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Replacement Of Liquidator Applications Carry A Heavy Burden

A replacement of the Liquidator application failed in the case of Zanardo v. Di Battista, 2021 ONSC 7835. The applicant did not succeed in convincing the Court they had discharged the onus on them.

It is a heavy burden on such an applicant. If you do not have good reasons and compelling evidence it might be unwise to proceed with such an application.

 

Background To The Liquidator Removal Application That Failed

The background to the removal application was a real estate company Di Battista Gambin Developments Limited (“DBG”) that was operated on a fifty-fifty basis between Luigi Gambin (“Luigi”) and Ray DiBattista (“Ray”) in 1988. Luigi died and his Estate was represented by a Trustee (“the Trustee”) in the removal of Liquidator application.

The replacement of Liquidator application was brought by Ray’s wife who held his 50% interest in DBG.

At an earlier court case, Ray was found to have breached his duty that culminated in the Liquidator of DBG’s appointment which was explained as follows:

In exercising his discretion to appoint a liquidator, Dunphy J. stated at par. 4 of his reasons (2018 ONSC 4905):

While it is clear that the breach of fiduciary duty and self-dealing evidenced by the Greystar transaction must be accounted for in full, that remedy alone would be insufficient. The deceased chose to place a great deal of trust in his business partner, Ray Di Battista to protect the interests of his estate within their joint enterprise. Time has shown that trust to have been misplaced. Ray has demonstrated resentment and hostility towards the 50% shareholder of a corporation he is charged as a fiduciary with managing. He has blatantly preferred his family’s interests to those of the corporation as a whole. The other individual respondents have utterly failed to act independently of Ray and cannot be relied upon as guarantors of the due and fair administration of this corporation in the future. A separation of interests is the only fair and reasonable course of action at this point.

 

Notwithstanding the issues with Ray referred to above, the Liquidator used Ray to assist with the management of properties and land of DBG despite the concerns of the Trustee.

It was interesting to note that not only did the Trustee have issues with Ray’s management but so to did the Liquidator:

Issues have arisen between the Liquidator and Di Battista concerning the sale of the Properties. While Di Battista submits that the sales of all but one of the Properties to date have resulted from his efforts in obtaining offers in excess of those obtained by Colliers, the Estate and the Liquidator submit that he has acted contrary to the terms of the appointment order by engaging in a parallel marketing process, without involving Colliers, contrary to the Liquidator’s direction. Further, he has refused to provide information to the Liquidator with respect to his dealings with prospective tenants and purchasers.

Replacement Of Liquidator Burden

The Court highlighted the heavy burden on the applicant as follows:

The case law establishes there is a heavy onus on the party seeking to remove a court appointed officer such as a receiver or liquidator. In normal circumstances, a court appointed officer will not be removed unless he, she or it has engaged in “blatant intentional action contrary to the interest of one or more parties”: Kraner v. Kraner2012 CarswellOnt 10876 at paras. 10 – 11Canada Trustco at para. 5.

Julia Babensky

Julian Babensky (“JB”) was Ray’s wife and she appears to have been unhappy that the Trustee and the Liquidator collaborated to stop repayment of a loan she claimed to be owed (“the Loan Position”). Ray also suggested collaboration between the Trustee and Liquidator.

The Court explained the Loan Position as follows:

Babensky, together with Di Battista, formed Greystar in 2016 to purchase the Markham property in order to develop a condominium. Babensky and Di Battista proceeded without the involvement of the Estate. Greystar purchased the property with a $3-million mortgage from DBG and a shareholder’s loan from Babensky. Dunphy J. found the Greystar transaction to be a breach of fiduciary duty and self-dealing by Di Battista and Babensky and as part of the relief established a constructive trust whereby the respondents (excluding DBG) hold any benefits of any kind derived directly or indirectly from Greystar for the benefit of DBG which extended to and included all the shares of Greystar.  When the Markham property was about to be sold, it was clear that the sale proceeds would be insufficient to repay Babensky’s shareholder loan which had grown to $2,704,990. As a result, Babensky brought a motion for an order requiring DBG to repay the loan (the “Motion”).

 

Ray And JB’s Issues With The Liquidator

The Court summarised the issues that Ray and JB had with the Liquidator. It said they did not establish a conflict of interest or come close to warranting replacing the Liquidator as follows :

[20] The allegation of collaboration between the Liquidator and the Estate in respect of Babensky’s motion for payment of her shareholder’s loan requires some background.

[21] Babensky, together with Di Battista, formed Greystar in 2016 to purchase the Markham property in order to develop a condominium. Babensky and Di Battista proceeded without the involvement of the Estate. Greystar purchased the property with a $3-million mortgage from DBG and a shareholder’s loan from Babensky. Dunphy J. found the Greystar transaction to be a breach of fiduciary duty and self-dealing by Di Battista and Babensky and as part of the relief established a constructive trust whereby the respondents (excluding DBG) hold any benefits of any kind derived directly or indirectly from Greystar for the benefit of DBG which extended to and included all the shares of Greystar. When the Markham property was about to be sold, it was clear that the sale proceeds would be insufficient to repay Babensky’s shareholder loan which had grown to $2,704,990. As a result, Babensky brought a motion for an order requiring DBG to repay the loan (the “Motion”).

[22] The Motion was heard by Gilmore J. on March 15, 2021. The Motion was opposed by the Estate on the basis that DBG should not be required to repay the loan as any shortfall arising from the sale of the Markham property resulted from the consequences of the oppressive conduct. In the alternative, repayment of the loan should not happen until the Liquidator had properly assessed and determined the amount owing. The Liquidator took the position that it was premature to make any order and the best course of action was to sell the Markham property and determine Babensky’s claims by way of a distribution motion in the winding-up.

[23] On March 23, 2021, Her Honour released reasons allowing the Motion and ordering that Babensky’s shareholder loan be repaid upon the sale of the Markham property with any shortfall after payment of the DBG mortgage to be paid by DBG and after a full accounting by her and validation by the Liquidator of the amount owing.

[24] In addressing the Liquidator’s submissions, Her Honour stated at para. 38 of her endorsement:

38. Finally, I do not agree with the Liquidator’s position that an Order at this stage is premature for two reasons. First, the Liquidator is intended to be a neutral party in this matter but is clearly aligned with the Estate. Second, DBG has significant cash and sale proceeds available. There is no need to incur more expense by requiring a distribution motion.

[25] Apart from setting out the positions of the parties, there is nothing in Gilmore J.’s reasons to support her finding that the Liquidator is “clearly aligned with the Estate”. In his affidavit, Di Battista states that finding arose from evidence before the court in the Liquidator ‘s account that counsel for the Liquidator had shared a draft of its Fourth Report (filed by the Liquidator on the Motion) with counsel for the Estate and there had been communications between them which did not include counsel for the respondents.

[26] In addition, Di Battista states that following the release of Gilmore J.’s reasons, he reviewed the Liquidator’s counsel’s fee invoice dated February 25, 2021, which indicated “multiple” occasions in January 2021 of “collaboration” between the lawyers for the Liquidator and the lawyers for the Estate concerning the Babensky motion.

[27] The fact that a court officer takes a position against one of the parties does not mean that he or she is in a position of conflict or not acting in good faith. As noted by Farley J., it must be considered based on the circumstances. In this case, Babensky was bringing a motion, not in her capacity as a shareholder of DBG but as a shareholder of Greystar. Further, while both the Estate and the Liquidator opposed the Motion, they did so for very different reasons. The Estate’s position was that Babensky should be paid solely from the proceeds of the sale of the Greystar property, which would have resulted in a shortfall. The Liquidator’s position was that the order was premature and should await the sale of the Markham property and final distribution.

[28] The Liquidator submits that it took a position that, in its view, protected the interests of DBG and its stakeholders by deferring the issue until all the relevant facts would be known to all parties. I accept the Liquidator’s submission.

[29] The evidence of the alleged “collaboration” indicates there were brief telephone calls between counsel for the Estate and the Liquidator concerning the motion. Further, on January 18, 2021, counsel for the Liquidator sent the final draft of the Liquidator’s report it intended to file on the motion. The next day, counsel for the Estate replied asking if the Liquidator had taken steps to confirm the amount of the loan given Di Battista’s evidence that there was no dispute of the amount. That question was a reasonable one for the Estate to ask as a 50% shareholder. I also do not consider counsel’s insertion of that point in the report was improper given the position it was taking on the motion. Later that same day, after making some other changes independent of any comment from the Estate, the Liquidator’s counsel sent the report to counsel for the Estate and advised it would be served the next day.

[30] Given that Babensky was bringing a motion for an order against DBG which impacted the liquidation, I do not consider the discussions between counsel for the Liquidator and the Estate to be indicative of bad faith. Nor do I consider sending counsel a copy of the draft final report the Liquidator proposed to file on the Motion to be inappropriate, in the circumstances.

[31] Based on the above, I am satisfied that the Liquidator’s counsel’s actions in communicating with counsel for the Estate in respect of the Motion did not come close to the type of conduct required for removal. It clearly did not amount to a conflict of interest. In my view, in the circumstances, the Liquidator’s actions were in keeping with its duties as the Liquidator of the respondent companies.

[32] Nor do I accept that Di Battista’s three examples of the Liquidator alleged favouring of the Estate over Babensky establish such conduct. As a result of Di Battista’s hostile actions towards Zanardo and the Estate and the subsequent litigation, the direct lines of communication between Di Battista and Zanardo were non-existent resulting in the Liquidator having to act as a conduit from time to time between Zanardo and Di Battista as DBG property manager when information about the assets and operations of DBG was requested by the Estate and not otherwise in possession of the Liquidator. The “examples” all relate to such circumstances.

[33] I also reject Babensky’s submission that there is no prejudice in removing Zeifman at this stage as the hourly rates charged by Gelman are less than Zeifman and Di Battista can deal with the day-to-day operation of DBG. Only one Property remains to be sold to complete the liquidation. Babensky has provided no estimate of costs for her proposed liquidator, but in my view, the costs incurred in bringing it up to speed at this stage, even at reduced rates, will likely be more than retaining Zeifman. I am also of the view, given the evidence of Di Battista’s actions in deliberately disobeying the Liquidator contrary to the provisions of the appointment Order, it is important that Zeifman remain as Liquidator to oversee Di Battista’s actions in the interests of all stakeholders.

 

Oliver Elliot Observation On Why Replacement Of Liquidator Application Failed

If you are going to attempt to issue a replacement of Liquidator application not only would it appear that you need to be able to discharge the heavy burden upon you to enable you to remove the Court’s own officer but it might be wise to consider if you have sufficiently clean hands in the matters at large.

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