Court File and Parties

COURT FILE NO.: CV-19-622245-00CL DATE: 2020-09-17

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Echelon Wealth Partners Inc., Plaintiff AND: Poland Renewable Energy Administration Corp., Computershare Trust Company of Canada, Polski Solar S.A., Stephen A. Suske and Suske Capital Inc.

BEFORE: C. Gilmore, J.

COUNSEL: Peter J. Osborne and Robert Trenker, Counsel, for the Plaintiff (Moving Party) F. Paul Morrison and John Philpot, Counsel for the Defendants (Responding Party)

HEARD: September 1, 2020

ENDORSEMENT on Motion

overview

[1] Echelon Wealth Partners Inc. (“Echelon”) brings this motion to enforce its contractual rights in the face of default by the Defendants on their obligations in relation to eight A Series Bearer Bonds (“the Bonds”). The current default is over $5M plus interest. Specifically, Echelon seeks to terminate the Administration Agreement and assume the position of Administrator of the Trust which owns the Bonds.

[2] If Echelon is granted the relief it seeks, it also seeks an Order permitting it to enter into negotiations with an independent third party who will replace the Administrator and act as Manager of the Trust. Finally, Echelon seeks a declaration that it is the legal and beneficial owner of Polski Solar S.A. (“Polski Solar”) and Suske Capital Inc. (“Suske Capital”).

[3] The Defendants argue that such relief is not available on an interlocutory motion. In substance, the Plaintiff seeks partial summary judgment which is contrary to the requirements of Rule 37.06. Even if properly brought as a motion for partial summary judgment, it should not be granted as issues of credibility are raised and the other issues raised cannot be bifurcated from the issues for trial.

[4] Further, Echelon has failed to demonstrate that the relief it seeks is in the best interests of the Unitholders. The Defendants submit that the relief sought, if granted, could destroy the Project.

FACTUAL BACKGROUND

[5] Echelon is a wealth management and capital markets investment firm incorporated under Ontario laws. Polski Solar is a corporation incorporated in 2013 under the laws of Poland to raise financing for the installation of solar panels and biogas plants in Poland (“the Project”). Polski Soloar was co-founded by William Buba (“Mr. Buba”) and Stephen Suske (“Mr. Suske”). Mr. Buba owns 60% of Polski Solar and is the Chairman and CEO. Mr. Suske is the Vice Chairman and owns 40% of Polski Solar.

[6] Mr. Suske has experience in doing Ontario solar projects based on the “feed-in-tariff” model. Mr. Suske was aware that the renewable energy market was in its infancy and that as a European Union member, Poland had committed to a renewable energy target of 15% by 2020 by way of the Renewable Energy Directive. This Directive led to Poland to enact legislation to incentivize renewable energy. After the legislation was enacted, Polski Solar began to acquire land rights and municipal partnerships in anticipation of upcoming opportunities.

[7] The initial Offering Memorandum set out that the proceeds of the offering would be used to purchase Polski Solar bonds for a project in Jelenia Gora, Poland (“the Project”). The total cost of the Project was $32,200,000. The Bond financing was only a portion of what was needed to fund the Project. Much of the Project’s value was based on guaranteed revenue contracts from the Government of Poland issued through an auction process. The purpose of the Offering was to obtain “mezzanine financing” which included costs related to acquiring building permits, zoning permits and connection to the energy grid. Polski Solar was successful in gaining all of the guaranteed revenue contracts for its Project with the assistance of this financing.

[8] By agreement between Suske Capital, Guaranteed Poland Renewable Energy Bond-Linked Trust (“the Trust”) and Polski Solar, Polski Solar issued eight A Series Bearer Bonds with a value of (CAD) $1M each and a total value of (CAD) $8M to the Trust.

[9] The Trust was established by a Declaration of Trust dated August 31, 2017. The Trust offered the Bonds as bond-linked units to investors.

[10] Computershare Trust Company of Canada was appointed Trustee of the Trust (“the Trustee”) pursuant to the Declaration of Trust.

[11] The Administration Agreement, dated August 31, 2017, appointed Poland Renewable Energy Administration Corp. as the administrator of the Trust (“the Administrator”). The Administrator is responsible for administrative and operational services on behalf of the Trust, providing unitholders with all information to which they are entitled under the Declaration of Trust, preparing annual review engagement, financial statements of the Trust and any distributions under the Bond Instrument. Mr. Suske’s daughter, Elizabeth Suske is the President, Director and sole shareholder of the Administrator.

[12] Polski Solar’s obligations to the Trust under the Bonds are indemnified by Suske Capital pursuant to an Indemnity Agreement (“the Indemnity”) dated August 31, 2017 in favour of the Trust. Suske Capital is a private equity firm founded by Mr. Suske who is the sole shareholder and President of Suske Capital. Suske Capital owns 40% of Polski Solar. Elizabeth Suske is the Vice-President of Suske Capital. The obligations of Suske Capital under the Indemnity are guaranteed by Mr. Suske personally pursuant to a Guarantee Agreement dated August 17, 2017 (“the Guarantee”). The Trust has no other assets other than Mr. Suske and Suske Capital.

[13] Polski Solar, the Trust, the Administrator and Echelon entered into an Event of Default Management Agreement which affords Echelon with broad authority to act on behalf of the Trust in the event of a default by Polski Solar or a failure of the Trust to make distributions in accordance with the Declaration of Trust.

[14] Section 1.1 of the Event of Default Management Agreement sets out as follows:

1.1 If an Event of Default under the Polski Solar Bonds occurs, which is not cured within the period permitted by the Polski Solar Bonds, or for any other reason the Trust fails to make the distributions to Unitholders contemplated by Section 3.5 of the Declaration of Trust within ten (10) business days that such distributions were required to be made pursuant to the Declaration of Trust, or if Suske Capital defaults on any obligations under the Indemnity, the Agent may exercise broad authority to act on behalf of the Trust and in the best interests of Unitholders, including but not limited to the following:

(a) to provide directions to the Administrator;

(b) to terminate the Administration Agreement;

(c) to assume the duties and responsibilities of the Administrator, as permitted by the Declaration of Trust and as provided for in the Administration Agreement, which Administration Agreement is attached to this Agreement in Schedule A, and shall apply mutatis mutandis herein;

(d) to negotiate and enter into, on behalf of the Trust, a management agreement with an independent third party to act as manager of the Trust in replacement of the Administrator; and

(e) to take any other steps it reasonably believes to be in the best interests of the Unitholders.

[15] Echelon’s position is that an Event of Default has occurred, and they seek to assume the duties and responsibilities of the Administrator as set out above.

[16] The terms of the Bond issuance require Polski Solar to make interest payments to the Trust of 15 percent per annum, payable in the amount of $600,000 semi-annually commencing on February 28, 2018 until the Bond redemption date of August 21, 2021. In addition, the Declaration of Trust requires distributions to the Unitholders of 15% cash semi-annually and a return of capital distribution of one-quarter of the Initial Unit Capital Account payable semi-annually until August 21, 2021. A chart of required payments is set out in Echelon’s factum at paragraph 25. A failure by Polski Solar to make any of the payments in accordance with the required schedule within three days of the due date of the payment is an Event of Default.

[17] Any Event of Default authorizes the Bond Holder to request early redemption. Events of Default include the non-payment of principal or interest, a breach of covenants, representations or warranties, sale of a substantial part of the Project without notice to the Bond Holder, or a Material Adverse Change.

[18] It is not disputed in this case that Polski Solar is currently in default in excess of $5.56M exclusive of penalty interest and including the $600,000 interest payment which was due on August 31, 2020, the day before this motion was heard. The Plaintiff seeks to assume the duties of the Administrator pursuant to the clear default and the terms of the agreements. The Defendants resist, taking the position that more time is needed to cure the default and that the Plaintiff is secured by the substantial assets owned by Suske Capital.

DISPUTED FACTUAL ISSUES

Biosila

[19] The Plaintiff alleges breaches by the Defendants other than monetary default. The Plaintiff allege that the Defendants have misallocated the proceeds of the sale of the Trust Units by diverting the proceeds to Biosila, an entity owned by Mr. Buba. The structure of the transaction was such that the $8M in proceeds of sale of the Trust Units was to go from the Trust to Polski Solar and returns to investment holders would go from Polski Solar to the investors. A Flow of Funds and Receipt Memorandum dated August 31, 2017 is explicit that funds would flow from Echelon to the Administrator and from the Administrator to Polski Solar. However, the proceeds from the sale of the Trust Units did not go to Polski Solar but rather to Biosila.

[20] The Defendants submit that the funds flowed through Biosila, a related entity, to avoid a 2% foreign investment tax and saved the Project $160,000. The proceeds were intended to be used for the Project and that is exactly what happened. The Defendants also submit that the Plaintiff knew funds had been directed to Biosila, which the Plaintiff denies. This is one of the credibility issues raised by the Defendants which will be explored more fully below.

The Guarantee Fee

[21] After Polski Solar defaulted on the third interest payment, Echelon requested a cash flow analysis showing the deployment of the $8M received. The analysis was requested in June 2019 and received in September 2019. The cash flow analysis was prepared by Suske Capital’s CFO, Stephen Pearce and is in the form of an informal schedule. The analysis shows that Mr. Suske used part of the proceeds to pay himself a guarantee fee of $160,000 per annum (2% on the $8M) in 2017 and 2018.

[22] Prior to receiving the cash flow analysis, Echelon was not aware that Mr. Suske had paid himself the guarantee fee. Echelon’s position is that the fee was improperly paid as it was not contemplated in any transaction document or the Offering Memorandum.

[23] Mr. Suske’s position is that Echelon and Suske Capital had done many deals together and Suske Capital had always received a guarantee fee in consideration for a personal guarantee. The guarantee fee was in accordance with industry standards and was properly invoiced. In any event, Mr. Farooq Moosa, Echelon’s Managing Director of Investment Banking was aware of the fee which had been discussed directly between him and Mr. Suske on multiple occasions. Mr. Moosa, in his cross-examination denied any knowledge of such conversations or the existence of a guarantee fee.

Financial Reporting Obligations

[24] The Bond Issuance document requires Polski Solar to provide the Trust annual review engagement statements within 90 days of the end of each fiscal year. Financial statements were provided in 2017 but not on a review engagement basis. Other than the cash flow analysis prepared by Mr. Pearce referenced above, and which is admittedly not done to any accounting standard, no further financial reporting has been received from Polski Solar.

[25] Mr. Buba, in his cross-examination adverted to an issue with the certification of the Auditor which was discovered in 2018. This issue does not appear to have been resolved and there was no evidence that any financial statements on a review engagement basis have ever been provided by Polski Solar.

[26] The Defendants submit that Echelon did not make any enquiries or conduct any analysis after receiving the cash flow analysis yet raised concerns about Biosila and the guarantee fee in its affidavit material. The failure to make enquiries and raise concerns at a later date is another credibility issue for Echelon, according the Defendants.

Changes to the Project

[27] The Bond Issuance document requires that there will be no material changes to the business and that the use of Proceeds of the Bond is restricted to the installation of 11 Megawatts (“MW”) of solar photovoltaic panels and 3 MW of biogas plants on 65 acres of land in Jelenia Gora, Poland. This is what has been referred to earlier as the Project.

[28] In 2018 Polski Solar changed the Project to 14 MW of solar photovoltaic panels and eliminated the biogas component. The Plaintiff submits that this change was reported to the unitholders after the fact and is a breach of the material change covenant and the restriction on the use of proceeds.

[29] After the Offering Memorandum was issued, the Polish government made unforeseen changes to its relevant regulations which resulted in a delay in the auction process. By way of quarterly investor reports the Unitholders were advised of these delays. According to Polski Solar, it made a strategic decision to make the 14MW Project entirely solar photovoltaic.

[30] In the Investor Report dated December 10, 2018, the following information was conveyed to the Unitholders:

Biogas Phase

The Polish government has declared its intention to delay receiving applications for biogas installations until after completion of the solar auction process it announced on November 15, 2018. Accordingly, Polski Solar management made a strategic decision to redesign the Jelenia Gora site as a 14MW Solar PV installation to capitalize on the need for Solar PV in Poland instead. Polski Solar has secured additional lands to develop the biogas installations in 2019.

[31] The Defendants are concerned that Echelon’s witness, Mr. Moosa, denied what it says in the plain interpretation of the news in the Investor Report. That is, that the 14 MW project was changed to entirely solar photovoltaic due to delays in the auction process. The Respondents submit that Mr. Moosa’s answers on cross-examination were disingenuous when he stated that the Biogas element of the project was not being dropped, only delayed. Further, Mr. Moosa confirmed that he heard no complaints from investors about this change to the Project. The Defendants submit this is another credibility issue for the Plaintiff.

The Defaults

[32] The Plaintiff submits that Mr. Suske and Mr. Buba have made hollow promises and misrepresentations with respect to curing the defaults. In an attempt to raise funds in April 2019 and make the outstanding interest payment due, Mr. Buba represented that Polski Solar would be receiving a construction loan of $1M from FundingNet. A letter dated April 24, 2019 (without an addressee) advised that Biosila Energy Corporation had been approved for a loan of $4M with a deposit of $1M already advanced. The letter then goes on to describe a delay in advancing the loan due to a banking issue in Dubai in response to which the lender committed five weeks to resolving while on site in Dubai.

[33] In October 2019 Mr. Suske provided a new excuse for the delay in funding from FundingNet. An email sent by Mr. Suske advised the funds were in a Chilean bank, but the banks were closed due to civil unrest. However, the banks were expected to re-open and the funding would be advanced soon. No funding was ever advanced. The $1M deposit came from the Bond Issuance funds and has not been recovered by Polski Solar. Because of the problems with the FundingNet loan, Suske Capital paid the third interest payment with its own funds in the amount of $617,600 inclusive of interest.

[34] When it became clear that no financing would be available from FundingNet, Suske Capital pursued alternative funding from Magnify Global Finance (“Magnify”) in the amount of $16,000 Euros. Mr. Suske asserted that the funding would be available at the end of March 2020. No funds have been advanced to date.

[35] Mr. Suske’s position is that COVID intervened and delayed the expected financing from Magnify. His position is that delays related to the auction and construction financing were anticipated and set out in the Offering Memorandum.

The Suske Capital Indemnity

[36] Pursuant to the Indemnity, Suske Capital is responsible for amounts owed by Polski Solar to the Trust. Mr. Suske advised on cross-examination that he intended to honour the Indemnity from his share of the sale proceeds from two long term retirement properties in Ontario. Copies of the Agreements of Purchase and Sale were requested but refused. Echelon asks the Court to infer that the agreements do not exist.

[37] Suske Capital submits that its efforts to sell assets and honour its Indemnity are real. However, Suske Capital is a minority partner in various projects and needs the consent of other partners in order to sell assets. These sales were also affected by the pandemic. Mr. Suske assures Echelon that there are plenty of assets to satisfy his obligations under the Indemnity to the Unitholders who will receive back their full investment plus interest.

[38] Echelon remains unconvinced given the outstanding defaults, the failed history of refinancing with NetFunding and Magnify, and the fact that the most recent interest payment due on August 31, 2020 was also not paid.

THE LEGAL ISSUES

Procedural Issues

[39] The Defendants argue that the motion should be dismissed as the Plaintiff seeks final relief on an interlocutory motion and the Rules do not permit the matter to proceed as a partial summary judgment motion. Even if the matter could proceed by way of partial summary judgment motion, it must be dismissed as the issues raised include credibility issues and other issues which cannot be bifurcated from the issues for trial.

[40] The Defendants submit that the relief sought by the Plaintiff is final and extraordinary including declarations that Echelon is the Administrator, may exercise broad powers under the EDMA, and is the legal and beneficial owner of Polski Solar and Suske Capital. Pursuant to the principles set out in Merrill v. Sommerville, 1992 CanLII 7457 (ON SC) a declaration is final by nature and not available in interim proceedings.

[41] Further, Echelon has not framed this motion as one for summary judgment under Rule 20. Even if the motion could be considered a motion for partial summary judgment, there are issues of credibility which would preclude the court from making a decision on this record. In particular, the Defendants submit that the following issues raise credibility issues:

a. Whether Echelon was aware of Biosila;

b. Whether Echelon was aware of and approved the Guarantee Fee;

c. The change of the Project to entirely solar photovoltaic;

d. Echelon’s failure to raise any concerns with the cash flow analysis.

[42] I agree with the Defendants with respect to their procedural concerns. They raise legitimate defences which must be dealt with at trial. For example, some of the contradictory answers given by Mr. Moosa on cross-examination on issues such as the Guarantee Fee must be more fully explored. As such, summary judgment or partial summary are not available to the Plaintiff on this motion.

Replacement of the Administrator

[43] As set out above, Section 1.1 of the Event of Default Management Agreement (“EDMA”) provides for Echelon’s right to remove the Administrator where there has been a default under the Bonds. The current admitted default has accumulated to more than $3.2M.

[44] Given the default, Echelon seeks to terminate the Administration Agreement and negotiate with a third party who will manage the Trust and replace the Administrator.

[45] The default also triggers the provisions of the Indemnity which requires Suske Capital to fully indemnify the Trust including expenses and interest. While Suske Capital claims to have assets sufficient to honour the Indemnity, it has failed to take reasonable steps. Echelon seeks to enforce the Indemnity and requires Suske Capital to make the Unitholders whole.

[46] Mr. Suske has also defaulted on his personal obligations under the Guarantee. Pursuant to the terms of Section 6.1 of the Guarantee, Echelon submits that in its capacity as Administrator, it should be declared the legal and beneficial owner of 100% of the shares of Suske Capital.

[47] Finally, Echelon submits that Polski Solar has entirely circumvented the governance and reporting structure contemplated by the Bond Issuance. Polski Solar has failed to provide proper financial reporting and reporting to the Unitholders from the Administrator. In fact, the Administrator has not provided any information to the Unitholders at all concerning the Project since December 2018.

[48] The Defendants’ main defence to the request to replace the Administrator is that it is both a requirement of law and a provision in the EDMA that Echelon’s actions are “in the best interest of the Unitholders.” The Defendants submit that a delay in payment does not automatically mean that replacement of the Administrator by Echelon is in the Unitholders best interests.

[49] Specifically, Echelon has provided no specific plan in relation to its intention to enter into a management agreement with an independent third party to replace the Administrator, including the proposed compensation for the third party, its experience in such matters, and what consideration would be given to other stakeholders of the Project and Suske Capital’s stakeholders. The Defendants point out that the current Administrator has performed all duties under the Trust and claimed no compensation.

[50] In McFlow Capital Corp v. Simcoe Condominium Corporation No. 27, 2009 CanLII 28400 (ON SC), the Court considered whether the appointment of an Administrator pursuant to the Condominium Act, was in the best interest of the Condominium Corporation. The Defendants rely on McFlow for the proposition that the court appointed an Administrator with excellent experience and a detailed plan.

[51] However, McFlow related to statutory considerations with respect to the replacement of an Administrator under the Condominium Act. No such statutory considerations exist in this case. The appointment is sought in the context of clear contractual rights.

[52] The Defendants rely on Fortunato v. Atrens, 2007 CarswellOnt 9008, [2007] OJ No 5773. This was also a condominium case in which the court refused to replace an administrator with another administrator who had an expensive and speculative plan. The Defendants rely on this case for a similar proposition as McFlow. That is, that without a plan for replacement of the Administrator, the Court ought to refuse such a request. Specifically, in Fortunato, the Applicant was unable to demonstrate that any substantial mismanagement had occurred.

[53] In Rio Tinto Canadian Investments Ltd. v. Bone, 2001 CarswellOnt 2418 (ON SC), the Court dealt with the authority of Trustees to implement a Rights Plan without the authority of the Unitholders. The Defendants rely on this case with respect to their view that acting in the best interest of the Unitholders is a requirement of law. I do not see the application of Rio Tinto to this case. Echelon is not seeking to become the Trustee nor does the EDMA permit that.

[54] The question for the Court is whether a detailed analysis of the court’s exercise of discretion is required in the face of the plain language of the EDMA which permits replacement of the Administrator in the event of default. I agree with Echelon that such an analysis is not required. The replacement of the Administrator is not discretionary; it is an entitlement of Echelon upon default.

[55] If I am wrong and some analysis of the current Administrator’s performance is required, I would still have found that her replacement is in the best interests of the Unitholders. There are several undisputed facts which highlight this finding as follows:

a. The Administrator has not communicated with the Unitholders in almost two years. The date of the last Investor Report was December 2018;

b. The Administrator has failed to meet financial reporting requirements;

c. The Administrator has failed to take required steps to enforce Mr. Suske’s Guarantee including the seizure and sale of Suske Capital’s shares. I reject the Defendants’ argument that such an action can only be taken by the Trust. The Declaration of Trust delegates responsibility for remedies under the Trust to the Administrator. I infer that part of the reason for the inaction on the part of the Administrator is because she is Mr. Suske’s daughter. Such an arrangement can no longer be in the best interests of the Unitholders.

[56] Given all of the above, I find that while the Administrator should be replaced and there is no impediment to such a replacement by the Plaintiff, such relief cannot be granted in the manner sought by the Plaintiff.

[57] What is a more procedurally acceptable solution in the circumstances is to give the Plaintiff the control it seeks but on a temporary basis until trial. An accounting can be provided at trial by the Plaintiff and a final determination on the issue of the Administrator and any further monies or damages owing.

[58] I come to this conclusion on the basis that while the Plaintiff has not met the test for summary judgment, it has met the test for a temporary mandatory injunction. That is, the Plaintiff has a strong prima facie case because default has been conceded. Given the strong prima facie case, the requirement to meet the thresholds of irreparable harm and the balance of convenience are less stringent. However, those thresholds are easily met because the Plaintiff risks irreparable harm if they do not take over as Administrator and attempt to manage the ever-increasing default. The balance of convenience also favours the relief sought by the Plaintiff since clearly the current Administrator is doing nothing.

[59] Finally, the Defendants seek to have all matters put over to trial to allow them time to cure their default by obtaining additional financing. Their attempts to do so thus far have been entirely unsuccessful. By way of example, the entire FundingNet escapade was, respectfully, difficult to treat as genuine. The letters and emails related to banking problems in Dubai, civil unrest in South America and the loss of a $1M deposit do not paint the Defendants in a positive light in terms of their business experience. The Magnify loan seems to have disappeared altogether. Mr. Suske’s attempts to satisfy the Indemnity and Guarantee have been feeble and undocumented. In short, there is no evidence that any funds will be available to cure the Defendants’ default either now or in future without Echelon taking steps.

ORDERS AND COSTS

[60] Given all of the above, the relief sought by Echelon in its Notice of Motion is granted in part.

[61] Echelon may assume the duties and responsibilities provided to the Administrator in the Administration Agreement and enter into a management agreement with a third party who will replace the Administrator and act as manager of the Trust, all on a temporary basis pending trial.

[62] Pending trial Echelon is entitled to exercise any and all rights and remedies under section 1.1. of the EDMA. While Echelon, as temporary Administrator of the Trust is declared the legal and beneficial owner of the shares of Suske Capital, Echelon may not dispose of those shares pending trial.

[63] In terms of costs, Echelon submits that the Administration Agreement and the EDMA provide for reimbursement by Polski Solar to the Administrator for reasonable fees and expenses incurred in enforcing the agreement. As per its costs outline, Echelon’s all-inclusive partial indemnity costs were $266,154.29 and its substantial indemnity costs were $394,387.16 all inclusive.

[64] The Defendants seek partial indemnity costs of $150,800. The Defendants’ submission is that if they are liable for costs, such costs should be in the cause and assessed following a trial of this matter.

[65] This matter required significant material and cross-examinations. A full day of argument was required. I agree with the Defendants that much of the time and effort in this matter related to the granting of relief which was not obtained by the Plaintiff and an expedited trial could have been sought in the face of the conceded defaults.

[66] However, the Plaintiff was successful in some measure by obtaining the control it sought and some reduced costs should be awarded in the circumstances. The Defendants shall therefore pay costs of $100,000 to the Plaintiff forthwith.

C. Gilmore, J.

Date: September 17, 2020