Court File and Parties

COURT FILE NO.: CV-23-00699065-00CL DATE: 20240722 ONTARIO - SUPERIOR COURT OF JUSTICE – COMMERCIAL LIST

APPLICATION UNDER SUBSECTION 243(1) OF THE BANKRUPTCY AND INSOLVENCY ACT, R.S.C. 1985, C. B-3, AS AMENDED AND SECTION 101 OF THE COURTS OF JUSTICE ACT, R.S.O. 1990, C. C.43, AS AMENDED

RE: Business Development Bank of Canada, Applicant AND: 170 Willowdale Investments Corp., Respondent

BEFORE: Peter J. Osborne J.

COUNSEL: Tony Van Klink, for the Moving Party, The Fuller Landau Group Inc. David M. Trafford and Tim Hogan, for the Respondent 170 Willowdale Investments Corp. David Filice, The Fuller Landau Group Inc., the Court-appointed Receiver

HEARD: July 22, 2024

Endorsement

[1] The Court-appointed Receiver of the property of 170 Willowdale Investments Corp. (the “Debtor”) seeks an order:

a. approving the Second Report dated July 2, 2024 and the activities of the Receiver described therein;

b. approving the pro forma statement of receipts and disbursements;

c. approving the professional fees of the Receiver and its counsel;

d. authorizing and directing the Receiver to make the following distributions:

i. all amounts owing by the Debtor to the CRA for HST, employee source deductions or corporate taxes;

ii. $851,578.09, plus per diem interest thereon, to RBC in respect of its secured claim;

iii. $60,926.23 plus per diem interest to RBC in respect of its unsecured claim;

iv. any further amounts owing by the Debtor to Wai-Hun Joung arising from the termination of her employment with the Debtor; and

v. subject to the Receiver completing the above distributions, maintaining such reserves for the proper administration of the estate, together with the costs thereof, a distribution to the debtor of the net proceeds of the receivership estate, including an initial distribution of $1,228,879.66; and

e. subject to the Receiver completing the administration of the receivership estate and filing certificate of completion, discharging and releasing the Receiver.

[2] The motion is strongly supported by RBC. The Debtor does not oppose any of the relief sought, save and except for the distribution to RBC.

[3] The Receiver relies on the Second Report dated July 2, 2024, together with its original Appointment Order. RBC relies upon the Affidavit of Natalia Naraine (“Naraine”) sworn July 16, 2024 together with exhibits thereto. The Debtor relies upon the Affidavit of Raymond Zar (“Zar”), affirmed July 14, 2024 together with exhibits thereto.

[4] Defined terms in this Endorsement have the meaning given to them in the motion materials unless otherwise stated. A court reporter was present for the hearing of this motion.

[5] The Receiver was appointed by order of this Court dated May 23, 2023 (the “Appointment Order”). Following a sale process, this Court granted an order dated May 15, 2024 approving a sale transaction that was completed on May 31, 2024 (the “Approval and Vesting Order” or “AVO”) in respect of the hotel property owned and previously operated by the Debtor (the “Real Property”).

[6] The sale price was $8 million, from which transaction costs and amounts in respect of the claims of the two secured creditors other than RBC - the Business Development Bank of Canada (“BDC”) and 729171 Alberta Inc. (“729 Alberta”), as well as professional fees, were paid. It is the balance of the net proceeds from that Transaction that are the subject of the proposed distributions for which approval is sought on this motion.

Activities and Fees of the Receiver

[7] I will address first the request for approval of the activities of the Receiver. I am satisfied that the activities of the Receiver as set out in the Second Report are consistent with the mandate given to it in the original Appointment Order, were appropriate and accretive to the maximize maximization of recoveries in this receivership, and were reasonable in the circumstances of this particular matter.

[8] Second, I am also satisfied that the fees of the Receiver and its counsel were reasonably incurred in respect of the fulfilment of the activities described above, that the fees themselves are reasonable and appropriate, and consistent with fees charged by comparable firms in the market. They are fully described in the fee affidavits of David Filice and Michael Prosia respectively, appended to the Second Report. The fees of the Receiver and its counsel are approved.

The Proposed Distributions other than to RBC, and the Discharge of the Receiver

[9] Third, with respect to the proposed distributions, I begin with the Canada Revenue Agency. HST returns have not been filed by the Debtor for the years 2021 through and including 2024. Corporate tax returns have not been filed since 2019. The Receiver proposes to maintain a reserve of $320,000 for potential liabilities pending the completion and filing of those returns, and seeks authorization to pay those amounts once determined. That is appropriate, and as noted above, is not opposed.

[10] With respect to employee claims, all but two of the employees of the Debtors that worked at the hotel property sold by the Receiver were hired by the purchaser, and their employment continues. Of the remaining two, one was terminated and the other had their employment continued. The Receiver proposes a reserve of $50,000 for further potential liability from the termination, and seeks authority to distribute to that employee any further amounts determined to be owing arising from her termination. That is reasonable, practical and is also unopposed.

[11] Once all distributions have been made (including, in the submission of the Receiver, the distributions to RBC), the Receiver proposes to distribute the remaining funds in the receivership estate to the Debtor, including an initial distribution in the amount of $1,228,879.66. That is also appropriate.

[12] Fourth, with all known assets of the Debtor having been realized upon by the Receiver, as they now have been, subject to the completion of the outstanding matters, it is appropriate that the Receiver be discharged and released from any further liability. I am satisfied that this also is appropriate and should be granted. The Receiver has carried out its duties professionally and in accordance with the terms of the Appointment Order. With the above-noted matters completed, the administration of the receivership estate will also be complete with the result that there is no basis upon which to continue the mandate of the Receiver. No party opposes this relief either. Accordingly, this relief is also granted on the terms proposed.

Proposed Distributions to RBC

[13] Finally, this leaves the matter of the proposed distributions to RBC. As set out in the Second Report, three creditors held registered security over the assets of the Debtor: BDC, 729 Alberta, and RBC. The claims of BDC and 729 Alberta have been satisfied, with the result that RBC is the sole remaining secured creditor.

[14] RBC extended three credit facilities to the Debtor:

a. a Highly Affected Sectors Credit Availability Program (“HASCAP”) Loan in the amount of $785,000;

b. a Canada Emergency Business Account (“CEBA”) Loan; and

c. a VISA credit card facility.

[15] As of June 20, 2024, the amount outstanding on the RBC Credit Facilities is $912,504.32, including:

a. $818,747.43 plus a per diem interest accrual of $85.23 in respect of the HASCAP Loan;

b. $60,926.23 in respect of the CEBA Loan;

c. $6,950.10 plus a per diem interest accrual of $3.17 in respect of the VISA credit card facility; and

d. the balance in respect of professional fees.

[16] The HASCAP Loan and the VISA facility were advanced on a secured basis. The CEBA Loan is unsecured.

[17] As security for the payment and performance of its obligations and indebtedness to RBC in respect of the HASCAP Loan and the VISA facility, the Debtor granted to RBC a general security agreement dated December 16, 2021 (the “RBC GSA”).

[18] The Receiver has sought and obtained from counsel a legal opinion to the effect that subject to customary qualifications and assumptions, RBC has a valid and perfected security interest in the personal property included in the Transaction, and although RBC did not have a security interest in the Real Property of the Debtor, it has a valid and perfected security interest in the proceeds arising from the sale of the Real Property.

[19] Accordingly, and on the basis that RBC has a valid and perfected security interest in the proceeds, the Receiver seeks authority and direction to make the distributions to RBC, as described above. Not surprisingly, RBC supports the proposed distribution.

[20] The Debtor opposes the distribution to RBC on the basis that the Approval and Vesting Order in respect of the Property granted by this Court on May 15, 2024 provides in relevant part, that the net proceeds from the sale of the Property stand in the place and stead of the Property. While the RBC indebtedness was and is secured by the RBC GSA, RBC did not have any registered security over the real Property, and since the proceeds from the sale thereof stand in the place of that Real Property, RBC is not entitled to any priority claim to those proceeds, with the result that the proposed distributions to RBC should instead be paid over to the Debtor.

[21] The Debtor does not dispute the indebtedness to RBC, but denies that either the HASCAP Loan or the CEBA Loan are due and payable in full (original repayment dates were accelerated upon the occurrence of Events of Default). Moreover, it submits that, notwithstanding the defaults under the HASCAP Loan, it is entitled to have that facility continue according to its terms, notwithstanding the missed payments and other defaults. Zar states in his affidavit that: “[t]he Company is prepared to reinstate the HASCAP Loan and direct payment to RBC for any amounts owing under the loan and its costs that have not been paid as a result of the appointment of the Receiver.” In the same paragraph, however, Zar is clear that the “Company denies that the HASCAP Loan is due and payable in denies there was any default under the loan entitling RBC to enforce any security provided under the GSA”.

[22] Most fundamentally, however, the Debtor takes the position that the funds held by the Receiver should be paid over to it, and that thereafter, if the Debtor refused or failed to pay RBC the balance of the indebtedness owing, RBC would be free to pursue its claim against the Debtor. It submits that the Receiver cannot and should not make any distribution to RBC, and that RBC bring a new claim against the Debtor and succeed thereon before it is entitled to any payment from the Debtor. As noted above, the position of the Debtor is that, notwithstanding the defaults, it is entitled to have the HASCAP Loan continue.

[23] For the reasons below, the motion of the Receiver is granted, and it is authorized and directed to make the distributions as it proposes to do, including to RBC.

[24] I am satisfied that:

a. the Debtor is indebted to RBC in the amounts set out above. I note that the balance owing under the HASCAP Loan comprises the bulk of the total indebtedness as to approximately 89%;

b. the HASCAP Loan and the VISA credit facility are secured according to the terms of the GSA; and;

c. the Debtor is in default under the terms of the RBC FACILITIES as a result of various Events of Default, including but not limited to missed payments.

[25] At the request of the Debtor, and pursuant to a letter agreement dated December 10, 2021 entered into between RBC and the Debtor (the “Letter Agreement”), RBC provided the HASCAP Loan. The Letter Agreement defines “Events of Default”, upon the occurrence of which the Bank, in its sole discretion, can cancel any Credit Facilities, and demand immediate repayment in full of any amounts outstanding under any term facility, together with outstanding accrued interest in any other indebtedness under or with respect to any term facility, and to realize on all or any portion of the Security.

[26] Events of Default as defined in the Letter Agreement include the failure of the Debtor to pay any principal, interest or other amount when due pursuant to the Letter Agreement; the commencement of any proceeding, including to have a receiver appointed for any part of the assets or operations of the Debtor; or if, in the opinion of the Bank, there is a material adverse change in the financial condition, ownership or operation of the Debtor.

[27] As consideration for the Financing, the Debtor entered into the RBC GSA dated December 16, 2021. The RBC GSA provides in Article 1 that:

The [Debtor] hereby grants to [the Bank] a security interest (the “Security Interest”) in the undertaking of the Debtor and in all of the Debtor’s present and after-acquired personal property, including, without limitation, in Goods (including all parts, accessories, attachments, special tools, additions and accessions thereto), Chattel Paper, Documents of Title (whether negotiable or not), Instruments, Intangibles, Money and Securities and all other Investment Property now owned or hereafter owned or acquired by or on behalf of the Debtor (including such as may be returned or repossessed by the Debtor), and in all proceeds and renewals thereof, accretions thereto and substitutions therefor (hereinafter collectively called “Collateral”), and including, without limitation, all of the following now owned or hereafter owned or acquired by or on behalf of the Debtor.

[28] The RBC GSA expressly provides in Article 2 that the “Security Interest granted hereby secures payment and performance of any and all obligations, indebtedness and liability of Debtor to RBC (including interest thereon), present or future, … wheresoever and howsoever incurred.”.

[29] The RBC GSA also defines Events of Default in Article 11, and they include the Events of Default as defined in the Letter Agreement, among others, and include the non-payment when due, whether by acceleration or otherwise, of any principal or interest or the failure of the Debtor to perform any obligation contained in the GSA or any other agreement between the Debtor and RBC.

[30] Article 12 of the RBC GSA provides that RBC, in its sole discretion, may declare all or any part of the Indebtedness which is not, by its terms, payable on demand to be immediately due and payable in the event of default, or if RBC considers itself insecure or that the Collateral is in jeopardy.

[31] Clearly, Events of Default have occurred. The Debtor has failed to make payments when due under the HASCAP Loan, including in January and February, 2023; accounts are overdrawn; the Debtor failed to make payments when due on the CEBA Loan and the VISA credit facility; and obviously this proceeding was commenced and the Receiver was appointed. This proceeding was originally commenced by BDC as a result of arrears owing to BDC (and other creditors) by the Debtor.

[32] The Events of Default are fully set out in the Affidavit of Naraine at paragraphs 9 – 23. That evidence includes references to the exchange of correspondence between RBC and the Debtor in late March, 2023 concerning these very defaults, the missed HASCAP payments and the accounts that were overdrawn, as well as a demand RBC had received from the Canada Revenue Agency in relation to amounts owing by the Debtor for HST.

[33] As a result of those continuing defaults, RBC issued a demand for payment to the Debtor together with a Notice of Intention to Enforce Security pursuant to section 244 of the Bankruptcy and Insolvency Act, RSC 1985, c. B-3. The demand and Notice were delivered on May 23, 2023. As acknowledged by the Debtor, the Notice of Intention to Enforce expressly confirmed that RBC sought to enforce security on the collateral and “from the proceeds of the sale of said collateral” under the GSA.

[34] On May 23, 2024, the Court granted the Appointment Order appointing the Receiver.

[35] I accept the submission of the Debtor that RBC does not (and did not prior to sale) have a registered security interest, such as a mortgage, registered on title to the Real Property. The problem for the Debtor is that this is not the end of the analysis. The Property has been sold, and the relevant asset now is the amount of the net proceeds from that sale. The above-noted provisions in the RBC GSA (and particularly Article 1) clearly provide that RBC has a security interest in such funds, just as it has a security interest in any other money held by the Debtor. The Security Interest of RBC in the assets of the Debtor attaches to any money of the Debtor. The proceeds of the sale of the Real Property constitute such money, and accordingly, are subject to the security interest granted pursuant to the terms of the RBC GSA.

[36] The position of the Debtor is based on its interpretation of the AVO and particularly paragraph 4 thereof. The AVO vested title to the purchaser in the Real Property when it was sold by the Receiver, free of any claims and encumbrances. The AVO provided in paragraph 4 that:

[F]or the purposes of determining the nature and priority of Claims, the net proceeds from the sale of the Purchased Assets shall stand in the place and stead of the Purchased assets, and that from and after the delivery of the Receiver’s Certificate CLAIMS and Encumbrances shall attached to the net proceeds from the sale of the Purchased Assets with the same priority as they had with respect to the Purchase Assets immediately prior to the sale, as if the Purchased Assets had not been sold, and remained in the possession or control of the person having that possession or control immediately prior to the sale.

[37] The Debtor submits that since RBC had no priority security interest to the Purchased Assets (i.e., the Real Property), it has no priority security interest to the proceeds. As a result, the Debtor submits that the Receiver has no power to distribute the net proceeds of sale from the Real Property to RBC, that the Receiver should be discharged, and then RBC must bring and succeed on a claim to collect its debt.

[38] In my view, that submission cannot succeed.

[39] I begin with the Appointment Order of May 23, 2023. The Receiver was appointed as Receiver of the Property of the Debtor. The Appointment Order is clear that the Receiver is appointed over all “Property” of the Debtor. That clearly included at the time the Real Property as well as all other assets. Indeed, this is expressly clear from paragraph 2 of the Appointment Order appointing the Receiver “of all the assets, undertakings and Property of the Debtor, including the Real Property, and all proceeds thereof”.

[40] The fact that “Property” includes both all assets of the Debtor and specifically includes all proceeds of the Real Property means that the Property clearly includes now, following the sale of the Real Property, the net proceeds generated therefrom. Accordingly, it cannot be successfully argued that the net proceeds are property of the Debtor outside the scope of this receivership and are not “Property” as defined in paragraph 2 of the Appointment Order.

[41] The Appointment Order authorizes and empowers the Receiver to take possession of and exercise control over the Property and any and all proceeds arising out of or from the Property (paragraph 3 (a)). That is the second reference in the Appointment Order to proceeds arising from Property as being within the scope of the receivership.

[42] There is nothing surprising or unusual in the fact that the receivership extended to proceeds from the sale of property of the Debtor. It is very common that one of the principal duties of a receiver is to monetize, often pursuant to a court-supervised sale process, assets of the debtor in order that the proceeds can be used to satisfy claims of creditors.

[43] It would be antithetical to the entire concept of the receivership in the first place if significant assets of a debtor were sold by the receiver for the specific purpose of satisfying creditor claims, only to have the proceeds of such sales automatically vest in the debtor outside the receivership unless creditors with proven claims had a specific registered security interest in the assets sold, such that creditors were compelled to commence a new proceeding to recover their debts from the debtor.

[44] The whole point of a receivership is to provide for the orderly identification, resolution and/or determination of claims of creditors, and thereafter a distribution to creditors with proven claims, in order of priority. In fact, the concept that proceeds from assets sold remain in the receivership is expressly provided for in the Appointment Order. Pursuant to paragraph 13, the Receiver is to hold all funds received or collected by the Receiver after the date of that Appointment Order from any source whatsoever, including without limitation, the sale of all or any of the Property, and such funds should be held by the Receiver to be paid in accordance with the terms of that order or any further order of the Court.

[45] That is part of the balancing of interests in a receivership proceeding. When the receiver is appointed, and the stay of proceedings is imposed, creditors lose the ability to bring independent enforcement claims in exchange for the ability to prove their claims and receive a distribution if there are sufficient funds within the receivership proceeding.

[46] That is exactly what occurred here. Pursuant to the terms of the Appointment Order, all actions and enforcement steps against the Debtor were subject to a stay of proceedings. As a result, RBC, which had already delivered its formal demand and its Notice of Intention to Enforce on its Security, was prohibited from taking such enforcement steps it otherwise would have taken.

[47] I do not accept the submission of the Debtor that RBC is not entitled to a priority claim within this receivership. In my view, and given the clear terms of the RBC GSA, RBC has a Security Interest in assets of the Debtor, including (as is relevant here), cash, to which it is entitled (i.e., the net proceeds of the sale). Whether RBC’s security interest in this case could defeat or rank in priority to the claim of another creditor who, hypothetically and for example, might have had a registered first mortgage security interest registered on title to the Property, is irrelevant to the priority dispute as between RBC and the Debtor.

[48] As soon as the Debtor has funds, RBC has a security interest in those funds. In my view, it does not matter whether those funds represent the proceeds of sale of the Real Property, the sale of any other asset, or indeed represented cash already on hand. The funds are subject to the receivership, and to the Security Interest in favour of RBC.

[49] Nothing in paragraph 4 of the AVO stating that the net proceeds stand in the stead of the Real Property disentitles RBC to that Security Interest. In my view, that language (which is standard in receivership orders, including the Model Order of the Commercial List), is intended to give effect to the point I make above: when an asset is sold by a receiver, the proceeds do not automatically fall outside the scope of the receivership such that a debtor is entitled to take them notwithstanding the proven claims of creditors.

[50] The claims of RBC are clearly “Claims” within the meaning of the AVO. “Claims” are defined in paragraph 2 of the AVO, which provides that all of the Debtor’s right, title and interest in the Purchased Assets (the Real Property) vest in the Purchaser, free and clear of Claims.

[51] It follows that the proceeds of sale of that Real Property are properly payable to RBC, to the extent of its indebtedness, pursuant to its secured claim. It further follows that the funds are Property over which the Receiver has powers and in respect of which it is authorized to make distributions to creditors with proven claims in order of priority of those claims (see paragraph 13 of the Appointment Order referenced above).

[52] I pause to observe that there are sufficient funds available from the net proceeds of the sale of the Real Property to pay all of the claims of creditors, in full. Even after all of the claims of creditors are paid, including RBC, the Debtor is expected to receive distributions, including a proposed initial distribution of $1,228,879.66 and any net surplus thereafter.

Result and Disposition

[53] For all of the above reasons, the motion of the Receiver is granted.

[54] At the conclusion of argument, I invited the parties to make submissions with respect to costs. The costs of the Receiver will be paid from the proceeds in the estate of the Debtor in the usual course. Each of the Debtor and RBC submitted that in the circumstances, neither was seeking costs against the other. Accordingly, the Receiver shall have its costs in the receivership in the usual course and no other order as to costs is sought or made.

[55] Order to go in the form signed by me.

Osborne J.