Cosa Nova Fashions Ltd. v. The Midas Investment Corporation

Cosa Nova Fashions Ltd. v. The Midas Investment Corporation Collection Decisions of the Court of Appeal Date 2021-08-24 Neutral citation 2021 ONCA 581 Docket numbers C69767, M52741 Judges Fairburn, J. Michal Subject Civil Decision Content COURT OF APPEAL FOR ONTARIO CITATION: Cosa Nova Fashions Ltd. v. The Midas Investment Corporation, 2021 ONCA 581 DATE: 20210823 DOCKET: M52741 (C69767) Fairburn A.C.J.O. (Motion Judge) BETWEEN Cosa Nova Fashions Ltd., B & M Handelman, Investments Limited, Comfort Capital Inc., 693651 Ontario Ltd., E. Manson Investments Limited, Natme Holdings Ltd., Francie Storm, Barsky Investments Ltd., Stephen Handelman, Rosewill Investment Corporation, Thomas Bock, The Bank of Nova Scotia Trust Company and Canada Investment Corporation Applicants and The Midas Investment Corporation Respondent Catherine Francis, for the moving party, Rosen Goldberg Inc. Kevin Sherkin, for the responding party, John Kavanagh David P. Preger, for the applicants Michael G. McQuade, for the respondent Robert A. Klotz and Timothy Danson, for Auto World Imports Heard: August 20, 2021 by video conference REASONS FOR DECISION A. OVERVIEW [1] Rosen Goldberg Inc. (the “Receiver”) brings this urgent motion. John Kavanagh, a non-party in the proceeding, is the responding party on the motion. Both made written and oral submissions on the motion. [2] In addition, the parties to the proceeding – the applicant mortgagees and the respondent Midas Investment Corporation (“Midas”) – made oral submissions on the motion. Auto World Imports, the tenant of the “Eastern Avenue property”, which is described below, also made oral submissions before me. [3] This urgent motion arises from two orders made by Koehnen J. (the “Motion Judge”) related to the sale of two properties. [4] The applicants hold a mortgage over the “Eastern Avenue property” and the “Yonge Street property”.0F[1] The mortgage has been in default since October 1, 2013, shortly after it was registered on March 4, 2013. This resulted in the court-appointed Receiver becoming involved in the sale of the properties. [5] The Motion Judge granted two approval and vesting orders: (i) the August 5, 2021 order (reasons dated August 9, 2021) for the Eastern Avenue property; and (ii) the August 12, 2021 order (reasons dated August 13, 2021, revised on August 15, 2021) for the Yonge Street property. The sale of the Yonge Street property is scheduled to close on Monday, August 23, 2021. The sale of the Eastern Avenue property is scheduled to close on Thursday, September 2, 2021. [6] Mr. Kavanagh has filed two notices of appeal, intending to appeal both approval and vesting orders. The Receiver, concerned that these attempted appeals could derail the imminent closing of the Yonge Street property and the shortly forthcoming closing of the Eastern Avenue property, brought an urgent motion seeking declaratory relief, which I heard on Friday, August 20, 2021. While the Receiver has raised a number of issues, in light of how I am deciding this matter, the only issues I need to address are: (i) whether Mr. Kavanagh has a right to appeal the approval and vesting orders under s. 193(c) of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (“BIA”); and, if not, (ii) whether he should be granted leave to appeal those orders under s. 193(e) of the BIA. [7] The answer to both of these questions is no. B. Background [8] Midas was the owner of both the Yonge Street and the Eastern Avenue properties. It appears that Mr. Kavanagh worked for Midas as an in-house accountant: Thomas Farrell v. John Kavanagh, 2020 ONSC 8154, at para. 13. He was involved in arranging the mortgages on the Yonge Street and Eastern Avenue properties. In the materials he filed on this motion, Mr. Kavanagh describes himself as a “shareholder and guarantor” of Midas and its properties. [9] Midas defaulted on the mortgages. Eventually, Midas and Midas’ President, Thomas Farrell, started an action, alleging that the mortgages taken out on the two properties were unauthorized and the result of fraudulent activity by Mr. Kavanagh. After over seven years of litigation, which saw Midas and Mr. Farrell seeking judgment against Mr. Kavanagh, the Motion Judge (who was also the trial judge on the action) determined that the mortgage was valid and dismissed the action: Farrell, at para. 124. Midas and Mr. Farrell unsuccessfully sought a stay of the decision: Farrell v. Kavanagh, 2021 ONCA 213. [10] Following the completion of the trial in Farrell, the applicants made a demand on Midas for payment of the sum of $11,045,858.94 and, when the demand was not met, applied for the appointment of a receiver. By order dated April 6, 2021, the Receiver was appointed over the assets, undertakings, and properties of Midas, including the Yonge Street and Eastern Avenue properties, which are the subject of this motion. [11] By order dated May 31, 2021, the marketing and sale process for the properties was approved, and Auto World Imports, the tenant at the Eastern Avenue property, was directed to produce documents showing how much rent they had prepaid on the property.1F[2] Subsequently, the Receiver came to learn that: (i) the tenant had paid $2 million in advance rent, half of which was paid while the decision in Farrell was under reserve; and (ii) Midas had agreed to sell the Eastern Avenue Property to a company affiliated with the tenant. [12] Given these newly discovered facts, the Receiver entered into negotiations with the tenant at the Eastern Avenue property and they ultimately entered into an agreement of purchase and sale. Equally, the Receiver entered into a separate agreement of purchase and sale for the Yonge Street property. [13] After the agreements had been reached in relation to both properties, the Receiver sought and obtained approval and vesting orders. Notably, the combined proceeds to be realized from the sale of the properties will be sufficient to pay out all encumbrances against the properties, although the Receiver acknowledges that it is possible that there could be a shortfall in respect of accrued interest depending on when distributions are authorized. [14] Mr. Kavanagh has now filed two notices of appeal, one for each of the approval and vesting orders. He maintains that he has a right to appeal the orders under s. 193(c) of the BIA. [15] In the event he is wrong about that, Mr. Kavanagh has also filed a motion seeking leave to appeal the August 5, 2021 approval and vesting order relating to the sale of the Eastern Avenue property, pursuant to s. 193(e) of the BIA. Counsel for Mr. Kavanagh informs the court that he also filed a motion seeking leave to appeal the August 12, 2021 approval and vesting order relating to the sale of the Yonge Street property, pursuant to s. 193(e) of the BIA. If that motion has been filed, it has not yet been located in the court’s records. In any event, I am prepared to take Mr. Kavanagh’s position at its highest and proceed on the assumption that the missing leave motion has been properly filed. C. ANALYSIS [16] Section 195 of the BIA says that “all proceedings under an order or judgment appealed from shall be stayed until the appeal is disposed of” (emphasis added). The provision goes on to say that a single judge of this court may do any number of things, including cancel the stay for any reason deemed proper. [17] As I understand it, what has triggered this last-minute motion for declaratory relief is that the Receiver is concerned about the potential operation of s. 195 of the BIA. That concern rests on the fact that Mr. Kavanagh has filed two notices of appeal and a leave motion, all arising from the approval and vesting orders made pursuant to the BIA. The Receiver wants to foreclose any possible suggestion that the approval and vesting orders – which are required to close the sales of the Yonge Street property on Monday, August 23, 2021 and the Eastern Avenue property on Thursday, September 2, 2021 – will be the subject of automatic stays pursuant to s. 195 of the BIA. If the automatic stays apply, then the Receiver asks that they be cancelled. [18] The Receiver’s concerns are well placed given that Mr. Kavanagh has responded to this motion, suggesting that he has a right to appeal under s. 193(c) of the BIA and, therefore, s. 195 operates to automatically stay the approval and vesting orders. He says the stay should not be cancelled. He also argues that, if he is wrong about the right to appeal, then I should grant him leave to appeal and impose stays on that basis. [19] I have concerns about whether Mr. Kavanagh even has standing to appeal the approval and vesting orders. The Receiver submits that he has no standing as a non-party with no personal stake in the proceeding. In the end, though, as will become clear in these reasons, it is unnecessary for me to settle on the question of standing. For the purposes of these reasons, I proceed on the assumption, but without deciding, that Mr. Kavanagh has standing to challenge the approval and vesting orders. (1) Is There an Automatic Right of Appeal Under s. 193(c) of the BIA? [20] Mr. Kavanagh’s first position is that he has an automatic right of appeal under s. 193(c) of the BIA, which reads as follows: 193 Unless otherwise expressly provided, an appeal lies to the Court of Appeal from any order or decision of a judge of the court in the following cases: … (c) if the property involved in the appeal exceeds in value ten thousand dollars; [21] The Receiver argues that, in this case, there is no such right of appeal. I agree. [22] This court has been clear that, given the “broad nature of the stay imposed by s. 195 of the BIA”, the right to appeal under s. 193(c) must be narrowly construed: First National Financial GP Corporation v. Golden Dragon HO 10 Inc., 2019 ONCA 873, 74 C.B.R. (6th) 1, at para. 15, citing Enroute Imports Inc., Re., 2016 ONCA 247, 35 C.B.R. (6th) 1, at para. 5. As noted by Brown J.A., the narrow construction of s. 193(c) accords with the “needs of modern, ‘real-time’ insolvency litigation”: 2403177 Ontario Inc. v. Bending Lake Iron Group Limited, 2016 ONCA 225, 396 D.L.R. (4th) 635, at para. 53. Therefore, Brown J.A. affirmed that s. 193(c) does not provide for an appeal as of right to matters involving: “(i) orders that are procedural in nature, (ii) orders that do not bring into play the value of the debtor’s property, or (iii) orders that do not result in a loss”: Bending Lake, at para. 53. [23] The operation of any one of these principles is fatal to an applicant’s automatic right of appeal pursuant to s. 193(c) of the BIA: see, for example, Downing Street Financial Inc. v. Harmony Village-Sheppard Inc., 2017 ONCA 611, 49 C.B.R. (6th) 173. The first and third principles are operative in this case. (a) Is the Order Procedural in Nature? [24] Section 193(c) of the BIA does not apply to decisions or orders that are procedural in nature, “including orders concerning the methods by which receivers or trustees realize an estate’s assets”: Bending Lake, at para. 54. At least in relation to the appeal from the order relating to the Eastern Avenue property, that is precisely what Mr. Kavanagh is seeking to appeal as of right: the method used by the Receiver to arrive at the agreement of purchase and sale of the Eastern Avenue property. [25] Mr. Kavanagh’s chief complaint is that the Receiver, as he puts it, “sought and obtained the Sale Process order and then abandoned that process and negotiated directly with one party based on new facts.” What he is referring to is the fact that, after receiving the May 31, 2021 court order setting out a marketing and sale process that the Receiver would follow for the Eastern Avenue property, the Receiver did not follow that process, but rather negotiated the sale with the current tenant at that property. [26] As the Motion Judge detailed in his reasons, the Receiver acted reasonably in the circumstances. The Receiver had very good reason to negotiate with the tenant before embarking upon the marketing and sale process that had been approved in the May 31, 2021 order. That reason rested on the fact that it was only after the May 31, 2021 order was issued that the Receiver came to learn that the tenant at the Eastern Avenue property had prepaid $2 million in rent to Midas and Mr. Farrell, representing rents paid until May 31, 2027, and had actually entered into an agreement of purchase and sale for the property. In light of that state of affairs, the Receiver recognized the obvious: unlike an ordinary buyer, the tenant would be highly motivated to protect its financial outlay, and allowing the tenant to do so would avoid potentially lengthy and costly litigation. [27] While the Receiver did not seek an order varying the marketing and sale process set out in the May 31, 2021 order on the basis of the new information that had come to light, I am not satisfied that the Motion Judge erred in concluding that the Receiver acted appropriately in the circumstances. Importantly, there is no evidence that the manner in which the Receiver proceeded resulted in any loss. [28] While Mr. Kavanagh is not pleased with the Receiver’s decision to negotiate with the tenant, in my view, his complaint in relation to the Eastern Avenue property is entirely procedural in nature. At its core, his complaint is that the Receiver should have followed a different process for selling the Eastern Avenue property. Section 193(c) does not permit an appeal as of right for this type of procedural complaint. (b) Does the Order Result in a Loss? [29] In any event, there is another reason that s. 193(c) does not afford Mr. Kavanagh an appeal as of right in relation to either approval and vesting order. [30] Section 193(c) grants a right of appeal where “the property involved in the appeal exceeds in value ten thousand dollars”. Determining the “value” of the “property involved” is subject to significant constraints because any other approach would lead to an automatic right of appeal in virtually all BIA matters: Business Development Bank of Canada v. Pine Tree Resorts Inc., 2013 ONCA 282, 115 O.R. (3d) 617, at para. 17. [31] As Brown J.A. explained in Bending Lake, for s. 193(c) to apply, the order in question must contain some element of a final determination of the economic interests of a claimant in the debtor. The court does not look to the total value of the property involved in the dispute, but to the value of the actual loss (or gain) resulting from the impugned order: Bending Lake, at paras. 61-64. The loss (or gain) must be squarely rooted in the evidentiary record. As Brown J.A. stated in Bending Lake, at paras. 64 and 69: The Debtor must demonstrate some basis in the evidentiary record considered by the motion judge that the property involved in the appeal would exceed in value $10,000, in the sense that the granting of the Approval and Vesting Order resulted in a loss of more than $10,000 because the Receiver could have obtained a higher sales price for the Debtor’s property. Bald assertion is not sufficient, otherwise a mere bald allegation of improvident sale in a notice of appeal could result in an automatic stay of a sale approval order under BIA s. 195 as the appellant pursues its appeal. … … I am not persuaded that there is any evidentiary basis to the Debtor's bald assertion in its notice of appeal that the Approval and Vesting Order sanctioned an improvident sales transaction which resulted in a loss to the Debtor within the meaning of s. 193(c). [32] Similarly, I am not persuaded that there is anything in the factual record here that supports Mr. Kavanagh’s suggestion that he has suffered or will suffer a loss greater than $10,000. The factual record does not even suggest that he has suffered or will suffer any loss at all. Recall that he describes himself, for the purposes of this motion, as the guarantor of the subject mortgage. It is worth emphasizing a point made earlier: it is anticipated that the mortgage will be paid out as a result of the sales of the properties, should those sales move efficiently. Therefore, as a guarantor, Mr. Kavanagh should not lose on the approved sales. [33] Mr. Kavanagh also points to what he describes as appraisals that have been done by a reputable broker, which value the properties at more than the ultimate purchase price. He further shares his view that this appraisal is at “the low end” of what could be obtained for the properties through a bidding process. As noted by the Motion Judge, the “report” makes clear that it is not an appraisal. The report also does not reference the critical fact that rent had already been prepaid on the property until May 31, 2027, meaning that even if the property could be sold to someone else, it would not earn rental income for a very long time. As a commercial investment property, this would undoubtedly affect the value received through a bidding process. Moreover, having reviewed the report, it appears that the author of the report was told that the landlord had indicated that the tenant was willing to vacate the property and reoccupy only after the property had been redeveloped. Therefore, few of the underlying premises upon which the report rested accord with reality. [34] At the very most, as a guarantor, someone in Mr. Kavanagh’s position may have a statutory right to redeem the mortgage. Counsel for Mr. Kavanagh stated in oral argument that this is Mr. Kavanagh’s primary concern. Mr. Kavanagh asserts he has that right, but has not clearly identified from which statute that right would arise. Others on the motion say he does not have that right in the current circumstances. Others were unsure, identifying various statutes from which that right might arise. In any event, Mr. Kavanagh has not clearly asserted the basis for his purported right of redemption, has not attempted to redeem the mortgage over the past eight years during which it has been in default, and has not proffered any evidence of the value of his loss. [35] Therefore, I have arrived at the conclusion that there is no evidence in the record to support the suggestion that the value of the property involved in Mr. Kavanagh’s appeals exceeds $10,000. Accordingly, I conclude that Mr. Kavanagh does not have a right to appeal either approval and vesting order under s.193(c) of the BIA. This means that there is no automatic stay of the approval and vesting orders pursuant to s. 195 of the BIA. (2) Should Leave to Appeal be Granted Pursuant to s. 193(e) of the BIA? [36] If he does not have a right to appeal under s. 193(c) of the BIA, Mr. Kavanagh asks that leave to appeal be granted pursuant to s. 193(e) of the BIA. He has filed a motion seeking leave to appeal the August 5, 2021 approval and vesting order relating to the sale of the Eastern Avenue property. Pursuant to s. 193(e), I have jurisdiction to determine this issue as a single judge of this court. [37] Granting leave to appeal is a discretionary decision. In exercising that discretion, the court must take into account whether the issue: “(1) raises an issue of general importance to bankruptcy/insolvency practice or the administration of justice, and is one this court should address; (2) is prima facie meritorious; and (3) would not unduly hinder the progress of bankruptcy/insolvency proceedings”: Marchant Realty Partners Inc. v. 2407553 Ontario Inc., 2021 ONCA 375, at para. 12, referring to Pine Tree Resorts, at para. 29; McEwen (Re), 2020 ONCA 511, 452 D.L.R. (4th) 248, at para. 76. [38] Applying this test, I would dismiss the motion for leave to appeal. [39] I see no issue of importance to bankruptcy and insolvency practice. This case is really about mortgages that fell into arrears a very long time ago and obstacles put in the way of the ability of the applicant mortgagees to recover on their losses. While it is true that the Receiver did not comply with the process as spelled out in the original order of May 31, 2021, the Motion Judge’s reasons aptly explain why the Receiver’s actions made perfect sense in the unusual circumstances of this case. [40] In the end, the proposed appeal really come down to Mr. Kavanagh’s complaint that the Motion Judge should not have approved the Receiver’s decision to deal directly with the tenant at Eastern Avenue. In my view, the Motion Judge’s reasons are clear, concise, and directly responsive to the issue at hand. There is no issue of general importance involved. [41] Nor is the issue one that is prima facie meritorious. While Mr. Kavanagh perhaps wishes that the Motion Judge’s order were different, it was an order that was available to him to make. [42] Finally, to grant leave to appeal would undoubtedly hinder the progress of the proceeding by interfering with the sale of the Eastern Avenue property. [43] For these reasons, I dismiss the leave motion in relation to the Eastern Avenue property. [44] As indicated above, I am prepared to take Mr. Kavanagh’s position at its highest and proceed on the assumption that the leave motion in relation to the Yonge Street property has been filed. However, in my view the proposed appeal raises no issues of importance to the practice, it is not prima facie meritorious, and it would hinder the progress of the proceeding by interfering with the sale of the Yonge Street property. [45] Given that I have refused to grant leave to appeal under s. 193(e) of the BIA, and given that s. 193(c) does not apply, s. 195 is inapplicable and no stay of either of the approval and vesting orders is imposed. D. conclusion [46] The Receiver’s motion is granted. Mr. Kavanagh’s notices of appeal in respect of the August 5, 2021 approval and vesting order and the August 12, 2021 approval and vesting order are quashed. His motion for leave to appeal in respect of the August 5, 2021 approval and vesting order is denied. Proceeding on the assumption that the motion for leave to appeal in respect of the August 12, 2021 approval and vesting order has been filed, it is also dismissed. [47] I note that there was a time-limited sealing order imposed by the Motion Judge so as to protect the pending sales. Therefore, the Receiver is directed to communicate with the Registrar of this court to identify whether there are any documents that have been filed in this matter that fall within the parameters of the Motion Judge’s sealing order or that should otherwise be sealed for a short time pending the completion of the sales. [48] Costs submissions of no more than three pages may be provided by the moving party and those supporting the moving party no later than August 25, 2021. Mr. Kavanagh may respond with no more than three pages by August 27, 2021. “Fairburn A.C.J.O.” [1] While there were initially two mortgages, one for each property, the second mortgage was used to pay out the first mortgage, thereby consolidating the two into a single, large mortgage registered on March 4, 2013: Thomas Farrell v. John Kavanagh, 2020 ONSC 8154, at paras. 1-2. [2] It had come to light that the tenant had prepaid some rent, but that a confidentiality order precluded disclosure of any details of the arrangement that had been made.