Docket: T-1226-10
Citation:
2014 FC 655
Ottawa, Ontario, July 4,
2014
PRESENT: The
Honourable Mr. Justice Mosley
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BETWEEN:
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OFFSHORE INTERIORS INC.
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Plaintiff
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and
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WORLDSPAN MARINE INC., CRESCENT CUSTOM YACHTS INC.,
THE OWNERS AND ALL OTHERS INTERESTED IN THE VESSEL
"QE014226C010" AND THE VESSEL "QE014226C010"
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Defendants
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and
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WOLRIGE
MAHON LIMITED IN ITS CAPACITY AS APPOINTED VESSEL CONSTRUCTION
OFFICER OF THE DEFENDANT VESSEL "QE014226C010", HARRY
SARGEANT III, MOHAMMAD ANWAR FARID AL-SALEH, AND 642385 B.C. LTD.
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Intervenors
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ORDER AND REASONS
[1]
This is an application under Rule 51 of the Federal
Courts Rules, SOR/98-106 by the Intervenor Harry Sargeant III
(Sargeant) to appeal the order of Prothonotary Roger Lafrenière, made June 23,
2014, with respect to the Motion of the Plaintiff Offshore Interiors Inc
(Offshore) dated June 18, 2014. In that order, Prothonotary Lafrenière approved
the sale of the Vessel QE014226C010 (the Vessel) to a numbered company for USD
$5 million.
[2]
Sargeant, supported by the Intervenor Comerica
Bank (Comerica), seeks to prevent the sale and sought an expedited hearing of
this appeal on the ground of urgency. The plaintiff Offshore, supported by the
Intervenors 642385 B.C. LTD (the Landlord) and Mohammad Anwar Farid Al-Saleh
(Al-Saleh), wish to have the sale proceed.
[3]
By order dated June 30, 2014, I stayed the
execution of the sale order pending disposition of this appeal and abridged the
times for serving and filing of this motion and supporting material. The matter
was heard the same day.
I.
BACKGROUND:
[4]
There is no dispute about the background facts
set out by Prothonotary Lafrenière in his Reasons for Order dated June 30,
2014:
[4] The underlying proceeding has a long
history. In summary, Sargeant and Worldspan Marine Inc. (Worldspan) entered
into a Vessel Construction Agreement (VCA) dated February 29, 2008 whereby
Worldspan agreed to design, construct, outfit, launch, complete, sell and
deliver the Vessel, a 142 foot custom built luxury yacht, to Sargeant. Construction
of the Vessel began in March 2008. A Builder’s Mortgage in favour of Sargeant
as against the Vessel was filed in the Vancouver Ship Registry on May 14, 2008.
By August 2009 payments made by or on behalf of Sargeant to Worldspan totalled
USD$11,064,525.38.
[5] On August 14, 2009, Sargeant entered
into a Construction Loan Agreement (CLA) with Comerica and others for
USD$9,400,000.00 to finance the completion of the construction of the Vessel.
Sargeant’s interests in the VCA, the Vessel, and the Builder’s Mortgage were
assigned to Comerica by way of an Assignment of Security Agreement and Mortgage
of same date. From August 2009 to March 2010, Comerica paid to Worldspan, on
Sargeant’s behalf, the sum of USD$9,387,398.67. By April 2010 the total amount
paid to Worldspan by or on behalf of Sargeant in connection with the
construction of the Vessel was USD$20,651,924.05.
[6] A dispute arose between Sargeant
and Worldspan concerning project costs and construction of the Vessel ceased in
April or May 2010. Offshore commenced the underlying action on July 20, 2010
against Worldspan, Crescent Custom Yachts Inc., the Owners and all others
interested in the Vessel, and the Vessel itself for unpaid invoices for
services and materials rendered in connection with construction of the Vessel.
The Vessel was arrested on July 28, 2010 and has remained under arrest ever
since in leased premises on a property owned by the Landlord at 27222 Lougheed Highway, Maple Ridge, British Columbia.
[7] On May 27, 2011, Worldspan and related
entities filed a Petition in the British Columbia Supreme Court seeking relief
under the Companies Creditors’ Arrangement Act, RSC 1985, c. C-36 (CCAA
Proceedings).
[8] On May 31, 2011, default judgment
was granted by this Court on behalf of Offshore against the Defendants,
including the Vessel or her bail, in the amount of $273,754.58, plus costs.
[9] On July 22, 2011, Justice Pearlman
of the British Columbia Supreme Court issued a claims process order in the CCAA
Proceedings (CCAA Claims Process Order). This required all creditors to deliver
proofs of claim on or before the claims bar date, September 9, 2011, failing
which the creditor would be forever barred from making or enforcing any claim.
It also provided that any creditor that filed a proof of claim in the CCAA
Proceedings asserting an in rem claim against the Vessel could pursue that
claim, outside the CCAA Proceedings, in this Court.
[10] By Order dated August 29, 2011, I
established a claims process for all creditors with in rem claims against the
Vessel (Federal Court Claims Process Order). That Order provided that notice be
given to all creditors of the requirement to file an affidavit containing
particulars in support of the claim against the Vessel, specifying the nature
of the claim to enable the Court to determine if such a claim constituted an in
rem claim and, if so, its priority. It also required all such affidavits to be
filed 21 days after the in rem creditor received the required notice and
provided that all questions relating to the right of any in rem claimant be
determined by the Federal Court upon application.
[11] On February 9, 2012, Offshore filed a
motion seeking an order declaring that the Builder’s Mortgage does not create a
lien or charge in the Vessel other than to secure its delivery. I granted the
relief sought by Offshore by Order dated March 5, 2013; however, the Order was
reversed on appeal by Madam Justice Cecily Strickland on December 19, 2013.
Offshore appealed and the matter is presently under deliberation by the Federal
Court of Appeal.
[12] The above facts provide background
information that is important for a contextual understanding of the timing and
interplay of the motions that were recently brought before this Court.
[13] The first salvo was by the Landlord.
It moved for an order that the arrest warrant for the Vessel be set aside or,
alternatively, that the arrest warrant be varied to permit the Landlord to
remove the Vessel from the Premises and to store the Vessel in the Landlord’s
exterior yard or such alternative location as may be directed by the Court.
[14] Sargeant in turn brought a motion to
relocate the Vessel to Richmond Shipyard and for a priority charge for the
movement of the Vessel and future rent. Sargeant submits that steps to prepare
the Vessel for the relocation must be taken immediately as the window of
opportunity is very short due to unfavourable tides later in the summer.
[15] The two motions for immediate relief
from the Court prompted Offshore to bring the present motion for approval of
the sale of the Vessel to the Purchaser.
[16] It should be noted that this is not
the first time that Offshore has sought the Court’s assistance to sell the
Vessel. On September 28, 2011, Offshore sought leave to market the Vessel for
sale. Mr. Justice Sean Harrington issued an Order on May 7, 2013 approving the
process for marketing and advertising the sale of the Vessel with a gross
asking price of USD$18,900,000.00. Notwithstanding extensive marketing efforts
and an extension of the marketing order, no satisfactory offer was received.
The Vessel has since languished at the Landlord’s premises, accumulating rent
charges and depreciating in value.
[5]
In the decision referenced at para 11 of
Prothonotary Lafrenière’s reasons, Justice Strickland noted that the VCA put
the Owner, Sargeant, at risk as regards his advances as the Builder, Worldspan,
retained title to the Vessel until delivery: Offshore Interiors Inc. v
Worldspan Marine Inc., 2013 FC 1266 at para 47 [Offshore 2013 FC].
[6]
Section 12.1 of the VCA reads as follows:
Builder will retain title to the Vessel until
delivery to the Owner. Builder grants to Owner a continuing first priority
security interest in the Vessel, including all work, materials, machinery, and
equipment relating to the Vessel, to secure any sums advanced or paid to
Builder under this Agreement; provided however, that such security interest
shall be subordinate to Owner’s obligations under the Contract Documents
including Builder’s right to receive payments pursuant to this Agreement.
In support of Owner’s security interest in the Vessel Builder agrees to
register a Ship’s Mortgage in favour of Owner or Owner’s construction lender
(the form of the mortgage document is to be agreed upon between the
parties acting reasonably) if Owner requests that this be done for any purpose.
[Emphasis added]
[7]
Worldspan’s in personam rights under
section 12.1 of the VCA have yet to be adjudicated. It remains open to
Worldspan to participate in the Claims Process and challenge the in rem
claims, as owners of the Vessel.
[8]
The builder’s mortgage entered into by Worldspan
and Sargeant was intended to ensure that the Vessel itself would stand as a
first priority security for Sargeant’s pre-delivery instalments subordinate,
however, to Worldspan’s right to receive payments pursuant to the VCA. Sargeant
stopped payment of the monthly instalments in December 2009 but did not
terminate the contract until April 2010. The outstanding payments owed to
Worldspan, according to Offshore, amount to $4.9 million, plus interest. The
VCA made no provision for third party claimants such as Offshore and the
Landlord (Offshore 2013 FC, above, at para 52).
[9]
Justice Strickland recognized, at para 64 of her
reasons that in the event of the total loss or breach of the VCA, the parties
to it intended that the Vessel would be sold to repay the advances made to fund
its construction. However, she noted:
[…]As the Vessel has been arrested and is
subject to claims by third parties, these provisions have no application in the
present circumstances. […]
[10]
And further, at para 99, Justice Strickland
observed:
…the Builder’s Mortgage was intended to secure
Sargeant’s first priority rights in the Vessel as against third parties in
circumstances, such as these, where the terms of the VCA do not govern the
disposition of the Vessel as between Worldspan and Sargeant as it has been
arrested by third parties and will be sold by the Court. [Emphasis added].
[11]
In conclusion, at para 100, Justice Strickland
found that the Builder’s Mortgage secured the unearned advances which were in
the nature of a loan or a potential debt and an obligation to repay in the
event of non-delivery. In the alternative, she found, Sargeant and Comerica’s
claim under subsection 22(2)(n) of the Federal Courts Act, RSC, c F-7
had merit and was to be addressed at the priorities hearing (para 111). Justice
Strickland’s decision was the subject of an appeal by Offshore to the Federal
Court of Appeal. The appeal was heard on June 9, 2014 and reserved.
[12]
Offshore, concerned about the depreciating value
and declining marketability of the Vessel, seeks a court-ordered sale in order
to clear title and to create a fund for distribution of proceeds once
priorities are determined. There is now an individual who has expressed a
serious interest in purchasing the Vessel through a numbered company and has
put down a deposit of $200,000.00.
[13]
The Landlord is anxious to have the Vessel
removed from its premises in order that they may be rented to another
manufacturer, while maintaining its interest in unpaid rental and other
charges. To facilitate removal, the Landlord is prepared to forego its common
law right of distraint over chattels on its premises related to but not forming
part of the arrested Vessel. Should the sale not proceed, the Landlord seeks an
order to allow the Vessel to be stored in an exterior location on its property.
That, the parties are agreed, would hasten the further deterioration of the
Vessel. However, it cannot remain where it is and removal by barge from the
present location is dependent on water levels in the Fraser River which rapidly decline following a peak in early July. The Vessel must therefore be moved
before the end of July 2014.
[14]
The Landlord’s rental arrears continue to accrue
and are now approximately $1 million. The Landlord is entitled, pursuant to an
Order of the Court, to a priority charge representing 20% of its rent from
August 2012. The 20% is roughly the space occupied by the footprint of the Vessel
within the premises. A further 37% of the premises, according to the Landlord,
is used for storage of materials intended for inclusion in the Vessel. As these
are not attached to or on the Vessel, the Landlord claims a common law right of
distraint over them.
[15]
Mr Al-Saleh has obtained judgment in Florida against
Sargeant and a corporate entity he controls for fraud related to the shipment
of oil in the Middle-East. He alleges that the proceeds of the fraud were used
to construct the Vessel. Sargeant’s interest in the Vessel has been assigned to
Al-Saleh by the Florida Court. Al-Saleh is taking steps to have the Florida fraud judgment registered in British Columbia and seeks to submit a claim against
any fund resulting from the sale of the Vessel. He asserts both a constructive
trust with respect to the proceeds of the frauds and a subrogated in rem claim
against the Vessel in his capacity as a judgment creditor of Sargeant. In a
decision on February 28, 2013 by the Case Management Prothonotary, affirmed on
November 29, 2013 by Justice Strickland, Al-Saleh was granted leave to
intervene in this action and the potential validity of his in rem claim
was recognized, without deciding the merits of the issue. This decision is also
the subject of an appeal to the Federal Court of Appeal heard on June 9, 2014
and reserved.
[16]
While the defendant Worldspan took no part in
this appeal and is insolvent, it remains an interested party because of
outstanding claims for materials and construction advances that Sargeant
stopped paying while work continued on the Vessel.
II.
DECISION UNDER APPEAL:
[17]
Prothonotary Lafrenière issued oral reasons on
June 23, 2014, written reasons on June 26, 2014 and an order on June 30, 2014.
[18]
Factors that the Prothonotary considered
relevant in determining that the time was ripe to sell the Vessel were:
(a)
First, the Vessel has been under arrest for four
years;
(b)
Second, the Vessel was the subject of a
Marketing Order issued by Mr. Justice Harrington dated October 7, 2011, as
extended by Mr. Justice Hughes on June 4, 2012, which resulted in no reasonable
offer;
(c)
Third, the movement of the Vessel from the
Landlord’s premises would involve risk of damage and the Vessel is not insured
for the benefit of the creditors;
(d)
Fourth, the Vessel is incomplete and has a
limited market;
(e)
Fifth, the Vessel has significantly declined in
value since its arrest and will depreciate further by further delay;
(f)
Sixth, additional costs, including relocation
costs and future rent, will have to be incurred in the event the vessel remains
under arrest; and
(g)
Seventh, the Landlord has agreed to release its
claim to distraint of the items listed in the schedules to the offer to
purchase so that the sale may complete without the necessity of further
hearings and potential priority disputes to address the Landlord’s rights,
which is of value to all parties concerned.
[19]
As a result, Prothonotary Lafrenière concluded
as follows:
[19] Considering all of the circumstances,
I consider it proper and in the interests of justice that the Vessel be sold.
The parties all agree that the Vessel will have to be monetized at some point
in time. In fact, counsel for Sargeant and Comerica conceded at the hearing
that the Vessel must first be sold by court order before it can be completed.
[20] While a vessel is under the
protection of a warrant of arrest, the Court’s role is to protect the interests
of all the creditors, not some of them. In my view, it would be unreasonable to
continue to hold the Vessel under arrest, at large expense (for relocation and
future rent) and for an indefinite period of time. The result would be a reduced
recovery for the claimants, whether they have a secured interest or otherwise.
[21] On the basis of the affidavit
evidence filed on behalf of Offshore, which has not been cross-examined or
contradicted by Sargeant and Comerica, and the appraisal prepared by Aegis
Marine Surveyors Ltd. at the Landlord’s request on May 17, 2013, I conclude the
Vessel has significantly depreciated in value since its arrest and is reaching
the point of obsolescence. The offer to purchase by 1005257 B.C. Ltd.
represents, in my view, fair value for the Vessel and its equipment.
[20]
In the order giving effect to these reasons,
Prothonotary Lafrenière directed that the Vessel and various parts and
equipment be sold on or before July 9, 2014 subject to Sargeant or Comerica
posting security in accordance with Rule 485 of the Federal Courts Rules
by 12:00 p.m. PST on Monday, June 30, 2014 in the Canadian Dollar equivalent of
USD $5 million. Under the terms of the order, the sales proceeds or security in
the event it was posted was to stand in place of the Vessel and the Vessel was
to be removed from the Landlord’s premises as soon as reasonably practical.
Absent such removal by August 30, 2014, the Landlord was authorized to store
the Vessel in its exterior yard.
[21]
At the hearing before this Court which began an
hour before the deadline of 12:00 p.m. PST on Monday, June 30, 2014, counsel
for Sargeant and Comerica advised that their clients did not intend to pay the
USD $5 million security into court. Counsel for Sargeant indicated that his
client was prepared to offer security of $200,000 for the Landlord’s storage
costs but expected that any costs associated with the removal of the Vessel
would stand as a priority charge against any subsequent sale. This offer was
not acceptable to the Landlord who maintained the position taken before
Prothonotary Lafrenière.
III.
ISSUES:
[22]
The sole issue is whether the Prothonotary erred
in the exercise of his discretion and failed to apply the appropriate
principles of law on the motion before him.
IV.
ANALYSIS:
[23]
It is well established that discretionary orders
of Prothonotaries ought not to be disturbed on appeal to a judge unless they
raise questions vital to the final issue of the case, or they are clearly wrong
in the sense that the exercise of discretion by the Prothonotary was based upon
a wrong principle or upon a misapprehension of the facts: Merck & Co. v
Apotex Inc., 2003 FCA 488 at para 19; Eli Lilly Canada Inc. v Novopharm
Limited, 2008 FCA 287 at para 52.
[24]
Where the decision of the Prothonotary
falls within the scope of either of the two categories outlined above, a
reviewing Judge may exercise his or her discretion de novo: Louis Bull
Band v Canada, 2003 FCT 732 at para 13; Seanix Technology Inc. v Synnex
Canada Ltd., 2005 FC 243 at para. 11. Absent such a finding, the decision
of a Prothonotary in the context of case management, such as here, attracts
considerable deference and should only be interfered with in the clearest case
of misuse of judicial discretion: Sawridge Band v
Canada, 2001 FCA 338, [2002] 2 FC 346 at 354 (FCA).
[25]
Comerica argues that the Prothonotary’s order
was a discretionary order that was vital to the final issue of this case,
namely the right of Sargeant to submit a credit bid to purchase the Vessel if
Offshore’s appeal to the Federal Court of Appeal is dismissed. Sargeant’s
argument, supported by Comerica in the alternative, is that the decision was
clearly wrong in that the learned Prothonotary erred in failing to recognize
and apply the correct legal principles. In that respect, their argument, in
essence, is that the Prothonotary failed to apply “the
presumption that where the proceeds of sale are insufficient to satisfy the
secured debt that the Court would not approve the sale unless the mortgagee
consents.”
[26]
Offshore, the Landlord and Al-Saleh dispute that
the Prothonotary’s decision is vital to the outcome of the case as, they
submit, Sargeant and Comerica are solely advancing claims pursuant to the
Claims Process Order. The value of the Vessel has been established at USD $ 5 million.
The fund created on the sale would simply replace the res. Sargeant and
Comerica’s goal to acquire the Vessel outside of the VCA cannot be “vital” to
the outcome of issues under the VCA.
[27]
I note that in Nordea Bank Norge ASA v
“Kinguk” et al., 2006 FC 1290 [Kinguk] , Justice Gauthier accepted
the position of the parties that sale of a vessel pursuant to a default
judgment to realize a mortgage security was an issue vital to the final
determination of the case and the rights of the parties. Given that, she
elected to exercise the Court’s discretion de novo. In the circumstances
of this matter, I am prepared to do the same.
[28]
Sargeant, supported by Comerica, contends that
the sale cannot proceed against his wishes, as holder of the secured mortgage
against the Vessel. In support of this proposition they rely primarily on Westar
Mining Ltd (Re), [1992] BCJ No 3128 [Westar] and Mahood v 429553 BC
Ltd [1998] BCJ No 246, 48 BCLR (3d) 362 (CA) [Mahood].
[29]
Westar concerned an
application by a prospective purchaser for an order for the sale of an operating
coal mine under the Bankruptcy Act. The sale was opposed by the Bank of
Montreal, a secured creditor. MacDonald J., at para 16, stated that he
reluctantly agreed with the Bank that there was no authority which entitled the
court to order a sale to which the secured creditor objects for less than the
amount at which the Bank’s security had been valued. That case turns, however,
on the application of s 129 of the Bankruptcy Act and is of little
assistance in this context.
[30]
In Mahood, a chambers judge had approved
the sale of certain properties owned by corporations under control of a court
appointed receiver-manager. The context was a long-standing family dispute that
had necessitated the involvement of the courts on many occasions. In upholding
the sale, the B.C. Court of Appeal agreed with the principles expressed in Westar,
above. It noted, at para 5, that “in a simple foreclosure
proceeding, a mortgagor should not normally obtain an order for sale of the
property charges unless the sale proceeds would be sufficient to satisfy the
full amount of the mortgage”. However, the case was exceptional because
of the long history of litigation and because the validity of some of the
mortgages in question was in dispute. In those circumstances, “it lay within the court’s discretion to approve a sale on
terms it would otherwise not likely have” (para 7).
[31]
Counsel for Sargeant and Comerica were unable to
direct my attention to any case directly on point involving the sale of a vessel.
I note that in Canada (Minister of Supply and Services) v Horizons
Unbound Rehabilitation and Training Society, [1996] FCJ No 1496,
Prothonotary Hargrave directed the sale of a ship that was deteriorating in
value prior to trial where the defendants held a second mortgage that would
thereby be extinguished and had an arguable case for trial.
[32]
Even assuming that Sargeant and Comerica are
correct that there is a presumption against the forced sale of an asset subject
to a mortgage where the mortgagee does not consent, that does not operate in my
view to prevent the sale of a vessel under the Federal Courts Rules where
it is warranted under the circumstances. Vessels are not immovable assets such
as factories and coal mines. And they are subject to rapid depreciation in
value unless properly maintained. For that reason, this Court has recognized
that it may be necessary to sell a vessel even before rights have been
determined in order to protect the value for the owner and creditors.
[33]
Rule 490 of the Federal Courts Rules provides
the basis for the judicial sale of vessels. It reads as follows:
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SALE OF
ARRESTED PROPERTY
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VENTE DES BIENS SAISIS
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Disposition of arrested property;
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Sort des biens saisis
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490. (1) On motion, the Court may order, in respect of property
under arrest, that
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490. (1) La Cour peut, sur requête, ordonner que les biens saisis,
selon le cas :
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(a) the property be appraised and
sold, or sold without appraisal, by public auction or private contract;
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(a) the property be appraised and
sold, or sold without appraisal, by public auction or private contract;
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(a) the property be appraised and
sold, or sold without appraisal, by public auction or private contract;
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(a) the property be appraised and
sold, or sold without appraisal, by public auction or private contract;
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(b) the property be advertised for
sale in accordance with such directions as may be set out in the order, which
may include a direction that
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b) soient mis en
vente par des avis publics conformes aux directives données dans l’ordonnance,
laquelle peut prescrire notamment
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(i) offers to purchase be under
seal and addressed to the sheriff,
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(i) que les offres
d’achat doivent être scellées et adressées au shérif,
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(ii) offers to purchase all be
opened at the same time in open court, that the parties be notified of that
time and that the sale be made pursuant to an order of the Court made at that
time or after the parties have had an opportunity to be heard,
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(ii) que les
offres d’achat doivent être toutes décachetées au même moment à une audience
publique, que les parties doivent être avisées de ce moment et que la vente
doit être faite en vertu d’une ordonnance de la Cour rendue à cette occasion
ou après que les parties ont eu l’occasion de se faire entendre,
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(iii) the sale not necessarily be
to the highest or any other bidder, or
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(iii) qu’il n’est
pas obligatoire de vendre les biens au plus haut enchérisseur ou autre
enchérisseur,
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(iv) after the opening of the
offers and after hearing from the parties, if it is doubtful that a fair
price has been offered, the amount of the highest offer be communicated to
the other persons who made offers or to some other class of persons or that
other steps be taken to obtain a higher offer;
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(iv) que, après
l’ouverture des offres d’achat et audition des parties, s’il y a un doute sur
la justesse du prix offert, le montant de l’offre la plus élevée doit être
communiqué aux autres personnes qui ont fait des offres ou à une autre classe
de personnes, ou d’autres dispositions doivent être prises pour qu’on obtienne
une offre plus élevée;
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(c) the property be sold without
advertisement;
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c) soient vendus
sans préavis de vente;
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(d) an agent be employed to sell
the property, subject to such conditions as are stipulated in the order or
subject to subsequent approval by the Court, on such terms as to compensation
of the agent as may be stipulated in the order;
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d) soient vendus,
sous réserve des conditions précisées dans l’ordonnance ou de l’approbation
subséquente de la Cour, par l’entremise d’un agent ou courtier rémunéré au
taux fixé dans l’ordonnance;
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(e) any steps be taken for the
safety and preservation of the property;
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e) fassent l’objet
de mesures assurant leur sécurité et leur conservation;
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(f) where the property is
deteriorating in value, it be sold forthwith;
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f) s’ils perdent
de leur valeur, soient vendus immédiatement;
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(g) where the property is on board
a ship, it be removed or discharged;
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g) s’ils sont à
bord d’un navire, en soient enlevés ou déchargés;
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(h) where the property is
perishable, it be disposed of on such terms as the Court may order; or
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h) s’ils sont de
nature périssable, soient aliénés de la manière qu’elle ordonne;
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(i) the
property be inspected in accordance with rule 249.
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i) soient examinés
aux termes de la règle 249.
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[34]
The only formal requirement for the exercise of
the power of sale under Rule 490 is the existence of an arrested vessel. It
provides that the “property”, i.e. the vessel, may be sold without appraisal by
public auction, private contract or by broker and authorizes the Court to
direct the manner of conducting the sale. This very broad discretion permits a
judgment creditor, such as Offshore, to negotiate an agreement with a
third-party for the purchase of the vessel and seek the approval of the Court. An
appraisement and advertisement is discretionary but not essential.
[35]
While a private contract may not be the
preferred manner of proceeding with a sale in most instances, it may be
necessary in exceptional circumstances. The Court has refused to approve a
private sale where it considers that it would not achieve the best possible
price for the vessel: International Marine Banking Co. v Dora [No. 2] (The)
[1977] 1 FC 603 (FCTD) [The Dora]; Sea-Tec Fabricators Ltd v Offshore
Fishing Co, [1985] FCJ No 236 (FCTD) [Sea-Tec]. Both of these
matters concerned proposed pre-judgment sales without prior public notice.
[36]
I note that in The Dora, at para 9,
Thurlow A.C.J. expressly rejected the argument that the vessel would suffer
undue physical deterioration by standing idle long enough for normal court procedures
leading to her appraisement and sale to be carried out. Moreover, there was
clear evidence that a sister ship and another comparable vessel had been
recently sold for amounts substantially higher than the proposed offer and the
opinion of three brokers that the vessel could obtain a much higher price. In Sea-Tec
there was no evidence before the Court as to the fair market value of the ship.
The Court could not presume, in the absence of such evidence, that the purchase
price that was proposed by the mortgagee represented a fair price for the
vessel.
[37]
The Court has granted orders approving private
sales where the evidence is that the vessel is losing value, timing is
essential to obtaining the best possible price and there is convincing evidence
that prior efforts to sell the vessel have not lead to higher offers: Bank
of Scotland v “Nel” (1997), 140 F.T.R. 271 (FCTD) [Nel]; Franklin
Lumber Ltd v “Essington II”, 2005 FC 95 [Essington II]; and Kinguk,
above. In the case of the Nel, timing was essential as the vessel
was carrying a corrosive cargo and might, within months, have become unsellable.
With respect to the Essington II and the Kinguk, there was
convincing evidence, as here, that the vessels had been marketed for sale for
several years and would not likely receive a higher offer.
[38]
As stated by Justice Gauthier in Kinguk
at para 2, the jurisprudence establishes that each case ought to be decided on
its own facts and on the basis of the evidence before the Court.
[39]
Here the uncontradicted evidence is that the
value of the Vessel has already substantially diminished since it was arrested.
At least 25% of the work required to complete the build remains to be done. The
Vessel is stored as a hull without its top structures attached and without most
of the systems necessary for its operation installed. The electronics, possibly
state of the art in 2008, are now compared to a Commodore 64, an obsolete
computer. The Vessel is susceptible to damage due to metallic dust particles
being produced by another business in the manufacturing plant.
[40]
The fact that the listing agreement authorized
by the Court in 2011 has expired is no reason, in my view, not to proceed with
this sale. The Court has the authority to approve a sale forthwith and without
marketing where the property in deteriorating in value. But that is not the
situation in this instance.
[41]
Offshore submitted extensive affidavit evidence
regarding the market value of the Vessel and the strenuous efforts made over
the past four years to sell it. This included the evidence of two yacht
builders, a Chartered Accountant who serves as a consultant for the manufacture
and sale of “super yachts” and a broker with the “world’s largest super yacht
brokerage firm”. Several of the affiants had occasion to visit the shipyard and
to view the Vessel in place. Efforts were made to clean it up to make it more
presentable to prospective buyers or their agents. Correspondence from a number
of other persons engaged in the manufacture and sale of super yachts and who
are familiar with the Vessel was attached as exhibits to the affidavit evidence.
These reflected a shared consensus about the value of the Vessel and the merits
of the offer to purchase.
[42]
It is clear on the evidence that the Vessel was
aggressively marketed, without success, for several years. The market for
“super yachts” is very specialized. A vessel of this nature has a very limited
market. Any potential purchaser faces considerable risk due to the complexity
and cost of completion. The failure to generate interest in the “Crescent 144”,
as the Vessel is described, is well known within the industry and has deterred
other prospective purchasers. The evidence is that further advertisement or
other marketing efforts would not produce a prospective buyer at a price
greater than that on offer.
[43]
A May 17, 2013 appraisal of the Vessel obtained
by the Landlord from a certified Marine Surveyor was that the value of the
Vessel fell within a range between scrap value and a maximum of USD $6.6
million. The further cost to complete the Vessel was identified as a minimum of
$13.3 million. The Landlord was then prepared to offer $5 million for the
ship. The uncontradicted weight of the evidence is that in June 2014 USD $5
million was a fair offer for the Vessel given the length of time since
production of the boat had halted, the condition under which it had been stored
and the obsolescence of its systems.
[44]
None of this evidence was challenged by Sargeant
or Comerica on the motion. They have not presented any recent evidence of a
higher value or made an offer to purchase the Vessel over the course of the
past four years. There is no evidence that USD $5, 000,000.00 is not the
maximum one could reasonably expect from the sale of the Vessel. I agree with
the parties supporting the sale that the evidence on the issue of value is
overwhelming and uncontroverted.
[45]
Sargeant, supported by Comerica, seeks to have
the Vessel relocated to a vacant shipyard, which he controls through a
corporate entity, for completion and delivery by a recently established
shipbuilding company. The capacity of that newly formed company to complete the
build is disputed by the opposing parties. The workforce that had been
assembled to build the Vessel is no longer available and it would be difficult
to find skilled tradesmen knowledgeable about the structure and components to
finish the job. Offshore, the Landlord and Al-Saleh assert that the value of
the Vessel will continue to depreciate and any fund created by its ultimate
sale will be substantially diminished. In my view, their assessment of the
situation is correct.
[46]
I note that under the terms of sale approved by
Justice Harrington in October 2011, the gross asking price of the Vessel was
already substantially lower than the total value of the advances provided by
Sargeant. Moreover, the sale was subject to a court approved commission for the
broker on a sliding scale beginning at 10%. Had an offer been made during the
life of that listing agreement, it was likely to result in a significant loss
to Sargeant. The Order provided that no Commission would be payable to the
Broker where Sargeant or any corporate entity associated with him was the
ultimate buyer. That option has been available to Sargeant, it would appear,
from the outset. It is irrelevant, in my view, that the present buyer has
likely made a private arrangement with the broker concerned to pay a commission
that does not factor into the net amount on offer.
[47]
Sargeant and Comerica have conceded that the
Vessel must be sold at some point. Sargeant’s intent, according to his written
representations, is to engage a shipbuilder to complete and deliver the Vessel
if his priority position is confirmed [emphasis added]. In the meantime he
seeks an order for removal of the Vessel to the Richmond shipyard which he
controls. The cost of removal of the Vessel to that shipyard is said to be in
the vicinity of $300,000.00 for which Sargeant says he would claim a priority
charge.
[48]
Sargeant says that upon completion of the
Vessel, he intends to apply for sale of the Vessel using the Federal Court sale
process. He would seek approval of a “credit bid” whereby the debt owing on the
mortgage would be used to purchase the Vessel without the payment of any
additional cash. The sale of the vessel under authority of a Federal Court
order, subject to the determination of priority charges, would render the
vessel free and clear of any other encumbrances.
[49]
The contingent nature of Sargeant’s intent is
dependent upon three factors, the Landlord argues:
(a) that Sargeant is successful before the
Federal Court of Appeal and his mortgage interest is upheld (subject to the
possibility of leave being granted for appeal to the Supreme Court;
(b) that Worldspan’s position on the import of
s 12.1 of the VCA fails; and
(c) that there is no equitable re-ordering that
would allow the in rem trade creditors to assert priority over the
mortgage.
[50]
I would add to this, Mr Al-Saleh’s assertion of a
constructive trust in any claim that Sargeant may have on the Vessel remains an
open issue.
[51]
It is not at all clear, in my view, that
Sargeant and Comerica will succeed in establishing their priority claim as
secured creditors. There remains a claim by the owner, Worldspan, to advances
never paid by Sargeant for the construction of the Vessel as the work
continued, and the claims of Offshore, the Landlord and Al-Saleh to contend
with. The merits of those competing claims are not for me to determine. That
will be resolved at the priorities hearing down the road. As Sargeant and
Comerica vigorously argued during the hearing, I must concern myself with the
situation as it stands to-day.
[52]
That situation, as I see it, is that a valid
offer has been made to purchase the Vessel for the amount of USD $5 million net
of any commission that may be payable to the broker. The Vessel has been under
arrest for 4 years and the resolution of the competing claims will not be soon
accomplished. The length of an arrest is a factor to be taken into account
where the asset is decreasing in value. The only evidence before me is that
this is not an improvident sale
[53]
The Vessel will further decline in value as the
parties await resolution of their claims. If the present offer is lost the
creditors will all be prejudiced. There is no evidence before the Court that
Sargeant has the means to pay any priority charge on the Vessel without a sale
to a third party and considerable evidence that any interest he may have in the
Vessel may be subject to Al-Saleh’s USD $36 million fraud judgment against him
and his corporation.
[54]
Comerica’s interest is no greater than Sargeant’s
under the terms of the VCA and Builder’s Mortgage. The record indicates that
they have already received at least partial reimbursement of their loans from
Sargeant. In its submissions to the several courts that have dealt with this
matter, including the Federal Court of Appeal on the appeal of Justice
Strickland’s decision, Comerica has explicitly recognized that the Vessel had
been arrested at the instance of a third party and will be sold by the Federal
Court. The fact that they now think the amount to be generated by that sale is
inadequate is insufficient to prevent the sale in light of the uncontradicted
evidence before the Court.
[55]
In the result, I am satisfied, exercising my
discretion de novo, that it is fair and just and in the interest of all
concerned that the sale of the Vessel be approved. The terms and conditions of
this sale shall be in accordance with the Order of Prothonotary Lafrenière
dated June 30, 2014. The Order of same date imposing a stay on the sale of the
Vessel shall be vacated. Costs are awarded the parties supporting the sale
against Sargeant and Comerica.
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