Who Gets the Upside in a Single-Asset Real Estate Company? Unsecured Creditors, Québec Court Rules


This article has been contributed by Julien Morissette, associate in the Insolvency and Restructuring Group of Osler, Hoskin & Harcourt LLP.
The approach to be used for insolvent single asset real estate companies has been debated before Canadian courts for some time. Typically, the companies want to continue operating and attempt a restructuring, while the first ranking secured creditor wants to foreclose or appoint a receiver. The debate often came down to who should benefit from any upside. While certain courts have been receptive to secured creditors, in a recent judgment the Superior Court of Québec allowed a one-building company to attempt a restructuring, a result which should be noted by the insolvency and financing communities.
Casperdiny IFB Realty Inc. (Casperdiny) and Les Appartements Club Sommet Inc. (together with Casperdiny, the Debtors) were the developers of a 291 unit apartment tower in downtown Montréal. They were in default of making payments to their creditors, including importantly the first ranking secured creditor, Timbercreek Senior Mortgage Investment Corp. (Timbercreek).
Timbercreek sent the debtors a notice under the Bankruptcy and Insolvency Act (BIA) that it would realize upon its security. In parallel, the syndicate (equivalent of a condominium corporation) had registered a substantial lien and moved for the building to be seized and sold. The Debtors filed a notice of intention to make a proposal under the BIA, which resulted in an automatic stay of proceedings. Sometime later, they sought to continue the file under the Companies’ Creditors Arrangement Act (CCAA), likely because it is a more flexible statute.
The Debtors requested that the Court create a substantial super-priority DIP charge. Timbercreek opposed the motion and essentially sought to bankrupt the Debtors. It primarily argued, as does a secured creditor seeking to appoint a receiver, lack of value for unsecured creditors. On the basis of its appraisal of the building it was arguable that Timbercreek’s loan was undersecured.
Some additional colour came from the fact that an entity closely related to Timbercreek had made, and subsequently withdrawn, several offers for the building, each one being lower than the previous one. The Debtors proposed that the loan to be secured by the sought DIP charge (to be provided by a related entity) be used to keep interest payments on Timbercreek’s loan current for six months. They presented independent appraisals of the building which suggested that Timbercreek’s loan was not at risk and argued that the high vacancy rate (about 40%) could be lowered quickly, increasing the building’s value and potential recovery for other creditors.
In a judgment rendered earlier this month (Casperdiny IFB Realty Inc. (Arrangement relatif à) 2014 QCCS 1480, reasons in French), the Superior Court agreed with the Debtors and granted an Initial Order under the CCAA, including the requested DIP Charge. Justice Castonguay did not mention a line of cases arising out of the provinces of British Columbia (Cliffs Over Maple Bay Investments Ltd. v. Fisgard Capital Corp., 2008 BCCA 327; Re Marine Drive Properties Ltd., 2009 BCSC 145) and Alberta (Re Octagon Properties Group Ltd., 2009 ABQB 500) which had been largely favourable to secured creditors of single asset real estates companies whose position was at risk. It may be that in those cases the proposed restructurings were “doomed to fail” while here, there was a glimmer of hope for other creditors.
The effect of the judgment is that Timbercreek will bear all the downside of the ups and downs of the rental accommodation market. Any significant upside, however, would be for the benefit of other creditors. It may be that this judgment is only a fact specific blip, but it may signal a swing of the pendulum for one building company workouts. Members of the insolvency and financing communities should keep an eye out for further developments.

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