COURT OF APPEAL FOR BRITISH COLUMBIA

Citation:

iAnthus Capital Holdings, Inc. v.
Walmer Capital Limited,

2021 BCCA 48

Date: 20210129

Docket: CA47108

Between:

iAnthus Capital
Holdings, Inc. and iAnthus Capital Management, LLC

Respondents

(Petitioners)

And

Walmer Capital
Limited, Island Investments Holdings Limited

and Alastair
Crawford

Appellants

(Respondents)

And

Senvest Master
Fund, LP, Senvest Global (KY) LP,

Hadron Alpha PLC
Hadron Alpha Select Fund, Hadron Healthcare and

Consumer Special Opportunities
Master Fund, Gotham Green Fund 1 L.P.,

Gotham Green Fund
1 (Q), L.P., Gotham Green Admin 1, LLC,

Gotham Green Fund
II, L.P., Gotham Green Fund II (Q), L.P.,

Gotham Green
Credit Partners SPV I, L.P., Gotham Green Partners SPV V, L.P.,

Oasis Investment
II Master Fund Ltd., Blue Sky Realty Corporation

and Sean Zaboroski

Respondents

FILE
SEALED IN PART

Before:

The Honourable Mr. Justice Tysoe

The Honourable Madam Justice Fenlon

The Honourable Madam Justice Fisher

On appeal from:  An
order of the Supreme Court of British Columbia, dated
October 5, 2020 (
iAnthus Capital Holdings, Inc. (Re)
, 2020 BCSC 1484,
Vancouver Docket S207785)

Oral Reasons for Judgment

Counsel for the Appellants

(via videoconference):

B. Roberts Jones

K. Richard

M. MacDonald

Counsel for the Respondents, iAnthus Capital Holdings Inc.
  and iAnthus Capital Management, LLC

(via videoconference):

V. Tickle

J. Levine

Counsel for the Respondents, Senvest Master Fund, LP,
  Senvest Global (KY) LP, Hadron Alpha PLC  Hadron Alpha Select Fund, Hadron
  Healthcare and Consumer Special Opportunities Master Fund

(via videoconference):

H.L. Williams

R. Jacobs

Counsel for the Respondents, Gotham Green Fund 1 L.P.,
  Gotham Green Fund 1 (Q), L.P., Gotham

Green Admin 1, LLC, Gotham Green Fund II, Gotham Green
  Fund II (Q), L.P., Gotham Green Credit Partners SPV I, L.P., Gotham Green
  Partners SPV V, L.P.

(via videoconference):

C.E. Hunter. Q.C.

M. Milne-Smith

Counsel for the Respondent, Oasis Investments II Master
  Fund Ltd.

(via videoconference):

E.N. Kolers

M. Wahaj

Place and Date of Hearing:

Vancouver, British
  Columbia

January 26, 2021

Place and Date of Judgment:

Vancouver, British
  Columbia

January 29, 2021

Summary:

iAnthus applied for an order
approving a plan of arrangement pursuant to the B.C. Business Corporations
Act.  Although the plan was initially rejected, the judge approved the plan
after iAnthus amended part of the plan to narrow the scope of a release of
claims.  The appellants opposed the application and now appeal on the grounds
that the judge erred in approving the plan because: (i) iAnthus made a
misrepresentation to the court by stating that all material financial information
had been given to the shareholders and the court, when this was incorrect; and
(ii) the appellants were denied an alleged security interest under the
plan of arrangement.  The appellants also apply to adduce fresh or new evidence
regarding iAnthus financial status and related matters.  Held: Appeal
dismissed.  The judge made a palpable, but not overriding, error in finding
that there were no undisclosed material changes from iAnthus first quarter financial
results.  The failure to deal with an alleged security interest of a different
class does not bar approval of the plan.  The evidence the appellants seek to
adduce is not admissible under the Palmer test because they did not exercise
proper due diligence and the evidence could not reasonably be expected to have
affected the shareholder vote or the judges decision.  The court is not
required to reject a plan of arrangement solely because of inadequate financial
disclosure, although it may be a relevant consideration.

[1]

TYSOE J.A.
: The appellants appeal the order of a chambers judge
dated October 5, 2020 approving a plan of arrangement, as amended, of the
respondents, iAnthus Capital Holdings, Inc. and iAnthus Capital Management, LLC
(together, iAnthus) pursuant to s. 291(4) of the
Business
Corporations Act
, S.B.C. 2002, c. 57 [
BCBCA
].  The
appellants also apply to introduce fresh or new evidence relating to the
financial position of iAnthus.

Background

[2]

iAnthus was incorporated under the laws of British Columbia, but it
carries on business in the United States of America.  Its business involves the
growing, processing and dispensing of medical and licensed cannabis in ten of
the United States.

[3]

In addition to ordinary trade creditors, iAnthus has two main categories
of creditors.  It owes approximately $97.5 million in principal to a group
of secured creditors, which hold secured debentures charging iAnthus assets
(the Secured Notes).  It owes the principal amount of $60 million to a
group of unsecured creditors, which hold convertible unsecured debentures (the
Unsecured Notes).

[4]

iAnthus was not able to make the March 2020 interest payment on its
secured debt.  As of August 4, 2020, iAnthus owes accrued interest on the
Secured Notes of approximately $8.6 million, and interest accrues at the
rate of approximately $1.3 million a month.  The default on the interest
payment constituted a cross default under the Unsecured Notes, and the entire
principal amount of approximately $157.5 million owing on the two sets of
Notes is now due and payable.

[5]

In early April, iAnthus formed a special committee of its board to
consider alternatives in view of its liquidity predicament.  It invited
expressions of interest for restructuring or investment opportunities from over 100
parties.  It received approximately 25 expressions of interest, and it
spent considerable effort in evaluating them over the following three months.

[6]

On June 22, 2020, counsel for the agent for the holders of the
Secured Notes delivered a demand letter and a notice of intention to enforce
the security.  This brought to a head discussions between iAnthus, the holders
of the Secured Notes and a group of the holders of the Unsecured Notes owning $55
million of the outstanding $60 million on the Unsecured Notes.  They began
negotiations on a restructuring support agreement.

[7]

On July 7, 2020, the special committee of iAnthus board, with the
assistance of a financial advisor, considered the expressions of interest that
had been received and the proposed restructuring support agreement.  On July 10,
2020, iAnthus board accepted the recommendation of the special committee and
approved the proposed restructuring support agreement.  On the same day,
iAnthus entered into the agreement (the Restructuring Agreement).  The
holders of the Secured Notes advanced interim financing of approximately $14.7
million so that iAnthus could continue operations until the restructuring was
implemented.

[8]

The Restructuring Agreement provided that the restructuring would be
implemented by way of a plan of arrangement pursuant to s. 291 of the
BCBCA
.
The main thrust of the restructuring was that debt would be converted to
equity, the details of which are as follows:

(a) the principal amount of the
Secured Notes would be reduced from $97.5 million to $85 million
(with the interest rate also being reduced from 13% to 8%);

(b) the amount of the Unsecured
Notes would be reduced from $60 million to zero;

(c) the holders of the Secured
Notes and the holders of the Unsecured Notes would provide new unsecured
financing of $5 and $15 million, respectively; and

(d) the
holders of the Secured Notes and the holders of the Unsecured Notes would each
receive shares in iAnthus representing 48.625% of the total outstanding
shares in iAnthus.

As the two groups of noteholders would receive a total of 97.25%
of the shares in iAnthus, the result of the restructuring was that the existing
shareholders would have their holdings diluted to 2.75% of the total
shares.

[9]

The Restructuring Agreement also provided that the plan of arrangement
was to include a release of claims against groups defined as iAnthus Released
Parties and Securityholders Released Parties except for claims of gross
negligence, fraud or wilful misconduct.  It further provided that there was to
be an injunction against persons taking steps to enforce the released claims.

[10]

The Restructuring Agreement provided that unless it could be implemented
by way of an arrangement under the
BCBCA
by December 31, 2020
without a pending appeal or stay, the restructuring would be implemented
pursuant to the
Companies Creditors Arrangement Act
, R.S.C. 1985,
c. C‑36 [
CCAA
] except that the shareholders would be entitled
to no recovery.  This deadline has been extended to January 31, 2021.

[11]

The relevant terms of the Restructuring Agreement were incorporated into
a plan of arrangement (the Plan of Arrangement).  As part of the process of
having the Plan of Arrangement approved by the court, iAnthus obtained a
fairness opinion from PricewaterhouseCoopers (PwC).  In opining that the
restructuring was fair to the existing shareholders from a financial point of
view, PwC noted that iAnthus was unable to cure the defaults on its existing
financing or to source new third party financing and that it did not appear
that iAnthus had any other feasible alternatives.  It also observed that
existing shareholders are typically eliminated in capital structure
reorganizations under the
CCAA
.

[12]

On September 14, 2020, iAnthus held meetings of the holders of the
Secured Notes, the holders of the Unsecured Notes and the holders of iAnthus
shares (which included holders of warrants and options) to consider the Plan of
Arrangement.  Both sets of noteholders unanimously approved the Plan of
Arrangement.  Of the shareholders who voted, 66.32% approved the Plan of
Arrangement (a higher percentage of the holders of warrants and options also
approved it).  iAnthus then sought approval of the Plan of Arrangement by the
B.C. Supreme Court.

Decisions of the Chambers Judge

[13]

The approval of the Plan of Arrangement by the court was opposed by the
appellants and a shareholder, Sean Zaboroski.  In reasons for judgment dated
September 28, 2020 and indexed as 2020 BCSC 1442 (the First
Judgment), the chambers judge initially declined to approve the Plan of
Arrangement because he found that the release and accompanying injunction
contained in the plan rendered the arrangement unfair and unreasonable.

[14]

In the First Judgment, the judge applied the test for approval of a plan
of arrangement as set out in
BCE Inc. v. 1976 Debentureholders
, 2008 SCC 69;
namely:

[156]     the corporation on a
s. 192 application must satisfy the court that: (1) the statutory
procedures are met; (2) the application is put forward in good faith; and (3)
the arrangement is fair and reasonable, in the sense that: (a) the arrangement
has a valid business purpose; and (b) the objections of those whose rights are
being arranged are resolved in a fair and balanced way.

The judge concluded that the first two requirements were met
and that, apart from the release and injunction, the Plan of Arrangement was
fair and reasonable.  He then considered the proposed release and injunction at
some length and concluded they were overly broad.  The judge did not dismiss
the petition and granted iAnthus liberty to re‑apply to approve the Plan
of Arrangement, as amended to narrow the scope of the release and injunction.

[15]

One of the submissions made by the appellants related to the claim they
were making in a pending action in the B.C. Supreme Court.  In that
action, the appellants say that they were entitled to a secured interest in the
assets previously owned by a company called MPX Bioceutical ULC (MPX) that
was combined with iAnthus through a plan of arrangement.  The appellants held
debentures against these assets, and they maintained that the debentures
continued to subsist because they were not honoured in accordance with the
provisions of the plan of arrangement.  The appellants also claimed damages
against one of iAnthus directors for breach of fiduciary obligations.

[16]

Relying on the decision of
Bravio Technologies Ltd. (Re)
, 2019 BCSC 2135
[
Bravio
],

the appellants submitted that iAnthus was not putting
the Plan of Arrangement forward in good faith because it would extinguish the
rights claimed by them in the litigation.  They also argued that it was not
fair for the Plan of Arrangement to fail to deal with their claim.  The
chambers judge distinguished
Bravio
and held that the Plan of
Arrangement did not extinguish the appellants claim because the proposed
release did not affect the appellants ability to pursue their rights under their
debentures.  He also held that their claim was not being ignored, but it was
being defended in the litigation.

[17]

Another one of the appellants submissions was that the shareholders
were not given the most recent financial information when they were asked to
vote on the Plan of Arrangement.  The judge dealt with the submission in the
following paragraph of the First Judgment:

[52]      Walmer submits that the
shareholders were denied access to the most up-to-date financial information
prior to the shareholders meeting, because iAnthus took advantage of a
regulatory extension to postpone making public its second quarter 2020
financial results in advance of the meeting. iAnthus responds that the
shareholders were advised by press release that there were no undisclosed
material changes from the first quarter financial results. I find that the
shareholders were adequately informed.

[18]

The penultimate sentence of this paragraph was based on the following
submission made by iAnthus counsel:

And there is a  the press release,
which is at paragraph  sorry  Exhibit R to Mr. Crawfords affidavit and
Im sorry, I dont have an easy way of telling you what page that is, but the
in that press release, the company discloses that they are relying on the OSC
COVID exemption for this  to delay, but they also disclosed in that press
release that there have been no material changes since the last financial,
except as has been press released.

[19]

Unfortunately, that is not what the press release stated.  It was a
press release issued by iAnthus on September 11, 2020 stating that the
Ontario Securities Commission and other Canadian securities regulators had
granted blanket exemptions allowing issuers an additional 45‑day
period to complete regulatory filings due by August 31 and that iAnthus
would be relying on the exemption for the filing of its interim financial
statements for the three and six‑month period ended June 30, 2020
(which otherwise were required to have been filed by the end of August).  The
press release contained the following sentence:

The Company confirms that there
have been no material business developments, other than as disclosed through
news releases, since August 14, 2020, being the date that the last interim
financial reports that were filed.

These statements will gain significance when we review
the fresh or new evidence that the appellants apply to introduce on appeal.

[20]

iAnthus did amend the Plan of Arrangement to narrow the scope of the
release and to delete the injunction (the Revised Plan).  On further application,
the judge approved the Revised Plan.  In his reasons for judgment dated October 5,
2020 and indexed as 2020 BCSC 1484 (the Second Judgment), the judge
rejected further arguments made by the appellants and Mr. Zaboroski, and
concluded that the Revised Plan was fair and reasonable.

[21]

On the further application, the appellants again made submissions in
relation to their claim related to the MPX debentures.  They argued that the
Revised Plan was not fair because the release would wipe out much of their
claim.  The chambers judge disagreed with this position.  He again held that
the release would not eliminate the appellants claim for a secured interest in
the assets formerly owned by MPX.  He also commented that, while the release
may limit the appellants ability to pursue the director for damages, it may be
that the alleged conduct of the director could be characterized as fraud or
wilful misconduct and that the release did not cover claims of such a nature.

Fresh or New Evidence

[22]

I have used the terminology fresh or new evidence because there is a
dispute between the parties as to whether the evidence in question is fresh or
new.  Fresh evidence is evidence that was in existence at the time of the
hearing in the lower court but was not introduced at the hearing.  New evidence
is evidence that came into existence subsequent to the hearing in the lower
court.  Appellate courts are less inclined to admit new evidence than fresh
evidence.

[23]

The evidence that the appellants apply to admit consists of two affidavits
in relation to iAnthus financial statements for the first and second quarters
of 2020 (Q1 and Q2).  The first affidavit exhibits the Q1 and Q2
statements.  The Q1 statements were published prior to the meetings held
for voting on the Plan of Arrangement.  The Q2 statements would normally
have been published prior to the meetings, but they were not published until
October 15, 2020 as a result of the blanket exemption granted by the
securities regulators.

[24]

These statements show that iAnthus revenues increased and its expenses
decreased in Q2 in comparison to Q1.  The net result was an
improvement of approximately $10 million in iAnthus cash flow in Q2,
from a negative cash flow of $5.7 million in Q1 to a positive cash
flow of $4.8 million in Q2.

[25]

The second affidavit exhibits an expert report of the accounting firm,
Deloitte. Applying the materiality range used in audits of 1% to 2%
of annual revenue, Deloitte expressed the view that the changes in cash flow in Q2
appeared to be significant and meaningful to a user of iAnthus financial
statements.  The affidavit also contains an expression of an opinion by a
principal of the appellants that, had the iAnthus shareholders been provided
with the Q2 financial statements, they may not have voted in favour of the
Plan of Arrangement.

[26]

The appellants have also filed three further items.  The first is an
affidavit exhibiting a second expert report from Deloitte expressing opinions
as to when iAnthus management would have been expected to receive financial
information prior to the publication of quarterly financial statements.  The
second is an affidavit of a principal of the appellants exhibiting favourable
press releases issued by iAnthus after the Plan of Arrangement was approved,
documents regarding the price of shares in iAnthus and other companies in the
same industry over the past several months and an exchange of text messages
with the former chief executive officer of iAnthus.  The third is an affidavit
exhibiting a letter dated September 11, 2020, that one of iAnthus in‑house
lawyers sent to the Nevada Cannabis Compliance Board regarding the transfer of
a licence.  In the letter, the lawyer discussed iAnthus favourable Q2
financial results and iAnthus recapitalization, and commented that iAnthus was
well positioned to generate $30 million of annual discretionary cash flow
in order to repay existing debt or enable refinancing.

Discussion

[27]

The appellants assert two errors by the chambers judge.  First, they say
the judge erred in making his decision as a result of the misrepresentation of
facts by iAnthus that all material financial information had been provided to
the shareholders and the court.  Second, they maintain the judge erred in
determining the Revised Plan to be fair and reasonable when they were denied
their security interest under the Revised Plan.

[28]

In my opinion, the issues in this appeal can be conveniently divided
into two categories.  The first is whether, apart from the additional evidence,
the judge made errors on the face of the First or Second Judgment that would
result in his order being set aside.  The second category is whether the
additional evidence should be admitted and, if so, whether it would result in
the judges order being set aside.

[29]

There are two sub‑issues in the first category; namely, whether
the judge made a palpable and overriding error in para. 52 of the First
Judgment and whether the judge erred in approving the Revised Plan when it did
not deal with the appellants security interest.

a) Palpable and Overriding Error

[30]

It is clear that the judge made a palpable error in para. 52 of the
First Judgment.  The evidence did not support the submission made by iAnthus
counsel, which the judge accepted, that the shareholders were advised by press
release that there were no undisclosed material changes from the Q1
financial results.  The statement in the press release issued by iAnthus was
that there had been no material business developments (other than those
disclosed through press releases).  Although one may argue that it is a matter
of semantics, it is my view there is a meaningful difference between changes in
financial results and business developments.  I should add that I do not
believe iAnthus counsel deliberately attempted to mislead the judge; she
simply paraphrased the press release in a manner that was not quite accurate.

[31]

The issue then becomes whether the error was overriding.  An overriding
error is one that is determinative in the assessment of the balance of
probabilities with respect to that factual issue:
Schwartz

v. Canada
,
[1996] 1 S.C.R. 254 at para. 35.

[32]

In my opinion, the appellants have not demonstrated that the judges
error was overriding.  It is likely the judge would have reached the same
conclusion regarding the fairness and reasonableness of the Revised Plan had he
understood that the press release referred to business developments rather than
financial results.  In the circumstances in which iAnthus found itself, it
would have been more important to shareholders to know whether there had been
material business developments than to know about material changes from the Q1
financial results unless those changes were material to iAnthus ability to
meet its debt obligations.

b) Failure to Deal with MPX Debentures

[33]

On appeal, the appellants repeat the arguments they made to the chambers
judge on this point.  They rely on
Bravio
to argue that the Plan of
Arrangement was not put forward in good faith because it did not address their
rights.  They also say that iAnthus should not have selectively chosen to
exclude them from the Plan of Arrangement.

[34]

I agree with the chambers judge that
Bravio
is distinguishable.
In that case, there was a dispute as to whether certain shares claimed to be
owned by a party were valid.  The plan of arrangement effectively extinguished
the disputed shares.  Justice Marchand held that the plan of arrangement was
not brought in good faith and was not fair and reasonable.

[35]

Bravio
is distinguishable because, in the present case, the
chambers judge held that the Revised Plan did not extinguish the appellants
claim.  Their claim was left alone by the Revised Plan except to the limited
extent the release may have affected their right to claim damages.  In that
regard, counsel for the appellants advised us at the hearing of this appeal
that they were in the process of amending their pleading in the litigation to
allege fraud, and claims of fraud are not covered by the release contained in
the Revised Plan.  The appellants right to claim security against the MPX
assets was unaffected by the Revised Plan.  iAnthus was not compelled to concede
the appellants claim in the Revised Plan.

[36]

The appellants second complaint is that their claimed debentures should
have been included in the arrangement so that they would have received shares
like the two groups of noteholders.  However, there was no requirement for
iAnthus to settle the appellants claim as part of the arrangement.  More
importantly, iAnthus was not obliged to include all classes of security holders
in the arrangement.  Section 288(1)(i) of the
BCBCA
permits
arrangements that propose a compromise between the company and the persons
holding its securities or any class of those persons.  The appellants claimed
debentures were of a different class than the secured debentures and the
unsecured debentures because they created security over part of iAnthus assets
only and had a different ranking of security.

[37]

I would not give effect to this ground of appeal.

c) Admissibility of Fresh or New Evidence

[38]

In my view, the two affidavits that the appellants have formally applied
to have admitted as evidence on this appeal should be treated as fresh
evidence, not new evidence.  Although the Q2 financial statements were not
published until 10 days after the Second Judgment, I am satisfied that the
information contained in them was in existence prior to the two hearings before
the chambers judge.  The first Deloitte expert report is a commentary on the Q2
financial statements and, in my view, its admissibility should be considered on
the same basis as the Q2 financial statements themselves despite the fact
that the report did not exist at the time of the fairness hearings.

[39]

Hence, the so‑called
Palmer
test applies to these
affidavits, without consideration of the more stringent test applicable to new
evidence.  As set out in
Palmer v. The Queen
, [1980] 1 S.C.R. 759
at 775, the court is to
be guided by the following principles on an application to admit fresh
evidence:

(1)        The evidence should generally not be admitted if,
by due diligence, it could have been adduced at trial provided that this
general principle will not be applied as strictly in a criminal case as in
civil cases: see
McMartin v. The Queen
[
McMartin v. The Queen
,
[1964] S.C.R. 484].

(2)        The evidence must be relevant in the sense that it
bears upon a decisive or potentially decisive issue in the trial.

(3)        The evidence must be credible in the sense that it
is reasonably capable of belief, and

(4)        It must be such that
if believed it could reasonably, when taken with the other evidence adduced at
trial, be expected to have affected the result.

As pointed out in
Golder Associates Ltd. v. North Coast
Wind Energy Corp.
, 2010 BCCA 263 at para. 37, the
overarching consideration is whether it is in the interests of justice to admit
the fresh evidence.

[40]

The respondents do not contest that the third component of the test is
satisfied.  They do dispute that the first, second and fourth components are
satisfied.

[41]

The applications to approve the Plan of Arrangement and the Revised Plan
were not the first applications heard by the chambers judge in this matter.  On
August 6, 2020, the judge granted an order that the meetings of the
holders of the Secured Notes, the holders of the Unsecured Notes and the
holders of iAnthus shares be held on September 14.  On September 4,
the appellants applied for, among other things, production of certain
documents.  One of the sets of documents the judge ordered iAnthus to produce
to the appellants was all of the documents listed on page 10 of PwCs
fairness opinion.  One of those listed documents was iAnthus draft May year to
date financials, dated June 25, 2020.  Those draft financial statements
were provided to the appellants counsel approximately two weeks prior to the
September 25 hearing before the chambers judge to consider approval of the
Plan of Arrangement.

[42]

These draft financial statements contained iAnthus financial results on
a monthly basis for the first five months of 2020 or, in other words, the
three months of Q1 and the first two months of Q2.  They showed that
net revenue was approximately the same for each of the first four months but
was approximately $2 million higher in the fifth month.  They also showed
that employee expenses were approximately $1 million per month less in the
first two months of Q2 than they were in the first two months of Q1.
Finally, they showed that EBITDA (
viz
., earnings before interest, taxes,
depreciation and amortization), which was negative, had improved by
approximately $5 million from the first month of Q1 to the second
month of Q2.

[43]

Accordingly, the appellants had in their possession most of the
financial information that they now apply to introduce.  They did not make any
submissions to the chambers judge about them, including, for instance,
submissions that the draft Q2 financial statements should be produced
before the application proceeded.

[44]

All the appellants say in response to this point is that they did not
have enough time to digest the 3,000 pages of documents produced to them
and that Deloitte did the best it could in the circumstances.

[45]

In my opinion, the appellants have not satisfied the due diligence
requirement.  They may have received a voluminous set of documents, but they
had specifically applied for production of the documents listed on page 10
of PwCs fairness opinion.  The appellants or their advisors had obviously read
the page and knew that one of the sets of documents they would be receiving was
the draft financial statements for the first five months of 2020.  If those
statements are as important as the appellants now say they are, one wonders why
they or their advisors would not have made the minimal effort to look at them.
They did not exercise the due diligence that one would expect in the
circumstances.

[46]

The second and fourth components of the
Palmer
test are related
because fresh evidence cannot be reasonably expected to have affected the
result unless it was relevant to a potentially decisive issue.  I will assume
that the Q2 financial statements were relevant, and I will focus on
whether the statements, together with the related evidence, could reasonably
have been expected to affect the outcome.

[47]

Section 290(1) of the
BCBCA
requires that persons entitled
to vote on a plan of arrangement be sent an explanation to permit those persons
to form a reasoned judgment concerning the plan of arrangement.  As is usual
for proposed arrangements, iAnthus sent an information circular to the holders
of securities who would be entitled to vote on the Plan of Arrangement,
including its shareholders.

[48]

In my opinion, the availability of the Q2 financial statements
could not reasonably be expected to have significantly affected the shareholder
vote or to have affected the assessment by the chambers judge that the Revised
Plan was fair and reasonable in view of iAnthus following circumstances as set
out in the information circular:

(a) as a result of the state of
the global cannabis industry, iAnthus faced liquidity challenges and did not
make the March 2020 interest payment due on the Secured Notes;

(b) the aggregate principal
amount of $157.5 million owing on the Secured Notes and the Unsecured
Notes had become due and payable;

(c) the positive cash flow in Q2
was not sufficient to pay the outstanding interest due on the Secured Notes and
the Unsecured Notes, much less their principal amount;

(d) iAnthus unsuccessfully
pursued other alternatives, including asset sales, cost reductions, revenue enhancements,
refinancing or repayment of debt and issuance of new debt or equity;

(e) the holders of the Secured
Notes were in a position to enforce their security against iAnthus assets;

(f) iAnthus needed to borrow an
additional $14 million from the holders of the Secured Notes and Unsecured
Notes for the continuation of its operations pending the implementation of the
arrangement; and

(g) if the
proposed arrangement was not implemented, the Restructuring Agreement provided
that the restructuring was to be pursued in a
CCAA
proceeding except
that the shareholders would be entitled to no interest.

[49]

My opinion in this regard is reinforced by PwCs fairness opinion.  PwC
was given iAnthus financial statements for the first two months of Q2 and
still expressed the opinion that the proposed arrangement was fair to iAnthus
shareholders from a financial point of view.  It is extremely unlikely that
PwCs opinion would have changed had it received the financial statements for
the third month of Q2.  It is also noteworthy that, while it is impossible
to predict with certainty the outcome of
CCAA
proceedings, PwC noted
that capital structure reorganizations under the
CCAA
typically
eliminate common shareholders.

[50]

Accordingly, I conclude that it would not be in the interests of justice
to admit into evidence iAnthus Q2 financial statements because the first
and fourth components of the
Palmer
test have not been satisfied.  I
would not admit the affidavit exhibiting those statements into evidence.  Nor
would I admit into evidence the affidavit exhibiting the first Deloitte report
because it is dependent on the Q2 financial statements being in evidence.

[51]

The Court would be justified in refusing to admit the three further
affidavits into evidence because there is no formal application seeking their
admission.  In any event, I would not have been inclined to admit any of them
had there been a formal application.  Like the first Deloitte report, the
second Deloitte report is dependent on the Q2 financial statements being in
evidence.  For the same reasons that the Q2 financial statements do not
meet the fourth
Palmer
component, the letter to the Nevada Cannabis
Compliance Board could not reasonably be expected to have affected the judges
assessment that the Revised Plan was fair and reasonable.  The exhibits to the
third affidavit constitute new evidence, and no special circumstances exist to
warrant their admission: see
Fotsch v. Begin
, 2015 BCCA 403 at para. 20.

[52]

I would like to deal with one final point.  Relying on
Magna
International, Re
, 2010 ONSC 4123 [
Magna
],
Plutonic Power
Corp. (Re)
, 2011 BCSC 804, and
Imperial Trust Company v. Canbra
Foods Ltd.
(1987), 78 A.R. 267 (Q.B.), the appellants argue that the
Revised Plan should not have been approved as a result of inadequate or
incomplete financial disclosure.  This submission is not necessarily dependent
on the fresh evidence the appellants applied to have admitted.

[53]

None of these authorities stand for the proposition that the court is
required to refuse to approve a plan of arrangement if the financial disclosure
is inadequate or incomplete.  They simply state that the court may refuse to
approve a plan in those circumstances.  It is noteworthy that, in
Magna
,
Justice Wilton‑Siegel qualified his comments by saying it would be an
important consideration particularly in the absence of a recommendation or a
fairness opinion (at para. 175).  In the present case, of course, there
was a fairness opinion.  In any event, for the same reasons that the Q2
financial statements do not satisfy the fourth
Palmer
component, the
absence of those statements in the present circumstances does not justify the
courts discretion being exercised to refuse to approve the Revised Plan.

Conclusion

[54]

I would dismiss the appellants application to introduce fresh evidence,
and I would dismiss the appeal.

[55]

FENLON J.A.
: I agree.

[56]

FISHER J.A.
: I agree.

[57]

TYSOE J.A.
: The application to introduce fresh evidence is
dismissed, and the appeal is dismissed.

The
Honourable Mr. Justice Tysoe


COURT OF APPEAL FOR BRITISH COLUMBIA

Citation:

R. v. Costello,

2021 BCCA 59

Date: 20210129

Docket: CA47105

Between:

Regina

Respondent

And

Shaun Earl Martin
Costello

Appellant

Restriction
on publication: A publication ban has been mandatorily imposed under s. 486.4
of the
Criminal Code
restricting the publication, broadcasting or
transmission in any way of evidence that could identify a complainant or
witness. This publication ban applies indefinitely unless otherwise ordered.

Before:

The Honourable Madam Justice DeWitt-Van Oosten

(In Chambers)

On appeal from: An
order of the Supreme Court of British Columbia, dated July 24, 2020
(sentence) (
R. v. Costello
, 2020 BCSC 1206, Kelowna Docket 92217‑2).

Oral Reasons for Judgment

The Appellant, appearing in person (via teleconference):

S.E.M. Costello

(appeared January 28,
  2021 only)

Counsel for the Respondent (via teleconference):

C. Lusk

Place and Date of Hearing:

Vancouver, British
  Columbia

January 28, 2021

Place and Date of Judgment:

Vancouver, British
  Columbia

January 29, 2021

Summary:

The appellant applied for
the appointment of legal counsel to assist with an application for leave to
appeal/appeal from sentence for aggravated assault. Held: Application
denied. The appellant has not met the test for an appointment of counsel under
s. 684(1) of the Criminal Code.

[1]

DEWITT-VAN OOSTEN J.A.
: Shaun Costello applies for the
appointment of legal counsel to represent him on an appeal from sentence for
aggravated assault. Section 684(1) of the
Criminal Code
,
R.S.C. 1985, c. C‑46 authorizes an appointment of counsel where
doing so is desirable in the interests of justice and the appellant does not
have sufficient means to obtain the assistance of a lawyer.

[2]

The Crown does not take issue with Mr. Costellos assertion that he
lacks sufficient means to retain counsel. The appellant is in custody and has
no income, no assets, and no family to provide financial support. Mr. Costello
applied for funding through the Legal Services Society (LSS), but was not
successful. The [in]sufficient means component of the test for an appointment
is clearly met.

[3]

The remaining question, then, is whether it is in the interests of
justice that Mr. Costello receive the assistance of a lawyer to advance
his appeal. Factors for consideration include: (1) the complexity of his
appeal; (2) the points to be argued; (3) Mr. Costellos competency
to present the appeal; (4) the need for counsel to find facts, research
law, or make argument; (5) the nature and extent of the penalty imposed;
and (6) the merits of the appeal. (See
R. v. Myles
, 2020
BCCA 143 (Chambers) at para. 37;
R. v. Silcoff
, 2012
BCCA 463 at paras. 1927.)

Background

[4]

Before addressing those factors, I will briefly set out the background
to the appeal.

[5]

On July 6, 2020, Mr. Costello pleaded guilty to aggravated
assault, contrary to s. 268(1) of the
Code
. An aggravated assault
is an assault that wounds, maims, disfigures or endangers the life of the
complainant. In pleading guilty to the offence, Mr. Costello acknowledged
his culpability on all essential elements.

[6]

Eighteen days after the guilty plea, on July 24, 2020, Mr. Costello
received a sentence in the British Columbia Supreme Court of 3.5 years in
prison for the offence, less 368 days credit for time spent in pre‑sentence
custody. This left Mr. Costello with an additional 909 days to serve
in prison (or, just shy of 2.5 years). Mr. Costello was represented
by a lawyer when he entered his guilty plea and at sentencing.

[7]

The oral reasons for sentence are indexed as
R. v. Costello
,
2020 BCSC 1206. An Agreed Statement of Facts was before the sentencing
judge. There is no need for me to set out the contents in detail. The published
reasons for sentence attach the statement as an appendix and it can be accessed
there.

[8]

I have reviewed the Agreed Statement of Facts. For purposes of these
reasons, it is sufficient to note that the aggravated assault consisted of
striking the victim on the right side of her face with enough force to cause a
three‑centimetre laceration to her right cheek, as well as undisplaced
fractures to the underlying facial bone. The assault occurred in the presence
of the victims three‑year‑old child. It formed part of a physical
altercation between Mr. Costello and the victim, in which the victim
repeatedly struck Mr. Costello. At sentencing, the Crown acknowledged that
the aggravated assault was a provoked assault and occurred in response to the
victims conduct. It was accepted that Mr. Costellos culpability for the
offence lay in the use of excessive (and therefore unreasonable) force. At the
time of the assault, Mr. Costello was on a probation order prohibiting him
from having contact with the victim. That order arose from a conviction for a
prior assault committed against the same victim, for which Mr. Costello
was sentenced to three months imprisonment and 18 months probation.

[9]

Before imposing sentence, the judge reviewed Mr. Costellos
familial, educational and work history. He acknowledged that Mr. Costello
has experienced mental health issues, including anxiety and depression. The
judge found that Mr. Costello has spent most of his adult life
incarcerated. While in prison, he has experienced hardship, including physical
and psychological trauma inflicted by others. The judge noted that when
programming has been made available to him, Mr. Costello has actively
been involved with and completed all programs.

[10]

The victim of the aggravated assault provided an impact statement for
use at sentencing, setting out the adverse psychological, emotional and
physical affects of the offence. She said this included a scar, continued pain
and other health challenges resulting from injury to her eye socket. In the
statement, the victim said she was considering surgery to address ongoing
issues associated with her injury.

[11]

The sentencing judge described Mr. Costellos criminal record as
extensive. It includes a prior conviction for aggravated assault of a
three-year-old child (for which he received a four‑year prison term,
upheld on appeal by this Court in
R. v. Costello
, 2003
BCCA 421); convictions for assault causing bodily harm; assault with a
weapon; multiple convictions for common assault; abandoning a child; uttering
threats; and dangerous driving. Some of the prior assaults were committed
against intimate partners. At sentencing, the judge was provided with a list of
Mr. Costellos convictions that involved harm perpetrated against intimate
partners and their children. That list is also attached as an appendix to the
published reasons for sentence.

[12]

Mr. Costello also has convictions for breaching bail and probation
orders intended to keep him out of contact with former partners. According to
the reasons for sentence, he has 17 prior convictions for non‑compliance
with a court order. Several of his convictions for violent offending were
committed while bound by a bail or probation order. As noted, at the time of
the offence at issue, Mr. Costello was bound by a court order prohibiting
him from contact with the victim.

[13]

Mr. Costello provided a letter to the sentencing judge expressing
remorse for his offence. He described himself as untreated for anxiety,
depression and post‑traumatic stress disorder. Among other things, the letter
spoke of an abusive home environment as a child and a sexual assault committed
against him while incarcerated.

[14]

The Crown sought a sentence of four years imprisonment (less credit for
time spent in pre‑sentence custody). The defence sought a sentence in the
range of 368 days to 18 months, or, at most, an effective two years
less one day of imprisonment, followed by probation. In making that submission,
Mr. Costellos counsel emphasized the circumstances surrounding the
assault; in particular, the victims physical aggression and a corresponding
reduction in the appellants moral blameworthiness. The defence also pointed
out that Mr. Costello pleaded guilty, avoiding the necessity of a trial,
and, while awaiting sentence, his custodial conditions were rendered more severe
by the COVID‑19 pandemic. Programs shut down; visits halted; and there
was limited movement, amounting to the functional equivalent of a general
lockdown. The defence suggested that because of the harshness of those
conditions, Mr. Costello should receive enhanced credit for his pre‑sentence
custody (an additional two months).

[15]

After reviewing numerous sentencing decisions for aggravated assault and
other violent offences, including ones involving violence inflicted against an
intimate partner, the judge imposed the equivalent of 3.5 years
imprisonment. In doing so, he emphasized a number of aggravating factors.
First, he saw the offence as one involving the abuse of an intimate partner.
Second, at the time Mr. Costello committed the offence, he was on
probation for an earlier assault on the same victim and under a no contact
order. Third, the judge accepted that the assault has had a lasting physical
and psychological impact on the victim and her child. Fourth, Mr. Costello
has an extensive prior record of violence towards previous intimate partners
and children of his intimate partners, and sentences of imprisonment do not
appear to have deterred him from offending.

[16]

In his reasons, the judge also identified a number of mitigating factors.
These included Mr. Costellos guilty plea and his difficult personal
circumstances, including a troubled childhood, cocaine addiction, and
challenges while incarcerated. The judge also took into account the fact that Mr. Costello
has taken counselling while in custody and the COVID‑19 crisis.

[17]

In light of a generally accepted range of sentence for aggravated
assault of 16 months to six years imprisonment and the principles of
denunciation, general and specific deterrence, the judge considered a 3.5‑year
sentence to be a fit sentence in the circumstances. In addition to the prison
term, he imposed a no‑contact order with the victim under s. 743.21
of the
Code
and a s. 109(1)(a.1) firearms prohibition order, and he
ordered a DNA sample pursuant to s. 487.051(1).

Positions on the Application

[18]

In his notice of appeal/application for leave to appeal (filed November 9,
2020), Mr. Costello alleges that the sentencing judge committed material
errors in principle. He also contends that the sentence is unduly harsh and
excessive. At the hearing of the s. 684(1) application, he identified
three primary errors.

[19]

First, he says the judge overemphasized the seriousness of the victims
injury based on a false claim by the victim that she requires surgery to repair
the injury. Mr. Costello says that is not true, the victim has fabricated
that claim, and the information available to both the Crown and the sentencing
judge made the fabrication clear. He says that information was ignored. Second,
the judge is said to have given insufficient weight to the fact that the
assault was committed in response to physically aggressive behaviour by the victim.
Instead, the judge approached the case as if Mr. Costello committed an
unprovoked assault. Third, Mr. Costello says the judge wrongly treated the
relationship between him and the victim as an intimate partner relationship. Mr. Costello
says there was no longer an intimate relationship between the two of them and
they were just friends. Finally, Mr. Costello says the sentence of
3.5 years imprisonment is clearly unreasonable (demonstrably unfit) in
light of the manner in which the assault unfolded and the fact that he did not
intend to injure the victim. He says he was responding to aggression, not
intending to cause harm.

[20]

In his submissions before me, Mr. Costello also contended that his
lawyers representation at sentencing was ineffective; he alleged corruption in
the prosecution process before and after the guilty plea; and he said he was
muscled into pleading guilty to aggravated assault. However, he acknowledges
that he has not filed an appeal from conviction asking to have his guilty plea
set aside on the ground that it was either involuntary or uninformed. He
furthermore understands that on the appeal from sentence, this Court has no
jurisdiction to go behind the plea.

[21]

Consistent with its usual practice, the Crown made no submissions on
whether an appointment of counsel is appropriate in this case. However, to
assist the Court in its determination, the Crown made submissions on the merits
of the appeala factor for consideration under s. 684(1). The Crown says
no material errors in principle are apparent from the face of the judges
reasons. The judge turned his mind to the mitigating factors put forward on Mr. Costellos
behalf. At the same time, he was alive to the many aggravating factors,
including the appellants demonstrated recidivism for violent offending. In
light of the aggravating factors, the Crown says the judge was entitled to
emphasize the sentencing principles of denunciation and deterrence (both
general and specific) and that the 3.5‑year prison term is well within
the generally accepted range of sentence for this type of an offence and this
type of offender.

[22]

The Crown reminds the Court that a deferential standard of review
applies to appeals from sentence. Before a division of this Court would
interfere with the prison term, Mr. Costello would have to show that the
judge committed a material error affecting the sentence (such that the sentence
would have been different but for the error) or that the sentence is
demonstrably unfit:
R. v. Friesen
, 2020 SCC 9 at paras. 2529;
R. v. Agin
,

2018 BCCA 133 at paras. 5657;
R. v. Lacasse
, 2015 SCC 64.

Discussion

[23]

Having reviewed the material on the s. 684 application, I am
satisfied that the application for leave to appeal/appeal from sentence does
not raise unusual or complex legal or factual issues. Instead, this appeal will
likely focus on the aggravating and mitigating factors identified by the
sentencing judge; whether those findings were reasonably open to him on the
record; and the relationship between those factors and the assessment of
quantum
,
as informed by the generally accepted range of sentence for aggravated assault.

[24]

I am also satisfied, based on his submissions, that Mr. Costello is
capable of pinpointing errors he says were made by the judge and explaining,
from his perspective, how those errors affected the sentence. He is also able
to explain why he says the sentence is too harsh in light of the circumstances
surrounding the offence and the victims participation in a physical
altercation. I appreciate that he does not have legal training, but Mr. Costello
describes himself as someone familiar with the criminal justice system; he
understands how the process works; and, importantly, he has the competency to
address matters relevant to the task of appellate review. He prepared a letter
for use at sentencing that was articulate, focused and relevant to the issues
before the judge. That same capacity manifested itself in his submissions
before me.

[25]

The generally accepted range for sentence of aggravated assault is well
established (
R. v. Gill
, 2014 BCCA 88 at para. 28),
and the judges reasons for sentence offer a fairly comprehensive review of the
relevant case law. This includes cases in which lesser sentences for aggravated
assault have been imposed. Submissions on range and the appropriateness of
where this case falls in that range can be made with reference to the
authorities captured in the judges reasons. In other words, there does not
appear to be a need for further research.

[26]

Mr. Costello received a sentence of 3.5 years imprisonment.
That is a substantial sentence and a factor that, depending on the
circumstances, can carry considerable weight in the s. 684(1) analysis.
However, in light of the inherent seriousness of the offence and his criminal
record, including prior convictions for violence, I see little merit in the
appeal given the deferential standard of review. This factor weighs against an
appointment of counsel. It is generally not in the interests of justice to
appoint counsel where an appeal has no merit:
Silcoff
at para. 26.

[27]

Specific to Mr. Costellos alleged errors, I see no indication from
the reasons for sentence that the judge treated the offence as more serious on
grounds that the injuries sustained by the victim necessitated surgical
intervention. The judge identified the lasting physical and psychological
impact on [the complainant] and her daughter as an aggravating feature of the
case. However, he did not single out surgery as one of the reasons for that or
make mention of the possibility of surgery in the analysis portion of his reasons.

[28]

In respect of the second alleged error, the Crown acknowledged at
sentencing that the assault arose during the course of a physical fight with
the victim and, as such, it was not unprovoked. Mr. Costellos lawyer told
the judge of injuries sustained by Mr. Costello in the altercation,
highlighting the mutuality of physical aggression. The judge was alive to this
submission, explicitly making mention of it in his reasons for sentence (at para. 38).
He described the force used by Mr. Costello as excessive and
unreasonable (at para. 79). By necessary implication, he acknowledged
that this was not an unprovoked assault. When discussing the range of sentence,
the judge noted that unprovoked attack[s] tend to fall at the higher end of
the 16‑month to six‑year range (at para. 71). He did not place
Mr. Costellos sentence at the higher end.

[29]

Finally, Crown counsel described this case to the sentencing judge as
one involving intimate partner violence. I have summarily reviewed the
transcript of the proceedings at sentencing. I do not see that this
characterization was contested by the defence. Moreover, it appears consistent
with the record before the sentencing judge. This includes the Agreed Statement
of Facts, which indicated that Mr. Costello and the victim were in an
intimate relationship when a first assault occurred in 2018. They then
reunited after his release from imprisonment one to two months before the
assault that forms the subject matter of the application for leave to appeal.
The aggravated assault occurred while vacationing together in Kelowna.

[30]

Although the merits of the appeal will be a matter for a division of
this Court to decide, based on my review of the material, I see no real
prospect of success in establishing that the sentence for aggravated assault
was affected by a material error in principle or clearly unreasonable. I note
that LSS denied Mr. Costello funding on grounds that the appeal carries no
prospect of success. Although certainly not determinative, that is a relevant
factor for consideration in deciding whether the application for leave to
appeal raises arguable grounds:
Silcoff
at para. 27. I appreciate
that in seeking an appointment of counsel, Mr. Costello does not bear an
onus of showing that his appeal
will
succeed; rather, only that the
grounds he seeks to put forward are arguable:
R. v. J.J.P.
,
2019 YKCA 16 at para. 11.

[31]

After consideration of the s. 684(1) factors, as a whole, I am not
persuaded that the interests of justice favour the appointment of counsel in
this matter.

Disposition

[32]

Mr. Costello filed his notice of appeal/application for leave to
appeal outside of the required timeline; as such, he requires an extension of
time under s. 678(2) of the
Code
and R. 16 of the
Criminal
Appeal Rules
. The Crown does not oppose an extension.

[33]

Accordingly, I grant an extension of time to November 20, 2020.
However, for the reasons provided, I dismiss the application for the
appointment of counsel under s. 684(1) of the
Criminal Code
.

The
Honourable Madam Justice DeWitt-Van Oosten