Opposing bidder dinged with security for costs

Teal Jones Holdings Ltd. (Re), 2025 BCSC 2291
Can a court grant security for costs against an opposing bidder in a CCAA proceeding?

Summary: In this case, the Court held that security for costs can be ordered against an opposing bidder in a CCAA proceeding after interim lenders sought $250,000 in security from Mercury Merchant LLC, whose failed bid for Teal Jones’ Pine Mill left it seeking the return of an US$850,000 forfeited deposit. Mercury’s APA had collapsed when its financing fell through, leading the monitor to terminate the deal and approve a new sale to Pine Products and Giving Tree Lumber. After the Court approved that sale and a conditional distribution of proceeds, Mercury launched an application for the return of its deposit, prompting the interim lenders to seek security on the basis that Mercury was an empty shell with no ability to satisfy a costs award. The Court found the lenders had standing, accepted that Mercury could not pay costs, and noted that the respondents had a strong defence to Mercury’s claims, including Mercury’s failure to provide credible evidence that the monitor undermined its financing. The Court also rejected the argument that a security order would unfairly stifle Mercury’s claim, pointing to the principals’ recent ability to fund a substantial deposit. Concluding that no countervailing factors outweighed the lenders’ interests, the Court ordered Mercury to post security as a condition of proceeding with its deposit application.

On September 12, 2025, G.C. Weatherill J. approved a sale of one of the Companies Creditors’ Arrangement Act petitioners’ mills located in the State of Virginia, USA, known as the Pine Mill, and a distribution of the proceeds of sale to the interim lenders, conditional only on the resolution of a pending application by Mercury Merchant LLC (“Mercury”) seeking the return of its deposit (the “Deposit Application”).

Mercury had previously made an offer to purchase both the Pine Mill, which was initially accepted by the monitor, on behalf of the petitioners. On April 25, 2025, the parties entered into an asset purchase agreement (“APA”) to that end. However, before the transaction was due to complete, Mercury’s financing fell through, and Mercury advised the petitioners and the monitor that it would not be in a position to complete the purchase by the deadline set out in the APA. The monitor terminated the APA, which resulted in the forfeiture of Mercury’s deposit of US$850,000.

Following the termination of the APA, the monitor entered into a new APA with the eventual purchasers of the Pine Mill, namely, Pine Products LLC and Giving Tree Lumber LLC. When the petitioners, with the support of the monitor, applied for the Court’s approval of the Giving Tree Sale, they also sought an order to distribute the proceeds, including Mercury’s forfeited deposit, to the interim lenders. Mercury sought to adjourn the hearing of the petitioners’ application for approval of the Giving Tree Sale and proposed distribution.

In refusing Mercury’s applications and granting the petitioners’ applications to approve the sale and distribution, Weatherill J. made the distribution conditional on the resolution of Mercury’s forthcoming Deposit Application, provided Mercury filed such an application by October 3, 2025. His Honour also left it open to the monitor to seek special costs against Mercury in the event the Deposit Application proceeded and was unsuccessful. The Deposit Application is scheduled to be heard on December 9 or 12, 2025.

The interim lenders of the petitioners filed an application for an Order, among other things, requiring Mercury to post security for costs in the amount of $250,000 and staying the Deposit Application until such security is posted. The monitor supported the interim lenders’ application. Mercury opposed the application, arguing that the interim lenders had no standing to seek such relief, and, in any event, that the relief sought would, if granted, be unfair to Mercury, insofar as it would effectively deprive Mercury of its only chance to seek relief from forfeiture.

The court has complete discretion whether to order security, and will act in light of all the relevant circumstances. The court must attempt to balance injustices arising from the use of security as an instrument of oppression to stifle a legitimate claim on the one hand, and the use of impecuniosity as a means of putting unfair pressure on a defendant on the other. Before the court refuses to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled. Once an applicant for security for costs has shown that a corporate plaintiff will not be able to pay costs should its claim fail, security is generally ordered unless the court is satisfied that there is no arguable defence.

First, the Court found that the interim lenders had the requisite standing to bring the application. The interim lenders were funding this litigation on their own, and were the only parties with a financial interest in this dispute, other than Mercury. Second, Mercury did not dispute that it was an empty shell with no ability to pay costs on its own. Third, the respondents to the Deposit Application appeared to have a strong defence to the Deposit Application. Mercury adduced no convincing evidence to support its allegation that the monitor somehow undermined Mercury’s financing. Having concluded that Mercury had no ability to pay costs if the Deposit Application fails, and that the respondents had a strong defence to the Deposit Application, the Court was satisfied that the interim lenders were entitled to the relief they sought unless there was some other reason to refuse that relief in the circumstances of this case.

The Court considered whether Weatherill J., in granting the order approving the Giving Tree Sale and the associated distribution, intended to preserve Mercury’s right to seek relief from forfeiture before that distribution occurs. The evidence before the Court fell short of establishing that the Deposit Application will, in fact, be stifled if the relief sought by the interim lenders is granted. Although Mercury was an empty shell, its principals had sufficient means available to them only a few months ago to pay the substantial deposit they subsequently sought to have returned. There was no evidence to suggest that anything had changed in that regard. To the extent those principals believed that Mercury’s case for relief from forfeiture was as strong as Mercury argued it to be in response to the interim lenders’ application, they would have sufficient incentive to put forward the requisite security on Mercury’s behalf, so that the Deposit Application can proceed.

The Court concluded that an order requiring Mercury to post security for costs was justified in the circumstances of this case.

Judge: The Honourable Mr. Justice Milman

Professionals involved:

• Andrew Froh, David Rotchtin and Michael Shakra of Bennett Jones for the Applicants, Wells Fargo Capital Finance Corporation Canada, Wells Fargo Capital Finance, LLC, and Export Development Canada

• Hari Nesathurai of C2 Global Law for the Respondent, Mercury Merchant LLC

• Arad Mojtahedi and Joel Robertson-Taylor of DLA Piper for the Petitioners

• William Skelly of MLT Aikins, and Joe Latham and Erik Axell of Goodmans for Ernst & Young Inc., in its capacity as Monitor of the Petitioners