White Oak Commercial Finance, LLC v. Nygård Holdings

Date: 20220310

Docket: CI 20-01-26627

(Winnipeg Centre)

Indexed as: White Oak Commercial Finance, LLC v. Nygård Holdings

(USA) Limited et al.

Cited as: 2022 MBQB 48

COURT OF QUEEN’S BENCH OF MANITOBA

BETWEEN:

) APPEARANCES:

)

WHITE OAK COMMERCIAL FINANCE, LLC,

) No one appearing

) for the applicant

applicant, )

) Wayne Onchulenko,

) Fred Tayar and Colby

) Linthwaite

- and -

) for the respondents

)

) Bruce Taylor, Ross McFadyen

) Melanie LaBossiere and

) A. Sherman

) for Richter Advisory Group Inc.

)

) Timothy Doyle

) for Attorney General

) of Canada

NYGÅRD HOLDINGS (USA) LIMITED,

NYGÅRD INC., FASHION VENTURES, INC.,

NYGÅRD NY RETAIL, LLC, 4093879 CANADA

LTD., 4093887 CANADA LTD., NYGÅRD

INTERNATIONAL PARTNERSHIP, NYGÅRD

PROPERTIES LTD., AND NYGÅRD

ENTERPRISES LTD.,

)

) Domenico Magisano

respondents. ) for Edson’s Investment Inc.

) and Brause Investment Inc.

)

) Donald Douglas, JJ Burnell,

) Jessica Wuthmann, Linda

) Galessiere, M. Citak, and

) S. Agarwal

) for interested creditors

)

) Judgment delivered:

) March 10, 2022

Page: 2

EDMOND J.

Introduction

[1]

On March 18, 2020, the court granted a receivership order (the “Receivership

Order”) appointing Richter Advisory Group Inc. (the “Receiver”) as the Receiver

respecting the assets, undertakings and properties (the “Property”) of Nygard Holdings

(USA) Limited, Nygard Inc. (“NI”) Fashion Ventures Inc., Nygard NY Retail, LLC

(collectively the “US Debtors”), Nygard Enterprises Ltd. (“NEL”), Nygard International

Partnership (“NIP”), Nygard Properties Ltd. (“NPL”), 4093879 Canada Ltd. (“879”) and

4093887 Canada Ltd. (“887”) and (collectively NEL, NIP, NPL, 879 and 887 the

“Canadian Debtors”). The US Debtors and the Canadian Debtors together are referred

to as the “Debtors”.

[2]

The application for the Receivership Order was made by White Oak Commercial

Finance, LLC for and on behalf of the applicant and Second Avenue Capital Partners,

LLC (the “Lenders”) pursuant to security held by the Lenders in the Property of the

Debtors in connection with a certain loan transaction and revolving credit facility (the

“Credit Facility”) governed by the terms and conditions of a credit agreement (the

“Credit Agreement”). The capitalized terms in this decision are the same as the defined

terms in the Receiver’s Twelfth Report and the Receivership Order.

[3]

Numerous orders have been made by this court approving the actions taken by

the Receiver including, the liquidation sale of retail inventory and owned furniture,

fixtures and equipment, approving the sale of certain real property in Canada, as well

as granting orders to permit a Receiver’s Charge, Receiver’s Borrowing Charge and a

Page: 3

Landlords’ Charge creating prior charges on the Property and approving the settlement

of certain claims.

[4]

The Receiver’s Twelfth Report provides details of the actions and activities of the

Receiver since the filing of the Eleventh Report and contains recommendations

respecting the treatment of the “Net Receivership Proceeds” (as defined in the Twelfth

Report).

[5]

An Interim Statement of Receipts and Disbursements (“Interim R & D”) prepared

by the Receiver is reproduced at paragraph 82 of the Twelfth Report. The Interim

R & D shows net receipts of $121,416,000 and disbursements of $42,221,000. The

amount distributed to the Lenders including the Receiver’s Borrowings, is $66,466,000.

The cash on hand as at May 15, 2021, is shown as $12,803,000. The Receiver confirms

that all amounts due under the Credit Agreement of approximately $36,000,000 and all

Receiver’s Borrowings of approximately $30,000,000, subject to the Receiver’s

Borrowing Charge, were distributed to the Lenders in full satisfaction of the secured

amounts owing to the Lenders.

[6]

The Receiver notes that the Debtors and the Receiver will continue to incur go

forward expenses related to the Receivership proceeding including the potential

employee priority claims; additional unpaid rent claims subject to the Landlords’ Charge

and other disbursements, which the Receiver conservatively estimates will total

$2,000,000. In addition, the Receiver has identified a tax liability owing to Canada

Revenue Agency (“CRA”) by NPL which is estimated to be approximately $3,000,000.

Page: 4

[7]

CRA claims an interest in the Net Receivership Proceeds. The validity and

priority of the CRA claim was not argued at the hearing and will be considered at a

further hearing, unless the interested parties agree on the priority issue. NPL has

acknowledged that there is a CRA claim and is prepared to agree to a reasonable

holdback from the Net Receivership Proceeds as security for the CRA claim.

[8]

This decision addresses claims to the Net Receivership Proceeds. It also

addresses a motion by the respondents seeking an order authorizing the sum of

$1,150,000 be paid from the Preserved Proceeds held in trust pursuant to the NPL

Proceeds Preservation Agreement and the Net Receivership Proceeds. Details of the

funds held pursuant to the NPL Proceeds Preservation Agreement and the various

claims to the funds being held are described in the Receiver’s Twelfth Report (see

paras. 67 - 81). The Preserved Proceeds held pursuant to the NPL Proceeds

Preservation Agreement represent net sale proceeds of the sale of two properties that

were owned by NPL, described as the Falcon Lake Cottage Property and the Fieldstone

Property which are not included as Property defined in the Receivership Order. The

funds requested by the respondents are for legal fees and disbursements incurred or to

be incurred by some of the respondents and Mr. Peter Nygard personally.

[9]

The Receiver seeks orders:

a) Declaring that each of the Debtors is jointly liable for the debts and

liabilities (the “Common Liabilities”) of each of the other Debtors, and the

Debtors are joint Debtors with respect to Common Liabilities;

Page: 5

b)

c)

Declaring the assets (the “Common Assets”) of each of the Debtors shall

be treated as “Common Assets” subject to the Common Liabilities;

Declaring that the assets and liabilities of the Debtors are properly to be

substantively consolidated for the purpose of addressing the claims of

creditors of each of the Debtors;

d)

Authorizing the Receiver to file assignments in bankruptcy on behalf of

each of the Debtors on a basis that reflects the Common Assets and the

Common Liabilities, and requesting that the official receiver in bankruptcy

appoint Richter Advisory Group Inc. as Trustee in bankruptcy respecting

the estates of each of the Debtors;

e)

In the alternative, the Receiver is seeking an order:

i) Authorizing the Receiver to file assignments in bankruptcy on behalf of

the Debtors, other than NPL and NEL;

ii) Authorizing the Receiver to file applications for bankruptcy orders in

this court in relation to the Debtors, NPL and NEL, on a basis that

reflects the Common Assets and the Common Liabilities and the

substantive consolidation of the estates of the Debtors;

iii) If necessary, lifting the stay of proceedings granted in the Receivership

Order to permit bankruptcy applications to be made and directing that,

for the purpose of such assignments and applications, the locality of

the Debtors shall be Winnipeg, Manitoba and the Receiver shall be

appointed as Trustee.

Page: 6

[10] The Receiver filed a separate motion dated December 16, 2021 seeking the

advice and direction of the court regarding the additional use of the Preserved Proceeds

held pursuant to the NPL Proceeds Preservation Agreement and the potential claim to

the remaining balance of the Preserved Proceeds by unsecured creditors if the court

grants the substantive consolidation of the estates of the respondents.

[11] The Receiver also seeks orders approving the Twelfth Report, the Supplementary

Twelfth Report and the Second Supplementary Twelfth Report and the conduct,

activities and accounts of the Receiver and its counsel.

[12] Seven of the nine respondents (excluding NEL and NPL) do not object to an

order granting a substantive consolidation of the estates of the respondent

corporations, such that the assets and liabilities of those corporations would be treated

as common assets and liabilities. Seven of the nine respondents also do no object to an

order assigning seven of the nine respondents into bankruptcy as sought by the

Receiver.

[13] Two of the respondents (NEL and NPL) contest the Receiver’s request for an

order of substantive consolidation and an order that NEL and NPL should be assigned

into bankruptcy. These respondents submit that they own assets and none of the other

respondents, nor their creditors, have legally valid claims to those assets. These

respondents further submit that NEL and NPL are solvent and were always maintained

as legally and financially distinct from the business enterprise engaged in by the other

seven respondents. As a result, these respondents submit that granting the orders

Page: 7

sought by the Receiver would seriously prejudice NEL and NPL, by divesting them of

their assets and rendering them bankrupt.

Documents and Relevant Evidence

[14] There are approximately 245 court filings in this receivership proceeding

including affidavits, Receiver’s reports, briefs and orders. While not all filings are

relevant to decide the present issues they provide the background information and

context to decide the present contested motions before the court. The primary court

filings reviewed to decide the contested motions include:

a)

b)

c)

d)

e)

f)

Affidavit of Robert Dean, affirmed March 9, 2020;

Affidavit of Debbie Mackie, affirmed March 10, 2020;

Affidavit of Greg Fenske, affirmed March 11, 2020;

Affidavit of Jamie Jacyk, affirmed March 12, 2020;

Affidavit of Greg Fenske, affirmed March 12, 2020;

Affidavit of Robert Dean, affirmed March 17, 2020;

Affidavit of Laura Leigh Buley, sworn March 17, 2020;

Affidavit of Greg Fenske, affirmed March 18, 2020;

Confidential Affidavit of Greg Fenske, affirmed March 18, 2020;

Receivership Order dated March 18, 2020;

g)

h)

i)

j)

k)

l)

Affidavit of Greg Fenske, affirmed April 8, 2020;

The First Report of the Receiver dated April 20, 2020;

Affidavit of Greg Fenske, affirmed April 24, 2020;

The Supplementary First Report of the Receiver dated April 27, 2020;

m)

n)

Page: 8

o)

p)

q)

r)

The Second Report of the Receiver dated May 27, 2020;

The Supplementary Second Report of the Receiver dated May 31, 2020;

The Third Report of the Receiver dated June 22, 2020;

Affidavit of Greg Fenske, affirmed June 24, 2020;

Affidavit of Peter Nygard, sworn June 25, 2020;

The Fourth Report of the Receiver dated June 27, 2020;

The Supplementary Third Report of the Receiver dated June 29, 2020;

The Fifth Report of the Receiver dated July 6, 2020;

The Sixth Report of the Receiver dated August 3, 2020;

The Seventh Report of the Receiver dated September 10, 2020;

The Supplementary Seventh Report of the Receiver dated September 14,

2020;

s)

t)

u)

v)

w)

x)

y)

z)

Order of Edmond J., September 15, 2020 (E/B Settlement Approval

Order);

aa)

bb)

cc)

dd)

ee)

Order of Edmond J., September 15, 2020;

The Eighth Report of the Receiver dated September 28, 2020;

Affidavit of Greg Fenske, affirmed September 29, 2020;

Affidavit of Greg Fenske, affirmed October 6, 2020;

The Supplementary Eighth Report of the Receiver dated October 12,

2020;

ff)

Affidavit of Greg Fenske, affirmed October 20, 2020;

The Ninth Report of the Receiver dated November 2, 2020;

gg)

Page: 9

hh) Affidavit of Greg Fenske, affirmed November 5, 2020;

ii)

Affidavit of Joe Albert, affirmed November 5, 2020;

The Supplementary Ninth Report of the Receiver dated November 10,

2020;

jj)

kk)

ll)

Affidavit of Joe Albert, affirmed November 12, 2020;

Affidavit of Peter Nygard, affirmed November 12, 2020;

mm) The Second Supplementary Ninth Report of the Receiver dated December

30, 2020;

nn) The Tenth Report of the Receiver dated January 21, 2021;

oo)

pp)

qq)

rr)

The Eleventh Report of the Receiver dated February 24, 2021;

Affidavit of Greg Fenske, affirmed April 28, 2021;

Affidavit of Robert Martell, affirmed April 28, 2021;

Affidavit of Myron Dyck, affirmed April 28, 2021;

Affidavit of Steve Mager, affirmed April 29, 2021;

Affidavit Derrick Sigmar, affirmed April 29, 2021;

ss)

tt)

uu) Affidavit of Aaron Wojnowski, affirmed April 29, 2021;

vv) Affidavit of Peter Nygard, affirmed May 3, 2021;

ww) Twelfth Report of the Receiver dated June 4, 2021;

xx)

Notice of Motion of the Receiver dated June 4, 2021 with attached draft

form of Net Receivership Proceeds Order;

yy)

zz)

Affidavit of Greg Fenske, affirmed September 7, 2021;

Supplementary Affidavit of Greg Fenske, affirmed September 14, 2021;

Page: 10

aaa) Affidavit of Joe Albert, affirmed October 29, 2021 (“Albert affidavit”);

bbb) Affidavit of Debbie Mackie, affirmed October 29, 2021;

ccc) Supplementary Twelfth Report of Receiver;

ddd) Second Supplementary Twelfth Report of Receiver;

eee) Affidavit of Brian Greenspan, affirmed December 9, 2021 (“Greenspan

affidavit”); and

fff)

Notice of Motion of respondents, dated December 10, 2021.

[15] I do not propose to summarize the facts which are relevant to the decision in this

case. The facts are reviewed in detail in the numerous reports filed by the Receiver and

the affidavits filed on behalf of the respondents. Instead, I propose to review the

issues to be decided and the facts relevant to a determination of those issues.

Issues

[16] The material filed raises the following issues relevant to the Net Receivership

Proceeds motion:

a) What is a substantive consolidation and should it be applied in the facts and

circumstances of this case?

b) What is the proper allocation of revenues generated from the sale of assets

during the receivership and receivership costs and expenses?

c) What rights of subrogation apply to the respondents and what is the correct

interpretation of the provisions of The Mercantile Law Amendment Act,

C.C.S.M. c. M120 (the “Act”) (ss. 2 and 3)?

Page: 11

d) Should one or more or all of the respondents be assigned into bankruptcy,

and if so, should the Receiver be appointed as the Trustee in Bankruptcy?

[17] The issues relating to the respondents’ motion seeking an order authorizing

$1,150,000 be paid from the proceeds from the sale of properties that were owned by

NPL for legal fees and disbursements are:

a) Should the court grant an order to release the balance of the Preserved

Proceeds held pursuant to the NPL Proceeds Preservation Agreement to pay

legal fees and disbursements and expert costs incurred by the respondents in

connection with the Receivership Proceedings or a bankruptcy proceeding?

b) Should the court grant an order to release a portion of the Net Receivership

Proceeds to fund legal fees and disbursements that have been incurred or will

be incurred in connection with the Receivership Proceedings or a bankruptcy

proceeding?

c) Can a portion of the Net Receivership Proceeds or the Preserved Proceeds

held pursuant to the NPL Proceeds Preservation Agreement be used to fund

legal fees and disbursements incurred to defend Mr. Nygard in connection

with the criminal charges laid against him in Toronto, Ontario?

Issues relevant to the Net Receivership Proceeds motion

a) What is a Substantive consolidation and should it be applied in the

facts and circumstances of this case?

[18] The orders sought by the Receiver include what is referred to in authorities as a

“substantive consolidation” of the estates of the Debtors for creditor purposes. The

Page: 12

parties refer to the leading authority on substantive consolidation, Redstone

Investment Corp. (Re), 2016 ONSC 4453, [2016] O.J. No. 5205 (QL).

[19] In Redstone, Morawetz J. (as he then was), defines substantive consolidation

as follows:

7

Under a substantive consolidation, a number of affiliated legal entities,

typically corporations, are treated as if they were one entity, resulting in the

assets of the various debtors being pooled to create a common fund out of which

claims of creditors of all the debtors are jointly satisfied. See: Janis Sarra,

"Corporate Group Insolvencies: Seeing the Forest and the Trees" 2008) 24

B.F.L.R. 63, at. p. 8.

8

The authority for substantive consolidation of bankrupt estates in Canada

lies under the equitable jurisdiction of the Superior Court of Justice granted by s.

183(1) of the Bankruptcy and Insolvency Act ("BIA"). See: A. & F. Baillargeon

Express Inc. (Trustee of) (Re), [1993] Q.J. No. 884 ("Baillargeon"), at para. 23);

Nortel Networks Corporation (Re), 2015 ONSC 2987, at para. 216 and Bacic v.

Millennium Education & Research Charitable Foundation, 2014 ONSC 5875.

[20] In Redstone, the court reviewed the law respecting substantive consolidation of

debtor estates in insolvency proceedings and stated:

78

The following general principles respecting the doctrine of substantive

consolidation represent a summary of Canadian case law:

(i) Are the elements of consolidation present, such as the intertwining of

corporate functions and other commonalities across the group?

(ii) Do the benefits of consolidation outweigh the prejudice to particular

creditors?

(iii) Is consolidation fair and reasonable in the circumstances?

[21] The relevant authorities reference the test for substantive consolidation

summarized in Bacic v. Millennium Educational & Research Charitable

Foundation, 2014 ONSC 5875, [2014] O.J. No. 4914 (QL), at para. 113 as follows:

Page: 13

113 The test as to substantive consolidation requires the balancing of interest

of the affected parties and an assessment whether creditors will suffer greater

prejudice in the absence of consolidation and the debtors or any objecting

creditors will suffer from its imposition. Regard must be had to the:

(a) difficulty in segregating assets;

(b) presence of consolidated Financial Statements;

(c) profitability of consolidation at a single location;

(d) commingling of assets and business functions;

(e) unity of interests in ownership;

(f) existence of intercorporate loan guarantees; and

(g) transfer of assets without observance of corporate formalities

(See also Atlantic Yarns Inc. (Re), 2008 NBQB 144, 333 N.B.R. (2d) 143; Northland

Properties Ltd. (Re), [1988] 29 B.C.L.R. (2d) 257, [1988] B.C.J. No. 1210 (B.C. Sup.

Ct.), affirmed in Northland Properties Ltd. v. Excelsior Life Insurance Co. of

Canada, [1989] 34 B.C.L.R. (2d) 122, [1989] B.C.J. No. 63 (B.C.C.A.) and PSINet Ltd.

(Re), [2002] C.B.R. (4th) 284, [2002] O.J. No. 1156 (Ont. Sup. Ct.) [Commercial List])

[22] In Redstone, the court dismissed the motion brought by the Receiver for

substantive consolidation of the estate’s three corporate entities. In reviewing the test

noted above, the court found:

a) The assets of the corporations were separate and easily identifiable;

b) All financial statements, audited and unaudited, were prepared on an entity

by entity basis;

c) All three corporations had separate ownership structures; and

d) There were no intercorporate loan guarantees of any third party financing.

(See Redstone at paras. 80 - 85)

Page: 14

[23] Ultimately, the court in Redstone determined that there would be a significant

prejudice to the creditors of one of the companies if substantive consolidation was

ordered.

[24] Morawetz J. stated at para. 88:

88

As Trainer J. explained in Northland, "it would be improper for the court

to interfere with or appear to interfere with the rights of the creditors," and that

such an appearance would be created if the estates are ordered merged for all

purposes. This caution rings true in this case. To order substantive consolidation

would require me to ignore written contracts and rely on subjective ex post facto

evidence.

[25] Cases where the courts have found that substantive consolidation is appropriate

are in circumstances where the affairs of the debtor corporations were conducted with

a disregard for the “niceties of corporate identity and separate juridical personalities”,

assets were intermingled, and where, due to the manner in which the corporations

were operated and the state of corporate records, the allocation of value and claims

between the corporations would be burdensome for the receiver. (See Bacic at para.

100; A. & F. Baillargeon Express Inc. (Trustee of) (Re), [1993] Q.J. No. 884

(Que. Sup. Ct.)(QL), at paras. 5, 12 - 16; PSINet Ltd. (Re) at paras. 2 and 11)

[26] Intermingling of assets, operations and liabilities of related corporations is a

factor consistently examined. The facts to support such a finding include:

a)

Holding common bank accounts through which funds are paid and

distributed to pay the expenses and obligations of each of the companies

regardless of which entity is entitled to the funds and/or is responsible for the

expense or obligation;

Page: 15

b)

The presence of intercorporate loans between related companies without

the observance of typical corporate formalities;

c) The comingling of records of the related companies such that it is

extremely difficult, if not impossible to identify which records belong to each

company;

d)

e)

f)

The use of common head offices shared by related companies;

One entity employing all employees for a group of companies; and

Common ownership and/or control, either directly or indirectly, by one

individual in a group of companies and/or each entity having substantially the

same officers and directors. (See Bacic at paras. 100 and 116; A. & F.

Baillargeon Express Inc., at paras. 12 - 16; PSINet Ltd. (Re), at paras. 2

and 11)

[27] NPL and NEL submit that they should not be subject to a substantive

consolidation order. The effect of such an order is the claims of creditors against

separate debtors become claims against a single entity. NPL was a real estate holding

company and NPL’s real property has been sold during the course of the receivership.

By virtue of its contribution to the Lenders, NPL submits that it now has a secured claim

against the Borrowers and a secured claim against the unlimited Guarantors for

contribution under the Credit Agreement. As a holder of the Lenders’ security, NPL

submits that it has a first claim to the Net Receivership Proceeds and the substantive

consolidation order sought would extinguish that claim.

Page: 16

[28] NPL submits that it is solvent, asset-rich and a secured creditor of the other

respondents. NPL and its owner, NEL submit that the Receiver wants access to NPL’s

assets to satisfy unsecured creditors’ claims of the other Debtors, specifically NIP. For

example, employees of NIP and NI are unsecured creditors who will only recover if the

Net Receivership Proceeds are available pursuant to a substantive consolidation order.

Similarly, landlords, suppliers, vendors, gift card purchasers and taxing authorities who

are owed debts by NIP, NI and other Debtors, will clearly be economically advantaged

by a substantive consolidation order.

[29] Courts in both the US and Canada have found that orders of substantive

consolidation are an extraordinary remedy, based in part on the fact that secured

creditors may be prejudiced in order to increase the overall return to other creditors,

including unsecured creditors.

[30] Applying the principles outlined in Redstone and the other authorities, I note

that the Receiver conducted an extensive review of all of the relevant factors in the

Twelfth Report (see paras. 131 – 200). The Receiver, after reviewing all of the

applicable factors, concludes that “it is fair and reasonable to substantively consolidate

the Debtors for the purposes of addressing claims of unsecured creditors, and that the

overall benefit to stakeholders arising from such a consolidation outweighs the

prejudice to any particular creditors.”

[31] I do not intend to conduct an exhaustive review of the factors that are outlined

in detail in the Twelfth Report. I am in substantial agreement with the analysis

Page: 17

undertaken by the Receiver. I do propose, however, to review the governing factors

outlined in Redstone and the other relevant authorities noted above:

a) Difficulty in segregating assets;

b) Presence of consolidated financial statements;

c) Profitability of consolidation at a single location;

d) Comingling of assets and business functions;

e) Unity of interests in ownership;

f) Existence of intercorporate loan guarantees;

g) Transfer of assets without observance of corporate formalities.

a) Difficulty in segregating assets

[32] NPL, a real estate holding company, held title to assets that can be segregated

from the assets of the other respondents. NEL is the parent corporation of NPL. All of

NPL’s real property has been sold during the course of the receivership. However, the

Receiver correctly points out that “ … those assets cannot readily be ‘segregated’ from

the substantial investments in those properties and costs thereof being borne by NIP

and from the costs incurred by NIP in providing centralized services to NPL and NI (and,

in the case of NI, funding certain of the inventory costs which resulted in (e.g.) NI

accounts receivable), all without any cash changing hands or ultimate reconciliation of

such contributions, investments and costs, to the benefit of stakeholders of NPL and NI,

but to the detriment of stakeholders of NIP”. (See para. 195 of the Twelfth Report)

Page: 18

b) Presence of consolidated financial statements

[33] The Nygard Group of Companies did prepare consolidated financial statements.

NPL and NEL are not included in the consolidated financial statements and those two

entities prepared their own financial statements. This is a factor that favours the

respondents’ submission but in my view, it is not a significant factor. The primary

questions are whether the elements of consolidation are present, such as the

intertwining of corporate functions and other commonalities across the group of

corporations and whether the benefits of consolidation outweigh the prejudice suffered

by creditors as a result of granting a substantive consolidation order.

c) Profitability of consolidation at a single location

[34] NPL held title to the real estate which was used in the operation of the business

of the Nygard Group of Companies. The principal business location for all of the

Debtors, including NPL and NEL, was the head office located at the Inkster property in

Winnipeg. While the respondents submit that NPL held real estate at various locations,

and thus profitability was not consolidated at a single location, services for the Debtors

including NPL was centralized and performed by employees of NIP at a single location.

The services required for the Nygard fashion business as well as NPL’s business,

including the business functions and accounting was completed primarily at the Inkster

property by NIP’s employees.

d) Comingling of assets and business functions

[35] Other than as explained below, NPL’s assets were not necessarily comingled with

the assets of the other respondents. NPL’s primary commercial assets including the

Page: 19

Inkster property, the Notre Dame property, the Broadway retail property and the

Niagara property were used by NIP and the Nygard Group of Companies to operate the

fashion business.

[36] As to the business functions the evidence establishes:

i) Most of the business functions were carried out by substantially the same

directors and officers of all the Debtors.

ii) At the material times, Mr. Nygard exercised general authority and direction

over all of the Debtors and their business affairs and functions.

iii) The Debtors including NPL generally operated using NIP bank accounts.

iv) The creditors of each of the Debtors were tracked and managed centrally on

one consolidated accounts payable sub-ledger, regardless of which Debtor

procured or benefited from the goods or services obtained.

v) NIP incurred and directly paid substantially all expenses on behalf of the

Debtors, regardless of which Debtor procured or benefited from the goods or

services obtained. The Receiver notes that these expenses were generally

captured for accounting purposes, but not on a consistent basis, as

intercompany transactions. These transactions were not necessarily on

reasonable commercial terms that would be expected with separate arms-

length corporations.

vi) The Receiver also noted that the intercorporate transactions between Debtors

rarely involved cash actually changing hands and intercompany accounts

Page: 20

were often not settled or paid, as you would typically expect among separate

arms-length corporations.

vii)NIP advanced substantial funds or paid specific amounts in relation to the

development and maintenance of NPL’s real property assets, including:

 Approximately $8 million for the development and maintenance of the

Falcon Lake Cottage Property, including approximately $2.6 million in

labour expenses;

 Approximately $5.6 million in capital improvements and maintenance

costs for the Inkster property; and

 Approximately $1 million in capital improvements and maintenance

costs for the Notre Dame Property.

viii) Substantially all accounting and payable functions, decision-making,

communication functions, marketing and pricing decisions, new business

development initiatives, negotiation of material contracts and leases, retail

and third party suppliers/services decisions, design and merchandising,

and production and distribution functions were managed centrally from

the Inkster property head office in Winnipeg.

ix)

The Debtors employed approximately 1550 people, 1450 of which were

employed by NIP and 100 of which were employed by NI. NIP funded

most of the employee costs, notwithstanding that employees provided

services and performed functions for the other Debtors including NPL.

Page: 21

x)

The IT system for all of the respondents was centralized and used by the

Debtors and the broader Nygard organization to maintain the books and

records of each of the Debtors.

xi)

The records of the Debtors are comingled within the IT system and

records which were maintained primarily at the Inkster property.

e) Unity of interests in ownership

[37] NPL is owned by NEL, which does not directly own any of the other named

respondents, except 879. While this arguably supports a finding that there is no unity

of interest in ownership, the evidence satisfies me that at the material times, NPL and

all of the respondents were controlled, directly or indirectly, by Mr. Nygard and he had

general authority and direction over all of the Debtors.

f) Existence of intercorporate loan guarantees

[38] The Receiver reported that the Debtors recorded in excess of $87 million in

aggregate intercompany loans as among the Debtors. The Credit Agreement was

guaranteed by a number of the respondents, including NPL, who provided a limited

recourse guarantee in the amount of $20 million US, plus costs and expenses. Other

respondents provided unlimited guarantees to secure the Credit Facility. The operation

of the Nygard business generated intercompany loans which are also relevant to NPL’s

and NEL’s submission that they should be excluded from a substantive consolidation

order. NPL has an intercompany loan owing to NIP in the approximate amount of

$2,500,000 and an intercompany loan owing to 887 (one of the partners of NIP) of

Page: 22

approximately $200,000.

NEL (NPL’s parent company) has an outstanding

intercompany loan owing to NIP in the approximate amount of $18,100,000.

g) Transfer of assets without observance of corporate formalities

[39] The Receiver noted that there were certain written intercompany agreements

between the respondents respecting their business arrangements. However, the

payment terms were not regularly complied with. As an example, lease agreements

were alleged to have been entered into between NPL and NIP and between NPL and

Mr. Nygard respecting the Inkster property. Although there is a lease agreement

between NPL and NIP, there is no evidence that any lease payments were actually

made. In the case of Mr. Nygard, the evidence of a lease agreement is referenced in

his affidavit affirmed June 25, 2020 (see also affidavit Greg Fenske, affirmed June 24,

2020).

[40] In a previous decision delivered June 30, 2020, I made the following finding

regarding Mr. Nygard’s assertion that he was a tenant pursuant to a verbal lease

agreement at the commercial property operated by the Nygard Group of Companies at

1340 Notre Dame Avenue:

There is no evidence of a written tenancy agreement, a lease term, rent paid,

renewal terms, utilities, repairs, security or damage deposit paid or any other

terms and conditions that are ordinarily agreed to by parties entering into

residential tenancy agreements. NPL and Mr. Nygard are sophisticated parties

who would be expected to follow the law and document agreements. While it is

possible to enter into a verbal tenancy agreement, other documents such as e-

mails, expense reports, or other documents prepared in the ordinary course of

business ought to have been produced to evidence the formation of the

residential tenancy agreement, and the payment of rent or security deposits. Mr.

Nygard produced no such documents or information other than references to the

fact that he resided at 1340 Notre Dame, which was where the Nygard group of

companies carried on business prior to the receivership order. The evidence

establishes that to the extent there was an agreement, it was an accommodation

Page: 23

to Mr. Nygard while he was performing duties for and on behalf of the Nygard

Group of Companies to use the space on a temporary basis only, not a residential

tenancy agreement.

[41] Based on my review of all of the evidence, I agree with the Receiver that “[t]he

approach taken by the Nygard Group of Companies is consistent with the operation of

the Debtors as a common enterprise and cannot be considered to have involved

independent arms’-length parties with independent directors acting in the best interests

of their respective corporations.” (See Twelfth Report of Receiver, at para. 195)

[42] In addition, other factors are referenced by the Receiver and its counsel

including:

a) At the time the application for the Receivership Order was made the

respondents, and specifically the Canadian Debtors, took a consolidated

approach in relation to the original NOI proceedings, advancing the position

that the Canadian Debtors were insolvent and intended to make a proposal in

bankruptcy on behalf of all Canadian Debtors, including NPL;

b) Throughout the receivership proceedings, the affidavit evidence filed on

behalf of the Debtors consistently refers to the “Nygard Group of Companies”,

“Nygard Group Assets” and/or “Nygard Group Resources”;

c) The respondents filed evidence from one primary affiant, Mr. Fenske on

behalf of the Debtors. Appendix M attached to the Twelfth Report, is a

summary of the evidence filed by the Debtors, which I considered in

assessing the factors noted above.

Page: 24

[43] Ultimately, the court must weigh the various factors and apply the general

principles outlined by the court in Redstone at para. 78. Applying the general

principles and weighing the potential prejudice to the affected parties, I find as follows:

a) While I accept that some of the factors outlined above do not support

granting an order of substantive consolidation of the estates of the

respondents, a review of all of the factors and the detailed evidence

presented in the unique circumstances of this case satisfies me that the

elements required to order a substantive consolidation are present;

b) In my view, the benefits of substantive consolidation outweigh the prejudice

to particular creditors, including NPL pursuant to its potential right of

subrogation. I place a great deal of confidence in the evidence presented

and opinion provided by the Receiver, as an officer of the court, particularized

in the consolidation analysis and the consolidation summary in the Twelfth

Report (see paras. 131 – 200). I agree that CRA and unsecured creditors of

NPL may be economically advantaged by substantive consolidation of the

Debtors for creditor purposes. If I accept NPL’s submission that it is a

secured creditor and has a priority interest in the Net Receivership Proceeds

then I agree that NPL may be prejudiced as a result of a substantive

consolidation order. The prejudice that may be suffered by NPL, and its

parent corporation NEL, must be weighed against the claims of the

employees, landlords, suppliers and other vendors, gift card purchasers and

taxing authorities who are owed debts by NIP, NI and other Debtors who are

Page: 25

economically advantaged by substantive consolidation of the Debtors for

creditor purposes.

c) In my view, all of the Debtors, including NPL, carried on a common enterprise

and benefited from the centralized manner in which the Nygard fashion

business was operated, including the work performed by NIP’s employees,

centralized administrative services and funding provided by NIP. I agree with

the Receiver that treating the Debtors and in particular NPL as separate

entities for creditor purposes would result in inequitable treatment for

creditors and unfairly deprive them of the benefit of pooled assets and

resources of the Nygard Group of Companies.

[44] The respondents submit that the court in Redstone, refused to grant the order

for substantive consolidation and the facts in Redstone are very similar to the facts

before the court in this case. The respondents submit that one creditor, in this case,

NPL, has a secured claim that would be eliminated by a substantive consolidation order.

In my view, the facts and circumstances in Redstone are distinguishable from the facts

in this case. While I accept that NPL is a separate corporation within the Nygard Group

of Companies, in Redstone, Morawetz J. found that the elements of consolidation were

not present and specifically stated “ … there would also be significant financial prejudice

to the creditors of RCC if substantive consolidation were ordered” (at para. 90). His

reference to creditors of RCC is a reference to third party investors/creditors who would

have suffered a significant financial prejudice. In this case, the alleged significant

financial prejudice is being suffered by one of the affiliated corporations within the

Page: 26

Nygard Group of Companies that carried on the fashion business as a common

enterprise. While I agree NPL’s potential secured claim would be eliminated by a

substantive consolidation order, that prejudice must be weighed against the prejudice

of all of the other creditors of the respondents that remain unpaid who advanced

products, services and resources to the Nygard Group of Companies.

[45] NPL’s real property holdings have been sold during the course of the receivership

and NPL does not own real estate and actively carry on business at this time. Its only

asset is a claim to the Preserved Proceeds and the Net Receivership Proceeds.

[46] I am satisfied that in the unique circumstances of this case, the benefits of

substantive consolidation outweigh the prejudice to particular creditors including NPL

and its parent corporation, NEL.

[47] Based on the recommendation of the Receiver, I agree that it is fair and

reasonable to substantively consolidate the Debtors for the purpose of addressing

claims of all creditors and that the overall benefit to the stakeholders arising from such

a consolidation outweighs the prejudice to any particular creditor.

b) What is the proper allocation of revenues generated from the sale of

assets during the receivership and receivership costs and expenses?

[48] The respondents and in particular, NPL and NEL, challenge the allocation of costs

and revenue generated during the receivership. NPL submits that the allocations made

by the Receiver are arbitrary, unfair and in effect, means that NPL does not have the

rights of subrogation accorded by the Act.

Page: 27

[49] In assessing the claims to the Net Receivership Proceeds, the Receiver points out

at paragraph 87 of the Twelfth Report that the claims to the Net Receivership Proceeds

depend upon whether claims are determined on a stand-alone “separate corporation”

basis or on the basis that the Debtor should be substantively consolidated for creditor

purposes. The Receiver undertakes a review of claims on a separate corporation basis,

in part, because NPL has asserted that it has a priority claim to all or a substantial

portion of the Net Receivership Proceeds. The Receiver points out that NPL has tax

liabilities that are being advanced as a result of the sale of NPL’s real property and NPL

may have other tax liabilities that may accrue in relation to dispositions of the Falcon

Lake Cottage Property and Fieldstone Property.

[50] In light of my finding made regarding substantive consolidation of the estates of

the Debtors for creditor purposes, it is unnecessary to review the Receiver’s separate

corporate analysis. However, if my finding regarding substantive consolidation is

incorrect, I agree an assessment of the separate corporate analysis is required and

therefore the Receiver’s allocations must be reviewed.

[51] The Receiver explains at paragraph 89 that the determination of claims on a

separate corporation basis requires a complex analysis involving:

(a) identification of receivership proceeds attributable to the realization upon

assets of affected Debtors. In this case, only NIP, NPL and NI had assets which

were included as Property in the receivership and which were sold or otherwise

realized upon by the Receiver;

(b) allocation of expenses incurred by the Receiver as against the proceeds

attributable to NIP, NPL and NI asset realizations in the course of the

receivership;

(c) allocation of priority claims and court-ordered charges, including statutory

priorities, the Receiver’s Borrowing Charge, the Receiver’s Charge and the

Page: 28

Landlords’ Charge, as against the proceeds attributable to NIP, NPL and NI asset

realizations in the course of the receivership;

(d) allocation of repayment of the Credit Facility from proceeds of NIP, NPL and

NI asset realizations, and determination of related subrogation rights, if any; and

(e) reliance upon the Nygard Group financial information in relation to

intercompany obligations as among the Debtors and other matters.

[52] The Receiver conducted a comprehensive separate corporation analysis at

paragraphs 92 – 130 of the Twelfth Report. During the course of the Receivership, the

Receiver received proceeds from the realization of the assets of NIP, NI and NPL as

follows:

Realizations

by Debtor (in

$000s)

NIP

NI

50,917

11,831

28,579

NPL

[53] The Receiver made allocations of expenses based on considerations outlined in

the Twelfth Report. The Receiver also made allocations respecting the repayment of

the Credit Facility. Rather than attempt to summarize the allocations made and analysis

conducted by the Receiver, I have attached as Schedule A to this decision a portion of

the Twelfth Report which sets out the Receiver’s analysis regarding the Net

Receivership Proceeds.

[54] The respondents submit that the sale of NPL properties generated $28,579,000.

The Receiver allocated the sum of $14,192,000 of that amount for distribution to the

Page: 29

Lenders in payment of the Credit Facility. The respondents dispute the allocation and

argue that it is arbitrary and unreasonable. NPL submits it ought to receive credit for

the full amount realized and because that amount exceeds its liability under the limited

recourse guarantee, rights of subrogation apply.

[55] NEL and NPL challenge the alleged arbitrary allocation of the payments made to

the Lenders’ and the Receiver’s explanation as set forth above in paragraphs 101 and

102 of the Twelfth Report. The respondents also challenge the allocations of costs and

expenses made by the Receiver and rely upon an expert report attached to the Albert

affidavit.

[56] Based on my review of all of the evidence, I agree with most of the assessments

made by the Receiver and make the following findings:

a)

b)

c)

The Receiver’s allocation of receivership costs and expenses was made on

a preliminary basis and is not a final analysis of the allocation of the costs

and the proceeds recovered during the receivership from the asset

realizations of NIP, NI and NPL;

The Receiver recorded in excess of 17,000 transactions during the

receivership proceedings and it would be time-consuming and complicated

to assess each of those transactions and in my view, it is not in the best

interests of the creditors to do so;

Corporate overhead expenses incurred during the course of the

receivership are not readily specifically allocable to a particular Debtor;

Page: 30

d)

e)

f)

The Receiver’s Borrowings of approximately $30 million were incurred to

fund receivership expenses. The Receiver’s Borrowing Charge established

pursuant to the Receivership Order created a charge against the Property

and the Receiver did not allocate Receiver’s Borrowings to any particular

Debtor;

The Receiver allocated repayment of the Credit Facility, referred to as

Lender Debt, as set out in paragraph 101 and after taking into account

funds received from a Borrower (NI), the Receiver split the remaining

balance of Lender Debt between NIP and NPL asset realizations. The

amount allocated to NIP and NPL is approximately $14.2 million each.

The Receiver estimates the Net Receivership Proceeds allocated between

NIP and NPL at paragraph 103 and provides a chart summarizing the

separate corporation analysis at paragraph 104. (See attached Schedule

“A”)

g)

h)

The Receiver then applies the implications of intercompany balances

between NIP, NI and NPL.

I agree with the Receiver that repayments made to the Lenders from

proceeds realized from the sale of NPL assets do not affect the historical

intercompany debts of NPL to NIP, NPL to 887 and NEL to NIP and also do

not create subrogated rights in favour of NPL as against NIP and its

assets. The Receiver outlines the correct accounting treatment of the

Credit Agreement transactions at paragraph 115 of the Twelfth Report.

Page: 31

[57] The respondents submit that the Receiver’s analysis amounts to allocations that

allocate away NPL’s subrogated rights. The respondents attacked the Receiver’s

allocations and specifically stated that the Receiver failed to provide an explanation for

the $14.2 million allocation of payment to the Lenders attributable to NPL.

[58] The respondents submit:

a)

The allocation is in breach of the Receiver’s duty to be impartial,

disinterested and to deal with the rights of all interested parties in a fair and

even-handed manner;

b)

The Receiver cannot legally allocate the proceeds of the sale of NPL’s

property to the credit of an entity other than NPL, unless and until NPL has been

made subject to substantive consolidation order;

c)

In contrast to the decision in Nortel Networks Corp. (RE), 2015 ONSC

2987, [2015] O.J. No. 2440 (QL), leave to appeal refused 2016 ONCA 332, 130

O.R. (3d) 481, in which the court made rulings that certain funds would be

shared on a pro rata basis, that since NPL’s assets consisted of real properties

owned by NPL alone and not the collective group of entities, the proceeds of

sales of those properties belong to NPL’s estate.

[59] I start my analysis of these submissions with a brief review of the applicable law

governing allocations in receivership proceedings. In assessing the allocation of

receivership costs, the authorities establish that allocation of costs amongst related

corporations is an exercise of discretion and the result must be fair and equitable.

Page: 32

[60] The general principles of law, which govern the allocation of receivership costs is

summarized in Royal Bank of Canada v. Atlas Block Co., 2014 ONSC 1531, [2014]

O.J. No. 1099, (QL) as follows:

43

As to the allocation of the fees, the general principles governing the

allocation of receiver's costs can be briefly stated:

(i) The allocation of such costs must be done on a case-by-case basis and

involves an exercise of discretion by a receiver or trustee;

(ii) Costs should be allocated in a fair and equitable manner, one which does not

readjust the priorities between creditors, and one which does not ignore the

benefit or detriment to any creditor;

(iii) A strict accounting to allocate such costs is neither necessary nor desirable in

all cases. To require a receiver to calculate and determine an absolutely fair

value for its services for one group of assets vis-à-vis another likely would not be

cost-effective and would drive up the overall cost of the receivership;

(iv) A creditor need not benefit "directly" before the costs of an insolvency

proceeding can be allocated against that creditor's recovery;

(v) An allocation does not require a strict cost/benefit analysis or that the costs

be borne equally or on a pro rata basis;

(vi) Where an allocation appears prima facie as fair, the onus falls on an

opposing creditor to satisfy the court that the proposed allocation is unfair or

prejudicial.

45

As to the allocation methodology for shared fees, the Receiver reported

that as early as October 18, 2013, it had provided BDC with its allocation method

for professional fees and expenses incurred in the estate. Its email to RBC of

that date stated:

The shared time will be allocated on realizations of the secured creditor assets so

the exact breakdown of those fees will not be known until the assets are

realized.

The Receiver provided BDC with requested weekly reports allocating those fees

amongst the three time categories. The Receiver responded to periodic inquiries

about the fees and their allocation from BDC, and it was not aware that BDC

took issue with the allocation until February 4, 2014.

[61] In JP Morgan Chase Bank N.A. v. UTTC United Tri-Tech Corp., 2006 25

C.B.R. 5th 156, [2006] O.J. No. 3048 (QL), the Ontario Supreme Court of Justice

Page: 33

considered a Receiver’s proposed allocation with respect to amounts secured by the

Receiver’s charge. The court approved the proposed allocation and noted:

42

The obligation on a Receiver in allocating costs from an insolvency

proceeding is to exercise its discretion in an equitable manner that does not

readjust the priorities between creditors. The allocation:

(a) should be fair and equitable; and

(b) not ignore the benefit or detriment to any creditor.

There is however no requirement that the Receiver be obliged to conduct a strict

accounting on a cost-benefit basis as between the creditor classes: Hunjan

International Inc. (Re) (2006), Carswell Ont. 2718 (Ont. S.C.) at p. 2 and p. 8.

43

The Receiver submits that the Proposed Allocation is reasonable and in

accordance with general principles established by Canadian insolvency courts.

44

The Receiver submits that the allocation of the Fees is reasonable in the

circumstances. Moreover, it has been held that "to require the Receiver to

calculate and determine an absolutely fair value for its services for one group of

assets vis-à-vis another would likely not be cost effective, would drive up the

overall receivership cost and would likely be a fool's errand in any event:

Hickman Equipment (1985) Ltd., [2004] N.J. No. 299 at p. 6.

45

Where as in this case, the Receiver was appointed for the benefit of

interested parties to ensure that all creditors were treated fairly and to ensure a

fair process to deal with the assets, there is no valid reason for a secured

creditor to avoid paying its fair share of the receivership costs: Bank of Nova

Scotia v. Norpak Manufacturing Inc., [2003] O.J. No. 4818 (Ont. C.A.) at p. 2.

[62] In DBDC Spadina Ltd. v. Walton, 2015 ONSC 2550, [2015] O.J. No. 2023

(QL), the Ontario Superior Court of Justice considered the proposed allocation of

professional fees to each of the parties. Newbould J. found:

28

Each case is different. This case involves unusual complexity involving the

Manager's responsibility for 31 Schedule B properties and several Schedule C

properties, all of which were improperly run by the Waltons before the Manager

was appointed. The Manager's task was made no easier by challenges raised

from the beginning to the end. I accept that the Fee Allocation Methodology in

this case allocates costs in a fair and equitable manner and that the discretion of

the Manager has been exercised fairly. The fact that one or more interested

Page: 34

parties is unhappy with the allocation is perhaps understandable but no basis in

this case to change what the Manager has proposed to allocate the costs.

[63] Applying these principles to this case, I accept that a comprehensive review of

over 17,000 transactions would be time-consuming, expensive and the creditors would

ultimately bear the costs associated with that review as well as the costs of any

associated further litigation.

[64] While not perfect, I am satisfied the Receiver has undertaken a review process

and allocation methodology that allocates costs in a fair and equitable manner. I am

also satisfied that the Receiver has exercised its discretion fairly in the circumstances.

It is understandable that NPL and NEL challenge the allocations of the proceeds of sale

of NPL’s assets on the basis that the allocations prejudice NPL’s potential right of

subrogation. I considered that factor, but in my view, that is not a sufficient basis to

determine that the allocations are unfair. The Receiver explained the complex process

of allocations in its reports and I am not satisfied that it is appropriate to interfere with

the Receiver’s exercise of discretion and the allocation of costs and proceeds of sale in

the unique circumstances of this case.

[65] The respondents point out that the authorities relied upon by the Receiver deal

with the allocation of costs of the receivership. In this case, some of the allocations

that are challenged include the allocation of the proceeds of the sale of assets

belonging to different entities.

[66] The respondents referred the court to two decisions, namely Royal Bank of

Canada v. Atlas Block Co. Ltd., 2014 ONSC 1531, [2014] O.J. No. 1099, and Nortel

(Re). The Royal Bank of Canada case is often cited regarding the principles

Page: 35

applicable to cost allocations in receiverships. A portion of that decision dealt with the

allocation of the proceeds of various asset sales, but did not set out any guiding legal

test applicable to that allocation.

[67] In Nortel (Re) the respondents reference the decision of Newbould J. who dealt

with a complicated cross-border liquidation of the assets of multiple corporations within

the Nortel Enterprise and the proper allocation of those proceeds as among the entities

and their creditors. Concerning the proceeds of assets sold the court stated at para.

202:

202 This is an unprecedented case involving insolvencies of many

corporations and bankrupt estates in different jurisdictions. The intangible assets

that were sold, being by far the largest type of asset sold, were not separately

located in any one jurisdiction or owned separately in different jurisdictions. They

were created by all of the RPEs located in different jurisdictions. Nortel was

organized along global product lines and global R&D projects pursuant to a

horizontally integrated matrix structure and no one entity or region was able to

provide the full line of Nortel products and services. R&D took place in various

labs around the world in a collaborative fashion. R&D was organized around a

particular project, not particular geographical locations or legal entities, and was

managed on a global basis. The fact that Nortel ensured that legal entities were

properly created and advised in the various countries in which it operated in

order to meet local legal requirements does not mean that Nortel operated a

separate business in each country. It did not.

[68] In connection with proceeds referred to as the “lockbox funds”, the court stated

that the funds should be distributed pro rata and stated:

250 The allocation each Debtor Estate will be entitled to receive from the

lockbox funds is the percentage that all accepted claims against that Estate bear

to the total claims against all Debtor Estates.

[69] Regarding the pro rata allocation, the court stated:

214 A pro rata allocation in this case would not constitute a substantive

consolidation, either actual or deemed, for a number of reasons. First, and most

importantly, the lockbox funds are largely due to the sale of IP and no one

Page: 36

Debtor Estate has any right to these funds. It cannot be said that these funds

in whole or in part belonged to any one Estate or that they constituted separate

assets of two or more Estates that would be combined. Put another way, there

would be no "wealth transfer" as advocated by the bondholders. The IFSA, made

on behalf of 38 Nortel debtor entities in Canada, the U.S. and EMEA, recognized

that the funds would be put into a single fund undifferentiated as to the Debtor

Estates and then allocated to them on some basis to be agreed or determined in

this litigation. Second, the various entities in the various Estates are not being

treated as one entity and the creditors of each entity will not become creditors of

a single entity. Each entity remains separate and with its own creditors and its

own cash on hand and will be administered separately. The inter-company claims

are not eliminated.

. . . . .

222 In considering these factors, it is clear beyond peradventure that Nortel

has had significant difficulty in determining the ownership of its principle assets,

namely the $7.3 billion representing the proceeds of the sales of the lines of

business and the residual patent portfolio. This amount constitutes over 80% of

the total assets of all of the Nortel entities. This issue has taken several years of

litigation and untoward costs in the parties attempting to establish an

entitlement to it. As the MRDA does not govern how the sales proceeds are to be

allocated, there is no one right way to separate them. It cannot be said that

there is no question which entity is entitled to the sale proceeds or in what

amount. It is clear that these assets are in the language of Dr. Janis Serra "so

intertwined that it is difficult to separate them for purposes of dealing with

different entities".

[70] I disagree with the respondents that these authorities assist to establish

governing legal principles and specifically that they support a finding that the sale

proceeds of NPL assets belong to NPL alone. The respondents’ submission is based on

the incorrect assumption that all of the NPL asset sale proceeds in the amount of

$28.579 million was paid to the Lenders pursuant to the Credit Facility. As the Receiver

points out, that is contrary to what actually happened.

[71] The Royal Bank of Canada case did not establish guiding leading principles to

be employed in allocating sale proceeds. The decision in that case was based on the

particular facts before the court. The court accepted the Receiver’s proposed allocation

Page: 37

of the sale proceeds amongst the debtors and there was evidence filed to support the

allocations.

[72] The decision of the court in Nortel (Re) dealt with the unique fact situation that

arose in connection with a very complex multi-jurisdictional insolvency proceeding.

Based on the facts before the court, it was determined that the funds should be

allocated to the credit of each of the debtor entities on a pro rata basis.

[73] Other than establishing that each case is different, I am not satisfied those

authorities assist the court with principles that apply in this case. In the unique facts of

this case, the Receiver was tasked with allocating the realizations achieved from the

sale of assets of NIP, NI and NPL.

[74] The Receiver points out in the Second Supplementary Twelfth Report what

actually happened upon the sale of the assets and states that none of the NPL asset

sale proceeds were used to repay the Credit Facility and that approximately $11.9

million of the NPL asset sale proceeds were used to repay the Receiver’s Borrowings. I

agree with the Receiver that the allocation of the Receiver’s costs and the repayment of

the Credit Facility recognizes the payment of such costs based on the actual timing of

the receipt of receivership proceeds from various assets owned by NIP, NI and NPL. I

disagree with the position advanced by the respondents that the allocation involves any

transfer of assets or proceeds as between NI, NIP and NPL.

[75] In my view, the legal principles applicable to allocations noted above, apply

equally to the allocation of costs and the allocation of proceeds of the sale of assets.

Page: 38

[76] As I have explained, the assumption that all NPL asset sale proceeds (totaling

$28.579 million) were paid to the Lenders to satisfy the Credit Facility is contrary to

what actually happened during the course of the receivership. The Credit Facility was

in fact satisfied prior to receipt of the net sale proceeds from the sale of the NPL

properties.

[77] It is also important to keep in mind that the Receiver’s Borrowing Charge

secured the Receiver’s Borrowings pursuant to the Receivership Order and funded

receivership costs and expenses including disbursements. The Receiver’s Charge and

Receiver’s Borrowing Charge are charges against all of the Property and rank in priority

to all encumbrances including the Credit Facility. The Receiver’s Borrowings during the

course of the receivership exceeded $30 million and is captured within “corporate

overhead” expenses in the separate corporation analysis conducted by the Receiver in

the Twelfth Report. I accept the Receiver exercised its discretion in a reasonable

manner to allocate the proceeds of sale of the assets received based on what actually

occurred during the receivership and in my view, the allocations are fair and equitable

in the circumstances.

[78] As to the respondents’ submissions, the evidence supports the following findings:

a)

The allocations made by the Receiver were fair and equitable and cannot

be characterized as in breach of the Receiver’s duty to be impartial, disinterested

and to deal with the rights of all interested parties in a fair and even-handed

manner; and

Page: 39

b)

The Receiver allocated the proceeds of the sale of NPL’s property as part

of the separate corporation analysis. I have found the allocations to be fair and

equitable. If I am wrong, I have nevertheless found that the evidence in this

case supports granting a substantive consolidation order and therefore the sale

of NPL assets can be used to satisfy the common liabilities of the respondents.

[79] I turn now to the other submissions advanced by the respondents based upon

the Albert affidavit. Mr. Albert provides an opinion regarding the Receiver’s separate

corporation analysis in the Twelfth Report. The report of Albert Gelman Inc. (“AGI”) is

attached as Exhibit “B” to the Albert affidavit. The AGI report indicates that the report

was requested for the following purposes:

a) To assist counsel to the Canadian Debtors in analyzing the separate

corporation analysis set out at page 36 of the Twelfth Report;

b) “To provide Debtors’ Counsel with an alternative separate corporation

analysis which, in the opinion of AGI incorporates a more reasonable, fair and

equitable allocation methodology.”

[80] The qualifications or expertise of Mr. Albert or AGI to express an opinion that

may assist the court in this matter was not challenged. Mr. Albert’s curriculum vitae is

attached as Exhibit “A” to his affidavit and he is described as one of the founding

principals of AGI with more than 30 years of experience. He is a chartered professional

accountant and licensed insolvency trustee and has acted in numerous engagements as

an officer of the court in such legal capacities as receiver, monitor, inspector,

Page: 40

investigative receiver and trustee in bankruptcy. I have no hesitation in accepting that

he is qualified to provide opinion evidence within his area of expertise.

[81] In its report, AGI challenges the following allocations made by the Receiver:

a) The allocation of the Landlords’ Charge in the separate corporation analysis.

The Receiver allocated the Landlords’ Charge equally in the amount of

$1,293,000 to each of NIP and NPL. AGI expresses the opinion that the

Landlords’ Charge should be allocated entirely to NIP on the basis that NPL

was not a party to any of the leases that pertain to the Landlords’ Charge;

b) The allocation of corporate overheads based upon the respective gross

proceeds of realizations of NIP, NI and NPL. AGI describes the corporate

overheads as primarily corporate payables and professional fees. Regarding

payables, AGI disputes the allocation of 31% of the corporate payable to NPL

on the basis that total property rent charged by NPL to NIP was

approximately $1.3 million per annum and the amount allocated exceeds the

total amount NPL earns as rental income per annum. AGI expresses the

opinion that a reasonable methodology for allocating the corporate payable to

NPL would be to consider the amount that would be charged by an arm’s-

length property manager. AGI reached out to a commercial real estate

broker who expresses the opinion that industrial property management fees

charged range from 2.5% to 3% of gross rents. Accepting for the moment

that this hearsay evidence is admissible, AGI allocates the sum of $39,000

Page: 41

based on 3% of rental income of $1.3 million versus the Receiver’s allocation

to NPL; and

c) The allocation of professional fees made by the Receiver based upon

respective gross proceeds of realizations.

AGI expresses the view a

reasonable allocation of the professional fees to NPL is 10%.

[82] In response to the opinion expressed by AGI, the Receiver filed a Second

Supplementary Twelfth Report and at paragraphs 72 – 89, provided a detailed response

to the opinion advanced by AGI. Based on my review of the reports, I prefer the

opinion expressed by the Receiver. In my view, the Receiver is in the best position to

analyze the costs and expenses and allocate them in a fair and equitable fashion as the

Receiver is responsible, as an officer of the court, to do so pursuant to the Receivership

Order. In my view, the Receiver acted responsibly and in accordance with its duties to

allocate the costs.

[83] I accept that the AGI proposed allocations may be appropriate if the costs were

being allocated on the basis that the Nygard fashion business was carrying on in the

ordinary course of business. However, I agree with the Receiver that AGI’s report and

opinion ignores the reality of what actually happened during the course of the

receivership. The allocations were made during a receivership when employees were

terminated and all assets were being liquidated to satisfy the Debtors’ obligations under

the Credit Facility. In my view, the Receiver’s allocations reflect the reality of what

actually happened during the receivership and are reasonable.

Page: 42

[84] Of the opinions expressed by AGI, I accept that the opinion regarding “direct

allocations” does have some merit. NIP leased the properties and the landlords have a

claim against the primary tenant, NIP, not NPL. I agree NPL was not a party to the

lease agreements relating to the Landlords’ Charge. However, in order to gain access

to the properties and proceed to the sale of the assets of all of the Debtors, the court

granted the Landlords’ Charge which provided a charge by the landlords against all of

the Property (including NPL’s property) captured in the receivership. That decision was

not appealed. The Receiver’s allocation reflects the fact that the Landlords’ Charge

grants a prior secured interest against the Property including NPL’s property.

[85] As to corporate overheads, I agree with the Receiver that what actually

happened was that the NPL asset sale proceeds were used to pay Receiver’s

Borrowings which included the funding of corporate overheads. I agree with the

Receiver that AGI’s analysis is flawed for the reasons set forth in paragraph 78 of the

Receiver’s Second Supplementary Twelfth Report.

[86] As to professional fees, I accept the Receiver’s analysis and opinion that a

significant part of the professional time involved in the Receivership Proceedings has

been in connection with issues that have been raised by NPL. In my view, the

allocation made by the Receiver is to be preferred and is fair and equitable in the

circumstances.

[87] The respondents challenge the position that Receiver’s Borrowings are not

advances made pursuant to the Credit Facility and repayment of funding provided

under the Receiver term sheet which is not guaranteed by any guarantee given in

Page: 43

relation to the Credit Facility. (See Receiver’s Supplementary Twelfth Report at para.

60)

[88] The respondents submit that the Receiver’s Borrowing Charge is not distinct from

the security granted under the Credit Agreement. Further, the respondents submit that

repayment of the Receiver’s Borrowing Charge is enforcement of the Lenders’ security

is consistent with:

a) The Credit Agreement;

b) The Debenture executed by NPL in favour of the Lenders on December 30,

2019 (the “Debenture”);

c) The demand letter sent by counsel for the Lenders to the respondents;

d) The affidavit of Robert L. Dean, affirmed March 9, 2020, filed by the Lenders

in support of the Receivership Order; and

e) The Receivership Order.

[89] I agree that the relevant terms of the Credit Agreement and the guarantee

require the Guarantors to guarantee “ … the due and punctual performance of the all

Obligations of each other Loan Party.” (Clause 11.01 of the Credit Agreement) The

NPL guarantee is limited as follows: “The Agent agrees that its recourse against …

(“NPL”) pursuant to Mortgages on owned Real Estate of NPL shall be limited to a

realized value after all costs and expenses, including enforcement costs of

$20,000,000.” (the “NPL Guarantee”) (Clause 11.05 of the Credit Agreement, page

122) (See Exhibit “D” of the Dean affidavit)

Page: 44

[90] Definitions in the Credit Agreement are relevant to the interpretation of the NPL

Guarantee including, “Obligations, Loan Parties, Guarantor, Limited Recourse

Guarantors, Canadian Holdings, Debtor Relief Laws.” I agree with the respondents’

submission that NPL guaranteed the repayment of Borrowers’ obligations, which

included “fees, costs, expenses and indemnities that accrue after the commencement

by or against any loan party or any affiliate thereof of any proceeding under any Debtor

relief laws.” NPL is a limited recourse Guarantor and a key question to determine is

how to properly interpret the wording of the NPL Guarantee.

[91] The respondents submit that the NPL Guarantee guaranteed repayment of the

Borrowers’ obligations subject to the $20 million US limit inclusive of the costs,

expenses and indemnities of the Receiver. The Receiver submits that the proper

interpretation of the of the NPL Guarantee is that the recourse pursuant to the

mortgages on owned real estate of NPL is limited to a realized value after all costs and

expenses. The reference to including enforcement costs is a reference to costs and

expenses. In other words, the realized value limit of $20 million US is after all costs

and expenses. Put another way, the proper interpretation of the NPL Guarantee is the

value received on the sale of the NPL property plus all costs and expenses including

enforcement costs.

[92] The primary principle of contract interpretation is to determine the parties’

intention from a plain, primary and actual meaning of the words that are used set out in

the entire context of the whole contract. (See Thomas G. Heintzman, Bryan G. West &

Immanuel Goldsmith, Heintzman and Goldsmith on Canadian Building Contracts, 5th ed

Page: 45

(Toronto: Thomson Reuters, 2019); Tercon Contractors Ltd. v. British Columbia

(Minister of Transportation & Highways), 2010 SCC 4, [2010] 1 S.C.R. 69; Eli

Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129 (S.C.C.) (QL); Geoffrey L.

Moore Realty Inc. v. Manitoba Motor League (c.o.b. CAA Manitoba), 2003

MBCA 71, 173 Man.R. (2d) 300 (QL); Dunn v. Chubb Insurance Co. of Canada,

2009 ONCA 538, 97 O.R. (3d) 701; Syncrude Canada Ltd. v. Hunter Engineering

Co., [1989] 1 S.C.R. 426 (S.C.C.); Shumilak v. Shumilak, 2013 MBQB 54, 289

Man.R. (2d) 208; and Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53,

[2014] 2 S.C.R. 633 (QL))

[93] In Geoffrey L. Moore Realty Inc., the Court of Appeal summarized the

principles at para. 26 as follows:

26

In brief summary then, to determine the intentions of the parties

expressed in a written contract, one looks to the text of the contract as a whole.

In doing so, meaning is given to all of the words in the text, if possible, and the

absence of words may also be considered. If necessary, the text is considered in

light of the surrounding circumstances as at the time of execution of the

contract. The goal is to determine the objective intentions of the parties in the

sense of a reasonable person in the context of those surrounding circumstances

and not the subjective intentions of the parties. If, after that analysis, the text

in question is ambiguous, extrinsic evidence may be considered.

[94] The Supreme Court of Canada in the decisions of Eli Lilly & Co. and Sattva

Capital Corp. make it clear that it is unnecessary to consider any extrinsic evidence at

all when the written contract being interpreted is clear and unambiguous on its face.

(See Eli Lilly & Co. at para. 55)

[95] In Sattva Capital Corp., the Supreme Court of Canada dealt with interpretation

of a written contractual provision and the factual matrix at para. 57 as follows:

Page: 46

57

While the surrounding circumstances will be considered in interpreting

the terms of a contract, they must never be allowed to overwhelm the words of

that agreement (Hayes Forest Services, at para. 14; and Hall, at p. 30). The goal

of examining such evidence is to deepen a decision-maker's understanding of the

mutual and objective intentions of the parties as expressed in the words of the

contract. The interpretation of a written contractual provision must always be

grounded in the text and read in light of the entire contract (Hall, at pp. 15 and

30-32). While the surrounding circumstances are relied upon in the interpretive

process, courts cannot use them to deviate from the text such that the court

effectively creates a new agreement (Glaswegian Enterprises Inc. v. B.C. Tel

Mobility Cellular Inc. (1997), 101 B.C.A.C. 62).

[96] The goal of the court is to determine the objective intentions of the parties in the

sense of a reasonable person in the context of the surrounding circumstances.

Applying these principles of contract interpretation, the objective intentions of the

parties supports a finding that amounts loaned and amounts guaranteed are subject to

the costs and expenses and enforcement costs. In my view, the words “after all costs

and expenses, including enforcement costs” means the costs and expenses including

enforcement costs are in addition to the value of the real property sold. The reference

to $20 million US is a reference to the realized value after deducting all costs and

expenses including enforcement costs. The reference to including enforcement costs in

the NPL Guarantee is not, in my view, a reference to enforcement costs being included

in the amount of the limited recourse guarantee of $20 million US. To read the NPL

Guarantee in a manner consistent with the respondents’ submission would, in my view,

give no meaning to the word “after” before the words “all costs and expenses, including

enforcement costs.” Had the parties intended to limit the recourse to $20 million US

inclusive of all costs and expenses and enforcement costs, the NPL Guarantee would

have said that. The wording of the NPL Guarantee could simply have stated that NPL’s

Page: 47

guarantee is limited to $20 million US inclusive of all costs and expenses, including

enforcement costs.

[97] In my view, applying the objective intentions of the parties in the sense of a

reasonable person in the context of the surrounding circumstances, the parties intended

the NPL Guarantee to guarantee the Borrowers’ debt in the amount of $20 million US

plus costs and expenses, including enforcement costs. In my view, the proper

interpretation of the NPL Guarantee is that the $20 million US refers to the “realized

value” and accordingly all costs and expenses, including enforcement costs are over

and above the value recovered upon the sale of the NPL real property assets. It is

therefore important for the Receiver to allocate all costs to determine if NPL paid an

amount that exceeds the amount guaranteed and for the purpose of assessing the

subrogation issues considered below.

[98] I am not satisfied that the demand letter, the Dean affidavit or the terms of the

Receivership Order assist the respondents’ submission. The Dean affidavit simply

references the terms of the Guarantee and Credit Agreement and uses the same

language found in the Credit Agreement in reference to the NPL Guarantee. Paragraph

24 of the Receivership Order grants a charge over all of the Property which includes

NPL’s property. The purpose of paragraph 24 is to establish a fixed and specific charge

referenced as the Receiver’s Borrowing Charge as security for payment of the monies

borrowed, together with interest and charges in priority to all other encumbrances. The

wording of the Receivership Order favours the position advanced by the Receiver that

the Receiver’s Borrowing Charge grants a priority over the Property. Paragraph 24 of

Page: 48

the Receivership Order also empowers the Receiver to borrow from the applicant in

accordance with the terms of the Receiver term sheet.

c) What rights of subrogation apply to the respondents and what is the

correct interpretation of the provisions of The Mercantile Law Amendment

Act, C.C.S.M. c. M120 (the”Act”) (ss. 2 and 3)?

[99] In November 2020, NPL took the position that it had satisfied its guarantee

obligation and therefore had rights of subrogation pursuant to s. 2 of the Act. NPL

submits that the rights of subrogation provide it with security over the assets of the

Borrowers and the unlimited Guarantors.

[100] In reasons for decision previously delivered on November 19, 2020, I found that

NPL and NIP “may have rights of subrogation to the extent that their payments to the

Lenders were made on behalf of the Borrowers, as defined in the Credit Agreement.”

[101] NPL submits that the sale of NPL’s assets produced $28,579,000 which exceeds

NPL’s maximum liability on its guarantee ($20 million US) and therefore NPL has

secured subrogated rights against the Debtors and Co-Guarantors. NPL’s subrogated

claim cannot be subordinated to the unsecured claims against, or by, the Debtors or the

Co-Guarantors.

[102] The parties agree on the law of subrogation generally. They disagree on the

proper application of the law to the facts and circumstances of this case.

Law of Subrogation

[103] The relevant sections of the Act provide as follows:

Page: 49

Surety entitled to assignment

Every person who, being surety for the debt or duty of another, or being

2

liable with another for any debt or duty, pays the debt or performs the duty, is

entitled to have assigned to him, or to a trustee for him, every judgment,

specialty, or other security that is held by the creditor in respect of the debt or

duty, whether the judgment, specialty, or other security is or is not deemed at

law to have been satisfied by the payment of the debt or performance of the

duty; and that person is entitled to stand in the place of the creditor, and to use

all the remedies, and, if need be, and upon a proper indemnity, to use the name

of the creditor, in any action or other proceeding, at law or in equity, in order to

obtain from the principal debtor, or any co-surety, co-contractor, or co-debtor, as

in the case may be, indemnification for the advances made and loss sustained by

the person who has so paid the debt or performed the duty, and the payment or

performance so made by the surety is not pleadable in bar of any such action or

other proceeding by him.

Right to recover

3

No co-surety, co-contractor or co-debtor is entitled to recover from any

other co-surety, co-contractor or co-debtor by the means aforesaid, more than

the just proportion to which, as between those parties themselves, the last

mentioned person is justly liable.

[104] In essence, once a surety or a guarantor makes payment of a Borrower’s debt,

that person or entity becomes subrogated to the rights of the creditor as against the

Borrower and any co-guarantor or surety. In this case, NPL may recover the full

amount it paid to the Lenders from the Borrowers. A claim against a Co-Guarantor is

limited to the proportion of the total debt for which each Co-Guarantor is justly liable.

[105] The Canadian text book on Guarantee, Kevin McGuinness, The Law of

Guarantee, 3rd ed (Markham: LexisNexis 213) comments on the Act as follows:

§10.40 […] Under the present rule not only is a surety who pays off his

principal’s debt entitled to a transfer of securities held by the creditor,

but he or she is also in all respects entitled to all the equities which the

creditor could have enforced.

[…]

§10.42 A surety is entitled to stand in place of the creditor, and to use all the

remedies and, on proper indemnity, to sue in the name of the creditor in any

Page: 50

action or other proceeding in order to obtain from the principal debtor, or any

co-surety, co-contractor or co-debtor, indemnification for the advances made or

loss sustained by such person, and the payment or performance made by him is

not a defence to such action or other proceeding by him. However, no co-surety,

co-contractor or co-debtor is entitled to recover from any other co-surety, co-

contractor or co-debtor more than a just proportion to which, as between

themselves, the last mentioned person is justly liable. There is no statutory limit

on recovery against the principal, since the principal is obliged to indemnify his

sureties in full.

[…]

§10.44 […] A surety for a limited amount has in respect of that amount the same

rights as the creditor. To the extent of his liability, therefore, the surety is

entitled to the benefit of any security held by the creditor in respect of the whole

debt.

[106] The leading Canadian textbook on insolvency law by Lloyd W. Houlden, Geoffrey

B. Morowetz and Janis P. Sarra, Annotated Bankruptcy and Insolvency Act, 4th ed

(Canada: Carswell, 2009) at para. 59(1):

If a guarantor pays in full the indebtedness of the principal debtor, the

guarantor is entitled to any security held by the principal creditor and

becomes a secured creditor. There is no necessity for any formal transfer of

the security to the guarantor; the guarantor stands in the place of the creditor

[citations omitted].

(See also Windham Sales Ltd. (1979), 102 D.L.R. (3d) 459, 26 O.R. (2d)

246; Alberta Treasury Branches v. Weatherlok Canada Ltd., 2011

ABCA 314, 68 Alta. L.R. (5th) 400)

[107] The general principles of law applicable to the right of contribution between co-

guarantors are summarized in Gill v. Cheema, 2018 BCSC 1453, [2018] B.C.J. No.

3082, as follows:

41

The right to contribution between co-guarantors is rooted in the

principles of unjust enrichment.

Page: 51

42

Paragraph 10.131 of McGuiness, The Law of Guarantee, 3rd ed

(Markham: LexisNexis, 2013) sets out "five general principles which govern the

rights of contribution among co-sureties" which include:

*All co-sureties are bound prima facie equally to see to the performance

of a guaranteed obligation, and must therefore bear their respective

share of any claim made by the creditor equally (or in the proportion as

agreed among themselves);

*The right to contribution to which the co-sureties in the case of any

particular guaranteed obligation are entitled may be varied by express or

implied agreement;

*In the absence of any such agreement, the obligation of each co-surety

is determined by dividing the total obligation to which all are liable by

the number of solvent sureties;

*The right of any particular co-surety to recover contribution arises upon

payment by the surety of more than his share;

*However, even prior to the payment of the creditor, a surety may seek

equitable relief (similar to the relief that is available in the case of the

surety's right to enforce his or her right of indemnification against the

principal)...

There is no obligation on a surety who seeks contribution to sue all other co-

sureties, but (except in the case of the insolvency of one of several co-sureties)

the surety seeking contribution may recover from each of his co-sureties only an

aliquot part of the total liability according to the number of sureties originally

liable.

[108] In Abakhan v. Halpen, 2008 BCCA 29, B.C.L.R. (4th) 267 (QL), the court dealt

with a circumstance in which a debtor was assigned into bankruptcy and a lender made

demand on three co-guarantors. One of the guarantors made payment to a lender

under the guarantees and obtained an assignment of certain remnant debt and the

security held by the lender including all of the guarantees of the three guarantors. The

guarantor that made payment subsequently advanced a claim against the two other co-

guarantors in relation to the amount paid.

[109] The court in Abakhan precluded the guarantor from collecting the remnant debt

from the co-guarantors interpreting s. 34 of the Law of Equity Act, R.S.B.C. 1996 c.

253. The court limited the guarantor’s claim against the co-guarantors to the amount

Page: 52

paid over and above the proportionate share of the debt repaid to the lender under the

guarantees. The guarantor was only entitled to recover one-third of the total amount

paid under the guarantees from each co-guarantor. (See Abakhan at paras. 12-15,

24)

[110] The law of subrogation has been applied in previous cases during receivership

proceedings. In Bank of Montreal v. Ladacor AMS Ltd., 2019 ABQB 985, [2019]

A.J. No. 1748 (QL), the court addressed the claims of three companies in receivership

(Ladacor, Nomads and 236). Dealing with the funds received during the course of the

receivership, the court stated:

24

Since 236 was also put into receivership, the Receiver took steps to sell

236's main asset, the Days Inn Hotel in Sioux Lookout. Of the roughly

$5,000,000 sale proceeds, $4,000,000 were paid by the Receiver to BMO.

25

Ultimately, the time of the Fourth Report, the Receiver had paid off the

secured debt to BMO, the Receiver's borrowings from BMO to enable it to carry

on the Receivership, the WEPP claims, CRA and Service Canada trust/priority

claims, along with its and its lawyer's fees and disbursements.

26

The supplemental report and Fifth Report update the figures. As at the

time of that report, October 25, the Receiver was holding $10,398 for Nomads,

$722,661 for Ladacor, and $637,241 for 236. The Receiver proposes to allocate

all of the available proceeds currently in Ladacor's and Nomads' accounts to 236.

. . . . .

46

BMO was a secured creditor, subject only to the superior WEPP claims

and CRA source deduction claims, and the costs of the receivership. The

Receiver argues on this application that guarantors (such as Nomads and 236)

are entitled to be subrogated to the claims they have paid out on behalf of the

principal debtor, Ladacor.

47

In this case, Nomads and 236 have paid off BMO's claims against

Ladacor. Nomads and 236 are entitled to be subrogated to BMO's claim, and to

stand in BMO's shoes with respect to any security BMO held against Ladacor.

That means, according to the Receiver, that Nomads and 236 are now the

primary secured creditors on any of Ladacor's remaining assets.

Page: 53

48

Additionally, as between guarantors who have paid out on their

guarantees, Nomads and 236 are entitled to be treated proportionately, so the

debt paid off should be apportioned between them. Where guarantors are

equally liable to the obligee, the guarantors are considered to be responsible for

equal shares of the debt.

49

Here, that would mean that each of Nomads and 236 should have paid

off half of the debt owed to BMO. Since 236 paid more than half of the BMO

debt, there should be an adjustment as between Nomads and 236, in 236's

favor.

50

The way the Receiver has accounted for this is that the excess of

collections over required payments has left a surplus, some of which now stands

to the credit of Ladacor. Because 236 paid more than its half of the obligation,

236 is entitled to recover that excess from Ladacor.

51

Of the $5,834,882 paid to satisfy BMO's claims, $4,000,000 came from

236. The remainder came from Nomads. Because of contribution principles

between guarantors, each of the guarantors should have paid $2,917,441. 266

overcontributed by $1,082,559. That amount is owed to it by Nomads.

52

The Receiver proposes to pay the funds remaining in the Nomads account

and the Ladacor account (after holdbacks for further administration costs) in the

approximate amount of $465,000 (Receiver's Fifth Report). 236 is expected to

have approximately $517,000 in its account, so it will recover $982,001. It will be

short by approximately $100,559. Because of it standing into BMO's security, it

will be Nomads' only secured creditor to that extent.

53

This analysis and position is well supported by the Receiver's first brief for

this application. The Receiver cites:

Gerrow v Dorais, 2010 ABQB 560;

Mercantile Law Amendment Act 1856, 19 & 20 Vict, c 97;

Karen Matticks v B & M Construction Inc (Trustee of), 1992 CarswellOnt

193 (ONCJGD);

Andrews & Millett, Law of Guarantees, 7th Ed (London: Sweet & Maxwell, 2015)

at para 11-017;

Re Windham Sales Ltd, 1979 CarswellOnt 227 (ONSC in bankruptcy);

Wong v Field, 2012 BCSC 1141;

EC&M Electric Ltd v Medicine Hat General & Auxiliary Hospital &

Nursing Home District N 69, 1987 CarswellAlta 25 (ABQB); and

Page: 54

Abaklhan v Halpen, 2006 BCSC 1979, aff'd 2008 BCCA 29.

54

J. Steenhof, as an unsecured creditor of 236, and 145 as an unsecured

creditor of Nomads on the Hythe project, agree with this analysis, as does

Liberty Mutual. Mr. Klisowsky raises no specific objection to this proposal on the

part of the Receiver, but suggests that it is premature. He says that the proper

contribution between Nomads and 236 can only be calculated once the assets

and liabilities of Nomads and Ladacor (as between those entities) have been

properly allocated.

55

I am satisfied that for the purposes of finalizing the Receivership

accounts, the monies the Receiver holds to the account of Ladacor and Nomads

should be transferred to 236's account as a function of a guarantor's right to

subrogation and to contribution rights and obligations as between co-guarantors.

(See also Wong v. Field, 2012 BCSC 1141, [2012] B.C.J. No. 1843 (QL), for a

discussion regarding claims against co-guarantors, at paras. 20 - 28)

[111] Applying these principles to the facts and circumstances of this case, it is

important to recognize that pursuant to the Credit Agreement, each of NEL, NIP, NPL,

879 and 887 is a joint and several Guarantor of the Borrowers’ obligations to the

Lenders. The Lenders had full recourse against NIP, 879 and 887 as they are unlimited

Guarantors. NEL and NPL were limited recourse Guarantors respecting the obligations

and as noted above, recourse is limited to $20 million US, plus all costs and expenses

including enforcement costs.

[112] It is also important to recognize as stated by the Receiver in the Second

Supplementary Twelfth report as follows: “NPL’s guarantee is not limited. Pursuant to

the Credit Agreement and related documents, NPL guarantees repayment of the Credit

Facility and secures its guarantee obligation by mortgaging certain real properties and

pledging (the “Share Pledge”) certain shares of 887 in favour of the Lenders. The

recourse of the Lenders to the mortgaged real properties is limited to USD$20 million,

Page: 55

plus costs and expenses including enforcement costs; there is no such limited recourse

to the pledged shares. Accordingly, it was open to the Lenders to recover the full

amount of any outstanding obligations under the Credit Agreement by means of

realizing upon the Share Pledge, had the pledged shares been of sufficient realizable

value. Accordingly, for the purposes of subrogation and the application of The

Mercantile Law Amendment Act, I agree with the Receiver that “NPL and NEL both

participate as ‘co-sureties’ on the same proportionate basis as the other Guarantors of

the Credit Facility; that is, 1/5^thof the total of the guarantee obligations, as described in

the Twelfth Report.” (At para. 59)

[113] NPL submits that it has more than satisfied the NPL Guarantee as a result of the

sale of the NPL properties. Since I have accepted the allocations made by the Receiver

as fair and equitable, the evidence does not satisfy me that the assumptions made by

the respondents are correct. As previously stated, I do not accept that the entire

amount of $28.579 million was paid to the Lenders pursuant to the Credit Facility. Each

of the five Canadian Debtors are Guarantors respecting amounts owed by the US

Debtors or Borrowers under the Credit Agreement. Applying the principles outlined

above, each Guarantor’s obligation to contribute to the Lenders is limited to one-fifth

(20%) of the total amount paid to the Lenders by the Guarantors, subject to a further

qualification that the contributions by NEL and NPL cannot exceed the recourse limit (in

this case $20 million US, plus costs and expenses, including enforcement under the

Credit Agreement).

Page: 56

[114] Since I have accepted the Receiver’s allocations and specifically the repayments

to the Lenders have been allocated equally to NIP and NPL, I agree that neither NIP nor

NPL can seek contribution from the other under the Act. On the other hand, NPL and

NIP could seek one-fifth contribution from each of the other Guarantors to the extent of

those respective overpayments. As well, NPL and NIP are entitled to indemnity from

each of the Borrowers.

[115] I accept the evidence of the Receiver that the Borrowers and Co-Guarantors are

insolvent and as a result there is no subrogated rights or right of contribution or

indemnity to enforce.

[116] In the motion brief of the respondents filed October 29, 2021, they submit that

the application of the legal principles of subrogation between the Co-Guarantors should

be applied as follows:

49.

The application of these principles to the facts before this Court is

straightforward. Firstly, NPL has a secured claim for indemnity against the

Borrowers in the amount of CDN $28,579,000. Secondly, it has secured claims

against the Unlimited Guarantors (897, 887 and NIP). The maximum liability of

the three Unlimited Guarantors is CDN $66,466,000 each, and for the limited

guarantor (NPL) it is CDN $24,698,000 (US $20,000,000 at the October 28,

2021 Bank of Canada exchange rate). The total of the maximum liabilities of

these four companies is $224,096,000. The ratio of NPL’s maximum liability to

the maximum liability of the Unlimited Guarantors is 11 percent ($24,698,000

divided by $224,096,000). Accordingly, the amount for which NPL is responsible

is $7,311,260 (11 percent of $66,466,000). Since the amount actually paid by

NPL was $28,579,000, NPL overpaid by $21,267,740 ($28,579,000 less -27-

$7,311,260). In the result, the three Unlimited Guarantors each owe NPL a

contribution of $7,089,246.

50.

Since NPL’s subrogated claims against the Borrowers and the Unlimited

Guarantors are secured, any (unsecured) inter-company debts owed by NPL(or

NPL’s owner) to the other respondents are irrelevant to an assessment of NPL’s

rights. This is to say that no matter the state of unsecured inter-respondent

debt involving NPL and NEL, the Receiver cannot prevent NPL from executing

on its security: in subrogation, set-off is not available, because the claims to be

Page: 57

set-off are not in the same right. At the least, any cash currently in the

receivership should be paid to NPL.

[117] As pointed out by the Receiver, the assumptions made by the respondents are

incorrect and the analysis is flawed. The entire amount of proceeds received from the

sale of NPL’s properties was not paid to the Lenders to satisfy the Borrowers’

obligations. Further, even if the respondents are correct and all of the NPL sale

proceeds were paid to the Lenders and applied against the Credit Facility, the analysis

does not take into account the fact that the guarantee is in the amount of $20 million

US plus costs and expenses. Further, the analysis must factor NEL in as a Co-

Guarantor. In any event, I am not satisfied the outcome for NPL following a potential

claims’ process would establish that the remaining Net Receivership Proceeds should be

paid to NPL.

[118] The respondents rely upon the Ladacor decision respecting that the process to

equalize contributions between co-guarantors. It is important to note that the court

approved the assignment of 236, Ladacor and Nomads into bankruptcy finding:

139 I acknowledge that the Receiver's work in allocating assets and

employees between Ladacor and Nomads may not have resulted in a perfect

allocation. That is not because the Receiver's work was deficient or flawed.

Rather, it was because of the corporate mess that existed at the time of the

Receivership Order. The Receiver had to try to make sense of an undocumented

and ill-conceived "takeover" of Nomads by Ladacor. The proposed method of

allocation by Mr. Klisowsky is unworkable, especially as it is founded on the

incorrect assumption that Nomads could assign its obligations to Ladacor in a

manner that would be binding on its creditors.

140 The reality is that any reallocation of assets would be moot. Putting more

assets and liabilities into Ladacor would result in Nomads making a smaller

contribution to paying off the BMO debt. That would simply increase the amount

of 236's secured claim for contribution from Nomads. While it might leave fewer

unsecured creditors for Nomads to have to deal with, the above analysis

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indicates that Nomads' unsecured creditors are unlikely to make any recovery at

all.

141 As such, my conclusion is that no creditor is prejudiced by the allocations

that were made by the Receiver between Nomads and Ladacor.

142 The Receiver has, in my view, correctly applied the applicable principles

of subrogation and contribution, such that it is appropriate to allocate all of the

remaining cash of Ladacor and Nomads to 236.

5. Approving the Receiver's proposal to assign the Debtors into

bankruptcy in accordance with the Receivership Order

143 What is left with the three debtor corporations is a paucity of assets and

a mountain of claims against them. Only the Liberty Mutual claim involves all

three corporations. Total claims (counting Liberty Mutual only once) exceed

$7,000,000. None of the claims have been proven. There may be defences to

some or many of the claims, and some of the claims may be excessive in

amount.

144 Getting to the bottom of all of this will be time consuming and very

expensive. Litigation with Hythe has already commenced. Its result is uncertain.

Success on that litigation would appear to be the only real chance of any

collection for Nomads' unsecured creditors. The only effective way of dealing

with the numerous claims is through a statutory process such as bankruptcy.

While there are possible ways of dealing with claims in a receivership, no one

other than Mr. Klisowsky is recommending that the receivership continue. The

Receiver's recommendation is to use the bankruptcy process to deal with the

few remaining assets and myriad of claims.

[119] Accepting for the moment, some of the assumptions advanced by the

respondents are correct, I agree with the Receiver’s findings and outcome addressed at

para. 61 of the Second Supplementary Twelfth Report as follows:

61.

In the result, assuming (as was done in the Twelfth Report) that the total

of the guarantee payment required to fully repay the Credit Facility was $28.4

million and that Net Receivership Proceeds in the amount of approximately $9.9

million are available for distribution, and further assuming (for the purpose of

this analysis only) that all of $9.9 million in distributable Net Receivership

Proceeds are NPL Asset Sale Proceeds, then the Net Receivership Proceeds in the

hands of NPL would be subject to at least the following claims:

(a) all of the guarantee payment was made by NIP, such that NIP has a

subrogated claim (i.e. a claim pursuant to the provisions of The Mercantile Law

Page: 59

Amendment Act (Manitoba)) as against NPL in an amount equal to 1/5th of

$28.4 million, which is $5.68 million;

(b) intercorporate obligations of NPL are not impacted by use of NPL Asset Sale

Proceeds to repay Receiver’s Borrowings, such that based on the Debtors’

records (i) NIP has an intercompany claim for approximately $2.5 million and (ii)

NIP has an intercompany claim against NEL (which is NPL’s parent corporation)

in the amount of approximately $18.1 million and a subrogated claim as against

NEL (i.e. a claim pursuant to the provisions of The Mercantile Law Amendment

Act (Manitoba)) in an amount equal to 1/5th of $28.4 million, which is $5.68

million, both of which are enforceable in due course against the assets of NPL;

(c) NPL has an accrued tax liability to Canada Revenue Agency in the estimated

amount of $3 million; and

(d) NPL may have other third-party creditor obligations.

62.

The claims against NPL or to which the Net Receivership Proceeds would

be, in due course, subject, are substantially in excess of the Net Receivership

Proceeds and it is apparent that, on the basis of “what actually happened”, there

is no “equity” in NPL or NEL that would enable Mr. Nygard to benefit from the

Net Receivership Proceeds.

[120] In my view, the findings made by Graesser J. in Ladacor, are apt in this case. I

agree that the Receiver’s allocations of assets and costs and expenses between the

respondents may not have resulted in perfect allocations. I disagree with the

respondents that the Receiver chose to apply arbitrary allocations and “simply move

numbers around to build a case against NPL’s right of subrogation”. I accept the

explanations provided by the Receiver in the relevant reports, including the Second

Supplementary Twelfth Report as reasonable and agree that the respondents’

submissions are simply not correct for the reasons set out in the Receiver’s reports.

[121] The Receiver’s allocations are not unfair or arbitrary. The Receiver was dealing

with a complicated receivership respecting a number of corporations and in my view,

made allocations that were fair and equitable based on the timing of numerous receipts

and disbursements made in the circumstances. Getting to the bottom of the various

claims would be time-consuming and very expensive and in my view, the most effective

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and efficient way to deal with the claims going forward is through a bankruptcy

proceeding.

[122] I am satisfied based on the evidence of the Receiver that even if some of the Net

Receivership Proceeds should be allocated to NPL, those funds are subject to claims of

NPL’s creditors which, in all probability, exceed the proceeds available to satisfy those

claims. If that finding is incorrect, I am satisfied the competing claims to the Net

Receivership Proceeds are best left to be resolved and determined during a bankruptcy

proceeding.

d) Should one or more or all of the respondents be assigned into

bankruptcy, and if so, should the Receiver be appointed as the Trustee in

Bankruptcy?

[123] Section 49(1) of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3

(the “BIA”) permits a Receiver, with leave of the court, to make an assignment in

bankruptcy of an insolvent person’s property for the general benefit of the insolvent

person’s creditors. The assignments “shall be offered to the official receiver in the

locality of the debtor”. (See s. 49(3))

[124] In light of my findings and decisions made in the past (see Order of March 13,

2020) and the evidence in the Twelfth Report, I am satisfied that the assignments in

bankruptcy should be filed in Winnipeg and heard in this court as the locality of the

Debtors is the principal place where the Debtors carried on business. The Debtors’

head office and management was located in Canada and substantially all of the

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Debtors’ books and records were located at the head office in Winnipeg at the Inkster

property.

[125] The respondents do not contest the request that seven of the nine respondents

are insolvent and may be assigned into bankruptcy. The respondents submit that NEL

and NPL are not insolvent and NPL in particular has a claim to the Net Receivership

Proceeds presently held by the Receiver.

[126] In light of my findings and the opinion of the Receiver in the Twelfth Report, I

accept that NPL and NEL are insolvent on a consolidated basis. Further, I accept the

opinion of the Receiver that NPL may be insolvent on a separate corporation analysis

depending on the outcome of a rigorous allocation of receivership expenses and the

extent of NPL’s direct liabilities.

[127] Other than legal arguments advanced on behalf of NPL and NEL, there is no

expert evidence that has been filed that proves NPL and NEL are solvent.

[128] At the time I granted the Inkster Approval and Vesting Order, I considered the

first AGI Report, the Supplementary First AGI Report and the affidavit of Greg Fenske

affirmed November 5, 2020. On the basis of my review of the evidence filed, I

concluded: “There is insufficient evidence to establish that NEL and NPL are solvent

entities, and I do not accept the opinion of AGI that they are solvent.” No further

expert evidence has been filed to alter my previous finding.

[129] The Receiver submits that on a consolidated basis, each of the Debtors are

jointly liable for the Common Liabilities, which is estimated to be in the amount of

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approximately $77 million. The Common Assets are identified in the Twelfth Report and

clearly are not sufficient to satisfy the Common Liabilities.

[130] The Receiver seeks alternative orders regarding bankruptcy. In my view, the

preferred approach is to grant leave to the Receiver to file assignments in bankruptcy

respecting all of the respondents, other than NPL and NEL, and to authorize the

Receiver to file applications for bankruptcy orders in this court in relation to NPL and

NEL, on a basis that reflects the Common Assets and the Common Liabilities and the

substantive consolidation of the estates of the Debtors.

[131] I grant an order lifting the stay of proceedings ordered in the Receivership Order

to permit bankruptcy applications to be made and direct that, for the purpose of such

assignments and applications, the locality of the Debtors shall be Winnipeg, Manitoba.

Finally, given the Receiver’s intimate knowledge of the assets and liabilities of the

Debtors, the most cost effective and expeditious way to proceed is to order that the

Receiver be appointed as Trustee in bankruptcy.

Issues relating to the respondents’ motion

a) Should the court grant an order to release the balance of the

Preserved Proceeds held pursuant to the NPL Proceeds Preservation

Agreement to pay legal fees and disbursements and expert costs

incurred by the respondents in connection with the Receivership

Proceedings or a bankruptcy proceeding?

[132] I previously granted orders approving payments from the Preserved Proceeds

established pursuant to the NPL Proceeds Preservation Agreement to satisfy legal fees

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and disbursements incurred by the lawyers representing the respondents in the

Receivership Proceedings. The Receiver did not object to reasonable fees and

disbursements being paid to the respondents for the purpose of satisfying professional

statements of account generated as a result of the Receivership Proceedings. At the

hearing on December 22, 2021, the Receiver did not oppose payment of statements of

account for professional services that had been issued to the respondents in connection

with the Receivership proceedings.

[133] The general legal principle governing payment of a debtor’s legal costs is that

the court has discretion to authorize an advance by the Receiver out of a debtor’s

assets to pay legal costs required to defend an application providing the defence is not

frivolous or vexatious. (See Lloyd W. Houlden, Geoffrey B. Morowetz and Janis P.

Sarra’s Annotated Bankruptcy and Insolvency Act, 4th ed (Canada: Carswell, 2009) at

para. 3.62; King Petroleum Ltd. (Re) (1973), 18 C.B.R. (N.S.) 270, [1973] O.J. No.

1324 (Ont. Sup. Ct.) and Royal Bank of Canada v. West-Can Resource Finance

Corp. Ltd., [1990] 77 Alta. L.R. (2d) 43 3 C.B.R. (3d) 55)

[134] In my view, the submissions advanced by the respondents have not been

frivolous or vexatious. The issues have been complex and the respondents deserve to

be represented to advance their best legal position. I agree with the respondents that

putting forth a defence would be hollow without an ability to retain and pay

experienced legal counsel in insolvency matters to represent their interests.

[135] The breakdown of the $1,150,000 requested by the respondents is described as

follows:

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a. Criminal Lawyers



$350,000 to Mr. Brian Greenspan;

$50,000 to Mr. Jeff Hartman;

$50,000 to Mr. Richard Wolson;

$50,000 to Mr. Jay Prober

Total- $500,000

b. Insolvency Lawyers



$250,000 to Fred Tayar & Associates;

$350,000 to Levene Levene Tadman;

$50,000 to Albert Gelman Inc. (AGI)

Total - $650,000

[136] Counsel for the respondents submit that after distributing $150,000 that was

authorized in court on December 22, 2021, the outstanding indebtedness to Levene

Levene Tadman is approximately $50,000 and the outstanding indebtedness to Fred

Tayar & Associates is approximately $31,000. Respondents’ counsel state that the

balance of the Preserved Proceeds remaining in trust pursuant to the NPL Proceeds

Preservation Agreement is $200,000.

[137] In my view, there is no reason to depart from the general principle that the

respondents are entitled to representation in the receivership and bankruptcy

proceedings. Accordingly, subject to providing statements of account to the Receiver or

Trustee in bankruptcy for approval on the basis the costs claimed are reasonable, the

Preserved Proceeds may be used to satisfy legal fees and disbursements and

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professional fees incurred in connection with the receivership and bankruptcy

proceedings.

b) Should the court grant an order to release a portion of the Net

Receivership Proceeds to fund legal fees and disbursements that have

been incurred or will be incurred in connection with the Receivership

Proceedings or a bankruptcy proceeding?

[138] The same governing legal principle as noted above applies in connection with the

second issue. In my view, providing statements of account for legal fees and

disbursements are submitted to the Receiver or Trustee in bankruptcy for approval and

are reasonable, the fees and disbursements may be paid from the Net Receivership

Proceeds. The respondents are entitled to mount a defence and advance legal

positions challenging the Receiver and if they elect to do so, the respondents may

proceed with an appeal of this decision. If the legal fees and disbursements exceed the

remaining balance of the Preserved Proceeds, a portion of the Net Receivership

Proceeds may be set aside to cover reasonable fees and disbursements incurred by the

respondents.

c) Can a portion of the Net Receivership Proceeds or the Preserved

Proceeds held pursuant to the NPL Proceeds Preservation Agreement

be used to fund legal fees and disbursements incurred to defend Mr.

Nygard in connection with the criminal charges laid against him in

Toronto, Ontario?

Page: 66

[139] In support of their position that a portion of the Preserved Proceeds and/or the

Net Receivership Proceeds may be used to defend the criminal charges against

Mr. Nygard, the respondents filed the Greenspan affidavit. Mr. Greenspan describes the

charges and his representation of Mr. Nygard as follows:

1. I am the lawyer representing Peter Nygard in respect of nine charges that

have been brought against him in the City of Toronto. I further act as counsel

with respect to the request for Mr. Nygard’s extradition to the United States for

various charges relating to sex trafficking.

2. There are six complainants in relation to the Toronto allegations. Three

complainants allege both sexual assault and unlawful confinement relating to

those occurrences. Three further complainants allege only sexual assault. All of

the allegations occurred between 1987 and 2006.

3. What is common to all the allegations is that the unlawful confinements

and/or sexual assaults are alleged to have taken place at 1 Niagara Street,

Toronto, the Toronto headquarters of Mr. Nygard’s business operations.

[140] The Receiver submits that the order sought by the respondents is contrary to

The Corporations Act C.C.S.M. c. C225 and legal authority. Section 19 of The

Corporations Act sets out specific circumstances in which an officer or director of

corporation (current or former) may be indemnified. It provides:

Indemnification

119(1)

Except in respect of an action by or on behalf of the corporation

or body corporate to procure a judgment in its favour, a corporation may

indemnify a director or officer of the corporation, a former director or officer of

the corporation or a person who acts or acted at the corporation's request as a

director or officer of a body corporate of which the corporation is or was a

shareholder or creditor, and his heirs and legal representatives, against all costs,

charges and expenses, including an amount paid to settle an action or satisfy a

judgment, reasonably incurred by him in respect of any civil, criminal or

administrative action or proceeding to which he is made a party by reason of

being or having been a director or officer of the corporation or body corporate, if

(a) he acted honestly and in good faith with a view to the best interests

of the corporation; and

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(b) in the case of a criminal or administrative action or proceeding that is

enforced by a monetary penalty, he had reasonable grounds for believing

that his conduct was lawful.

[141] Section 113(2)(e) of The Corporations Act also provides that directors who

approve “a payment of an indemnity contrary to section 119 … are jointly and severally

liable to restore to the corporation any amounts so distributed or paid and not

otherwise recovered by the corporation.”

[142] The duty of care of directors and officers is outlined in s. 117 of The

Corporations Act and includes a duty to act honestly and in good faith and with a

view to the best interests of the corporation; and to exercise the care, diligence and

skill that a reasonably prudent person would exercise in comparable circumstances.

[143] The Receiver submits that in accordance with the provisions of The

Corporations Act, NPL is not permitted to indemnify Mr. Nygard in connection with

any legal costs, expenses or charges incurred, however reasonable, to defend criminal

charges.

[144] The Receiver acknowledges that Mr. Nygard has publically denied all allegations

against him and has not been found guilty of any of the criminal charges. There is no

question that Mr. Nygard is presumed innocent unless the Crown proves beyond a

reasonable doubt that he is guilty of the charges.

[145] The Receiver submits that the present officers and directors of NPL may only

make payment of an indemnity in respect of Mr. Nygard’s personal legal fees incurred

to defend him in connection with the criminal charges if:

a)

Mr. Nygard was a director and/or officer of NPL at the material time;

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b)

c)

d)

Mr. Nygard is subject to the criminal charges by virtue of his tenure as a

director and/or officer of NPL at the material time;

Mr. Nygard reasonably incurred legal costs, charges or expenses as a

result of the criminal charges;

Mr. Nygard acted honestly and in good faith with a view to the

corporations best interests in connection with the alleged conduct or

giving rise to the criminal charges; and

e)

Mr. Nygard had reasonable grounds for believing the alleged conduct was

lawful.

[146] NPL submits that because Mr. Nygard is the ultimate owner of NPL, it is in NPL’s

best interests that Mr. Nygard be acquitted of the criminal charges. If Mr. Nygard is

convicted, NPL’s assets would likely be used to pay a judgment obtained by anyone

who is successful in the prosecution of a civil claim after a successful criminal

prosecution against Mr. Nygard. Further, NPL may be added to the civil proceedings

and the work done in defence of Mr. Nygard will benefit NPL and NIP. (See Greenspan

affidavit at para. 5)

[147] As to the application of ss. 113, 117 and 119 of The Corporations Act, NPL

submits those sections describe instances when a corporation can pay the legal costs of

an officer, director or employee. Mr. Nygard is not currently an officer, director or

employee of NPL, so it is not on this basis that NPL submits monies should be paid on

his behalf. NPL submits Mr. Nygard was an officer of NPL and his conduct was in

accordance with the company’s scope for his work. NPL submits it is unaware of any

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conduct that was not within the scope of his employment or criminal and there is no

evidence before this court to the contrary. The Receiver has the onus of establishing

that Mr. Nygard did not act honestly and in good faith and it has not met the onus.

[148] In the event s. 119 of The Corporations Act is applicable, the respondents

referred the court to the leading Manitoba case on the indemnification provisions

(Manitoba (Securities Commission) v. Crocus Investments Fund, 2007 MBCA

36, 214 Man.R. (2d) 44 (“Crocus”)). In Crocus, the Manitoba Court of Appeal applied

the test set out by the Supreme Court of Canada in Blair v. Consolidated Enfield

Corp., [1995] 4 S.C.R. 5, [1995] S.C.J. No. 29 (QL). The respondents referred the

court to the three conditions that must exist "in order to receive indemnification for the

costs of defending in litigation" at para. 36:

(1)

the person must have been made a party to the litigation by reason of

being a director or an officer of the corporation;

(2)

(3)

the costs must have been reasonably incurred; and

the person must have acted honestly and in good faith with a view to

promoting the best interests of the corporation.

[149] The respondents submit these conditions have been met and there is a

presumption that the officer acted honestly and in good faith.

[150] Applying the principles noted above I am not satisfied the conditions to

indemnify Mr. Nygard for legal costs incurred to defend criminal charges have been

met. I fail to see how it is possibly in the best interests of NPL to successfully defend

criminal charges of sexual assault and other related offences against a former officer or

director or person controlling or directing the corporation. The evidence has not clearly

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established Mr. Nygard’s actual position with NPL and whether he was an officer or

director of NPL at the material time. I accept that he was, at the material times when

the sexual offences are alleged to have occurred, a person who directed the operations

of the Nygard Group of Companies, including NPL or one of its predecessor

corporations. In any event, the criminal charges in no way arise as a result of

Mr. Nygard performing any duties reasonably expected of an officer, director, directing

mind or employee of NPL. The cases relied upon by the respondents deal with officers

or directors who were made a party to litigation because they were officers or directors

and were performing duties honestly and in good faith.

[151] Mr. Nygard is seeking indemnification and priority respecting funds held for the

benefit of all of the creditors of the respondents and he has not established that the

criminal charges have anything to do with acting as an officer or director of the

Debtors. Nor does the evidence satisfy me that he acted honestly and in good faith

with a view to promoting the best interests of NPL. I agree that the criminal charges

are unproven allegations and Mr. Nygard is innocent unless he is proven guilty beyond

a reasonable doubt. However, the allegations simply cannot relate to performing any

duties of an officer or director or former officer or director who owes duties to act

honestly and in good faith and to exercise the care, diligence and skill that a reasonably

prudent person would exercise in comparable circumstances.

[152] The fact that the criminal charges relate to incidents alleged to have occurred at

one or more of the properties owned by NPL does not assist the respondents’

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argument. The location of alleged criminal conduct is not part of the test to seek

entitlement to indemnification.

[153] The respondents’ reference to the civil action is a reference to the Jane Doe

proceeding, a class action law suit commenced in the US and referenced in the

Receivership Order. NPL is not named as a defendant in the Jane Doe proceeding and I

disagree with the submission that NPL’s assets will likely be used to satisfy any

judgment obtained in that case. Even if I accept that NPL is entitled to the Net

Receivership Proceeds, which I do not, the submission advanced is speculative. In light

of my ruling in this case, the Net Receivership Proceeds, which includes NPL’s assets,

will be used to satisfy Common Liabilities of the respondents’ creditors in the

bankruptcy proceedings. Mr. Nygard has no prior claim or entitlement to any of NPL’s

assets, including the Preserved Proceeds or the Net Receivership Proceeds.

[154] To conclude on the indemnification issues, the respondents’ motion to authorize

or permit payment of reasonable legal fees and disbursements and professional costs in

the receivership or bankruptcy proceedings is granted. The respondents’ motion to

authorize or permit payment of reasonable legal fees and disbursements from the

Preserved Proceeds or the Net Receivership Proceeds to defend the criminal charges

against Mr. Nygard is dismissed.

Costs

[155] The Receiver and its counsel submit that the respondents have made serious

allegations regarding the Receiver’s conduct and submit that in the circumstances, the

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Receiver should be awarded costs on a substantial indemnity basis or in an amount in

excess of the Court of Queen’s Bench tariff against the respondents.

[156] The Receiver outlines statements made by the respondents under the heading

“Misleading/Inaccurate statements and allegations of impropriety” at paras. 98 - 102 of

the Second Supplementary Twelfth Report.

[157] The Receiver relies on Kaptor Financial Inc. v. SF Partnership LLP, 2016

ONSC 6607, [2016] O.J. No. 5612 (QL), as authority for the proposition that the court

may award costs on a substantial indemnity basis against a party who had previously

been involved in the control of certain debtors where the conduct of a party is

reprehensible, scandalous or outrageous. As pointed out by the respondents, the

Kaptor Financial Inc. case involved “ … unsubstantiated allegations … completely

unrelated to the relief sought …”, including statements that the relevant trustee in

bankruptcy had participated in an improper conspiracy, had deliberately omitted

material facts from its reports, and had disregarded generally accepted accounting

principles. (See para.6)

[158] Reviewing the specific allegations, I have no hesitation finding that the Receiver

has carried out its duties as an officer of the court in a responsible manner and the

improper conduct alleged by the respondents has not been established.

[159] That said, I am not satisfied that the conduct of the respondents is

reprehensible, scandalous or outrageous or that the allegations made are the same or

similar to the allegations made in the Kaptor Financial Inc. case justifying an

enhanced award of costs above the costs granted pursuant to the Receivership Order.

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I would describe the approach taken by the respondents as aggressive and the conduct

bordering on inappropriate, but not conduct justifying a further cost award in the

circumstances.

[160] In accordance with the Receivership Order, all reasonable professional costs of

the Receiver and Receiver’s counsel have been fully indemnified pursuant to accounts

submitted and approved by the court. Those costs have been paid during the course of

the receivership from the proceeds of the sale of the Property and will continue to be

paid subject to approval of the court. In my view, an additional award of costs against

the respondents in favour of the Receiver is not appropriate or required in the

circumstances.

Summary of Orders/Declaratory Relief

[161] I grant the following orders and/or declaratory relief:

a)

Each of the Debtors is declared to be jointly liable for the Common

Liabilities of each of the other Debtors, and the Debtors are hereby joint

Debtors respecting Common Liabilities;

b)

c)

The Common Assets of each of the Debtors are declared to be treated as

Common Assets subject to the Common Liabilities;

The assets and liabilities of the Debtors are declared to be substantively

consolidated for the purpose of addressing the claims of creditors of each

of the Debtors;

d)

The allocations made by the Receiver respecting receivership costs and

the proceeds of sale of the Property are approved;

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e)

f)

The Receiver is authorized to file assignments in bankruptcy on behalf of

the Debtors, other than NPL and NEL;

The Receiver is authorized to file applications for bankruptcy orders in this

court in relation to the Debtors, NPL and NEL, on a basis that reflects the

Common Assets and the Common Liabilities and the substantive

consolidation of the estates of the Debtors;

g)

The stay of proceedings granted in the Receivership Order is hereby lifted

to permit bankruptcy applications to be made and the court directs that,

for the purpose of such assignments and applications, the locality of the

Debtors shall be Winnipeg, Manitoba;

h)

i)

The Receiver is hereby appointed as Trustee in bankruptcy (the

“Trustee”);

The Receiver/Trustee is authorized to apply for an order for procedural

and substantive consolidation of the estates of each of the Debtors in

bankruptcy for all purposes in the administration of the said estates under

the BIA;

j)

Upon completion of its duties as the Receiver and making the necessary

filings in bankruptcy on behalf of the Debtors, the Receiver is hereby

directed to pay or transfer the Net Receivership Proceeds to the Trustee

for the purposes of administering the consolidated estates in bankruptcy

of the Debtors;

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k)

The Twelfth Report, the Supplementary Twelfth Report and the Second

Supplementary Twelfth Report and the conduct and activities of the

Receiver, including the NPL Proceeds Preservation Agreement are

approved;

l)

The accounts of the Receiver and its legal counsel are approved as

reasonable and consistent with the standard charges for the services

performed;

m)

The respondents’ motion to authorize or permit payment of the

respondents’ reasonable legal fees and disbursements and professional

costs incurred and to be incurred in the Receivership Proceedings and to

be incurred in the bankruptcy proceeding from the Preserved Proceeds

and, if necessary, the Net Receivership Proceeds is granted;

The respondents’ motion to authorize or permit payment of reasonable

legal fees and disbursements from the Preserved Proceeds or the Net

Receivership Proceeds to defend the criminal charges against Mr. Nygard

is dismissed; and

n)

o)

The Receiver’s request for an additional award of costs against the

respondents is dismissed.

J.

Page: 76

Schedule “A”

(excerpt from Receiver’s Twelfth report)

Net Receivership Proceeds

103. Based on the assumptions and considerations, and subject to the limitations

of the analysis, described above, the Separate Corporate Analysis yields the

following results:

(a) the Net Receivership Proceeds of NIP are estimated to total

approximately $1.4 million and Net Receivership Proceeds of NPL are

estimated to total approximately $8.5 million;

(b) there are no Net Receivership Proceeds in NI, as the totality of the

proceeds realized from the sale of its assets was allocated to expenses,

priority claims, court-ordered charges and repayment of Lender Debt; and

(c) an unequal allocation of the repayment of Lender Debt by which all

remaining NIP asset realization proceeds are applied to repayment of Lender

Debt would increase the Net Receivership Proceeds of NPL to approximately

$9.9 million (i.e. all remaining Net Receivership Proceeds would be

attributable to NPL), however, any resulting increase in equity in NPL would

still be ultimately subject to the intercompany obligations of NEL to NIP (and

would accrue to NIP).

104. The Receiver considers the allocations forming the basis of the Separate

Corporation Analysis, for the purposes aforesaid, to be fair and equitable, and

otherwise consistent with the basis on which the Receiver is to exercise its

discretion and the principles on which such allocations are to be made. Below is

a chart summarizing the Separate Corporation Analysis:

Nygard Group Separate

Corporation Analysis

(in 000s)

Operating Entity

NIP

Inc.

NPL

Corporate TOTAL

OH

1. Compute Net Receipts

And Disbursements by

Entity

Cash on Hand-March 18, 2020

73

Page: 77

Receipts

Accounts Receivable, Real Estate

And other Collections

Sales Receipts

7071

11,825

28,579

7

47,483

43,846

50,917

6

-

43,852

Total Receipts

11,831

28,579

7

91,334

Disbursements

Payroll

(8,118) (980)

(6,175)

(2,966) (256)

-

(4,647)

(13,745)

(6,175)

(3,446)

(803)

Rent

-

Utilities/Operating Expenses/Other

Insurance

(223)

-

(312)

(1,128)

(89)

(502)

(387)

(6)

(104)

-

Postage/Courier/Logistics Providers

Asset Protection Services

Chargebacks/Returns/Bank Fees

Consultant Fees

-

(1,135)

(327)

(209)

(12)

(30)

-

(0)

(514)

(2,620) (260)

-

(2,880)

(6,438)

(201)

Professional Fees

-

(6,438)

Receivers' Sales Taxes

Debtors' Sales Taxes

Payment of Landlord Charge

Total Disbursements

(0)

-

(201)

(3,971)

(1,293)

(27,175)

-

(3,971)

(2,586)

(42,221)

-

(1,293)

-

(2,110)

(1,650)

26,929

(11,286)

Excess of Receipts over Disbursements

2. Remaining Receivership Expenses

Remaining Cash Outflows (estimate only)

23,815

9,721

(11,279)

49,187

(2,000)

23,815

9,721

26,929

(13,279)

47,187

Excess of Receipts over Disbursements after Remaining Receivership

3. Allocation of Corporate Overhead (Note 1)

(7,403)

(1,720)

(4,155)

13,279

-

Corporate Overhead Allocation

Page: 78

Excess of Receipts over Disbursements after Allocation of Corporate

16,412

8,001

22,774

-

47,187

4. Payments that Rank in Priority to Secured Claims

Vacation Pay

(720)

Excess of Receipts over Disbursements after Priority Payments

15,692

-

46,467

5. Repayment of Debt by Borrowers

Nygard Inc. Debt Repayment as Borrower

-

(8,001)

-

(8,001)

Excess of Receipts over Disbursements after Repayment of Debt by

15,692

22,774

38,466

6. Payment of Remaining Debt by Guarantors (Note 2)

Receiver's Borrowings

-

30,082

(30,082)

-

30,082

(58,465)

10,083

Distribution to Lenders

(14,192)

1,500

(14,192)

8,582

Excess of Receipts over Disbursements after Repayment of Debt by

7. Payments of Landlord's Charge (Note 3)

Landlord Charge Payment

(100)

(200)

Cash Available for Unsecured Creditors (Note 4)

1,400

8,482

9,883

Allocation of Corporate

Overhead (in 000’s)

NIP

NI

NPL

Total

Gross Proceeds

50,917

56%

11,831

13%

28,579

31%

91,328

100%

Proration of Gross

Proceeds

Corporate Overhead

13,279

Allocation of Corporate

Overhead

7,403.40

1,720.26

4,155.42

13,279

Page: 79

Debt Repayment Summary

(in 000’s)

Total Amount Distributed to lender

66,466

Repayment

Borrowings

of

Receiver's

(30,082)

Repayment of Lender Debt

36,384

(8,001)

Repayment of Lender Debt by

Borrower (NI)

Balance of Lender Debt

28,383

14,192

Equal Contribution by NIP/ NPL

Note 3: Disputed Landlord Claims

The Disputed Landlord Claims have not been adjudicated by the Receiver. Based

on the Debtors’ books and records, the aggregate amount owing in respect

Unpaid Rent for the 14 leases in which landlords filed Notices of Dispute totals

approximately $120,000. The amount included in the above chart ($200,000) is

an estimate of the amounts remaining to be paid, pursuant to the Landlords’

Charge, based on the Receiver’s preliminary assessment of the Disputed

Landlord Claims. The actual amount paid in respect of the Disputed Landlord

Claims may, however, differ (and the difference may be material) from the

Receiver’s preliminary assessment.

Note 4: Cash Available for Unsecured Creditors

On a separate corporations basis, and subject to the qualifications set out above

as to the limitations of the allocation process described herein, the Separate

Corporation Analysis results in approximately $1.4 million being available to NIP

creditors, and approximately $8.5 million being available to NPL and its creditors,

prior to applying the analysis set out below.

Allocation of Corporate Overhead

(000's) NIP NI NPL Total

Gross Proceeds 50,917 11,831 28,579 91,328

Proration of Gross Proceeds 56% 13% 31% 100%

Corporate Overhead 13,279 13,279 13,279

Allocation of Corporate Overhead 7,403.40 1,720.26 4,155.42 13,279

Debt Repayment Summary000's)

Total Amount Distributed to Lender 66,466

Repayment of Receiver's Borrowings (30,082)

Page: 80

Repayment of Lender Debt 36,384

Repayment of Lender Debt by Borrower (NI) (8,001)

Balance of Lender Debt 28,383

Equal Contribution by NIP/ NPL 14,192

Implications of Intercompany Balances

105. Ultimately, at issue is the extent to which “direct” (as opposed to

consolidated) creditors and stakeholders of NIP, NI and NPL (each of the Debtors

that had assets) have access to Net Receivership Proceeds and other amounts

against which they can attempt to recover debts outstanding to them.

106. Intercompany balances represent either liabilities or assets, affecting the

scope of the debts outstanding and the prospects for recovery. Accordingly, to

fairly estimate the extent to which the unconsolidated creditors and stakeholders

of each of NIP, NI and NPL are to benefit, it is necessary to include, on a

separate corporation analysis basis, an assessment of the relevant intercompany

balances.

107. In this case, determination of the relevant intercompany balances depends

on reliance upon Nygard Group financial records and statements for historical

intercompany balances as at the Appointment Date, and the accounting

treatment to be applied to advances made by the Lenders and repayments by

NIP, NI and NPL, under the Credit Agreement.

Relevant Historical Intercompany Balances

108. As a caution, the Receiver has previously questioned the reliability of the

Debtors’ books and records as part of the Ninth Reports, and the accounting

treatment applied by Nygard Group staff to intercompany transactions.

109. Among others, at paragraph 111 of its Ninth Report, the Receiver

commented: In the Receiver’s view, taking into consideration its concerns

regarding the reliability of the Debtor’s books and records, and the accounting

treatment applied by Nygard staff to certain material intercompany transactions,

it would be difficult for an independent financial advisor to provide unqualified

advice and guidance regarding the Debtors’ financial circumstances (either

collectively or individually) or endeavour to “separate out” the financial

relationships among the complex web of related entities that comprise the

Nygard Group and the broader Nygard Organization. and at paragraph 117 of its

Ninth Report, the Receiver commented: On a general note, it has been described

to the Receiver that, because the Nygard Group (and other non-Debtor entities)

operated from the perspective of the accounting team as whole rather than

individually, the entry of intercompany transactions was, at times, made at the

direction of certain employees or executives without regard to the provision of

normal accounting rules or usual backup for such entries. This calls into question

the intercompany balances generally. In the Receiver’s view, if the Nygard Group

entities are to be treated separately for creditor purposes, rather than on a

Page: 81

consolidated basis, even a complex accounting review may not be sufficient to

properly and fairly sort out intercompany balances.

110. In its Ninth Report at paragraphs 113 and 114, the Receiver described the

incorrect accounting treatment applied by the Nygard Group staff to the Credit

Agreement advances and, consequently, to the proceeds generated from the

sales of the Notre Dame Property and the Toronto Property. The Receiver’s

opinion regarding the incorrect accounting treatment applied to these

transactions by the Nygard Group was endorsed by the Manitoba Court. In his

reasons issued November 19, 2020, Mr. Justice Edmond found that: The

Receiver and AGI disagree on the proper accounting treatment of certain assets

and liabilities and treatment of intercompany loans within the Nygard Group of

Companies. I agree with the analysis provided by the Receiver that it is incorrect

to characterize the proceeds generated from NPL property sales as repayment of

NIP’s debt to the Lenders and result in NIP owing approximately $17 million to

NPL. I agree with the Receiver that the correct accounting treatment respecting

the proceeds generated from the NPL property sales, namely the Niagara

Property and the Notre Dame Property, is an intercompany payable as between

one or more of the US Debtors and NPL, and not an intercompany payable

between NIP and NPL. (at page T6, lines 27-33 and 38-41 and page T7, lines 1-

4)

111. These were material transactions – the Credit Agreement may have been

the most material recent Nygard Group financial transaction, both from a

business and accounting perspective, and the fact that advances under the

Credit Agreement and repayments were improperly accounted for supports the

Receiver’s concerns as to the reliability generally of the Debtors’ books and

records. It is also concerning that the accounting treatment applied to these

matters appears to reflect a bias to simply recording obligations as obligations of

NIP rather than a dedication to accounting rigour.

112. Having stated such a caution, as at the Appointment Date, the Debtors’

books and records disclose the following intercompany balances relevant to the

Separate Corporation Analysis:

(a) NPL was indebted to NIP in the amount of approximately $2.5 million;

(b) NEL (100% owner of NPL) was indebted to NIP in the amount of

approximately $18.1 million; and

(c) NPL was indebted to 887 (one of the partners of NIP) in the amount of

approximately $200,000.

These amounts generally accord with disclosure made by the Debtors in the

Perfection Certificate dated December 30, 2019 provided to the Lenders in

connection with the Credit Agreement, and are the basis on which AGI prepared

its First Pre-Filing Report dated November 5, 2020 on behalf of NPL. Accordingly,

for purposes (as among NIP, NEL and NPL) relevant to the Separate Corporation

Analysis, the intercompany balances described in (a), (b) and (c) in this

paragraph are used and referenced as the historical intercompany balances.

Page: 82

Accounting Treatment of Credit Agreement Transactions

113. NPL previously argued that:

(a) repayments of Lender Debt from the proceeds of realization of NPL assets

should be treated as payments made pursuant to NPL’s guarantee, resulting

in rights of subrogation in favour of NPL;

(b) advances made by the Lenders under the Credit Agreement were

advances to NIP as a “Borrower”;

and

(c) alternatively, if Credit Agreement advances were made to the US Debtors

as Borrowers and were thereafter advanced by them to NIP, repayments of

Lender Debt from proceeds realized from NIP assets should be treated as

repayment of intercompany obligations to the US Debtors and not as

payments made pursuant to NIP’s guarantee, such that rights of subrogation

did not arise in favour of NIP.

114. The Manitoba Court did not accept NPL’s arguments described in

subparagraphs 113 (b) and (c) above. In his reasons issued November 19, 2020,

Mr. Justice Edmond held that: NPL is a limited recourse guarantor pursuant to

the Credit Agreement. NIP, the entity that carried on the fashion clothing

business is also a guarantor pursuant to the Credit Agreement. Both entities may

have rights to subrogation to the extent of their payments to the Lenders were

made on behalf of the borrowers, as defined in the Credit Agreement. (at page

T6, lines 8-13)

115. Accordingly, repayments of Lender Debt from proceeds realized from NPL

assets do not affect the historical intercompany debts of NPL to NIP and of NEL

to NIP, as alleged in past by NPL, and do not create subrogated rights in favour

of NPL as against NIP and its assets. Instead, the correct accounting treatment

of Credit Agreement transactions appears to be as follows:

(a) the Borrowers caused the Lenders to initially advance funds under the

Credit Agreement variously to Bank of Montreal, a title insurance provider,

various professional firms and NIP, and thereafter on a revolving basis to

NIP, to the repay a Bank of Montreal credit facility, pay the costs of the

Credit Agreement transaction and fund ongoing expenses. For the purposes

of this Separate Corporation Analysis, the Receiver has treated the flow of

funds directed by the Borrowers as creating intercompany debts of NIP to the

Borrowers collectively in the amount of the Lender Debt (approximately $36

million);

(b) NIP and NPL, as guarantors, made equal payments to the Lenders to

repay the balance of the Credit Facility, in the amounts of approximately

$14.2 million;

(c) both NIP and NPL are equally subrogated to the rights of the Lenders, as

against the Borrowers, in the full amounts of their guarantee payments

(calculated by the Receiver to be approximately $14.2 million each) and are

equally subrogated to the rights of the Lender, as against Debtor co-

Page: 83

guarantors 4093887 Canada Ltd., 4093879 Canada Ltd. and NEL for equal

contributions (in the amounts of approximately $2.85 million each) to

repayment of the Lender Debt attributable to guarantors, resulting in

subrogated claims (but not intercompany transactions) accordingly.

116. Based on the equal allocation of the repayment of the remaining Lender

Debt to both NIP and NPL, neither NIP nor NPL has subrogated rights as against

one another. In addition, the subrogated rights and claims of NIP and NPL as

against the Borrowers (i.e. the US Debtors) and other co-guarantors, are illusory,

as none of the Borrowers or co-guarantors has assets. Accordingly, while much

has been argued in respect of subrogation and rights of guarantors arising under

The Mercantile Law Amendment Act (Manitoba), there is no practical significance

to such rights in this case.

117. Illustrated below is a snapshot of the corporate structure and intercompany

obligations among the Canadian Debtors after applying the correct accounting

treatment to the funds advanced pursuant to the Credit Facility, including

booking an intercompany payable as between NIP and one or more of the US

Debtors in respect of the funds advanced pursuant to the Credit Agreement:

The Mercantile Law Amendment Act (Manitoba)

118. In considering the matter of subrogation, the Receiver notes that the Credit

Agreement is governed by the law of the State of New York, and the security

agreements provided by the Canadian Debtors to the Lenders are generally

governed by the law of the Province of Ontario. NPL has argued that,

nevertheless, it is The Mercantile Law Amendment Act (Manitoba) that governs

subrogation issues. For the purposes of this Separate Corporation Analysis, and

given that, in the Chapter 15 Proceedings, the US Court has determined that

Manitoba is the center of main interest, the Receiver has reached its conclusions

on matters of subrogation with reference to The Mercantile Law Amendment Act

(Manitoba).

Page: 84

119. Based on advice from TDS, the Receiver understands that, under The

Mercantile Law Amendment Act (Manitoba), on payment of a principal obligor’s

debt to a lender, a surety (or guarantor) becomes subrogated to the rights of the

creditor as against the principal obligor (“borrower”) and any co-sureties. A

guarantor that has paid all or part of a borrower’s debt, can recover the full

amount of its payment from the borrower, however, where the right to

contribution from other co-surety arises, it is limited to contribution by the co-

surety to that proportion of the total debt for which the co-surety is “justly liable”.

120. With respect to being “justly liable”, the general principle is that co-sureties

are to contribute equally towards the satisfaction of a guaranteed debt unless

there is an agreement between the co-sureties that would supersede such

principle. In practice, where a co-surety pays more than its proportionate share

of the guaranteed debt, the co-surety is entitled to contribution from the other

co-sureties to equalize the amounts paid among the co-sureties. The Receiver

further understands that, in circumstances where there are multiple co-sureties,

each co-surety’s obligation to “contribute” towards the equalization of a co-

surety’s disproportionate payment of a guaranteed debt should not exceed its

fractional (i.e. number of co-sureties) obligation thereunder.

121. Pursuant to the Credit Agreement, each of the five (5) Canadian Debtors

are guarantors (NEL and NPL are limited recourse guarantors) of amounts due

by the Borrowers to the Lenders. As such, each guarantor’s obligation to

“contribute” towards the equalization of a co-guarantor’s disproportionate

payment of the Lenders claim, should not exceed twenty percent (20%) of the

total amount paid by guarantors, and the contributions by NEL and NPL cannot

exceed their recourse limit (i.e. USD 20 million plus costs). For example, if, as in

this case, the total amount paid by NIP and NPL as Guarantors toward the

repayment of the Credit Facility totaled approximately $14.2 million each, the

maximum claim for “contribution”, by each of NIP and NPL, against each non-

paying guarantor would be 1/5th of that amount, or approximately $2.85 million.

122. Since the Receiver has fairly allocated the guarantee repayments equally to

NIP and NPL, in amounts in excess of their respective “just liability” to other

sureties, neither NIP nor NPL can seek contribution from the other under The

Mercantile Amendment Act (Manitoba). Since none of the remaining borrowers or

co-sureties have assets, there are, as a practical matter, no subrogated rights to

enforce.

123. The Receiver has noted in past that the Credit Agreement provides that

each guarantor guarantees Credit Agreement Obligations “as a primary obligor

and not merely as a surety.” On the basis of the equal allocation of repayment of

the balance of the Lender Debt to NIP and NPL, the designation of NIP and NPL

as “primary obligors” does not affect the outcome of the analysis, as both NIP

and NPL would have equal rights of recovery against each other if both were

treated as primary obligors.

Page: 85

Claims against NPL

124. Based on the assumptions and considerations, and subject to the limitations

of the analysis described above, and on the evidence adduced by NPL earlier in

these Receivership Proceedings as to its assets, it appears that the only

remaining assets of NPL are the Net Receivership Proceeds of NPL totaling

approximately $8.5 million and the Preserved Proceeds (estimated at $0.6

million) referred to in paragraph 81 of this Twelfth Report, totaling approximately

$9.1 million.

125. As noted above, in general, NPL has argued that it has no third party

creditors, however, it is apparent that a significant tax liability has accrued to

NPL in respect of the sales of its properties in the course of these proceedings,

and other tax liabilities may accrue in relation to dispositions of the NPL Falcon

Lake Property and the Fieldstone Property. The Receiver presently estimates

those tax liabilities (other than in relation to the dispositions of the NPL Falcon

Lake Property and the Fieldstone Property) to be in the range of approximately

$5 million. NPL may also have other third party creditor obligations.

126. In addition, as discussed above, on the basis of the Debtors’ financial

information, NPL is indebted to NIP in the amount of approximately $2.5 million,

and NEL, which is NPL’s parent corporation, is indebted to NIP in the amount of

approximately $18.1 million.

127. In the result, after repayment of any known NPL “direct” liabilities, any

funds remaining in NPL (whether accruing from the sale of Property or arising

from other NPL assets) would ultimately be subject to NIP recovering same by

means of enforcing the $18.1 million intercompany debt owing by NEL to NIP.

128. Below is a chart summarizing claims in relation to NPL, NI, NIP and others,

indicating that the outcome is that all remaining assets of NPL are either subject

to claims of direct creditors of NPL, or subject to the enforcement of NIP’s

intercompany claim against NEL:

Note 1:

Page: 86

Note 1: Settlement of NPL Debts

As noted, based on the Receiver’s preliminary assessment, NPL has a tax liability

resulting from its real property sales estimated at approximately $5 million. The

Receiver is in the process of assembling and reviewing the information necessary

to complete of the Debtors’ outstanding tax filings. As per the Debtors’ books

and records, NPL owes NIP approximately $2.5 million. Intercompany loans are

also recorded as between NPL and 887 in the amount of approximately $210,000

and 887 and NIP in the amount of approximately $387,000. Consequently, upon

repayment of NPL’s debt to 887, these monies would ultimately accrue to NIP.

The Debtors have previously presented information to the Manitoba Court that,

except for Canada Revenue Agency (the “CRA”), NPL has no arm’s length

creditors. In the Receiver’s view (and as described later in this Twelfth Report),

NPL historically incurred limited direct obligations, as most (if not all) of its

operating expenses were paid by NIP. After the Appointment Date, with NIP no

longer able to pay NPL’s expenses, NPL has been incurring obligations directly.

The Receiver’s purpose in entering into the NPL Proceeds Preservation

Agreement was to preserve funds for payment of NPL creditor claims, including

the claim of NIP, based on the Receiver’s view of the intercompany accounts,

and more generally for creditors of the “consolidated” Debtors, should a court

order that the Debtors be consolidated for creditor payment or bankruptcy

purposes (as discussed later in this Twelfth Report).

Note 2. Distribution to NEL by NPL On the basis of the assumptions and

considerations described above in this Twelfth Report, following repayment of

the items in Note 1, the remaining funds in NPL would effectively be available to

its shareholder, NEL and subject to enforcement by NIP of the debt owing to it

by NEL (and certain other minor creditors of NEL).

Page: 87

Based on the above analysis, NPL is estimated to have approximately $1.5

million remaining after payment of known direct liabilities described in Note 1.

Application of these monies to the intercompany amounts owing from NEL to NIP

($18.1 million) would reduce the obligation owing as between NEL and NIP to

approximately $16.6 million. The additional amounts represented by the

Preserved Proceeds would contribute to reduction of NEL’s intercompany

obligation to NIP, but would be insufficient to fully satisfy that obligation.

129. On a separate corporation basis, NPL may have other obligations to

creditors arising from the conduct of the Nygard Group business. For example,

vendors regularly performed work or supplied goods for the benefit of NPL and

its properties, but contracted directly with NIP in respect of such services. Such

vendors, if unpaid, may have claims against NPL in relation to the provision of

these goods and services. Further, as more fully described later in this Twelfth

Report, the Receiver understands that NIP “employed” various individuals that

effectively worked (both full-time and part-time) for NPL to manage and maintain

its real property assets, including the Falcon Lake Cottage, the Notre Dame

Property, the Broadway Property, the Inkster Property and the Toronto Property.

NPL may be jointly responsible for outstanding obligations to such employees, on

a “common employer” basis. Further, as noted above, on a more comprehensive

allocation review, NPL may be determined to be responsible for a greater

proportion of the expenses and disbursements of the Receiver.

130. In consideration of the above, the Receiver is not purporting, by this

Separate Corporate Analysis to determine the solvency or insolvency of NPL.