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Forjay Management Ltd. v 0981478 B.C. Ltd., 2018 BCSC 527

How does a Court determine if a contract can be disclaimed in an insolvency?

In October 2017, the Court granted a receivership order in respect of a 92-unit strata condominium development located in Langley, British Columbia (the “Development”). At that time, the developer—0981478 B.C. Ltd. (the “Debtor”)—and various purchasers were parties to 40 pre-sale contracts, none of which had been completed. 

The Court-appointed Receiver sought directions from the Court as to whether it should complete the 40 pre-sale contracts. The Receiver described these contracts as “without issues” and recommended that it be authorized to complete them. Many of the pre-sale purchasers supported the Receiver’s recommendation. However, the major secured mortgagees of the Debtor opposed the completion of the sales, arguing that the contracts were not valid and enforceable, or, alternatively, even if they were, they ought to be disclaimed to allow a market sale of the units.
 
If the contracts were disclaimed, the Receiver would be authorized to take immediate steps to market and sell the units at the current market value, which, according to a recent appraisal, was now collectively 46% higher than the contract prices. At issue was who, among the various parties, should “reap the benefit” of this increase.

Guided by the goal of maximizing the recovery of the assets under its charge, a receiver must consider whether it is beneficial to continue to abide by contracts between the debtor and other parties, or to disclaim them. A receiver must exercise proper discretion in breaking a contract, or else face the allegation that it could have realized more by performing the contract rather than terminating it.

 The central question in a motion to disclaim a contract is whether a party seeks to improve its pre-filing position at the expense of other creditors by means of a disclaimer of the contract. The equities between the parties must be assessed by reference to their respective priorities. The Court framed the test as follows: 
  1. What are the respective legal priorities as between competing interests?
  2. Would a disclaimer enhance the value of the assets? If so, would a failure to disclaim amount to a preference in favour of one party?; and
  3. If a preference would arise, can the party seeking to avoid a disclaimer establish that the equities favour completion of the contract?

The Court began its analysis with an assessment of the respective priorities of the purchasers and the mortgagees.

The mortgages were granted and registered against title by the mortgagees well before the 40 pre-sale contracts were executed. In fact, the disclosure statements that the Debtor provided to all of the purchasers made express reference to the existing legal rights of the mortgagees. There was no evidence that the mortgagees had agreed to discharge their security against the 40 units in question.
 
On the other hand, the pre-sale contracts created contractual rights only, with the purchasers acquiring an interest in land upon completion of the purchase and sale. The purchasers’ contractual rights had no legal priority over those held by the mortgagees. The purchasers could not assert claims of specific performance against the Debtor because there was evidence of similar units being available in the marketplace in the same vicinity.
 
The Court then found that remarketing and selling the 40 units would undoubtedly enhance the value of the assets to be distributed to the stakeholders. Moreover, a failure to disclaim would result in the purchasers receiving a preference in respect of value that would otherwise accrue to the mortgagees pursuant to their prior ranking security—effectively elevating the purchasers’ claims above those of the mortgagees.

Turning to the third part of the test, the Court held that the equities in favour of the pre-sale purchasers did not justify overriding the mortgagee’s legal priority. The purchasers knew of the inherent risk in the pre-sale contract that the Debtor may be unable to complete the contract. The contracts expressly provided that if the sales were not completed, the purchasers would be entitled to the return of their deposits with accrued interest. As such, the purchasers will not be “out of pocket” any monies under the pre-sale contract. Additionally, the purchasers had the option to pursue claims for damages against the Debtor for any losses suffered as a result of the sales not completing. The Court conceded that this was a hollow remedy, given the status of the receivership, but maintained that the mortgagees’ prior legal rights against the Development trumped the purchasers’ interest in completing the sales.

 
The Court expressed sympathy for the purchasers, who have potentially lost the ability to obtain what they hoped would be their homes. However, their loss was one of opportunity, while the mortgagees stood to suffer real monetary loss if the sales were permitted to be completed at prices that fell below current market value.
 
The Court directed the Receiver to disclaim the 40 pre-sale contracts and take immediate steps to remarket and sell the 40 units. Having regard for the purchasers’ legal misfortune, the Court also directed the Receiver to implement a sales process that would give the purchasers a right of first refusal.

CounselKibben JacksonDaniel Byma and Layne Hellrung of Fasken for the Petitioner and Reliable Mortgages Investment Corp., Daniel Nugent and Janet Kwong of Webster Hudson & Coombe LLPRobert Cooper, Q.C.and Eric Aitken of McEwan Partners and Nicolas Hooge of Farris for 0981478 B.C. Ltd. and Mark Chandler, various lawyers for individual purchasers, Diego Solimano of Solimano Law for PeeverConn Properties Inc. and Richard and Jacqueline Johnston, Joni Worton and Sandra Wilkinsonfor the Superintendent of Real Estate, Matthew Nied of Cassels Brockand and Jeremy Shragge of Shields Harney for 625536 B.C. Ltd., Gordon Plottel and Amanda Baron of Miller Thomson for HMF Home Mortgage Fund Corporation and Canadian Western Trust Company, in trust.