By Bill Preston
Too often Designers/Contractors/Trades/Suppliers (I have witnessed delinquents among all of them!) invest services and materials into a project without first carefully investigating:
A recent BC Court of Appeal decision in Mission Creek v. New Recreations should be a gut wrenching lesson for everyone. In early 2007, New Recreations and its associated companies owned (and secured their investment by a mortgage on the title) prime Schuswap Lake waterfront property. They conceived a $19M West Beach Lands Development consisting of leased holiday sites and adjacent permanent storage facilities. For New Recreations’ business plan the appurtenant storage was critical to the success of the project. But, this portion of its scheme was attracting pushback from the municipal planners. Eventually, the municipality rejected the storage portion of West Beach Lands Development’s proposal and a Judge affirmed its decision in August 2010. But, by then New Recreation’s mortgage financing and the designers/builders had invested a whole bunch of credit in the development and eventually fought over who was going to spill the most financial blood.
Here is a chronology of what happened:
Oct/10
Liens for approximately $725,000 had been registered against the project.
Oct/10
But, Mission Creek Mortgage had before any liens were registered advanced $19M on its mortgages.
Oct/10
New Recreations was in default so Mission Creek gave bankruptcy notice.
Oct/10
New Recreations, hoping to complete its project and create better value for all of the creditors, obtained a Court order\staying all debt collection proceedings.
Oct/10
This Court also permitted the monitor (trustee) of New Recreations to borrow money (DIP financing) from Mission Creek Mortgage to leases-up the sites and sell the project.
Nov/10
So that New Recreation’s monitor could provide clear title to the lease sites, the Court vacated all of the liens upon the monitor borrowing and paying $725,000 into a lawyer’s trust account.
Aug/12
At this point there was $22.1M dollars owing Mission Creek for both its mortgages and the DIP financing, as well as a further $725,000 was still owing to the lien claimants.
Aug/12
The West Beach Lands Development was sold for $17.9M, about $4.2M short.
The fight thus distilled down to the issue, who was entitled to the $725,000 in the lawyer’s trust account? It became a fight between Mission Creek seeking payment on its mortgages and DIP loans on one side, and the lien claimants on the other side. This dispute went all the way to the Court of Appeal, which decided that Mission Creek was entitled to the trust money while the lien claimants were left with an empty claim + legal costs!
The lien claimants had argued that the trust deposit was a set aside for the purpose of first paying their claims, while Mission Creek countered that the trust deposit merely stood in substitution for the land and its mortgages and DIP financing were superior claims, thus it was entitled to all the trust funds. The Court of Appeal agreed. It concluded that because all of the mortgage advances had been duly made before the liens were registered and the DIP financing gave Mission Creek statutory priority over the liens pursuant to the federal CCAA legislation, they trumped the liens. The Court rationalized that in October 2010 this project was in grave financial peril and all creditors, including Mission Creek and the lien claimants, hoped to revive the project or at least optimize their claims by using DIP financing to complete it. It didn't work out; and, it would create a mischief and uncertainty for future DIP financing Court orders if the financing could be trumped by late filed lien claimants.
Conclusion
Would it have been different if the liens had been filed sooner? Maybe. Earlier filed liens may have sooner prompted Mission Creek to freeze the mortgage financing and threaten bankruptcy proceedings. The better conclusion, in my opinion, is that had the lien claimants carefully investigated the financial prospects and strengths of the project before investing their credit in services and materials, they would have discovered that New Recreation’s business proposal was substantially predicated upon obtaining municipal approval for the storage sites; and further New Recreations has no rainy day resources, rather only debt financing.
Here in the end, New Recreation’s affiliated company also lost its investment in the land because earlier, to obtain Mission Creek’s mortgage financing, it had postponed its land mortgage to Mission Creek’s claim, and the sale price didn't realize enough to even completely pay off Mission Creek’s mortgages.
For more issues, visit our website or visit our archive for past issues.Too often Designers/Contractors/Trades/Suppliers (I have witnessed delinquents among all of them!) invest services and materials into a project without first carefully investigating:
- Does the proposed project have good market prospects and is its financing a smart investment for your credit?
- Does the Owner/Developer have available some extra financial resources if a problem arises?
A recent BC Court of Appeal decision in Mission Creek v. New Recreations should be a gut wrenching lesson for everyone. In early 2007, New Recreations and its associated companies owned (and secured their investment by a mortgage on the title) prime Schuswap Lake waterfront property. They conceived a $19M West Beach Lands Development consisting of leased holiday sites and adjacent permanent storage facilities. For New Recreations’ business plan the appurtenant storage was critical to the success of the project. But, this portion of its scheme was attracting pushback from the municipal planners. Eventually, the municipality rejected the storage portion of West Beach Lands Development’s proposal and a Judge affirmed its decision in August 2010. But, by then New Recreation’s mortgage financing and the designers/builders had invested a whole bunch of credit in the development and eventually fought over who was going to spill the most financial blood.
Here is a chronology of what happened:
Oct/10
Liens for approximately $725,000 had been registered against the project.
Oct/10
But, Mission Creek Mortgage had before any liens were registered advanced $19M on its mortgages.
Oct/10
New Recreations was in default so Mission Creek gave bankruptcy notice.
Oct/10
New Recreations, hoping to complete its project and create better value for all of the creditors, obtained a Court order\staying all debt collection proceedings.
Oct/10
This Court also permitted the monitor (trustee) of New Recreations to borrow money (DIP financing) from Mission Creek Mortgage to leases-up the sites and sell the project.
Nov/10
So that New Recreation’s monitor could provide clear title to the lease sites, the Court vacated all of the liens upon the monitor borrowing and paying $725,000 into a lawyer’s trust account.
Aug/12
At this point there was $22.1M dollars owing Mission Creek for both its mortgages and the DIP financing, as well as a further $725,000 was still owing to the lien claimants.
Aug/12
The West Beach Lands Development was sold for $17.9M, about $4.2M short.
The fight thus distilled down to the issue, who was entitled to the $725,000 in the lawyer’s trust account? It became a fight between Mission Creek seeking payment on its mortgages and DIP loans on one side, and the lien claimants on the other side. This dispute went all the way to the Court of Appeal, which decided that Mission Creek was entitled to the trust money while the lien claimants were left with an empty claim + legal costs!
The lien claimants had argued that the trust deposit was a set aside for the purpose of first paying their claims, while Mission Creek countered that the trust deposit merely stood in substitution for the land and its mortgages and DIP financing were superior claims, thus it was entitled to all the trust funds. The Court of Appeal agreed. It concluded that because all of the mortgage advances had been duly made before the liens were registered and the DIP financing gave Mission Creek statutory priority over the liens pursuant to the federal CCAA legislation, they trumped the liens. The Court rationalized that in October 2010 this project was in grave financial peril and all creditors, including Mission Creek and the lien claimants, hoped to revive the project or at least optimize their claims by using DIP financing to complete it. It didn't work out; and, it would create a mischief and uncertainty for future DIP financing Court orders if the financing could be trumped by late filed lien claimants.
Conclusion
Would it have been different if the liens had been filed sooner? Maybe. Earlier filed liens may have sooner prompted Mission Creek to freeze the mortgage financing and threaten bankruptcy proceedings. The better conclusion, in my opinion, is that had the lien claimants carefully investigated the financial prospects and strengths of the project before investing their credit in services and materials, they would have discovered that New Recreation’s business proposal was substantially predicated upon obtaining municipal approval for the storage sites; and further New Recreations has no rainy day resources, rather only debt financing.
Here in the end, New Recreation’s affiliated company also lost its investment in the land because earlier, to obtain Mission Creek’s mortgage financing, it had postponed its land mortgage to Mission Creek’s claim, and the sale price didn't realize enough to even completely pay off Mission Creek’s mortgages.
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