COURT FILE NO.: CV-17-11818-00CL DATE: 20180918 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 PARTNERSHIP, 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, Mizzi Company Claimants Paul Le Vay, for the Applicant, Ontario Securities Commission Pavle Masic, for the Respondent, Silverfern Investors
HEARD: August 20, 2018
ENDORSEMENT
BACKGROUND
[1] Grant Thornton Limited (“GTL”) brings this motion in its capacity as the court-appointed receiver (“Receiver”) of each of the respondents (“Paramount Group”) for an order disallowing the claims of the companies (“Claimants”) listed at Schedule “A” hereto (“Disputed Claims”) against Silverfern Secured Mortgage Fund (“Silverfern Fund”) and GTA Private Capital Income Fund (“GTA Fund”), (collectively “Mortgage Investment Funds”).
[2] The Claimants are companies owned and/or controlled directly or indirectly by Enzo Mizzi (collectively “Enzo Companies” and individually “Enzo Company”). The Disputed Claims total approximately $105.5 million. This substantially exceeds the book value of the Mortgage Investment Funds’ assets.
[3] The Disputed Claims can be summarized as follows: (i) claims by Enzo Company borrowers for loss of profit and damages arising from the Mortgage Investment Funds’ failure to advance the full amount of the loan set out in the loan agreements between Paramount Equity Financial Corporation (“PEFC”) and the applicable borrower (collectively “Enzo Borrowers”); and (ii) claims by Mpire Development Corporation (“Mpire”), another Enzo Company, for payment or reimbursement of costs/damages associated with works performed by Mpire in respect of properties owned by the Enzo Borrowers (“Enzo Properties”).
[4] The Mortgage Investment Funds are not parties to the loan agreements (“Loan Agreements”) relied on by the Enzo Borrowers.
[5] However, the Claimants allege that PEFC assigned the loans between it and the Claimants to one or more of the Mortgage Investment Funds.
[6] The Receiver submits that there is no evidence that PEFC assigned any of the loans to the Mortgage Investment Funds. Further, according to the Receiver, Mpire has not produced any evidence of an agreement by the Mortgage Investment Funds or PEFC to pay the costs of developing, renovating or operating the Enzo Properties.
[7] The Receiver seeks an order fully disallowing the Disputed Claims against the Mortgage Investment Funds.
[8] The Claimants submit that the proper evaluation of their losses should not be determined on this motion but should proceed by way of an application with a full record, cross-examinations and a trial of an issue.
FACTS
[9] On application by the Ontario Securities Commission, GTL was appointed as Interim Receiver of the Paramount Group pursuant to my order dated June 7, 2017. Subsequently, GTL was appointed as Receiver over the Paramount Group pursuant to the terms of the Receivership Order of Penny J. dated August 2, 2017.
[10] PEFC entered into commitment letters with borrowers to provide financing secured by mortgages on residential properties and mortgages on properties to be developed into multi-residential properties and retirement homes.
[11] Most of the development properties for which financing was provided were owned or controlled, directly or indirectly by Enzo.
[12] The funds advanced to the Enzo Borrowers were raised from investors through three types of investment products:
(a) direct mortgage investments (“DMI”) administered by the Paramount Group where each investor was registered as a mortgagee on title to the property;
(b) bare trust investments (“Bare Trusts”) where a mortgage was registered in the name of a Paramount Group entity and held in trust for the benefit of the investors to the extent of their interest in the mortgage; and
(c) Mortgage Investment Funds where investors’ funds were pooled.
[13] The Paramount Group established two Mortgage Investment Funds: (i) the GTA Fund, which was only available to a small group of related investors; and (ii) the Silverfern Fund, which was available to all of the Paramount Group’s investors.
[14] Each of the Mortgage Investment Funds is a trust established under the laws of Ontario.
[15] By investing in the Mortgage Investment Funds, investors acquired beneficial ownership of limited partnership units in Silverfern Secured Mortgage Limited Partnership (“Silverfern LP”) or GTA Private Capital Income Limited Partnership (“GTA LP”). The fund investors’ claims against the Mortgage Investment Funds are equity claims which rank behind creditors’ claims. Silverfern GP Inc. (“Silverfern GP”), is the general partner of Silverfern LP and GTA LP.
[16] On October 6, 2017, Conway J. granted a Claims Procedure Order authorizing the Receiver to administer the claims procedure provided for in the order to determine the claims of creditors and investors against the Mortgage Investment Funds (“Claims Process”).
[17] Pursuant to the Claims Process, 42 Proofs of Claim were filed against the Mortgage Investment Funds totaling approximately $174 million. Most of the claims were filed by Enzo Companies.
[18] The Receiver reviewed the Proofs of Claim submitted and issued Notices of Revision or Disallowance in response to all the Proofs of Claim filed disallowing the entire amounts claimed.
[19] The Enzo Companies submitted 24 Notices of Dispute in response to the Receiver’s Notice of Revision or Disallowance. Except for the Disputed Claims referred to below the other Enzo Companies’ Notices of Dispute have been withdrawn.
[20] Until the Disputed Claims have been finally resolved, the Receiver is unable to make any distributions to the Mortgage Investment Funds’ investors.
[21] The following is a summary of the 5 Disputed Claims which are in issue on this motion:
(a) Harriet Claim – This is an unsecured claim by 2540594 Ontario Limited (“Harriet Owner”), the registered owner of the property municipally known as 1 and 19 Harriet Street, Penetanguishene, Ontario (“Harriet Property”), in the amount of $5,000,000 for damages for the alleged failure by the Mortgage Investment Funds to advance money under the commitment letter (“Harriet Commitment Letter”) between Guardian Real Estate Ventures Inc. (“Guardian”) and PEFC;
(b) Cambridge Claim – This is an unsecured claim by 2538139 Ontario Limited (“Cambridge Owner”), the registered owner of the property municipally known as 69 Ainslie Street, South, Cambridge, Ontario (“Cambridge Property”), in the amount of $17,617,765 for the following categories of damages arising from the alleged failure by the Mortgage Investment Funds to advance money under the commitment letter between Mpire Capital Corporation and PEFC (“Cambridge Commitment Letter”): (i) loss of profit; and (ii) payment for services provided by Mpire and Edgecon Inc. (“Edgecon”) (another Enzo Company) with respect to the Cambridge Property;
(c) Wilson Claim – This is an unsecured claim by Virk Hospitality Corp. (“Wilson Owner”), the registered owner of the property municipally known as 1677 Wilson Avenue, Toronto, Ontario (“Wilson Property”), in the amount of $75,801,573.35 for the following categories of damages arising from the alleged failure by the Mortgage Investment Funds to advance money under the commitment letter between Guardian and PEFC (“Wilson Commitment Letter”): (i) loss of profit; and (ii) payment for services provided by Edgecon and North 44 Property Management Inc. (“North 44”) with respect to the Wilson Property;
(d) Dacey Unsecured Claim – This is an unsecured claim by 2488123 Ontario Ltd. (“Dacey Owner”), the registered owner of the property municipally known as 326 Dacey Road, Sault Ste. Marie, Ontario (“Dacey Property”), in the amount of $5,525,610 for the following categories of damages arising from the alleged failure by the Mortgage Investment funds to advance money under the commitment letter between Guardian and PEFC (“Dacey Commitment Letter”): (i) loss of profit; and (ii) payment for services allegedly provided by Edgecon and Mpire with respect to the Dacey Property; and
(e) Dacey Secured Claim – This is a secured claim by the Dacey Owner in the amount of $165,000 that is not supported by any particulars or documentation.
[22] PEFC arranged financing for the Enzo Borrowers for the purpose of financing the acquisition and development of the Enzo Properties.
[23] The loans to the Enzo Borrowers were made pursuant to the terms of commitment letters and/or term sheets between PEFC and an Enzo Borrower. The Mortgage Investment Funds were not parties to the Loan Agreements.
[24] The monies loaned to the Enzo Borrowers were advanced by DMI investors, Bare Trust investors and/or Mortgage Investment Funds. The advances were secured by mortgages registered in favour of the DMI investors, the Bare Trust trustee and/or the applicable Mortgage Investment Fund.
[25] In the Mortgage Investment Funds’ standard charge terms, which formed part of every mortgage, the Enzo Borrowers expressly agreed that the lenders were not obligated to advance any of the monies secured by the mortgage as follows:
Advance of Funds
The Borrower agrees that neither the preparation, execution nor registration of the Charge shall bind the Lender to advance the monies hereby secured, nor shall the advance of a part of the principal sum herein bind the Lender to advance any unadvanced portion thereof, but nevertheless the estate hereby charged shall take effect forthwith upon the execution of the Charge by the Borrower, and the expenses of the examination of the title and of the Charge and valuation are to be secured hereby upon the Property, and shall be without demand thereof, payable forthwith with interest at the rate provided for in the Charge, and in default the remedies herein shall be exercisable.
ISSUES
[26] I must determine the following issues:
(a) Should the Claimants’ Disputed Claims be determined on this motion, or should they be determined on an application?
(b) Should the Disputed Claims be disallowed?
ANALYSIS
Should the Disputed Claims be determined on this Motion?
[27] Conway J. made the Claims Procedure Order on October 6, 2017 that applies to the Claimant’s Disputed Claims.
[28] The Order provides for the resolution of the claims as follows:
RESOLUTION OF CLAIMS
- THIS COURT ORDERS that as soon as practicable after the delivery of the Notice of Dispute to the Receiver, the Receiver may:
a. attempt to consensually resolve the classification and/or amount of the Claim with the Claimant; and/or
b. schedule an appointment with the Court for the purpose of scheduling a motion to have the classification and/or amount of the Claim determined by the Court, and at such motion the Claimant shall be deemed to be the applicant and the Receiver shall be deemed to be the respondent.
THIS COURT ORDERS that notwithstanding the other provisions of this Order, the Receiver may make a motion to the Court for a final determination of a Claim at any time, whether or not a Notice of Revision or Disallowance has been sent by the Receiver.
THIS COURT ORDERS that in the event that the dispute between the Claimant and the Receiver is not settled within a time period or in a manner satisfactory to the Receiver or the Claimant, the Receiver or the Claimant may make a motion to the Court for the final determination of a Claim.
[29] The Receiver makes the following submission at para 59 of its Factum:
- In a motion to finally determine a claim in a court-approved claims process, the onus is on the claimant disputing the Receiver’s disallowance to prove its claim. The court should only interfere with the Receiver’s determination if there has been an error of law or a palpable and overriding error of fact.
Coast Capital Savings Credit Union v. Symphony Development Corp. (2011), 2011 BCSC 333, 2011 CarswellBC 669 (B.C.S.C. [In Chambers])
DBDC Spadina Ltd. V. Walton (2015), 2015 ONSC 5608, 2015 CarswellOnt 13805 (Ont. S.C.J.)
[30] In DBDC Spadina Ltd. v. Walton (2015), 2015 ONSC 5608 (“DBDC Spadina”) Newbould J. held as follows at paras 2 and 3 on a motion for the court’s approval of the disallowance of a claim by the Manager pursuant to a claims process order:
- The claims process order did not provide any direction regarding which party has the onus when a dispute is brought, before the Court for determination. In my view, the onus should be on claimant as it is in an appeal from a disallowance, of a claim by a trustee in bankruptcy. The Manager is an officer of the Court with the same level of responsibility to the parties as a trustee in bankruptcy. I agree with Walker J. in Coast Capital … who stated:
20… the Court’s review of the receiver’s determinations must be conducted on a principled basis; the review must not trample upon the integrity of the claims process. The review or appeal process should not detract from the requirement that the parties who choose to engage in the claims process in the first instance must take it seriously. Further, the review process should be one that maintains the onus on any party who disputes the receiver’s decisions.
I agree with the receiver’s submissions that to permit a de novo examination of each of the contested claims is not appropriate. It is unprincipled, and it renders pointless the claims undertaken to date.
On an appeal from a disallowance of a claim, the court should only intervene in the case of an error of law or a palpable and overriding error of fact. See Houlden, Morawetz and Sarra, 2015 Annotated Bankruptcy and Insolvency Act, …
[31] In my view, this approach also applies to the Receiver’s motion in this proceeding for an order disallowing the Disputed Claims.
[32] In Galaxy Sports Inc., Re, BCCA 284 (“Galaxy Sports”) the British Columbia Court of Appeal held at paras 40-42 that an appeal from a disallowance of a claim by a trustee in bankruptcy or a proposal trustee is a true appeal and not a trial de novo. The court concluded that the appeal must be confined to whether the trustee made a reviewable error of fact, of law or of procedure.
[33] At para 40 of their Factum the Claimants submit as follows:
We respectfully submit that proper evaluation of the Claimants’ losses should proceed by way of application with a fulsome record, cross-examination and potentially directions for the trial of an issue.
[34] I do not agree with this submission. The court-ordered claims process is intended to establish an expeditious, efficient and summary procedure for the Receiver’s resolution of claims against the Mortgage Investment Funds. The Claimants’ suggestion that the resolution provisions in the Claims Procedure Order require extensive discovery and the formal trial of an issue undermines the integrity and summary nature of the court-approved claims process.
[35] I agree with the Receiver’s approach to this motion which is in accord with the decisions in Coast Capital, DBDC Spadina and Galaxy Sports. I have concluded that the onus is on the Claimants to establish that the Receiver committed an error of law or a palpable and overriding error of fact in disallowing the Claimants’ claims. This is the approach that I will follow in considering whether the Disputed Claims should be disallowed.
Should the Disputed Claims be Disallowed?
[36] As a preliminary matter, there is no evidence that PEFC assigned any of its loans with the Enzo Borrowers to the Mortgage Investment Funds. Further, there is no evidence that the Mortgage Investment Funds or PEFC agreed to pay the costs of developing, renovating or operating the Enzo Properties.
[37] I will now consider each of the Disputed Claims individually.
The Harriet Claim
[38] As set out above, The Harriet Owner claims damages of $5 Million for the alleged failure of the Mortgage Investment Funds to advance funds under the Harriet Commitment Letter. At para 30 of their Factum, the Claimants submit that
The project failed when Silverfern Secured capaciously refused to advance further monies as set out in the financing agreement.
[39] The Silverfern Fund was not a party to the Loan Agreements and had no obligation to advance any funds with respect to the Harriet Property. In any event, there is no evidence that any further advances to fund renovations of the Harriet Property were ever requested or refused.
[40] The Claimants have, therefore, failed to meet the onus to establish that the Receiver erred in disallowing the Harriet Claim for this reason.
[41] The Harriet Claim is therefore disallowed.
The Cambridge Claim
[42] As set out above, the Cambridge Owner claims that it suffered a loss of profits as a result of the failure by Silverfern LP to advance additional funds under the Cambridge Commitment Letter.
[43] The Mortgage Investment Funds were not a party to the Loan Agreements and had no obligation to advance any funds with respect to the Cambridge Property and there is no evidence that any further advances were either requested or refused with respect to the Cambridge Property.
[44] The Claimants have, therefore, failed to meet the onus to establish that the Receiver erred in disallowing the Cambridge Claim for this reason.
[45] At para 27 of their factum the Claimants further submit as follows:
Pursuant to the agreements governing the Cambridge project Mpire provided development services and remitted invoices for the same to PEFC (who as fund administrator to the various projects was to ensure that they were paid) and to [the Cambridge Owner]. Those invoices in the aggregate amount of $477,865.70 were never paid.
[46] As set out above, there is no evidence of a formal agreement or any other document evidencing an agreement between Mpire and PEFC to support this allegation. There are also no invoices issued by Mpire to PEFC in connection with the Cambridge Property before the appointment of the Receiver.
[47] The Claimants have, therefore, failed to meet the onus to establish that the Receiver erred in disallowing the Cambridge Claim.
[48] The Cambridge Claim is therefore disallowed.
The Wilson Claim
[49] At para 21 of their Factum, the Claimants submit as follows:
Without notice, Silverfern Secured arbitrarily stopped advancing funds to Virk causing Virk to be unable to pay Edgecon and North 44 for the services provided
[50] The Claimants submit that, as a result, the Wilson Owner incurred losses of approximately $75 million.
[51] The Silverfern Fund was not a party to the Loan Agreements and had no obligation to advance any funds with respect to the Wilson Property and there is no evidence that any further advances were either requested or refused with respect to the Wilson Property. In fact, the full $21.5 million provided for in the Wilson Commitment Letter was advanced to the Wilson Owner.
[52] At paras 19 and 20 of their Factum, the Claimants allege that pursuant to agreements governing the development of the Wilson Property, Edgecon and North 44 provided services and remitted invoices to the Wilson Owner and PEFC.
[53] There is no evidence of any agreement by PEFC or the Mortgage Investment Funds to pay for services provided by Edgecon or North 44 in respect of the Wilson Property. The Claimants have also not produced any invoices issued by Edgecon or North 44 to PEFC in support of this claim.
[54] As a result, the Claimants have failed to meet the onus to establish that the Receiver erred in disallowing the Wilson Claim.
[55] The Wilson Claim is therefore disallowed.
The Dacey Claims
[56] As with the other Disputed Claims, the Mortgage Investment Funds were not a party to the Loan Agreements and there is no evidence that further advances were either requested or denied with respect to the Dacey Property. There is also no documentary evidence to support the allegation that any of the Paramount Group’s entities agreed to fund the expenses of Mpire or Edgecon with respect to the development of the Dacey Property. Further there is no evidence to support the secured claim of $165,000.
[57] As a result, the Claimants have failed to meet the onus to establish that the Receiver erred in disallowing these claims.
[58] The Dacey Claims are therefore disallowed.
CONCLUSION
[59] I have concluded that the Receiver’s approach to this motion is correct and that the Claimants have failed to meet the onus upon them to establish that the Receiver erred in disallowing any of the Disputed Claims.
[60] The Receiver is entitled to an order disallowing all the Disputed Claims against the Mortgage Investment Funds.
[61] The Receiver is also entitled to its costs of this motion. If the parties cannot settle the amount of costs, they may schedule a 9:30 a.m. attendance with me.
[62] I thank counsel for their helpful submissions.
HAINEY J. Released: September 18, 2018
SCHEDULE “A” DISPUTED CLAIMS
| Claim No. | Type of Claim | Claimant Name | Disputed Amount |
|---|---|---|---|
| 836 | Enzo Borrower Claim | 2538139 Ontario Limited (referred to herein as the Cambridge Owner) | $17,617,765.00 |
| 838 | Enzo Borrower Claim | 345205 Ontario Inc. (claim in respect of the Goulais Property) | $1,722,222.00 |
| 814 | Enzo Borrower Claim | 2540594 Ontario Limited (referred to herein as the Harriet Owner) | $5,000,000.00 |
| 821 | Enzo Borrower Claim | 2488123 Ontario Ltd. (referred to herein as the 326 Dacey Owner) | $165,000.00 |
| 839 | Enzo Borrower Claim | 2488123 Ontario Ltd. (referred to herein as the 326 Dacey Owner) | $5,525,610.00 |
| 824 | Enzo Borrower Claim | Virk Hospitality Corp. | $75,801,573.35 |
| 835 | Enzo Borrower Claim | 2398035 Ontario Inc. (referred to herein as the Simcoe Owner) | $3,461,283.00 |
| 815 | Enzo Developer Claim | Mpire Development Corporation | $392,901.00 |
| 816 | Enzo Developer Claim | Mpire Development Corporation | $691,749.84 |
| 819 | Enzo Developer Claim | Mpire Development Corporation | $255,357.40 |
| 825 | Enzo Developer Claim | Mpire Development Corporation | $51,415.00 |
| 826 | Enzo Developer Claim | Mpire Development Corporation | $255,380.00 |
| 827 | Enzo Developer Claim | Mpire Development Corporation | $63,280.00 |
| 828 | Enzo Developer Claim | Mpire Development Corporation | $199,424.53 |
| 829 | Enzo Developer Claim | Mpire Development Corporation | $19,152.12 |
| 830 | Enzo Developer Claim | Mpire Development Corporation | $399,000.00 |
| 831 | Enzo Developer Claim | Mpire Development Corporation | $104,938.58 |
| 832 | Enzo Developer Claim | Mpire Development Corporation | $68,079.11 |
| 833 | Enzo Developer Claim | Mpire Development Corporation | $477,865.70 |
| 834 | Enzo Developer Claim | Mpire Development Corporation | $866,710.00 |
| 840 | Enzo Developer Claim | Edgecon Inc. | $4,082,602.43 |
| 841 | Enzo Developer Claim | Edgecon Inc. | $2,731,407.75 |
| 823 | Sechelt Claims | 2509492 Ontario Ltd. | $15,373,341.00 |
| 822 | Sechelt Claims | Mpire Development Corporation | $15,373,341.00 |