SISP transaction fee challenged

Re 2039882 Ontario Limited
How will a court determine whether a transaction fee is payable to a sales agent under a SISP?

Summary: In this case, the Court considered a request by a sales agent engaged under a CCAA SISP for payment of a transaction fee. The relevant transaction was entered into over four months after the SISP had concluded, and was entered into with a receiver who was subsequently appointed (and not the debtor). In addition, the transaction did not meet the requirements set out in the engagement letter for the transaction fee to be payable. As a result, the Court ruled against the sales agent and found the transaction was not payable.

2039882 Ontario Limited (the "Debtor") operated a land lease community from real property municipally known as 38 Cheapside Road, Selkirk, Ontario. KHL Investments USA Inc. ("KHL") was the Debtor’s pre-filing senior secured creditor and provided debtor-in-possession financing during the Debtor’s proceedings under the Companies' Creditors Arrangement Act (the "CCAA Proceeding"). On the application of KHL following the Debtor having obtained CCAA protection, the Fuller Landau Group Inc. was appointed as court-appointed as receiver (the “Receiver”) of all of the assets, undertakings and properties of the Debtor.

By Order dated February 6, 2024 (the “SISP Order”), a sale and investment solicitation process in the CCAA Proceeding (the "SISP") was approved. The same order approved the engagement of Clariti Strategic Advisors Inc. ("Clariti") pursuant to the terms of an engagement letter (which included that a $150,000 Transaction Fee was payable to Clariti if a KHL Credit Bid (as defined in the Engagement Letter) was completed in certain circumstances) and granted a court-ordered charge over the property of the Debtor to Clariti as security for the Transaction Fee.

Initially, KHL submitted a credit bid to the Debtor in April 2024, which the Debtor chose not to sign back. In fact, no offer was selected as part of the SISP and the SISP terminated, according to its terms, on April 12, 2024. KHL attempted to negotiate a further bid with the monitor in the CCAA Proceeding and submitted a second offer to the Debtor in July 2024. However, the Debtor was not willing to proceed and, ultimately, the Receiver was appointed at the request of KHL.

The Receiver and KHL engaged in further discussions and an asset purchase agreement dated August 23, 2024 (the “Purchase Agreement”) was entered into by the Receiver and Sandusk Creek Properties Ltd. (the "Purchaser") wherein the Purchaser agreed to purchase substantially all the Debtor's assets in exchange for a purchase price payable in part by way of set-off against a portion of the amounts owing to KHL by the Debtor (the "Transaction"). The Transaction was approved by the Court on October 2, 2024, and closed on October 16, 2024.

Clariti sought an order that the Receiver be directed to distribute $150,000, held in trust by the Receiver's counsel (the “Escrowed Funds”), to Clariti in satisfaction of the Transaction Fee. KHL and the Purchaser (collectively, the "Lender Parties") conversely sought an order that the Receiver distribute the Escrowed Funds to them. The issue to be determined was whether Clariti was owed the Transaction Fee by the Debtor pursuant to the terms of the Engagement Letter.

The Lender Parties took the position that the Transaction Fee was not payable by the Debtor as certain terms of the Engagement Letter were not satisfied. Specifically, the Lender Parties argued that the Transaction did not occur ‘at the conclusion of the SISP’ as required by the terms of the Engagement Letter. The ultimate Purchase Agreement was entered into with the Receiver and not the Debtor and it was not entered into until over four months after the SISP had concluded. Secondly, the Lender Parties argued that the Transaction was not a KHL Credit Bid since only a portion of KHL’s secured indebtedness was set off against the purchase price under the Transaction, and not the full amount as required under the Engagement Letter.

Clariti took the position that ‘at the conclusion of the SISP’ in section 2(d) of the Engagement Letter did not mean that the Transaction must have been contemporaneous with the conclusion of the SISP, but that it merely needed to have happened after the SISP concluded.

The Court held that if the parties had intended the language to be at any point after the conclusion of the SISP, they could have said that. The entering into of the relevant transaction needed to be sufficiently linked to the conclusion of the SISP. The Purchase Agreement was entered into by the Receiver, who was not even in existence at the conclusion of the SISP and was not entered into until over four months after the SISP had concluded.

Further, the Court found that for the Transaction Fee to be payable, the Purchase Agreement and Transaction would also have to meet the definition of KHL Credit Bid in the Engagement Letter. KHL Credit Bid was not defined as some or all of the KHL debt. Under the SISP, KHL could only submit a KHL Credit Bid for the full amount of the KHL indebtedness. That was consistent with the circumstances in which Clariti was to receive the Transaction Fee.

The Court concluded that the Transaction Fee was not payable by the Debtor based on the provisions of the Engagement Letter. The Court ordered that the Escrowed Funds be paid to the Lender Parties.

Judge: Justice Dietrich

Professionals involved:

• Domenico Magisano and Spencer Jones of Lerners for KHL

• Sanjeev Mitra and Adrienne Ho of Aird & Berlis for Fuller Landau as receiver

• Nick Holland of BLG for Clariti