SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: Keith Alexander, Arthur Barkin, Marshall Barkin, Harvey Frisch, Eric Grossman, Robert Grossman, Stanley Grossman, Tom Koffler, Avi Ritter, Mark Simon, Judith Sporn, Stephen Stark, Michael Steinberg, John Uster, Steven Warsh and David Yarmus, Applicants

AND:

2025610 Ontario Limited, Kaptor Financial Inc. and Insignia Trading Inc., Respondents

BEFORE: D. M. Brown J.

COUNSEL: J. Larry, for the Applicants A. O’Brien, for the Respondents W. Jaskiewicz, for Bibby International Trade Finance R. English, for Toronto Dominion Bank D. Stewart, for SF Partnership LLP

HEARD: June 8, 2012

REASONS FOR DECISION

I. Application for the appointment of a receiver

[1] Eric Inspektor and his family control and manage a group of companies called the “Kaptor Group”. That Group included the respondents, 2025610 Ontario Limited, Kaptor Financial Inc. and Insignia Trading Inc. It used to include CarCap Inc. and Car Equity Loans Corp, but those companies were placed into receivership last December and their assets sold pursuant to court order this past March.

[2] The applicants invested money in 2025610 Ontario Limited (“202”) and Kaptor Financial Inc. (“KFI”). Neither is engaged in active business.[^1] The respondent, Insignia Trading Inc., carries on business as the distributor of household merchandise, and it looked, in part, to 202 and KFI for funds to finance its operations.

[3] The applicants seek the appointment of a receiver over all the respondents alleging, in the case of 202 and KFI, defaults under loan agreements, and in the case of all three respondents breaches of an April 17, 2012 Forbearance Agreement. The respondents opposed the appointment of a receiver.

[4] For the reasons set out below, I grant the application.

II. Evidence

A. Overview

[5] According to Robert Grossman, who filed the affidavit on behalf of the applicants, KFI financed the operations of the CarCap Companies, which are now in receivership. The applicants were amongst the persons who invested money in KFI. Mr. Grossman deposed that KFI owes the applicants about $8 million which now is in default.

[6] 202 owns 48% of KFI’s equity with 60% of its voting rights. Individual investors, including some of the applicants, own the remaining 52% equity in KFI carrying 40% of the voting rights. Some of the applicants loaned 202 approximately $7 million which they contend is now in default.

[7] Eric Inspektor controls 202 and has managed KFI.

[8] KFI owns 60% of Insignia, with the remaining equity held by two children of Eric Inspektor, Russel and Darren Inspektor.

[9] Mr. Grossman deposed that the applicants have not been able to ascertain what has happened to the approximately $15 million which they have invested in 202 and KFI.

B. Loans and security

Loans to KFI

[10] Loans by the applicants to KFI were secured by short term and/or convertible debentures requiring monthly interest payments. KFI ceased paying interest at the end of August, 2011, putting it in default of the terms of the debentures. Mr. Grossman filed proof of the registration under the PPSA of his security interest given by the debentures. The debentures provided that in the event of default the creditor could apply to court for the appointment of a receiver. On December 28, 2011, Robert Grossman, and other applicants, served KFI with Notices of Intention to Enforce Security under section 244(1) of the Bankruptcy and Insolvency Act. Notwithstanding those demands, KFI has not repaid the debts owed.

Loans to 202

[11] Loans by the applicants to 202 were by way of demand promissory notes with fixed repayment dates. Evidence was filed of demands on some of those notes for which principal had not been repaid by the stipulated date.

[12] In August, 2011, some applicants loaned $1.45 million to 202 pursuant to a Co-Tenancy Agreement amongst the investors, 202, Mr. Inspektor and his wife, Lynette Inspektor. The Co-Tenancy Agreement stipulated that the funding to 202 was for the purpose of assisting “it in providing short term funding against a portfolio of car loans”. On December 28, 2011 certain of the applicant investors demanded repayment of their investments because they had “learned that the monies they advanced were not, in fact, used for the purpose of funding car loans as required by the Co-Tenancy Agreement.”

Insignia

[13] The applicants did not loan money to Insignia. The evidence showed that Insignia owed KFI somewhere between $2 million and $8.2 million.

[14] Mr. Grossman deposed that some investors had loaned money to 202 for the express purpose of financing inventory purchases by Insignia, but the evidence filed related to investors who were not named applicants.

[15] Nevertheless, it is clear from an “Investor Package” dated January 18, 2012 prepared by Mr. Inspektor for “The Kaptor Group” that he treated the respondents as a closely linked and integrated group of companies for the purpose of presenting a work-out plan to those who had invested in all three respondents. Mr. Inspektor admitted the fact of the inter-company indebtedness in his May 31, 2012 affidavit.

C. The Monitoring and Forbearance Agreement

[16] In early April, 2012 the applicants informed the respondents that they intended to seek the appointment of a receiver and provided the respondents with a draft Notice of Application and the affidavit of Mr. Grossman sworn April 2, 2012.

[17] Negotiations ensued resulting in an April 17, 2012 monitoring and forbearance letter agreement amongst the applicants, 202, KFI and Insignia (the “Forbearance Agreement”). The Forbearance Agreement also was signed by Eric Inspektor, Lynette Inspektor, Darren Inspektor and Russel Inspektor in their personal capacities. Under the Forbearance Agreement 202, KFI and Insignia consented to the appointment of Soberman Inc. as Monitor over each of them. The respondents agreed to fund the Monitor. The Monitor’s mandate included conducting a forensic audit of the respondents and securing “complete and unfettered access” to the respondents’ business premises, securing “complete, unfettered access” to “all books and records” of the respondents. The respondents agreed to disclose all their bank accounts to the Monitor, and 202 and KFI agreed to add the Monitor as one of the two signatories required on all cheques. As well, Insignia agreed to provide the Monitor with a weekly operating budget which “shall be approved by the Investor Group, acting reasonably”. Limits were placed on the respondents’ ability to incur debt or dispose of assets.

[18] Concurrent with entering into the Forbearance Agreement the respondents, through their counsel, signed a Side Letter which stated, in part:

The parties understand and agree that in the event that there is a breach of any term of the Letter Agreement that is not cured within 3 days of receiving notice thereof, the Investor Group may commence proceedings in the Ontario Superior Court of Justice under the Bankruptcy and Insolvency Act and/or the Courts of Justice Act to appoint a receiver over the assets, undertakings and property of any one or more of 202, Kaptor Financial and Insignia.

It is further agreed that each of 202, Kaptor Financial and Insignia will sign a consent to the appointment of a receiver, in the form attached as Schedule “A”, which consent shall be held in escrow by the Investor Group’s counsel and may be released from escrow and relied upon in the event of a default as contemplated above.

[19] In his initial responding affidavit of May 22, 2012, Eric Inspektor questioned the inclusion of certain terms in the Forbearance Agreement and Side Letter, hinting that he had only recently learned of their existence. I give no credence to Mr. Inspektor’s efforts to distance himself and Insignia from those agreements. Mr. Inspektor is an experienced businessman and he signed the Letter Agreement. He was represented by very experienced counsel – Mr. Mel Solmon – who signed the Side Letter on behalf of the respondents.

III. Review of the respondents’ position on their indebtedness and default

[20] In his initial responding affidavit of May 22, 2012 Eric Inspektor did not respond in any fashion to the applicants’ evidence establishing their loans, the security they had received, the defaults by 202 and KFI, and the demands for repayment made to those companies by the applicants.

[21] In his second affidavit dated May 31, 2012 Eric Inspektor deposed:

There has been no independent or objective vetting of the security or levels of investment claimed by the Applicants. The alleged indebtedness has been exaggerated and misrepresented to the Court.

[22] Although Mr. Inspektor deposed that “the Kaptor Group has from time to time provided an accounting to the Investor Group of the outstanding indebtedness due and owing to them”, he did not provide any statement of accounts in his affidavit. He simply asserted that “the amounts owing to the Investor Group are in dispute” and “until the forensic audit is conducted and security is vetted, the Investor Group status standing and amount at issue is in doubt”.

[23] In sum, when faced with evidence by the applicants that they had loaned $15 million to 202 and KFI, Mr. Inspektor did not dispute the fact of some indebtedness – his January, 2012 work-out proposal closed that avenue to him - offered no evidence on the amount of the indebtedness, notwithstanding the receipt of funds by 202 and KFI, and did not dispute the allegations of default or entitlement to repayment. His evidence on the issues of indebtedness and default was vague and evasive.

[24] I find, on the evidence filed, that 202 and KFI are indebted to the applicants for significant sums of money and are in default of their obligations to repay. Mr. Inspektor did not respond in any meaningful way to the applicants’ evidence about the amount of the debt or the default, and the respondents’ entry into the Forbearance Agreement and Side Letter confirms the fact of the indebtedness and default – companies which are not in default of their obligations do not enter into such agreements, especially when they have the assistance of highly experienced insolvency counsel.

[25] I also find that the Kaptor Group, as described by Mr. Inspektor in his January, 2012 Investor Package, has an excess of liabilities over assets of approximately $13 million. In addition, from the weekly budget submitted by Insignia for the week ended May 18, 2012, it is clear that Insignia is operating at a loss.

IV. Review of the allegations of default under the Side Letter

A. The allegations of default

[26] The Forbearance Agreement was entered into on April 17, 2012. According to the Monitor’s First Report dated May 25, 2012, on its first attendance at the respondents’ premises on April 27 the Monitor requested:

(i) access to certain books and records of the businesses;

(ii) access to the online bank statements of 202 and KFI; and,

(iii) its addition as co-signatory on the bank accounts of 202 and KFI.

[27] By May 9 the respondents had provided much of the documentation requested by the Monitor; however, 202 and KFI had not facilitated the addition of the Monitor as co-signatory on their accounts nor provided online access to their accounts. Nor had Insignia provided a weekly operating budget for approval by the applicants. The Monitor also informed the respondents of material deficiencies in their financial statements and records which were preventing the preparation of the forensic audit.

[28] In its First Report the Monitor stated that instead of receiving complete and unfettered access to the respondents’ books and records as required by the Forbearance Agreement, records were not released until first reviewed and authorized by Eric Inspektor.

[29] The Monitor reported that by May 10 the respondents had committed several defaults of the Forbearance Agreement, including (i) their failure to provide online access to bank statements, (ii) their failure to add the Monitor as co-signatory for the accounts of 202 and KFI, and (iii) Insignia’s failure to provide weekly operating budgets.

[30] On May 10 the Monitor wrote Eric Inspektor requiring the rectification of those failures by May 11, failing which the Monitor would inform the applicants that the respondents were in default of the Forbearance Agreement.

[31] On May 11 the respondents provided online access to bank records and presented a first budget. However, arrangements were not made to add the Monitor as the second signature on 202 or KFI accounts. A further letter of May 17 was sent to the respondents advising them of their continuing default on that matter. The default was not remedied by the respondents until May 18, under further pressure from the Monitor. The evidence shows that the reason for the delay was the unwillingness of Eric Inspektor to make himself available to change the account signing cards or to send an appropriate direction to the bank to add the Monitor to the accounts.

[32] Upon obtaining online access to bank statements for 202 and KFI on May 11, the Monitor discovered that between April 17 and May 11, 2012, funds had been paid from those accounts to Eric Inspektor and his wife in respect of “shareholder loans”, “consulting fees”, and a “guarantee fee”. Payments to Eric Inspektor and his wife totaled about $60,000 and payments to their related company, 1360403 Ontario Limited, totaled $52,000. Funds also had been transferred to Insignia. In respect of those transactions the Monitor reported:

It appears from the Monitors’ initial review that the excessive delay by Eric Inspektor to add the Monitor as a 2nd signature on the bank accounts during this time a number of payments to Eric and Lynette Inspektor were made without the authorization or approval of the Monitor during the Monitoring Period (April 17, 2012 onwards). The Monitor sees this as a default of the Monitor Agreement (par. 9).

Although the Monitor has not fully reviewed the circumstances of these payments from 2025610 Ontario Ltd. and Kaptor Financial Inc. to the Inspektors, the Monitor notes the quantum and frequency of the payments to be unusual for corporations which do not carry on active business.

[33] The first budget presented by Insignia was for the week ending May 18 showed an operating deficit of $32,900. The second largest operating expense was payroll of $11,500, most of which would be payable to members of the Inspektor family working for the respondents.

[34] On May 17 the applicants informed the respondents that a payment of $10,000 was due the next day to the Monitor as required by paragraph 2 of the Forbearance Agreement. The respondents did not make that payment; their default remains outstanding.

B. The position of Eric Inspektor

[35] In his two affidavits Eric Inspektor offered several explanations for the events which transpired between the appointment of the Monitor and the First Report of the Monitor of May 25, 2012, including the following:

(i) “the information requests had nothing to do with doing a forensic review of the historic operations and transactions of the companies”;

(ii) The Monitor “began to make demands and requests for information in a peremptory and dictatorial manner”;

(iii) The Bank would only add the Monitor as a signatory if a personal attendance was made with the presentation of photo ID. That turned out to be inaccurate; Mr. Inspektor ultimately ended up sending a May 18 letter of authorization;

(iv) The Monitor attempted to create “circumstances of default simply for the purposes of trying to use the Forbearance letter that was entered into and that they have done so in bad faith”;

(v) The respondents “saw absolutely no reason to make the $10,000” payment to the Monitor since the applicants had taken the position that the respondents were in default of the Forbearance Agreement and would be seeking the appointment of a receiver;

(vi) The payments to Lynette and himself out of the accounts of 202 and KFI were to repay Lynette, as a creditor, for funds she had advanced to the respondents and to pay them both amounts due under their employment contracts for the first 3.5 months of 2012.

C. Findings of fact

[36] When read as a whole, the Forbearance Agreement and Side Letter were designed to provide the applicants, through the appointment of the Monitor, with complete and unfettered access to the respondents’ books and records so that they could attempt to find out what had happened to the significant amount of money they had loaned to 202 and KFI. The inclusion of Insignia in those agreements reflected the business reality of the high degree of inter-relatedness amongst the Kaptor Group of companies. In order to ensure that the operations of the respondents, pending completion by the Monitor of a forensic audit, were limited to ordinary course transactions, the Forbearance Agreement imposed restrictions on the respondents’ operations and provided the Monitor with access to all material financial and operational information about the companies. That the applicants were affording the respondents a “last chance forbearance” from enforcement by such an arrangement was signaled by the tight default provisions contained in the Side Letter and the applicants’ securing of the respondents’ consents to the appointment of a receiver in the event of an uncured default.

[37] Against that background, I have reviewed carefully Mr. Inspektor’s affidavits of May 22 and 31, 2012. In them he developed the theme that he really did not know what he was getting into when he agreed to the appointment of a Monitor, he has had second thoughts, and he is not prepared to have his companies fund the Monitor anymore.[^2] As I noted above, I give no credence to Mr. Inspektor’s efforts to distance himself and Insignia from the contents of the Forbearance and Side Agreements. Mr. Inspektor and the respondents entered into those agreements freely and with independent legal advice.

[38] The evidence filed by the applicants and Eric Inspektor reveals, and I find, that following the appointment of the Monitor Mr. Inspektor, as the person in control of the respondents, did not provide the Monitor with “complete and unfettered access” to the respondents’ records. He insisted on reviewing and authorizing the release of information, thereby impeding and delaying access by the Monitor.

[39] The respondents did not provide the Monitor with online access to their banking records for over three weeks after the execution of the Forbearance Agreement and for two weeks after the Monitor had made formal demand. There was no reasonable excuse offered by the respondents for such a failure. While the respondents ultimately “cured” the defect by giving access and arranging for the co-signature, I conclude from the evidence that the respondents delayed providing such access in order to arrange payments to members of the Inspektor family, and their related companies, in preference to payments to other creditors, including the applicants. That is clear from the information the Monitor obtained about withdrawals from the 202 and KFI accounts once it had secured online access.

[40] In his second affidavit Mr. Inspektor deposed that “the only purpose for the appointment of the Monitor was to give the Applicants comfort while the forensic audit was performed.” That is an ironic statement given the payments which Mr. Inspektor made to his wife and himself from the bank accounts of 202 and KFI during the period of April 17 to May 18 when he delayed placing the Monitor on those accounts as a signing authority.

[41] While the respondents cured their default in respect of providing online access to bank records and adding the Monitor to as signatory for the 202 and KFI accounts, the “cure”, for all practical purposes, was too late and therefore meaningless. By the time the Monitor had secured access and signing authority, the damage had been done, to the prejudice of the applicants and other arm’s-length creditors of 202 and KFI.

[42] There is no dispute that the respondents failed to make the $10,000 payment due to the Monitor on May 18, 2012. I do not accept Mr. Inspektor’s explanation that he was justified in so doing because the applicants were intending to apply before the court for the appointment of a receiver. Mr. Inspektor’s position would stand the Forbearance Agreement and Side Letter on their heads. The respondents were granted forbearance on very strict terms, understandably strict in light of the respondents’ failure to account for the significant sums loaned by the applicants. As I have found, after the execution of the Forbearance Agreement the respondents failed to provide timely and meaningful access to information about the accounts of 202 and KFI and, by the time they had, the preferential withdrawals in favour of the Inspektor family had been made and the damage done. Under those circumstances the applicants’ intention to apply to court for a receiver was understandable. However, it did not relieve the respondents of their obligation to continue to fund the Monitor. The respondents’ refusal to make the May 18 payment of $10,000 to the Monitor in my view simply re-inforced the message their conduct had been conveying that they were not prepared to comply with the terms, or the spirit, of the Forbearance Agreement.

V. Consideration of the applicants’ request to appoint a receiver

[43] The general principles guiding a court’s consideration about whether to appoint a receiver were set out in Bank of Nova Scotia v. Freure Village on Clair Creek:

The Court has the power to appoint a receiver or receiver and manager where it is "just or convenient" to do so: the Courts of Justice Act, R.S.O. 1990, c. 43, s. 101. In deciding whether or not to do so, it must have regard to all of the circumstances but in particular the nature of the property and the rights and interests of all parties in relation thereto. The fact that the moving party has a right under its security to appoint a receiver is an important factor to be considered but so, in such circumstances, is the question of whether or not an appointment by the Court is necessary to enable the receiver-manager to carry out its work and duties more efficiently…It is not essential that the moving party, a secured creditor, establish that it will suffer irreparable harm if a receiver-manager is not appointed…[^3]

[44] The applicants gave notice of this proceeding to the secured creditors of 202, KFI and Insignia. Some secured creditors were parties related to the Inspektor family; they opposed the application. Their interests are identical to those of the respondents. As to the arm’s-length secured creditors, two appeared on the return of the application – Bibby Financial Services (Canada) Inc. and Toronto-Dominion Bank - and neither opposed the appointment of a receiver.

[45] In the present case the applicants loaned monies to KFI, obtained security for their loans, KFI defaulted on the loans, demand was made, and the applicants enjoyed the right under their security to apply for the appointment of a receiver. So, too, the applicants loaned money to 202, default occurred and demand was made, although the applicants do not hold security which entitles them to the appointment of a receiver.

[46] However, as Mr. Inspektor’s January, 2012 proposal to the applicants and other investors demonstrated, the “Kaptor Group”, including KFI, 202 and Insignia, were highly inter-related companies run as a group. The April Forbearance Agreement signified that the respondents realized that if they were to secure the forbearance of significant creditors, they would have to provide transparency to the creditor/applicants about the affairs of the remaining operating company, Insignia, to which both 202 and KFI had provided funds, and provide the creditors with sufficient comfort to justify their forbearance by exposing the business of Insignia to a possible receivership if the respondents did not live up to their promises of transparency. I reiterate: those were heavy terms, but reasonable in the circumstances and ones freely entered into by the respondents with the benefit of independent legal advice.

[47] The respondents did not live up to their promises. They failed to make the May 18 payment of $10,000 to the Monitor. That was a breach of section 2 of the Forbearance Agreement. That breach triggered the rights of the applicants under the Side Letter, including the right to rely on the respondents’ consents to the appointment of a receiver.

[48] In addition, the respondents’ unjustifiable delays in providing the Monitor with online access to their bank accounts and adding the Monitor as a signatory to the 202 and KFI accounts, when coupled with the self-dealing withdrawals the Inspektors undertook during the period of delay, constituted material breaches of sections 6 and 9 of the Forbearance Agreement. The late technical cures of those breaches made by the respondents did not cure the actual damage caused by the breaches. As a result, I regard those breaches as entitling the applicants to invoke the terms of the Side Letter for the appointment of a receiver over all three respondents.

[49] Moreover, I regard that conduct, against the backdrop of all three respondents agreeing to the obligations contained in the Forbearance Agreement, as making it just and convenient to appoint a receiver over the three respondents under section 101 of the Courts of Justice Act. The respondents, by their conduct, turned their backs on their obligations under the Forbearance Agreement, thereby disentitling themselves to the benefit of the forbearance afforded by the applicants. The applicants understandably have lost confidence in the respondents’ willingness to comply with the terms of the Forbearance Agreement and want the benefit of a court-appointed receiver to obtain timely directions and approvals in the realization process for the benefit of all creditors.[^4]

[50] With the benefit of independent legal advice the respondents provided consents in escrow for the appointment of a receiver. I regard it just and convenient to appoint a receiver to make good the consents given by the respondents.

[51] Although the applicants did not loan monies to Insignia, that company owes KFI somewhere between $2 million and $8 million. Although Insignia owes a secured creditor, Bibby, about $270,000, as confirmed by Bibby’s counsel at the hearing, a very significant receivable remains due and owing to KFI. A receivership of KFI inevitably will result in calls on Insignia to repay those loans. No doubt that degree of inter-connectedness between the two companies underlay the inclusion of Insignia in the Forbearance Agreement and Side Letter. Insignia appears to be insolvent on a balance sheet and operating basis. Its inclusion in the receivership therefore is justified not only by the terms of the Forbearance Agreement and Side Letter, but also by commercial practicality.

[52] Accordingly, I grant the application to appoint Soberman Inc. as Receiver of 202, KFI and Insignia.

[53] I have reviewed the terms of the proposed Receivership Order. The auditors of KFI, SF Partnership LP, proposed some changes to the language of the Model Order regarding the production of books and records. The applicants and SF Partnership have agreed on that language. Bibby Financial also proposed changes to take into account its factoring arrangement with Insignia; the applicants have agreed to those changes. The changes sought are reasonable in the circumstances. Consequently, I have signed the amended order submitted by the applicants.

[54] I would encourage the parties to try to settle the costs of this application. If they cannot, the applicants may serve and file with my office written cost submissions, together with a Bill of Costs, by Friday, June 29, 2012. The respondents may serve and file with my office responding written cost submissions by July 13, 2012. The costs submissions shall not exceed three pages in length, excluding the Bill of Costs.

D. M. Brown J.

Date: June 18, 2012

[^1]: Respondents’ Factum, para. 69. [^2]: Strikingly, in the January, 2012 Investor Package for The Kaptor Group, Eric Inspektor also complained about the unfairness of the forbearance agreement entered into with Callidus in October, 2011: see Application Record, Vol. 1, pp. 125-6. [^3]: (1996), 1996 CanLII 8258 (ON SC), 40 C.B.R. (3d) 274 (Ont. Gen. Div.), para. 11, citations omitted. [^4]: GE Commercial Distribution Finance Canada v. Sandy Cove Marine Co., 2011 ONSC 3851, paras. 21 and 22.