Court File and Parties

COURT FILE NO.: CV-17-11818-00CL DATE: 20180723 SUPERIOR COURT OF JUSTICE – ONTARIO (Commercial List)

RE: ONTARIO SECURITIES COMMISSION Applicant

AND:

PARAMOUNT EQUITY FINANCIAL CORPORATION, SILVERFERN SECURED MORTGAGE FUND, SILVERFERN SECURED MORTGAGE LIMITED PARTNERSHIP, GTA PRIVATE CAPITAL INCOME FUND, GTA PRIVATE CAPITAL INCOME LIMITED PARTNERSHJIP, SILVERFERN GP INC., PARAMOUNT EQUITY INVESTMENTS INC., PARAMOUNT ALTERNATIVE CAPITAL CORPORATION, PACC AINSLIE CORPORATION, PACC CRYSTALLINA CORPORATION, PACC DACEY CORPORATION, PACC GOULAIS CORPORATION, PACC HARRIET CORPORATION, PACC MAJOR MAC CORPORATION, PACC MAPLE CORPORATION, PACC MULCASTER CORPORATION, PACC SCUGOG CORPORATION, PACC SHAVER CORPORATION, PACC SIMCOE CORPORATION, PACC WILSON CORPORATION, NIAGARA FALLS FACILITY INC. AND PARAMOUNT EQUITY SOLUTIONS INC. Respondents

BEFORE: HAINEY J.

COUNSEL: Maya Poliak and Harvey Chaiton, for the Receiver, Grant Thornton Limited Michael Simaan, for the Respondent, Virk Hospitality Corp. Paul Le Vay, for the Applicant, Ontario Securities Commission Justin Fogarty and Pavle Masic, for the Respondent, Silverfern Investors

HEARD: July 11, 2018

Endorsement

Overview

[1] On an application by the Ontario Securities Commission (“OSC”), Grant Thornton Limited (“GTL”) was appointed as Receiver over the Paramount Group on August 2, 2017. (“Paramount’s Receiver”)

[2] Paramount’s Receiver moves for an order appointing GTL as receiver over the property, assets and undertakings of Virk Hospitality Corp. (“Virk”) including the property at 1677 Wilson Avenue, Toronto (“Virk Property”). The Virk Property includes a hotel/transitional accommodation facility (“Virk Hotel”).

[3] The motion is supported by the OSC and by the respondents, Silverfern Investors.

[4] Virk is owned or controlled by Enzo Mizzi (“Enzo”). Companies related to Enzo have provided development, construction and property management services to Virk.

[5] The Paramount Group made three loan facilities available to Virk in the total amount of approximately $21 million to fund the acquisition and development of the Virk Property (“Virk Loan”). The Virk Loan is secured by mortgages in favour of certain direct mortgage investors (“DMI Investors”) and Silverfern LP (“Virk Mortgages”).

[6] To assist Virk with obtaining financing from the Paramount Group, 2490793 Ontario Inc. (“249”) and 2180366 Ontario Inc. (“218”) each signed a Postponement and Subordination of Shareholder’s Financing Agreement dated February 25, 2016, pursuant to which 249 and 218 both agreed to postpone and subordinate to Silverfern LP and the DMI Investors all sums payable to them by Virk (the “Postponement Agreement”).

[7] Pursuant to the Postponement Agreement, Virk acknowledged and agreed that, as long as the Virk Loan remains outstanding, it will not make any payments to 218 or 249 on account of any monies owing to them by Virk.

Positions of the Parties

[8] Paramount’s Receiver takes the position on this motion that Virk is in default of its obligations under the Virk Loan for the following reasons:

a) Failure to repay the Virk Loan on its maturity date; b) Breach of the Postponement Agreement; c) Failure to pay property taxes on the Virk Property; and d) Failure to comply with Virk’s reporting requirements.

[9] On March 7, 2018, Paramount’s Receiver demanded payment of the Virk Loan and served Virk with a Notice of Intention to Enforce Security pursuant to s. 248(1) of the Bankruptcy and Insolvency Act (“BIA”). Virk did not respond to the demand. As a result, Paramount’s Receiver brought this motion to appoint a receiver over Virk’s property.

[10] Virk opposes the motion and submits that the Virk Loan is not in default because it has a three-year term and therefore does not mature for another 7 months. Virk also denies that it has breached the Postponement Agreement and that there are tax arrears outstanding with respect to the Virk Property. It also denies that it is in breach of any reporting obligations.

Facts

[11] The Virk Hotel was to be redeveloped into condominiums. Since Virk acquired the Virk Property it no longer operates as a hotel and has been converted to a transitional housing facility for refugees which is supported by the City of Toronto.

[12] Pursuant to a Letter of Commitment dated November 2, 2015, (“Commitment Letter”) the Paramount Group agreed to make the Virk Loan in the amount of $19,772,350.

[13] The Commitment Letter provided for the following three loan facilities related to the Virk Property:

a) A facility in the amount of $10,000,000 to fund the purchase and renovation of the Virk Property. (“First Facility”); b) A second facility in the amount of $2,616,175 to fund the renovation of existing buildings. (“Second Facility”); and c) A third facility in the amount of $7,156,175 to fund the soft costs of development, including zoning, planning and architecture. (“Third Facility”).

[14] The Commitment Letter provides that the loan is for a term of 2 years from the date of the initial drawdown for each facility.

[15] The Commitment Letter was amended on July 13, 2016. (“July Amendment”). Pursuant to the July Amendment the Second Facility was increased to $3,344,500. The July Amendment contains a handwritten notation that purports to change the 2-year term of the Second Facility to 3 years.

[16] The Virk Mortgages that secure the Virk Loan are registered against the Virk Property as follows:

a) A second mortgage in the amount of $12,605,000 in favour of the DMI Investors; and b) A third mortgage in the amount of $14,895,000 in favour of Silverfern LP.

[17] Each of the Virk Mortgages provides for a term of 3 years.

[18] The DMI Investors and Silverthorn LP are each a party to a Non-Merger Acknowledgment with Virk that provides as follows:

In the event of any conflict or discrepancy between the Letter of Commitment, the Charge or the Loan Documents, the Lender may, in its sole discretion determine which shall prevail.

[19] Schedule A to each of the Virk Mortgages sets out what constitutes an event of default under the Virk Loan as follows:

33.1 Failure by the Borrower to pay any instalment of principal, interest and/or Taxes under the Charge or under any charge or other encumbrance of the Property, on the date upon which any of the payments for same become due;

33.2 Failure by the Borrower or any Covenanter to strictly and fully observe or perform any condition, agreement, covenant or term set out in the application or Commitment for the loan secured by the Charge, the provisions of the Charge, or any other document creating a contractual relationship as between them or any of them or if it is found at any time that any representation to the Lender with respect to the loan secured by the Charge or in any way related thereto is incorrect or misleading;

33.3 Default by the Borrower in the observance or performance of any of the covenants, provisos, agreements or conditions contained in any charge or other encumbrance affecting the Property, whether or not it has priority over the Charge;

[20] Paramount’s Receiver alleges that Virk paid $2,050,000 to 218 and $900,000 to 249 out of the Virk Loan funds in contravention of the Postponement Agreement. Paramount’s Receiver maintains that this constitutes an event of default under the Virk Mortgages. The express purpose of the Virk Loan was to finance the acquisition, renovation and development of the Virk Property. The Commitment Letter set out how the funds advanced were to be used by Virk. According to Paramount’s Receiver, Virk has breached this term of the Commitment Letter by misdirecting the funds and not using them for their stated purpose.

[21] Paramount’s Receiver also alleges that there is approximately $145,000 in property tax arrears outstanding in respect of the Virk Property. This also constitutes an event of default under the Virk Mortgages.

[22] According to Paramount’s Receiver, under the terms of the Commitment Letter, Virk was required to provide monthly project reports confirming the work in progress. Virk has only produced one status report to Paramount’s Receiver dated April 30, 2018. No other project reports have been provided.

Issue

[23] The issue that I must decide is whether I should appoint GTL as a receiver under the BIA over Virk’s property, assets and undertakings.

Analysis

[24] Under s. 243 of the BIA the court has the power to appoint a receiver where it is “just or convenient to do so”. In making this determination the court must have regard to all of the circumstances, including the nature of the property and the rights and interests of all parties in relation thereto. Where a party has the right to appoint a receiver under its security the court should consider whether a court appointment will enable the receiver to carry out its duties more efficiently. In the circumstances of this case I must determine whether it is more in the interest of all concerned to appoint a receiver.

[25] I have considered the test I must apply under s. 243 of the BIA in the light of the evidentiary record before me. I have concluded that it is just and convenient to appointment GTL as receiver of Virk for the following reasons.

Term of Virk Loan

[26] In my view the Commitment Letter is the operational document that establishes the term of the Virk Loan as two years from the date of the initial drawdown for each of the three loan facilities provided for in the letter. Mr. Simaan, on behalf of Virk, submits that the term of the Virk Loan is three years because the Second Facility for the renovation of the Virk Property has a handwritten notation changing the two-year term to three years. He argues that the two-year term for the two other facilities provided for in the Commitment Letter must have also been amended to provide for a three-year term. Despite Mr. Simaan’s able argument, I do not accept his submission. There is no evidence to support this assertion which amounts to mere speculation. The Commitment Letter is clear that the term of the Virk Loan is two years.

[27] Mr. Simaan also relies upon the fact that the Virk Mortgages registered against title to the Virk Property provide for three-year terms in support of his position that the Virk Loan has a three-year term. I do not accept this submission either because the Virk Mortgages contain a Non-Merger Acknowledgment clause that provides that the Paramount Group is entitled to determine that the 2-year term set out in the Commitment Letter prevails if there is a conflict between it and the terms of the Virk Mortgages. In my view the Commitment Letter clearly prevails and is the operative document that establishes that the Virk Loan has a two-year term.

[28] Since Virk did not repay the Virk Loan when it matured following two years it is in default of the Virk Loan under Schedule A to the Virk Mortgages. The Paramount Group therefore has the right to enforce its security including the right to appoint a receiver over Virk’s property, assets and undertakings.

Breach of the Postponement Agreement

[29] I accept the evidence relied upon by Paramount’s Receiver that Virk re-directed approximately $3 million of the funds advanced to it pursuant to the Virk Loan to 218 and 249 in contravention of the terms of the Postponement Agreement. I do not accept Mr. Simaan’s argument that there was no breach of the Postponement Agreement because the payments made to 249 and 218 were not in respect of monies owing to them by Virk but were for other purposes. This does not make commercial sense in the context of the Virk Loan that is very specific as to how the funds advanced are to be used. In my view, these payments to 218 and 249 constitute an event of default under Schedule A to the Virk Mortgages. As a result, Paramount’s Receiver has the right to enforce its security, including the right to appoint a receiver over Virk’s property.

Tax Arrears

[30] The evidentiary record contains a City of Toronto Tax Certificate that indicates that as of July 9, 2018 the outstanding taxes on the Virk Property were $191,252.02. I accept the evidence of Darren Marr who attended at the City of Toronto’s Revenue Services on July 10, 2018 and confirmed that these tax arrears remained unpaid and outstanding as of that date. I do not accept the evidence of Gwendolyn Adrian, an associate with Mr. Simaan’s law firm, who testified as follows:

Finally, I am advised by Enzo that the property taxes have been paid for the Wilson Property and are current. Enzo advised me that while the tax payment was slightly late, this was due to the City being late with its own payments in respect of the residence and boarding provided at the Wilson Property.

[31] I do not doubt that this is what Enzo said but it cannot be true in light of the Tax Certificate that confirms the outstanding tax arrears. These tax arrears also constitute an event of default under Schedule A to the Virk Mortgages. This also entitles Paramount’s Receiver to appoint a receiver over Virk’s property.

Monthly Project Reports

[32] I am unable to make a finding as to whether Virk is in breach of an obligation to provide monthly project reports to Paramount’s Receiver on the evidentiary record before me. However, in view of my other findings and conclusions it is not necessary for me to decide this issue.

Conclusion

[33] For the reasons outlined above I have concluded that it is just and convenient in the circumstances to appoint GTL as receiver over the property, assets and undertakings of Virk. I am of the view that GTL is particularly well-suited to perform this role because it has become familiar with the Virk Property as the receiver of the Paramount Group.

[34] I am also satisfied that the first mortgagee on the Virk Property will not be prejudiced by the appointment of a receiver since, based upon Paramount’s Receiver’s estimate of the value of the Virk Property, the first mortgagee appears to be fully secured.

Costs

[35] I urge the parties to settle the issue of costs of the motion. If they cannot they may schedule a 9:30 a.m. attendance with me to settle costs.

[36] I thank counsel for their helpful submissions.

HAINEY J. Released: July 23, 2018