Hazelton Development: the credit-bid RVO is not granted 'in its current form'

Justice Kimmel put the answer at the top of the endorsement, "To jump to the end, since the decision is long": the approval and reverse vesting order the monitor sought for Firm Capital Mortgage Fund Inc.'s credit bid for Hazelton Development Corporation, whose Highlight of Mississauga condominium project remains incomplete, is not granted "in its current form" (Endorsement, Oct. 30, 2026, paras. 11, 14, 36). The endorsement, dated October 30 after hearings on October 22 and 26 and cited as In Re Hazelton Development Corporation, 2026 ONSC 6161, rejects the main argument of the construction trades holding lien claims, but finds that the monitor, Grant Thornton Limited, had not shown they would be no worse off than in a bankruptcy. It also says what would change the result: "If the parties reach an agreement to address the specific concerns of the lien claimants that the court has recognized as potential impediments to the ARVO, I would grant it" (Endorsement, Oct. 30, 2026, paras. 65–66, 95, 112).

The order would approve Firm Capital's subscription agreement, a credit bid whose price includes the plan sponsor's debt of approximately $73.5 million as of September 30, 2026 and $802,000 in cash; move excluded assets, contracts and liabilities to a ResidualCo; disclaim the 48 remaining pre-sale contracts; release Firm Capital and the monitor; and authorize the monitor to put ResidualCo into bankruptcy after closing (Endorsement, Oct. 30, 2026, paras. 1, 6, 28, 101). The lien claims would go to ResidualCo with the rest: 24 claimants with 26 lien notices totalling approximately $10,802,325.50, besides three claims discharged from title when Hazelton posted lien bonds totalling $4,369,943.48 (Endorsement, Oct. 30, 2026, paras. 12, 18–20). Firm Capital told the court in an October 21 aide memoire that the transaction "is conditional on the claims of the Lien Claimants being vested out" (Firm Capital Aide Memoire, Oct. 21, 2026, para. 10). The trades' case that their statutory priority had never been decided was reported here on October 22.

The carve-outs

"I can see how the specific impediment to the approval of the ARVO that the court has identified could be solved by carve-outs in this case if the parties want to negotiate for them," the judge wrote, adding, "and I can also see how these impediments could be avoided in future cases." The carve-outs would not be all of the amendments the trades proposed, but "might include" agreement to "preserve the Lien Bonds, Hazelton's position as principal and preservation of the necessary records," and to "exempt the Lien Bonds and alleged Part II trust liabilities from the paragraph 27 releases" (Endorsement, Oct. 30, 2026, paras. 98–99). That paragraph 27 is the draft order's release clause, which in the endorsement's account would release Firm Capital, as purchaser and plan sponsor, from "any and all present and future claims whatsoever", including "liens", subject only to fraud, gross negligence or wilful misconduct (Endorsement, Oct. 30, 2026, para. 60).

The trades' October 20 factum had asked for more: that the lien claims stay with Hazelton, and the lien charge continue against the lands, solely to the extent of their priority over a mortgage under s. 78 of the Construction Act; that Hazelton's obligations under the 2024 lien regularization order be preserved; and that those retained claims and the lien charge also be excepted from the releases (Ad Hoc Group Factum, Oct. 20, 2026, para. 77). The judge's list leaves those requests out.

The solutions, the endorsement says, "have financial implications for the Purchaser that it would have to agree to. The hope is that it is not too late in this case, even though the ultimatum was given of an outside closing date of November 4, 2026" (Endorsement, Oct. 30, 2026, para. 100).

The priority question, closed

The trades' main argument, in the endorsement's words, was that the priority of lien claims "has yet to be determined" under the regularization order. The judge agreed that if the order were "eliminating the trades' ability to assert statutory priority that they could otherwise assert and recover anything for in a bankruptcy, that would be a problem under the Harte Gold test." The question was whether the order did that, or whether prior orders giving the CCAA charges super-priority over lien claims already had. "I have concluded it is the latter" (Endorsement, Oct. 30, 2026, para. 66). On the trades' point that paragraph 27 of the 2022 sanction order was amended to subordinate their claims on or shortly before the day of the sanction hearing, the endorsement records that "The only explanation offered for the last minute change is that it was intended to more closely align the language with the Commercial List model sanction order" (Endorsement, Oct. 30, 2026, paras. 15, 70).

The judge found the answer in paragraph 8 of the April 18, 2024 lien regularization order, which ranks the Lien Charge "subordinate to the CCAA Charges." That paragraph makes the ranking clear, the endorsement says, "even if paragraph 27 of the Sanction Order did not": "The undetermined priorities were only those between Lien Claims and other creditors, not those protected by the CCAA Charges" (Endorsement, Oct. 30, 2026, paras. 16, 74–75). In the ranking the monitor described in May, the Lien Charge stands tenth of ten, below charges that include the Plan Sponsor's Charge of up to $80 million and DIP lender's charges of up to $104,708,099 and $3 million (Endorsement, Oct. 30, 2026, paras. 23–24). The judge concluded: "I do not accept the submission of the Ad Hoc Group that the paramountcy question between the priorities established under the CCAA Orders and the provincial Construction Act remains an undecided and open question. It was addressed at least by the time of the LRO. I am not going to revisit what has already been decided" (Endorsement, Oct. 30, 2026, para. 83).

The trades also asserted a limited statutory priority against Firm Capital's registered mortgage; s. 78(2), the endorsement notes, subordinates a building mortgage "to construction liens to the extent of any deficiency in the holdback." But, the judge found, that mortgage "was granted as secondary security to the same creditor for the same advances secured under certain of the CCAA Charges," and treating it as a separate, subordinated security "could, in my view, lead to a tortured interpretation of the totality of the CCAA orders, security and priorities" (Endorsement, Oct. 30, 2026, paras. 85–88).

The holdbacks

The argument on which the order failed took shape between the two hearing days. On October 22 the court let the trades put written questions about documents in the record to the monitor, for a response by October 23 (Endorsement, Oct. 22, 2026, paras. 5–6). Through that process, the endorsement says, the trades "were able to confirm that the Plan Sponsor held back funds from Hazelton when advancing construction financing during the CCAA proceedings" for work the lien claimants were doing. In a supplemental aide memoire they contended that those funds stayed with Firm Capital as unadvanced construction funds, giving rise to trust and knowing-receipt claims under s. 8 of the Construction Act that the draft order's release would extinguish (Endorsement, Oct. 30, 2026, para. 60). As the judge set out the facts, Firm Capital's $80 million construction loan under Hazelton's plan was made "subject to the Construction Act requirements," its advances were net of the 10% holdback, and "It has now been confirmed that each of Firm Capital's advance calculations deducted the Borrower's 'Lien Holdback'" (Endorsement, Oct. 30, 2026, para. 62).