Groia & Company Professional Corporation et al. v. Medcap Real Estate Holdings Inc., 2021 ONSC 7986

COURT FILE NO.: BK-20-00208454-T31 DATE: 20211206

ONTARIO SUPERIOR COURT OF JUSTICE IN BANKRUPTCY AND INSOLVENCY

IN THE MATTER OF THE BANKRUPTCY OF MEDCAP REAL ESTATE HOLDINGS INC. IN THE CITY OF BRAMPTON IN THE PROVINCE OF ONTARIO

BETWEEN:

GROIA & COMPANY PROFESSIONAL CORPORATION, BENNINGTON FINANCIAL CORP., HEFFNER DEVELOPMENT GROUP (BRAMPTON) LIMITED, PHYSIOMED HEALTH HOLDINGS INC. and ANNE WILSON Applicants

– and –

MEDCAP REAL ESTATE HOLDINGS INC. Respondent

COUNSEL: Ivan Y. Lavrence, for the Applicants F. Scott Turton, for the Respondent

HEARD: May 31, June 1, 2 and 4, 2021

BEFORE: L. A. PATTILLO J.

Introduction

[1] This is an application commenced by Groia & Company Professional Corporation, Bennington Financial Corp., Heffner Development Group (Brampton) Limited, Physiomed Health Holdings Inc. and Anne Wilson on September 16, 2020, for a Bankruptcy Order against the property of the respondent, Medcap Real Estate Holdings Inc.

[2] A. Farber & Partners have consented to its appointment as the Trustee in the event the application is granted.

[3] In support of the application, each of the applicants has filed an affidavit of verification deposing that at the time of filing of the application, the respondent had debts owing to each of them in excess of $1,000, and had committed acts of bankruptcy within six months of the filing of the application, contrary to s. 43(1)(a) and (b) of the Bankruptcy and Insolvency Act, RSC 1985, c. B-3, as amended (the “BIA”).

[4] Medcap disputes the applicants’ allegations. It submits that it did not have monies owing to some the applicants at the time of the filing of the application based on ongoing litigation and it has subsequently paid others. It further denies that it committed any of the acts of bankruptcy alleged. It submits that the application is being brought by the applicants for a collateral purpose contrary to the BIA.

Preliminary Matter

[5] Initially the application named two acts of bankruptcy set out in s. 42(1) of the BIA: permitting a process under which the respondent’s property is seized, levied or taken in execution to remain unsatisfied for more than 15 days (s. 42(1)(e); and ceasing to meet liabilities generally as they become due (s. 42(1)(j)).

[6] At the outset of the trial, the applicants brought a motion to add a third act of bankruptcy: the respondent assigned, removed or disposed of property with intent to defraud, defeat or delay its creditors (s. 42(1)(g)). The respondent did not oppose the motion.

[7] Accordingly, I granted the applicants’ motion and directed that the application for a Bankruptcy Order be amended accordingly.

The Facts

[8] The following are my findings of fact concerning each of the applicant’s dealings with the respondent, based on the affidavits of verification filed by the applicants, the Agreed Statement of Facts filed by the parties and the evidence called at trial. In that regard, I accept the evidence of all of the applicants’ witnesses.

Medcap Real Estate Holdings Inc.

[9] Medcap Real Estate Holdings Inc. (“Medcap”) is an Ontario corporation, whose principal is John Robert Cardillo (“Cardillo”). Medcap’s principal business is owning property at which Cardillo, through other companies which he owns or controls, operates various fitness facilities which at one time operated under the name of Premier Fitness. While Premier Fitness ran into financial issues and ceased operating under that name around 2012, Cardillo has continued, directly or indirectly, to operate fitness clubs under different names.

[10] Two of the commercial properties owned by Medcap are 92/100 Centennial Parkway South (“Centennial Parkway”) and 635 Upper Wentworth Street (“Upper Wentworth”), both of which are located in the City of Hamilton. Both properties have buildings which had fitness clubs/gyms run by companies controlled directly or indirectly by Cardillo. At the time of the hearing, Upper Wentworth was rented to BodyPro Gym Inc., which operates a fitness club at the premises and Centennial Parkway was vacant.

Groia & Company Professional Corporation

[11] Groia & Company Professional Corporation (“Groia”), carries on the practice of law with its head office in Toronto.

[12] On October 1, 2018, Groia obtained a judgment against Medcap and Cardillo for $247,854.79 plus post-judgment interest in respect of fees owing and costs. Medcap appealed the judgment to the Court of Appeal. On March 1, 2019, Groia obtained an order from the Court requiring Medcap to post security for costs in the amount of $80,000 by March 29, 2019, failing which the appeal would be dismissed. Groia was awarded costs of the motion against Medcap of $5,000. Medcap failed to post the money and on April 16, 2019, its appeal was dismissed.

[13] As of September 16, 2020, Medcap remained indebted to Groia for $252,845.79 on account of the judgment and the cost order.

[14] Medcap subsequently paid the amount owing in full, including interest, to Groia by payments on December 31, 2020 ($15,000) and April 7, 2021 ($250,620.40).

Bennington Financial Corp.

[15] Bennington Financial Corp. (“Bennington”), formerly Equirex Leasing Corp., carries on the business, among other things, of equipment financing through leases.

[16] Bennington claims that as at September 16, 2020, Medcap owed it $13,310,014.08 arising out of equipment leases entered into by Bennington as lessor and Medcap and other related parties as lessees. Bennington is the mortgagee pursuant to six mortgages totalling $5,350,000.00 which it asserts are collateral security for the amount owing on the leases. Three of the mortgages, totalling $3,850,000.00, are registered against the Centennial and Upper Wentworth Properties.

[17] In addition, one of the mortgages is registered against property at 474 Iroquois Shore, Oakville, owned by National Racquets Club Inc. (“National Racquets”).

[18] Medcap disputes Bennington’s debt, the validity of the Bennington mortgages and the validity and enforceability of the leases, which dispute has been in litigation for some time in 11 actions in the Superior Court. Three of the actions are between Bennington and Medcap and eight are between Bennington and other parties alleged to be jointly liable with Medcap.

[19] In the fall of 2019, Bennington brought a motion for summary judgment in three of the actions commenced by Bennington, two against Medcap and one against National Racquets. Bennington sought judgment for $3.5 million owing under six mortgages that were provided as collateral security for payments owing under 32 equipment leases by Medcap and its related companies. Bennington also claimed in the actions approximately $7,465,585 owing under the leases.

[20] On November 28, 2019, Nightingale J. dismissed Bennington’s summary judgment motion on the basis that, given the number of additional actions between the parties concerning similar issues, there were serious concerns of bifurcation of Bennington’s claims. Further, granting judgment in the three actions would not resolve the entirety of the actions. The Motion Judge also concluded that there were genuine issues for trial concerning the underlying leases which the mortgages were collateral security for.

[21] On December 21, 2020, the Divisional Court dismissed Bennington’s application for leave to appeal for the Order of Nightingale J.

[22] Bennington conceded at the commencement of the trial that in light of the Nightingale Order, it’s application cannot prevail.

Heffner Development Group (Brampton) Limited

[23] The applicant Heffner Development Group (Brampton) Limited (“HDGB”) submits that Medcap owes it $933,036.42 in respect of Medcap’s guarantees of four leases entered into between HDGB and three companies owned or controlled by Cardillo.

[24] The Heffner Group has had a long-standing relationship with Medcap and Cardillo dating back to the early 1990’s involving vehicle and equipment financing to Cardillo and his various companies.

[25] In 2014, Cardillo approached Willy Heffner (“Heffner”), the President of HDGB and asked if he would help him out in respect of a property Medcap owned at 40B Hanson Road South in Brampton (“Hanson Road”). Hanson Road has a two storey office building which was occupied by a number of companies owned or controlled by Cardillo which carried on fitness and wellness businesses. It had a mortgage which was in default and the mortgagee was about to foreclose.

[26] The arrangement Heffner and Cardillo reached with respect to Hanson Road was that Heffner would purchase the property and Cardillo, through the various companies occupying the building, would enter into leases with HDGB and Cardillo would buy back the property at some point in the future.

[27] On September 9, 2014, HDGB as purchaser and Medcap as vendor, entered into an agreement of purchase and sale for Hanson Road (the “APS”). The purchase price was $6.1 million and included a vendor take back second mortgage for $2 million. Paragraph 3(a) of the APS provided that the amount of the second mortgage would be reduced by any rents owing.

[28] The APS closed on November 20, 2014. At the same time, the parties entered into an option agreement whereby HDGB granted Medcap the option of purchasing Hanson Road on certain terms and conditions.

[29] As part of the closing, HDGB entered into leases with the following companies, each of which was controlled either directly or indirectly by Cardillo or his wife. The leases were all dated December 1, 2014 and provided for a term of 20 years with a right to renew and rent payable on the first day of the month beginning on December 1, 2014:

i. 1869461 Ontario Inc., o/a Regency Fitness, for approximately 19,431 sq. ft. on the ground floor at a monthly rent for the first five years of $22,669.50 payable on the first month;

ii. 1884379 Ontario Inc., o/a Cardio Med Health Clinics, for approximately 1,500 sq. ft. on the second floor at a monthly rent of $1,750.00 for the first year; $2,000 for the second year; and $2,125 for the remaining 18 years;

iii. 1906570 Ontario Inc., o/a Fitness for Home, for approximately 8,800 sq. ft. on the second floor at a monthly rent of $7,333.33 for the first year; $8,066.67 for the second and $8,800 for the remaining 18 years; and

iv. 1869461 Ontario Inc., o/a Regency Fitness, for approximately 4,765 sq. ft. in the basement at a monthly rent of $2,779.58 for the first five years and $2,918.56 for the remaining 15 years.

[30] Each of the above leases was guaranteed by Medcap pursuant to the following provision in each lease:

In consideration of the Landlord entering into this lease with the Tenant, the Guarantor personally guarantees to the Landlord the due payment of all rent, additional rents and moneys payable by the Tenant to the Landlord pursuant to this lease and further guarantees the due performance of all the obligations and terms imposed by the Tenant by the terms of this Lease to the Landlord, as if the Guarantor were the Tenant named herein. The Landlord shall not be bound to look to any other person or to the Tenant for payment or performance before being entitled to seek recourse from the Guarantor. The Landlord shall not be required to exhaust its remedies against the Tenant before seeking recourse from the Guarantor. The Landlord may agree with the Tenant or any successor of the Tenant, at any time, and, at its sole discretion, to alter or change the terms of payment or the obligations of the Tenant under this Lease without thereby releasing the Guarantor. The Landlord may, with or without consideration, release any person or the Tenant from any liability under this Lease, without releasing the Guarantor. The Landlord may apply all moneys received to the payment of any moneys owing under the terms of this Lease, whether then due or not, in any manner it thinks reasonable.

[31] Beginning on December 1, 2014, none of the tenants paid any rent to HDGB as required by the four leases.

[32] Towards the end of 2015, Cardillo again was in need of money. He asked Heffner to pay out the second mortgage which Heffner refused to do. Heffner sent Cardillo a “quick calculation” of the amounts that are set-off on the second mortgage which totalled approximately $870,000 and included $505,217 for rent for the three tenants which Medcap guaranteed.

[33] After further negotiation, Heffner and Cardillo reached an agreement, confirmed in a letter from HDGB’s lawyer dated January 29, 2016, whereby HDGB would pay Medcap $950,000 in exchange for a discharge of the second mortgage and a termination of Medcap’s option to buy back Hanson Road. The agreement was completed and the second mortgage discharged on February 1, 2016.

[34] In July 2016, with the continued failure of the tenants at Hanson Road to pay any rent, HDGB took steps to terminate the tenancies. On July 8, 2016, HDGB re-entered the leased premises, gave notice that the tenancies were terminated, changed the locks and distrained against the fitness equipment.

[35] Apart from a credit on the closing of the purchase of Hanson Road for the portion of the rent owing by the three tenants from November 20 to November 30, 2014, HDGB never received payment of rent from or on behalf of each of the tenants throughout the period from December 1, 2014 to July 31, 2016.

[36] Subsequent to the discharge of the second mortgage and the termination of the tenancies at Hanson Road, Medcap has commenced two actions against HDGB arising out of HDGB’s purchase of Hanson Road. The first was a claim by Medcap for an amount it claimed was the impute tax credit in respect HST it was entitled to in respect of the arrears of rent (including HST) accounted for in HDGB’s payout of the second mortgage. The second was a claim for wrongful conversion of the chattels distrained by HDGB in July 2016 which Medcap alleged it owned.

[37] HDGB defended both actions. In neither action did HDGB crossclaim or counterclaim against Medcap for the rents owing in respect of Hanson Road, pursuant to its guarantee. On December 31, 2018, Medcap obtained summary judgment against HDGB for $45,672.88 in its action for conversion, plus interest and costs.

[38] The total rents owing by each of the three tenants at Hanson Road for the period from December 1, 2014 to July 31, 2016 are, as follows:

i. 1869461 Ontario Inc. o/a Regency Fitness $674,297.38 ii. 1884379 Ontario Inc. o/a Cardio Med 47,001.86 iii. 1906570 Ontario Inc. o/a Fitness from Home 211,737.18 $933,036.42

[39] The above amount includes the rent owing from February 1, 2016 to July 31, 2016 which totals $239,756.06.

[40] HDGB has never served a notice on Medcap requiring payment of the unpaid rents pursuant to the guarantee. When asked why not, Heffner said he had no good answer as to why he had not pursued the rents.

Anne Wilson

[41] The applicant Anne Wilson (“Anne”) is the former spouse of Neil Scott Charles Wilson (“Dr. Wilson”), the principal of the applicant Physiomed Health Holdings Inc. (“Physiomed”).

[42] On August 18, 2015, Anne loaned $43,210.00 to several corporations related to Medcap (the “Loan”). On August 31, 2015, Medcap issued a cheque to her for $43,210 to repay the Loan but Medcap subsequently stopped payment.

[43] As described in more detail below, on March 4, 2016, Anne and Physiomed entered into an agreement with three corporations and Medcap concerning, among other things, repayment of the Loan. In the absence of repayment, in January 2017, Anne and Physiomed commenced an action against Medcap and recently obtained summary judgment against Medcap.

[44] As of September 16, 2020, Anne submits that the amount owing to her by Medcap in respect of the Loan, including accrued interest, was $64,188.46. On April 7, 2021, Medcap paid Anne $51,223.37 on account of the debt, without prejudice to its appeal from the summary judgment.

Physiomed Health Holdings Inc.

[45] Dr. Wilson is a doctor of chiropractic medicine and an officer and director of the applicant Physiomed. Physiomed is a holding company for, among other things, chiropractic and wellness clinics which were located in 12 Premier Fitness Club locations.

[46] In and around 2005-06, Physiomed was owned 50/50 by both Dr. Wilson and Cardillo. Subsequently, Dr. Wilson bought out Cardillo. In December 2011, Dr. Wilson and Cardillo agreed to establish a number of companies to operate fitness/wellness centres under the name Physiomed Fitness but the idea never proceeded and ended in February 2012.

[47] In late 2015, early 2016, Medcap was in default under its first mortgage to the Sun Life Assurance Company of Canada (“Sun Life”) on Upper Wentworth. The mortgage was for $3,250,000 million of which approximately $1.45 million remained owing. On January 20, 2016, Sun Life commenced an application for the appointment of a receiver for Upper Wentworth.

[48] On January 29, 2016, Sun Life, Medcap and Cardillo entered into an agreement which provided, among other things, that the respondent would pay the outstanding indebtedness to Sun Life by no later than February 23, 2016 failing which the court would immediately issue a receivership order (the “Forbearance Agreement”). The terms of the Forbearance Agreement were, on consent of the parties, embodied in an order of the court dated February 1, 2016. The deadline for payment of the Sun Life debt was subsequently extended by agreement of the parties to March 4, 2016.

[49] As a result of Sun Life’s receivership application, Cardillo and Dr. Wilson discussed taking an assignment of the Sun Life debt to be shared by them on a 50/50 basis. Physiomed was a tenant at Upper Wentworth.

[50] On March 3, 2016, Cardillo sent Dr. Wilson a draft co-ownership agreement between 2312130 Ontario Inc (Dr. Wilson’s company) and 2503866 Ontario Ltd., a company Dr. Wilson had no knowledge of. The draft set out a proposed 50/50 ownership of the Sun Life mortgage which Dr. Wilson did not agree with. As a result of further discussions between Cardillo and Dr. Wilson which culminated late on March 3, 2016, Dr. Wilson agreed that Physiomed would advance $250,000 to Cardillo/Medcap to make up the shortfall required by Medcap to pay out Sun Life. They further agreed that the amount advanced to Medcap by Anne in August 2015, which had not been repaid by Medcap, would be included in the agreement to be repaid along with the $250,000 together with interest at 9.75% per annum.

[51] By agreement in writing dated March 4, 2016 between Physiomed, Anne, 1927032 Ontario Inc., 1869461 Ontario Inc. (together, the “Fitness Clubs”), 2503866 Ontario Ltd. (“250”) and Medcap, agreed, amongst other things, that the $43,210 advanced by Anne in August 2015 and the $250,000 advanced by Physiomed on March 4, 2016 would be repaid by the Fitness Clubs over 38 months commencing on March 20, 2016 through to April 20, 2019 in the amount of $9,000 per month pursuant to an amortization schedule attached to the agreement (the “Agreement”). The Agreement further provided that Medcap guaranteed the monthly payments and remaining balance of the amounts advanced as per the amortization schedule until the amounts were paid in full.

[52] The Agreement was signed on the morning of March 4, 2016 by Dr. Wilson on behalf of Physiomed and by Cardillo on behalf of Medcap and 250 when they met in person at a Starbucks. Although the typed form of the Agreement does not provide for 250 to be a party, as it was the corporation that Cardillo proposed would take the assignment of the mortgage from Sun Life, Dr. Wilson insisted it be part of the Agreement and, with Cardillo’s agreement, wrote its participation by hand on the first page of the Agreement and Cardillo also signed on its behalf.

[53] Dr. Wilson subsequently arranged for the Agreement to be signed by Anne later on March 4, 2016. Although the Fitness Clubs were controlled indirectly by Cardillo (his niece was the sole officer and director of both companies), and despite repeated requests on behalf of Physiomed of Cardillo, it was never signed on behalf of the Fitness Clubs.

[54] Later on March 4, 2016, at Cardillo’s direction, Physiomed provided a bank draft payable to Tabuchi Law Corporation, in Trust, for $250,000. Maureen Tabuchi, the principal of Tabuchi Law Corporation, was acting for Cardillo and Medcap.

[55] Subsequently, on March 16, 2016, the Sun Life mortgage was assigned to 250 upon the payment of $1,432,181.03 to Sun Life. At the same time, Sun Life also assigned its General Security Agreement in respect of rents to 250. The $250,000 advanced by Physiomed on March 4, 2016 was used as part of the funds to pay out Sun Life’s mortgage, enabling Medcap to avoid receivership.

[56] In 2017, in the absence of either of the Fitness Clubs, 250 or Medcap paying any amounts to Physiomed in accordance with the Agreement, Physiomed and Anne commenced an action in the Superior Court against Medcap and 250, claiming payment of the principal amount of $293,210 made up of the $43,210 advanced by Anne Wilson and $250,000 advanced by Physiomed, plus interest and costs (the “Action”).

[57] Medcap and 250 defended the Action and Medcap counterclaimed against Physiomed for an accounting in respect of all financial dealings between them, including alleged rent owing.

[58] In reasons for judgment dated March 30, 2021, Justice A. J. Goodman granted summary judgment to Physiomed and Anne against Medcap in the amount of $293,210.00 and against 250 for $250,000, jointly and severally and dismissed Medcap’s counterclaim.

[59] As at September 16, 2020, Physiomed submits that the amount of the debt owing to it by Medcap was $250,000 plus accrued interest of $108,225.00 for a total of $358,225.00.

[60] On April 22, 2021, Medcap and 250 filed a Notice of Appeal from the Goodman Judgment.

[61] On May 28, 2021, Medcap paid Physiomed $250,000 plus $10,147.95 in pre-judgment interest pursuant to the Courts of Justice Act, $841.03 in post-judgment interest and $30,000.00 in costs by bank drafts payable to Physiomed’s lawyer, in trust, “without prejudice to the pending appeal”.

Other Creditors

i. The City of Hamiliton

[62] On March 19, 2019, the City of Hamilton (“Hamilton”) registered a tax arrears certificate against the title to Upper Wentworth. As at that date, the total outstanding property tax arrears for Upper Wentworth were $600,188.01. As of November 5, 2019, the tax arrears for Upper Wentworth totalled $850,703.44.

[63] On January 9, 2020, Hamilton sent a Final Notice pursuant to the Municipal Act, S.O. 2001, C. 25, advising that if the tax arrears on Upper Wentworth were not paid or an extension agreement is not arranged before March 19, 2020, the land will be advertised for public sale.

[64] Medcap subsequently negotiated an extension agreement with Hamilton but it was not signed because on March 23, 2020, Bennington, Heffner Investments Ltd. and Physiomed, all mortgagees of Upper Wentworth, collectively paid Hamilton $926,021.24 on account of Medcap’s tax arrears. As a result, Bennington, Heffner Investments Ltd. and Physiomed all have a collective lien against Upper Wentworth.

[65] Medcap disputes the validity of the mortgages held by Bennington, Heffner Investments Ltd. and Physiomed.

[66] Medcap has continued to not pay the taxes on Upper Wentworth. As of September 10, 2020, there were outstanding realty taxes owing to Hamilton in the amount of $117,512.84. As of April 12, 2021, Upper Wentworth had unpaid realty taxes of $182,129.89 made up of unpaid taxes for 2020 of $104,407.88 and $69,716.88 for 2021.

[67] Centennial Parkway also had property tax arrears owing to Hamilton reaching back to 2016. Centennial Parkway is shown on the tax rolls as two separate parcels: 92 and 100 Centennial. The outstanding property taxes for 2016 to 2019 totalled $27,606.09 for 92 Centennial and $338,480.71 for 100 Centennial.

[68] On October 2, 2019, Hamilton sent a final notice under the Municipal Act stating that unless the tax arrears for 100 Centennial were not paid by December 11, 2019, the land would be advertised for public sale.

[69] On January 17, 2020, KLN Holdings Inc. and Bennington, as the first and second mortgagees of Centennial Parkway respectively, collectively paid the arrears of property taxes owing on Centennial Parkway in the amount of $374,883.56 ($29,270.27 for 92 Centennial and $345,613.29 for 100 Centennial) and obtained a collective lien against 92 and 100 Centennial Parkway for the above amounts.

[70] Medcap has continued to not pay taxes on Centennial Parkway. As of August 2020, it had outstanding realty taxes owing to Hamilton for the two parcels of $53,490.83. As of April 12, 2021, Centennial Parkway’s unpaid realty taxes were $82,856.45 made up of unpaid taxes for 2020 of $52,773.78 and unpaid interim taxes for 2021 of $24,628.34.

ii. KLN Holdings Inc.

[71] KLN Holdings Inc. (“KLN”) holds the first mortgage on Centennial Parkway.

[72] The first mortgage on Centennial Parkway was initially held by First National Financial GP Corporation. On May 12, 2017, First National assigned the mortgage to Merk Investments Ltd. (“Merk”).

[73] In late April, early May 2017, KLN, through its principal, Larry Kelln (“Kelln”), purchased a 78.57% interest in the first mortgage on Centennial Parkway which it received by way of assignment from Merk dated May 12, 2017. The mortgage was for $1.4 million and had a term of two years, due June 30, 2019.

[74] Also on May 12, 2017, Merk assigned the remaining 21.43% interest in the mortgage to 2576280 Ontario Inc. (“257”). The sole officer and director of 257 was Ann Karmen Lum (“Lum”).

[75] In the spring of 2019, Kelln advised Medcap and Cardillo that KLN did not intend to renew the mortgage. Subsequently, at Cardillo’s request, Kelln agreed to a short term renewal of six months to November 30, 2019.

[76] On September 27, 2019, Kelln advised Medcap and Cardillo that KLN was not going to renew the mortgage. Cardillo asked Kelln to extend the mortgage for three to four months and told him that all taxes and insurance was up to date. On November 25, 2019, Cardillo attended at Kelln’s office and asked him for a further extension of the mortgage to June 1, 2022. Kelln became suspicious when he offered him 15% interest and a $30,000 lending fee.

[77] Following the meeting, Kelln contacted Hamilton and found out that it was taking steps to have a tax sale of the property and if that occurred, KLN would lose its mortgage. He did not agree to extend the mortgage as he felt Cardillo had misled him.

[78] As a result of the pending tax sale of Centennial Parkway, Kelln contacted Bennington, the second mortgagee on the property, and together they agreed to pay off the tax arrears to prevent the sale and preserve their mortgages. As noted, they collectively paid $374,883.56 or $187,441.78 each to Hamilton in respect of the property tax arears owing by Medcap for 2016 to 2019.

[79] Medcap made no payments to KLN pursuant to the mortgage after it came due on December 1, 2019.

[80] In order to be able to take any steps to enforce the mortgage, KLN was advised that it needed to own the whole mortgage. Accordingly, KLN contacted Lum, the sole officer and director of 257 and entered into an agreement with her to purchase 257’s interest in the mortgage for $300,000 (the amount then owing on 257’s portion of the mortgage).

[81] On January 27, 2020, KLN caused a certified cheque for $300,000 payable to 257 to be delivered to Lum and registered a transfer of 257’s interest in the Charge to KLN.

[82] On January 28, 2020, Julie Catenacci, Cardillo’s niece, sent a letter by email to Kelln on the letterhead of 257 advising that she was the president, sole director and sole shareholder of 257 and that she had just learned of the January 27th registration of the transfer of 257’s interest in the mortgage on Centennial Parkway and stating that the transfer was ineffective as Karen Lum resigned as a director of 257 on May 9, 2017 and had no authority to bind 257. Enclosed with the email were copies of the resignation as well as corporate resolutions dated May 9, 2017. The letter demanded that KLN forthwith reconvey to 257 its interest in the mortgage. The letter also enclosed a Corporation Profile Report showing Ms. Catenacci as the sole officer and director.

[83] In January 2020, he and his son visited Centennial Parkway and observed that the building was abandoned, there was no electricity on in the building and the roof appeared to be leaking. He has returned on sereral occasions and the property remained vacant.

[84] On March 9, 2020, KLN commenced a mortgage action against Medcap claiming, among other things, payment of the sum of $1,685,846.40 which amount includes then due under the mortgage to March 9, 2020 together with KLN’s payment of $187,441.78 for tax arrears.

[85] Medcap has defended the action on the basis that the initial transfer of the mortgage to both KLN and 257 did not confer upon either of them the status to maintain the action. Further, Medcap takes issue with KLN’s purchase of 257’s interest in the mortgage in January 2020 primarily on the basis of Catenacci’s allegations in her January 28, 2020 letter that Lum had no authority to bind 257. No defence is pleaded to the claim for payment of the tax arrears.

[86] Medcap owes KLN the moneys under the mortgage as well as $187,441.78 which is 50% of the amount paid by it and Bennington on account of Medcap’s tax arrears on Centennial Parkway.

iii. Writs of Execution

[87] On September 16, 2020, the following Writs of Execution were outstanding against Medcap:

1. Execution 17-0001462 relating to a judgment in favour of Bosnac Heating & Electric Ltd. (“Bosnac”) dated October 30, 2015 in the amount of $9,865.17 plus interest. The judgment was satisfied sometime after September 16, 2020;
2. Executions 17-0001247 and 17-0001248 relating to judgments in favour of Aird & Berlis LLP dated June 17, 2019 in the amount of $7,500 plus interest and February 26, 2018 also in the amount of $7,500 plus interest. The debts were settled and paid in February 2020;
3. Execution 17-0001463 relating to a judgment in favour of the Bank of China (Canada) dated September 22, 2017 in the amount of $28,796.73 plus interest. The debt was settled and paid in June and July 2019 however the Writ remained registered as of September 16, 2020.

iv. Canada Revenue Agency

[88] Canada Revenue Agency (“CRA”) issued tax arrears Certificates against Medcap which, as at September 16, 2020, were registered against Upper Wentworth as follows:

a) On December 14, 2015, in the amount of $2,328,526.53 plus interest, in Federal Court File No. ITA-1246-16; b) On February 11, 2016, in the amount of $25,694.42 plus interest, in Federal Court File No. ITA-1246-16; and c) On February 26, 2016, in the amount of $66,264.76 plus interest, in Federal Court File No. ITA-1030-16.

[89] Mr. Neil Bass, a partner in the Tax Group of Aird and Berlis, dealing principally with sales tax issues, testified on behalf of Medcap concerning its tax issues and the liens filed against the properties in respect of both GST/HST and income tax arrears.

[90] Mr. Bass has been engaged by Medcap since 2015 in respect of the tax arrears. Essentially, Medcap has been actively engaged in contesting the amounts owing.

[91] Mr. Bass produced a statement of CRA accounts re Medcap as of June 1, 2021 which showed Medcap owes CRA a total of $290,146.20 in respect of both GST/HST and income tax. Medcaps has disputed most of those amounts and the resolution of those disputes is onging.

v. Enercare Home and Commercial Services Limited Partnership

[92] On July 20, 2020, Enercare Home and Commercial Services Limited Partnership (“Enercare”) delivered a Notice of Intention to Remove Fixtures and Enforce Security to Medcap and other parties holding a registered interest in Centennial Parkway stating that Medcap owed $28,793.90.

[93] In March 2021, Medcap reached an agreement to Enercare to resolve the issue on the basis of 12 monthly payments of $1,500.00.

The BIA

[94] s. 43(1) of the BIA provides as follows:

Subject to this section, one or more creditors may file in court an application for a bankruptcy order against a debtor if it is alleged in the application that:

a) the debt or debts owing to the applicant creditor amount to one thousand dollars; and

b) the debtor has committed an act of bankruptcy within six months preceding the filing of the application.

[95] s. 42(1) of the BIA lists the acts of bankruptcy. In this case, the applicants rely on subsections (e), (g) and (j) of s. 42(1) which provide as follows:

(e) if the debtor permits any execution or other process issued against the debtor under which any of the debtor’s property is seized, levied on or taken in execution to remain unsatisfied until within five days after the time fixed by the executing officer for the sale of the property or for fifteen days after the seizure, levy or taking in execution, or if any of the debtor’s property has been sold by the executing officer, or if the execution of other process has been held by the executing officer for a period of fifteen days after written demand for payment without seizure, levy or taking in execution or satisfaction by payment, or if it is returned endorsed to the effect that the executing officer can find no property on which to levy or to seize or take, but if interpleader or opposition proceedings have been instituted with respect to the property seized, the time elapsing between the date at which the proceedings were instituted and the date at which the proceedings are finally disposed of, settled or abandoned shall not be taken into account in calculating the period of fifteen days;

(g) if he assigns, removes, secretes or disposes of or attempts or is about to assign, remove, secrete or dispose of any of his property with intent to defraud, defeat or delay his creditors or any of them;

(j) if he ceases to meet his liabilities generally as they become due.

[96] Section 42(7) of the BIA provides as follows:

If the court is not satisfied with the proof of the facts alleged in the application, or of the service of the application, or is satisfied by the debtor that the debtor is able to pay their debts, or that for other sufficient cause no order ought to be made, it shall dismiss the application.

Analysis

[97] At the outset, Medcap raises the following technical objections to the applications.

[98] Medcap submits that the application is not properly constituted as the affidavits of verification from each of the applicants pre-date the commencement of the application.

[99] The BIA permits “one or more creditors” to file an application for a bankruptcy order (s. 43(1)) and requires that the application be verified by an affidavit of the applicant or someone duly authorized on their behalf with personal knowledge (s. 43(3)). Each of the affidavits of verification sworn on behalf of the applicants set out the amount that Medcap is indebted to the applicants. There is no requirement in the BIA or the rules that the affidavits of verification be sworn at or after the application.

[100] On a similar vein, Medcap complains that only Bennington signed the notice of application, not the other four applicants. Again, there is no requirement in the BIA or the rules that all applicants must sign the application. If that is necessary, however, I consider failure to do so an irregularity as opposed to a fatal defect. There is no prejudice to Medcap as the notice of application clearly sets out the five applicants and the grounds upon which each apply and is accompanied by an affidavit of verification from each applicant. Medcap was able to and did respond to each of the applicant’s allegations.

[101] As Medcap’s “technical” objections have no merit, they are dismissed.

Quantum

[102] The first issue to determine is whether, at the time of the application, any of the applicants had a debt or debts owing by Medcap in excess of $1,000 as required by s. 43(1)(a) of the BIA.

[103] Based on the evidence, I am satisfied that as at September 16, 2020, when the application was commenced, Medcap had debts of in excess of $1,000 owing to each of Groia and Anne.

[104] Medcap has admitted that at the time of the application, it owed Groia $252,845.79 pursuant to a judgment dated October 1, 2018 which it did not satisfy until shortly before the April 7, 2021.

[105] Anne lent $43,210 to Medcap and some related companies on August 18, 2015. Medcap subsequently acknowledged the debt by issuing her a cheque for $43,210 on August 31, 2015 to repay her, but stopped payment. Despite requests for payment, that debt remained unpaid by Medcap as at September 16, 2020.

[106] As noted, repayment of Anne’s debt was part of the Agreement with Physiomed and Medcap on March 4, 2016. In the absence of Medcap complying with that Agreement, Physiomed and Anne commenced the Action and ultimately obtained summary judgment against Medcap on March 31, 2020. Medcap has since appealed that judgment.

[107] Medcap submits that as the Action, which it defended, was in existence at September 16, 2020, no debt was owing to Anne. But merely defending the action is not sufficient in my view. There must be some merit to the defence and there was none in respect of Anne. Having acknowledged the debt on August 31, 2015, there was never any issue that Medcap owed Anne the money or that it was not repaid by September 16, 2020.

[108] That fact was found by Justice Goodman in his reasons granting summary judgment in the Action (2021 ONSC 2389) at paras. 31-32:

31. On this record, I accept that on August 18, 2015, Anne advanced Medcap the sum of $43,210. Anne was told by Cardillo that Medcap was using this sum to make payments on its mortgage on the Upper Wentworth Property. This advance is not disputed. In a purported effort to pay back the sums advanced by Anne, Cardillo/Medcap provided her with a cheque dated August 31, 2015 made out to ‘Anne Wilson’ for the sum of $43,210. The cheque from Medcap was returned NSF, and with the exception of a single interest payment made in January 2016 for the sum of $885, no payments have been made to Anne under this advance.

32. Accordingly, by March 2016, the principal sums owing to Anne remained outstanding. Various text message exchanges between the periods of November 2015 to February 2016 indicate that Anne had been requesting payment for the sums from Cardillo.

[109] Nor does the appeal assist Medcap in respect of its debt to Anne as there is no issue raised with respect to it in the notice of appeal save and except for interest. The principal amount is unchallenged.

[110] At the outset of the application, Bennington conceded in light of Justice Nightingale’s dismissal of its summary judgment motion thereby requiring a trial of its actions against Medcap, coupled with the Divisional Court’s dismissal of its leave to appeal motion, its application could not prevail.

[111] HDGB’s application is based on the claim that as at the date of the application, Medcap owed it $933,036.42 pursuant to a guarantee of rents contained in leases HDGB entered into with four companies on December 1, 2014.

[112] There is no issue any of the four companies paid any rent to HDGB over the entire duration of their tenancies. The amount claimed by HDGB is the full amount of the rent owing by the four tenants over that period. At no time, however, did HDGB ever request payment of the rents from Medcap pursuant to the guarantee. Nor did it ever raise the guarantee in the two actions Medcap has brought against it following termination of the leases.

[113] Further, the evidence raises issues as to what is the amount of the rent owing. It is not clear from the evidence whether, when HDGB paid off Medcap’s second mortgage on February 1, 2016, part of the consideration paid by HDGB included the amount of unpaid rents due under the leases to that date. HDGB submits, in the alternative, that in any event, Medcap owes $239,756.06 which is the amount of the unpaid rent from February 1, 2016 to July 31, 2016 when it terminated the tenancies. Yet it has made no demand or pursued any claim for that amount.

[114] Further, Medcap submits that as at September 16, 2020, the two year limitation period in respect of the guarantee had expired and, in accordance with Re Eyton, 2012 ONSC 3646, a statute-barred claim under the Limitations Act, 2002, S.O. 2002 c. 24, Sched. B, is not provable in bankruptcy. As there is an issue between the parties as to what the limitation period is and whether it has expired, I make no finding in respect of that issue.

[115] Nevertheless, for the above reasons, I am unable to find that as at the date of the application, Medcap owed HDGB any money in respect of its guarantee of the rents of the tenants at Hanson Road.

[116] With respect to Physiomed, and based on the evidence, I am satisfied that as at September, 2020, Medcap owed it the sum of $250,000 which it advanced to it on March 4, 2016 to enable it to avoid receivership and which it failed to repay, with interest by April 20, 2019 resulting in Physiomed and Anne having to commence the Action.

[117] Medcap relies on the fact that, given its appeal, the issue of liability for that amount has not been finally decided and accordingly it cannot be said that it owed Physiomed any money at the date of the application. There is no issue that Physiomed advanced the $250,000 to Cardillo and Medcap on March 4, 2016 or that Medcap used it to avoid receivership.

[118] While I consider that Medcap’s appeal of the Goodman Judgment has little, in any, merit particularly given that it has paid the principle sum plus Courts of Justice Act interest and notwithstanding its “without prejudice” notation, it is not necessary to make such a finding in light of my finding that both Groia and Anne were owed at least $1,000 at the time of the application.

Acts of Bankruptcy

[119] As noted, the applicants submit that Medcap committed three acts of bankruptcy in the six months preceding the application (March 16, 2020 to September 16, 2020): ceasing to meet its liabilities as they became due (s.41(1)(j)); permitting a process issued against it under which its property was “seized, levied on or taken in execution” to remain unsatisfied until within five days of the time fixed for the sale of the property (s. 41(1)(e)); and assigning property with intent to defraud, defeat or delay its creditors (s. 41(1)(g)).

s. 41(1)(j)

[120] The evidence establishes that as at September 16, 2020, in addition to the debts owing to Groia and Anne as already discussed, Medcap owed the following creditors: Bosnac (judgment for $9,865.17); Enercare, $28,793.90; KLM Holdings, approximately $1.5 million under its mortgage on Centennial Parkway and $187,441.78 on account of the money paid to Hamilton on account of payment for tax arrears on Centennial Parkway; Bennington, $187,441.78 on account of payment for tax arrears on Centennial Parkway; Bennington, Heffner Investments Limited and Physiomed on account of payment of tax arrears on Upper Wentworth of $926,021.24; Hamilton for property taxes owing on Upper Wentworth as at September 10, 2020 of $117,512.84 and on Centennial Parkway as at the same date for $53,490.83.

[121] Medcap submits that apart from Groia and Anne, all of the above creditors held security for their debt and therefore their debt was “safe and sound”. If a debt is due, however, it matters not whether it is secured or not. Failure to pay is evidence that Medcap has ceased to meet its liabilities as they fall due.

[122] Medcap submits that the amounts paid by KLN, Bennington, Heffner Investments Limited and Physiomed in respect of its arrears of taxes are not debts due. While they have a lien on the property for the amount, there is no right of sale and accordingly, it is only payable when the property is sold. I disagree. The amount paid on account of the arrears is a debt due. The lien is merely the security.

[123] Medcap submits that the amount owing to KLN is the subject of bona fide litigation and therefore not owing until final judgment. I disagree for reasons discussed later in this judgment.

[124] Apart from all of the above amounts owed, there is no issue that Medcap owed Groia in respect of its judgment during the six months. Failure to pay a single creditor can constitute an act of bankruptcy under s. 42(1)(j) when there are special circumstances. Special circumstances exist where (a) repeated demands for payment have been made within the six-month period; (b) the debt is significantly large and there is fraud or suspicious circumstances in the way the debtor has handled its assets which require that the processes of the BIA be set in motion; and (c) prior to the filing of the petition, the debtor has admitted its inability to pay creditors generally withouot identifying the creditors: Valente v. Fancsy Estate, (2004), 70 O.R. (3d) 243 (C.A.) at para. 8.

[125] In my view, special circumstances exist in this case, both in repect to items (a) and (b) above. A judgment constitutes a continuing demand for payment and Groia’s judgment was outstanding for 17 months as at the date of the application (April 16, 2019 to September 16, 2020). Further, I consider the Groia debt to be significantly large and, for reasons that follow, the evidence raises suspicious circirstances concerning Medcap’s dealings with its properties which require the processes of the BIA to be set in motion.

[126] As a result, I find that as at September 16, 2020 and within the six months preceding it, Medcap had ceased to meet its liabilities as they fell due.

[127] As my finding that Medcap committed the above act of bankruptcy is sufficient to meet the requirements of s. 43(1)(b) of the BIA, I need not deal with the other two alleged acts. Nevertheless, I will refer to them briefly.

s. 41(1)(e)

[128] The applicants submit that as a result of Hamilton sending a Final Notice under the Municipal Act on January 9, 2020, that if the tax arrears on Upper Wentworth were not paid or an extension agreement arranged by March 19, 2020, the property would be advertised for sale, Medcap has committed an act of bankruptcy under s. 41(1)(e) by failing to pay the arrears or arrange an extension by March 14, 2020, five days before March 19.

[129] The power to sell land for tax arrears is found in the Municipal Act, s. 379. Under that section, the city obtains the right to sell the property by filing a Certificate for the amount owing and giving the Final Notice. I agree with Medcap’s submission that pursuant to s. 379, the land is not seized, levied or taken in execution. The power to seize is only in respect of personal items (s. 351). What s. 41(1)(e) refers to is a writ of seizure and sale and not a tax sale.

[130] I am not satisfied the applicants have established Medcap committed an act of bankruptcy under s. 41(1)(e) of the BIA.

s. 41(1)(g)

[131] The applicants submit that Medcap’s assignment of the BodyPro rents due under its lease at Upper Wentworth from itself to 250, the first mortgagee of Upper Wentworth amounts to a disposal of property by Medcap with intent to defraud, defeat or delay its creditors.

[132] The allegation arises from a notice registered on title by BodyPro Gym Inc. on May 15, 2020 providing notice of an agreement between BodyPro and 250 whereby 250 agreed that it will not assign the assignments of rents or lessor’s interest without the written consent of Julie Catenacci on behalf of BodyPro.

[133] Apart from what’s set out in the notice, there is no evidence as to what the reason is behind the agreement and more importantly, what Medcap’s role is in it. What the evidence does establish is that Sun Life had a General Assignment of Rents as security for Medcap’s debt. When 250 paid off Sun Life’s loan and took an assignment of the mortgage, it also got an assignment of the General Assignment of Rents. There is no evidence, however, that 250 ever gave notice under the General Assignment requiring BodyPro to pay its rent to it.

[134] While I have concerns with the bona fides concerning the assignment of Sun Life’s mortgage and security to 250, the evidence does not establish that Medcap made any assignment to 250. Accordingly, I am also not satisfied the applicants have established that Medcap committed an act of bankruptcy under s. 41(1)(g) of the BIA.

Other

[135] Medcap submits that I should exercise my discretion, under s. 42(7) of the BIA and dismiss the applications on the basis that it has either paid the debts owing to the applicants or is engaged in bona fide litigation with them concerning the alleged debt. It further submits the application was brought for a collateral purpose and/or there is nothing to be gained from a bankruptcy.

[136] Pursuant to s. 43(7) of the BIA, there is an onus on Medcap to prove that it is able to pay its debts: Re: 484030 Ontario Ltd. (1992), 1992 CanLII 7417 (ON SC), 8 O.R. (3d) 243; Re: Hays (1979), 34 C.B.R. (NS) 280 (BCSC) at pp. 280-281. Payment to the applicants and the other creditors identified after the date of the application and on some cases, on the eve of the application, does not satisfy that onus.

[137] In fact, Medcap has not presented any evidence of its overall financial position to establish that it is able to pay its debts. As a result, it has failed to meet its onus.

[138] I do not consider that the applications were brought, as Medcap submits, because the applicants were not getting the result they desired in the various court proceedings they are involved with. That is certainly not the case with respect to Groia. There is no question that Medcap is engaged in litigation with the applicants. I am satisfied, however, in all the circumstances that it is not the litigation that has motivated this application but rather the actions of Medcap in dealing with its property and refusing to pay debts justly due.

[139] Nor do I consider that there is nothing to be gained by a bankruptcy. The evidence concerning Medcap’s dealings with both Upper Wentworth and Centennial Parkway in respect of its creditors raise suspicious circumstances.

[140] With respect to Upper Wentworth, I refer to the evidence of Medcap being able to avoid receivership by having 250, a company not at arms length from Cardillo, pay out the Sun Life mortgage, in part with a loan to Cardillo and Medcap, from Physiomed, and obtain an assignment of the mortgage, together with an assignment of rents, when the only tenant is BodyPro, in turn controlled by Cardillo’s lease.

[141] In respect of Centennial Parkway and as discussed earlier, in March 2020, KLN brought an action against Medcap to enforce its mortgage on Centenial Parkway which had been in default since December 2019. Medcap’s defence that KLN had no status to sue on the mortgage must be viewed together with the fact that it paid KLN pursuant to the mortgage for two and a half years and, at Cardillo’s request, agreed to an extension of the due date in June 2019. It was only when KLN refused to renew the mortgage beyond November 30, 2019 that Medcap took the postion KLN had no status to sue on the mortgage.

[142] More concerning is its defence that KLN did not purchase 257’s interest in the mortgage in January 2020 because Lum had no authority to bind 257, as Catenacci, Cardillo’s niece, was the sole shareholder and director of 257 and had been since May 2017 and that Lum had resigned as a director at that time.

[143] Apart from the fact that Catenacci’s letter was sent the day after KLN paid 257 $300,000 care of Lum in respect of their agreement, the problem with Medcap’s position is that in June 2019, Cardillo sent KLN a copy of an agreement between Medcap and 257 dated June 5, 2019 which Lum signed on behalf of 257, establishing she did not resign in 2017. Further, at the time of the transaction in January 2020, KLN obtained a Corporate Profile Report which showed Lum as the sole director. The Corporate Profile Report sent by Catenacci to show her as the sole director was produced January 31, 2020 and indicates a change notice was filed on January 28, 2020, the day after KLN’s purchase.

[144] Medcap’s relationship with 257, and its dealings with it in connection with KLN smack of fraud and raise serious concerns regarding its dealings with Centennial Parkway. Further, the fact that it has allowed Centennial Parkway to remain empty and deteriorate also raises concerns given the KLN mortgage.

[145] In the absence of Cardillo’s testimony, many questions remain unanswered as to the reasons behind Medcap’s dealings with both Upper Wentworth and Centennial Parkway.

[146] I also do not accept Medcap’s submission that its defences of the actions against it for payment of debts are bona fide and with merit.

[147] In his reasons for summary judgment in the action by Physiomed and Anne, Justice Goodman rejected Medcap’s defence/counterclaim that it had an ongoing running account of mutual debts that must be accounted for on the basis it was “prima facie frivolous, unsupported by the evidence and barred by the Limitations Act.” He also had serious questions concerning the actions of 250. He found Steven Reichert, a director of 250 was clearly not at arm’s length from Cardillo.

[148] Given the above examples, together with the absence of any financial information from Medcap as to its ability to pay its debts, I am unable to conclude that there is nothing to be gained by the bankruptcy of Medcap.

Conclusion

[149] For the above reasons, the applications of Groia and Anne are allowed. A Bankruptcy Order will issue against Medcap. Farber is appointed as the Trustee.

[150] The applications of Physiomed, Bennington and HDGB are dismissed.

[151] In the circumstances, I am inclined to no costs but if any party feels thay are entitled to costs, I may be spoken to.

L.A. Pattillo J. Released: December 6, 2021