COURT FILE NO.: FS-12-382982 DATE: 20220422 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Lynda Friendly and Lynda Friendly & Associates by their assignee, Assignment Credit Corp. Applicants – and – 1671379 Ontario Inc. and Manuel Elkind, MCAP Financial Corporation, Dorr Capital Corporation c.o.b. as Dorr and Associates, Cherniak Law Professional Corporation, Sullivan Mahoney LLP, Starkman Barristers, Hentob Construction Limited Respondents

COUNSEL: Elliot Birnboim and Michael Crampton, for the Applicants David Seed, for the Respondents 1671379 Ontario Inc. and Manuel Elkind Caitlin Milne, for the Respondent MCAP Financial Corporation Varoujan Arman, for the Respondent DORR Capital Corporation c.o.b. as DORR and Associates Jason Cherniak, for the Respondent Cherniak Law

HEARD: November 23, 2021

BEFORE: Pinto J.

Reasons for Decision

Overview

[1] Various creditors of the respondents 1671379 Ontario Inc. ("167 Corp") and Manuel Elkind (collectively the "167 respondents") bring separate motions and seek a court determination of priority status regarding payments owed, or to be owed, by the garnishees, the City of St. Catharines and Region of Niagara.

[2] For the reasons that follow, I find that the creditor, MCAP Financial Corporation ("MCAP"), which has a registered and perfected security interest under the Personal Property Security Act, R.S.O. 1990, c. P.10 ("PPSA") should receive the garnishment payments until its Shortfall Judgment, as described below, is satisfied.

[3] In the alternative, if I am incorrect that MCAP enjoys priority status, then I find that the various creditors should share in the garnishment proceeds on a pro rata basis. In any event, with respect to Assignment Credit Corp. ("ACC"), I would limit its claim to $400,000.

Facts

[4] 167 Corp is a company owned by the respondent Manuel "Manny" Elkind. 167 Corp owned a commercial property located at 583 Welland Avenue in St. Catharines (the "Property"), which it intended to develop as a residential subdivision.

[5] The garnishees owe payments to 167 Corp due to a Community Improvement Plan called the Brownfield Tax Increment Based Incentive Grant Program Agreement ("BTIG"), designed to encourage the remediation of contaminated properties. 167 Corp and the City of St. Catharines entered into the BTIG on December 23, 2014.

[6] Manny Elkind and Lynda Friendly were involved in a family proceeding which culminated in a final order of Justice Mesbur dated January 20, 2015 (the "Mesbur Judgment"). Mr. Elkind was represented at one point by Jason Cherniak and, by 2015, was self-represented. Lynda Friendly was represented by Elliot Birnboim of the law firm Chitiz Pathak LLP.

[7] Under Paragraph 1 of the Mesbur Judgment, the 167 respondents were ordered to pay Ms. Friendly $960,000 plus pre-judgment interest in the amount of $26,837.18 to purchase Ms. Friendly's shares in 167 Corp according to the terms of the parties' 2006 Marriage Contract.

[8] Paragraph 3 of the Mesbur Judgment makes reference to the BTIG as follows:

Pursuant to section 248 of the OBCA, the following property shall be charged as security for the payments owing by the Respondents [the 167 Respondents] to the Applicants [Ms. Friendly and her corporation], subject to any valid prior encumbrance:

(a) The property municipally known as 583 Welland Avenue, St. Catharines, Ontario;

(b) [omitted for brevity]

(c) Brownfield Tax Credits which may be owed to the Respondent's pursuant to any agreement or arrangement with the Town of St. Catharines.

[9] Other paragraphs of the Mesbur Judgment ordered that:

(a) The 167 respondents were to pay Ms. Friendly $195,538.98 plus interest, and pay Ms. Friendly's corporation $10,000 plus interest, to satisfy their obligations to pay promissory notes which were the subject of a summary judgment against the respondents on November 22, 2013 by Judgment of Justice Backhouse.

(b) Manny Elkind was to pay Ms. Friendly $36,356.02 for household expense obligations under the Marriage Contract.

(c) The 167 respondents were to pay $400,000 to Ms. Friendly and her corporation for the costs of the family proceeding.

[10] After the Mesbur Judgment, there was a breakdown in the relationship between Ms. Friendly and her lawyers Chitiz Pathak LLP which resulted in legal proceedings. Ms. Friendly brought a negligence action against her former lawyers on August 13, 2015, and Chitiz Pathak LLP brought an Application for a Charging Order on the matrimonial home under the Solicitors Act, R.S.O. 1990, c. S.15, on August 18, 2015.

ACC's claim for priority status based on Assignment Agreement

[11] ACC seeks priority status for the garnishment payments on the basis that Ms. Friendly and her corporation assigned their interest in the Mesbur Judgment to ACC by way of an Assignment Agreement. Mr. Birnboim is listed as the sole registered officer and director of ACC, and is also the counsel of record for ACC.

[12] ACC did not provide a copy of the purported Assignment Agreement in its motion materials. [1]

[13] Instead, counsel for the 167 respondents provided a document entitled "Assignment of Judgments" dated July 8, 2016 that states (in part):

WHEREAS Lynda Friendly and Lynda Friendly and Associates (hereinafter referred to as the "Assignor") commenced an action in the Superior Court hearing Court File No FS-12-382-982 the "Action" against, Manuel Elkind and 1671379 Ontario Inc. ("the Debtors").

AND WHEREAS the Assignor obtained various judgments against Manuel Elkind and 1671379 Ontario Inc.

AND WHEREAS the Assignor has agreed to assign to Assignment Credit Corp. (the "Assignee") the entirety of the balance of the Assignor's monetary claims that have not already been enforced or collected by the Assignor during the period of time in which Chitiz Pathak LLP was acting for her including to August 1, 2015, under the following Judgments, without reservation of interest by the Assignor and without any personal liability whatsoever of the Assignor to the Assignee with respect to this Assignment.

(1) Order of Justice Penny dated December 18, 2012; (2) Order of Justice Paisley dated August 20, 2013 (3) Order of Justice Mesbur dated January 21, 2014 (4) Order of Justice Backhouse dated September 9, 2014 (5) Order of Justice Mesbur dated January 20, 2015.

(the "Judgments")

AND WHEREAS the Assignor represents and warrants that the Assignor is the legal and beneficial owner of the Judgments, that she has not at any time after the date Chitiz Pathak LLP ceased to act for her, which is deemed to be August 1, 2015 otherwise assigned same, settled same or compromised same and that she has the right to assign the Judgments to the Assignee free and clear of all encumbrances.

AND WHEREAS the Assignor represents and warrants that there has been no satisfaction, variation or compromise by the Assignor of the Judgments at any time on or after August 1, 2015, but otherwise she makes no representation or warranty including as to the enforceability or validity of the Judgments and the Assignee acknowledges that there may be no value whatsoever to the Assignment and the Assignor's Releases and settlements of the proceedings involving MCAP, Hentob and Dorr made after August 1, 2015 are deemed not to be considered a satisfaction, variation or compromise contrary to the terms of this Assignment.

NOW THEREFORE the Assignor and Assignee hereby agree as follows:

1. In consideration of the sum of $2.00 and other valuable consideration effective as of the date hereof, the Assignor, and its successors and assigns and on behalf of any person or entity who claims a right or interest through it, hereby unconditionally and irrevocably grants, assigns, transfers to the Assignee and their successors the Assignor's interest and benefit under the said Judgments and all monies recoverable thereunder and all other rights, title and interest in the Judgments to the Assignee and its successors, without reservation or limitation. [Emphasis in original.]

[14] The Assignment of Judgments contains additional paragraphs, but the relevant components for analysis are included above.

Paisley J. Endorsement and Side Deal to Assignment Agreement

[15] The Assignment Agreement was referenced in an Endorsement of Justice Paisley dated December 6, 2016 whereby the 167 respondents conceded the validity of the assignment to ACC and Justice Paisley ordered that the assignment was valid on consent.

[16] The 2016 Paisley Endorsement also contained a "Side Deal" which states:

(1) ACC and the Respondents agree that Elkind/# Co. shall be entitled to pursue the MCAP litigation +ACC shall limit its claim in any proceeds to 400K and if 400K [illegible margin note] is paid, this shall fully discharge the debt to ACC, in addition to any other amounts collected prior.

(2) Paragraph 1 does not limit enforcement of the full judgment at any time up to the payment in paragraph 1.

MCAP's financing of 167 Corp and PPSA Agreement

[17] A second creditor, MCAP, is a mortgage financing company in the mortgage and development financing sector. MCAP loaned money to 167 Corp in May 2013 to allow it to develop the Property. The development loan was secured by a first priority mortgage on the Property in favour of MCAP, as well as a General Security Agreement ("GSA") in favour of MCAP. The GSA was registered and perfected under the PPSA on June 19, 2013. The registration remains effective until at least June 2023, or until the amounts owed to MCAP arising out of the development loan are paid in full.

[18] The mortgage went into default in August 2014. MCAP exercised its rights and sold the Property in a power of sale proceeding to Hentob Construction Limited. However, the proceeds of the sale were less than the amount then owing on the development loan. MCAP obtained default judgment against the 167 respondents on the shortfall remaining unpaid on the loan following the sale via the judgment of Justice Brown dated September 18, 2015, in the amount of $458,821.25 plus interest and $3,909.35 in costs (the "Shortfall Judgment").

The MCAP - Friendly Settlement Agreement

[19] MCAP and Ms. Friendly entered into a settlement agreement on September 24, 2015, to settle an application brought by MCAP against Friendly ("Friendly-MCAP Settlement"). Notably, in respect of the BTIG, Paragraph 2 of the Friendly-MCAP Settlement states:

MCAP has full and complete Priority over all claims of Friendly with respect to and regarding the Property. Without limitation, the Priority Claim of MCAP over and regarding Friendly shall include the following:

(c) all monies payable or which may become payable pursuant to a Brownfield Tax Increment Based Incentive Grant Program Agreement;

167's Improvident Sale Action against MCAP

[20] Following the Property sale, 167 Corp brought an action against MCAP for improvident sale. MCAP brought an unsuccessful summary judgment motion before Justice Lederer resulting in a 2017 costs award of $35,576.69 plus HST to be set-off against MCAP's Shortfall Judgment. On December 11, 2021, following a trial before Justice Carpenter-Gunn, the improvident sale action against MCAP was dismissed with MCAP receiving a costs award of $330,000.

Other Creditors

[21] Dorr Capital Corporation c.o.b. as Dorr and Associates ("Dorr") is another creditor of the 167 respondents. Dorr obtained a judgement against the 167 respondents on December 16, 2014, for payment of $66,814.68 plus costs of $1,250 plus interest at the rate of 10% per annum.

[22] Dorr was the mortgage broker for the financing of the MCAP mortgages.

[23] As mentioned above, Jason Cherniak acted as counsel to the 167 respondents at one point. Cherniak Law Professional Corporation ("Cherniak") was granted an order for an assessment of its outstanding fees on August 25, 2014. On June 22, 2016, the assessment officer ordered the 167 respondents to pay Cherniak $105,893.98.

[24] There are a number of other creditors such as Starkman PC and Hentob Construction who did not participate at the motions hearing. Starkman PC seeks priority to the garnished funds based upon a charging order dated October 16, 2017. Starkman PC previously acted as counsel to 167 Corp.

The Amounts at Issue and the Notices of Garnishment

[25] The City of St. Catharines has confirmed that at least $167,976.15 is currently available and payable to 167 Corp under the BTIG. Additional amounts may become available in the future as the development project is completed.

[26] ACC served a Notice of Garnishment on the City of St. Catharines and the Region of Niagara (the Notice date is unknown). MCAP served the City of St. Catharines and the Region of Niagara with Notices of Garnishment in the Fall of 2015.

Issues

[27] Rule 29 of the Family Law Rules, O. Reg. 114/99, addresses garnishment in family proceedings. However, while the present matter emerged from a family proceeding between Mr. Elkind and Ms. Friendly, the issues now raised are not adequately addressed by r. 29. As permitted by r. 1(7), I find it appropriate to make reference to the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, and in particular, r. 60.08, which addresses garnishment.

[28] Under r. 60.08(16) of the Rules of Civil Procedure, the court may hold a garnishment hearing to "determine the rights and liabilities of the garnishee, the debtor, any co-owner of the debt and any assignee or encumbrancer", or "determine any other matter in relation to a notice of garnishment".

[29] This hearing requires the court to determine whether any party has a priority claim to the amounts now owed to 167 Corp under the BTIG.

[30] Ordinarily, there would be no priority among the creditors in a garnishment hearing. Section 2(1) of the Creditors' Relief Act, 2010, S.O. 2010, c. 16, Sched. 4, provides that, "[e]xcept as otherwise provided in this Act, there is no priority among creditors by execution or garnishment issued by the Superior Court of Justice".

[31] However, security registered and perfected under the PPSA permits claims in priority. On its face, it is unclear how the PPSA interacts with the Creditors' Relief Act, 2010. However, I agree with Newbould J.'s interpretation that "once perfected [under the PPSA], the security of a lender takes priority over a later notice of garnishment": 1889072 Ontario Ltd. v. Globealive Wireless Management Corp., 2016 ONSC 3578, 37 C.B.R. (6th) 39, at para. 12, interpreting s. 20(1)(a) of the PPSA.

[32] Both ACC and MCAP submit that they have a priority claim. The court must therefore evaluate their claims, to determine whether they should be given priority over the other creditors in this hearing, and whether one has priority over the other. If there is no priority, then the creditors should be entitled to the amounts owed under the BTIG on a pro rata basis, as contemplated in the Creditors' Relief Act, 2010.

Party Positions

[33] I will briefly summarize the parties' positions on this matter.

[34] MCAP submits that the amounts owing under the BTIG are captured by the broad language of its GSA, which is registered and perfected under the PPSA. Although MCAP exercised its right to sell the Property under power of sale, its remaining interest, embodied in the Shortfall Judgment, is still secured under the PPSA. As a result, MCAP argues that it is entitled to a priority claim.

[35] ACC submits that Ms. Friendly and her corporation validly assigned their interests in the Mesbur Judgment to ACC by way of the Assignment Agreement. Because the Mesbur Judgment ordered that the BTIG be charged as security for the payments owing by the 167 respondents, ACC claims that it is entitled to a priority claim by virtue of this security and the assignment. ACC argues that MCAP's interest was not secured against the BTIG, and it therefore cannot claim priority.

[36] Dorr submits that the creditors should share in the garnishment proceeds on a pro rata basis. It refers to s. 2 of the Creditors' Relief Act, 2010, which states that "there is no priority among creditors by execution or garnishment" subject to several exceptions, including some family law obligations. The parties agreed that the exception for family law obligations does not apply here.

[37] The 167 respondents and Cherniak take no position on MCAP's priority claim. However, both submit that ACC cannot claim priority, because its claim is premised on Ms. Friendly's rights as a shareholder in 167 Corp. They submit that giving ACC a priority claim would improperly elevate the rights of a shareholder above those of creditors.

Analysis

Are amounts owed under the BTIG part of the security under MCAP's GSA?

[38] MCAP relies on section 1(a)(iii) of the GSA, which I reproduce at length here:

(a) For value received, 1671379 Ontario Inc. (the "Debtor"), hereby grants to MCAP Financial Corporation (the "Lender"), by way of mortgage, charge, assignment and transfer, a security interest (the "Security Interest") in the undertaking of the Debtor and in all Goods (including all parts, accessories, special tools, additions and accessions thereto), Chattel Paper, Documents of Title (whether negotiable or not), Instruments, Intangibles, and Securities now owned or hereafter owned or acquired by or on behalf of the Debtor (including such as may be returned to or repossessed by the Debtor) and in all proceeds and renewals thereof, accretions thereto and substitutions therefor (hereinafter collectively called "Collateral"), including without limitation, all of the following now owned or hereafter owned or acquired by or on behalf of the Debtor:

iii. all book accounts and book debts, rents and leases, all Agreements of Purchase and Sale entered into or to be entered into (including any deposits payable to the Debtor pursuant thereto) and generally all accounts, debts, dues, claims, choses in action and demands of every nature and kind howsoever arising or secured including letters of credit and advices of credit, which are now due, owing or accruing or growing due to or owned by or which may hereafter become due, owing or accruing or growing due to or owned by the Debtor ("Debts");

[39] I also refer to s. 1(b) of the GSA, which notes that:

Notwithstanding the generality of the foregoing, the Security Interest created by this Agreement affects only such Collateral associated with the Debtor's business and assets situate in the City of St. Catharines and more particularly described in Schedule "A" attached hereto.

[40] The collateral referred to in Schedule "A" of the GSA is the Property.

[41] The court must therefore determine whether the amounts owed under the BTIG constitute "accounts, debts, dues, claims, [or] choses in action" which have "become due, owing or accruing or growing due to or owned by" the 167 respondents. Further, they must be "associated" with the 167 respondents' "business and assets" in the City of St. Catharines and the Property.

[42] ACC submits that this question was answered definitively in the negative in the course of the improvident sale action, and under the principle of res judicata, this court is bound by previous judicial findings.

[43] The improvident sale action required the court to consider whether MCAP took reasonable steps in exercising its right to sell the Property under power of sale. At issue was whether MCAP received a fair price.

[44] On the unsuccessful summary judgment motion brought by MCAP before Lederer J. in the improvident sale action, MCAP submitted that it "did not receive an assignment of the Brownfield Tax Agreement". MCAP had concluded that the BTIG was not assignable, based on the advice of its real estate agents and its own analysis. Therefore, Lederer J. found that the valuation it received for the Property "does not refer to and, presumably did not account for, any possibility of the value of these tax advantages adding to the value of any prospective sale": 1671379 Ontario Inc. v. MCAP Financial Corporation, 2016 ONSC 4688, at para. 26.

[45] ACC submits that MCAP "confirmed to Justice Lederer that it had not received an assignment of any interest in the Brownfield Credits" (emphasis in original) yet takes the opposite position in the within proceeding. I understand ACC's argument but accept MCAP's submission that Lederer J.'s reasons on a summary judgment motion are not binding on the parties. In Skunk v. Ketash, 2016 ONCA 841, 135 O.R. (3d) 180, at para. 60, the court held that:

[I]n the absence of an express indication by the motion judge that her determination is to be binding on the parties at trial, it should be presumed that in expressing a conclusion on a point of law when dismissing a summary judgment motion she is simply explaining why she concluded that there is a genuine issue requiring a trial, and did not intend her determination to be binding on the parties.

[46] In the absence of such an "express indication" by Lederer J., I do not take his reasons to be binding on this point. As Lederer J. noted, at para. 62, "On a motion for summary judgment, the court is asked to find on the evidence before it, whether a determination can be made without a trial." On that motion, there was simply "too much uncertainty" for summary judgment to be granted. I do not think it can therefore be taken to be conclusive on the issue before this court.

[47] In the subsequent improvident sale trial, where 167 Corp was the plaintiff and MCAP was the defendant, the trial judge, Carpenter-Gunn J., dismissed the plaintiff's improvident sale action on December 11, 2020 and awarded MCAP $330,000 in costs. ACC submits that the trial judge made definitive findings that the Brownfield Agreement was not part of the security given by 167 Corp to MCAP and consequently, MCAP cannot assert a security interest in the payments now available from the garnishees in respect of the BTIG. In fact, ACC puts it more strongly, and argues that MCAP's position amounts to an abuse of process or a collateral attack on the decision of the trial judge.

[48] In her oral reasons found at 1671379 Ontario Inc. v. MCAP Financial Corporation, 2020 ONSC 8187, Carpenter-Gunn J. stated:

The Court finds that the rights under the Brownfield Agreement are personal to the plaintiff and do not run with the title to the property. As well, the Brownfield Agreement was not part of the security given by the plaintiff to the defendant for the development loan.

Paragraph 54 says, and I quote, in the Agreed Statement of Facts:

The Brownfield Agreement did not run with the land, meaning that it was not registered on title, would not be transferred on sale of the property, and did not form part of the security given to MCAP for the development loan.

[49] Based on the agreed statement of facts, as laid out above, Carpenter-Gunn J. found that the BTIG "would have no effect on the valuation". This finding was relevant in determining that there was no better offer available when MCAP sold the property, and therefore no improvident sale. There was a higher offer by another party, but that offer included several conditions, including the assignment of the BTIG. After the higher offer was adjusted to account for the fact that the BTIG could not be assigned, it was much lower than the offer MCAP ultimately accepted.

[50] ACC submits that MCAP's disavowal of any interest in the BTIG by way of the agreed statement of facts in the improvident sale action, and Carpenter-Gunn J.'s finding that the 167 respondents retained ownership of all rights under the BTIG, are determinative in the within motions proceeding. ACC asserts that, if MCAP was not assigned the BTIG and could not dispose of it under power of sale, then the amounts owed under the BTIG cannot be part of MCAP's security.

[51] MCAP disagrees with ACC and draws a distinction between the BTIG Agreement itself, and the proceeds of the BTIG that have now become available. MCAP's position is as follows:

MCAP does not take the position that the BTIG itself was assigned to MCAP as security, such that MCAP could dispose of the BTIG or reap the proceeds of the BTIG directly. Rather, MCAP asserts that pursuant to the GSA it is entitled to the proceeds of the BTIG that are now payable to 1671379 and those proceeds that may become payable in the future.

[52] I accept MCAP's submission. The proceeds of the BTIG that are now available from the garnishees are something different from the BTIG Agreement itself. The fact that the latter was not captured by the PPSA does not mean that the former are similarly not captured. The payments due under the BTIG qualify as part of MCAP’s GSA in a number of ways. They are "generally all accounts, debts, dues, claims, choses in action and demands of every nature and kind howsoever arising" which are “now due, owing or accruing or growing due to" the 167 respondents. Arguably, they are “all monies other than trust monies lawfully belonging to others”. I would also find that they are captured in the definition of "intangible" in s. 1(1) of the PPSA: "'intangible' means all personal property, including choses in action, that is not goods, chattel paper, documents of title, instruments, money or investment property".

[53] The security must also be "associated" with 167 Corp's "business and assets", and more particularly, the Property. The BTIG payments were made so as to compensate for the costs of rehabilitating and redeveloping the Property. On this basis, the BTIG payments would appear to be "associated" with the Property, and particularly, 167 Corp's "business" in relation to the Property.

[54] I find, notwithstanding the ruling of Carpenter-Gunn J. in the improvident sale action concerning the BTIG Agreement itself, that the BTIG payments that are due, and are now available are captured in the broad language of the GSA.

[55] They are "associated" with the 167 respondents' "business and assets" in the City of St. Catharines and specifically, the Property.

[56] I therefore accept that MCAP has a secured claim to the amounts owed under the BTIG.

Is the Shortfall Judgment entitled to priority?

[57] By exercising power of sale, MCAP recovered most of what was owed to it by the 167 respondents under the loan. However, its remaining interest was reduced to judgment in the Shortfall Judgment.

[58] There is a dispute with respect to what effect seeking judgment has on MCAP's priority status. It revolves around the meaning and effect of merger in s. 59(7) of the PPSA:

A security agreement does not merge merely because the claim has been reduced to judgment by the secured party or because the secured party has levied execution thereunder on the collateral.

[59] Based on the plain language of s. 59(7), the parties agree that MCAP's security has not merged into its judgment. However, they disagree about the implications.

[60] Dorr submits that, because the Shortfall Judgment and the security do not merge, the Shortfall Judgment should not be treated with priority status, as if it were registered under the PPSA. Rather, MCAP should simply be treated like a judgment creditor.

[61] MCAP advances the opposite conclusion: its priority status should not be reduced to that of a judgment creditor simply because it sought and received judgment. The amounts owing under the Shortfall Judgment arose from the secured loan and remain outstanding. The Shortfall Judgment should still have priority status, and the priority date should remain the day on which it perfected its security interest under the PPSA.

[62] There has been little judicial treatment of s. 59(7) of the PPSA, upon which both Dorr and MCAP rely.

[63] However, it is addressed by Richard H. McLaren in Secured Transactions in Personal Property in Canada, 3rd ed. (Toronto: Carswell, 2022), s. 15:4, which provides some guidance:

The basic feature of common law conditional sales theory was that the seller's election to proceed on the debt stripped the seller, at some point, of the security rights and converted the transaction into one of absolute sale, this occurred in General Securities Ltd. v. Lyons. Section 59(7) is intended to reverse this common law position and provides that a security interest does "not merge merely because the claim has been reduced to judgement". This provision is complementary to s. 58 which indicates that the remedies are cumulative… Section 59(7) operates to prevent the election to pursue the remedy of suit on the debt from barring the other available remedies against the collateral. Under the provisions of Articles 9-501(1) of the U.C.C. which is similar to s. 58, the American case law arrived at this point in Adrian Research & Chemical Co., Inc.

The secured party's attempt to collect the debt without immediate resort to the security in no sense harms or takes advantage of the debtor. The Act does not permit forfeiture of the collateral as could happen under the common law of conditional sales. There is, therefore, no reason to strip the secured party of their security rights because they attempt to collect the debt first. Nor does there seem to be any reason to allow intervening execution creditors to leap-frog themselves into a position of priority over the security interest because of the secured party's resort to a legitimate remedy. The execution creditor is in no way defrauded or deluded by the action on the debt. Unfortunately, s. 59(2) does not expressly deal with the effect of seizure and sale under execution. The Americans did so in Article 9-501(5) of the U.C.C., where it was provided that upon realization under execution the security holder would continue to have such priority in respect of the proceeds as the security agreement had prior to realization. It is to be hoped that the courts will arrive at the foregoing straightforward and obvious conclusion.

[64] Read in combination with s. 58, which provides that "[t]he rights and remedies mentioned in this Part are cumulative", and with the assistance of the passage above, I take s. 59(7) to mean that a party that seeks a legitimate remedy (in this case, power of sale) should not be prevented from seeking other legitimate remedies or be punished by losing priority status.

[65] Based on this understanding, I accept MCAP's submission: its security agreement did not merge into judgment and thereby lose priority status as a result of the Shortfall Judgment. Rather, the Shortfall Judgment is entitled to priority. To find otherwise would permit other creditors to "leap-frog" into a position of priority by virtue of MCAP seeking a legitimate remedy.

Other Arguments in MCAP's Favour

[66] My conclusion that MCAP's interest is in priority to ACC's is confirmed by two other factors.

[67] First, the portion of the Mesbur Judgment which orders that the BTIG "shall be charged as security for the payments", makes clear that such an interest is "subject to any valid prior encumbrance". Thus, having found that MCAP had a secured interest in amounts owed under the BTIG, any claim by ACC must be subject to MCAP's, which was perfected before the rendering of the Mesbur Judgment.

[68] Second, as part of the Friendly-MCAP Settlement, Ms. Friendly acknowledged that "MCAP has full and complete Priority over all claims of Friendly with respect to and regarding the Property".

[69] ACC submits that the Friendly-MCAP Settlement bound only Ms. Friendly, and not her corporation, which was awarded a portion of the Mesbur Judgment. I would accept this argument, although it would only have any bearing on the $10,000 owed to Ms. Friendly's company for obligations under the promissory notes, and a portion of the $400,000 in costs awarded jointly to Ms. Friendly and her company.

[70] However, ACC also submits that it is not bound by the Friendly-MCAP Settlement, because the agreement did not include language that would bind an assignee. ACC refers to an example invoked by Master Glustein, as he then was, in Forvest Trust S.A. v. Devine Entertainment Film Library Limited Partnership, 2013 ONSC 3347, at paras. 40-42:

By way of example, if person A agrees with person B to pay B's mortgage with a bank, the agreement between A and B may well refer to all of the particulars of the mortgage between the bank and B, including the principal amounts owed and the date and amount of interest payments. However, the mere "incorporation by reference" of B's mortgage debt to the bank in the contract between A and B does not provide the bank with privity to enforce B's contract with A.

If the bank wanted the ability to enforce the internal agreement between B and A, the bank could insist on an assignment of that agreement (to which A and B would have to agree), or the bank might seek a direct guarantee from A to the bank (in which case the bank would be a party to the agreement).

The hypothetical situation would be no different in the privity analysis if the bank knew about the internal agreement, had a copy of it, was advised of it by B, or whether B referred to the agreement with A directly in the mortgage documentation between B and the bank. The bank still does not have a claim against A if the agreement is not assigned or there is no direct obligation, unless the intention to benefit the bank is set out in the agreement between A and B. The bank, as a secured lender, has the ability to attempt to obtain the benefit of the internal agreement through assignment or a direct guarantee, but it has no right to enforce the agreement if it does not take such steps.

[71] ACC argues that MCAP never acquired Ms. Friendly's rights and that Ms. Friendly merely entered into a personal contract with MCAP where she agreed that she would postpone her rights. ACC expressly disagrees that Ms. Friendly assigned her rights to MCAP.

[72] I cannot agree with ACC's submissions. That the Friendly-MCAP Settlement was not entered as a legal judgment does not render it a "postponement" agreement or derogate from the clear intention of the parties and the rights they understood to have enjoyed arising from the settlement agreement.

[73] Here, the Friendly-MCAP Settlement was entered into before Ms. Friendly purportedly assigned her interest in the Mesbur Judgment to ACC by way of the Assignment Agreement. In my view, the situation is better captured by the maxim nemo dat quod non habet - you can't give what you don't have. In Green v. Green, 2015 ONCA 541, 387 D.L.R. (4th) 512, in the family law context, the Court of Appeal stated, at para. 53: "at common law, an assignor may not assign more than it has, or put differently, nemo dat quod non habet, no one gives who does not possess."

[74] In fact, in the Assignment of Judgments between Ms. Friendly, her company, and ACC, dated July 8, 2016, the parties contemplated the fact that Ms. Friendly had previously reached a settlement with MCAP. Whereas the agreement includes a provision that "the Assignor's Releases and settlements of the proceedings involving MCAP, Hentob and Dorr made after August 1, 2015 are deemed not to be considered a satisfaction, variation or compromise contrary to the terms of the Assignment", I fail to see how simply deeming it to be so can recharacterize the legal right of MCAP. I would therefore reject the assertion that the Friendly-MCAP Settlement is rendered irrelevant because of the Assignment Agreement.

[75] Nonetheless, these two factors - the "subject to any valid prior encumbrance" language in the Mesbur Judgment, and the Friendly-MCAP Settlement - are not necessary to my determination that MCAP has a priority claim to the amounts owed under the BTIG.

[76] ACC relies on Iafolla v. Lasota, 2020 ONSC 5213, rev’d in part, 2021 ONCA 245, leave to appeal to S.C.C. refused, , a decision where the applicant sought a declaration that, as a judgment creditor of the ex-husband of the respondent, he was entitled to receive the balance of the proceeds of the sale of a matrimonial home that were awarded to the husband in a Divorce Order. Schabas J. dismissed the application and held that the applicant should have brought his request for relief in the divorce proceedings, where the objectives of the Divorce Act and the equities could be addressed in resolving whether the applicant should have any priority over the remaining funds.

[77] I disagree that Iafolla is applicable to this case. First, to the extent that MCAP ought to have interceded in the litigation as between Ms. Friendly and the 167 respondents, it already filed an application which was concluded with the Friendly-MCAP Settlement where the parties agreed that "MCAP has full and complete Priority over all claims of Friendly with respect to and regarding the Property" which includes the monies payable under the BTIG. Secondly, as discussed above, the Friendly-MCAP Settlement dated September 24, 2015 preceded the Assignment of Judgments that ACC relies on dated July 8, 2016. Finally, MCAP had already registered and perfected a security interest on June 19, 2013 under the PPSA.

If MCAP is not entitled to priority, then the BTIG funds should be distributed on a pro rata basis

[78] If my finding of priority in favour of MCAP is found to be incorrect, I would find that the garnished amounts should be distributed on a pro rata basis.

[79] In doing so, I find that ACC does not have a priority claim.

[80] ACC submits that it is "uncontroversial that the [Mesbur] Judgment grants certain declared security which would entitle it to the priority over general creditors".

[81] However, Dorr submits that the Mesbur Judgment does not order priority over other judgment creditors, and would be prevented from doing so on the basis that there is no priority among creditors under the Creditors' Relief Act, 2010. Cherniak supports this submission, and suggests that the fact that the Mesbur Judgment is "subject to any valid prior encumbrance" decreases the priority of ACC's claim.

[82] Furthermore, several parties raised issues with respect to whether ACC's claim is limited by its basis in Ms. Friendly's rights as a shareholder.

[83] In the Mesbur Judgment, the 167 respondents were ordered to pay $960,000, plus pre-judgment interest in the amount of $26,837.18, to purchase the shares in 167 Corp held by Ms. Friendly and her company. Where Justice Mesbur ordered that the BTIG be charged as security, the order was made "[p]ursuant to section 248" of the Business Corporations Act, R.S.O. 1990, c. B.16 (the "OBCA"). Section 248 is the basis of the oppression remedy.

[84] Cherniak urges this court to consider s. 248(6) of the OBCA, which provides that:

(6) A corporation shall not make a payment to a shareholder under clause (3) (f) or (g) if there are reasonable grounds for believing that,

(a) the corporation is or, after the payment, would be unable to pay its liabilities as they become due; or

(b) the realizable value of the corporation's assets would thereby be less than the aggregate of its liabilities.

[85] It is unclear what evidence was before Justice Mesbur with respect to 167 Corp's assets and liabilities. However, the very existence of the current proceedings provides some evidence that 167 Corp would be unable to pay its liabilities to creditors if a payment were made to its shareholders. I share Cherniak's concern that, to give ACC priority status would amount to elevating shareholder rights above those of creditors.

[86] However, most fatal to ACC's priority claim is s. 2(1) of the Creditors' Relief Act, 2010, which requires that there be no priority among creditors. As I discussed above, the court in Globealive held that, despite s. 2(1), perfection of a security interest under the PPSA can still create a priority claim.

[87] In the Mesbur Judgment, the court ordered that "Lynda Friendly shall be at liberty to register this judgment as security against such assets". However, ACC has provided no evidence of registration or perfection. Absent such evidence, ACC cannot now claim that it should have priority.

Is ACC bound by the "Side Deal" in Justice Paisley's Endorsement to limit its claim to $400,000?

[88] Although the 167 respondents submit that Ms. Friendly's assignment to ACC was not valid, I see no reason to disturb the December 6, 2016 Endorsement of Justice Paisley, where the 167 respondents conceded the validity of the assignment on consent. There is a remaining issue: is ACC bound by the "Side Deal" in Justice Paisley's Endorsement to limit its claim to $400,000?

[89] ACC refers to Griffiths v. Zambosco (2001), 54 O.R. (3d) 397 (C.A.), at para. 61, for the proposition that under s. 53(1) of the Conveyancing and Law of Property Act, R.S.O. 1990, c. C.34, "once a judgment is assigned to a third party, that party stands in the place of the original creditor with respect to any lawful claim". On this basis, it seeks to enforce the Mesbur Judgment in its entirety.

[90] In Griffiths, the plaintiff obtained assignments of three judgments from creditors of the defendant, his ex-wife. He paid a total of $89,000, although their face value at the time was $151,000. The trial judge credited the plaintiff with the $89,000 he had paid, but would not permit him to collect the face value of the judgments. On appeal, the court found that the plaintiff was entitled to the full face value of the judgments. Whether or not the plaintiff had purchased the judgments, the defendant had incurred the debts that led to the judgments. The plaintiff was not unjustly enriched by receiving the full value; in fact, to deny him their full value would amount to unjustly enriching the defendant at the plaintiff's expense.

[91] In the present case, the Assignment Agreement was part of a larger settlement between Ms. Friendly and her counsel, Chitiz Pathak LLP, to settle mutual claims. Ms. Friendly had commenced a negligence action against her former solicitors, and Chitiz Pathak LLP had brought an application for a charging order under s. 34 of the Solicitors Act against the matrimonial home of Ms. Friendly and Mr. Elkind.

[92] Section 34(1) of the Solicitors Act permits the court to place a charge on "property recovered or preserved through the instrumentality of the solicitor for the solicitor's fees, costs, charges and disbursements in the proceeding". In its application, Chitiz Pathak LLP indicated its intent to requisition a referral for assessment under the Solicitors Act "to ensure that the fees are fair, proper and reasonable in all the circumstances". There is no further evidence about the ultimate assessment, if it in fact took place.

[93] The granting of a charging order under s. 34(1) is discretionary, and the court must "balance the circumstances and equities of each case and client": Peter B. Cozzi Professional Corporation v. Szot, 2020 ONCA 397, 2 C.C.L.I. (6th) 1, at para. 52.

[94] I also note the Court of Appeal's more general observations on the Solicitors Act in Plazavest Financial Corp. v. National Bank of Canada (2000), 47 O.R. (3d) 641 (C.A.), at paras. 14-16:

The rendering of legal services and the determination of appropriate compensation for those services is not solely a private matter to be left entirely to the parties. There is a public interest component relating to the performance of legal services and the compensation paid for them. That public interest component requires that the court maintain a supervisory role over disputes relating to the payment of lawyers' fees. I adopt the comments of Adams J. in Borden & Elliot v. Barclays Bank of Canada (1993), 15 O.R. (3d) 352 (Ont. Gen. Div.) at 357-58, where he said:

... The Solicitors Act begins with s. 1 reflecting the legal profession's monopoly status. This beneficial status or privilege of the profession is coupled with corresponding obligations set out in the Act and which make clear that the rendering of legal services is not simply a matter of contract. This is not to say a contract to pay a specific amount for legal fees cannot prevail. It may. But even that kind of agreement can be the subject of review for fairness: see s. 18 of the Solicitors Act.

The observation of Adams J. that the rendering and payment of legal accounts is not "simply a matter of contract" finds support in a long established line of authority which recognizes, apart entirely from the Act, that a superior court has an inherent jurisdiction, as part of its disciplinary authority over lawyers, to direct the assessment of lawyers' fees: Peel Terminal Warehouses Ltd. v. Wootten, Rinaldo & Rosenfeld (1978), 21 O.R. (2d) 857 at 861 (Ont. C.A.); Minkarious v. Abraham, Duggan (1995), 44 C.P.C. (3d) 210 (Ont. Gen. Div.) at 242.

The provisions of the Solicitors Act also offer full support for the conclusion reached by Adams J. Sections 16 to 36 of the Act recognize that clients and solicitors may enter into written agreements concerning payments for legal services. These sections do not, however, suggest that those agreements oust the assessment process. To the contrary, they provide detailed provisions for the assessment of legal fees rendered pursuant to written agreements between lawyers and their clients.

[95] The court is not being asked to assess the fees in accordance with the Solicitors Act, nor does the present dispute directly involve Ms. Friendly. Nonetheless, I think an understanding of the origins of ACC's claim and the statutory goals of the Solicitors Act are relevant.

[96] The Solicitors Act provides a mechanism by which an unpaid solicitor can have their fees assessed and a charging order placed against property recovered or preserved through the instrumentality of the solicitor. Evidently, Chitiz Pathak LLP began pursuing this remedy. But for reasons unknown to this court, Ms. Friendly and her solicitors found it mutually agreeable to execute the Assignment Agreement instead, thereby making this court's "supervisory role" more challenging to fulfill.

[97] In the Side Deal to Justice Paisley's endorsement, ACC agreed to limit its claim against the 167 respondents to $400,000. It is unclear how that figure was arrived at. In the Mesbur Judgment, Ms. Friendly and her company were awarded $400,000 in legal costs. Similarly, there is no evidence as to how that figure was arrived at, or whether it has any relation to the $400,000 limit agreed to in the Side Deal.

[98] Dorr submits that the Side Deal "suggests an intention by ACC to limit its recovery to $400,000, being the approximate amount of legal costs that Lynda Friendly owed to Mr. Birnboim". Dorr further submits that, if the court finds that the assignment was valid, ACC's right to collect funds ought to be capped at $400,000, so as to prevent a "windfall" at the expense of other creditors.

[99] I recognize that, if ACC is entitled to its full claim on a pro rata basis, whether or not ACC receives a "windfall" will depend on the ultimate amount paid out under the BTIG. The record shows that the principal claimed under the Mesbur Judgment is $1,628,730, out of the total principal claimed by all the creditors of $2,451,264 (each without accounting for any interest that has accrued).

[100] I also observe that Cherniak, another creditor of the 167 respondents, sought and received an assessment of its fees through the mechanisms available under the Solicitors Act.

[101] In these circumstances, I agree with Dorr's submission, and would limit ACC's claim to the $400,000 contemplated in the Side Deal. I find the present circumstances distinguishable from those in Griffiths, due to the involvement of the Solicitors Act and the importance of the court's supervisory role.

Order

[102] MCAP's motion is allowed. The other creditor's motions are dismissed.

[103] Within 15 days of the release of these Reasons, the parties shall provide me with a Draft Order approved as to form and content, and a clean copy of the Draft Order in WORD format for my signature.

Costs

[104] If the parties cannot agree on costs, they shall make written submissions as to costs within 15 days of the release of these Reasons. Such written submissions shall not exceed five double-spaced pages, exclusive of Costs Outlines, Bills of Costs, Offers to Settle, and authorities are to be hyperlinked or forwarded to me via my judicial assistant. If no submissions are received within this timeframe, the parties will be deemed to have settled the issue of costs as between themselves.

[105] The Draft Order and Costs Submissions shall be sent via email to the Family Law Judicial Assistant AnnaMaria.Tiberio@ontario.ca.

Pinto J. Released: April 22, 2022

[1] There is a subsequent document called a “Confirmation of Assignment of Judgments” signed by the same parties on July 14, 2016. It is unclear as to what the relationship is between the Assignment of Judgments and the Confirmation of Assignment of Judgments.