COURT FILE NOS.: CV-21-00667655-00CL
CV-21-00668235-00CL
DATE: 20211112
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
BETWEEN:
TERRAFARMA INC. and 9258159 CANADA INC. o/a THRIVE CANNABIS
Applicants
– and –
DAVID MARTIN MILLEN BERRY and DMM BERRY HOLDINGS LTD.
Respondents
Shawn Irving and Mark Sheely, for the Applicants/Respondents
Scott C. Hutchison and Daniella Murynka, for the Respondents/Applicant DMM Berry Holdings Ltd.
AND BETWEEN:
DMM BERRY HOLDINGS LTD.
Applicant
– and –
TERRAFARMA INC. and 9258159 CANADA INC. o/a THRIVE CANNABIS
Respondents
HEARD: October 28, 2021
L. A. Pattillo j.
REASONS FOR JUDGMENT
Introduction
[1] The applicants, Terrafarma Inc. (“Terrafarma”) and 9258159 Canada Inc. o/a Thrive Cannabis (“Thrive”), seek the following relief:
discharge of the security registration under the Personal Property Security Act, R.S.O. 1990, c. P.10 (PPSA), by the respondent David Martin Millen Berry (“Berry”) in respect of a loan he made to Terrafarma which has been paid; and
a declaration that Terrafarma has fully repaid the outstanding indebtedness owing to the respondent DMM Berry Holdings Ltd. (“DMMB”) in respect of a loan from DMMB (the “Loan”) together with other ancillary relief, and that DMMB is estopped from exercising the conversion rights provided for in the loan agreement between the parties.
[2] In response, DMMB has commenced a cross-application seeking, among other things, declarations that Thrive failed to pay the Loan at the maturity date, entitling DMMB to exercise the conversion right in the agreement.
Background
[3] Terrafarma is a privately-held Ontario corporation and is a vertically integrated cultivator and processor of cannabis and cannabis offshoots. Thrive is a wholly-owned subsidiary of Terrafarma and holds various licences from Health Canada concerning cannabis production, sales and research.
[4] DMMB is an Alberta corporation whose principal is Berry. Berry, through 2660071 Ontario Inc, is a minority shareholder in Terrafarma.
[PPSA](https://www.canlii.org/en/on/laws/stat/rso-1990-c-p10/latest/rso-1990-c-p10.html) Registration
[5] Pursuant to a loan agreement dated May 31, 2018 which agreement was amended and re-stated on September 28, 2018 and July 22, 2020 (the “Berry Loan”), Berry personally loaned money to Terrafarma. The Berry Loan was secured and the security was registered under the PPSA. While the Berry Loan was repaid by Terrafarma on March 31, 2021 by wire transfer to Berry’s bank account in Toronto, he refused to discharge the registration under the PPSA.
[6] Prior to the hearing, I was advised by the parties that they had agreed to adjourn the issue surrounding the discharge of the PPSA registration. When I questioned why given that the issues appeared to be related, I was advised that the PPSA registration had been removed but the issue of damages and costs arising from Berry’s actions remained outstanding. In the circumstances, that issue is adjourned, hopefully to be resolved between the parties.
The Loan
[7] Pursuant to an agreement in writing dated January 14, 2020 between DMMB, Thrive and Terrafarma, DMMB agreed to establish the Loan in the amount of $1,190,000 in favour of Thrive, subject to the terms and conditions set out (the “Agreement”). The Agreement defined DMMB as the “Lender” and Thrive as the “Borrower”.
[8] The Agreement provided for a Maturity Date of the Loan of October 31, 2020, subject to the Borrower’s request to extend the term to an Extended Maturity Date of July 31, 2021, but only if the Loan was otherwise in good standing. On October 30, 2020, Thrive exercised its right to extend the Maturity Date of the Loan to the Extended Maturity Date.
[9] The Agreement contains the following clause entitled “Repayment”:
Subject to the terms of this loan agreement, the Borrower shall permanently repay the Loan, together with all accrued interest, fees and other amounts then unpaid by the Borrower, on the Maturity Date or the Extended Maturity Date, as the case may be, and the Loan shall be automatically terminated at such time. If the Maturity Date or Extended Maturity Date, as the case may be, is on a day that is not a business day, then payment shall be made on the first business day following the Maturity Date or the Extended Maturity Date, as the case may be. If the Loan is not paid when due, the Loan will continue to be convertible as set out herein.
[10] With respect to the Loan being convertible, the Agreement provided:
Terrafarma will entitle the Lender to convert, all or less than all, of the outstanding indebtedness into Common Shares, in the Lender’s sole discretion, prior to the Extended Maturity Date at a conversion price per share equal to a $70 million pre-money valuation of Terrafarma Inc. calculated on a fully diluted basis at the time of conversion. If the Loan is not repaid on or prior to the Extended Maturity Date, Terrafarma will entitle the Lender to convert, all or less than all, of the outstanding indebtedness into Common Shares, in the Lender’s sole discretion, at a conversion price per share equal to a $30 million pre-money valuation of Terrafarma Inc. calculated on a fully diluted basis at the time of conversion.
[11] In late April and again in late June, 2021, Thrive advised DMMB of its intention to repay the Loan as of the Extended Maturity Date (July 31, 2021). In that regard, during July Terrafarma took steps to obtain the funding necessary to repay the Loan. As July 31, 2021 fell on a Saturday, as noted above, the Agreement provided that payment “shall be made” on the first business day following the Extended Maturity Date, in this case, Tuesday, August 3 as Monday was a holiday.
[12] On Thursday, July 29, 2021, Thrive requested confirmation from DMMB that it could wire the repayment funds to the same account as had been used in Terrafarma’s repayment of the Berry Loan. DMMB did not respond.
[13] Later the same day, the applicants’ counsel emailed DMMB’s counsel and advised that their clients intended to repay the outstanding indebtedness under the Loan on the Extended Maturity Date and was proposing to do so by wire transfer by end of the day on July 30th to avoid any inadvertent delays given the long weekend.
[14] DMMB’s counsel responded on July 30, 2021, taking the position that Thrive was required to give 14 days’ prior written notice of any repayment and stating that DMMB “insists that Thrive comply with the strict terms of the Loan Agreement.” The applicants’ counsel responded immediately stating the notice of repayment was not required but in any event, the applicants had previously advised DMMB of their intention to repay the Loan at the Extended Maturity Date.
[15] At the end of the day on July 30, 2021, in the absence of receiving any wire transfer information in respect of DMMB, Thrive’s counsel initiated a wire transfer to DMMB for the outstanding indebtedness owing on the Loan as at July 31, 2021. The information to facilitate the wire transfer was obtained from Terrafarma’s earlier repayment of the Berry Loan.
[16] On August 5, 2021, the applicants were advised the wire transfer had been rejected. Immediately thereafter, the applicants’ counsel requested DMMB’s counsel provide corrected wire payment instructions, failing which Thrive would deliver a bank draft to DMMB’s counsel, in trust.
[17] On the same day, DMMB’s counsel responded, advising that Thrive had not repaid the Loan by the Extended Maturity Date and they would not accept any effort to repay the debt after the Extended Maturity Date. They further advised that as a result of Thrive’s failure to repay the Loan, DMMB was exercising its right under the Agreement to convert the entire outstanding indebtedness of the Loan into Terrafarma common shares at a conversion price per share equal to a $30 million pre-money valuation of Terrafarma, calculated on a fully diluted basis at the time of conversion.
Position of the Parties
[18] The applicants submit they took all reasonable steps and acted in a commercially reasonable manner in attempting to repay the DMMB Loan and accordingly discharged its obligations under the Agreement. Thrive was at all times in a position to repay the Loan on or before the Extended Maturity Date and, in the absence of DMMB providing wire transfer instructions, they caused a wire transfer for the full amount of the outstanding indebtedness to be sent to an account that had been previously used to repay the Berry Loan. They submit the respondents’ refusal to provide wire transfer instructions and accept payment was “tactical” and amounted to bad faith. As a result, this court should not countenance such behaviour or permit DMMB to exercise its conversion rights under the Agreement.
[19] DMMB submits that the Loan was not repaid to it on or before the date or in the manner provided for in the Agreement. As a result, DMMB was entitled to and did exercise its right to conversion, also as provided for in the Agreement. Far from “bad faith” as alleged, DMMB and Berry submit their actions amounted to no more than realizing on legal contractual rights properly bargained for and agreed to by the applicants.
Analysis
[20] The Agreement clearly provides for the date and manner of payment of the Loan. It is to be repaid on the Extended Maturity Date and all payments “shall be made in immediately available funds to the Lender at its address referred to in the ‘Notice’ section of the Agreement.” The address in the Notice section of the Agreement for DMMB was a street address in Canmore, Alberta, to Berry’s attention and included Berry’s email address.
[21] The applicants submit that the Lender did not act in good faith by failing to provide wire transfer instructions despite repeated requests. In my view, it had no obligation to do so. While payment by wire transfer may have been faster and safer, DMMB was entitled to insist on compliance with the terms of the Agreement, which it clearly did.
[22] The applicants submit that the address for Notice in the Agreement is Berry’s ski chalet in Canmore and there was no point sending a bank draft for the indebtedness there given the amount involved and that he was out of the country on holiday. The applicants’ information concerning Berry’s whereabouts appears to be based on a statement from DMMB’s counsel that Berry had been travelling or on vacation for most of July. Further, there is no evidence that there was no one at the Canmore address between July 30 and August 3, 2021, to accept a delivery or registered mail.
[23] The applicants further submit that the decision to send a wire transfer for the amount owing to DMMB to Berry’s personal account at his bank in Toronto was reasonable given DMMB’s refusal to provide wire transfer details and a wire transfer was agreeable previously to effect repayment of the Berry Loan in circumstances where the Berry Loan agreement contained similar provisions concerning repayment as the Agreement.
[24] I disagree. While Berry agreed to payment of the monies owing to him by wire transfer to his personal account and provided the transfer details, there was no such agreement with DMMB. Not only was it clear there was no agreement to a wire transfer, counsel for DMMB advised counsel for the applicants on July 30 that DMMB insisted on strict compliance with the terms of the Agreement. What is reasonable, in those circumstances, is to effect payment in accordance with the terms of the Agreement, not to provide a wire transfer to an account belonging to someone other than the lender.
[25] There is no evidence as to why the wire transfer was refused. It is clear on its face, however, that there were problems with it. The beneficiary was DMMB at its address in Alberta; the beneficiary bank information was Berry’s bank in Toronto and the account information, which purported to be Berry’s personal account, was missing the routing information.
[26] The applicants point to DMMB and Berry’s aggressive tactics during the course of the loans as evidence of bad faith. Specifically they point to the delivery of notices of default and notices of intent to enforce security in respect of both loans on February 24, 2021; Berry’s resistance to the repayment of his loan based on an alleged oral agreement with Terrafarma’s CEO; Berry’s claim to additional amounts owing on his loan, after repayment and his refusal to discharge his PPSA registration; and DMMB’s position on July 30, 2021 that Thrive was required to provide 14 days prior notice of repayment and had not done so.
[27] DMMB characterizes its and Berry’s actions in respect of the loans as “asserting plainly documented legal rights that arise under the terms of an agreement reached by two sophisticated commercial parties.” Whether that is so or not, I am in no position to make such a finding except to say I do not consider such actions to amount to bad faith.
[28] What is important to observe from the prior conduct is that there were pre-existing tensions between the parties caused mainly by Berry and DMMB advancing aggressive positions. In such circumstances, it was even more important, in my view, to comply with the Agreement particularly after being advised by DMMB, that its terms must be strictly strictly complied with in effecting repayment. As set out herein, they weren’t, resulting in the Loan not being repaid by Thrive on the Extended Maturity Date.
[29] Based on the facts which are not in dispute, I find that Thrive did not repay the Loan in accordance with the terms of the Agreement. Rather, it attempted to repay the loan by wire transfer which was not provided for in the Agreement and was not agreed to by DMMB. Further, to compound the error, the wire transfer which was sent did not contain correct information.
[30] As the Loan was not repaid on or before the Extended Maturity Date, DMMB has the right pursuant to the Agreement to convert all or less than all of the outstanding indebtedness into Terrafarma’s common shares at the conversion price provided for in the Agreement.
[31] DMMB exercised that right on August 5, 2021 and is entitled to the shares in accordance with the Agreement. The applicants submit that based on the conversion price provided, DMMB will obtain a benefit to the detriment of Terrafarma’s other shareholders based on the price of the most recent share placement. While that may be, it was what was agreed to by the parties in the event the Loan was not repaid on the Extended Maturity Date which is what occurred.
Conclusion
[32] For the above reasons, the applicants’ application is dismissed and DMMB’s application is allowed.
[33] In the event the parties are unable to agree on costs, I may be spoken to.
L.A. Pattillo J.
Released: November 12, 2021
COURT FILE NOS.: CV-21-00667655-00CL
CV-21-00668235-00CL
DATE: 20211112
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
TERRAFARMA INC. and 9258159 CANADA INC. o/a THRIVE CANNABIS
Applicants
– and –
DAVID MARTIN MILLEN BERRY and DMM BERRY HOLDINGS LTD.
Respondents
AND BETWEEN:
DMM BERRY HOLDINGS LTD.
Applicant
– and –
TERRAFARMA INC. and 9258159 CANADA INC. o/a THRIVE CANNABIS
Respondents
REASONS FOR JUDGMENT
L. A. PATTILLO J.
Released: November 12, 2021