Is the negotiation of a forbearance agreement covered by settlement privilege in subsequent litigation between a debtor and its lender?Re: Bella Senior Care Residences, 2019 ONSC 3259 (CanLII)
1. BSCR is the operator of a senior care facility in Niagara Falls, Ontario. Canada Life is a lender and secured creditor of BSCR pursuant to a Credit Agreement between it, BSCR and Stonebridge, Canada Life’s agent, dated January 22, 2002 (the “Credit Agreement”).
2. On December 1, 2017, BSCR filed a Notice of Intention to Make a Proposal to its creditors. The stated purpose of the filing was to effect a sales process to repay creditors, including Canada Life. On April 4, 2018, BSCR entered into an agreement to sell the Niagara Falls facility. The sale received court approval and will close once regulatory approval is received. Upon closing, Canada Life will receive full repayment of the principal and interest owing under the Credit Agreement.
3. BSCR had a pending motion against Canada Life concerning the issue of whether BSCR had an obligation under the Credit Agreement to pay—in addition to principal and interest—“redeployment costs”, which are triggered upon repayment of the loan. BSCR sought a declaration that the correspondence between it and Canada Life, as well as evidence concerning the discussions between the parties, were properly admissible, and could be considered by the Court in this motion. Canada Life argued that the correspondence and evidence in issue were precluded from disclosure on the basis of settlement privilege.
4. The purpose of settlement privilege is to promote settlements by precluding the parties from later using settlement discussions as evidence of an admission of liability or a weak case. The three-part test for establishing litigation privilege requires that: 1) a litigious dispute must be in existence or within contemplation; 2) the communication must have been made with the intention that it would not be disclosed to the court in the event that the negotiations failed; and 3) the purpose of the communication must be an attempt to effect a settlement. In applying the test, the court must examine the communications between the parties as a whole, in context, to determine whether or not the rationale for settlement privilege exists in the circumstances.
5. All but one of the letters sent on behalf of Canada Life to BSCR contained the phrase “Without Prejudice”, along with the words “personal” or “private and confidential”. All of the letters were sent in response to either letters from BSCR or meetings with them. They asserted that the Credit Agreement was in default in a number of ways. They were generally couched in the form of an offer to remedy the defaults and/or forbearance by Canada Life of its remedies. They set forth a number of terms along with timelines that needed to be met by BSCR, while at all times reserving all of Canada Life’s rights and remedies under the Credit Agreement.
6. In actuality, the letters did not constitute offers of settlement. The terms proposed did not offer any form of compromise by Canada Life. Rather than seeking settlement of the issues, Canada Life sought to greatly expand its entitlements under the Credit Agreement without in any way releasing or relinquishing any of its rights and remedies under it. Given the accompanying warning that, if not accepted, Canada Life would pursue its remedies under the Credit Agreement, the terms proposed were effectively an ultimatum. As such, they were not a genuine attempt by Canada Life to negotiate a settlement.
7. Given that the letters sent on behalf of Canada Life did not contain any offer of settlement giving rise to privilege, it followed that BSCR’s responding letters could not be privileged either. The fact that the letters were marked as being “Without Prejudice” had no bearing on whether they are privileged or not. It is the substance of the letters and the context in which they are written that determines whether the privilege attaches—not the label placed on the letter.
8. The overall context of the dispute between BSCR and Canada Life confirmed that the rationale for settlement privilege did not exist in this case. The dispute concerned a lender seeking to enforce its rights against its borrower in default. Canada Life’s actions throughout were designed not to compromise any of its rights under the Credit Agreement but rather to bring BSCR into compliance with its terms and subsequently to amend it to provide for stricter controls. In the absence of being able to accomplish that, and as BSCR’s financial situation worsened, Canada Life’s demands increased. The documents over which Canada Life asserted privilege were but a small sample of the correspondence between the parties concerning issues arising from BSCR’s performance under the Credit Agreement. Canada Life’s claim for privilege was selective.
9. The Court held that the evidence was inconclusive regarding the second part of the test, but found that the third part had clearly not been met. The Court allowed BSCR’s motion and issued a declaration that the correspondence at issue was not the subject of privilege.