JOSEFINA PRATS PAREDES, JOSE ANTONIO PAREDES, MARTHA O’CONNOR, ANNE HARRISON, v. CANADIAN, 2016 NLCA 31

IN THE SUPREME COURT OF NEWFOUNDLAND AND LABRADOR COURT OF APPEAL Citation : Project Management and Development Limited (Re) , 2016 NLCA 31 Date : 20160622 Docket : 201601H0050 BETWEEN: JOSEFINA PRATS PAREDES, JOSE ANTONIO PAREDES, MARTHA O’CONNOR, ANNE HARRISON, AND CANADIAN WESTERN TRUST COMPANY, IN TRUST FOR RRSP PLAN NOS. 10085602, 10084347 AND 10084588 APPLICANTS (RESPONDENTS) AND: PROJECT MANAGEMENT AND DEVELOPMENT LIMITED RESPONDENT (APPELLANT) Coram: Rowe J.A.

Court Appealed From: Supreme Court of Newfoundland and Labrador Trial Division (G) 201601G0442 (2016 NLTD(G) 79) Application Heard: June 21, 2016 Decision Rendered: June 22, 2016 (Orally) Written Reasons filed: June 23, 2016 Counsel for the Appellant: Daniel W. Bennett Counsel for the Respondent: William T. Cahill Rowe J.A.: INTRODUCTION

[ 1 ] This is an application by certain creditors of Project Management and Development Limited (“PMDL”) pursuant to s.195 of the Bankruptcy and Insolvency Act , RSC 1985, B-3 (“ BIA ”) to cancel or vary the stay of proceedings that arose by virtue of an appeal by PMDL against an order pursuant to s. 43(1) of the BIA t hat it is bankrupt. The creditors, Josefina Prats Paredes et al, hold mortgages on vacant land owned by PMDL on Temperance Street in St. John’s. PMDL had intended to build condominiums on the mortgaged land.

FACTS [ 2 ] On April 29, 2016, a judge of the Trial Division rendered a decision (2016 NLTD(G) 79) adjudging PMDL to be bankrupt. Janes & Noseworthy Limited was appointed as trustee. The judge summarized the facts and the law as follows: [1] The Applicants [the creditors] collectively loaned the Respondent [PMDL] $1,550,000 under certain terms and conditions and as security hold pari passu mortgages over a 1,234.6 sq. m. parcel of land owned by the Respondent on Temperance Street, St.

John’s, Newfoundland and Labrador (the “Subject Property”). [2] The Applicants seek a bankruptcy order and allege the Respondent has committed

an act of bankruptcy by failing to meet its liabilities, generally, as they become due. They also state that the value of their security in the Subject Property is $665,000, substantially less than the balance of principal and interest they submit is owed on their collective loan to the Respondent as of March 8, 2016, that figure being $2,404,205. [ 3 ] The Applicants extended the loan to the Respondent in 2013 for the development of a 60-unit condominium complex on the Subject Property. This development was not completed and the Subject Property remains vacant land at the date of this hearing.

The Law [ 4 ] In order for a creditor to obtain a bankruptcy order under section 43(1) of the Bankruptcy and Insolvency Act , R.S.C. 1985, c. B-3 (the “ BIA ”), it must establish on the balance of probabilities that: (

a) the creditor is owed at least one thousand dollars; and (

b) that the debtor has committed

an act of bankruptcy within the last six months preceding the application. [ 5 ] Pursuant to section 43(2) of the BIA , a secured creditor shall either state in the application that they will give up their security for the benefit of creditors if a bankruptcy order is made against the debtor or they may give an estimate of the value of the secured creditor’s security and provided the estimated value is at least one thousand dollars less than the amount owed to the secured creditor, the secured creditor may be admitted as an applicant creditor to the extent of the balance of debt remaining after deducting the estimated value of the security.

Position of the Respondent [ 6 ] The Respondent opposes the application for a bankruptcy order under section 43(1) of the BIA on a number of grounds, namely:

a) A mortgage amending agreement entered into among the parties changed the terms of interest payments such that there is now some question as to when interest is due and payable. The Respondent maintains the interest is not owed until the sale of each condo unit and, as a result, only the principal of the loan could be considered owing at this time, that being $1,550,000;

b) That the loan maturity date being three years after the date of advance is later than March 8, 2013 as alleged by the Applicants and occurred at the earliest of April 10, 2013 or as late as April 24, 2013 such that the principal and interest owed was not even due and payable until after the Applicants filed this application for a bankruptcy order, and, therefore, their Application should be dismissed;

c) That the value of the security estimated by the Applicants at $665,000 is far below the market value opinion put forward in a report from the Respondent’s Appraiser in January of 2013, that figure being $2,100,000. It is the $2,100,000 figure that the Respondent submits should be used in determining whether or not Applicants can qualify for a bankruptcy order under sections 43(1) and (2) of the BIA ; and

d) That the Applicants did not give the requisite 10-day notice of their intention to enforce their security interest before actually enforcing their security as required by

section 244 of the BIA ; The Respondent states the Applicants violated this notice provision by filing their application with the Court in advance of the expiry of the 10-day notice period. [3] The judge was not persuaded by PMDL’s submissions. The judge gave his conclusion as follows: [22] Therefore, in conclusion, after considering all of the affidavit evidence before the Court and the submissions of counsel: a. I am satisfied that Respondent has had the requisite notice of this application under the BIA as well as additional time to either prepare a proposal to the Applicants and/or a response to the Application; b. I am satisfied that the Respondent has committed

an act of bankruptcy within the last six months by ceasing to meet its liabilities generally as they become due, that being the failure to pay the outstanding principal and interest owed to the Applicants on the maturity date of the loan pursuant to the terms of the mortgages, as amended by the mortgage amending agreement; c. I am satisfied that the Applicants, as creditors of the Respondent, are owed more than $1,000 above the estimated value of their security. [23] It is therefore appropriate for the bankruptcy order to issue in the form requested and filed with the Court, that being: 1.

The Respondent is hereby adjudged bankrupt and a bankruptcy order is hereby made against the Respondent; 2. Janes& Noseworthy Limited is hereby appointed trustee of the estate of the Respondent (the “Trustee”);

3. The Trustee shall forthwith give security in cash or by bond for the due accounting, the payment and the transfer of allproperty received by the Trustee as trustee and for the due and faithful performance of the Trustee’s duties in accordance with subsection16(1) of the BIA, as amended; and 4. The costs of the Applicants shall be paid out of the estate of the Respondent upon taxation thereof. [4] On May 9, 2016, PMDL filed a notice of appeal of the April 29, 2016 decision.

Pursuant to s. 195 of the BIA, this had theeffect of staying the bankruptcy order until the appeal is disposed of, unless a judge of the Court of Appeal varies or cancels the stay.Section 195 reads: Except to the extent that an order or judgment appealed from is subject to provisional execution notwithstanding any appeal therefrom,all proceedings under an order or judgment appealed from shall be stayed until the appeal is disposed of, but the Court of Appeal or ajudge thereof may vary or cancel the stay or the order for provisional execution if it appears that the appeal is not being prosecuted diligently, or for such other reason as theCourt of Appeal or a judge thereof may deem proper. [5] On May 31, 2016, the creditors applied for an order: (1) cancelling the stay of proceedings; (2) in the alternative, varying the stay such that the trustee could proceed in all respects, save that it could not dispose of assets ofPMDL pending disposition of the appeal; and (3) expediting the hearing of the appeal. [6] The creditors underlined the importance of the trustee engaging quickly to investigate two transactions whereby land ownedby PMDL had within the last year been conveyed in a way that, in the view of the creditors, raised questions as to whether theconveyances were made under value or to confer a preference.

The creditors submitted that the two properties have been the subject offurther transactions that may have the effect of making more difficult or defeating a claim against them by the creditors. PMDL deniedany such purpose for the conveyances of the two properties. LAW [7] The parties agree that the relevant test is that set out by the Supreme Court of Canada in RJR-MacDonald Inc. v.

Canada(Attorney General), (SCC), [1994] 1 S.C.R. 311 at 347-49: (1) is there a serious question to be tried in the appeal; (2) will the applicant suffer irreparable harm if relief is not granted; (3) what is the balance of inconvenience arising from granting or refusing relief? ANALYSIS [8] Regarding a serious question to be tried, the bar is not high.

Is there an arguable case, one that is not “frivolous” (in the legalsense)? [9] PMDL’s grounds of appeal relate essentially to three things: - Did the creditors act in advance of when they were entitled to; - Having regard to s. 43 of the BIA, does the amount owed to the (secured) creditors exceed the value of the property; and - Did PMDL receive the 10-day notice required under s. 244 of the BIA? [10] I would note some key facts: - PMDL appears to be substantially without assets other than the property mortgaged to the creditors.

It appears to have ceased tooperate as a property developer. - The principal secured by the mortgage ($1.5 million) remains unpaid, even though the mortgage has matured. As well, PMDL hasmade no payment of interest.

While it disputes the date of the payment, what is not in dispute is that the interest continues toaccumulate. - While PMDL says the property is properly valued at $2.1 million, that valuation is more than three years old; a more recentvaluation obtained by the creditors estimates the value of the property to be $665,000. [11] In short, PMDL has not paid the creditors any of the money owed them under the mortgage, nor is there a prospect that thecreditors will receive any money save by realizing on the assets of PMDL. [12] In light of this, I would see PMDL’s position in the appeal as tenuous.

Nonetheless, I will not decide this application based on“no serious question to be tried”. I turn to the other two factors.

[ 13 ] Regarding whether the applicant would suffer irreparable harm if relief is not granted, I am persuaded by the creditors’ submissions that if the trustee cannot investigate promptly the circumstances surrounding the conveyance by PMDL during the past year of the two properties referred to above, then the possibility of realizing against those properties may well be diminished.

Given that PMDL’s remaining assets seem to consist only of the property mortgaged to the creditors, if the creditors cannot pursue in a timely way the possibility of realizing on the other two properties, they may suffer significant losses. [ 14 ] Regarding the balance of inconvenience, the key consideration is the impact on the parties if the mortgaged property is or is not sold before the appeal is disposed of. As PMDL is not carrying on operations as a real estate development company, there seems no prospect of it developing the mortgaged property in the foreseeable future.

Thus, what does it matter if the mortgaged property is sold by the trustee? If a sale is made at fair market value, how is PMDL harmed? If a sale is made at less than fair market value, then a claim can be made by PMDL against the trustee for this. By contrast, a delay in the sale harms the creditors in that interest continues to accumulate under the mortgage (whenever it is payable), but the value of the property shows no sign of increasing. The passage of time thus worsens the creditors’ position.

As well, the opportunity for an early sale might be lost if offering it for sale is delayed pending disposition of the appeal. CONCLUSION [ 15 ] Accordingly, I am persuaded that having regard both to irreparable harm to the creditors and to the balance of convenience between PMDL and the creditors, a cancelling of the stay is warranted and I would so order. [ 16 ] As to an expedited hearing, the parties agree that PMDL will file its factum by August 1, the creditors will file their factum by September 1 and the appeal will be heard on September 22, and I would so order. ____________________________________ M. H.

Rowe J.A.