Business Development Bank of Canada v. Date:, 2012 MBCA 115

Citation: Business Development Bank of Canada v. Date: 20121214 Paletta & Company Hotels Ltd., 2012 MBCA 115 Docket: AI 12-30-07892 IN THE COURT OF APPEAL OF MANITOBA B E T W E E N : BUSINESS DEVELOPMENT BANK ) R. W. Schwartz and OF CANADA ) J. S. Harvey ) for the Appellant (Applicant) Respondent ) ) G. B. Taylor and ) J. J. Burnell - and - ) for the Respondent ) ) D. G. Douglas and PALETTA & COMPANY HOTELS LTD. ) R. A. McFadyen ) for the Receiver, Lazer Grant Inc. (Respondent) Appellant ) ) D. G. Gu é nette and ) D. A.

Johnston ) for the Government of Manitoba ) (Manitoba Development Corporation) ) ) Chambers motion heard: ) December 13, 2012 ) ) Decision pronounced: ) December 14, 2012 SCOTT C.J.M. 1 On November 18, 2010, a Court of Queen’s Bench motions court judge appointed Lazer Grant Inc. as receiver of essentially all the assets of the respondent (Paletta) in relation to a business known as the Hecla Oasis Resort.

On November 16, 2012, after numerous and lengthy efforts made by the receiver and an experienced hotel consultant to dispose of the assets of the resort, the receiver applied to the same Queen’s Bench motions court judge (who had remained seized of the matter throughout) for a vesting order to approve an asset purchase agreement dated November 15, 2012, with Lakeview Management Inc. In the absence of an agreement by both the receiver and Lakeview Management Inc., the transaction must close by no later than December 14, 2012.

It is common ground that the actual price for the assets being purchased, consisting of chattels and equipment, is approximately $350,000. 2 There can be no doubt that the receiver and the secured creditors were disappointed by the amount of the sale price; notwithstanding, the applicant (Business Development Bank of Canada) and Manitoba Development Corporation, the two largest secured creditors, approved the sale. 3 On November 20, the motions court judge approved the transaction. 4

Section 195 of the Bankruptcy and Insolvency Act reads as follows: Stay of proceedings on filing of appeal 195. 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 a judge 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 the Court of Appeal or a judge thereof may deem proper.

5 On November 29, 2012, Paletta filed a notice of appeal against the decision of the motions court judge. In the result, an “automatic stay” came into effect.

This caused the receiver to move before a Court of Appeal judge in chambers, returnable Thursday, December 13, being the next available chambers day, to remove the stay so that the sale approved by the motions court judge could be completed. 6 Argument proceeded before me on December 13 by counsel for the parties, for the receiver and for Manitoba Development Corporation. 7 At the conclusion of argument, I indicated to counsel that in light of the urgency, I would endeavour to have my decision completed by today and that my reasons would be brief and to the point.

Standard of Review 8 The motions court judge’s decision was an exercise in judicial discretion and is hence entitled to deference. See Towers Ltd. v. Quinton’s Cleaners Ltd. et al. , 2009 MBCA 81 at para. 25 , 245 Man.R. (2d) 70, and Soldier v. Canada (Attorney General) , 2009 MBCA 12 , 236 Man.R. (2d) 107. Decision 9 The facts overwhelmingly support the conclusion that the balance of convenience favours the removal of the stay and that irreparable harm will result if this is not done. The receiver estimates that it will cost in excess of $300,000 to heat and maintain the resort premises over the winter.

The Business Development Bank of Canada has already advanced approximately $1.2 million to the receiver with respect to the costs of the bankruptcy, including maintenance of the property, and is not willing to continue this level of support. Despite serious efforts, the receiver has been unable to obtain a better offer. The deal is approved and is ready to close now.

There will be enormous uncertainty if the sale is not completed, with no guarantee that Lakeview Management Inc. will still be “at the table” at a future date. 10 On December 12, the parties and the court were provided with a form of “letter of intent” proferred on behalf of a corporation related to Paletta. The letter of intent is conditional on a 60-day inspection period and specifically states that it is not a “legally binding and enforceable Agreement of Purchase and Sale.” The proposed purchase price, I was told, is $500,000.

Paletta’s counsel advised that his client was not willing to fund the upkeep and heating of the resort while “due diligence” was taking place pursuant to the letter of intent. 11 Counsel for Paletta focussed his argument on the assertion that there had been a lack of procedural and substantive fairness on the part of the receiver.

This concern arises, counsel argues, because the receiver failed to advise Paletta until a day and a half prior to the proceedings before the motions court judge on November 19, that the chattels and physical assets had become “unhinged” from the resort enterprise itself, and that efforts were no longer being made to sell the entire complex as one entity.

Counsel asserted that the final negotiations between Lakeview Management Inc. and the receiver were done “behind closed doors,” which prevented Paletta or someone on its behalf from bettering the Lakeview Management Inc. offer. 12 But the facts are that, throughout, Paletta was provided with the receiver’s reports (eight in all) and was fully aware of the difficulties being encountered by the receiver in even obtaining signs of interest in the assets under receivership.

It is obvious that the Queen’s Bench motions court judge was fully aware that there were difficulties with some Paletta family members and addressed it in his reasons for decision of November 20 as follows: What is particularly important to me in my assessment of this matter is that the Paletta group have been served with materials for every application which the Receiver has made during the course of this receivership and have been present at many, if not most of them. Although Mr.

Schwartz argues that the relationship between the Receiver has been strained, that does not depart from the fact that there is a court appointed receiver. If the receiver is doing something that is inappropriate or not commercially reasonable, there was ready access to the court to complain and to convince the court to put the Receiver back on track. . . . . . I do not accept that a party who claims to be a stakeholder can sit quietly back and then come in at the last minute and say that the publicized process is all wrong. At best, the Paletta group has simply stuck their heads in the sand.

At worst, they wanted to see what someone else would offer and then try and arrange for someone else or themselves to do better. Neither extreme nor anything in between is reason for me to interfere with the process which has been undertaken by the Receiver with the knowledge of all concerned. . . . . . The practical thing to do, at this time, is to approve the offer of Lakeview Management.

It is not the court’s function to make its Receiver, nor the major creditors, take unnecessary risks and there being no one prepared to fund, it is time to move on or at least give Lakeview and the government the opportunity to work out their plans. 13 It is noteworthy that the existing lease agreement between Paletta and the Province of Manitoba deals essentially with the very same classification of assets as are now the subject of the agreement with Lakeview Management Inc. 14 Based on all of these facts, I am not satisfied that Paletta has an arguable case, or a reasonable prospect of success, in

challenging the procedure followed by the receiver in arriving at the asset purchase agreement with Lakeview Management Inc., asapproved by the motions court judge. 15 I am completely satisfied the receiver has made out a compelling case for the stay to be removed. See Manitoba (AttorneyGeneral) v. Metropolitan Stores Ltd., (SCC), [1987] 1 S.C.R. 110, and RJR – MacDonald Inc. v. Canada (AttorneyGeneral), (SCC), [1994] 1 S.C.R. 311.

My decision would be the same regardless of the deference required of me bythe applicable standard of review. 16 For the foregoing reasons, I grant the receiver’s application to cancel the stay under s. 195 of the Bankruptcy and InsolvencyAct. 17 Costs may be spoken to. _________________________________ C.J.M.