Court File and Parties
COURT FILE NO.: 1484/19 DATE: 20200406 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
Atlas (Brampton) Limited Partnership, Romlex International Ltd. and Peter Grigoras, Applicants
– and –
Canada Grace Park Ltd., Xing Ou Yang and Atlas Springbank Developments Ltd., Respondents
COUNSEL: J. Kaufman and B. Adams, for the applicants P. Starkman, for the respondents
HEARD: March 4, 2020 at London
BEFORE: Aston J.
Reasons for Judgment
1For reasons that follow the application is dismissed.
[2]
Background
On May 10, 2018, Atlas Springbank and Atlas Brampton entered into a Loan Agreement. Atlas Springbank loaned Atlas Brampton $1.8 million with interest at 12 percent per annum, payable semi-annually, and a due date of May 10, 2019. The first interest payment was due November 10, 2019. It was not paid.
3Peter Gregoras and Xing Ou Yang (Jenny O), the two principals of various entities named in this proceeding, negotiated a second agreement to provide security for Atlas Brampton’s liability to Atlas Springbank under the Loan Agreement. Gregoras owns and controls Romlex which held 55 percent of the shares of Atlas Springbank. Jenny O owns and controls Canada Grace Park which owns the other 45 percent. Gregorious agreed that he would give a personal guarantee for the debt of Atlas Brampton to Atlas Springbank and that his company Romlex would pledge its shares in Atlas Springbank as security for that debt. They entered into a “Supplementary Agreement to the Loan Agreement with Security and Guarantor”. The parties refer to this agreement by various names. I will simply refer to it as the Security Agreement.
[4]
The Security Agreement and Due Date
I am satisfied that the parties reached a mutual agreement that upon timely payment of the $1.8 million, with interest, to Atlas Springbank (and absent any other default under the Loan Agreement) the “pledged shares” provided as collateral in the Security Agreement would be released and returned to Romlex. The parties dispute the due date for repayment: February 28, 2019 or May 10, 2019.
5The first draft of the Security Agreement was authored by Jenny O’s solicitor and signed by Gregoras on or about December 4, 2018. However, he made handwritten amendments, including one that would preserve the original due date for the repayment of principle, May 10, 2019. That first draft had changed the due date to December 31, 2018. The agreement was then redrafted by Jenny O or her solicitor. Instead of a due date of December 31, 2018 (set out in the first draft), the due date was changed from May 10, 2019 to February 28, 2019, a compromise. This copy, signed and initialled by Jenny O, was left at Gregoras’ office on December 12. He later emailed a copy back to her.
6Gregoras maintains that he never agreed to change the due from May 10, 2019 to February 28, 2019. I do not accept his evidence on that point. At page 73 of the Application Record there is a copy of the Security Agreement which he emailed to Jenny O. On its face the due date is changed to February 28, 2019. Gregoras’ initials plainly appear where the date is changed.
7I also note that Gregoras does not dispute his initials opposite the provision in paragraph 3(3) of the Security Agreement which refers to partial payments prior to “the balance due date of February 28, 2019”, a provision that would be meaningless if he had not accepted the variation of the original Loan Agreement that changed the due date from May 10, 2019 to February 28, 2019.
8The consideration for the Security Agreement was the forbearance on enforcement of the Loan Agreement, the preservation of the ongoing business relationship between Romlex and Canada Grace Park as joint developers of the Springbank property through Atlas Springbank and the ability of Gregoras to preserve his investment in Atlas Brampton. The submission that Romlex and Gregoras received no consideration for the Security Agreement is without merit.
9The parties had further discussions after entering into the Security Agreement about alternative arrangements, including a proposal whereby Gregoras would purchase the shares of Atlas Springbank held by Jenny O’s company Canada Grace Park, so that he and/or Romlex would become the sole owners of Atlas Springbank. However, nothing came to fruition. The Security Agreement remained in effect.
10Paragraph four of the Security Agreement contemplates that it would be registered under the Personal Property Security Act, R.S.O. 1990 c. P. 5 “to secure the performance of this agreement and the Loan Agreement”. It was registered under that Act.
[11]
The Default and Share Transfer
No payment was made on February 28, 2019. Consequently, the Loan Agreement was in default as of March 1, 2019. On or about that date the pledged shares of Romlex were transferred by Jenny O’s solicitor to Canada Grace Park. This is consistent with para. 3 of the Security Agreement which reads “if the Borrower becomes default [sic] for any reason, the Pledged Shares shall be transferred to Canada Grace Park at $2.00 nominal costs (the “shares transfer”). The receipt of payment of such $2.00 nominal costs is hereby confirmed by Romlex”.
12The Security Agreement provides that the share transfer for the pledged shares shall be “deemed as being completed immediately upon the borrower becomes [sic] default”. It further provides that Gregoras would be “deemed as being removed” from his positions as a director and officer of Atlas Springbank and that Jenny O would become the sole director of Atlas Springbank, with Canada Grace Park becoming its sole shareholder. Jenny O was specifically given the authority to sign any relevant documents to effect the share transfer as the “irrevocable Power of Attorney” for Romlex in that regard.
[13]
The Applicants' Claims
The applicants assert that the respondents took possession of the pledged shares and transferred those shares to Canada Grace Park prior to the due date of the Loan Agreement, at a time when the Loan Agreement was not in default. Alternatively, they assert that if the respondents lawfully had possession of the pledged shares, the respondents nevertheless violated the provisions of the PPSA: a) by failing to allow the applicants to redeem the pledged shares that are collateral security (s. 66 of the PPSA); b) by disposing of, foreclosing on, accepting as payment or incumbering the pledged shares without notice (ss. 63 and 65 of the PPSA); c) by failing to preserve the pledged shares or use those shares in the manner provided in the Security Agreement (s. 17 of the PPSA); or d) by failing to apply funds received and/or value taken from the collateral of the pledged shares to reduce or eliminate the secured obligation, and remit surplus funds to the applicants (s. 17.1 of the PPSA).
14The applicants seek a declaration that the transfer of the pledged shares to Canada Grace Park is null and void and an order that those shares be returned to Romlex. In the alternative, the applicants seek relief under the PPSA, permitting Romlex to now redeem the pledged shares, with a consequential accounting and compensation for events transpiring after March 1, 2019. In the further alternative, if that relief is not available under the PPSA, the applicants seek relief from forfeiture, and a similar remedy, pursuant to the court’s inherent equitable jurisdiction.
15Gregoras claims that when he found out the pledged shares of Romlex had been transferred to Canada Grace Park on March 1, he instructed his lawyer to negotiate the return of the pledged shares to Romlex in exchange for payment in full of the loan plus accrued interest. He continued to maintain that the due date was May 10, 2019.
16In early December 2018, Atlas Brampton had been the subject of a receivership order, which also constituted a default under the original Loan Agreement. The receivership was certainly known to Gregoras when he signed the Security Agreement, but it was only discovered by Jenny O on December 17, 2018, after the Security Agreement had already been signed. Although Gregoras says she must have known of the receivership before that date, there is no evidence that she did. He certainly did not tell her. The receivership ended in April 2019, but the point is that on February 28, 2019, there was not one default under the Loan Agreement but two – the non-payment of the overdue principle and interest and the fact of the receivership order.
17I agree with counsel for the applicants that the Security Agreement had the effect of waiving the default related to the interest payment in November 2018, but I also conclude that Gregoras, Romlex and Atlas Brampton did not disclose the receivership during the negotiation of the Security Agreement. There is nothing in the evidence to suggest that Jenny O or Canada Grace Park waived this particular default. I am satisfied that Jenny O never agreed to give Gregoras or the other applicants a “second chance” beyond her February 28, 2019 deadline.
18Other than the bald assertion by Gregoras, there is nothing to prove or corroborate his professed ability to redeem the pledged shares by May 10, 2019, must less February 28, 2019. Moreover, he did not communicate any redemption promise or proposal until after March 1.
[19]
Analysis under the Personal Property Security Act
The parties do not dispute that the Security Agreement was properly registered under the PPSA. Part V of that Act deals with the rights and remedies of debtors and security holders upon a default. Section 63 authorizes the secured party to “dispose of” the collateral upon default, but s.63(4) provides for a prior notice requirement to the debtor and any other person having an interest in the collateral, or who may be liable as a guarantor. Under s.66 each of them has a right to redeem the collateral “by tendering fulfillment of all obligations secured by the collateral”. The respondents did not give the requisite notice. As a consequence, they had no statutory right to “dispose” the collateral. However, their failure to avail themselves of their statutory right under the PPSA does not matter because they acted within their contractual right under the Security Agreement.
20Section 59(5) of the PPSA prohibits waiver or variation of the rights of a debtor or the duties of the secured party under sections 17 and 63 of the PPSA. However, the respondents have never invoked their right to any remedy authorized under the PPSA. There is nothing in the Security Agreement obliging them to do so.
21The applicants rely on Tureck v Hanston Investments Ltd., 1986 CarswellOnt 704 for the proposition that at common law there is no right to foreclosure on pledged shares. They submit that any right of foreclosure is dependent upon the respondents’ compliance with their obligations under the PPSA and subject to the rights of the applicants under that statute. I disagree.
22This case is distinguishable from Tureck. In that case, the pledge of shares reserved to the pledgor all the incidents of ownership and title in the pledged shares (para.17) and the security agreement itself did not confer any right to foreclose on those shares (para.29). In that case the only remedy available to the security holder was the statutory right under the PPSA. The security holder was thus obliged to give the requisite notice of an intention to retain the collateral in satisfaction of the secured obligation, which Mr. Tureck did not do. In this case, the respondents also have failed to give the requisite notice under the PPSA but, unlike Mr. Tureck, they have an independent contractual right under the Security Agreement itself that effectively amounts to foreclosure.
23This critical distinction was the ratio of the decision in Harry Shields Ltd. v. Bank of Montreal, [1992] O.J. No. 68 (Ont. Div. Ct.) at pages 14-15. Like the Bank of Montreal in Harry Shields, Canada Grace Park and Jenny O did not rely on the PPSA for a remedy. They did not need to do so. Expressed another way, the applicants only have a right of redemption under the PPSA if the secured party chooses to pursue a remedy under the PPSA.
[24]
Relief from Forfeiture
The applicants cannot rely on the PPSA for the relief they seek. Alternatively, they claim equitable relief from forfeiture.
25Relief from forfeiture is reserved for exceptional cases. It is particularly appropriate where the party seeking enforcement by forfeiture can be fully paid without resort to forfeiture. I start by observing that the applicants have not adduced any reliable evidence of their ability to pay the amount due under the Loan Agreement – on March 1, 2019, May 10, 2019 or even today. Even if they had done so, I would not grant the relief sought.
26The conduct of the debtor, the guarantor and the provider of security are important considerations. There are four factors to take into account on this score. First, none of the applicants disclosed the receivership order against Atlas Brampton when negotiating the Security Agreement. Second, Gregoras not only denied agreeing to an amended due date of February 28, 2019 he falsely accused Jenny O of fraudulently changing the due date. Third, Romulex has continued to collect rent from a tenant of the Springbank property, purportedly in its capacity as property manager, without any accounting to Atlas Springbank for that rent. Finally, the explanation for the delay in bringing this application after Gregoras learned of the share transfer on or about March 1, 2019 has not been adequately explained.
27The consideration that weighs most heavily in favour of the applicants’ claim for relief from forfeiture is the fact that the Romlex shares in Atlas Springbank had an agreed upon value of $2.4 million in May 2018. The amount owing under the Loan Agreement as of February 28, 2019 ($1.8 million plus 294 days interest) amounted to a little less than $2 million by my reckoning. On the other hand, the amount due would now exceed $2.2 million and, in addition, Atlas Springbank has been denied the use of 90% of the $2.0 million Canada Grace Park contributed as capital in May 2018, money that was earmarked for the development of the Springbank property. Development has been delayed, but in the meantime Atlas Brampton has had the use of the money Canada Grace Park invested in Atlas Springbank. In short, the evidence does not go so far as to establish that the respondents have necessarily reaped a windfall from the forfeiture of the Romlex shares.
28On balance, this is not a case for equitable relief.
[29]
Disposition and Costs
The application is therefore dismissed. Counsel agreed that the appropriate quantum of costs on the application is $30,000 on a partial indemnity scale and $35,000 on a substantial indemnity scale. Given the false accusation of fraud against Jenny O, the applicants shall pay the respondents costs fixed at $35,000 and are jointly and severally responsible for payment of those costs.
Justice D. R. Aston Aston J. Released: April 6, 2020
Court File and Parties (Duplicate)
COURT FILE NO.: 1484/19 DATE: 20200406 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
Atlas (Brampton) Limited Partnership, Romlex International Ltd. and Peter Grigoras, Applicants
– and –
Canada Grace Park Ltd., Xing Ou Yang and Atlas Springbank Developments Ltd., Respondents
REASONS FOR JUDGMENT Aston J.
Released: April 6, 2020