SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

COURT FILE NO.: CV-21-00660390-00CL

DATE: 20210525

RE: MERIDIAN CREDIT UNION LIMITED, Applicant

AND:

OKJE CHO & FAMILY ENTERPRISE LTD. and 2341567 ONTARIO LTD., Respondents

BEFORE: L.A. Pattillo J.

COUNSEL: Ian Klaiman and Jason Spetter, for the Applicant

Robert Choi and Adam Beyhum, for the Respondents

HEARD: May 21, 2021

ENDORSEMENT

[1] The applicant, Meridian Credit Union Limited (“Meridian”) seeks an order pursuant to s. 243(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (BIA) and s. 10 of the Courts of Justice Act, R.S.O. 1990, c. C.43 (“CJA”), appointing BDO Canada Limited (“BDO”) as receiver and manager over all property, assets and undertaking of the respondents, Okje Cho & Family Enterprise Ltd. (“Okje”) and 2341567 Ontario Ltd. (“234”).

[2] 234 operates as franchisee a Hampton Inn by Hilton at 40 McPherson Drive in Napanee, Ontario (the “Property”) which is owned by Okje. Paul OJ Cho and his wife Choon Bum Cho are the principals and the officers and directors of both Okje and 234.

[3] Pursuant to a Credit Agreement dated September 20, 2018, Meridian authorized a non-revolving loan to Okje to a maximum of $7,200,000, payable on demand. That agreement was superseded by a Credit Agreement dated November 4, 2019 pursuant to which Meridian authorized the following credit facilities, payable on demand:

a) A non-revolving loan to a maximum of $6,995,000 (Credit Facility 1); and

b) An installment loan to a maximum of $700,000 (Credit Facility 2).

[4] In the spring of 2020, as a result COVID-19 and the government restrictions, Okje requested payment relief from its obligations under the 2019 Credit Agreement. Pursuant to amending agreements dated April 8, 2020 and July 14, 2020, Meridian agreed to defer Okje’s monthly principal and interest payments for three months and then a further two months. The July 14, 2020 amending agreement also authorized a further credit facility to Okje, payable on demand, to a maximum of $102,000 to capitalize the interest accrued pursuant to the April 8, 2020 amending agreement (Credit Facility 3).

[5] Okje’s indebtedness under the Credit Facilities is secured by:

a) Personal guarantees and postponement of claims from the Chos of the loans under Credit Facilities 1 & 2;

b) Guarantee and postponement of claim of Okje’s liabilities by 234;

c) General Security Agreements from both Okje and 234, registered under the Personal Property Security Act;

d) A collateral mortgage granted by Okje in favour of Meridian for $8,000,000 registered against the Property (the “Mortgage”);

[6] Okje is in default under the Credit Facilities. It has made no payments under Credit Facility 1 since December 1, 2020; made no payments on Credit Facility 2 since January 1, 2021 and failed to repay Credit Facility 3 by its maturity date, October 31, 2020.

[7] In addition, Okje and 234 were also in default under the Credit Agreement in respect of the following arrears: property taxes for the Property totaling $135,350.18 as at October 6, 2020; non-resident tax of $102,386.14 as of July 29, 2020; GST/HST arrears for Okje of $8,904.29 as at June 30, 2020; GST/HST arrears for 234 of $115,183.91 as at December 31, 2019.

[8] In October 2020, Okje made an application for a $1.4 million loan under the EDC Business Credit Availability Program (“BCAP Loan”) through Meridian. The application was declined by Meridian on December 8, 2020. Subsequently, Meridian and Okje attempted to address the respondents’ defaults.

[9] On February 26, 2021, after a payment by Okje of past due amounts under Credit Facility 2 was returned due to “insufficient funds”, Meridian made a demand for payment upon Okje, 234 and the personal guarantors of the entire amount of the indebtedness under the Credit Facilities, which at that date was $7,770,121.39. The indebtedness remains outstanding.

[10] The application was commenced on April 13, 2021 and returnable April 22, 2021 at which time it was put over to May 11, 2021 to permit the respondents to file responding materials. On May 11, 2021 it came before me. As part of their responding material, the respondents filed an affidavit from Mr. Maneet Singh Gadhok (also known as Monty Singh), in which he deposed that he had entered into an Agreement of Purchase and Sale with Okje dated April 8, 2021, amended April 16, 2021, to purchase the Property for $8,000,000.00 (the “Agreement”). The Agreement was conditional on, among other things, the approval of the terms of the Agreement by Mr. Singh’s solicitor and assumption by him of the Mortgage. As a result of the amendment, the date for satisfying the conditions was May 17, 2021 and the closing date was June 1, 2021.

[11] Meridian’s position was that it was not prepared to consent to Mr. Singh assuming the Mortgage. Further, and even if the Agreement as produced was completed, there would likely still be money owing to it and to Okje and 234’s other creditors, some of whom have priority over the Mortgage. In response, Okje and 234 took issue with the statement Meridian would not assume the Mortgage and stated the Chos’ including their son, have indicated that they were prepared to or have already listed their homes in Toronto for sale and there is sufficient equity to pay off both Meridian and the outstanding creditors.

[12] In the circumstances, I granted a short adjournment to May 21, 2021 to enable Okje and 234 to firm up their plan to resolve their obligations. In so doing, I stated that prior to the return date, the respondents must provide evidence concerning the status of the Agreement and specifically whether the conditions in the Agreement had been fulfilled or waived such that the Agreement was firm as well as evidence of the status of both the Chos and their son’s proposed sales of their Toronto properties including whether the properties have been listed; the listing price; the total amount of mortgages and other encumbrances on the properties and the expected “net” proceeds that will be available.

[13] I further advised the parties that if I was satisfied on the return date that based on the evidence, there was a realistic possibility that the respondents and the Chos could resolve their obligations to Meridian and their other creditors, I would further adjourn the application for a reasonable period to let that happen. For that to happen, however, the respondents must have a concrete plan including a firm agreement of purchase and sale.

[14] Prior to the return on May 21, 2021, both parties filed further evidence concerning events subsequent to May 11, 2021. Mr. Cho advised that the Agreement was “alive” and that it had been further amended to reduce the purchase price of the Property to $7 million. The amended Agreement contained a clause that the buyer agreed to lend $2 million to the seller for closing the deal. Both parties agreed to “register this money” on the Chos’ personal residence. The amended Agreement still contained the buyer’s lawyer’s approval condition but not the assumption of the Mortgage. Finally, the time to satisfy conditions was extended to June 15, 2021 and the closing date to June 30, 2021.

[15] Mr. Cho further deposed that the $9 million (the new purchase price together with the $2 million loan) would be sufficient to pay off all the respondents’ liabilities. He further stated that Okje had become aware of and submitted a loan application for $1 million to the Regional Relief and Recovery Fund, a Federal programme to help small businesses and he anticipated that funding would be distributed in 6 to 9 weeks-time. Finally, he provided evidence of listings of both his personal residence ($6,990,000) and his son’s residence ($3.289 million).

[16] Meridian filed a further affidavit of Amber Waheed, a Commercial Credit Specialist and the person responsible for managing the respondents’ loans. On May 18, 2021, Ms. Waheed had a telephone discussion with Mr. Singh during which he advised he had not yet retained legal counsel; the removal of the condition requiring the assumption of Meridian’s mortgage was an error and that he still required the condition to be included; although he’d been in touch with the franchisor, he had not received its approval to take over the hotel; his understanding was that Okje currently owed the franchisor between a $100,000 and $150,000 in outstanding franchise fees; in respect of the $2 million loan, he said Meridian would receive approximately $1 million and the balance would be used for priority and trade payables although he could not provide any details of the timing or the amounts owing.

[17] Following the above discussion with Mr. Singh, he retained a lawyer and discussions took place between Mr. Singh and Meridian, but no agreement was reached.

[18] Mr. Cho filed a further brief affidavit taking issue with Ms. Waheed’s statement that Mr. Singh had said that the deletion of the condition requiring the assumption of the Meridian mortgage was an “error”. Mr. Cho said that the condition was specifically discussed and deleted, and that Mr. Singh communicated to him that he could finance the acquisition of the hotel.

[19] Both s. 243(1) of the BIA and s. 101 of the CJA provide that the court may appoint a receiver if it considers it to be just or convenient to do so.

[20] In determining whether it is just or convenient, the court must have regard to all of the circumstances of the case including the nature of the property, the rights and interests of the parties to the property, whether the lender’s security is at risk of deteriorating, whether there is a need to stabilize and preserve the business, whether there is a loss of confidence in the debtor’s management and the positions and interests of other creditors. See: Confederation Life Insurance Co. v. Double Y Holdings Inc., 1991 CarswellOnt 1511 (Ont. S.C.J. (Commercial List) at para. 20; BCIMC Construction Fund Corporation et al. v. The Clover on Yonge Inc., 2020 ONSC 1953.

[21] Further, while the appointment of a receiver is considered an extraordinary remedy, in circumstances such as in this case, where the Credit Agreement, the Okje and 234 General Security Agreements and the Mortgage all provide that Meridian is entitled to appoint a receiver and manager in the event of a default, as Meridian’s right to the appointment of a receiver is derived from a private contract, the appointment of a receiver cannot be considered an extraordinary remedy. See: Business Development Bank of Canada v. 2197333 Ontario Inc., 2012 ONSC 965; BCIMC Construction Fund, at para. 43.

[22] Meridian submits that is just and convenient to appoint a receiver in this case. The respondents are clearly in default of the Credit Agreement. They are insolvent and have presented no clear path to resolve their obligations. There is no assurance the Agreement will be completed and even if it is, the respondents, by their actions, concede that more money will be required to pay out Meridian and the other ranking creditors, the source of which is also tenuous. Meanwhile, the longer the delay, the more its security is in jeopardy and at risk of eroding. Meridian has lost confidence in Okje’s management and the appointment of a receiver will bring stability to the business and permit an orderly resolution of the issues.

[23] The respondents submit that a receivership would not be just or convenient. It would result in a substantial reduction in the value of the hotel and add substantial unnecessary expense to the process of finding a purchaser. It would also lead to the termination of 234’s franchise pursuant to the franchise agreement. The respondents submit that they ought to be provided a fair opportunity to rectify any defaults and to sell their assets in an orderly manner.

[24] The respondents also raise issues of misrepresentation and bad faith conduct on the part of Meridian in relation to its handling of Okje’s application for BCAP Loan in October 2020 and Meridian’s subsequent decline of the application. They have commenced an action against Meridian and submit, given the factual issues in dispute, the application should be converted to an action.

[25] Finally, the respondents rely on the Agreement together with their actions in attempting to liquidate their assets to demonstrate that they have a plan which they are executing to enable them to pay off Meridian and their other creditors. They also point to their recent application for $1 million in funding to the Regional Relief and Recovery Fund.

[26] In my view, based on all the evidence, I am satisfied the appointment of a receiver is justified in this case.

[27] There is no issue that the loans are in default and have been for some time. The amount involved is substantial. The respondents essentially seek an opportunity to either bring the loans into good standing or sell the Property and business and repay Meridian and their other creditors. The evidence of how they intend to do that however does not in my view establish that to be a realistic possibility.

[28] The Agreement, which has been amended twice, is far from firm. There is also evidence that the parties may have a disagreement over whether there is a condition regarding Mr. Singh’s assumption of the Mortgage. The further $2 million loan from Mr. Singh and/or the sale of the residences are also far from firm. The former is not documented and is to be secured by a mortgage on the Chos’ residence which is for sale. Nor is there evidence of the encumbrances on the residences or what the net proceeds from the proposed sales would be should they occur.

[29] There is also no evidence that Okje’s recent application for funding from Regional Relief and Recovery Fund will solve the respondents’ issues. Even if approved, funding is still 6-9 weeks away and will not resolve their issues with Meridian or with the other creditors.

[30] There is also no evidence on the financial status of the hotel, including its recent cash flow and liabilities. As part of its disclosure for the BCAP Loan in the fall of 2020, Okje noted cash shortfalls of $622,593 for 2020 and projected $923,437 for 2021. That was before the province wide stay at home order in March of this year which has impacted all small businesses. Mr. Singh’s information that there are substantial franchise fees in arrears is also troubling. In my view, in the circumstances, a receiver is required to stabilize and preserve the business.

[31] I also not satisfied that the application should be converted to an action or that Meridian’s actions in respect of declining the BCAP Loan should impact on this application. The documentary evidence does not come close to establishing that Meridian made any misrepresentations to the respondents concerning the availability of the BCAP Loan or its actions in declining it. The respondents were aware at all times that approval of the loan was subject to the approval of Meridian’s credit department, which was not forthcoming for reasons which were communicated to the respondents.

[32] For the above reasons, BDO is appointed as receiver and manager over all property, assets and undertaking of Okje and 234.

[33] I am not prepared at this stage to authorize BDO to assign the respondents into bankruptcy. Such a request is premature in my view.

[34] Nor do I consider that the Agreement should be sealed. There is no evidence that it was obtained based on a formal sale process or that the proposed purchase price has any relation to the actual market value of the Property. In the circumstances, it should have no impact on the value of the Property.

[35] A receivership order, substantially in the form of the Commercial List order shall issue.

L.A. Pattillo J.

Released: May 25, 2021.