Court File and Parties

Superior Court of Justice – Ontario

Re: In the Matter of the Bankruptcy of The Templar Hotel Corporation, of the City of Toronto, in the Province of Ontario

and Re: Monk Development Corporation, 1586091 Ontario Limited c.o.b. as Rhed and Del Hugh Terrelonge, Applicants

And: CVC Ardellini Investments Inc., The Templar Hotel Corporation, Gabretta Investments Limited, Gail Appel, Lynn DiGenova, Taragar Holdings Limited, Tenenbaum Family Trust, Lawrence Tenenbaum, Wendy Tenenbaum, Randi Usher, Shael Sone, Her Majesty the Queen in Right of Ontario as Represented by the Minister of Finance, National Leasing Group Inc., Howieco Entertainment Inc., Martin Kravashik, in Trust, Misim Investments Limited, Prime One Financial, Inc., Ralcap Investments Corporation, Indcom Leasing Inc., 1220356 Ontario Limited, 768124 Ontario Inc., Snap Premium Finance Corp., Her Majesty the Queen in Right of Canada as Represented by the Minister of National Revenue, Aubrie Appel, MCAP Service Corporation, Templar Lake on the Mountain Inc., and A5 Capital Inc., Respondents

Before: Mr. Justice H.J. Wilton-Siegel

Counsel: L. Ferreira, for the Moving Party, CVC Ardellini Investments Alfred Schorr, for the Respondent, Del Terrelonge H. Manis, for the Trustee in Bankruptcy, Russo Corp.

Heard: September 21, 2018

Endorsement

[1] On this motion, the applicant CVC Ardellini Investments Inc. seeks a declaration that the debt of the bankrupt Templar Hotel Corporation (“Templar”) is a minimum of $17,052,134.75 as of May 10, 2014 and, after receipt of the proceeds of sale of the Property (as defined below), is currently at least $7 million. The motion is opposed by Del Terrelonge (the “respondent” or “Terrelonge”) who says that the arrangements between the applicant and Templar limited or reduced Templar’s obligation to repayment of a loan in the amount of $8.5 million, and interest thereon, which totals an amount less than the proceeds of sale of the Property. On this basis, Terrelonge argues that CVC has no deficiency claim against Templar and, accordingly, a default judgment obtained in a separate action commenced by CVC in Milton on a personal guarantee of Terrelonge has been satisfied.

Factual Background

[2] Templar charged the property municipally known as 344-348 Adelaide Street West, Toronto (the “Property”) in favour of Romspen Investment Corporation (“Romspen”) pursuant to two mortgages (collectively, the “Charge”) to secure loans extended in 2004 and 2006 by Romspen to Templar (collectively, the “Romspen Loan”).

[3] Terrelonge guaranteed the Romspen Loan and provided a collateral mortgage on his personal residence at 37 Boulton Drive, Toronto (the “Boulton Property”) to secure the guarantee (the “Boulton Charge”).

[4] Templar defaulted on the Romspen Loan in 2009. At that time, Templar owed approximately $9.8 million under the Romspen Loan. In 2013, Romspen commenced power of sale proceedings seeking a total payment of approximately $15.6 million.

[5] Pursuant to an agreement dated April 14, 2014 between Romspen and a third party, Michael Sannella, on behalf of a corporation to be incorporated (the “Romspen Agreement”), Romspen agreed to accept $8.45 million as consideration for an assignment of the Charge and the Boulton Charge. Of that amount, $8.15 million was to be paid in cash and $300,000 (subsequently increased to $435,000) was to be paid by way of a promissory note secured by a charge on a condominium.

[6] Templar obtained refinancing in the principal amount of $8.5 million from two sources (collectively, “CVC”).

[7] The refinancing arrangements were initially set out in two undated non-binding commitment letters (the “Commitment Letters”) that were provided by CVC to Terrelonge and Templar in May 2014. The Commitment Letters contemplated two loans totalling $8.5 million to be made to a corporation to be incorporated. The Commitment Letters provided that the borrower was to use the loans to purchase the Charge and the Boulton Charge for $8.45 million pursuant to the Romspen Agreement. The loans contemplated by the Commitment Letters were intended to provide the cash required to purchase the Charge and the Boulton Charge, and to pay the fees required to be paid by the borrower in respect of the loans. The Commitment Letters contemplated loans of one year with an option to renew for an additional year on terms to be agreed upon, including the payment of a fee. The loans were to be secured by a security interest in the Charge and the Boulton Charge, among other security.

[8] However, because of the existence of a subordinated creditor who was unwilling to postpone its security, the refinancing took the form of an assignment by Romspen to CVC of the Romspen Loan together with the security therefor including the Charge and the Boulton Charge (collectively, the “Romspen Loan position”). The terms of the Romspen Loan position were then supplemented by an agreement dated May 2014 executed by CVC, Templar, and Terrelonge, among others (the “Forbearance Agreement”). It is noteworthy that the parties did not execute new commitment letters, or amendments to the Commitment Letters, confirming their agreement to the revised structure of the refinancing with CVC (the “Refinancing”).

[9] The documentation pertaining to the transaction is set out in reporting letters of CVC’s counsel to CVC dated August 11, 2014 (the “Refinancing Documentation”).

[10] The principal documentation consists of the assignments of the Charge and the Boulton Charge dated May 26, 2014 and May 29, 2014, respectively, executed by Romspen in favour of CVC, and the Forbearance Agreement. Neither Templar nor Terrelonge were parties to the assignments. Certain other documentation is also discussed below. In addition, each of Terrelonge and Templar, among others, executed a new joint and several guarantee of all obligations of Templar to CVC limited to the principal amount of $8,500,000 plus interest and any enforcement costs (the “New Terrelonge Guarantee”). I also note that the documentation in the record does not contain an assignment of the Romspen Loan, as distinct from the Charge and the Boulton Charge, but Donata Ardellini states in his affidavit sworn May 2, 2018 that “CVC purchased the Romspen Loan and security” and no issue has been raised regarding this aspect of the Refinancing on this motion.

The Forbearance Agreement

[11] The Forbearance Agreement contained the following provisions that are relevant for this proceeding.

[12] First, Templar acknowledged that, as of May 10, 2014, Templar owed $17,052,134.75 under the Charge and that the Charge was in default.

[13] Second, section 5 provided that CVC would not enforce the Charge and the Boulton Charge if certain fees and interest were paid, and other covenants observed during the period until the earlier of (1) May 31, 2015, (2) repayment in full of the Charge, and (3) default under the provisions of the Forbearance Agreement accompanied by a declaration of termination (the “Forbearance Period”). The following is the text of section 5:

Provided:

[there follows a list of twelve conditions]

the Chargee agrees that, during the Forbearance Period, it will forbear from exercising its rights as against the Chargor to recover payment of the Charge as a result of the Existing Default. Upon the expiry of the Forbearance Period or the occurrence of a Triggering Event, the foregoing agreement to forbear will automatically be terminated. For greater certainty, notwithstanding the foregoing agreement to forbear (a) the Existing Default will continue to operate as an Event of Default for all other purposes of the Charge and Security Documents, (b) the Chargee reserves all of its rights and remedies with respect to the Existing Default or future Event of Default now or at any time hereafter existing, and (c) the Chargee has not waived the Existing Default, but has reserved its right to recover payment of the Charge as a result of the Existing Default upon the termination or expiry of the Forbearance Period. Except as expressly provided herein, the execution and delivery of this Agreement shall not: (i) constitute an extension, modification, or waiver of any term or aspect of the Charge or any Security Document; (ii) extend the terms of the Charge; (iii) give rise to any obligation on the part of the Chargee to extend, modify or waive any term or condition of the Charge or any Security Document; or (iv) give rise to any defences or counterclaims to the right of the Chargee to compel payment of the Charge or to otherwise enforce its rights and remedies under the Charge and/or the Security Documents. Except as expressly limited herein, the Chargee hereby expressly reserves all of its rights and remedies under the Charge and Security Documents and under applicable law with respect to the Existing Default.

[14] Third, under section 10, CVC agreed to reduce the principal amount required to repay the Charge to $8.5 million, together with accrued and unpaid interest thereon, provided Templar paid that amount on or before May 31, 2015 and otherwise complied with all of its covenants in the Forbearance Agreement, and made the interest payments required thereunder, during the Forbearance Period. Section 10 reads as follows:

The Chargor agrees that, provided all payments are made in accordance with the terms of this Agreement and there is not and never has been, after the date hereof, default pursuant to Section 5 hereof that has not been cured and corrected within the time limits provided in Section 8 hereof and that the principal amount of $8,500,000 plus any outstanding interest, costs and expenses including, without limitation, legal fees has been paid to the Chargee, on or before May 31, 2015 or by the end of any Extension or Forbearance Termination Period as provided for in Section 7 hereof (if applicable), then the Chargee agrees to reduce the principal amount required to repay the Original Charge to the principal amount of $8,500,000, together with accrued and unpaid interest, costs and expenses and waive any requirement of the Chargee to pay the Excess Interest to the Chargee, at the time of repayment of the Original Charges, it being understood that time and compliance with the terms of this Agreement shall be strictly of the essence.

[15] Fourth, Templar’s obligations regarding the payment of interest during the Forbearance Period are set out in section 9 as follows:

Provided that the Borrower is not in default and commits no act of default with respect to the Charge after the date hereof, then notwithstanding that interest is due pursuant to the Charge at the rate of 12% per annum on the principal amount outstanding of $17,052,134.75, the Borrower shall only be required to make payments during the Forbearance Period and prior to default based upon $5,500,000 of principal at 9.25% per annum calculated monthly, not in advance and $3,000,000 of principal at 12% per annum calculated monthly not in advance. The interest differential of $1,777,516.17 per annum based upon 12% per annum on the principal amount of $17,052,134.75 shall be herein referred to as the “Excess Interest”.

[16] Lastly, Terrelonge, Templar, and certain other parties agreed to execute the New Terrelonge Guarantee.

Default under the Forbearance Agreement and Subsequent Events

[17] Templar failed to repay $8.5 million plus accrued interest to CVC on May 31, 2015. On December 12, 2014, CVC served a notice of termination of the Forbearance Period pursuant to the Forbearance Agreement. In a covering letter, CVC’s counsel indicated that CVC would be prepared to accept $8,840,967.30 as a full settlement or, alternatively, $540,967.80 as payment of all outstanding arrears, costs, and fees owing in order to reinstate the Forbearance Agreement. Templar failed to make either payment.

[18] On January 19, 2015, CVC served a notice of sale in respect of the Charge, claiming a debt of approximately $19.8 million. That amount was the amount outstanding at that time under the Charge.

[19] On May 8, 2015, Templar was deemed bankrupt when a proposal under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 was rejected by Templar’s creditors.

[20] On November 2, 2016, CVC entered into an agreement to sell the Property under the power of sale for $9.75 million. The sale was completed on December 1, 2016.

[21] Prior to completion of the sale, pursuant to a consent order dated November 28, 2016, Hainey J. ordered that the trustee in bankruptcy of Templar had the opportunity to redeem CVC’s security against the Property, including the Charge, by delivering a bank draft in the amount of $9.75 million prior to a stipulated date. The trustee in bankruptcy failed to exercise that right, which then expired.

Procedural Matters

[22] Prior to the sale of the Property, CVC commenced an action in Milton for the enforcement of the Boulton Charge. By order dated August 26, 2015 of Miller J., CVC obtained default judgment on the Boulton Charge against Terrelonge in the amount of $8,074,327.68 and Terrelonge was ordered to deliver up possession of the Boulton Property.

[23] Subsequent to the sale of the Property, Terrelonge brought a motion in the Milton action seeking a declaration that the amount owing by Templar to CVC under the Charge had been satisfied by the sale of the Property on the grounds that the proceeds of sale exceeded the amount owing by Templar under the Refinancing. As mentioned, this was based on Terrelonge’s position that the Refinancing constituted a loan in the principal amount of $8.5 million and, accordingly, even with the accrual of interest thereon, CVC had no deficiency claim against Templar after application of the proceeds of sale of the Property.

[24] By agreement of the parties, the issue of the amount owing by Templar to CVC has effectively been transferred to the Commercial List by CVC’s commencement of this motion in the Templar bankruptcy proceedings. The Terrelonge motion in the Milton action has been adjourned on consent pending a determination of this motion.

[25] In view of the fact that the only asset of Templar has been sold, the determination of the issue on this motion will have no practical effect in the Templar bankruptcy proceedings even if CVC is successful. There will be no assets available to satisfy any unsecured deficiency claim of CVC. The motion is therefore moot in a practical sense. It is therefore arguable that the issue of whether or not CVC has a deficiency claim under the Refinancing should be determined in the Milton action.

[26] However, I have addressed this issue on this motion on the basis that: (1) the issue involves the rights and obligations of Templar and is therefore justiciable in the bankruptcy proceedings; and (2) both parties have requested that this court determine the issue of whether CVC has a deficiency claim under the Refinancing.

Applicable Law

[27] The issues in this motion principally involve matters of contractual interpretation. The general principles pertaining to such an exercise are set out in Ventas Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205, 85 O.R. (3d) 254, at para. 24, which confirmed that contracts are to be interpreted:

(a) as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;

(b) by determining the intention of the parties in accordance with the language they have used in the written document and based upon the "cardinal presumption" that they have intended what they have said;

(c) with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to the subjective intention of the parties; and

(d) to the extent there is any ambiguity in the contract, in a fashion that accords with sound commercial principles and good business sense, and that avoid a commercial absurdity.

[28] In Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 47 and 48, the Supreme Court also recently addressed the principles to be applied in the interpretation of contracts, including, in particular, the extent and nature of the surrounding circumstances at the time of the formation of the contract to which a court may have regard in the interpretation of the contract, as follows:

… the interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine “the intent of the parties and the scope of their understanding” (Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at para. 27, per LeBel J.; see also Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, at paras. 64-65, per Cromwell J.). To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning:

No contracts are made in a vacuum: there is always a setting in which they have to be placed. . . . In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.

(Reardon Smith Line, at p. 574, per Lord Wilberforce)

The meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement (see Moore Realty Inc. v. Manitoba Motor League, 2003 MBCA 71, 173 Man. R. (2d) 300, at para. 15, per Hamilton J.A.; see also Hall, at p. 22; and McCamus, at pp. 749-50). As stated by Lord Hoffmann in Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98 (H.L.):

The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.

[29] Terrelonge argues that, in the present case, these principles require that the Court take into consideration “all of the surrounding circumstances as would have been understood by a reasonable man and within the common knowledge of the parties to the transaction.” He suggests that such circumstances indicate that the Refinancing was essentially “a standalone loan of $8,500,000 to be secured by an Assignment of various mortgages from Romspen.”

[30] In this case, Terrelonge’s reference to the “surrounding circumstances” is essentially to the Commitment Letters, the Direction (defined below) and certain other documentation in the transaction. For clarity, I think the Court can and should have regard to all of the executed documentation constituting the Refinancing, apart from the Commitment Letters for the reasons discussed below. However, I do not think that taking this documentation into consideration is an exercise in taking into consideration the factual nexus in which the Refinancing was negotiated and executed. Such circumstances, as contemplated by Sattva, relate to the business context in which a transaction is negotiated. Instead, I think that the principle upon which the Court is relying in taking the Refinancing Documentation into consideration is the principle that regard may be had to other related agreements where they form components of a single transaction.

The Positions of the Parties Regarding the Nature of the Refinancing and Comments Thereon

[31] Before addressing the issues on this motion, I propose to set out the positions of the parties regarding the legal nature of the Refinancing and certain conclusions of the Court regarding this issue, which inform the determinations in this Endorsement.

[32] The transaction contemplated in the Commitment Letters involved loans totalling $8.5 million to a borrower to be incorporated for the purpose of purchasing the Charge and the Boulton Charge. The Commitment Letters contemplated that the rights and obligations of Templar and CVC in respect of such transaction would have been set out in a loan agreement between CVC and Templar. Under the structure described in the Commitment Letters, CVC would have made the loans to the new corporation, which would have purchased the Charge and the Boulton Charge, using the proceeds of the loans and its own promissory note, and granted CVC a security interest in the Charge and the Boulton Charge, as security for repayment of the loans and the agreed interest thereon. Under this structure, in the event Templar defaulted and CVC realized on its security, Templar’s obligations would have been limited to repayment of the principal amount of the loan, being $8.5 million, together with interest thereon.

[33] However, the parties did not implement such a transaction. Instead, because of the existence of a non-consenting subordinate creditor, they implemented a different transaction pursuant to which Romspen assigned the Romspen Loan position to CVC and the parties entered into the Forbearance Agreement, the terms of which have been set out above. While the documentation pertaining to the Refinancing is clear, the parties dispute the intended legal effect of the transaction. Essentially, Terrelonge says the parties intended to change the form but not the substance of the transaction contemplated by the Commitment Letters. CVC says the parties agreed to change both the form and the substance of the transaction contemplated by the Commitment Letters.

[34] I do not think it is possible to address whether the parties agreed upon a loan of $8.5 million, as Terrelonge suggests, without having in mind the structure of the alleged loan transaction. However, Terrelonge does not provide much clarity on the actual structure by which he says that the alleged loan arrangements were implemented. There are two possibilities that bear examination.

[35] The first possibility is a direct loan by CVC. Given that there was no newly-incorporated borrower, any such loan would have to have been made by CVC to Templar directly. Under such a transaction, the monies paid by CVC to Romspen would have constituted advances by CVC to Templar to enable Templar to acquire the Charge and the Boulton Charge. Under such a transaction, to the extent that CVC received the assignments of the Charge and the Boulton Charge and continued to hold them, CVC would have done so as a trustee on behalf of Templar as the beneficial owner.

[36] The second possibility is that the parties agreed that the Refinancing would have the substantive, but not the legal, effect of a loan of $8.5 million from CVC to Templar. Such an agreement would be implemented by a restructuring of the outstanding Romspen Loan position effective upon CVC’s acquisition of the Romspen Loan position. In the absence of any other agreement between CVC and Templar setting out the terms of the Refinancing, as so restructured, any such arrangement would have been set out in the Forbearance Agreement in the form of a provision limiting Templar’s obligations, whether before or after default, to payment of $8.5 million plus the agreed upon interest.

[37] CVC says the terms of the Refinancing are set out exclusively in the Forbearance Agreement. On its face, that Agreement provided that CVC would only forbear in respect of power of sale proceedings under the Charge for one year and would further accept $8.5 million in full satisfaction of the Charge only if repayment were made within one year and all other covenants were complied with, including the payment of interest at the rates agreed in the Forbearance Agreement. In other words, CVC suggests that the parties implemented the second form of transaction but limited the transaction to a forbearance arrangement rather than an absolute reduction in the principal amount of the Romspen Loan. Among other things, CVC relies on the fact that the Forbearance Agreement expressly preserved the existing defaults under the Charge and provided that CVC’s rights to enforce the Charge were reserved in their entirety in the event of termination of the Forbearance Period.

[38] As I understand Terrelonge’s position, in the absence of language in the Forbearance Agreement expressly implementing a Restructuring of the Romspen Loan position in that Agreement, he acknowledges that he cannot argue that the parties proceeded to implement the second form of transaction described above. Accordingly, by default, he argues that the parties proceeded to implement a loan of $8.5 million. Further, as mentioned above, in the absence of any other evident means of implementing the alleged loan, I think Terrelonge’s position necessarily involves assertion of a direct loan from CVC to Templar, i.e. the first form of transaction. I will address the implications of this conclusion below.

Analysis and Conclusion

[39] Terrelonge has raised three issues on this motion that will be addressed in turn.

The Agreement Between the Parties

[40] The central, and principal, issue in this proceeding is the nature of the agreement between CVC and Templar constituted by the Refinancing

[41] The plain meaning of the Forbearance Agreement is clear. CVC agreed to forbear from exercising the power of sale proceedings that Romspen had initiated and to accept $8.5 million in repayment of Romspen Loan position only if that amount, and the agreed interest for the period to the date of repayment, was paid within one year. Templar agreed that, in the event of a failure to make such payment, the full amount secured under the Charge would become payable and CVC would be entitled to the full benefit of the security constituted by the Charge and the Boulton Charge.

[42] I have some sympathy for Terrelonge’s position insofar as the Commitment Letters clearly contemplated a loan of $8.5 million and it is not clear from the record when Terrelonge became aware of the legal consequences that flowed from the departure from the structure of the transaction contemplated by the Commitment Letters in the implementation of the Refinancing.

[43] Nevertheless, when the Refinancing Documentation is considered as an entirety as Terrelonge suggests, I find that the parties agreed to a Refinancing in the terms of the Forbearance Agreement. I reach this conclusion for the following reasons.

[44] First, there are fundamental problems with Terrelonge’s position that the parties implemented a direct loan from CVC to Templar that flow from the structure that such a transaction would have taken, as discussed above.

[45] Under a direct loan transaction between CVC and Templar, the Charge and the Boulton Charge would have been extinguished on Templar’s purchase of it from Romspen. Accordingly, the Charge and the Boulton Charge would have ceased to secure any outstanding obligations and would therefore have become unenforceable. To avoid this result and maintain security in the Property and the Boulton Property, Templar would have had to grant a new charge on the Property and a new charge on the Boulton Property as collateral security for Templar’s obligations to CVC under the loan agreement contemplated by the Commitment Letters. That is not, however, the documentation that the parties executed.

[46] Further, even if Templar had granted such charges, the new charge on the Property would have ranked behind the security in favour of the subordinated creditor. Accordingly, a direct loan from CVC to Templar of $8.5 million would have been inconsistent with the intentions of the parties regarding the priority of the security for such a loan.

[47] Second, as mentioned, given the considerations described above, the only feasible means of implementing a loan transaction limited to $8.5 million would appear to have been a restructuring of the Romspen Loan position as described above. However, the language of the Forbearance Agreement does not go beyond forbearance for a year and there is no other document among the Refinancing Documentation before the Court to which Terrelonge can point that restructured the principal amount of the Romspen Loan on a permanent basis. I have no doubt that, if the parties had agreed that the outstanding principal amount of the Romspen Loan as of May 15, 2014 was to be permanently reduced, the Forbearance Agreement would have stated this expressly, as is the practice in such circumstances. The parties would not have left the central term of the financing arrangements to be implied from extrinsic evidence. In any event, as mentioned, it is my understanding that Terrelonge himself does not suggest that the arrangements were structured in this manner.

[48] Third, there are a number of subsidiary documents in the Refinancing and in the legal proceedings between the parties, that support CVC’s position that it purchased the Romspen Loan position as principal, rather than made a loan to Templar.

[49] On the closing with Romspen, the latter executed an acknowledgement addressed to CVC that states “in consideration of your purchasing the Charges from us”. Similarly, the New Terrelonge Guarantee states that the covenants therein are “in consideration of [CVC] purchasing the existing mortgages … and entering into the Forbearance Agreement”.

[50] Fourth, there are also documents that negate any agreement to limit Templar’s obligations in respect of the Romspen Loan position. Most importantly, the reporting letters of CVC’s counsel refer to the registration of a mortgage amending agreement that amended the Charge. The mortgage amending agreement specifically provided that the principal amount secured by the first mortgage in favour of Romspen included in the Charge was $17,052,134.75. It also provided that the balance under the Charge became due on June 1, 2015. In addition, in an affidavit sworn March 2, 2016, Terrelonge stated that “[t]he amount due is in excess of $17,000,000 even though CVC et al acquired the mortgage for $8,500,000. I have acknowledged this in writing.” In addition, on the closing of the Refinancing, Templar executed an estoppel certificate confirming that it owed $17,052,134.75 under the Charge and that the Charge was in default.

[51] Fifth, in my view, the factual context in which the Forbearance Agreement was formed does not unequivocally support Terrelonge’s view of the Refinancing. At best, it is ambiguous in terms of the intentions of the parties for the following reasons.

[52] Terrelonge says that it would not have been reasonable to agree to pay in excess of $8.5 million to satisfy the Romspen Loan, given that the amount secured under the Charge after the first anniversary date would far exceed the estimated value of $12 million for the hotel upon completion of the renovations. However, this argument disregards the terms of the Forbearance Agreement which provided that the amount in excess of $8.5 million and accrued interest would not have been payable if, as contemplated, Templar had completed construction of the hotel within the term of the Forbearance Period i.e. prior to the first anniversary date.

[53] At the time of the Refinancing, Terrelonge already faced the imminent risk of default, and enforcement proceedings in respect of the Property and the Boulton Property, if the Refinancing did not proceed. In such circumstances, the Refinancing makes commercial sense, even with the draconian consequences of a failure to repay within one year. Default after one year merely restored him to his previous situation.

[54] Further, it is also clear that Terrelonge anticipated that the hotel would be completed within the year when Templar entered into the Forbearance Agreement. In this regard, clause 5(l) of the Forbearance Agreement made such completion a condition of CVC’s agreement to accept $8.5 million in satisfaction of the Romspen Loan position. If Templar completed the hotel within one year, it was only obligated to repay $8.5 million, not the full amount owing under the Charge. From this point of view, the assumption of the risk of paying an amount in excess of $8.5 million was the cost of buying one year of forbearance in the hope and expectation of completing the construction of the hotel within that period and thereby realizing the gross value of $12 million for the Property.

[55] In reaching the conclusion herein, I have rejected three specific submissions of Terrelonge which are addressed in the following paragraphs.

[56] Terrelonge says that the Court should have regard to the Commitment Letters as evidence of the context in which the loan arrangements were negotiated and executed. He says that the Commitment Letters evidence an intention of the parties to enter into a loan of $8.5 million and that the Romspen Loan position, including in particular the Charge and the Boulton Charge, were intended to be security for the repayment of that amount only, plus interest as agreed thereon.

[57] While I agree with Terrelonge’s description of the transaction contemplated by the Commitment Letters, I do not think the Court can have regard to the Commitment Letters as evidence of an intention of the parties that the transaction, as restructured, would continue to be a direct loan of $8.5 million for the following reasons. First, the Commitment Letters were never legally binding agreements. In the evolution of the Refinancing, the Commitment Letters were, in essence, merely draft transaction documentation. Second, and more importantly, the parties consciously changed the structure of the transaction contemplated by the Commitment Letters in a material manner. This is reflected in the statement of CVC’s counsel in its reporting letters, upon which Terrelonge otherwise relies, that “generally speaking” because of the subordinate creditor, these Commitment Letters “were not relied upon except for the purchase price.” There is no necessary reason why, in these circumstances, the parties would have continued to implement a direct loan transaction and good reasons discussed elsewhere for not doing so.

[58] Terrelonge also suggests that the reporting letters dated August 11, 2014 of counsel for CVC reporting on the Refinancing expressed the transaction as a loan and thereby reflect the intention of the parties that the Refinancing was to be a loan limited to $8.5 million.

[59] There is admittedly a certain lack of precision in the terminology used by counsel in these reporting letters. However, it is clear from at least one of the reporting letters that, in the context in which they were prepared, counsel’s use of the term “Loan” is meant to mean no more than monies advanced by CVC for the purpose of acquiring the Romspen Loan position without any characterization of such advance for legal purposes. This is reflected in the definition of “Loan” in that letter as “the transfer of the existing first and second mortgages (the “Charges”) on 344-348 Adelaide Street West, Toronto, Ontario from Romspen to [CVC].” In particular, counsel does not state that the monies advanced to Romspen were loans to Templar for the purpose of Templar’s acquisition of the Romspen Loan position.

[60] Lastly, Terrelonge submits that the direction dated May 7, 2014 executed by Templar and Terrelonge, among others, in favour of CVC and its counsel (the “Direction”) suggests a loan to Templar, rather than a purchase of the Romspen Loan position by CVC as principal. The Direction authorizes and directs CVC to pay $8.1 million to Romspen and to pay various other amounts to CVC and third parties in satisfaction of certain fees and expenses payable in respect of this transaction. This could be interpreted as a direction in respect of a loan advance of $8.5 million to Templar.

[61] However, Templar’s Direction should be understood in the context of CVC’s unwillingness to rely on Templar’s covenant to pay the transaction-related fees that were a condition of the transaction between CVC and Templar. In effect, such fees were paid in partial consideration of CVC agreeing to take an assignment of the Romspen Loan position. The Direction addresses this concern by providing Templar’s acknowledgement that CVC would pay itself and the third parties out of the monies that would otherwise have been applied to purchase the Romspen Loan Position with the result that Templar was responsible for funding the balance required to be paid by CVC to acquire that Loan position. Consistent with this arrangement is the fact that, while Templar provided the remaining monies to complete the Refinancing by way of the secured promissory note described above, Templar did not assert any interest, proportionate or otherwise, in the Romspen Loan position after it was assigned by Romspen to CVC.

[62] Based on the foregoing, I conclude that the parties did not agree that the Refinancing would constitute a loan in the principal amount to $8.5 million nor did they agree to a permanent reduction in the principal amount of the Romspen Loan to that amount.

Section 8 of the Interest Act

[63] As an alternative argument, Terrelonge says that s. 8 of the Interest Act, R.S.C. 1985, c. I-15 applies in these circumstances. Section 8(1) provides as follows:

No fine, penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage on real property or hypothec on immovables that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.

[64] In particular, Terrelonge suggests that the principle in Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18, [2016] 1 S.C.R. 273 applies in the present circumstances. He also says that, in considering the application of s. 8 of to the present circumstances, the Court should look to the substance of the transaction. He suggests that the substance of the Refinancing is to increase the interest rate payable by Templar in the event of default. I do not accept this argument for two reasons.

[65] First, s. 8 is directed at provisions of a mortgage that have the effect of increasing the rate of interest payable in respect of arrears of principal beyond the rate of interest payable on the principal not in arrears. In the present circumstances, the provisions in paragraph 9 of the Forbearance Agreement regarding the interest payable in the event that Templar failed to repay the $8.5 million within one year are not at issue. Moreover, even if the accrued interest on the Romspen Loan were unenforceable by virtue of s. 8 of the Interest Act, the amount outstanding under the Charge acknowledged by Templar in the Forbearance Agreement as of the date of execution of that Agreement was at least $17,052,134.75.

[66] Accordingly, the only issue for present purposes is the provision in paragraph 10 of the Forbearance Agreement that stipulates that, if Templar failed to pay $8.5 million in principal in satisfaction of the Romspen Loan within one year, the Forbearance Period would terminate and CVC would be entitled to exercise its full rights in respect of the Charge.

[67] This paragraph contains a classic forbearance provision rather than a penalty default rate of interest. Under the Forbearance Agreement, Templar expressly acknowledged that it owed $17,052,134.75, that it was already in default in payment of that amount, that CVC had not waived such default, and that CVC reserved the right to require payment of the Charge after any termination of the Forbearance Period. The effect of termination of the Forbearance Period is simply to restore the enforceability of the principal amount owing in respect of the Romspen Loan position as it existed prior to execution of the Forbearance Agreement. Put another way, the effect of default was simply to terminate Templar’s right to obtain a discharge on payment of $8.5 million on or before May 15, 2015.

[68] Similar provisions have been upheld by the courts in North-West Life Assurance Co. v. Kings Mount Holdings Ltd. (1987), 15 B.C.L.R. (2d) 376 (C.A.) and Stawro v. Mayfield Holdings Inc., 2016 ONCA 710. While both these decisions appear to relate only to an agreed reduction in the interest payable during a forbearance period, for present purposes I see no distinction in principle between a reduction in interest and a reduction in principal during a forbearance period.

[69] In contrast, the cases upon which Terrelonge relies do not deal with a true forbearance but rather attempts to stipulate for a higher interest rate after default: see, for example, Krayzel Corp. and Reliant Capital Ltd. v. Silverdale Development Corp., 2006 BCCA 226, 52 B.C.L.R. (4th) 13 (where a contract that provided for an interest rate increase in advance of default was upheld). They are therefore not applicable in the circumstances of this proceeding.

[70] Given the foregoing, I conclude that s. 8 of the Interest Act would only be applicable in the present circumstances if the parties had agreed to reduce the principal amount of the Romspen Loan effective as of the date of the Forbearance Agreement to $8.5 million. As I have found otherwise above, it follows that s. 8 has no application in the present circumstances.

Section 98 of the Courts of Justice Act

[71] Terrelonge also submits that the Court should exercise its discretion under s. 98 of the Courts of Justice Act, R.S.O. 1990, c. C.43 to grant relief against penalties and forfeitures on such terms as to compensation or otherwise as are considered just. He says that the Court should grant such relief to give effect to the agreement of the parties that the loan arrangements were to take the form of a loan of $8.5 million.

[72] There is, however, no basis for the exercise of the Court’s discretion in this case given the agreement between the parties as determined above. As mentioned, Templar and Terrelonge agreed that the full amount of the Romspen Loan would become due and payable if $8.5 million, and stipulated interest, was not paid within one year.

[73] In making his argument under s. 98, Terrelonge is effectively asking the Court to rewrite the agreement between the parties to reduce the amount of the Romspen Loan position to $8.5 million whether before or after default. I see no basis in the record for doing so.

Conclusion

[74] It is not disputed that the amount outstanding under the Charge, as confirmed by Templar and Terrelonge in the Forbearance Agreement, was not reduced by the sale of any other security provided in respect of the Romspen Loan position or by any profits realized from the business of the hotel on the Property pending sale. Based on the foregoing, CVC is therefore entitled to an order that the debt of the bankrupt, Templar, is a minimum of $17,052,134.75 as of May 10, 2014 and after receipt of the proceeds of sale of the Property is currently at least $7 million.

Costs

[75] As the successful party, CVS is entitled to its costs on a partial indemnity basis as there is nothing in the manner in which Terrelonge has conducted this motion that would attract substantial indemnity costs. CVS seeks costs on that scale of $17,230.33 on an all-inclusive basis. Counsel for Terrelonge has advised the Court that he considers this amount to be reasonable in the circumstances and that, although he did not provide the Court with Terrelonge’s costs submissions, he would have sought a similar amount on behalf of his client if Terrelonge had succeeded on this motion. Accordingly, CVS is entitled to costs of $17,230.33 on an all-inclusive basis, payable forthwith.

Wilton-Siegel J.

Date: January 8, 2019