Lifting the CCAA stay for a construction lien?

What is the test for lifting the CCAA stay to allow a construction lien to be prosecuted?

Re Hazelton Development Corporation
What is the test for lifting the CCAA stay to allow a construction lien to be prosecuted?

Overview: In this case, the Court considered a request to lift the stay made by a construction lien claimant. The claimant argued it couldn’t afford to wait over a year before its claim was dealt with while there was a bond posted with the Court for that very purpose. The Court rejected the request, finding that there was no evidence beyond declaratory statements that the lien claimant would suffer real hardship, or that it would be unable to continue in business or be at risk of insolvency, if the stay were not lifted. The Court was also cognizant that lifting the stay in this case could open the floodgates for other trades with lien claims to pursue a similar course of action, and that the company could not afford to engage in litigation with lien claimants while at the same time working diligently to complete the restructuring process.

Hazelton Development Corporation (“Hazelton”) was the developer of a residential condominium project known as the “Highlight of Mississauga” (the “Project”). On April 20, 2022, Hazelton obtained protection under the Companies’ Creditors Arrangement Act on account of the delays to construction and cost overruns arising as a result of, among other things, shutdowns due to the Covid-19 pandemic and escalating costs for construction-related materials and services.

City Electric Inc. (“City Electric”) was one of approximately 30 construction trades that had been involved in the Project in the course of development. On August 25, 2021, City Electric registered a $1,507,492.60 claim for lien against the lands of the Project. That construction lien was vacated on June 30, 2021 by Hazelton’s payment of security into court to the credit of the construction lien action. The claim for lien and security were both subsequently reduced on December 24, 2021. As a result, City Electric had a claim for lien in the amount of $857,209.49 and a non-lien, breach of contract claim, in the amount of $615,283.41. The claim by City Electric was disputed by Hazelton on the basis that City Electric owed it $1,374,795 after set-off.

The Initial Order provided for a stay of proceedings against Hazelton, including the enforcement of any lien claim. On May 27, 2022, Hazelton obtained an order, on notice to City Electric, establishing a claims process for the determination and resolution of claims filed against it. The claim of City Electric was an excluded claim. City Electric submitted a proof of claim despite the exclusion of its claims, which proof of claim has not been adjudicated by Grant Thornton as Monitor. City Electric brought this motion to lift the stay of proceedings to allow it to prosecute its construction lien proceeding against Hazelton, prove its claim and realize on the security.

A party applying to the court to lift the stay of proceedings under the CCAA faces a very heavy onus. In determining whether to lift the stay, the court should consider whether there are sound reasons for doing so consistent with the objectives of the CCAA. Circumstances when courts will lift a stay order include when:

  1. The plan is likely to fail;

  2. The applicant shows hardship (which must be caused by the stay itself and be independent of any pre-existing condition of the applicant creditor);

  3. The applicant shows necessity for payment (where the creditor’s financial problems are created by the order or where the failure to pay the creditor would cause it to close and thus jeopardize its existence);

  4. The applicant would be significantly prejudiced by refusal to lift the stay and there would be no resulting prejudice to the debtor company or the positions of creditors; and

  5. It is in the interests of justice to do so.

City Electric argued that the balance of convenience and relative prejudice led to the conclusion that the stay should be lifted. City Electric would be materially prejudiced by having to wait over a year before its claim was dealt with while there was a bond posted with the Court for that very purpose. City Electric could not afford to let its claim of $857,209.19 languish and the unpaid claim was materially impacting City Electric’s ability to continue with its business. On the other hand, City Electric argued that Hazelton had the capability of engaging with City Electric’s lien action while it continued to complete the Project.

Hazelton argued that City Electric was but one of many construction trades that raised payment and/or work-related disputes in connection with the Project. As Hazelton was a small family-owned company, it had no capacity to litigate the City Electric claim in parallel with working to complete the Project within the CCAA proceeding or to proceed with parallel litigation of other contentious claims of contractors that may follow.

The Court was not satisfied that City Electric would suffer significant prejudice should the stay continue for the time being while construction of the Project is completed, units are sold, and the restructuring process is completed. The Court noted that there was no evidence, beyond declaratory statements, that if the stay remained in effect while a bond was in place to secure City Electric’s lien claim, City Electric would suffer real hardship. There was no evidence that City Electric would be unable to continue in business or be at risk of insolvency.

The Court did not accept City Electric’s assertion that the fact that Hazelton was working with construction trades to resolve disputes showed that it had the capability to litigate City Electric’s claim and its counterclaim while completion of the Project was still underway. There is a difference between devoting operational resources to resolving issues that arise in the course of day-to-day construction, and devoting resources to complex and contentious litigation outside of day-to-day operations. If leave were granted to City Electric to continue its lien litigation, there would be no principled reason why other trades with lien claims, in the same circumstances, should not be allowed to proceed with litigation of their claims. Hazelton lacked the resources to engage in litigation with City Electric and other lien claimants while, at the same time, working diligently to complete the restructuring process.

The Court dismissed City Electric’s motion to lift the stay of proceedings as against it.

.Judge: Justice Cavanagh

Counsel: Miller Thomson for Hazelton, TGF for Grant Thornton as Monitor, BLG for Aviva/Westmount, Fogler for Firm Capital and Goldman Sloan Nash & Haber for City Electric