Court File No. CV-13-10370-00CL ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST)

Court File No. CV-13-10370-00CL
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST)
IN THE MATTER OF THE BANKRUPTCY OF SHS SERVICES
MANAGEMENT INC./GESTION DES SERVICES SHS INC AND SHS
SERVICES LIMITED PARTNERSHIP
IN THE MATTER OF AN APPLICATION PURSUANT TO SECTION 243
OF THE BANKRUPTCY AND INSOLVENCY ACT, R.S.C. 1985, c. B-3, AS
AMENDED
FACTUM OF PAUL VERHOEFF AND STEPHEN VERHOEFF
Paliare Roland Rosenberg Rothstein LLP
155 Wellington Street West
35th Floor
Toronto, ON M5V 311
Massimo Starnino (LSUC No. 41048G)
Tel: 416.646.7431
Fax: 416.646.4301
Email: [email protected]
Lawyers for Paul Verhoeff and
Stephen Verhoeff
1
PART I. INTRODUCTION
1.
Paul Verhoeff and Stephen Verhoeff (the "Verhoeffs") do not oppose the relief
being sought by the Receiver in connection with its motions seeking approval of its fees
and disbursements and its proposed settlement agreement (the "Settlement
Agreement") with Sears Canada Inc. ("Sears"), except to the extent that they would
clarify that nothing in the proposed order implementing the Settlement Agreement
fetters this courts' jurisdiction in connection with its obligation to fairly allocate the cost
of the receivership proceedings among asset pools subject to different security
interests.
2.
Considerable costs have been and will continue to be incurred in these
proceedings, including for the purpose of recovering and distributing the funds withheld
by Sears. Those costs should be fairly allocated as among the lien claimants and the
other stakeholders, such as the Verhoeffs, who may have personal liability as a result of
certain guarantee agreements executed by them.
PART II. FACTS
3.
The Verhoeffs are two of the co-founders of SHS Services Management
Inc./Gestion Des Services SHS Inc. ("SHS"), along with Michael Clements.'
4.
As part of a refinancing of SHS that took place in or about October 2013, SHS
received a $2,000,000 loan from Sears (the "Sears Loan")2. In connection with the
Sears Loan:
Affidavit of Michael Clements. sworn December 12, 2013 ("Clements Affidavit"). Application Record,
Volume 1, Tab 2, at para. 2.
2
(a)
the Verhoeffs provided personal guarantees (the "Sears Guarantee"); 3
and,
(b)
the Verhoeffs were required to and did resign their various offices with
SHS.4
5.
The Sears Loan was to be secured by a first ranking charge against the assets of
SHS.5
6.
The Receiver was appointed by order of the Honourable Mr. Justice D.M. Brown
dated January 9, 2014 the ("Receivership Order"). Paragraph 23 of the Receivership
Order provides as follows:
23.
THIS COURT ORDERS that the Receiver and counsel to the Receiver
shall be paid their reasonable fees and disbursements... and that the Receiver
and counsel to the Receiver shall be entitled to and are hereby granted a charge
(the "Receiver's Charge") on the Property, as security for such fees and
disbursements... and that the Receiver's Charge shall form a first charge on the
Property in priority to all security interests, trusts, liens, charges and
encumbrances, statutory or otherwise, in favour of any Person, but subject to
sections 14.06(7), 81.4(4), and 81.6(2) of the BIA.6
7.
Prior to or in the course of the receivership, payments totalling approximately
$1.4 million were made into accounts controlled by Sears, for work performed for
customers by SHS prior to the Receiver's appointment (the "Pre-Filing Customer
Payments"). Sears has been withholding the Pre-Filing Customer Payments, claiming,
2 Loan Agreement dated October 31, 2013, between SHS LP and Sears Canada Inc., Application Record,
Volume 2, Tab 2K.
3 Letter of Understanding, Exhibit "H" to the Clements Affidavit, Application Record, Volume 1, Tab 2G, at
para. 1. For greater certainty, the Verhoeffs do not admit liability in respect of and may assert a number of
defences to the Sears Guarantee.
4 Clements Affidavit, Application Record, Volume 1, Tab 2, at para. 6.
5 Loan Agreement dated October 31, 2013, between SHS LP and Sears Canada Inc., Application Record,
Volume 2, Tab 2K;
6 Receivership Order of Justice D. Brown, January 9, 2014, para. 23.
3
amongst other things, set off against certain claims that it asserts against SHS. Various
creditors of SHS have purported to assert construction lien claims against the Pre-Filing
Customer Payments.'
8.
The Receiver has entered into an agreement with Sears contemplating, among
other things, that Sears will pay the following amounts to the Receiver:
(a)
an amount up to $1,000,000 on account of lien claims that are proven in
due course (the "Sears Primary Settlement Payment"); and,
(b)
the amount of $100,000 to be applied to proven claims of creditors of SHS
in accordance with applicable priorities, which may include secured claims
of Sears.8
9.
The Sears Primary Settlement Payment forms part of the property of SHS that is
subject to the Receiver's charge.9
10.
The Receiver's most recent Statement of Fees and Disbursements shows
disbursements for the period ended July 31, 2014, on account of its fees and its legal
costs, totalling $1,601,000.10 The fees and disbursements for which the Receiver has
Receiver's Eighth Report to the Court, at para. 15: http://www.pwc com/en CA/CNcar/shs/assets/shs141 081314.pdf
8
Receiver's
Eighth
to
the
Report
Court,
at
para.
31(b):
http://www.PWC. CO rn/en CA/CA/car/shs/assets/shs-141 081314.pdf
9 Supra, note 6.
10
Appendix
B
to
the
Receiver's
Eighth
Report
to
the
Court:
http://www.pwc.com/en CA/CA/car/shs/assets/shs-141 081314.pdf
7
4
obtained or is currently seeking approval for the period ending August 31, 2014 total
approximately, $2,090,000.11
11.
The Receiver has yet to recommend an allocation of its costs among the various
pools of funds in its possession.
However, the Receiver has reported that its
negotiations with Sears in connection with the Settlement Agreement were "extensive"
and "complicated".12 Further, pursuit of the Settlement Agreement is listed as the first of
the Receiver's principal activities since February 22, 2014.13
PART III. STATEMENT OF ISSUES AND ARGUMENT
12.
The Verhoeffs do not oppose Receiver's request for approval of its fees, the
Settlement Agreement or the Lien and Trust Claim Resolution Process.14 However, the
Verhoeffs are concerned that care is taken to ensure that the Receiver's historical and
future costs are allocated in a fair and equitable manner. In Royal Bank of Canada v.
Atlas Block Co. Limited15 , the court articulated the following governing principles with
respect to the allocation of a Receiver's costs:
11 Fee Approval Order of Justice D. Brown, March 24, 2014;
Appendix D to the Ninth Report to the Court, Receiver's Motion Record (fee approval returnable October
3, 2014), Tab 2D.
12 Ninth Report to the Court, Receiver's Motion Record (fee approval returnable October 3, 2014), at Tab
2, p. 3. para. 9(a).
13 Ninth Report to the Court. Receiver's Motion Record (fee approval returnable October 3. 2014). at Tab
2, p. 3, para. 9(a).
14 For the avoidance of doubt, the Verhoeffs reserve all rights with respect to the allocation of any PreFiling Customer Payments retained by Sears. as between the Sears Loan and SHS other obligations to
Sears.
15 Royal Bank of Canada v. Atlas Block Co. Limited, 2014 ONSC 1531 (CanLII), at paras 40-41. In this
case. the receiver and its counsel had tracked their time and expenses according to the different asset
realization activities they had undertaken, recognizing that certain activities were to the benefit of different
secured creditors.
5
(i) The allocation of such costs must be done on a case-by-case basis and
involves an exercise of discretion by a receiver or trustee;
(ii) Costs should be allocated in a fair and equitable manner, one which does not
readjust the priorities between creditors, and one which does not ignore the
benefit or detriment to any creditor;
(iii) A strict accounting to allocate such costs is neither necessary nor desirable in
all cases. To require a receiver to calculate and determine an absolutely fair
value for its services for one group of assets vis-a-vis another likely would not be
cost-effective and would drive up the overall cost of the receivership;
(iv) A creditor need not benefit "directly" before the costs of an insolvency
proceeding can be allocated against that creditor's recovery;
(v) An allocation does not require a strict cost/benefit analysis or that the costs be
borne equally or on a pro rata basis;
(vi) Where an allocation appears prima facie as fair, the onus falls on an
opposing creditor to satisfy the court that the proposed allocation is unfair or
prejudicial.16
13.
Although the order proposed by the Receiver quite properly contemplates that
the costs of the Lien Claim Resolution Process will be applied to the Lien Claim Cash
Pool, the order and the Receiver's reports are silent as to how the Receiver's other
costs in respect of the Disputed Funds are to be allocated. The Receiver has yet to
propose any allocation for those costs.
14.
The Verhoeffs recognize that it may not be practicable to propose an allocation of
the Receiver's costs until the Lien Claim Resolution Process is complete; however,
there should be no question that the issue is being reserved for another day. The costs
at issue may be significant, and the benefits of the Settlement appear to enure
principally to the lien claimants, who may receive over 90% of the potential value of the
settlement.
16 Royal Bank of Canada v. Atlas Block Co. Limited, 2014 ONSC 1531 (CanLII) at para 43 ["Atlas Block],
citing Re Hunjan International Inc., 2006 CanLII 63716 (ON SC), (2006), 21 C.B.R. (5th) 276 (Ont. S.C.J.)
and JP Morgan Chase Bank N.A. v. UTCC United Tri-Tech Corp., 2006 CanLII 25352 (ON SC), (2006),
25 C.B.R. (5th) 156 (Ont. S.C.J.).
6
PART IV. ORDER REQUESTED
15.
In keeping with the foregoing, the Verhoeffs ask that this court clarify that its
order approving the Settlement Agreement is without prejudice to its jurisdiction to
allocate costs over and above those related to the Lien Claim Resolution Process (as
defined in the proposed order) among SHS' various asset pools, including the Lien
Claim Cash Pool (as defined in the proposed order).
ALL OF WHICH IS RESPECTFULLY SUBMITTED.
October 1, 2014
Massi
Starnino, of counsel to Paul and
Stephen Verhoeff
Schedule "A"
1. Royal Bank of Canada v. Atlas Block Co. Limited, 2014 ONSC 1531
2. Re Hunjan international Inc., 2006 CanLII 63716 (ON SC), (2006), 21 C.B.R.
(5th) 276 (Ont. S.C.J.)
3. JP Morgan Chase Bank N.A. v. UTCC United Tri-Tech Corp., 2006 CanLII 25352
(ON SC), (2006), 25 C.B.R. (5th) 156 (Ont. S.C.J.)
IN THE MATTER OF THE BANKRUPTCY OF SHS SERVICES
MANAGEMENT INC./GESTION DES SERVICES SHS INC AND SHS
SERVICES LIMITED PARTNERSHIP
Court File No. CV-13-10370-00CL
IN THE MATTER OF AN APPLICATION PURSUANT TO SECTION 243
OF THE BANKRUPTCY AND INSOLVENCY ACT, R.S.C. 1985, c. B-3, AS
AMENDED
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST)
PROCEEDING COMMENCED AT
TORONTO
FACTUM OF PAUL VERHOEFF AND
STEPHEN VERHOEFF
Paliare Roland Rosenberg Rothstein LLP
155 Wellington Street West
35th Floor
Toronto, ON M5V 3H1
Massimo Starnino
Tel: 416.646.7431
Fax: 416.646.4301
Email: [email protected]
Doc 1254196 v2
Lawyers for Paul Verhoeff and Stephen Verhoeff