Court of Appeal for Ontario

Date: 2019-07-11

Docket: M50486 (C66503)

Judges: Feldman, Hourigan and Brown JJ.A.

Between

Buduchnist Credit Union Limited Applicant (Respondent/Moving Party)

and

2321197 Ontario Inc., Carlo DeMaria, Sandra DeMaria, 232198 Ontario Inc., Sasi Mach Limited, Vicar Homes Ltd. and Trade Finance Capital Corp. Respondents (Appellants/Responding Parties)

Counsel:

• Barbara L. Grossman, for the moving party/respondent
• Andrew Winton and Philip Underwood, for the responding parties/appellants

Heard: July 5, 2019

Reasons for Decision

I. Overview

[1] This is a motion by the respondent, Buduchnist Credit Union Limited ("BCU"), to quash the appeal filed by Carlo DeMaria and Vicar Homes Ltd. from the order of Penny J. dated January 17, 2019 (the "Order"). The Order appointed a receiver over two pieces of real property pursuant to s. 243(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, and s. 101 of the Courts of Justice Act, R.S.O., c. C.43.

[2] The appellant, Carlo DeMaria, borrowed money for many years from BCU, both for his own use and the use of several of his companies, of which the appellant, Vicar Homes, is one.

[3] In 2010, Mr. DeMaria and his wife granted a first mortgage on their Family Residence to BCU. In 2012, the DeMarias granted a second mortgage over the Family Residence. In April 2015, Mr. DeMaria gave a personal guarantee to BCU to secure, in part, the indebtedness of Vicar Homes under certain loan agreements with BCU.

[4] In 2006, the DeMarias granted a charge against their Cottage to MCAP Mortgage Corporation, which later assigned the mortgage to BCU.

[5] In November 2018 the Credit Union issued the notice of application in this proceeding seeking the appointment of a receiver over five properties, owned by the DeMarias and/or certain DeMaria companies, over which the BCU has security, as well as judgment for the debts owed. On November 13, 2018 a receiver was appointed over two of the properties.

[6] The Order appointed a receiver over two more properties: the Family Residence and Cottage. The Order was in the form of the Commercial List's Model Order for receivers appointed under the BIA and CJA, with some tweaks to reflect the specific circumstances.

[7] The Order in respect of the Family Residence has been stayed for a short period of time pending the determination of a motion to set aside a Mareva injunction granted against Mr. DeMaria at the instance of another creditor.

[8] On January 29, 2019, twelve days after the Order was made, the appellants filed a notice of appeal with this court, asking that the Order be set aside and the application to appoint a receiver over the Family Residence and Cottage be dismissed. The appellants did not seek leave to appeal. The appeal was perfected on March 4, 2019.

[9] On May 24, 2019, BCU filed this motion seeking to quash the appeal on the basis that the appellants have no right of appeal to this court, they have not sought or obtained leave to appeal to this court and, in any event, they cannot meet the test for leave to appeal.

II. The Applicable Appeal Routes

[10] Both s. 243(1) of the BIA and s. 101 of the CJA authorize a court to appoint a receiver when it is "just or convenient to do so." In Business Development Bank of Canada v. Astoria Organic Matters Ltd., 2019 ONCA 269, 69 C.B.R. (6th) 13, Zarnett J.A. concluded, at paras. 66 and 67, that where an order is made pursuant to both s. 243 of the BIA and s. 101 of the CJA, the more restrictive appeal provisions in the BIA govern the rights of appeal and appeal routes.

[11] In the present case, para. 1 of the Order expressly states that the appointment of the receiver is made pursuant to BIA s. 243(1) and CJA s. 101. The recitals to the Order state that the application is under both the BIA and the CJA. And the powers of the receiver to which the appellants object – the power to take possession of and exercise control over the Family Residence and Cottage – are powers that BIA ss. 243(1)(a) and (b) expressly authorize a court to grant to a receiver. Accordingly, the right to appeal the Order and the appeal routes are those set out in the BIA.

III. Does an Appeal as of Right from the Order Exist?

[12] There is no appeal as of right under BIA ss. 193(a) or (c) from an order appointing a receiver: Business Development Bank of Canada v. Pine Tree Resorts Inc., 2013 ONCA 282, 115 O.R. (3d) 617, at para. 14.

[13] The appellants argue they have an appeal as of right under BIA s. 193(b): "if the order or decision is likely to affect other cases of a similar nature in the bankruptcy proceedings." The jurisprudence has consistently interpreted s. 193(b) as meaning that a right of appeal will lie where the decision in question will likely affect another case raising the same or similar issues in the same bankruptcy or receivership proceedings: 2403177 Ontario Inc. v. Bending Lake Iron Group Ltd., 2016 ONCA 225, 396 D.L.R. (4th) 635, at para. 32.

[14] Here, BCU's application for the appointment of a receiver concerns five residential properties. The application judge's endorsement for an April 25, 2019 case conference records that "a new receivership proceeding involving a property known as Stavebank" is contemplated. That new proceeding is not the receivership proceeding in which the Order was made. Accordingly, BIA s. 193(b) does not apply.

[15] As a result, the appellants require leave to appeal the Order under BIA s. 193(e).

IV. Should Leave to Appeal Be Granted?

[16] Notwithstanding their technical non-compliance with BIA Rule 31(1) – namely, not filing the appeal in the proper office strictly within the prescribed time – the appellants request that leave to appeal be granted, if leave is required. Given that the appellants had an intention to appeal and exceeded the filing time prescribed by the BIA Rules by only one day, we shall consider their alternative position that leave to appeal should be granted.

(a) The Guiding Principles

[17] The principles guiding the consideration of a request for leave to appeal under s. 193(e) were set out by Blair J.A. in Pine Tree Resorts where, at para. 29, he stated:

Beginning with the overriding proposition that the exercise of granting leave to appeal under s. 193(e) is discretionary and must be exercised in a flexible and contextual way, the following are the prevailing considerations in my view. The court will look to whether the proposed appeal,

a) raises an issue that is of general importance to the practice in bankruptcy/insolvency matters or to the administration of justice as a whole, and is one that this Court should therefore consider and address;

b) is prima facie meritorious, and

c) would unduly hinder the progress of the bankruptcy/insolvency proceedings.

(b) Consideration of the Factors

(1) Issue of General Importance

[18] The proposed appeal does not raise an issue of general importance to the practice in insolvency matters or to the administration of justice as a whole. It concerns a very fact-specific dispute between two debtors and their creditor.

(2) Is the Appeal Prima Facie Meritorious?

[19] In their appeal factum, the appellants advance two main grounds of appeal in respect of the Order: (i) the application judge failed to consider BCU's conduct in engaging in an unauthorized transaction; and (ii) the application judge's treatment of certain factors relevant to whether it was "just and convenient" to appoint a receiver was not appropriate.

The "Unauthorized Transaction"

[20] First, the appellants submit that in granting the Order, the application judge failed to take into consideration conduct by BCU that disentitled it to the equitable relief of the appointment of a receiver.

[21] In their appeal factum, the appellants acknowledge that the first mortgages on the Family Residence and Cottage fell into arrears in August 2018 and November 2018 respectively. Their main ground of appeal concerns the conduct of BCU in respect of the debt secured by the second mortgage on the Family Residence.

[22] The second mortgage on the Family Residence secures the line of credit extended to Vicar Homes (the "Vicar LOC"). In opposing the appointment of a receiver over the Family Residence, the appellants took the position that in February and March 2017 BCU carried out a series of unauthorized transactions in respect of the Vicar LOC. Mr. DeMaria deposited funds into the account of a related company, Do You Know Inc. He transferred those funds to the Vicar LOC. The cheques deposited were returned NSF. As a result, BCU reversed the transactions, without Mr. DeMaria's authorization, thereby increasing the amount due under the Vicar LOC.

[23] In their appeal factum, the appellants contend that the reversal of the transactions constituted a breach of the Vicar LOC Loan Agreement and amounted to misconduct that deprived BCU of the ability to claim the equitable relief of the appointment of a receiver over the Family Residence. The second mortgage on the Family Residence secured the Vicar LOC but not the Do You Know account into which Mr. DeMaria initially deposited the NSF cheques.

[24] The appellants submit that "by failing to consider this breach, the application judge did not give any weight to this critical factor in the test for the appropriateness of the appointment of a receiver and in particular the issue of whether BCU had clean hands."

[25] The reasons of the application judge disclose that he did consider this issue. He stated:

Before the cheques cleared, [DeMaria] instructed BCU to transfer the money from DYK to reduce the line of credit of Vicar. BCU did as instructed. The cheques bounced. BCU reversed the transfers, putting the Vicar LOC back where it was before the NSF cheque amounts were transferred from the DYK to the Vicar account.

I simply cannot agree that this was misconduct or motivated by a conflict of interest by BCU. No money was actually deposited to DYK. Therefore, the "transfer" of this money to reduce the Vicar LOC was really nothing more than an accounting error on the part of BCU. Had it waited for the cheques to clear, no funds would have been transferred and there would never have been a credit of $800,000 to the Vicar account. The problem arose, not from BCU misconduct, but from the fact that the cheques deposited to the DYK account were bad.

[26] In respect of the Vicar LOC, the application judge also reviewed and considered whether the change in the amount outstanding under the Vicar LOC amounted to a material variation in the guaranteed obligations and whether the relevant lending and security documents permitted the variation. He concluded that the documents permitted an increase in the amount loaned to Vicar Homes. That said, the application judge made it clear that: "This hearing, of course, is not a final ruling on the question. No doubt further evidence would be required in the event there are proceedings to enforce the guarantee."

The Application Judge's Treatment of Other Factors

[27] Second, the appellants argue in their appeal factum that the application judge based his assessment on whether it would be "just and convenient" to appoint a receiver on two erroneous findings of fact: (i) the existence of competing creditor claims to the Family Residence and Cottage; and (ii) the appointment of the receiver would not be the "high cost alternative".

[28] As to the first finding of fact, the application judge's reasons disclose that his reference to other creditors was made in his discussion of the earlier appointment of a receiver over two other properties and disputes involving other creditors "over adequacy of security and priority issues." In those circumstances, the application judge concluded that it was "critical to move matters 'under one roof' so to speak".

[29] As to the second finding of fact, the application judge expressed the view that given the existence of other receivership proceedings and added costs through private mortgage enforcement proceedings, "it is not at all clear to me that extending the receiver's powers to [the Family Residence and Cottage] as well is the 'high cost' alternative."

[30] On the face of his reasons, it is not apparent that the application judge made any palpable and overriding error. The findings, when read in context, were more in the nature of his assessment of relevant factors to take into account in considering whether to appoint a receiver.

[31] When their grounds of appeal are considered together, it is far from clear that the appellants have demonstrated a prima facie meritorious appeal from the Order.

(3) Effect of an Appeal on the Conduct of the Receivership

[32] Although the enforcement of the Order against the Family Residence has been stayed for a time, BCU contends that the receiver has been reluctant to freely exercise its powers under the Order to market and sell the Cottage while the appeal is pending.

(c) Conclusion

[33] From the materials before us, we conclude that: (i) an appeal would affect the conduct of the receivership proceedings, at least in respect to the Cottage; (ii) the appeal does not raise an issue of general importance; and (iii) the appellants have not demonstrated that their appeal is prima facie meritorious. In those circumstances, we do not grant leave to appeal the Order.

V. Disposition

[34] For the reasons set out above, we grant the motion and quash the appeal on the basis that leave to appeal is required, which we decline to grant.

[35] BCU seeks full indemnity costs of this motion and the appeal. Although the appellants perfected their appeal, BCU has not filed its responding materials. While the charges enable BCU to recover its costs of enforcement on an elevated basis, this court retains the discretion to determine the award of costs that would be fair and reasonable in the circumstances. We fix the fair and reasonable costs to which BCU is entitled at $20,000, inclusive of disbursements and applicable taxes.

K. Feldman J.A.

C.W. Hourigan J.A.

David Brown J.A.