Court File and Parties

COURT OF APPEAL FOR ONTARIO

DATE: 20230615

DOCKET: C70645

Brown, Sossin and Copeland JJ.A.

BETWEEN

Lynda Friendly and Lynda Friendly & Associates by their assignee, Assignment Credit Corp. Applicants (Appellants)

and

1671379 Ontario Inc., Manuel Elkind, MCAP Financial Corporation, Dorr Capital Corporation c.o.b. as Dorr and Associates, Cherniak Law Professional Corporation, Sullivan Mahoney LLP, Starkman Barristers and Hentob Construction Limited Respondents (Respondents)

Counsel: Elliot Birnboim and Michael Crampton, for the appellant Samuel Robinson, for the respondent MCAP Financial Corporation Jason Cherniak for the respondent Cherniak Law Professional Corporation Varoujan Arman, for the respondent Dorr Capital Corporation David Seed, for the respondent 1671379 Ontario Inc.

Heard: February 14, 2023

On appeal from the order of Justice Andrew Pinto of the Superior Court of Justice, dated April 22, 2022, with reasons reported at 2022 ONSC 2409.

Copeland J.A.:

[1] This appeal raises issues of priorities of various creditors in a garnishment hearing. The payments subject to the garnishment are owed to the respondent 1671379 Ontario Inc. (“167”) by the City of St. Catharines and the Region of Niagara, pursuant to a program designed to encourage remediation of contaminated properties. 167 is owned by the respondent Manuel Elkind.

[2] The appellant, Assignment Credit Corp. (“ACC”), and the remaining respondents are creditors of 167 and Mr. Elkind (together, “the 167 respondents”). The creditors have varying interests. The issues raised in this appeal do not all involve all of the creditors or the same asserted claims to priority. For this reason, I begin by describing the payments over which garnishment was sought. I then describe the creditors and their interests in the analysis of each legal issue.

The payments subject to garnishment

[3] 167 owned a commercial property located at 583 Welland Avenue in St. Catharines (the “Property”), which it intended to develop as a residential subdivision.

[4] The garnishees are the City of St. Catharines and the Region of Niagara. They owe payments to 167 pursuant to a Community Improvement Plan called the Brownfield Tax Increment Based Incentive Grant Program Agreement (“BTIG”), designed to encourage remediation of contaminated properties. 167 and the City of St. Catharines entered into the BTIG on December 23, 2014. The BTIG credits are the payments subject to garnishment.

[5] At the time of the hearing before the motion judge, the City of St. Catharines had confirmed that at least $167,976.15 was then available and payable to 167 under the BTIG. Additional amounts may become available in the future as the development project is completed. As I will return to below, those potential additional amounts were not quantified in the motion judge’s reasons.

Analysis

(1) Did the motion judge err in finding that MCAP’s claim for the Shortfall Judgment had priority based on MCAP’s General Security Agreement?

(a) Relevant factual background

[6] The respondent MCAP Financial Corporation (“MCAP”) loaned money to 167 in May 2013 in order for 167 to develop the Property. The loan was secured by a first priority mortgage on the Property in favour of MCAP (“the mortgage”), as well as a general security agreement in favour of MCAP (the “GSA”). The GSA was registered and perfected under the Personal Property Security Act, R.S.O. 1990, c. P.10 (the “PPSA”) on June 19, 2013. The registration remains effective until at least June 2023, or until the amounts owed to MCAP arising out of the development loan are paid in full.

[7] The mortgage went into default in August 2014. MCAP exercised its right under the mortgage to sell the Property in a power of sale proceeding. However, the proceeds of the sale were less than the amount then owing on the development loan to 167. MCAP obtained default judgment against the 167 respondents on the shortfall remaining unpaid on the loan following the sale, by judgment of Brown J., dated September 18, 2015, in the amount of $458,821.25, plus interest, and $3,909.35 in costs (the “Shortfall Judgment”).

[8] ACC asserts its claim to priority over the BTIG proceeds based on a judgment of Mesbur J., dated January 20, 2015 (the “Mesbur Judgment”). I will discuss the circumstances in which the Mesbur Judgment was issued and the assignment to ACC in more detail in relation to the second legal issue in the appeal. [1] The following facts are sufficient for purposes of determining the issue of priority as between MCAP and ACC.

[9] The Mesbur Judgment was issued in family law proceedings and subsequently assigned to ACC in July 2016. ACC is a corporation controlled by Elliot Birnboim, counsel to the appellant and former counsel to Lynda Friendly in her matrimonial proceedings. Ms. Friendly, then the wife of Mr. Elkind, as well as a corporation in her name, brought an application against the 167 respondents to enforce a marriage contract together with an application for an oppression remedy under s. 248 of the Business Corporations Act, R.S.O. 1990, c. B.16. One of the remedies sought was a court-ordered buy-out of her interest in 167. The Mesbur Judgment required the 167 respondents to pay Ms. Friendly $960,000, plus pre-judgment interest, to purchase her shares according to the terms of the marriage contract.

[10] The Mesbur Judgment provided for various assets of the 167 respondents to be charged as security for the payments under the judgment. The portions of paras. 3 and 4 of the Mesbur Judgment relevant to this appeal provide as follows:

3. Pursuant to section 248 of the OBCA, the following property shall be charged as security for the payments owing by the Respondents to the Applicants, subject to any valid prior encumbrance: c. Brownfield Tax credits which may be owed to the Respondents pursuant to any agreement or arrangement with the Town of St. Catharines.

4. Pursuant to s. 248 of the OBCA, the Respondents shall be restrained from any dealings, sale or encumbrance with the said assets and shall be entitled to take no step of any kind on behalf of 1671379 Ontario Inc. without the prior written consent of the Applicant, Lynda Friendly, not to be unreasonably withheld or by court order. The Applicant, Lynda Friendly shall be at liberty to register this judgment as security against such assets. [Emphasis added.]

[11] One other aspect of the procedural history is relevant to the issue of priorities as between MCAP for the Shortfall Judgment and ACC under the assignment of the Mesbur Judgment.

[12] Following the sale of the Property by MCAP under the terms of the mortgage, 167 brought an action against MCAP for improvident sale. MCAP brought an unsuccessful summary judgment motion before Lederer J., resulting in a 2017 costs award of $35,576.69, plus HST, to be set off against the Shortfall Judgment. On December 11, 2021, following a trial, Carpenter-Gunn J. dismissed the improvident sale action and awarded costs to MCAP in the amount of $330,000 (the “Costs Judgment”).

[13] ACC served a Notice of Garnishment on the City of St. Catharines and the Region of Niagara (notice date unknown). MCAP served the City of St. Catharines and the Region of Niagara with Notices of Garnishment in the fall of 2015.

(b) The motion judge’s reasons

[14] The motion judge held a garnishment hearing under r. 68.08(16) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. [2]

[15] The motion judge recognized that s. 2(1) of the Creditors’ Relief Act, 2010, S.O. 2010, c. 16, Sched. 4 (the “CRA”), provides: “Except as otherwise provided in this Act, there is no priority among creditors by execution or garnishment issued by the Superior Court of Justice.”

[16] However, based on s. 20(1)(a) of the PPSA and 1889072 Ontario Limited v. Globealive Wireless Management Corp. et al, 2016 ONSC 3578, 37 C.B.R. (6th) 39, at para. 12, the motion judge held that perfected security under the PPSA takes precedence over a later notice of garnishment.

[17] On that basis, the motion judge described his task as being to evaluate the claims to priority of both MCAP and ACC and determine whether they should be given priority over the other creditors in the hearing, as well as whether MCAP or ACC had priority over the other. If there was no priority, then, in the view of the motion judge, the creditors would be entitled to the amounts owed under the BTIG on a pro rata basis, as contemplated by the CRA. At this stage, I summarize the motion judge’s reasons only in relation to priority between MCAP and ACC and MCAP’s priority over other creditors. I summarize his reasons in relation to priority as between ACC and other creditors under the second ground of appeal.

[18] The motion judge found that the amounts owing to 167 under the BTIG agreement were covered by the terms of MCAP’s GSA. In particular, the proceeds of the BTIG fell within the future accounts and claims terms of the GSA, which took security over “generally all accounts, debts, dues, claims, choses in action and demands of every nature and kind howsoever arising” which are “now due, owing or accruing or growing due to” the 167 respondents. He also found that the BTIG proceeds were captured by the definition of “intangible” in s. 1(1) of the PPSA, another category of property over which the GSA created security.

[19] The GSA also provided that the security interest it created only affected collateral “associated with” 167’s “business and assets situate in the City of St. Catharines and more particularly described in Schedule ‘A’”. The collateral referred to in Schedule “A” was the Property. The motion judge found that the BTIG payments were associated with 167’s business and assets in the City of St. Catharines and with the Property because the BTIG payments were made so as to compensate for the costs of rehabilitating and redeveloping the Property.

[20] The motion judge rejected ACC’s argument that the position taken by MCAP in the improvident sale action was inconsistent with its claim that it had a secured priority interest in the proceeds of the BTIG. In the improvident sale action, MCAP had taken the position that it did not receive an assignment of the “Brownfield Tax Agreement” because the legal advice it had received was that the Brownfield Tax Agreement was not assignable. The motion judge also rejected the related argument made by ACC that the fact that in the improvident sale action, Carpenter‑Gunn J. found that the “Brownfield Agreement” was not part of the security given to MCAP by 167 should bar MCAP from asserting a security interest in the proceeds now available and due to 167 under the BTIG.

[21] On these issues, the motion judge accepted MCAP’s submission that there was a distinction between the BTIG Agreement itself, and the proceeds of the BTIG now available and due to 167. He held that the fact that the BTIG Agreement was not captured by the GSA does not mean that proceeds due are not captured.

[22] In relation to priority as between MCAP and ACC, the motion judge held that the Mesbur Judgment, by its express terms, provided that the security interest it created in the BTIG payments is “subject to any valid prior encumbrance.” In light of his finding that MCAP had a secured interest (under the GSA) in amounts owed to 167 pursuant the BTIG, any claim by ACC based on the Mesbur Judgment must be subject to MCAP’s claims secured by the GSA, which was perfected before the date of the Mesbur Judgment.

[23] The motion judge found that, based on s. 59(7) of the PPSA, MCAP’s perfected security interest in the Shortfall Judgment did not merge because it has made partial recovery of the amounts owed to it by the 167 respondents through the sale of the Property. He found that a party who seeks a legitimate remedy (in this case, the power of sale of the Property) should not be prevented from seeking other legitimate remedies or punished by losing priority status. The amounts owing under the Shortfall Judgment arose from the loan secured by the GSA and remained outstanding. Thus, MCAP still had priority status for the Shortfall Judgment based on the GSA.

[24] The motion judge gave additional reasons for reaching his conclusion that MCAP’s enforcement of the Shortfall Judgment had priority over ACC’s assignment of the Mesbur Judgment with respect to payments due to the 167 respondents under the BTIG agreement. I do not summarize the other reasons as they are not relevant in light of the grounds of appeal raised by ACC.

(c) Analysis

[25] ACC argues that the motion judge erred in finding that MCAP’s Shortfall Judgment had priority under the GSA over ACC’s security interest in the proceeds of the BTIG based on the security interest created by the Mesbur Judgment.

[26] I note that, on appeal, none of the respondents challenge the motion judge’s conclusion that MCAP’s Shortfall Judgment has priority over all of the other creditors by garnishment based on the prior perfected security of the GSA. They either agree that this conclusion of the motion judge was correct or take no position on the issue. There is also no dispute by any party with the legal conclusion of the motion judge that a prior registered and perfected security under the PPSA takes priority over a later notice of garnishment.

[27] I see no error in the finding of the motion judge that MCAP’s GSA gives it priority over ACC’s claim based on the assignment of the Mesbur Judgment. I reach this conclusion for three reasons.

[28] First, the GSA in favour of MCAP, by its terms, applies to the amounts due to the 167 respondents pursuant to the BTIG credits. For purposes of this ground of appeal, it is sufficient to note that the security interest created by the GSA applies to:

… all Goods (including all parts, accessories, special tools, additions and accessions thereto), Chattel Paper, Documents of Title (whether negotiable or not), Instruments, Intangibles, and Securities now owned or hereafter owned or acquired by or on behalf of the Debtor (including such as may be returned to or repossessed by the Debtor) and in all proceeds and renewals thereof, accretions thereto and substitutions therefor (hereinafter collectively called “Collateral”), including, without limitation, all of the following now owned or hereafter owned or acquired by or on behalf of the Debtor:

iii. all book accounts and book debts, rents and leases, all Agreements of Purchase and Sale entered into or to be entered into (including any deposits payable to the Debtor pursuant thereto) and generally all accounts, debts, dues, claims, choses in action and demands of every nature and kind howsoever arising or secured including letters of credit and advices of credit, which are now due, owing or accruing or growing due to or owned by or which may hereafter become due, owing or accruing or growing due to or owned by the Debtor (“Debts”);

Notwithstanding the generality of the foregoing, the Security Interest created by this Agreement affects only such Collateral associated with the Debtor’s business and assets situate in the City of St. Catharines and more particularly described in Schedule “A” attached hereto. [Emphasis added.]

The collateral referred to in Schedule “A” of the GSA is the Property.

[29] I see no error in the finding of the motion judge that the amounts due to the 167 respondents for the BTIG credits fell within the scope of the security over “generally all accounts, debts, dues, claims, choses in action and demands of every nature and kind howsoever arising …, which are now due, owing or accruing or growing due to or owned by or which may hereafter become due, owing or accruing or growing due to” the 167 respondents. Further, I agree with the motion judge’s conclusion that the proceeds from the BTIG are associated with 167’s “business and assets situate in the City of St. Catharines” and in particular, with the Property. The purpose of the BTIG payments is to compensate for the costs of rehabilitating and redeveloping the Property.

[30] Second, the GSA was perfected prior to the date of the Mesbur Judgment. The Mesbur Judgment is dated January 20, 2015. MCAP’s security interest was perfected on June 19, 2013.

[31] Third, the Mesbur Judgment, by its terms, makes the security interest it creates in the payments due to the 167 respondents on account of the BTIG credits subordinate to “any valid prior encumbrance.”

[32] Indeed, ACC does not dispute that the Mesbur Judgment expressly makes the security interest it creates in the payments due to the 167 respondents pursuant to the BTIG credits subordinate to any valid prior encumbrance. Nor does the appellant challenge on appeal the finding of the motion judge that MCAP’s GSA, which was registered under the PPSA on June 19, 2013, is a valid prior encumbrance. Rather, ACC argues that MCAP is disentitled to claim priority based on the GSA because, according to ACC, MCAP took a contrary position about its security to payments under the BTIG in the improvident sale action brought against it by 167. ACC argues that in the improvident sale action, MCAP took the position that it had not received a security interest in the BTIG. ACC argues that it is an abuse of process for MCAP to now claim priority over the BTIG proceeds based on the GSA.

[33] I would reject this argument.

[34] I see no error in the conclusion of the motion judge that the proceeds of the BTIG that are due now (and in the future) to 167 are distinct from the BTIG Agreement itself, and that the proceeds of the BTIG due to 167 are captured by the GSA.

[35] There is no inconsistency in the positions taken by MCAP in the improvident sale action and in the present proceeding. The issue in the improvident sale action was whether MCAP had taken reasonable precautions to obtain fair market value on the sale of the Property in enforcement proceedings under the mortgage. In the improvident sale action, MCAP took the position that it could not sell or transfer the BTIG Agreement when it sold the Property under the terms of the mortgage because, by its terms, the BTIG Agreement did not run with the title to the Property. It is an agreement personal to 167. Indeed, there can be no doubt that the BTIG Agreement did not run with the land because it is still held by 167.

[36] In the improvident sale action, the trial judge found that the rights of 167 under the BTIG Agreement were personal to 167 and did not run with the title to the Property. She further found that the BTIG Agreement itself was not assigned to MCAP, and thus, that the BTIG Agreement was not part of the security for the development loan. In other words, in the power of sale under the mortgage, MCAP was not entitled to sell, transfer, or assign the BTIG Agreement to the purchaser. The BTIG Agreement remained (and remains) in the hands of 167. The trial judge in the improvident sale action was considering issues related to enforcement of the mortgage. She made no findings regarding whether payments which would come due to 167 under the BTIG were within the scope of the security under the GSA.

[37] In the motion under appeal, MCAP did not take the position that the BTIG Agreement itself was assigned to it as security, such that MCAP could dispose of the BTIG Agreement or enforce its terms directly. Rather, MCAP argued that pursuant to the GSA, it was entitled to payments that are now due to 167 pursuant to the BTIG, as well as any future payments that may come due to 167. In other words, the language of the GSA granted MCAP security over all debts presently due, or due in the future, to 167. The proceeds of the BTIG are debts due to 167, as are any future proceeds of the BTIG. There is no contradiction between MCAP’s position that the BTIG Agreement itself was not assigned to it, but that the terms of the future debts provisions of the GSA give it security over payments that come due to 167 as proceeds of the BTIG. Lenders may hold security over receivables without having an interest in the contracts that give rise to the receivables.

[38] As there is no inconsistency between the positions taken by MCAP in the improvident sale action and the present proceeding, there is no abuse of process.

[39] For these reasons, I see no error in the finding of the motion judge that MCAP has a perfected security interest in the amounts owed to the 167 respondents under the BTIG, and that as a result, MCAP has priority for the amount of the Shortfall Judgment over ACC and the other creditor respondents. I would dismiss the appeal as it relates to paragraphs 1 to 4 of the motion judge’s order.

(2) Did the motion judge err in finding that ACC’s claim under the assignment of the Mesbur Judgment does not have any priority as among the claims of the remaining creditor respondents?

(a) Relevant factual background

[40] This ground of appeal concerns the priority of ACC’s assignment of the Mesbur Judgment and the claims of the other creditor respondents as unsecured judgment creditors. The unsecured judgment creditors are as follows.

[41] MCAP concedes that its Costs Judgment in the improvident sale action, dated December 11, 2021, is not covered by the GSA. On the Costs Judgment, it is an execution creditor in the amount of $330,000.

[42] The respondent Dorr Capital Corporation c.o.b. as Dorr and Associates (“Dorr”) is another judgment creditor of the 167 respondents. Dorr was the mortgage broker for the financing of the MCAP mortgage. Dorr obtained a judgment against the 167 respondents on December 16, 2014, for payment of $66,814.68, plus costs of $1,250, plus interest at the rate of 10% per annum.

[43] Jason Cherniak acted as counsel for 167 and Mr. Elkind at one point (but not when the Mesbur Judgment was obtained). Cherniak Law Professional Corporation (“Cherniak”) was granted an order for assessment of its outstanding fees on August 25, 2014. On June 22, 2016, the assessment officer ordered the 167 respondents to pay Cherniak $105,893.98.

[44] I provide some additional detail about the Mesbur Judgment which is relevant to the issue of priorities as between ACC and the unsecured judgment creditors.

[45] At the time the Mesbur Judgment was obtained, Ms. Friendly and her corporation were represented by Mr. Birnboim of the law firm Chitiz Pathak LLP, who is counsel for ACC on this appeal. As noted above, Mr. Birnboim is the sole officer and director of ACC.

[46] After the Mesbur Judgment, there was a breakdown in the relationship between Ms. Friendly and her lawyers at Chitiz Pathak LLP, which resulted in legal proceedings. Ms. Friendly brought a negligence action against her former lawyers on August 13, 2015, and Chitiz Pathak LLP brought an application for a charging order on the matrimonial home under the Solicitors Act, R.S.O. 1990, c. S.15, on August 18, 2015.

[47] As part of the settlement of the proceedings between Ms. Friendly and Chitiz Pathak LLP, Ms. Friendly and her corporation assigned their interest in the Mesbur Judgment to ACC. The assignment of the Mesbur Judgment is the basis on which ACC asserts its claim to priority. ACC did not provide a copy of the purported assignment agreement in its materials before the motion judge, but instead relied on a subsequent document entitled Assignment of Judgments. As a lengthy excerpt of that document is reproduced in the motion judge’s reasons, I do not reproduce it here. The relevant portion assigns to ACC monetary claims of Ms. Friendly and her corporation under a number of listed judgments, including the Mesbur Judgment.

[48] The respondent creditors and the motion judge appear to have proceeded on the basis that the Mesbur Judgment was obtained following a trial. However, it became clear after the hearing of the appeal, while this judgment was reserved, that this was not the case.

[49] Following the appeal hearing, on March 30, 2023, this court requested additional documents from the parties that were not contained in the appeal record. In particular, the court requested Justice Mesbur’s reasons for decision for the January 20, 2015 judgment, and the Application for Relief and Answer that resulted in the judgment. These documents were provided to the court and the respondents by counsel for ACC on March 31, 2023, along with several other documents relating to the proceedings before Justice Mesbur.

[50] The documents disclosed after the hearing of the appeal reveal that the Mesbur Judgment was not the product of a trial, but was a consent judgment. Justice Mesbur’s endorsement reads, in its entirety: “Case settled in accordance with Minutes of Settlement attached. Final order to issue in terms of approved order, also attached. I have signed the final order.” The minutes of settlement, which were also provided for the first time on March 31, 2023, confirm that it was a consent judgment. I note that the formal judgment, which was the only documentary evidence of the Mesbur Judgment previously available to the respondent creditors and the motion judge, does not indicate that the judgment was on consent.

[51] In oral submissions on the appeal, Mr. Birnboim had referred to the Mesbur Judgment as being the product of “an uncontested trial”. For reasons that are unclear, even after it was disclosed to this court following the hearing of the appeal that the Mesbur Judgment was a consent judgment, Mr. Birnboim maintained in his additional submission on behalf of ACC that the Mesbur Judgment was the product of “an uncontested trial”.

[52] The endorsement of Mesbur J. demonstrates that this is not an accurate characterization of how the judgment was obtained. The application appears to have been scheduled for an uncontested trial due to the fact that the 167 respondents’ pleadings had been struck in September 2014. But the application was not ultimately decided by an uncontested trial. It was a consent judgment. The endorsement of Mesbur J. and the minutes of settlement between Ms. Friendly, her corporation, Mr. Elkind, and 167 make this clear.

[53] It is troubling that it was not disclosed to the other creditors, the motion judge, or to this court, until the court inquired after the hearing, that the Mesbur Judgment was a consent judgment. There can be no question that ACC was aware at all times that it was a consent judgment. ACC’s counsel and its directing mind, Mr. Birnboim, was counsel to Ms. Friendly and her corporation at the time the Mesbur Judgment was issued. He is listed as counsel on both the judgment and the endorsement of Mesbur J.

[54] After the new information about the Mesbur Judgment being a consent judgment was disclosed, the respondents requested an opportunity to make further written submissions to the court. The court permitted all parties to file a brief additional written submission. As I will explain, the issues arising from the fact that the motion judge and the respondent creditors were not told that the Mesbur Judgment was a consent judgment have implications for the disposition of the appeal.

(b) The motion judge’s reasons

[55] The motion judge considered the priorities of the remaining creditors, in the alternative, if his conclusion about MCAP’s priority for the Shortfall Judgment based on the GSA was incorrect. As I have noted, the motion judge was not told that the Mesbur Judgment was a consent judgment. As a result, he did not consider whether the fact that it was a consent judgment has an impact on whether the PPSA applies to the Mesbur Judgment. It is clear from portions of his reasons that the motion judge understood the Mesbur Judgment to have been the product of a trial of some kind. For example, at one point, he stated: “It is unclear what evidence was before Justice Mesbur with respect to 167 Corp’s assets and liabilities.”

[56] That said, even without the information that the Mesbur Judgment was a consent judgment, the motion judge concluded that ACC did not have priority over other creditors based on the Mesbur Judgment. He reasoned as follows. The Mesbur Judgment created a security interest in several listed assets, including the BTIG credits, which may be owed to the 167 respondents. By its terms, the Mesbur Judgment provided that: “Lynda Friendly shall be at liberty to register this judgment as security against such assets.” However, ACC had provided no evidence of registration or perfection. The motion judge then referred back to his earlier analysis of s. 2(1) of the CRA, which provides that there is no priority among creditors by execution or garnishment, subject to security registered and perfected under the PPSA. [3] He held that because ACC’s asserted security from the Mesbur Judgment had not been registered and perfected, ACC could not claim priority over other creditors because of the general rule in s. 2(1) of the CRA that creditors are entitled to share in garnishment proceeds on a pro rata basis.

(c) Analysis

[57] For reasons I will explain, in my view, the issue of priorities between ACC and the remaining creditor respondents after MCAP’s Shortfall Judgment has been satisfied must be remitted to the motion judge for determination. The existing record and factual findings of the motion judge are insufficient for this court, sitting on appeal, to decide the legal issues that arise from the disclosure that the Mesbur Judgment was obtained on consent. In order to explain my reasons for this conclusion, it is necessary to summarize the arguments raised by the parties both before and after the disclosure that the Mesbur Judgment was obtained on consent.

[58] In its initial factum and at the hearing of the appeal, ACC argued that the terms of the Mesbur Judgment, assigned to ACC, gave it priority over the other judgment creditors, whether or not it was registered under the PPSA. ACC argued that security declared in a judgment, whether registered or not, has priority over unsecured creditors.

[59] The respondents argued that s. 2(1) of the CRA applied such that ACC did not have priority over other creditors in the garnishment; rather, pursuant to s. 2(1) of the CRA, after MCAP’s Shortfall Judgment was satisfied, all remaining creditors were entitled to share in the proceeds of the garnishment on a pro rata basis. In making this argument, the respondents relied on the fact that the Mesbur Judgment expressly provided that it could be registered under the PPSA, but that neither Ms. Friendly nor ACC had registered it. According to the respondents, it was thus an unperfected security interest, and did not take precedence over the application of s. 2(1) of the CRA.

[60] In the additional submissions that the court permitted after the disclosure that the Mesbur Judgment was obtained on consent, the respondent creditors raised new arguments against ACC’s entitlement to priority based on the Mesbur Judgment. The respondent creditors were denied the opportunity to raise these arguments before the motion judge because they were not aware that the Mesbur Judgment was a consent judgment.

[61] A brief summary of the main new arguments raised by the respondent creditors is sufficient to provide context for the analysis that follows. In providing this summary, I make no assessment of the merits of these arguments.

[62] First, the respondent creditors argue that the fact that the Mesbur Judgment was obtained on consent is relevant to whether the PPSA applies to the Mesbur Judgment. If the PPSA applies, they argue that this affects whether ACC is entitled to priority based on the Mesbur Judgment when the Judgment was not registered or perfected under the PPSA. They argue that a consent judgment does not reflect a judicial determination: Rick v. Brandsema, 2009 SCC 10, [2009] 1 S.C.R. 295, at para. 64; D’Onofrio v. Advantage Car & Truck Rentals, 2017 ONCA 5, 135 O.R. (3d) 260, at para. 44. They argue that, as a consent judgment, the security interest that the Mesbur Judgment creates in the BTIG is simply an agreement to create a security interest, which has been elevated to an order on consent. They further argue that the fact that this agreement was elevated to an order on consent does not change its character as an agreement to create a security interest because the PPSA applies to any transaction that, in substance, creates a security interest “without regard to its form”: PPSA, s. 2(a). It is undisputed that the Mesbur Judgment was not perfected by registration. Taking these points together, the respondent creditors argue that the fact that the Mesbur Judgment was obtained on consent represents a further basis to conclude that ACC’s unperfected security interest based in the assignment of the Mesbur Judgment is subordinate to the interest of parties entitled to participate on a pro rata basis in the distribution of property seized by garnishment, pursuant to s. 2(1) of the CRA and s. 20(1)(ii) or (iii) of the PPSA. If this argument is accepted, [4] it provides another basis to sustain the motion judge’s conclusion that ACC is not entitled to priority based on the Mesbur Judgment because its security interest was not perfected.

[63] Second, two of the respondent creditors, Dorr and Cherniak, argue that in light of the new information that the Mesbur Judgment was obtained on consent, it contravened ss. 3 and 4 of the Assignments and Preferences Act, R.S.O. 1990, c. A.33 (the “APA”), such that the Mesbur Judgment is void as against them. In particular, Dorr and Cherniak argue that there is reason to believe that the 167 respondents were insolvent as of January 2015, when the Mesbur Judgment was issued. The 167 respondents knew of the claims of Dorr and Cherniak at the time the Mesbur Judgment was issued, but gave no notice to Dorr and Cherniak of the proceedings. They further argue that there is a basis to conclude that in entering into the Mesbur Judgment on consent, the 167 respondents preferred Ms. Friendly and her corporation as creditors, voluntarily or by collusion with Ms. Friendly, with intent to defeat other creditors, contrary to s. 3 of the APA. In the alternative, Dorr and Cherniak argue that the consent judgment is a conveyance or transfer made with intent to defeat creditors, contrary to s. 4 of the APA. If these arguments are accepted, then the Mesbur Judgment would be void as against any creditor against whom the 167 respondents engaged in an unjust preference and ACC would not be entitled to share in the disputed garnishment funds on a pro rata basis.

[64] As noted above, the respondent creditors were denied the opportunity to raise these arguments before the motion judge, and to develop the appropriate evidentiary record, because ACC did not disclose before the motion judge that the Mesbur Judgment was obtained on consent. As a matter of fairness, the respondent creditors should be given an opportunity to create a record and make submissions on these issues.

[65] I have considered whether this court can decide these issues on the existing record. In my view, we cannot do so. There are factual uncertainties about the circumstances in which the Mesbur Judgment was issued on consent. The record below is insufficient for this court to make findings on the issues that arise from the disclosure that the Mesbur Judgment was obtained on consent. To give a couple of examples:

• Although there is some suggestion in the record that 167 was insolvent at the time the Mesbur Judgment was issued, the parties did not directly join issue on this question before the motion judge, and the motion judge made no findings on this issue. In my view, the record is insufficient for this court, sitting on appeal, to make the necessary findings.
• The question of whether the settlement which was the basis for the consent Mesbur Judgment was made with intent to defeat creditors at the time it was entered into was not the subject of evidence before the motion judge, nor did he make factual findings on this issue. There is simply no record at all on this issue – which turns on the intent of the 167 respondents and Ms. Friendly at the time of the Mesbur Judgment – that would allow this court to make the necessary factual findings.

[66] My conclusion that the issue of priorities as between the remaining creditors after MCAP’s Shortfall Judgment is satisfied should be remitted to the motion judge is fortified by the fact that on the record before the court, it appears somewhat speculative that the garnishment will produce funds beyond the approximately $512,000 necessary to satisfy MCAP’s Shortfall Judgment.

[67] As noted above, the motion judge found that at the time of the motion, the amount available and payable to 167 under the BTIG was approximately $167,000. He further found that additional amounts may become available in the future as the development of the Property is completed. However, those potential additional amounts were not quantified. These findings by the motion judge were based on information provided to the parties by the City of St. Catharines, which does not appear to have been the subject of dispute.

[68] The amount of MCAP’s shortfall judgment, as quantified in the order of the motion judge, is approximately $512,000 (plus post-judgment interest). Based on the amount of $167,000 due to 167 as proceeds of the BTIG at the time the motion was heard, there were not funds, at that time, to satisfy the whole of MCAP’s Shortfall Judgment. It follows that, at that time, there were no funds available from the BTIG proceeds to satisfy the claims of other creditors.

[69] The motion judge described his conclusions regarding priorities of other creditors after MCAP’s Shortfall Judgment was paid as findings “in the alternative”, if his finding about MCAP’s priority for the Shortfall Judgment was incorrect. It may not be strictly accurate to describe those findings as “in the alternative”, as the motion judge’s order contains operative paragraphs setting out priorities of the other creditors “after the Shortfall Judgment has been satisfied”. However, the combination of the motion judge’s findings that, at the time of the motion, $167,000 was due to 167 under the BTIG, that the amount of the Shortfall Judgment is $512,000, and his description of his findings about the priorities of the remaining creditors as being “in the alternative” suggests that the motion judge was of the view that it was unlikely that after MCAP’s Shortfall Judgment was satisfied any proceeds of the BTIG would remain to satisfy the claims of other creditors.

[70] Thus, in addition to the need for further factual findings, the fact that the issue of priorities after MCAP’s Shortfall Judgment is satisfied appears somewhat hypothetical at this stage also counsels against this court deciding these issues. Remitting this issue to the motion judge will also give the parties an opportunity to assess whether there are realistically further funds forthcoming before continuing these proceedings before the motion judge.

(d) The “side deal” argument

[71] Before turning to the specific order disposing of the appeal, I address one additional ground of appeal raised by ACC that, in my view, it is not appropriate for this court to consider in light of the issues I would remit to the motion judge.

[72] The motion judge held that ACC’s claim under the Mesbur Judgment was limited to $400,000. This was based on a consent endorsement of Paisley J., dated December 6, 2016. Based on the consent of 167 and Mr. Elkind, the endorsement affirmed the validity of the assignment of various judgments, including the Mesbur Judgment, to ACC by Ms. Friendly and her corporation. The endorsement also contained a “side deal” which the motion judge found limited ACC’s entitlement under the assignment to $400,000.

[73] On appeal, ACC argued that the motion judge’s interpretation of the side deal portion of the endorsement is tainted by palpable and overriding error.

[74] In light of the fact that I would remit the issue of priorities as between ACC and the other unsecured judgment creditors to the motion judge, it is premature for this court to consider whether the motion judge erred in finding that the side deal portion of the endorsement of Paisley J. limited ACC’s claim under the assigned Mesbur Judgment to $400,000. The necessity to consider whether ACC’s claim under the assigned Mesbur Judgment is limited to $400,000 only arises in the context of the priorities issue in this garnishment hearing in the event ACC is either found to have priority over the other unsecured creditors or is entitled to a pro rata share of the proceeds of the garnishment after MCAP’s Shortfall Judgment is satisfied. As I would remit that issue to the motion judge, it is not appropriate for this court to consider the motion judge’s interpretation of the side deal portion of the Paisley endorsement.

Disposition

[75] I would allow the appeal in part. I would affirm paras. 1 to 4 of the order of the motion judge, dated April 22, 2022. I would set aside paras. 5 and 6 of the order, and modify para. 7 to set aside the portion: “All other motions are dismissed.”

[76] I would remit to the motion judge, pursuant to s. 134 of the Courts of Justice Act, R.S.O. 1990, c. C.43, the issue of the priority of creditors after MCAP’s Shortfall Judgment is satisfied. The motion judge may provide direction to the parties regarding filing additional material as a result of the new information that the Mesbur Judgment was obtained on consent.

[77] At the close of the hearing of the appeal, all parties except for the 167 respondents reached agreements with respect to costs of the appeal. However, that was before the creditor respondents learned the new information that the Mesbur Judgment was obtained on consent. In light of the significant change that this information makes to the landscape of the litigation, in my view, it is not appropriate to hold the parties to the agreements regarding costs of the appeal. I note as well, that at least one respondent requested the opportunity to make further submissions on costs of the appeal in its written submission regarding the new material.

[78] If the parties are unable to agree on costs of the appeal, they may make written submissions not exceeding three pages each. The submissions of the respondents shall be delivered within 15 days of the release of these reasons. The appellant’s submissions shall be delivered within ten days after receipt of those of the respondents.

Released: June 15, 2023 “D.B.”

“J. Copeland J.A.”

“I agree. David Brown J.A.”

“I agree. Sossin J.A.”

Footnotes

[1] It became apparent after the hearing of the appeal, and only as a result of an inquiry by this court, that a significant fact about the Mesbur Judgment was not placed before the motion judge or known to the respondent creditors – that it was a consent judgment based on a settlement. This fact has consequences for the second legal issue in this appeal, but not for the issue of the priorities as between MCAP and ACC for the shortfall judgment.

[2] In his reasons, the motion judge acknowledged that r. 29 of the Family Law Rules, O. Reg. 114/99, addresses garnishment in family proceedings. However, he found that, although the matter emerged from the family proceedings between Ms. Friendly and Mr. Elkind, the issues raised in relation to garnishment were not adequately addressed by r. 29. As permitted by r. 1(7) of the Family Law Rules, he found it appropriate to make reference to the Rules of Civil Procedure, and in particular, r. 60.08.

[3] The motion judge appears to have assumed that the PPSA applied to the Mesbur Judgment, and not considered whether one of the exceptions to the application of the PPSA in s. 4(1) were engaged.

[4] Whether the fact that the Mesbur Judgment was obtained on consent impacts the analysis of whether one of the exceptions in s. 4(1) of the PPSA is engaged would also have to be considered.