Must a receiver consult with all secured creditors as part of a sales process?
On April 13, 2018, Rosen Goldberg Inc. was appointed as receiver (the “Receiver”) of a partially constructed property known municipally as 4 Birchmount Avenue, located in the Scarborough Bluffs neighborhood (the “Property”). The appointment order contained the usual Model Order clauses granting the Receiver the power to engage consultants and appraisers, market the property, and negotiate the terms and conditions of sale. The appointment order also permitted the Receiver to report to, meet with, and discuss with affected Persons (as defined in the appointment order) “as the Receiver deems appropriate” and to share information subject to confidentiality terms. It permitted the Receiver to sell the Birchmount Property with court approval and to apply for a vesting order to convey the property to a purchaser free and clear of encumbrances.
At all material times, the Property was vacant, in need of repairs and unfit for occupancy. There were three mortgages on title. The first mortgagee claimed that it was owed $2,534,582.27 under its mortgage. The second mortgagees claimed that $1,164,755.78 was owing under the second mortgage. The third mortgage was held 69.9% and 30.1% by World Finance Corporation (“WF”) and Money Gate Mortgage Investment Corporation, respectively. WF claimed that nearly $6.7 million was owing under the third mortgage.
The Receiver secured an appraisal of the Property that set the value at $3.2 million. The Property was listed at a sale price of $3.8 million. On May 8, 2018, the Receiver received an unconditional offer to purchase for $3.45 million, an amount higher than the appraised value. Nevertheless, such offer would not generate sufficient proceeds of sale to fully retire the encumbrances. In fact, WF stood to recover nothing. The Receiver accepted this offer subject to court approval. On June 1, 2018, the Court made an approval and vesting order (the “Order“).
On June 7, 2018, WF filed a notice of appeal challenging the Order. WF’s key complaint was that the Receiver failed to consult it about the sale and marketing process, and the listing price. In its view, had the Receiver discharged its duty, a higher purchase price would have resulted. It relied on the opinion of a realtor who stated that he would have listed the Property at between $4 million to $4.5 million, and would not have accepted an offer of $3.4 million.
The Court described the steps that the Receiver took in selling the Property. First, the Receiver considered how to best market the Property and accounted for the fact that the Property was a partially constructed shell with a roof that had a hole in it, and had become a home for wild animals. The Receiver also considered the carrying costs of the Property in terms of accrued realty taxes, the state of the market, and the qualifications and experience of possible listing agents.
The Court concluded that the fair market value for the Property had been obtained. The Court did not accept WF’s argument that the Receiver had acted too quickly. In the Court’s view, the MLS marketing process was designed to obtain offers as soon as reasonably practicable. The Court also rejected the argument that the Receiver failed to consider the interests of all parties, including WF. The Court pointed out that the appraisal was available to the creditors if they chose to review it, and some of the stakeholders did obtain said appraisal. There had been confusion about who the interested parties were and who was entitled to speak on each party’s behalf. Nobody contacted the Receiver until the time came to begin the process of seeking court approval, which did not speak well for the level of interest they had in seeking to shape the sales process.
Additionally, the Court held that, in seeking the highest and best price reasonably available, the Receiver did, in fact, consider the shared interest of all parties. Marketing strategy and list price are merely means to the end of achieving the highest and best price reasonably available, so the Receiver did not have a positive obligation to consult with stakeholders as to a particular sales process and listing price. The appointment order granted the Receiver the discretion to proceed as it did.
The Court granted the Receiver’s motion, approving the closing of the sale to the purchaser.
Counsel: Eric Golden of Blaney McMurtry LLP, for the moving party, Rosen Goldberg Inc., P. James Zibarras, Leslie Dizgun, and Caitlin Fell of Brauti Thorning Zibarras LLP for the responding party, World Finance Corporation, David Preger of Dickinson Wright LLP, for the responding party, B&M Handelman Investments Limited, Adam Wygodny of BYLD Law, for the responding party, Money Gate Investment Corp. and Miranda Spence of Aird & Berlis LLP for the purchaser, Frederic P. Kielburger