This article has been contributed to the blog by Caitlin Fell and Mary Angela Rowe. Caitlin Fell is an Associate in the Insolvency & Restructuring group of Osler, Hoskin & Harcourt LLP. Mary Angela Rowe is an Articling Student-at-law at Osler, Hoskin & Harcourt LLP.
A court-appointed receiver is bound to maximize return on the sale of an asset. But when a purchaser gets a better offer for the asset than the receiver could, all parties are in a difficult position. In the case of Meridian Credit Union Limited v. Baig, the court considered when partial truths may amount to fraud, after a buyer tried to conceal from a receiver that the buyer had re-sold the property before closing the sale.
The plaintiff, Meridian Credit Union Limited (“Meridian”), was the first priority secured creditor of a building. A court-appointed receiver and receiver and manager (the “Receiver”) of the building commenced sale efforts for the benefit of Meridian and a subordinated secured creditor. After initial offers on the building were unsatisfactory, a second marketing effort led to a bid from the defendant Ahmed Baig (“Baig”) for approximately $6.2 million dollars.
Baig and the Receiver signed an agreement of purchase and sale (the “APA”), which provided that Baig could not assign the APA without the Receiver’s consent. Such consent “may be arbitrarily withheld.” However, the Receiver could not unreasonably withhold its consent for Baig to assign the APA to a corporation that would be incorporated for the purposes of the sale.
Before the transaction closed, Baig received an offer from a third party to purchase the building. Baig agreed to sell the building to the Yellowstone Consulting Group (“Yellowstone”) for $9 million.
Baig sought to avoid paying land transfer tax for the transaction by having title for the building transferred directly from the Receiver to Yellowstone. However, had the Receiver known of Baig’s deal with Yellowstone, the Receiver would likely not have agreed to assign the APA without renegotiating the purchase price. But pursuant to the APA, the Receiver could not unreasonably withhold its consent to assign the agreement to Baig’s non-arm’s length corporation incorporated for the purposes of closing the transaction. To this end, Baig and his counsel allowed the Receiver to assume that Yellowstone was Baig’s corporation, and took steps to ensure that the Receiver did not learn the true nature of Baig’s relationship with Yellowstone until after the transaction had closed.
The Receiver contended that, had it known of Yellowstone’s offer to Baig, it would not have recommended that the court authorize the sale. As Meridian did not recover the full amount owing to it through the sale, the Receivership assigned to Meridian its cause of action against Baig. Meridian pursues Baig for breach of contract, fraudulent misrepresentation, and conspiracy.
Absent a contractual stipulation, Baig had no positive duty to disclose his agreement with Yellowstone to the Receiver. Had Baig simply allowed the Receiver to make incorrect assumptions, then Meridian might not have been successful. However, Baig’s conduct went beyond mere sins of omission when he took active steps to encourage the Receiver to draw the wrong conclusions.
The court drew a distinction between allowing someone to draw the wrong conclusions, and an omission buttressed by misleading statements or half-truths that, taken together, amount to deception. For instance, Baig’s counsel provided closing documents that only the purchaser or its assignee had a contractual obligation to deliver to the Receiver, naming Yellowstone instead of Baig. In the words of the court, “Although Baig had no duty to disclose his flip, once his lawyers knowingly made misleading disclosures representing Yellowstone to be the purchaser under Baig’s agreement with the Receiver, the failure to correct the misimpression created amounts to fraudulent misrepresentation.”
The court questioned whether the documents representing Yellowstone as the purchaser might have constituted an implicit assignment of the APA without the Receiver’s consent, although it drew no conclusions on this issue.
Meridian Credit Union emphasizes that, even without a positive duty to disclose material facts, parties to a sale under a receivership cannot actively mislead one another – particularly when this means that fewer funds are available for the general body of creditors.
Baig’s agreement with Yellowstone placed the Receiver in a difficult position. A Receiver requires court approval to make a material sale of the debtor’s property. To obtain this approval, the Receiver must show that it took commercially reasonable steps to maximize return on the property for the benefit of creditors. If a Receiver learns of a higher offer on the property after signing an APA, it may be contractually bound to seek court approval when its own position is vulnerable to opposition from creditors.
The court was clear that, if Baig had simply closed the transaction and then immediately flipped the property, no issue of fraudulent misrepresentation would have arisen. It was Baig’s attempt to avoid the land transfer tax that led to the difficulties. However, as Baig indignantly noted, Meridian and the Receiver did not ‘lose’ anything through Baig’s conduct – in fact, initially Meridian had been pleased with the sale to Baig. The court left the issues of causation and damages for another day, so it remains to be seen how the court will characterize the consequences of Baig’s actions.
Mary Angela Rowe