by TPMT. [ 34 ] As the adjournment application is granted, the application for sanction of the proposal must be adjourned to a later date, at which time the court can hear that application de novo . [ 35 ] Given the need to have the section 135(5) application determined as expeditiously as possible, I direct that the parties contact Associate Chief Justice K.

G. Nielsen, or in his absence, Chief Justice M. Moreau, requesting the appointment of a case manager on an expedited basis to set a date for the hearing of the TPMT application, and the

schedule for the required steps leading up to the hearing of that application. Costs of this application can be determined by the court hearing the s. 135(5) application. Heard on the 28 th day of July, 2021. Dated at the City of Edmonton, Alberta this 10 th day of August, 2021. James T. Neilson J.C.Q.B.A. Appearances: Karen Fellowes, Q.C.

Stikeman Elliott LLP for the Proposal Trustee Colin Feasby, Q.C. Randal Van de Mosselaer Mark Sheeley Olser, Hoskin & Harcourt LLP for TPMT Kenneth T. Lenz, Q.C. Bennett Jones for Trez Walker W. MacLeod for Riaz Mamdani Kent Rowan Ogilvie LLP for Creditors Francis N.J. Taman Bishop & McKenzie for Creditors