Lemare Holdings Ltd. (Re)

2014 BCSC 893 Lemare Holdings Ltd. (Re)

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Lemare Holdings Ltd. (Re), 2014 BCSC 893 Date: 20140521 Docket: S124409 Registry: Vancouver In the Matter of the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, As Amended And: In the Matter of the Business Corporations Act, S.B.C. 2002, c. 57, As Amended And: In the Matter of a Plan of Compromise or Arrangement of Lemare Holdings Ltd., Lemare Lake Logging Ltd., Lone Tree Logging Ltd., C.&E. Roadbuilders Ltd., Coast Dryland Services Ltd., Dominion Log Sort Ltd., and Central Coast Industries Ltd. Petitioners Before: The Honourable Mr. Justice Grauer Reasons for Judgment In Chambers Counsel for the Petitioners: John I. McLean, Q.C. Counsel for Concentra Financial Services Association: Diana K. Lee Counsel for Concentra Trust: Peter L. Rubin Counsel for the Monitor: Magnus Verbrugge Place and Date of Hearing: Vancouver, B.C. May 9, 2014 Place and Date of Judgment: Vancouver, B.C. May 21, 2014

INTRODUCTION [1] In this ongoing proceeding under the Companies' Creditors Arrangement Act, RSC 1985, c C-36 (the "CCAA"), the petitioners ("Lemare") apply for a "Meeting Order", authorizing them to file a Consolidated Plan of Arrangement, and directing a meeting of the trade creditors to vote on the plan. [2] In the particular circumstances of this case, Lemare also seeks a declaration, without which there would be no point in pronouncing the Meeting Order, concerning the status of the respondent creditor Concentra Financial Services Association ("Concentra"), in connection with a promissory note called the "Opco note". Concentra is the assignee of the Opco note, which was given by a number of companies including Lemare, in relation to a loan in the principal amount of $10,000,000. The Opco note matured on January 29, 2013. [3] Concentra, who is not a trade creditor, opposes the application on the ground that the order sought would effectively impair its rights as an unsecured creditor while excluding it from the plan and depriving it of the right to vote.

BACKGROUND 1. The Petitioners [4] The petitioners constitute an integrated forestry business located on northern Vancouver Island, where they are a major employer and a significant contributor to the economy.

2. The genesis of the Opco note [5] In 1999, a group of companies that included the petitioners, which I will call the "Lemare group" established a retirement plan for the benefit of its then controlling shareholder, David Dutcyvich. This plan included the creation of a Retirement Compensation Agreement ("RCA") and a related RCA Trust to comply with the then provisions of the Income Tax Act. [6] In 2002-2003, Concentra (then called CUCORP) refinanced the RCA through a series of cascading loans, all in the principal amount of $10,000,000 and flowing down a chain of borrowers, the design of the structure driven by the provisions of the Income Tax Act. Concentra lent the RCA trust $10,000,000 (the "RCA loan") on the security of a promissory note. The trust in turn lent $10,000,000 to a shell company called "Investco" on the security of a promissory note. Investco then lent $10,000,000 to a group of companies including the Lemare group, collectively referred to as the "Opcos", on the security of the Opco note. The Opco note and the Investco note were then assigned to Concentra as security for the RCA loan. [7] The result was that the Opcos' contribution of $10,000,000 to the RCA trust was funded by a loan from Concentra on the security of the Opco note, structured in a manner to maximize the available tax advantages. [8] Concentra bundled up a number of similar loans it had made to various RCA trusts, and "securitized" them by selling them into the market. In the result, the Opco note is currently held by a "fund" for which Concentra acts as the agent.

3. The terms of the Opco note [9] Of significance to the present application, the terms of the Opco note include paragraph 6.1: The Borrower covenants and agrees, and the Lender, by its acceptance hereof, also covenants and agrees, that the payment of the principal, interest and other amounts in respect of this Note shall be and are hereby expressly subordinated in right of payment to the prior payment of all other indebtedness of the Borrower (including, for greater certainty, all trade debts of the Borrower) (the "Indebtedness"). In order to give effect to the foregoing: 6.1.1 in the event that proceedings are commenced by or against the Borrower as a result of its insolvency or in the event of the liquidation or winding-up of the Borrower or if proceedings are commenced which effect a reorganization, arrangement or compromise of debt of the Borrower, the holders of all other Indebtedness shall be entitled to receive payment in full of all amounts due thereon before the Lender is to receive any payment in respect of the principal, interest or any other amount owing in respect of this Note; 6.1.2 upon the maturity of any Indebtedness which constitutes debt for borrowed money of the Borrower, by lapse of time, acceleration or otherwise, then all amounts owing in respect of such matured Indebtedness shall first be paid in full, or shall first have been duly provided for, before

any payment on account of principal, interest or any other amount due in respect of this Note is made. To the extent requested by any creditor of the Borrower, the Lender agrees to enter into a confirmation that such creditor is entitled to rely on the provisions of this section. The foregoing subordination shall not relieve the undersigned from any of its obligations hereunder or restrict the rights of the Lender hereunder.

4. The Lemare reorganization [10] By 2009, generational and operational tension had developed within the Lemare group and related companies. The founder of the enterprise, David Dutcyvich, had become increasingly involved in real estate development and had acquired a large ranch property in Saskatchewan. He funded this largely by withdrawals from the Lemare group, which met with concern on the part of the Toronto-Dominion Bank, the group's lender. [11] David Dutcyvich's sons, Eric Dutcyvich and Chris Dutcyvich, the petitioners' current principals, had taken over the operational management of the core forestry and road building businesses. They initiated a process to restructure the organization so that the forestry related businesses (the petitioners) remained with them, while the real estate operations (comprising five corporations) went with their father. These companies together constitute the Opcos. It was contemplated that, as part of this process, the petitioners would be released from liability under the Opco note. [12] As part of the restructuring, David Dutcyvich's principal real estate holding company, 3L Cattle Company Ltd. ("3L Cattle") assumed all of Lemare's liabilities under the Opco note. Concentra was a party to these arrangements and acknowledged 3L Cattle to be the primary borrower. 3L Cattle also agreed to obtain a release of Lemare from the note, and

undertook to indemnify Lemare for any liability under it. In return, 3L Cattle's debt to Lemare was reduced from $19,000,000 to $2,000,000. [13] 3L Cattle's obligations to Lemare in relation to the Opco note were secured by a mortgage in the amount of $15,000,000 to Lemare, charging 3L Cattle's Saskatchewan ranch. 3L Cattle had failed to obtain the promised release by the time the Opco note matured on January 29, 2013. [14] Lemare is currently involved in foreclosure proceedings in Saskatchewan to realize on its security. These proceedings are complicated by the provisions of the Saskatchewan Farmland Security Act, and have already received the attention of the Saskatchewan Court of Queen's Bench and the Court of Appeal for Saskatchewan. They continue. [15] It will be observed that the practical effect of this arrangement was to secure the Opco note by the mortgage on the 3L Cattle ranch, which was more than Concentra had ever bargained for.

5. Insolvency looms [16] In the meantime, in circumstances I outlined in Lemare Holdings Ltd. (Re), 2012 BCSC 1591, leave to appeal refused: Lemare Holdings Ltd. v British Columbia, 30 November 2012, BCCA Docket CA040365, Lemare entered CCAA protection by way of an initial order I pronounced on June 21, 2012. [17] The difficulty was not with Lemare's core business. In that Lemare was performing, and continues to perform, quite well. There were two problems: the first was what was then a potential liability on the Opco note for $10,000,000, which had nothing to do with the core business. The second comprised two proposed assessments against Lemare by the Ministry of Finance for stumpage allegedly payable to the Crown, and had very much to do with the core business. Those proposed assessments, together with a proposed penalty and interest, totalled some $12,000,000. [18] As I stated in Lemare Holdings at para 62, these two problems combined to give rise to a reasonably foreseeable expectation of a looming liquidity crisis that would deprive Lemare of the ability to pay its debts as they generally became due, without the benefit of a stay under the CCAA. Hence, I ruled, applying Re Stelco Inc. (2004), 48 CBR (4th) 299 (Ont SCJ), leave to appeal refused: 2004 CarswellOnt 2936 (CA), the court had jurisdiction to pronounce the initial order. [19] Since then, Lemare was able to settle the Crown's claim for stumpage in the course of this process, to the great advantage of all other creditors, including Concentra.

6. Lemare seeks to emerge from protection [20] Since settling the Crown's stumpage claim, Lemare has worked with its monitor and advisors to create a proposal that would allow its trade creditors to be paid in full, and permit it to emerge from CCAA protection. It is supported in this by its secured creditors, particularly the Toronto-Dominion Bank. Emergence at this time would enable Lemare: · to obtain additional financing at commercially reasonable rates; · to qualify for and obtain bonding; · to bid on new jobs without the stigma of being in what many perceive as "bankruptcy", and · to obtain better terms from its suppliers; all of which would improve its financial circumstances and enhance its ongoing viability, to the benefit of its hundreds of employees and contractors, and the North Island economy. [21] This is precisely the sort of result that the CCAA is intended to achieve. But there is a problem: the Opco note became due in January 2013, and Concentra has demanded payment from Lemare. Pending a successful conclusion to its Saskatchewan foreclosure proceedings, Lemare is not presently in a position to pay Concentra in full as well as its trade creditors.

THE PLAN [22] The Plan is a proposal to the petitioners' trade creditors, who are owed approximately $1,550,000. The proposal is to pay these creditors in full with interest over a period of three years, by way of consecutive equal quarterly instalments of principal and interest. It is designed in a manner that is intended not to affect the secured creditors, including Toronto-Dominion Bank and TD Equipment Finance, the shareholders' loan or inter-corporate debt, and the claim of Concentra pursuant to the Opco note. [23] It is a condition of the Plan that Lemare obtain a Sanction Order in the usual form. Moreover, as noted, for the Plan to be viable, it is necessary that Lemare obtained a declaration as to the rights of the holder of the Opco note as against the Lemare group. It is this aspect that gives rise to the opposition of Concentra. [24] The declaration Lemare seeks is in the following terms: [S]ubject to the Petitioners obtaining the approval of the Trade Creditors to the Plan in accordance with the CCAA, and subject to the Court otherwise approving and sanctioning the Plan, the Petitioners are entitled to a declaration that: (a) in respect of the Opco Note neither Concentra Financial Services Association nor Concentra Trust or any assignee or holder of the Opco Note is entitled to receive any payment from the Petitioners in respect of the principal, interest or any

other amounts claimed to be owing in respect of the Opco Note until the following debt has been paid in full: (i) the Trade Creditors, Proven Secured Creditors, Intracompany claims, the claims of the Toronto-Dominion Bank and T-D Equipment Finance (the "Existing Debt"), and (ii) any other debt incurred by the petitioners in the ordinary course of business between the Filing Date and the date of payment in full of the Existing Debt (the "Other Debt"), (the Other Debt and the Existing Debt being collectively the "Indebtedness"); (b) that no action may be commenced against the Petitioners in respect of the Opco Note until the Indebtedness has been paid in full provided that: (i) the limitation period in respect of the Opco Note shall cease to run in respect of the Petitioners from the date of this Order until the Indebtedness is paid in full; (ii) Concentra Financial Services Association or Concentra Trust may issue proceedings in respect of the Opco note for the purpose of preserving any limitation period, but no further steps shall be taken against the Petitioners in any such proceedings until the Indebtedness is paid in full; (iii) If requested by Concentra Financial Services Association or Concentra Trust, the Petitioners shall execute a Tolling Agreement with respect to the Opco note in a format acceptable to the Petitioners, acting reasonably. [25] The proposed Plan, then,

excludes Concentra. It is addressed to, and may be voted upon by, only the trade creditors. Concentra is described in the Plan as an "unaffected creditor". The declaration would subordinate the Concentra debt to all other indebtedness until, in essence, the Plan has run its course, while protecting Concentra from the expiry of any limitation period. Thus Concentra is subject to a post-sanction stay of proceedings for the three-year period of the Plan.

DISCUSSION [26] Lemare submits that the order it seeks does not affect Concentra, which is not a trade creditor, and whose claim is not in any way being compromised or impaired. What has the potential to impair Concentra's rights is the declaration. Without that declaration, the Plan cannot practically proceed. But, says Lemare, the declaration does no more than recognize the meaning and effect of paragraph 6.1 in the Opco note. Thus, Lemare asserts, it does not rely on any power or discretion granted by the provisions of the CCAA; rather, it seeks only to leave Concentra in the position it bargained for under the terms of the Opco note. [27] Concentra maintains that its position is being impaired and that the Plan does affect it. It points out that it is an unsecured creditor, just like all of the trade creditors, and yet is being treated like a separate class. The question of subordination, Concentra submits, is one that is relevant only among the unsecured creditors, and does not affect its right to participate in the Plan. Consequently, Concentra asserts, the proposed Plan cannot be sanctioned because the declaration upon which it depends would affect a party who has not been permitted to vote on the Plan; the application should accordingly be dismissed. [28] As presented, the proposed Plan of Arrangement does not seek to compromise the indebtedness owed on the Opco note,

except in so far as it incorporates and depends upon the declaration sought. The key question, then, is whether the declaration affects or impairs Concentra's position as an unsecured creditor. If so, then the meeting order ought not to be made. This is because the court would not be in a position to sanction the Plan of Arrangement, if approved, as to do so would have the effect of binding a party that was not given an opportunity to vote on it: see, for instance, Doman Industries Ltd (Re), 2003 BCSC 376, 41 CBR (4th) 29. [29] The answer to this question turns on the provisions of paragraph 6.1 of the Opco note. [30] Concentra submits that it would be inappropriate for me to interpret paragraph 6.1 on this application as the clause is ambiguous, and a full hearing would be necessary in order to provide appropriate evidence of the circumstances surrounding the negotiation of the note. I disagree. Not only do I not find the note to be ambiguous, but I also observe that the approach urged by Concentra would violate the principle of summary determination that underlies proceedings under the CCAA: see Jameson House Properties Ltd (Re), 2009 BCSC 964 at paras 36-38. Concentra has had ample opportunity to adduce any evidence it considered material to this question. [31] A helpful discussion of the principles of contractual interpretation can be found in Water Street Pictures Ltd v

Forefront Releasing Inc, 2006 BCCA 459, 57 BCLR (4th) 212, per Lowry J.A.: [23] Recourse to extrinsic evidence to aid in the interpretation of an agreement is the court's last resort. It is only when the intentions of the parties cannot be objectively determined from the words they have chosen to employ, such that there is ambiguity, that the law permits consideration to be given to evidence of their conduct in making their agreement and in fulfilling their obligations. If it were otherwise, the certainty that is essential to documenting commercial transactions would be seriously undermined. The two-step approach to be taken has been succinctly stated by the Manitoba Court of Appeal in Geoffrey L. Moore Realty Inc v Manitoba Motor League, 2003 MBCA 71, [2003] 9 WWR 385, at para 26: [26] In brief summary then, to determine the intentions of the parties expressed in a written contract, one looks to the text of the contract as a whole. In doing so, meaning is given to all of the words in the text, if possible, and the absence of words may also be considered. If necessary, the text is considered in light of the surrounding circumstances as at the time of execution of the contract. The goal is to determine the objective intentions of the parties in the sense of a reasonable person in the context of those surrounding circumstances and not the subjective intentions of the parties. If,

after that analysis, the text in question is ambiguous, extrinsic evidence may be considered. [24] Thus, the court looks first to the words of the agreement, read as a whole, aided, if necessary, by evidence of the circumstances or what is referred to as the factual matrix existing when the agreement was made. Such evidence is generally restricted to circumstances known to both parties that illuminate the meaning a reasonable person would give to the words employed: Glaswegian Enterprises Inc v BC Tel Mobility Cellular Inc (1997), 49 BCLR (3d) 317 (CA) at paras 18 to 20. See also Lord Hoffmann's discussion of the principles of interpretation in Investors Compensation Scheme Ltd v West Bromwich Building Society, [1998] 1 WLR 896 (HL). The wording of the agreement must not, however, be overwhelmed by a contextual analysis: Black Swan Gold Mines Ltd v Goldbelt Resources Ltd (1996), 25 BCLR (3d) 285 (CA) at para 19. [25] If, after undertaking the first step of the analysis, the text is ambiguous, extrinsic evidence becomes admissible for the purpose of resolving the ambiguity and determining what was actually agreed. But there must be a true ambiguity before recourse can be had to evidence of the way in which the parties conducted themselves. It is well recognized that the court is not to search for ambiguity. In Melanesian Mission Trust Board v Australian Mutual Provident Society,

[1996] UKPC 53, [1996] JCJ No 63 at para 9, Lord Hope of Craighead expressed the caution the court must exercise in this regard, as follows: [9] The approach which must be taken to the construction of a clause of the formal document of this kind is well settled. The intention of the parties is to be discovered from the words used in the document. Where ordinary words have been used they must be taken to have been used according to the ordinary meaning of these words. If their meaning is clear and unambiguous, effect must be given to them because that is what the parties are taken to have agreed to by their contract. Various rules may be invoked to assist interpretation in the event that there is an ambiguity. But it is not the function of the court, when construing a document, to search for an ambiguity. Nor should the rules which exist to resolve ambiguities be invoked in order to create an ambiguity which, according to the ordinary meaning of the words, is not there. So the starting point is to examine the words used in order to see whether they are clear and unambiguous. It is of course legitimate to look at the document as a whole and to examine the context in which these words have been used, as the context may affect the meaning of the words. But unless the context shows that the ordinary meaning cannot be given to them or that there is an ambiguity, the ordinary meaning

of the words which have been used in the document must prevail. [26] An ambiguity can be said to exist only where, on a fair reading of the agreement as a whole, two reasonable interpretations emerge such that it cannot be objectively said what agreement the parties made: Gilchrist v Western Star Trucks Inc (2000), 73 BCLR (3d) 102, 2000 BCCA 70 at paras 17-18; and Re Canadian National Railways and Canadian Pacific Ltd (1978), 95 DLR (3d) 242 at 262, [1979] 1 WWR 358 (BCCA), aff'd [1979] 2 SCR 668. Where extrinsic evidence has been admitted, it has been to resolve an ambiguity in what the parties in fact agreed as opposed to overcoming an uncertainty about the legal consequences of the agreement they made. See also Salah v Timothy's Coffees of the World Inc, 2010 ONCA 763, 74 BLR (4th) 161 at para 16. [32] Applying these principles, I note the following circumstances. The Opco note was the result of a tax-driven transaction ultimately benefiting David Dutcyvich, principal shareholder of what was then the Lemare group. The terms initially offered by CUCORP concerning that transaction confirmed that "the Opco Loan shall be fully subordinated in right of payment to all other indebtedness of Opco". The assets of the borrower would include a universal life insurance policy on Mr. Dutcyvich's life, and the borrower's entitlement to a refund of refundable tax account in an amount

equal to 50% of the amount contributed to the RCA trust, subject to a 30% withholding tax. [33] The words used in paragraph 6.1 are straightforward. Anything owing under the note is subordinated in right of payment to the prior payment of all other indebtedness, including all trade debts. Concentra suggests that the terms are ambiguous because it is not clear at what point the amount of "indebtedness" to which the Opco note debt is subordinated is crystallised. Does it mean indebtedness at the time of the signing of the note? Or at the time of the note's maturity? [34] In my view, when read in the context of the clause as a whole, including 6.1.1 and 6.1.2, there is no ambiguity. Clause 6.1 subordinates Concentra's right of payment to the prior payment of all other indebtedness. To give effect to this, Clause 6.1.1 specifically permits the borrower to proceed through a process such as the present one before Concentra is entitled to receive any payment. It follows that in accordance with this provision, Concentra is not in a position to sue, execute, and pay other creditors before it pays itself, until the process is complete. Until then, it must stand aside. The indebtedness must include all debt arising that would be subject to the process in question. Any other interpretation would make nonsense of the borrower's right to invoke the CCAA process as expressly contemplated by

this provision, and would be commercially untenable. [35] That being the case, I conclude that the proposed Plan of Arrangement together with the declaration sought by Lemare do not affect Concentra's rights under the terms of the Opco note. [36] On this interpretation, it must be observed, the Opco note does not exclude Concentra from participation in the contemplated proceedings. But where the effect of the clause on Concentra's rights leaves it in a position, as I find it does, where those rights are not impaired by the proposed Plan, then I see no basis for requiring that Concentra have a vote. [37] Concentra submits that the declaration sought by Lemare is simply an attempt to sidestep the problem inherent in attempting to create two classes of creditors, the trade creditors and Concentra, when they are all unsecured creditors. That argument cannot succeed if, as I have found, Concentra is not affected by the proposal. But if Concentra were to be included, it would properly be in a separate class in any event, given the lack of commonality of interests between the trade creditors on the one hand, and Concentra on the other. This lack of commonality is recognised in the Opco note itself, and is amplified by the very different interest each has in Lemare's viability as a going concern. Their respective rights, in my view, are so dissimilar that it would not be reasonably

possible for them to consult together with a view to their common interest. Nor would there be anything unfair or unjust, given the provisions of the Opco note and the other debtors to whom it has access, to exclude Concentra from that consultation. [38] Concentra further asserts that its contractual rights would effectively be confiscated without a vote, due to the effect of the declaration. Thus, it argues, Concentra would be prohibited from commencing action during the period contemplated in the Plan although the terms of the Opco note would otherwise permit it to do so. In this, Concentra relies upon the sentence at the end of paragraph 6.1: The foregoing subordination shall not relieve the undersigned from any of its obligations hereunder or restrict the rights of the Lender hereunder. [39] That sentence must, however, be read in context. The interpretation Concentra would place upon it would render paragraph 6.1.1 meaningless, as it would allow Concentra to ignore the very processes that it specifically agreed to acknowledge. As I read it, the effect of that sentence in the context we are here considering is to recognize, as Lemare does, that nothing about this process impairs Concentra's claim on the note in accordance with its terms. Subordination, in short, does not mean that Lemare does not ultimately have to pay. [40] Concentra then argues that clause (a)(ii) of the

declaration Lemare seeks would have the effect of forever postponing Concentra's ability to collect on its note, because future trade accounts would keep intervening. But that provision, as I read it, imposes nothing out of the ordinary in the context of a CCAA Plan of Arrangement, given the terms of the subordination clause in the note. When the CCAA process comes to an end, Concentra can proceed with its remedies as contemplated by paragraph 6.1.1. Once it does so, regardless of any CCAA proceedings or declaration, it will always be subordinated to whatever other debt exists.

CONCLUSION [41] As I ordered at the conclusion of the hearing of this matter, the existing stay of proceedings is extended to July 31, 2014. [42] The proposed Meeting Order is approved in the form submitted. [43] I order two modifications to the terms of the declaration that Lemare seeks. The first is to ensure appropriate flexibility in the event of unforeseen circumstances. The second reflects the fact that, much as I might wish it were otherwise, I do not have jurisdiction to stop the running of time. The declaration is granted as follows, with the changes blacklined: Subject to the Petitioners obtaining the approval of the Trade Creditors to the Plan in accordance with the CCAA, and subject to the Court otherwise approving and sanctioning the Plan, the Petitioners are entitled to a declaration that: (a) in respect of the Opco Note neither Concentra Financial Services Association nor Concentra Trust or any assignee or holder of the Opco Note is entitled to receive any payment from the Petitioners in respect of the principal, interest or any other amounts claimed to be owing in respect of the Opco Note until the following debt has been paid in full: (i) the Trade Creditors, Proven Secured Creditors, Intracompany claims, the claims of the Toronto-Dominion Bank and T-D Equipment Finance (the "Existing Debt"), and (ii) any other debt incurred by the petitioners in the ordinary

course of business between the Filing Date and the date of payment in full of the Existing Debt (the "Other Debt"), (the Other Debt and the Existing Debt being collectively the "Indebtedness"); (b) that, subject to further order of the Court, no action may be commenced against the Petitioners in respect of the Opco Note until the Indebtedness has been paid in full provided that: (i) with respect to the effluxion of time pursuant to any limitation period applicable to the Opco Note, the Petitioners are estopped from relying on time passing from the date of this order to the date that the indebtedness is paid in full; (ii) Concentra Financial Services Association or Concentra Trust may issue proceedings in respect of the Opco note for the purpose of preserving any limitation period, but no further steps shall be taken against the Petitioners in any such proceedings until the Indebtedness is paid in full; (iii) If requested by Concentra Financial Services Association or Concentra Trust, the Petitioners shall execute a Tolling Agreement with respect to the Opco note in a format acceptable to the Petitioners, acting reasonably. [44] In my view, this accomplishes a result that is fair and reasonable to all of Lemare's creditors, leaves Concentra's rights unimpaired in the context of CCAA proceedings as contemplated by paragraph 6.1.1 of the Opco note, and fulfils the underlying purpose of the CCAA. "GRAUER, J."