Re: Hester Creek Estate Winery Ltd.

2004 BCSC 345 Re: Hester Creek Estate Winery Ltd. IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Re: Hester Creek Estate Winery Ltd., 2004 BCSC 345 Date: 20040317 Docket: L040416 Registry: Vancouver Between: IN THE MATTER OF THE COMPANIES CREDITORS' ARRANGEMENT ACT, R.S.C. 1985, c. C-36, as amended And IN THE MATTER OF HESTER CREEK ESTATE WINERY LTD. PETITIONER Before: The Honourable Mr. Justice Burnyeat Reasons for Judgment (From Chambers) Counsel for the Petitioner W.E.J. Skelly Counsel for 658302 B.C. Ltd. J.I. McLean Counsel for Bank of Montreal H.M.B. Ferris Date and Place of Hearing: March 1, 2 and 4, 2004 Vancouver, B.C. [1] This is a motion on behalf of the Petitioner that the relief provided in the February 16, 2004 Order be confirmed and extended under certain terms, including that, first, the Petitioner call a meeting for no later than May 14, 2004 for the purpose of considering and voting on a plan of arrangement and compromise and, second, that the Monitor appointed on February 16, 2004 prepare what is referred to as a solicitation package to solicit offers for the assets of the Petitioner, with any such offers to be received by April 21, 2004. [2] There is also a motion by the Bank of Montreal and 658302 B.C. Ltd. that, first, this proceeding under the Companies' Creditors Arrangement Act, R.S.C. 1985 c. C-36 ("C.C.A.A.") be dismissed and, second, the ex parte order made February 16, 2004 pursuant to s. 11(3) of the C.C.A.A. be set aside. While I will deal with the Motion of the Bank of Montreal and 658302 B.C. Ltd. first, many of the conclusions I have reached also apply to the question of whether the Petitioner should be granted the extension of time it seeks. [3] The primary basis upon which the order is sought by the Bank of Montreal and 658302 B.C. Ltd. is that a number of matters were not disclosed by the Petitioner when the February 16, 2004 Order was made, that these matters were collectively of a material nature, that they should have been disclosed, that the Order would not have been made if they had been disclosed, and that the Order now sought by the Petitioner should not be granted. [4] I am satisfied that I am bound by the decision in Philip's Manufacturing Ltd. (1991), 60 B.C.L.R. (2d) 311, (B.C.S.C.), regarding the question of whether the order should have been granted on February 16, 2004. In Philip's, Macdonald, J. dealt with a similar application and stated: I have concluded that none of the facts alleged, or where all of them taken together, would have influenced my decision to grant the ex parte order in the first place. [5] I am also satisfied that the obligation of a Petitioner on an ex parte application under the C.C.A.A. can be likened to the obligation of an applicant for a Mareva injunction. In Mooney v. Orr (1994), 100 B.C.L.R. (2d) 335, (B.C.S.C.), that obligation was described as follows by Huddart, J., as she then was, as being that the Applicant: "... must make full and fair disclosure of all material facts known to him and make proper inquiries for any additional relevant facts before making the application." I am also satisfied that the obligation includes the requirement to disclose what Huddart,J. described as "facts relevant to the defendant's position to the extent it is known." [6] Huddart, J. then concluded in Mooney as follows: If there is less than full disclosure, or if there is a misleading of the court about material facts, the order should be discharged. [7] The material facts said to have been withheld to the court in the original materials are said to be numerous. If known by me, I have concluded that a number of factors would have led me to a contrary decision to the one I made February 16, 2004 as I have concluded that there was not a full and fair disclosure of all material facts. [8] Dealing first with the government debt, the Petition states it to be $227,000, whereas the material now indicates it to be $340,000. In this regard, I am satisfied that this is not a fact which could have been known after making proper inquiries, and, therefore, the fact that the figure has changed would not have influenced my decision at the time as it does not appreciably increase the debt that is owing by the Petitioner. [9] Regarding the overall debt owed by the Petitioner, I find that the debt owed and how the debt was owed to the parent company of Hester Creek was a material fact not disclosed. I am also satisfied the overall debt was not sufficiently described because potential amounts owing to three employees whose employment had been terminated were not included in the list of debts. The Petition showed that the secured debt included $875,000 owing to European and Allied Commerce Ltd. ("European"). In fact and well within the knowledge of Mr. Odishaw who swore the Affidavit verifying the information set out in the Petition, there was no debt owing to European. The debt described was actually a shareholders loan to the parent company of Hester Creek, being Valtera Wines Ltd. ("Valtera"). [10] The significance of this fact is twofold. First, the debt is owing by shareholders loan and it would undoubtedly be the case that a shareholder would not be in the same class of creditors as would secured creditors, so that the likelihood of any plan of arrangement being approved may well be diminished, taking into account that the Bank of Montreal and 658302 B.C. Ltd. would then represent almost 98% of the secured debt, rather than only about 80%. This percentage change combined with the known but undisclosed views of the Bank of Montreal and 658302 B.C. Ltd. make it almost impossible to conclude that any plan of reorganization will be successful. [11] Second, the debt owing to Valtera becomes suspect in the context of whether the total debt of Hester Creek reaches the minimum of $5 million which is required under the C.C.A.A. The debt set out in the petition materials totals $5,315,000, of which $4,759,000 is secured debt. Now that it is apparent that $875,000 is not owed to European as a secured debt but is owed to Valtera as a shareholders loan, the amount said to be owing has decreased from $875,000 to what the Petitioner now says and what the Monitor appointed under the February 16, 2004 Order says is $686,922. While the total debt is then reduced only $188,000 to $5,126,922, the $686,922 figure does not have the sufficient certainty which would have allowed me to conclude that the Petitioner had met the $5 million threshold required under the C.C.A.A. [12] First, the financial statements which were part of the Petition materials show the shareholders loan to Valtera as being $927,528 at December 31, 2001, $487,411 at December 31, 2002, and $556,003 at September 30, 2003. There is no explanation why no amount was shown as owing to Valtera in the Petition despite the fact that the financial statements were available to the Petitioner and were included in the Petition materials. There is no certainty that the shareholders loan was at least $560,000 when the Petition was filed in order that the total debt, including the shareholders loan, would be at least $5 million. [13] Second, there is no credible explanation from Mr. Odishaw why he would omit any debt as owing to Valtera while stating that there was secured debt owing to European. By December 2003, Mr. Odershaw was a director of both Valtera and Hester Creek. I cannot conclude his affidavit sworn February 16, 2004 constitutes full and fair disclosure of all material facts known to him or that it could be said that he had made proper inquiries about relevant facts before he swore his misleading affidavit. [14] Third, it appears that Valtera was able to obtain funds from European and that those funds were used either to pay debts of Hester Creek directly or to advance funds to Hester Creek so that Hester Creek could pay its debts directly. It is not clear whether funds advanced to Hester Creek were advanced by shareholders loan, whether the balances reflected in the financial records of Hester Creek reflect all such advances made, or whether funds paid directly by Valtera to creditors of Hester Creek are reflected as shareholders loans. [15] In this regard, I note the following. In his December 17, 2003 letter to the Farm Debt Mediation Service, Mr. Odishaw states that Valtera will pay "back salaries" of various Hester Creek employees on an "ex gratia basis", and that "all advances" made on behalf of Hester Creek by Valtera are "and will be on an ex gratia basis." In the February 27, 2004 report of the Monitor appointed in the February 16, 2004 Order, the Monitor states that the $686,922 now stated to be the balance owing under the shareholders loan includes all payments made by Valtera on behalf of Hester Creek since the new management took over in November 2003, and that this amount is $106,999. If this sum represents ex gratia payments not to be included in the amount of the shareholders loan, then the total debt owing may well be reduced to an amount which is perilously close to the $5 million minimum. [16] Fourth, it is difficult to see how $875,000 advanced by European to Valtera so that Valtera could purchase the shares of Hester Creek could end up being part of any shareholders loan owed by Hester Creek to Valtera. Accordingly, any part of the shareholders loan representing the original $875,000 advanced by European to Valtera would have to be removed from the balance owing under the shareholders loan balance said to be owing. [17] Accordingly, I have concluded that there was less than full disclosure and a misleading of the Court about material facts regarding the overall debt owed by the Petitioner and that, if those facts had been known, the Order made February 16, 2004 would not have been made. [18] Regarding the possibility of a Farm Credit Corporation Loan as a possible source of financing, the Petition materials state: The management of Hester Creek has also recently had discussions with Mr. Raymond Wagner of Farm Credit Corporation of Canada ("F.C.C.C."). In respect of potential financing, Mr. Wagner indicated that F.C.C.C. may be prepared to extend as much as $2,500,000, representing approximately 50% of the value of Hester Creek's hard assets. [19] What was not disclosed was that an application had been made to F.C.C.C. in the summer of 2003 and that this application had been turned down by F.C.C.C. I consider that material as it appears to close the door on F.C.C.C. being a realistic source of funding in any restructuring plan to be advanced by Hester Creek. Also, the impression left by Mr. Odishaw and the Petition that possible F.C.C.C. financing is a recent possibility is adversely affected by the knowledge that this is the second time around for such an application. [20] Regarding the role of European in these matters, European is described in the Petition materials as having provided Valtera with some of the financing for the acquisition of the shares of Hester Creek and as being a company that might be willing to invest $1 million in Hester Creek. In what Mr. Odershaw describes as a February 16, 2004 letter, but which is, in fact, undated, European states that it is reviewing "a financial restructuring package," that any decision would depend on "further due diligence by us and a further review of the business plan," and that a decision would be made in 30 to 45 days. Full disclosure would have required that Hester Creek provide some explanation about the business plan referred to as that plan has not been made available to the court, about why it would be necessary for European to undertake due diligence on a company that it had been involved with for over 5 years, and about why European was a likely candidate for $1 million of investment. In this latter regard, I note that the former President of Hester Creek in her February 26, 2004 affidavit states that the principal of European advised her in 2003 that European "had no further funds to invest in Valtera or Hester Creek." The failure to disclose that there might be some doubts about whether an undated letter represented a realistic source of funds was material to the question of whether the plan of reorganization had any likelihood of success and was material to the question of whether or not I would have granted the February 26, 2004 order. [21] The statement in the Petition that Hester Creek has "excellent prospects of obtaining financing" cannot be sustained if Hester Creek is relying only on European. However, that statement may also apply to the possibility of financing through Fog Cutter Capital Group ("Fog Cutter") of Portland, Oregon. In the Petition materials, Fog Cutter is described as an investment banker lender who had expressed a great deal of interest and who was in the process of completing due diligence with respect to the potential investment of $3,500,000. In his affidavit, Mr. Odishaw states that, but for a holiday on February 16, 2004 in the United States, Hester Creek would have had a letter available outlining the intention of Fog Cutter. The possible financing from this source also appears to be illusory. No such letter was subsequently produced. Nothing is filed to refute the statement in the February 26, 2004 affidavit of the former President of Hester Creek that one of the principals of Hester Creek has mentioned Fog Cutter since 2003 as a potential source of funds and that some of the principals of Fog Cutter are also principals of Valtera. [22] Regarding the financial position of Valtera, the following statement is made in the Petition: From a short‑term perspective, Valtera has indicated that it would be prepared to provide up to $100,000 in debtor-in-possession financing to allow Hester Creek to satisfy its post‑filing obligations until sufficient cash flow is generated for that purpose. [23] What is not set out in the materials was a material failure to disclose the following. First, the shares of Valtera are pledged to European so that Valtera is not in a position to provide any security by the hypothecation of its shares in Hester Creek when and if Valtera seeks funds. Second, the Bank of Montreal obtained a judgment against Valtera on January 15, 2004 which totals $3,217,335.14 as at February 18, 2004. The failure to disclose these facts would have resulted in the Order granted on February 16, 2004 not being made as there could be no assurance that the financial status of Valtera would allow the debtor-in-possession financing which is so critical to the expense of the Monitor and to the cost of running Hester Creek. The judgment in favour of the Bank of Montreal was granted more than a month before Mr. Odishaw swore his affidavit. The failure to advise the Court regarding this judgment is inexcusable. [24] The details provided about the foreclosure proceedings of 657302 B.C. Ltd. do not constitute full disclosure. The Petition materials indicate that a June 2002 mortgage was granted, Hester Creek breached its obligations under that mortgage within six months, that foreclosure proceedings were commenced in December 2002, that the original debt was assigned to 657302 B.C. Ltd., and that Hester Creek entered into a forbearance agreement with 657302 B.C. Ltd. What was not revealed was that a three‑month redemption period was granted. I take that to be a reflection of the court's determination of the jeopardy being faced by the mortgagee about whether the balance owing under all three charges against the land could be satisfied. Also not revealed in the Petition materials was that there was an order absolute of foreclosure application pending, that a June 2003 appraisal of $3,400,000 was filed in the foreclosure proceedings, that the forbearance agreement with 657302 B.C. Ltd. was signed by both Hester Creek and Valtera, and that Valtera agreed not to displace Ms. Warwick as a director and President of Hester Creek. I consider the failure to disclose those facts as a failure to make full and fair disclosure and to set out the facts about the likely views of a major creditor when that view was well known by the Petitioner. [25] The other matters about the foreclosure action which were not disclosed also constitute a failure to make full and fair disclosure of all material facts. First, the January 20, 2004 appraisal material revealed in the Petition materials showed a value of $5,030,000 while the appraisal that was filed in the foreclosure proceedings indicating a value of $3,400,000. The difference of an appraisal obtained only about eight months earlier is significant. Second, in view of the engineered departure of Ms. Warwick who had solicited the take‑out financing by 657302 B.C. Ltd. and whose presence was demanded by 657302 B.C. Ltd., it might well be unlikely that 657302 B.C. Ltd. would vote in favour of any plan of reorganization. Third, the assessment by the court that a three‑month redemption period was warranted and the fact that an order absolute of foreclosure application was available to 657302 B.C. Ltd. should have been revealed. Fourth, if the $3,400,000 appraisal of land was accurate, there was considerably less, if not very little certainty that any plan of reorganization could be successful without great amounts of equity participation being available. Certainly Hester Creek could not borrow itself out of its problems with both debt and assets of about $5,000,000 to $5,500,000. Fifth, the picture presented in the Petition materials that the future would be better for Hester Creek now that Ms. Warwick was gone ignored the added complication of the unhappiness of 657302 B.C. Ltd. that Ms. Warwick was no longer President. [26] There was also not full and fair disclosure regarding the forbearance agreements that were in place. The Petition materials indicate forbearance agreements with the Bank of Montreal and 658302 B.C. Ltd. but do not disclose the following. First, there were four forbearance agreements with the Bank of Montreal not one. Second, the first forbearance agreement with the Bank of Montreal provided that Valtera would seek equity partners and inject a minimum of $500,000 into Hester Creek. Third, the four forbearance agreements generally acknowledge that Hester Creek was in default of conditions surrounding its indebtedness to the Bank of Montreal back to 2002. Fourth, the third and fourth forbearance agreements provided that Hester Creek would not seek relief under the C.C.A.A. or the Bankruptcy and Insolvency Act ("B.I.A.") without the prior written consent of the Bank of Montreal. Fifth, that same provision is in the forbearance agreement between Valtera, Hester Creek and 658302 B.C. Ltd. [27] I consider these matters to be material non‑disclosures because the Petition materials fail to set out that: (a) Hester Creek and Valtera have been attempting to arrange new financing since April 2002 and have been unsuccessful in doing so; (b) that the indulgences granted by the Bank of Montreal were gained partially on the agreement of Hester Creek not to seek C.C.A.A. or B.I.A. protection; and (c) that Hester Creek has been in default since April 2002 whereas the Petition materials leave the impression that the financial problems have only resulted as a result of poor management. Although it may be that the covenant not to seek C.C.A.A. or B.I.A. relief is unenforceable against Hester Creek, it is a factor that I would have taken into account in determining the possibility of any plan of reorganization being successful in view of the position taken by the Bank of Montreal and 658302 B.C. Ltd., who represent somewhere between 98% and 100% of what I now know to be three and not four secured creditors. [28] I am also satisfied that there was not full and fair disclosure about an application made by Hester Creek under the Federal Farm Debt Mediation Act. Nothing is set out in the Petition materials about such a filing. I consider that a material non‑disclosure having the effect of misleading the Court. An application for the appointment of a Receiver Manager by the Bank of Montreal in its action to enforce its security was to be heard on December 12, 2003 and was then adjourned to December 16, 2003. On December 13, 2003, Hester Creek applied under the Farm Debt Mediation Act for a stay of proceedings, a review of its financial affairs, and for a mediation with its creditors. A stay of proceedings was granted automatically on December 16, 2003 but, after counsel for the Bank of Montreal made representations, the stay was terminated by Agricultural and Agri‑Food Canada as at January 9, 2004. On January 8, 2004, Hester Creek appealed that termination of the stay of proceedings, stating that it had not had the opportunity "to present to all creditors or the majority thereof any arrangement for consideration." The appeal of Hester Creek produced a further stay to February 14, 2004. However, the appeal board reached its decision on January 19, 2004 and determined that the original decision to terminate the stay of proceedings should be upheld. [29] All of this information was known to Hester Creek when the Petition materials were filed on February 16, 2004. All of this information should have been revealed in the Petition materials as it goes to provide background to the longstanding efforts of Hester Creek to make arrangements with its creditors and to fully advise the court of the position which would have been taken by the Bank of Montreal regarding a potential restructuring. The refusal of the Bank of Montreal to enter into further discussions would have been apparent if there had been full disclosure. This knowledge about the likely position of the Bank of Montreal regarding a possible restructuring would have influenced my decision about whether the Order made February 16, 2004 should have been made or not. This information was also relevant regarding whether any plan of reorganization would have any chance of approval. This failure to provide full and fair disclosure of all material facts and to set out the likely position of the Bank of Montreal on a potential reorganization was less than full disclosure and amounted to misleading the Court about material facts. [30] For the reasons set out above, I have concluded that if there had been full and fair disclosure or if the Petitioner had not inadvertently or advertently misled the court, the order that was made on February 16, 2004 would not have been made. On ex parte applications and in all materials which will be presented to the Court and to the creditors of a company seeking protection under the C.C.A.A., it is unacceptable for the materials to constitute anything less than full and fair disclosure. Affidavit material prepared by counsel for a petitioner should not be presented to the Court without counsel making proper inquiries about all material facts. Affidavits should not be sworn in support of a petition without the affiant making proper inquiries about all material facts. Materials which constitute less than full disclosure or which mislead the Court about material facts are unacceptable. In the case at bar, the materials prepared and filed were not only woefully inadequate but were also purposely misleading. In the circumstances, the Order will be discharged. [31] After notice to Valtera as to the charge created for the debtor-in-possession advances and to the Monitor as to the administrative charge set out in the February 16, 2004 Order, the Petitioner, the Bank of Montreal, 658302 B.C. Ltd. or the Monitor will be at liberty to speak to the question of whether the debtor-in-possession financing charge and the administrative charge will or will not retain the priority ranking set out in the February 16, 2004 Order. The granting of the Order today will not affect that question. The question of who should bear the costs of the Motion of the Bank of Montreal and 658302 B.C. Ltd. will also not be dealt with today. The Bank of Montreal and 658302 B.C. Ltd. will be at liberty to speak to that question in due course. [32] The stay of proceedings set out in the February 16, 2004 Order and by the March 2, 2004 Order will expire at 12 o'clock noon today. The Petitioner shall deliver up its assets to the Receiver Manager appointed in the Bank of Montreal proceedings. [33] If I am found to be wrong in deciding that the February 16, 2004 Order should be discharged, then I have also reached the conclusion that the test set out under s. 11(6) of the C.C.A.A. has not been met as I cannot be satisfied that the circumstances which exist are such that the order sought by Hester Creek is appropriate or that Hester Creek has acted and is acting in good faith and with due diligence. I cannot be satisfied that continued protection under the C.C.A.A. is appropriate. I am satisfied that any plan of reorganization of Hester Creek is doomed to fail. Hester Creek has reached the end of a two‑year road and the creditors of Hester Creek should no longer be delayed. The application of Hester Creek is therefore dismissed. [34] The application to join Valtera as a co‑Petitioner is also dismissed. That dismissal will not affect the ability of Valtera to file its own proceedings under the C.C.A.A. if it so wishes. I will hear any such application by Valtera. Any such application will be heard only upon notice to the secured creditors of Valtera, to the Bank of Montreal, and, if it is a creditor of Valtera, to 658302 B.C. Ltd. "G.D. Burnyeat, J." The Honourable Mr. Justice G.D. Burnyeat