No. S-137743 Vancouver Registry IN THE SUPREME COURT OF BRITISH COLUMBIA

No. S-137743
Vancouver Registry
IN THE SUPREME COURT OF BRITISH COLUMBIA
IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT
R.S.C. 1985, c. C-36, AS AMENDED
AND
IN THE MATTER OF THE CANADA BUSINESS CORPORATIONS ACT
R.S.C., 1985, c. C-44 AS AMENDED
AND
IN THE MATTER OF THE BUSINESS CORPORATIONS ACT
SBC, 2002, C-57 AS AMENDED
AND
IN THE MATTER OF LEAGUE ASSETS CORPORATION AND THE
PETITIONERS LISTED IN APPENDIX “A”
(COLLECTIVELY “LEAGUE” OR THE “COMPANY”)
MONITOR’S EIGHTH REPORT TO COURT
[Prepared for the December 19, 2013 hearing]
December 16, 2013
LEAGUE ASSETS CORPORATION, ET AL
MONITOR’S EIGHTH REPORT TO COURT
December 16, 2013
TABLE OF CONTENTS
1.
INTRODUCTION ........................................................................................................ 1
2.
THE MANAGEMENT AGREEMENT .......................................................................... 3
3.
MONITOR’S RECOMMENDATION ............................................................................ 6
4.
CONCLUSION ........................................................................................................... 9
APPENDIX
A.
List of Petitioners
LEAGUE ASSETS CORPORATION, ET AL
MONITOR’S EIGHTH REPORT TO COURT
December 16, 2013
1.
INTRODUCTION
1.1
On October 18, 2013 (the “Filing Date”), on the application of League Assets
Corporation (“LAC”) and those parties listed in Appendix A (collectively referred to as
“League” or the “Company”), the Supreme Court of British Columbia (the “Court”)
made an order (the “Initial Order”) granting League protection from its creditors
pursuant to the Companies’ Creditors Arrangement Act (the “CCAA”). Under the Initial
Order, PricewaterhouseCoopers Inc. (“PwC”) was appointed Monitor of the Companies
(the “Monitor”).
1.2
On October 25, 2013, League further applied for the approval of an interim financing
agreement and a charge to provide security for the interim financing. The Court
approved this application in part and made an Amended and Restated Initial Order (the
“ARIO”).
1.3
On November 22, 2013, the Court made an order (the “Process Order”) that, among
other things (i) increased the amount of interim financing available to League and the
related charge, (ii) set out a process to deal with certain properties owned by League, and
(iii) stayed all creditors from commencing or continuing any proceedings against League
until June 28, 2014.
1.4
On November 22, 2013, the Court also made an order (the “Colwood Development
Order”) that, among other things, (i) provided that neither the ARIO or any other order
made in the CCAA proceeding shall apply to the Colwood Development; (ii) permitted the
secured creditors of the Colwood Development to exercise any and all of their rights and
remedies against the Petitioners or the Colwood Development, subject to certain
limitations; and (iii) directed the Monitor to continue to collect all rents from tenants of
the Colwood Development and disburse such rents in the manner set out in the Colwood
Development Order.
1.5
On November 22, 2013, the Court also made an order (the “Sale of Units Order”) that,
among other things, approved the sale of the 3,872,863 units of Partners REIT owned by
the Petitioner IGW Public Limited Partnership (“IGW Public LP”) to McCowan and
Associates Ltd. (“McCowan”). The units were to vest in McCowan upon the Monitor
delivering a Monitor’s Certificate confirming that certain closing conditions were
satisfied.
1
LEAGUE ASSETS CORPORATION, ET AL
MONITOR’S EIGHTH REPORT TO COURT
DECEMBER 16, 2013
1.6
The sale of the Partners REIT units closed on November 28, 2013 and the Monitor’s
Certificate was delivered that day.
1.7
LAPP Global Asset Management Corp. (“LAPP GAM”), a wholly owned subsidiary of
IGW Public LP, currently manages Partners REIT pursuant to an amended and restated
management agreement between Partners REIT and LAPP GAM dated March 30, 2012
(the “Management Agreement”).
1.8
Since the closing of the sale of the Partners REIT units to McCowan, the Monitor has
been involved in discussions among League, Partners REIT and McCowan regarding a
potential assignment of the Management Agreement to a wholly-owned subsidiary of
McCowan. These discussions resulted in an agreement among League and 1862302
Ontario Limited (the “Assignee”), McCowan’s wholly-owned subsidiary, that the
Management Agreement be assigned to the Assignee. Partners REIT has consented to the
assignment of the Management Agreement to the Assignee.
1.9
The purpose of this report is to comment on League’s application, returnable December
19, 2013, for the approval of the assignment of the Management Agreement to the
Assignee, and for the approval of the related Secondment Agreement and Consent
Agreement (both as described below).
1.10
Unless otherwise stated, all monetary amounts noted herein are expressed in Canadian
dollars. Capitalized terms not otherwise defined herein are as defined in the Monitor’s
Sixth Report to Court, dated November 21, 2013.
1.11
The Monitor has set up a website at:
www.pwc.com/car-leagueassets
All prescribed materials filed by League and the Monitor relating to this CCAA proceeding
are available to creditors, Investors, and other interested parties in electronic format on
the Monitor’s website. The Monitor will make regular updates to the website to ensure
creditors, Investors, and interested parties are kept current and to add prescribed
materials as required.
2
LEAGUE ASSETS CORPORATION, ET AL
MONITOR’S EIGHTH REPORT TO COURT
DECEMBER 16, 2013
2.
THE MANAGEMENT AGREEMENT
Background
2.1
Pursuant to the Management Agreement, LAPP GAM provides significant strategic,
advisory, asset management and administrative services to Partners REIT in exchange for
a Management Fee and an Incentive Fee (both as defined in the Management
Agreement). A significant number of League’s employees are involved in the provision of
services under the Management Agreement from League’s offices located in Victoria,
Calgary and Toronto. The Management Agreement also provides for certain additional
fees in respect of acquisitions made by Partners REIT and property management services
provided to Partners REIT by LAPP GAM.
2.2
The Management Agreement has an initial term commencing March 30, 2012 and ending
March 15, 2015 (the “Initial Term”), subject to earlier termination in accordance the
terms of the Management Agreement. It automatically renews for successive three-year
terms following the Initial Term, subject again to earlier termination in accordance the
terms of the Management Agreement.
2.3
The Management Agreement may be terminated by Partners REIT in certain
circumstances. In some but not all circumstances where the Management Agreement is
terminated by Partners REIT, a fee is payable to LAPP GAM equal to two times the
annual Management Fee paid under the Management Agreement in respect of the last
full calendar year (the “Termination Fee”), provided that LAPP GAM has made certain
payments described below.
2.4
Upon termination of the Management Agreement in circumstances where the
Termination Fee is payable, LAPP GAM is to receive the Termination Fee provided that it
has paid all costs associated with terminating the employment or services of any
individuals acting as employees or providing services for LAPP GAM in connection with
the Management Agreement, and all other costs and expenses incurred in respect of
terminating contracts, leases or other agreements entered into by LAPP GAM in respect
of services provided under the Management Agreement, including penalties.
2.5
Upon termination of the Management Agreement in circumstances where the
Termination Fee is payable, Partners REIT is also to pay all other amounts owing to LAPP
GAM (including outstanding Management Fees) under the Management Agreement.
3
LEAGUE ASSETS CORPORATION, ET AL
MONITOR’S EIGHTH REPORT TO COURT
DECEMBER 16, 2013
2.6
As previously reported in the 4th Report and as described in the first affidavit of John
Parkinson dated December 16, 2013 (the “Parkinson Affidavit”), Partners REIT has
provided notice of termination of the Management Agreement in order to assume or
“internalize” the management of its investments.
2.7
Partners REIT has taken the position to League and the Monitor that the Termination Fee
may not be payable in respect of its intention to terminate the Management Agreement.
Partners REIT has also expressed concerns over a number of other issues relating to the
management of Partners REIT by LAPP GAM, including the quantum of the Management
Fee owing to LAPP GAM. The Company and Partners REIT were in discussions regarding
settlement of these issues and of the amounts owing under the Management Agreement
prior to the issuance of the Sale of Units Order.
Proposed Assignment of the Management Agreement
2.8
League and McCowan first commenced discussions regarding the assignment of the
Management Agreement prior to the issuance of the Sale of Units Order. These
discussions were suspended briefly to permit the parties to focus on the sale of the
Partners REIT units to McCowan.
2.9
Subsequent to the issuance of the Sale of Units Order, League, in consultation with the
Monitor, continued its discussions with Partners REIT and McCowan regarding a
potential assignment of the Management Agreement to the Assignee.
2.10
These discussions resulted in the execution of an assignment and assumption agreement
among LAPP GAM, LAC and the Assignee dated December 13, 2013 (the “Assignment
and Assumption Agreement”), as well as an employee secondment and expense
reimbursement agreement among LAC, LAPP GAM and the Assignee dated December 13,
2013 (the “Secondment Agreement”) and a consent agreement among Partners REIT,
LAPP GAM, LAC and the Assignee dated December 13, 2013 (the “Consent
Agreement”).
2.11
Collectively, the agreements represented by the Assignment and Assumption Agreement
and the Secondment Agreement are referred to as the “Assignment Transaction”.
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LEAGUE ASSETS CORPORATION, ET AL
MONITOR’S EIGHTH REPORT TO COURT
DECEMBER 16, 2013
2.12
The key terms of the Assignment Transaction are as follows:
2.12.1
The Assignee has agreed to pay to the Monitor, on behalf of LAPP GAM, $1.5
million in respect of the assignment to the Assignee of the Management
Agreement (the “Closing Payment”);
2.12.2 LAPP GAM will provide to the Assignee all books, records and relevant client
information relating solely to the Management Agreement and the services
provided by LAPP GAM to Partners REIT thereunder;
2.12.3 The Assignee has accepted the assignment of the Management Agreement and
covenants and agrees with LAPP GAM that it shall assume and be responsible for
all obligations and liabilities under the Management Agreement and perform all
duties and obligations arising thereunder on or after the closing date of the
Assignment Transaction (the “Closing Date”). It is contemplated that the
Closing Date will occur on December 20, 2013 and in any event on or before
December 24, 2013;
2.12.4 Subject to the provisions of the Secondment Agreement, the Assignee shall have
no liability for any employees currently providing services to Partners REIT
under and in connection with the Management Agreement (the “Employees”),
which Employees will remain employees of LAC;
2.12.5
LAC shall continue to employ certain of the Employees (the “Seconded
Employees”) on the terms and conditions of their current employment
arrangements with LAC from the Closing Date until February 15, 2014 (the
“Term”) and such Seconded Employees shall remain on the payroll of LAC
during the Term;
2.12.6 During the Term, the Seconded Employees shall be seconded to the Assignee and
shall perform such services as are required by the Assignee under the
Management Agreement (the “Secondment Duties”); and
2.12.7
The Assignee shall pay to LAC all Employment Costs (as defined in the
Secondment Agreement) associated with the Seconded Employees, including all
wages, salaries, benefits and employment taxes owing in respect of the
Secondment Duties and the Assignee shall pay certain other amounts for services
supplied by LAC and LAPP GAM.
5
LEAGUE ASSETS CORPORATION, ET AL
MONITOR’S EIGHTH REPORT TO COURT
DECEMBER 16, 2013
2.13
Pursuant to the Consent Agreement, Partners REIT has consented to the Assignment
Transaction and has agreed, among other things, that:
2.13.1
Partners REIT will pay to the Monitor, on behalf of LAPP GAM, all accrued and
unpaid fees as are due and payable by Partners REIT pursuant to the
Management Agreement as of Closing Date, including all accrued and unpaid
Management Fees. As at December 20, 2013, such fees are calculated to be
$573,915.64 inclusive of GST;
2.13.2 The Management Agreement shall be treated as being in full force and effect as
between Partners REIT and the Assignee as of Closing Date and any outstanding
notices of termination are revoked;
2.13.3 As at the Closing Time (as defined in the Consent Agreement), any prior defaults
or breaches of the Management Agreement are waived and Partners REIT fully
and finally releases any claims that it may have against the Companies and their
respective directors, officers, trustees and employees. Partners REIT also waives
any entitlement to file a claim under any claims process ordered by the Court in
the CCAA proceedings; and
2.13.4 Should the Management Agreement subsequently be terminated, Partners REIT
will not pay to the Assignee any amount in excess of $1.5 million in respect of the
Termination Fee.
3.
MONITOR’S RECOMMENDATION
3.1
LAPP GAM will be receiving approximately $2,074,000 in respect of the Assignment
Transaction, consisting of the $1.5 million Closing Payment and the payment of
approximately $574,000 of accrued but unpaid Management Fees owing by Partners
REIT to LAPP GAM as of the Closing Date. In addition, LAC will be receiving payments
from the Assignee in respect of the Secondment Duties and certain other amounts that
are intended to ensure that the secondment arrangements are cost neutral to League.
3.2
As set out in the Parkinson Affidavit, the Monitor has been advised by League that the
Termination Fee owing to LAPP GAM would be approximately $2.7 million if the
Termination Fee were to become payable in 2013.
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LEAGUE ASSETS CORPORATION, ET AL
MONITOR’S EIGHTH REPORT TO COURT
DECEMBER 16, 2013
3.3
While the Closing Payment is less than the Termination Fee, there is uncertainty
regarding whether the Termination Fee would be due and payable upon termination of
the Management Agreement in the current circumstances. As discussed above, Partners
REIT has expressed its view that the Termination Fee is not payable and has expressed
concerns over a number of other issues relating to the management of Partners REIT by
LAPP GAMM, including the quantum of the Management Fee owing to LAPP GAM.
3.4
The Monitor shares League’s view, as expressed in the Parkinson Affidavit, that there is a
potential for significant and protracted litigation between LAPP GAM and Partners REIT
with respect to the status of the Management Agreement, the payment of the Termination
Fee and other potential disputed matters, including the quantum of the Management Fee
owing to LAPP GAM.
3.5
The Assignment Transaction and the Consent Agreement represents a global settlement
of the outstanding issues faced by LAPP GAM in respect of the Management Agreement,
and will result in payment of the Closing Payment and payment in full of the accrued but
unpaid Management Fees owing by Partners REIT to LAPP GAM.
3.6
In addition, pursuant to the Consent Agreement, the Assignee will not be able to collect
any amount in excess of the Closing Payment in respect of the Termination Fee. The
Assignee therefore, does not have the potential to receive a windfall as a result of the
Assignment Transaction.
3.7
The Monitor notes that the Management Agreement was not publically marketed through
a customary marketing process. However, it was known in the market that League
intended to assign the Management Agreement to a third party. League received one
unsolicited proposal to take an assignment of the Management Agreement. This
proposal, the original Orange Proposal, was conditional on LAPP being in good standing
with respect to the Management Agreement (which Partners REIT contended LAPP was
not).
3.8
The Monitor also notes that Partners REIT has the right to and may choose to object to
the assignment of the Management Agreement to any other party and significant costs
may be incurred by League in finding an acceptable alternate assignee or in obtaining
Court approval of an assignment over the objection of Partners REIT. A contested
assignment motion with respect to the Management Agreement would add significant
uncertainty to these CCAA proceedings.
7
LEAGUE ASSETS CORPORATION, ET AL
MONITOR’S EIGHTH REPORT TO COURT
DECEMBER 16, 2013
3.9
The Monitor also notes that the seconded employees will continue working on the
management of Partners REIT until February 15, 2014, with the possibility that certain of
them may be hired on a permanent basis by the Assignee or Partners REIT following the
end of the transition period.
3.10
The Monitor is of the view that the Assignment Transaction will efficiently monetize the
Management Agreement, settle the outstanding issues in respect thereof, permit League
to avoid protracted litigation in respect of the Termination Fee and status of the
Management Agreement and ensure that LAPP GAM receives the Management Fees
currently outstanding under the Management Agreement.
3.11
Moreover, the Monitor is of the view that the Assignment Transaction represents a
significant milestone in these CCAA proceedings. The separation of the management
function between League and Partners REIT will allow League to continue to rationalize
its business and to focus its efforts on other aspects of its restructuring.
3.12
The Monitor is of the view that:
3.12.1
The Assignment Transaction and the Consent Agreement are fair and reasonable
in the circumstances and in the best interest of League and its stakeholders;
3.12.2 The process leading to the proposed Assignment Transaction was reasonable in
the circumstances. The transaction avoids the risk that Partners REIT would
maintain the position that the Management Agreement was terminable for cause
without payment. As League and Partners REIT were in a dispute as to the status
of the agreement, the Monitor agrees with the statement in the Parkinson
Affidavit that it was not realistic to attempt to sell the Management Agreement in
a public sale process; and
3.12.3 The sale or disposition represented by the Assignment Transaction would be
more beneficial to the stakeholders than a sale or disposition under a bankruptcy.
3.13
The Monitor is of the view that the sale proceeds should be held by the Monitor pending
further order of the Court.
8
LEAGUE ASSETS CORPORATION, ET AL
MONITOR’S EIGHTH REPORT TO COURT
DECEMBER 16, 2013
4.
CONCLUSION
4.1
The Monitor supports the application by League for an order approving the Assignment
and Assumption Agreement, the Secondment Agreement and the Consent Agreement and
related relief as set out in the draft Order attached to Leagues’ Notice of Application.
This report is respectfully submitted this 16th day of December, 2013.
PricewaterhouseCoopers Inc.
Court Appointed Monitor of
League Assets Corporation, et al
Michael J. Vermette, CA, CIRP
Senior Vice President
Neil Bunker, CA, CIRP
Vice President
9
APPENDIX A
List of Petitioners
LEAGUE ASSETS CORPORATION, ET AL
MONITOR’S EIGHTH REPORT TO COURT
DECEMBER 16, 2013
List of Petitioners
Corporations
1.
0781591 B.C. Ltd.
2.
0811883 B.C. Ltd.
3.
0812307 B.C. Ltd.
4.
0827524 B.C. Ltd.
5.
0873201 B.C. Ltd.
6.
0891146 B.C. Ltd.
7.
0895249 B.C. Ltd.
8.
0895251 B.C. Ltd.
9.
0908150 B.C. Ltd.
10.
2128273 Ontario Inc.
11.
2146431 Ontario Inc.
12.
2148711 Ontario Inc.
13.
2164613 Ontario Inc.
14.
2164614 Ontario Inc.
15.
2246329 Ontario Limited
16.
2291088 Ontario Inc.
17.
2314845 Ontario Inc.
18.
473 Albert St. Office GP Inc.
19.
7667906 Canada Inc.
20.
8252220 Canada Inc.
21.
Arbutus Industrial Park Ltd.
22.
Colwood Belmont Developments Ltd.
23.
Colwood City Centre Corp.
24.
Colwood City Centre GP Inc.
25.
Colwood Jerome Developments Ltd.
26.
Colwood Sooke Developments Ltd.
27.
Colwood's Triumph GP Ltd.
28.
Cowichan District Financial Centre GP Inc.
LEAGUE ASSETS CORPORATION, ET AL
MONITOR’S EIGHTH REPORT TO COURT
DECEMBER 16, 2013
29.
Cygnet Apartments GP Inc.
30.
Cygnet Properties GP Inc.
31.
Duncan City Centre GP Inc.
32.
Durham Portfolio GP Inc.
33.
Fort St. John Retail GP Inc.
34.
Gatineau Centre Development GP Inc.
35.
Gatineau Centre Real Estate Development Corporation
36.
IGW Cash Management Fund Ltd.
37.
IGW Diversified Redevelopment Fund GP Inc.
38.
IGW Energy Capital GP Inc.
39.
IGW Industrial GP Inc.
40.
IGW Mortgage Investment Corporation
41.
IGW Properties GP I Inc.
42.
IGW Public GP Inc.
43.
IGW REIT GP Inc.
44.
IGW Residential Capital GP Inc.
45.
Jesken Development GP Inc.
46.
Jesken Investment GP Inc.
47.
LAPP GAM Global Asset Management Corp.
48.
League Acquisition Corp.
49.
League Assets Corp.
50.
League Assets GP Inc.
51.
League Assets International Inc.
52.
League Capital Markets Ltd.
53.
League Capital Partners Ltd.
54.
League Debt Corp.
55.
League Financial Partners Inc.
56.
League Founding Limited Partner Ltd.
57.
League Holdings Corp.
58.
League Investment Fund Ltd.
59.
League Investment Services Inc.
LEAGUE ASSETS CORPORATION, ET AL
MONITOR’S EIGHTH REPORT TO COURT
DECEMBER 16, 2013
60.
League Opportunity Fund Ltd.
61.
League Realty Advisory Ltd.
62.
League Realty Services Ltd.
63.
League REIT Investco Inc.
64.
Londondale Shopping Centre GP Inc.
65.
Market Square Properties GP Inc.
66.
Member-Partners' Consolidated Properties GP Inc.
67.
North Vernon Properties Inc.
68.
Partners Equity Finance Inc.
69.
Residences at Quadra Village GP Inc.
70.
Stoney Range Industrial GP Inc.
71.
Sundel Square Ltd.
72.
Tsawassen Retail Power Centre GP Inc.
73.
Tyee Plaza GP Inc.
74.
Village Green Holdings #2 Ltd.
75.
Village Green Holdings #3 Ltd.
76.
Zeus Energy Ltd.
Limited Partnerships
77.
473 Albert St. Office Limited Partnership
78.
Colwood City Centre Limited Partnership
79.
Colwood's Triumph Limited Partnership
80.
Cowichan District Financial Centre Limited Partnership
81.
Duncan City Centre Limited Partnership
82.
Durham Portfolio Limited Partnership
83.
Fort St. John Retail Limited Partnership
84.
Gatineau Centre Development Limited Partnership
85.
IGW Diversified Redevelopment Fund Limited Partnership
86.
IGW Energy Capital Limited Partnership
87.
IGW Industrial Limited Partnership
88.
IGW Properties Limited Partnership I
LEAGUE ASSETS CORPORATION, ET AL
MONITOR’S EIGHTH REPORT TO COURT
DECEMBER 16, 2013
89.
IGW Public Limited Partnership
90.
IGW REIT Limited Partnership
91.
IGW Residential Capital Limited Partnership
92.
Jesken Development Limited Partnership
93.
Jesken Investment Limited Partnership
94.
League Assets Limited Partnership
95.
Londondale Shopping Centre Limited Partnership
96.
Market Square Properties Limited Partnership
97.
Member-Partners' Consolidated Properties Limited Partnership
98.
North Vernon Properties Limited Partnership
99.
Redux Duncan City Centre Limited Partnership
100.
Residences At Quadra Village Limited Partnership
101.
Stoney Range Industrial Limited Partnership
102.
Tsawassen Retail Power Centre Limited Partnership
103.
Tyee Plaza Limited Partnership
104.
Village Green Holdings Limited Partnership
Real Estate Investment Trusts
105.
League IGW Real Estate Investment Trust