Royal Bank of Canada v Keller & Sons Date:, 2016 MBCA 46

Citation: Royal Bank of Canada v Keller & Sons Date: 20160502 Farming Ltd et al, 2016 MBCA 46 Docket: AI16-30-08585 IN THE COURT OF APPEAL OF MANITOBA Coram: Madam Justice Freda M. Steel Madam Justice Diana M. Cameron Madam Justice Janice L. leMaistre BETWEEN : ROYAL BANK OF CANADA ) R. W. Schwartz ) for the Appellant Shilo (Plaintiff) Respondent ) Farms ) ) F. J. Trippier and ) A. K. Anjoubault - and - ) for the Appellant M. Keller ) ) J. M. J. Dow KELLER & SONS FARMING LTD. and ) for the Respondent Royal KELLER HOLDINGS LTD. ) Bank of Canada ) (Defendants) ) A. J. Stacey and ) R. A.

McFadyen ) for the Respondent Ernst ) & Young AND BETWEEN : ) ) D. E.

Swayze ) for the Prospective SHILO FARMS LTD. and ) Purchasers Spud Plains MARCUS KELLER ) Farms Ltd. ) Appellants ) ) - and - ) ) Appeal heard and ERNST & YOUNG INC., in its capacity as ) Decision pronounced: Receiver of the undertaking, property and ) May 2, 2016 assets of the Debtors, and not in its ) personal capacity ) ) (Applicant) Respondent ) On appeal from 2016 MBQB 77 STEEL JA (for the Court): [ 1 ] This is an appeal from the decision of the motion judge approving the request of Ernst & Young Inc. (the Receiver) for the sale of Keller lands, buildings and related irrigation infrastructure equipment (the Keller Lands) to Spud Plains Farms Ltd., A&A Farms Ltd., TA Farms Ltd. and A&M Potato Growers Ltd. (collectively referred to as the Adriaansen Group). [ 2 ] Shilo Farms Ltd. (Shilo), an unsecured creditor and unsuccessful bidder, and Marcus Keller, the sole shareholder of

the defendant debtor companies, an unsecured creditor, and also the general manager of Shilo, appeal from that decision. [3] Fundamentally, the appellants argue that the sale process was not fair or equitable. They argue that the integrity ofthe process of bidding was tainted. It is submitted that the Receiver “muddied the waters” by asking Shilo to make an offer that includeda settlement offer for outstanding disputed claims. [4] At a later stage in the modified sale and investor solicitation process, the Receiver asked the Adriaansen Group andShilo to resubmit improved offers.

Specifically, the Receiver asked Shilo to make an offer that included an amount related to certaindisputed claims between the Receiver and Shilo. The Adriaansen Group made an offer for the land and, as well, advised the Receiverthat, if successful, it would be reselling a parcel of the Keller Lands known as Parcel 4. Depending on the amount obtained on the resale,it was possible for the Receiver to obtain further proceeds from that resale. [5] Shilo made an improved offer that included an amount of $700,000 as a settlement of the disputed claims.

Shilo alsoindicated it would make arrangements to repay amounts owing to the defendants’ unsecured creditors over time out of future profits. Itis this additional amount, submitted by Shilo for settlement of the claims, that was the subject of much of Shilo’s submissions opposingthe sale in the Court below and in this Court. [6] While the offers were relatively close, the Receiver accepted the offer from the Adriaansen Group, explaining that theamount offered by the Adriaansen Group was higher than the offer of Shilo when the settlement amount was removed from the Shilooffer.

The Adriaansen Group offer for the land alone was $300,000 higher than the Shilo offer. The Receiver decided that, uponacceptance of the Adriaansen Group offer, it could then still realize on the claims against Shilo, the claims estimated at $1,100,00 by theReceiver, even though the realization of those claims might very well include litigation and the necessity to incur additional legal fees.

The Receiver also noted a potential to further increase the proceeds depending on the subsequent reselling of Parcel 4 of the KellerLands. [7] Shilo submits that the Receiver’s request to Shilo that it include an amount for settlement of the outstanding disputescreated an unfair process. In other words, it was a mistake on the Receiver’s part to say to Shilo that its bid would be more favourablyreceived by the Receiver if it included an amount to settle outstanding claims by the Receiver against Shilo. As well, it is argued thatthe Receiver was acting outside of its authority.

The Receiver only had the authority to deal with the land itself, not extraneous claims. [8] Keller argues that the Receiver did not consider the interests of all the parties, particularly those of the unsecuredcreditors, and the offer to pay the unsecured creditors 20 cents on the dollar over time out of future profits. [9] The appeal of Shilo and Keller must, out of necessity, also consider the question as to whether they have standing toappeal. Standing is a pre-requisite to opposing a sale approval motion.

See Skyepharma plc v Hyal Pharmaceutical Corp (2000), (ON CA), 130 OAC 273; and Shape Foods Inc (Receivership), Re, 2009 MBQB 171, 241 ManR (2d) 235. At the motion,because of the exigencies of time, the Court heard from both parties on the merits of their motion and decided the matter on those merits,despite the Court’s final decision that neither party had standing. [10] In this Court, the appellants argue that they have standing to challenge the decision of the Receiver and, hence thedecision of the motion judge.

Shilo argues that it has standing as a result of its status as an unsuccessful bidder for the property, and alsoas an unsecured creditor. Keller argues that he has standing as an unsecured creditor, as well as a shareholder of the defendant debtorcompanies. Standard of Review [11] The motion judge owed the decision of the Receiver significant deference. While it is the duty of the court to ensurethe integrity of the process, it is not appropriate for the court to go into the minutia of that process.

The court’s role in reviewing the saleprocess in receiverships is not to second guess the receiver’s business decisions, but rather to critically examine the procedural fairness innegotiations and bidding so as to ensure that the integrity of the process is maintained. The court should not intervene in the decision ofthe receiver except in an exceptional case.

See Royal Bank of Canada v Soundair Corp et al (1991), (ON CA), 46OAC 321; and Crown Trust Co et al v Rosenberg et al (1986), (ON SC), 60 OR (2d) 87 at pp 109, 111. [12] The decision of the motion judge was an exercise in judicial discretion and is entitled to deference in this Court. Wewill intervene only if the motion judge exercising his discretion, erred in law, misapprehended the evidence in a material way or wasclearly wrong.

See Business Development Bank of Canada v Paletta & Co Hotels Ltd, 2012 MBCA 115 at para 8, 288 ManR (2d) 129;and Towers Ltd v Quinton’s Cleaners Ltd et al, 2009 MBCA 81 at para 25, 245 ManR (2d) 70. Decision [13] We have some sympathy for the appellants’ argument as to standing. That is, if unsecured creditors are unable tochallenge the process, who will speak on their behalf? While a party must have a material interest that has been affected in order toestablish standing, the question of what constitutes a material interest will vary depending on the facts of the case.

It may be, as wasargued, that the unfairness of the process itself prevented the party from obtaining a material interest in the sale process. In any event,this is not the case to pursue that argument because, even if we disagreed with the motion judge and felt that either or both parties shouldhave standing, we do not see a ground for appellate intervention in the final decision. [14] When reviewing a sale by a court-appointed receiver, among other duties, the court should be concerned primarily withprotecting the interests of the creditors.

However, it is also an important consideration that the sale process should be fair and equitable,and the interests of all parties be taken into account; this includes the interests of the unsecured creditors. There is no question that it isthe responsibility of the court to ensure the efficacy and integrity of the process by which offers are obtained, and to ensure that there hasbeen no unfairness in the working out of that process. See Soundair Corp. [15] However, the offer to pay unsecured creditors over time out of future profits is not realistic when the best possible offer

would nonetheless result in a shortfall to secured creditors. Given the outstanding amounts owing to the secured creditors, and the amounts that would be generated from the sale of assets, there will inevitably be a significant shortfall in this case. As a result, the secured creditors are the only parties with a material and direct commercial interest in the proceeds of the sale. Thus, it was reasonable for the Receiver not to take into account the portion of the offer dealing with unsecured creditors. [ 16 ] There is some dispute as to whether Shilo knew that there would be a shortfall to the secured creditors.

Whether or not the company knew this, it also stated in its affidavit that it would not have changed the offer. We do not see how that affected the integrity of the process. [ 17 ] Second, with respect to the fairness of the sale process, the motion judge held that since the Receiver was dealing with a prospective purchaser, Shilo, with which it had outstanding claims, this was an efficient way to proceed in wrapping up other aspects of the receivership, and possibly obtaining an increased overall bid.

Moreover, the amount that Shilo did offer for the Keller Lands was not as high as the offer put forward by the Adriaansen Group, if the amount proposed for settlement was taken out. The motion judge held that the Receiver was entitled to conclude that taking more money for the land, and taking the risk of suing for the entire amount owing in the disputed claims with Shilo, was a better option than taking less for the land and settling the disputed claims. [ 18 ] In addition, the Receiver had the authority to deal with all assets and receivables of Keller & Sons Farming.

The Receiver was granted authority to sell property in the order granted by Schulman J on October 8, 2015. That order gave the Receiver the right to sell by negotiating such terms and conditions as it saw fit and to consider, evaluate and, if it deemed appropriate, settle claims relating to the defendants.

THIS COURT ORDERS that the Receiver is hereby empowered and authorized, but not obligated, to act at once in respect of the Property and, without in any way limiting the generality of the foregoing, the Receiver is hereby expressly empowered and authorized to do any of the following where the Receiver considers it necessary or desirable: . . . (

g) to settle, extend or compromise any indebtedness owing to or by the Defendants; . . . (

j) to market any or all of the Property, including advertising and soliciting offers in respect of the Property or any part or parts thereof and negotiating such terms and conditions of sale as the Receiver in its discretion may deem appropriate. [ 19 ] We believe that Shilo’s argument interprets the power of the Receiver too narrowly. The second order (February 8, 2016) allowed the Receiver to take such steps as it considered necessary in carrying out the sale process.

THIS COURT ORDERS AND DECLARES that the Receiver is authorized and directed to continue to implement the Sales Process, subject to further order of the Court, and to take such steps as it considers necessary or desirable in carrying out the Sales Process, including entering into an auction agreement with Ritchie Bros.

Auctioneers (Canada) Ltd. (“Ritchie”) with respect to the equipment of Keller & Sons Farming Ltd. [ 20 ] Consequently, it was within the Receiver’s discretion to consider pending litigation, along with a sale price of the land, and to ultimately conclude that it was better to take a higher amount for the land and pursue the outstanding claims against Shilo, than to accept the proposed settlement. Whether someone else would have decided differently is irrelevant.

It is clearly not an improvident bargain. [ 21 ] The motion judge specifically addressed each of the relevant criteria and found on the facts that the Receiver had fully canvassed the market for the Keller Lands in an “open, fair and transparent manner to all potential interested purchasers” (at para 28). That decision was reasonable, given the evidence before him. We see no error in such a conclusion, certainly no error that is clearly wrong. [ 22 ] The appeal is dismissed with costs. JA

JA JA