SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: 1529599 Ontario Limited, Applicant

AND:

Dalcor Inc., Respondent

BEFORE: D. M. Brown J.

COUNSEL:
S. Thom, for the Applicant

C. Daley, in person for the Respondent

HEARD: September 19, 2012

REASONS FOR DECISION

I. Overview

[ 1 ] 1529599 Ontario Limited (“152”) applied for orders appointing A. Farber & Partners Inc. as receiver and manager over the assets and undertaking of Dalcor Inc. (“Dalcor”) and judgment against Dalcor in the amount of $100,000.00 in respect of a promissory note dated March 11, 2010 (the “Note”).

[ 2 ] Dalcor issued a notice of counter-application seeking the return of construction equipment seized by 152 and damages for losses allegedly suffered as a result of that seizure.

[ 3 ] The cardinal issue in dispute between the parties is whether Dalcor has paid the first installment of $50,000 under the Note.

[ 4 ] I find that Dalcor has not. I grant the relief sought by 152, and I dismiss part of Dalcor’s counter-application, deferring the balance.

II. Procedural history

[ 5 ] When this application came before me on May 25, 2012, I adjourned the application to permit the calling of viva voce evidence. In light of new evidence the applicant wished to file on the return of the application on June 22, I further adjourned the matter and permitted the respondent to file a reply affidavit. The hearing did not proceed as scheduled on July 25 because respondent’s counsel sought to get off the record. On August 17, 2012 the respondent filed a reply affidavit. The applicant objected to the relevance of some portions of the affidavit. By endorsement dated September 5, 2012 I wrote: “Dalcor’s right of reply was limited to matters raised in that affidavit (June 22), so to extent Mr. Daley’s affidavit of Aug 17/12 (his late-filed reply affidavit) raises any matter which is not proper reply evidence, I will not take such improper evidence into account.” The matter finally proceeded, with viva voce evidence, on September 19, 2012. Mr. Charles Daley, the principal of Dalcor, represented the company at the hearing.

[ 6 ] The affidavits filed by both parties were marked as evidence at the hearing and I treated them as the examination-in-chief of the affiants, Brain Constans, the sole officer and director of 152, and Mr. Daley. Both Mr. Constans and Mr. Daley were cross-examined at the hearing.

III. The events

A. The February, 2010 share purchase agreement

[ 7 ] 152 used to own Zuron Construction Inc. (“Zuron”). Daley owns Dalcor. Prior to March, 2010, Daley had worked for Zuron.

[ 8 ] Under a share purchase agreement dated February 18, 2012, Dalcor purchased all issued and outstanding shares of Zuron from 152 for the price of $100,000.00, payable in two equal $50,000 installments on December 31, 2011 and December 31, 2012. At that time Daley operated both Dalcor and Zuron out of premises located at 10 Ruggles Avenue, Richmond Hill, which they leased from Cobra Power Inc., another company owned by Constans.

[ 9 ] Amongst the security granted by Dalcor for performance of the obligations set out in the Share Purchase Agreement were the Note dated March 11, 2010 and a General Security Agreement dated March 11, 2010.

[ 10 ] Under the Note both Dalcor and Zuron agreed to pay 152 the sum of $50,000 on December 31, 2011 and $50,000 on December 31, 2012. The last paragraph of the Note provided:

This Note shall be open for repayment at any time or times in whole or in part without notice or bonus. This note shall be due and payable in the event of the sale of the assets of Zuron Construction Inc. and/or there is a transfer or change of control in the shareholdings of Zuron Construction Inc. by Dalcor Inc.

[ 11 ] Under the General Security Agreement Dalcor granted to 152 a security interest in all its undertaking, property and assets, then owned or after-acquired, including equipment. The failure of Dalcor to pay 152 when due any obligation secured by the GSA constituted an event of default. The GSA provided that upon an event of default 152 would enjoy the rights and remedies provided by law, including applying to court for the appointment of a receiver of the collateral and 152 was entitled to take possession of the collateral.

[ 12 ] Around March 10, 2012, 152 delivered the Zuron shares to the escrow agent specified in the Share Pledge Agreement entered into between Dalcor and 152.

B. The dispute about whether Dalcor paid under the Note

[ 13 ] Dalcor was evicted from the Ruggles Avenue premises around the end of October, 2011.

[ 14 ] 152 alleged that Dalcor failed to make the first payment due under the Note on December 31, 2011. On March 8, 2012 counsel for 152 sent a demand letter to Dalcor, to the attention of Daley, demanding payment of the $50,000 due on December 31, 2011. The demand letter included a notice of intention to enforce security under section 244(1) of the Bankruptcy and Insolvency Act .

[ 15 ] Dalcor did not make any payments in response to that demand.

[ 16 ] Constans deposed that 152 is the only creditor with a registered security interest against Dalcor.

[ 17 ] On March 21, 2012 representatives of 152 attended at 1880 O’Connor Avenue, Toronto and seized three pieces of equipment owned by Dalcor. 152 took possession of the equipment, and it now is stored at 10 Ruggles Avenue. 152 also took possession of a 2006 Caterpillar 906 Loader owned by Dalcor located at the Ruggles Avenue location.

[ 18 ] On March 26, 2012 Dalcor’s counsel responded to the demand letter, describing the seizure of equipment as illegal because:

[C]ontrary to your client’s allegations, our client has made advance payments to your client’s company and/or associated companies, in respect of the Promissory Note on March 10, 2011 and April 20, 2011 in the amounts of $25,000.00 and $50,000.00 respectively, for a total payment by our client in the amount of $75,000.00.

In that letter, and in a subsequent letter of March 29, 2012, Dalcor demanded the return of the seized equipment.

IV. The positions of the parties

[ 19 ] 152 took the position that Dalcor had not made any payments under the Note and, therefore, its seizure of the equipment was lawful.

[ 20 ] Dalcor argued that in 2011 it had made three advance payments under the Note totaling $80,000.00, together with some cash payments. As a result, Dalcor contended that it was not in default under the Note, the seizures were unlawful, and it had suffered losses as a result.

V. Analysis

A. Did Dalcor pay $90,000 against the amounts due under the Note?

[ 21 ] Daley deposed and testified that several payments Dalcor made in 2011 constituted advance payments of amounts due under the Note:

(i) a Dalcor cheque dated March 2, 2011 in the amount of $5,000 made payable to Kenco Electrical Supply Inc. in Mississauga;

(ii) a Dalcor cheque dated March 16, 2011 in the amount of $25,000 made payble to Kenco;

(iii) a Dalcor cheque dated April 22, 2011 in the amount of $50,000 made payable to Cobra Power. The “Memo” section of the cheque recorded the word “loan”; and,

(iv) unspecified cash payments totaling $10,000.

Daley testified that each cheque represented a partial re-payment of amounts due under the Note and the cheques were made payable to the stated payees at the direction of Constans. The latter denied having given any such directions and testified that the cheques had nothing to do with the repayment of the amount due under the Note.

[ 22 ] For the reasons set out below, I do not accept Daley’s evidence that these three payments constituted repayments of the amount due under the Note.

[ 23 ] First, let me start with what Dalcor omitted to place into evidence. I think one can reasonably assume that Dalcor, as an operating company, maintains books and records, including financial statements, which record its debts, as well as any payments made against those debts. Dalcor placed none of its books and records into evidence even though Daley filed a total of four affidavits. The failure of Dalcor to file business records which showed that the three payments were treated, for its internal accounting purposes, as repayments of the amounts due under the Note weighs heavily against Daley’s contention that they were.

[ 24 ] Second, Dalcor could not point to any document passing between the parties, contemporaneous with any of the three payments, stating that the payments were to be treated as partial payments of the amounts due under the Notes. The parties papered the share purchase transaction in a very formal manner, with a Share Purchase Agreement and several related security documents. This was not a “back of the envelope” deal between two businessmen. Given that context, one reasonably would expect some formal documentation evidencing specific repayments of monies due under the Note.

[ 25 ] Third, on their face none of the three cheques were noted as constituting repayments of amounts due under the Notes.

[ 26 ] Fourth, regarding the two cheques Dalcor made payable to Kenco, Constans acknowledged that he was a shareholder in Kenco. At the hearing Daley conceded that Dalcor had bought some supplies from Kenco, perhaps tools. 152 filed a May 2, 2012 letter from Bruce Strain of Kenco stating that the March 18, 2011 cheque for $25,000 was received from Dalcor “on account for the supply and delivery of electrical materials to various project sites”.

[ 27 ] Although this evidence was filed on an “information and belief” basis, it is noteworthy that Mr. Strain included with his letter certain Kenco business records. One was a March 2, 2011 deposit slip for Kenco’s account at the Meridian Credit Union which identified, as part of that deposit, the amount of $5,000 from Dalcor “on account”. This coincided with the first Dalcor cheque in that amount dated March 2, 2011. The second was a March 16, 2011 deposit slip for Kenco’s Meridian account recording a deposit of $25,000 on that date of funds from Dalcor “paid on account”. This deposit coincided with Dalcor’s second payment to Kenco, the one dated March 16, 2011. At the hearing Daley rejected the suggestion that these slips recorded funds paid by Dalcor for supplies bought from Kenco and stated that the records were either erroneous or falsified. I do not accept Daley’s evidence on this point. The most probable conclusion to be drawn from this evidence is that on March 2 and 16, 2011 Dalcor paid Kenco $5,000 and $25,000 on account of supplies it had purchased and, therefore, those payments did not constitute the repayment of amounts due under the Note.

[ 28 ] Fifth, regarding Dalcor’s April 22, 2011 cheque to Cobra in the amount of $50,000, Daley deposed that as a result of Dalcor’s advance payments, Cobra provided it with a statement evidencing that only $10,000 was owing to Kenco regarding the Zuron purchase by Dalcor. In support of this statement Daley adduced an August 11, 2001 document on Cobra letterhead. Under the heading “Monies Owing to Cobra Power Inc.” appeared the line item: “Owing Kenco regarding Zuron Construction Inc. purchases, $10,000”. On its face this line item does not reference the Note or the Share Purchase Agreement.

[ 29 ] Constans deposed that the $50,000 payment to Cobra was made in partial satisfaction of debts incurred by Dalcor and Zuron in respect of rent and supplies acquired with Cobra’s credit. Constans testified that as of April 20, 2011, just prior to the $50,000 cheque, Dalcor and Zuron owed Cobra $124,666.20. In response Daley testified that a November 23, 2011 statement produced by Cobra’s accountant, Colavita & Associates, showed that no receivables were owing to Cobra from Zuron or Dalcor at that time. A May 22, 2012 letter the accountant, Joseph Colavita, stated that the document only showed the trade receivables of Cobra and did not show loans payable by Zuron or Dalcor because they were not regarded as trade receivables. Mr. Colavita wrote that as of May 22, 2012 Dalcor and Zuron owed Cobra $184,304. Daley submitted a May 9, 2011 Canada Revenue Agency Notice of Assessment for Dalcor assessing $62,385.11 for unremitted source deductions, including penalty and interest. As I read his May 10, 2012 affidavit, sworn one year after that notice of assessment, as of the latter date Dalcor still had not paid the assessed amount.

[ 30 ] The weight of this evidence shows that at the material time – April, 2011 – Zuron and Dalcor owned significant sums to Cobra. There is no doubt that the parties worked on some of the same construction projects. Although Daley attempted to demonstrate that in fact Dalcor and Zuron were loaning large amounts of money to Cobra at that time, an examination of some of the payments – e.g. the April 13, 2011 cheque for $58,000 – would indicate that the payments made by Dalcor and Zuron were in the context of ordinary course payments for specific construction projects on which both parties were involved. Again, the absence of any of the internal accounting records from Dalcor or Zuron makes it difficult to accept Daley’s characterization of the payments as advances against the Note.

[ 31 ] Sixth, Daley could provide no support for the various cash payments he contended reduced the overall debt to $10,000.

[ 32 ] Finally, the Note bore no interest. Accordingly, while the Note did allow for repayment at any time, the absence of any interest charged on the principal amount meant little financial incentive existed to make any pre-payment.

[ 33 ] In sum, the overwhelmingly weight of evidence leads to the conclusion that Dalcor has made no repayments of the monies due under the Note. I therefore find that Dalcor failed to pay the first installment due under the Note on December 31, 2011 and, as a result, an event of default occurred under the General Security Agreement.

B. What amount presently is due and owing under the Note?

[ 34 ] Under the Note Dalcor was required to pay 152 the sum of $100,000.00 in equal, $50,000 payments on December 31, 2011 and December 31, 2012. I have found that Dalcor has not made any payments under the Note. Dalcor therefore breached its obligation to pay $50,000 on December 31, 2011. The Note did not contain a standard acceleration clause. However, as noted, the last paragraph of the Note provided that the Note became “due and payable in the event of the sale of the assets of Zuron Construction Inc.”

[ 35 ] In paragraph 4 of his May 10, 2012 affidavit Daley deposed that Dalcor had taken possession of all the construction equipment and machinery owned or financed by Zuron, and he detailed the pieces of equipment transferred by Zuron to Dalcor. Daley stated that 152 had agreed to those transfers. Daley deposed that in 2011 had purchased from the leasor two pieces of Zuron equipment: a 2006 Caterpillar 420E Backhoe Loader and a 2006 Caterpillar 906 Loader.

[ 36 ] Constans, in paragraph 42 of his May 13, 2012 affidavit, denied that he had agreed to such transfers. Dalcor produced no documentary evidence supporting its contention that 152 had agreed to such transfers.

[ 37 ] Then, in paragraphs 3 and 4 of his May 23, 2012 affidavit, Daley deposed:

At no time was the above noted construction machinery and equipment transferred directly over to Dalcor. Dalcor as owner of the shares and assets of Zuron, by implication, became the owner of all construction machinery and equipment owned or financed by Zuron.

Zuron remains the registered owner of all construction equipment and machinery obtained through the transaction with 152.

[ 38 ] In contradiction of that evidence 152 adduced documents showing that three of the vehicles owned by Zuron at the time of the share purchase transaction were, as of May 27, 2011, insured in the name of Dalcor. In his August 17, 2012 reply affidavit Daley did not respond to this evidence, although in paragraphs 24 to 25 of his May 10, 2012 affidavit Daley had characterized one of the pieces – a 2006 Triaxle Trailer – as Dalcor’s equipment. At trial Daley acknowledged that Dalcor owned the three pieces of equipment for which it was designated as the insured.

[ 39 ] Daley’s assertion in paragraphs 3 and 4 of his May 23, 2012 affidavit that “at no time was the above noted construction machinery and equipment transferred directly over to Dalcor” simply is not borne out by the evidence. On his own testimony Daley admitted that Dalcor had purchased two pieces of equipment leased by Zuron and it owned three other pieces for which Dalcor was registered as the insured. From this evidence I conclude that some equipment owned by Zuron at the time of the share purchase agreement was transferred to or bought by Dalcor. I prefer Constans’ evidence that 152 did not consent to such transfers of Zuron equipment over the inconsistent evidence of Daley on the point. I therefore find that after the execution of the Note there was a sale of some of the assets of Zuron and that, in accordance with the terms of the Note, the entire amount under the Note became due and payable. I conclude that Dalcor owes 152 the sum of $100,000.00 under the Note, and judgment shall issue in favour of 152 against Dalcor for that amount.

C. Request to appoint a receiver over the assets and undertaking of 152

[ 40 ] In Bank of Nova Scotia v. Freure Village on Clair Creek , 1996 8258 (ON SC) , [1996] O.J. No. 5088 (Gen. Div.) the Court described the basic principles governing the judicial appointment of a receiver/receiver-manager:

10 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; see generally Third Generation Realty Ltd. v. Twigg (1991) 6 C.P.C. (3d) 366 at pages 372-374 ; Confederation Trust Co. v. Dentbram Developments Ltd. (1992), 9 C.P.C. (3d) 399 ; Royal Trust Corp. of Canada v. D.Q. Plaza Holdings Ltd. (1984), 1984 2343 (SK QB) , 54 C.B.R. (N.S.) 18 at page 21. 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: Swiss Bank Corp. (Canada) v. Odyssey Industries Inc. (1995), 30 C.B.R. (3d) 49 .

Although Dalcor argued that the appointment of a receiver is an extraordinary remedy to be granted sparingly, as observed by Newbould J. in paragraph 25 of his reasons in Bank of Montreal v. Carnival National Leasing Ltd. , 2011 ONSC 1007 (S.C.J.), the line of cases expressing that principle do not deal with the situation of a secured creditor, such as 152, exercising its right to enforce its security.

[ 41 ] In the present case it would be just or convenient to appoint a receiver over the assets and undertaking of Dalcor for the following reasons:

(i) Dalcor owes 152 the sum of $100,000;

(ii) The GSA dated March 11, 2010 grants 152 a security interest in the undertaking, property and assets of Dalcor and enables 152 to appoint a receiver/receiver-manager of the collateral upon an event of default;

(iii) An event of default occurred when Dalcor failed to make the December 31, 2011 payment under the Note;

(iv) The evidence disclosed that Dalcor will not co-operate with the private appointment of a receiver by 152. Indeed, Dalcor’s principal, Daley, has disputed any indebtedness, and I have rejected his evidence; and,

(v) There is evidence that Dalcor may owe the CRA a significant sum of money. The appointment by the court of a receiver will ensure that competing claims to the assets and undertaking of Dalcor are dealt with in an equitable fashion.

[ 42 ] A. Farber & Partners Inc. has consented to act as receiver. I appoint Farber as the receiver and manager of the assets, undertaking and property of Dalcor, and I have signed the draft order submitted by 152 at the hearing.

D. Dalcor’s counter-application

[ 43 ] In light of my findings that Dalcor defaulted on its obligations under the Note and that 152 was granted a security interest in the GSA with the power to appoint a receiver in the event of Dalcor’s default, I dismiss that part of its Counter-Application seeking an order for the return of equipment already seized by 152. Since the prudence of the realization of the collateral can be dealt with at an appropriate point in the receivership proceedings, I defer dealing with the relief requested in paragraphs 1(b) through to 1(d) of the Notice of Counter-Application.

VI. Summary and Costs

[ 44 ] By way of summary, I grant judgment in favour of 152 against Dalcor in the amount of $100,000, I appoint Farber as the receiver-manager of the assets, undertaking and property of Dalcor, and I dismiss the relief sought in paragraph 1(a) of the Notice of Counter-Application.

[ 45 ] I would encourage the parties to try to settle the costs of this application. If they cannot, 152 may serve and file with my office written cost submissions, together with a Bill of Costs, by Friday, October 19, 2012. Dalcor may serve and file with my office responding written cost submissions by Wednesday, October 31, 2012. The costs submissions shall not exceed three pages in length, excluding the Bill of Costs.

D. M. Brown J.

Date : October 10, 2012