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Monitor's Advice and Direction Application

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Monitor's Advice and Direction Application Clerk’s Stamp COURT FILE NUMBER: 2001-06194 JUDICIAL CENTRE: CALGARY APPLICANTS: IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, RSC 1985, c C- 36, as amended AND IN THE MATTER OF THE COMPROMISE OR ARRANGEMENT OF REDROCK CAMPS INC., SOCKEYE ENTERPRISES INC., SWEETWATER HOSPITALITY INC. and BALDR CONSTRUCTION MANAGEMENT INC. DOCUMENT: BRIEF ADDRESS FOR SERVICE AND MLT AIKINS LLP CONTACT INFORMATION OF Barristers & Solicitors PARTY FILING THIS DOCUMENT: 2100 Livingston Place – 222 3rd Avenue SW Calgary, AB T2P 0B4 Attention: Ryan Zahara/Catrina Webster Phone: 403.693.5420/403.693.4347 Facsimile: 403.508.4349 File: 0128056.00002 24101598 - 2 - TABLE OF CONTENTS PART I – INTRODUCTION ........................................................................................................ 3 PART II – STATEMENT OF FACTS .......................................................................................... 3 PART III - ISSUE ....................................................................................................................... 5 PART IV – LAW AND ARGUMENT ............................................................................................ 6 A. Preferences under the CCAA .......................................................................................... 6 B. The Set-Off Agreement was Executed to Prefer Blue Collar ............................................ 7 PART V – RELIEF SOUGHT ..................................................................................................... 8 LIST OF AUTHORITIES ............................................................................................................ 9 24101598 - 3 - PART I – INTRODUCTION 1. This brief is submitted on behalf of BDO Canada Limited, in its capacity as the court- appointed Monitor (“BDO” or the “Monitor”) of Redrock Camps Inc. (“Redrock”), Sockeye Enterprises Inc. (“Sockeye”), Sweetwater Hospitality Inc. (“Sweetwater”), and Baldr Construction Management Inc. (“Baldr”, and together with Redrock, Sockeye and Sweetwater, the “Companies”), in support of an Application filed by the Monitor on February 18, 2021 (the “Application”) seeking, among other things, advice and direction regarding a set-off claim advanced by one of Sockeye’s customers, Blue Collar Silviculture Ltd. (“Blue Collar”). Blue Collar claimed a right to set off a debt claim that was assigned from Troy Ferguson (“Mr. Ferguson”), Sockeye’s president, to Sockeye the day before the Companies brought their application for relief under the Companies’ Creditors Arrangement Act (the “CCAA”).1 2. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the Seventh Report of the Monitor, dated February 12, 2021 (the “Seventh Report”).2 PART II – STATEMENT OF FACTS 3. On May 13, 2020, this Honourable Court granted the Initial Order, among other things, granting a stay of proceedings up to and including May 25, 2020 (the "Stay Period"), and appointing BDO as the Monitor of the Companies in these proceedings.3 4. On May 25, 2020, this Honourable Court granted an Amended and Restated CCAA Initial Order (the “ARIO”), among other things, extending the Stay Period. Since then, the Court has extended the Stay Period through to March 31, 2021.4 1 Companies’ Creditors Arrangement Act, 1985 RSC, c C-36 (the “CCAA”), at TAB 1. 2 Seventh Report of the Monitor, dated February 12, 2021 (the “Seventh Report”). 3 Seventh Report, at paras. 2-3. 4 Seventh Report, at para. 5. 24101598 - 4 - 5. Throughout the Stay Period, the Companies experienced difficulties collecting accounts receivables. As a result, the ARIO included provisions to provide the Monitor with enhanced powers to receive and collect all monies and accounts owing to the Companies.5 6. As part of its collection efforts, on November 24, 2020, the Monitor, through its legal counsel, issued a letter to Blue Collar regarding amounts owing from Blue Collar to Sockeye in the amount of $722,334.08 (the “Outstanding Amount”), and regarding Blue Collar’s assertation that it had a right to set off $250,000.00 of the Outstanding Amount.6 7. Based on a number of documents provided to the Monitor, the Monitor became aware of the following: a. on April 1, 2020, Mr. Ferguson, in his role as the president of Sockeye, borrowed $250,000.00 from David Newton (“Mr. Newton”), the director of Blue Collar;7 b. on April 1, 2020, Mr. Ferguson assigned his $250,000.00 debt to Sockeye pursuant to a promissory note (the “Ferguson Promissory Note”);8 c. on May 12, 2020, after receiving notice of the Companies’ intention to file for CCAA relief, Mr. Ferguson assigned his rights in the Ferguson Promissory Note to Mr. Newton (the “Ferguson Assignment”);9 d. on May 12, 2020, Mr. Newton assigned his rights in the Ferguson Promissory Note to Blue Collar (the “Newton Assignment”, and together with the Ferguson Assignment, the “Assignments”);10 and e. on May 12, 2020, Blue Collar and Sockeye executed a set-off agreement (the “Set-Off Agreement”). 5 Seventh Report, at para. 30. 6 Seventh Report, at para. 31 and Appendix “D”. 7 Seventh Report, at para. 31(a) and Appendix “E”. 8 Seventh Report, at para. 31(b) and Appendix “F”. 9 Seventh Report, at para. 31(c). 10 Seventh Report, at para. 31(d). 24101598 - 5 - 8. Under the Set-Off Agreement, Blue Collar and Sockeye agreed that Sockeye was indebted to Blue Collar in the amount of $252,868.85, pursuant to the Ferguson Promissory Note, and that Blue Collar was indebted to Sockeye in an unspecified amount in excess of $252,868.85, pursuant to a subcontractor agreement and a master services agreement between Blue Collar and Sockeye.11 The Monitor has since confirmed that Blue Collar is indebted to Sockeye in the amount of the Outstanding Indebtedness.12 9. Pursuant to the Set-Off Agreement, Blue Collar and Sockeye agreed to set off the debts owing to one another, such that the Ferguson Promissory Note was deemed to be paid in full, and the Outstanding Indebtedness owing from Blue Collar to Sockeye was also deemed to be paid in full.13 10. Mr. Ferguson advised the Monitor that the Assignments and Set-Off Agreement were entered into to reflect that the original $250,000.00 loan from Mr. Newton to Mr. Ferguson was injected by Mr. Ferguson into Sockeye to fund Sockeye’s payroll.14 11. Based on the date of the Assignments and Set-Off Agreement, it appeared to the Monitor that the Set-Off Agreement constituted a preference that is contrary to section 36.1 of the CCAA.15 PART III - ISSUE 12. The issue for this Honourable Court to determine on the within Application is whether the Set-Off Agreement should be treated as a preference. 11 Seventh Report, at para. 31(e) and Appendix “I”. 12 Seventh Report, at para. 31. 13 Seventh Report, at para. 33 and Appendix “I”. 14 Seventh Report, at para. 34. 15 Seventh Report, at para. 37. 24101598 - 6 - PART IV – LAW AND ARGUMENT A. Preferences under the CCAA 13. Pursuant to section 36.1(1) of the CCAA, sections 95 to 101 of the Bankruptcy and Insolvency Act (the “BIA”)16 apply to a compromise or arrangement under the CCAA.17 Section 95(1)(a) of the BIA provides that an obligation incurred by an insolvent person in favour of an arm’s length creditor, with a view to giving that creditor a preference over another creditor, is void if it is incurred within three months before the date of the bankruptcy filing (or the CCAA filing, in these circumstances).18 14. Further, pursuant to s. 95(2) of the BIA, if the obligation incurred under s. 95(1)(a) has the effect of giving the creditor a preference, it is presumed, in the absence of evidence to the contrary, to be incurred with a view of giving the creditor a preference.19 15. In Accel Canada Holdings Limited, Re, the Alberta Court of Queen’s Bench confirmed that where a transaction has the effect of preferring a creditor, and the debtor could not demonstrate with contradicting evidence that the debtor did not intend to prefer the creditor, then such a transaction was a preference and voidable under s. 95(1) of the BIA.20 16. Finally, section 97(3) of the BIA provides that the law of set off applies to all claims against the estate, “except in so far as any claim for set-off or compensation is affected by the provisions of this Act respecting frauds or fraudulent preferences.”21 In Canada (Attorney General) v Reliance Insurance Co., the Court held that s. 97(3) of the BIA applies to the contractual right of set off, so long as the set off is not a preference under s. 95 of the BIA.22 16 Bankruptcy and Insolvency Act, RSC 1985, c B-3 (the “BIA”), at TAB 2. 17 CCAA, at s. 36.1(1), at TAB 1. 18 BIA, at s. 95(1)(a), at TAB 2. 19 BIA, at s. 95(2), at TAB 2. 20 Accel Canada Holdings Limited, Re, 2020 ABQB 204, at para. 69, at TAB 3. 21 BIA, at s. 97(3), at TAB 2. 22 Canada (Attorney General) v Reliance Insurance Co. (2008), 40 CBR (5th) 292 (Ont SCJ [Commercial List]), at para. 26, at TAB 4. 24101598 - 7 - 17. Thus, contractual set off is permitted under the CCAA, but only to the extent the obligation to be set off is not incurred by the insolvent person with the dominant intention of giving the creditor a preference, or has the effect of preferring that creditor. B. The Set-Off Agreement was Executed to Prefer Blue Collar 18. Based on the information available to the Monitor, and in light of the statutory framework above, the Monitor has proceeded on the basis that the Set-Off Agreement is a preference under s. 95(1)(a) of the BIA. 19. In Brunswick Chrysler Plymouth Ltd., Re (“Brunswick”),23 the Court held that contractual set-off in a bankruptcy was permitted in the circumstances because the parties were operating under a contractual right to set off their obligations for years prior to the bankruptcy, and the obligations in question arose in the ordinary course of business.
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