Court File and Parties
Court File No.: CV-22-00681586-00CL Date: 2022-11-02 Superior Court of Justice - Ontario
Re: CERIECO CANADA CORP., Plaintiff And: SAM MIZRAHI, JENNY COCO, BOSCO CHAN (a.k.a. Ye Chen), MIZRAHI COMMERCIAL (THE ONE) LP, MIZRAHI COMMERCIAL (THE ONE) GP INC., MIZRAHI DEVELOPMENT GROUP (THE ONE) INC., MIZRAHI INC., LIVESOLAR CAPITAL CORP., 10216267 CANADA CORP., COCO PAVING INC., 12823543 CANADA LTD. and SAM M INC. Defendants
Before: Kimmel J.
Counsel: Edward Babin & Brendan Monahan, for the Applicant, Respondent on Motion Scott Hutchinson, Ewa Krajewska & David Postel, for the Respondents Sam Mizrahi, Mizrahi Commercial (The One) LP, Mizrahi Commercial (The One) GP Inc., Mizrahi Development Group (The One) Inc., Mizrahi Inc., and Sam M Inc. (Moving Parties)
Heard: September 23, 2022
Endorsement (Motion to dismiss/stay)
The Motion
[1] The "Mizrahi Defendants," Sam Mizrahi, Mizrahi Commercial (The One) LP, Mizrahi Commercial (The One) GP Inc., Mizrahi Development Group (The One) Inc., Mizrahi Inc., and Sam M Inc., ask for an order dismissing or alternatively staying this action as against them pending the repayment or satisfaction of certain Senior Indebtedness and/or liabilities based upon the standstill provision contained in a Priority, Subordination and Standstill Agreement that is said to bar this action. It is on the strength of this contractual provision that these defendants ask that this action be dismissed or stayed on the grounds that it is frivolous, vexatious and/or an abuse of process.
The Statutory Test
[2] The Mizrahi Defendants must demonstrate that this is one of those clearest of cases in which the action is “inevitably doomed to fail” or has “no realistic prospect” of success because of the standstill provision that the plaintiff agreed to.
[3] Rule 21.01(3)(d) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 provides that: "[a] defendant may move before a judge to have an action stayed or dismissed on the ground that ... (d) the action is frivolous or vexatious or is otherwise an abuse of process of the court.”
[4] Rule 25.11 provides that: "[t]he court may strike out or expunge all or part of a pleading or other document, with or without leave to amend, on the ground that the pleading or other document ... (b) is scandalous, frivolous or vexatious; or (c) is an abuse of process of the court".
[5] Section 106 of the Courts of Justice Act, R.S.O. 1990, c. C.43 ("CJA") provides that: "[a] court, on its own initiative or on motion by any person, whether or not a party, may stay any proceeding in the court on such terms as are considered just".
[6] The facts as pleaded in the Statement of Claim are presumed to be true for purposes of this motion brought under Rules 23.01(3)(d), 25.11. See Miguna v. Toronto Police Services Board, 2008 ONCA 799, 301 DLR (4th) 540 at para. 20; Chuvalo v. Worsoff, 2022 ONSC 4079, 75 R.F.L. (8th) 94 at para. 29.
[7] The Court of Appeal has adopted with approval (in Baradaran v. Alexanian, 2016 ONCA 533, 3 CPC (8th) 131 at para 15) the following approach to the standard to be applied and the permitted use of evidence on motions under these Rules, set out in Miguna, at para. 34:
Evidence is admissible in relation to a rule 25.11 motion or in relation to the "frivolous and vexatious" aspect of a motion under rule 21.01(3)(d). It does not follow, however, that such a motion may be turned into an evidentiary disposition. The test remains: is it plain and obvious that the claim cannot succeed? The test is not whether it is unlikely the claim will succeed. Nor is the process one of weighing and assessing the evidence against the allegations as if the motion were a trial or a request for summary judgment.
[8] The court's task on a motion under these Rules and statutory provisions is to determine whether, with reference to "extrinsic evidence" as appropriate, the action is “inevitably doomed to fail” or has “no realistic prospect” of success (see Mayer v. Athanasopoulos, 2022 ONSC 5286, paras. 87 and 91). In Mayer, the court explained the difference between Rules 21.01(1)(b) and (d) thusly:
[73] If a legal claim is sufficiently well-crafted to survive a challenge under rule 21.01(1)(b), there will usually be no basis for striking it as frivolous or vexatious on its face. However, extrinsic evidence may reveal that a claim that is not facially deficient is nevertheless frivolous, vexatious or an abuse of process when it is considered in its full context. As Brown J.A. explained in Salasel v. Cuthbertson, 2015 ONCA 115 at para 8:
Any action for which there is clearly no merit may qualify for classification as frivolous, vexatious or an abuse of process, with a common example being the situation where a plaintiff seeks to relitigate a cause which has already been decided by a court of competent jurisdiction. A court only invokes its authority under rule 21.01(3)(d) or pursuant to its inherent jurisdiction to dismiss or stay an action in the clearest of cases: Currie v. Halton (Region) Police Services Board, 2003 CanLII 7815 (ON CA), [2003] O.J. No. 4516, 233 D.L.R. (4th) 657 (C.A.), at paras. 17 and 18.
[9] The Ontario Court of Appeal has cautioned against improperly "converting" motions under Rule 21.01(3)(d) and Rule 25.11 into motions for summary judgment. See Baradaran, at paras. 16 and 17.
Summary of Outcome
[10] For the reasons that follow in this endorsement, the motion by the Mizrahi Defendants is granted, on terms detailed at the end of this endorsement.
Background – As Pleaded in the Statement of Claim
[11] The Plaintiff, CERIECO CANADA CORP. (“CERIECO”), is a Canadian corporation wholly owned by CERIECO China, which is in turn wholly owned by China Machinery Engineering Corporation ("CMEC"). CMEC is a Chinese state-owned enterprise.
[12] The defendant Mizrahi Commercial (The One) LP ("MCLP"), is a limited partnership that is indirectly owned 50 percent by the defendant Sam Mizrahi ("Sam"), and 50 percent by the defendant Jenny Coco ("Jenny"). MCLP is the registered owner and Mizrahi Development Group (The One) Inc. is the beneficial owner (together, the “Owner”) of a construction project for an 85-storey mixed use residential tower to be located at the south-west corner of Yonge Street and Bloor Street in downtown Toronto, marketed as "The One" (the "Project").
[13] In 2017, CERIECO negotiated and executed documentation related to its participation in the Project through a combination of trade credit, construction loan financing, profit sharing and associated security. Part of the security package included a joint and several guarantee executed on or about August 24, 2017 by Coco Paving, Bridging, Mizrahi Development Group and SMI (the "Guarantee"). Under the Guarantee, the parties unconditionally guaranteed, on a joint and several basis, payment and performance to CERIECO of all present and future indebtedness, liabilities and obligations owing to CERIECO by MCLP, forthwith on demand.
[14] Under the prime construction contract (“PCC”), CERIECO advanced a total of $200,000,000.00 to the Project. All such advances bear interest at the rate of 8 percent per annum, compounded annually, in addition to certain fees payable to CERIECO. The first repayment in the principal amount of $53,250,000.00 (plus interest, for total of $61,337,287.67) was due to CERIECO by June 25, 2021. That date passed and various demands were made by or on behalf of CERIECO for payment from MCLP and/or the guarantors, but they were not favourably responded to over the course of the rest of that year.
[15] In February 2022, CERIECO says it first learned from Coco Paving about a document dated November 3, 2021 purporting to be a release of Coco Paving and Bridging from their obligations under the Guarantee (the “purported Release”). The Release purports to be executed by the defendant 10216267 Canada Corp. ("102 Canada") as "agent" for and on behalf of CERIECO. Bosco Chan (“Bosco”) is the sole officer, director and controlling mind of 102 Canada.
[16] In addition to signing the purported Release, Bosco also signed an agreement in May 2021 (the "SCA Amendment") that records that CERIECO agreed to sign the purported Release in exchange for the payment of $7,500,000.00, of which $4.5 million was paid to Bosco and $3 million was paid to Sam. None was paid to CERIECO.
[17] Other agreements signed by Bosco on behalf of CERIECO from and after 2019 include:
a. A Priority, Subordination and Standstill Agreement between (among others) 102 Canada as agent for CERIECO, KEB Hana Bank Canada ("KEB") as agent for the Senior Lenders and MCLP dated August 30, 2019 (the "KEB Agreement"); and
b. A Priority Agreement between (among others) 102 Canada as agent for CERIECO and Aviva Insurance Company of Canada ("Aviva") dated July 11, 2019 (the "Aviva Subordination Agreement").
Collectively (the “Subordination Agreements”).
[18] The preamble to the KEB Agreement records that:
In order to induce the Senior Lender and the Lenders to provide the Senior Loan to the Owner notwithstanding the existence of the Subordinate Indebtedness and the Subordinate Security, the CERIECO Parties have agreed to subordinate and postpone the Subordinate Indebtedness and the Subordinate Security to and in favour of the Senior Indebtedness and the Senior Security.
[19] The KEB Agreement contains the following “standstill provision”:
- Standstill. The CERIECO Parties agree that from and after the date hereof, to and until the date of the repayment and/or satisfaction of all of the Senior Indebtedness and/or liabilities of the Owner to the Senior Lender and the Lenders under the Senior Credit Agreement and the Senior Security and the complete discharge thereof (the "Standstill Period"), no CERIECO Party shall take, direct, initiate, pursue, continue, support or otherwise participate in, either directly or indirectly, any Enforcement Action in connection with or in respect of the Subordinate Indebtedness, CERIECO Agreements or the Subordinate Security against or in respect of any Credit Party [defined to include the Owner] or against or in respect of all or any part of the Collateral nor against any party or parties who may be entitled to claim contribution and indemnity against the Owner. [emphasis added]
….Should any CERIECO Party hereafter breach any of its respective covenants and agreements herein set forth, then in addition to its respective exposure to an application for injunction relief, a suit for specific performance and/or a claim in damages sought by the Senior Lender and/or the Owner against it, it is understood and agreed that the Owner shall automatically be deemed to be in default under the Senior Credit Agreement and the Senior Security.
"Enforcement Action" is defined in section 1(d) as:
"Enforcement Action" means the exercise of any remedy available to any of the CERIECO Parties (subject always to the standstill provisions contained in Section 13 hereof) or the Senior Lender and shall include the commencement of power of sale, foreclosure or other judicial or private sale proceedings, appointing or applying for, or obtaining or consenting to the appointment of, a receiver, a manager or a receiver and manager or other person having similar powers in respect of the Beneficial Owner or the Registered Owner or all or any part of the Collateral, taking possession or control of all or any part of the Collateral, giving notice of intention to enforce security, or undertaking, commencing, giving notice of or taking any action or proceeding seeking payment or recovery of all or any part of the Subordinate Indebtedness (subject always to the standstill provisions contained in Section 13 hereof) or the Senior Indebtedness, as the case may be, or damages in lieu thereof, or accepting a transfer of any property in lieu of foreclosure, or the exercise of any other rights or remedies available to a creditor under its security or otherwise at law or in equity, including without limitation, any bankruptcy or insolvency proceedings or any participation in or any actions in furtherance of the foregoing. [emphasis added]
“Collateral” is defined in section 1(b) as follows:
"Collateral" means any and all present and future undertaking, property or assets of the Owner and any proceeds thereof, whether real, personal or mixed, including the Property and Project.
[20] Section 27 of the KEB Agreement provides that:
Nothing in this Agreement shall create any rights in favour of, or obligations to, the Owner, and the covenants and agreements of the Senior Lender and the CERIECO Parties herein shall not be enforceable by the Owner.
[21] The statement of claim in this action was issued on May 24, 2022 in which CERIECO makes various claims against the Owner and others for orders, including:
a. to set aside the SCA Amendment and the purported Release;
b. under the oppression remedy at common law and in equity damages for fraud, conspiracy, breach of fiduciary duty, knowing assistance in breach of fiduciary duty, knowing assistance of fraud and/or breach of trust, and knowing receipt; and
c. damages of $200 million for breach of contract.
[22] Under the oppression remedy CERIECO also asks the court to direct an investigation into the matters described in the statement of claim. The statement of claim does not expressly seek to set aside either of the Subordination Agreements, although CERIECO maintains that the circumstances surrounding the purported execution of the KEB Agreement (of particular relevance to this motion) will be part of any investigation ordered by the court in this action and may lead to further claims in respect of the Subordination Agreements.
[23] The only damages particularized in the statement of claim correspond with the outstanding principal debt for which demand was made by CERIECO upon the first default in payment under the PCC that occurred on or about June 25, 2021.
[24] More specifically, the statement of claim includes the following assertions:
This action relates to the wrongful, dishonest and oppressive conduct of Sam, Jenny, and Bosco Chan, as directors and controlling minds of the corporate defendants described herein (in Bosco's case, as a director of CERIECO) in connection with the contractor's loan.
As a result, Dentons drafted and CERIECO adopted the following provision as part of CERIECO's By-Law No. 1:
Contracts, documents or instruments in writing requiring the signature of the Corporation shall only be signed on behalf of the Corporation by Mr. Long Hai Wang [Emphasis added in pleadings].
Bosco, Sam and Jenny (and their respective corporate alter egos described herein) have also, since at least 2019, conspired to use Bosco, without CERIECO's knowledge, to execute agreements and other documents (purportedly on CERIECO's behalf) that are highly prejudicial to CERIECO's interests as a creditor of the Project.
CERIECO seeks an order to set aside the SCA Amendment and the purported release, and an order under the oppression remedy directing an investigation into the matters described herein. Such investigation may give rise to further claims, including with respect to the purported subordination of CERIECO's security interest in the Project as described below.
At no time during the negotiation of CERIECO's participation in the Project was Bosco held out by CERIECO, directly or indirectly, as an individual having the actual or apparent authority to bind CERIECO.
CERIECO has advanced a total of $200,000,000.00 in accordance with the PCC (the "Outstanding Indebtedness"). The Outstanding Indebtedness bears interest at the rate of 8 percent per annum, compounded annually, in addition to certain fees payable to CERIECO.
CERIECO would later learn that at or around the same time MCLP was urging CERIECO (through Wang) to forbear from taking enforcement steps, it was in the process of improperly and oppressively purporting to negotiate such a release through Bosco (in the absence of legal counsel), as described below. MCLP had also purportedly already obtained Bosco's commitment (purportedly on behalf of CERIECO) to deliver the release under the SCA Amendment.
CERIECO has also since discovered that Bosco has, since at least 2019, entered into several other agreements purportedly on CERIECO's behalf that have prejudiced CERIECO's interest in the Project, in favour of MCLP or other lenders, and have thereby potentially caused significant damage to CERIECO.
These agreements include a Priority, Subordination and Standstill Agreement between (among others) 102 Canada as agent for CERIECO, KEB Hana Bank Canada ("KEB") and MCLP dated August 30, 2019 (the "KEB Subordination Agreement") and a Priority Agreement between (among others) 102 Canada as agent for CERIECO and Aviva Insurance Company of Canada ("Aviva") dated July 11, 2019 (the "Aviva Subordination Agreement"; together with the KEB Subordination Agreement, the "Subordination Agreements").
MCLP has breached its contractual obligations to CERIECO under the PCC as described above. Under the Guarantees, Coco Paving, 128 Canada and Mizrahi Development Group guaranteed the payment and performance of MCLP's obligations to CERIECO under the PCC.
As a result of MCLP's breaches, CERIECO has suffered damages in the sum of at least $200,000,000.00, for which Coco Paving, 128 Canada and Mizrahi Development Group are liable.
The Positions of the Parties
[25] This motion under Rules 21.01(3) and 25.11 and under s. 106 of the Courts of Justice Act turns on whether the KEB Agreement is a bar to the core relief sought in this action.
[26] The Mizrahi Defendants contend that because this action seeks payment or recovery from the defendants (including the Owners) of all or any part of the outstanding principal and interest under the PCC (Subordinated Indebtedness under the KEB Agreement), or damages in lieu thereof (whether pursuant to the oppression remedy, at common law and/or in equity for fraud, conspiracy, breach of fiduciary duty, knowing assistance in breach of fiduciary duty, knowing assistance of fraud and/or breach of trust, knowing receipt or for breach of contract), it clearly comes within the standstill provision. This, in turn, entitles the Owner to seek injunctive relief or specific performance of those obligations, which they maintain is to be achieved through the requested order for a stay or dismissal of this action.
[27] The plaintiff insists that the standstill provisions contained in the KEB Agreement cannot be found to be a bar to this action at this early stage because:
a. The enforceability and/or validity of the KEB Agreement is “in play” and remains open to challenge. More specifically, the investigation may lead to further claims in respect of the Subordination Agreements if it identifies concerns that this agreement was forged or fraudulently procured by Bosco to the knowledge of the other parties (as has been alleged in relation to the SCA Amendment and purported Release but, so far, not alleged in relation to the KEB Agreement); and/or
b. the relief claimed in the statement of claim goes beyond the specific relief that is prohibited by the standstill provision in the KEB Agreement and is not precluded by it;
c. the moving Mizrahi Defendants do not have standing to enforce the standstill provision in s. 13 of the KEB Agreement because, under s. 27 of the KEB Agreement, only the Senior Lender or Lenders to whom CERIECO agreed to subordinate its debt can do so; and/or
d. the court should decline to exercise its equitable discretion in favour of the Mizrahi Defendants.
[28] The Mizrahi Defendants’ responses to these arguments are that:
a. The enforceability of the KEB Agreement is not “in play”:
i. CERIECO has not asked the court to set aside the KEB Agreement, in contrast with its express request for an order setting aside the SCA Amendment and purported Release, and cannot rely on what may come out of the investigation order it is seeking as a catch-all for relief not pleaded.
ii. the other key parties to the KEB Agreement, the Senior Lender and the Lenders under the Senior Credit Agreement and the Senior Security (referred to herein as the “Senior Lenders”) are not parties to this litigation and would be necessary parties in any proceeding in which the enforceability and/or validity of that agreement was genuinely “in play”;
iii. it is not enough to make non-specific assertions from which the court might infer that the enforceability or validity of the KEB Agreement might be in question. In the face of the documentary evidence that has been put before the court by the Mizrahi Defendants, the plaintiff has not put forward evidence to establish that there is a credible basis for any argument that the KEB Agreement was forged or signed without authority.
b. The statement of claim seeks payment or recovery from the defendants (including the Owners) of all or any part of the outstanding principal and interest under the PCC (which forms part of the Subordinated Indebtedness under the KEB Agreement), or damages in lieu thereof, and clearly comes within the standstill provision entitling the Owner to seek injunctive relief or specific performance of those obligations. If there are residual claims, such as the request to set aside the purported Release and SCA Amendment, those can either be excluded from the order on this motion (whether it be for dismissal or a stay) or leave can be granted for them to be asserted in a new Fresh As Amended Statement of Claim.
c. The KEB Agreement creates a clear and specific exception in s. 13 (that contemplates that the Owner may enforce the standstill provision) notwithstanding the general prohibition in s.27 against enforcement by the Owner of the covenants and rights of other parties to that agreement.
d. The equities are not relevant, but if they were they would not favour CERIECO.
[29] The Senior Lenders have not been named as parties to this action and have not sought leave to intervene. Their counsel appeared as observers on this motion, as did counsel for Coco Paving and related entities, but took no position.
[30] The Senior Lenders asked, and were advised by CERIECO during a case conference prior to this motion, that CERIECO is not at this time seeking to set aside the KEB Agreement. Counsel for the Owner advised that, to date, the Senior Lenders have not taken a position one way or the other regarding the automatic deemed default of the Owner said to arise in the event of any default by CERIECO of the standstill provision contained in s. 13 of the KEB Agreement.
The Issues to be Decided
[31] The issues to be decided correspond with the arguments noted above, namely:
a. Is the enforceability and/or validity of the KEB Agreement at issue (“in play”) in this proceeding?
i. Has it been sufficiently pleaded?
ii. Are the necessary parties before the court for any such determination?
iii. Is there a sufficient basis for challenging the enforceability and/or validity of this agreement?
b. Are the claims asserted in this action covered by the standstill provision in the KEB Agreement?
c. Do the Mizrahi Defendants have standing to rely upon and ask the court to enforce the standstill provision contained in the KEB Agreement?
d. Are there equitable considerations that tip the balance on the request for a stay?
A) The Threshold Issue – Is the Enforceability and/or Validity of the KEB Agreement at Issue?
[32] The premise of this motion is that it is frivolous, vexatious and/or an abuse of the court’s process for CERIECO to have commenced this action that is barred by the standstill provision contained in the KEB Agreement. Thus, if the enforceability or validity of the KEB Agreement has been put in issue, that would be a gating or threshold issue. If this question is answered in favour of CERIECO, then the motion must be dismissed and the other issues raised will have to be determined after, or at least in conjunction with, the determination of whether the KEB Agreement is enforceable and/or valid.
[33] If this threshold issue is determined in favour of the Mizrahi Defendants, then the remaining issues regarding the scope of the standstill provision, the standing of the Mizrahi Defendants to enforce it and any equitable considerations will need to be considered.
(i) Has the unenforceability and/or invalidity of the KEB Agreement been pleaded?
[34] The starting point is the statement of claim. Something must be pleaded or asserted in a proceeding for it to be “in play”.
[35] The plaintiff has not claimed that the KEB Agreement is invalid or unenforceable and has not requested as part of the relief claimed that this agreement be set aside. However, the plaintiff says that, reading the statement of claim as a whole, the possible unenforceability or invalidity of the standstill provision in the KEB Agreement should be inferred from the allegations of conspiracy and/or the alleged oppressive course of conduct that the defendants are said to have engaged in with a view to undermining or altering the nature and extent of the security that CERIECO believed it had negotiated for its loan.
[36] The plaintiff contends that the various and related allegations of forgery and fraud and unauthorized agreements are sufficiently tied together by the assertions in the statement of claim (for example, at paragraphs 27, 34, 129 and 130):
Bosco, Sam and Jenny (and their respective corporate alter egos described herein) have also, since at least 2019, conspired to use Bosco, without CERIECO's knowledge, to execute agreements and other documents (purportedly on CERIECO's behalf) that are highly prejudicial to CERIECO's interests as a creditor of the Project.
CERIECO seeks an order to set aside the SCA Amendment and the purported release, and an order under the oppression remedy directing an investigation into the matters described herein. Such investigation may give rise to further claims, including with respect to the purported subordination of CERIECO's security interest in the Project as described below.
CERIECO has also since discovered that Bosco has, since at least 2019, entered into several other agreements purportedly on CERIECO's behalf that have prejudiced CERIECO's interest in the Project, in favour of MCLP or other lenders, and have thereby potentially caused significant damage to CERIECO.
These agreements include a Priority, Subordination and Standstill Agreement between (among others) 102 Canada as agent for CERIECO, KEB Hana Bank Canada ("KEB") and MCLP dated August 30, 2019 (the "KEB Subordination Agreement") and a Priority Agreement between (among others) 102 Canada as agent for CERIECO and Aviva Insurance Company of Canada ("Aviva") dated July 11, 2019 (the "Aviva Subordination Agreement"; together with the KEB Subordination Agreement, the "Subordination Agreements").
[37] However, these specific pleas, even when read together, do not challenge the enforceability and/or validity of the KEB Agreement. Read generously, it might be inferred that the plaintiff asserts that the KEB Agreement, including the standstill provision contained in it, might later be found to have been an instrument utilized to advance the alleged conspiracy and fraud intended to undermine the security and collateral for the subordinated loans advanced by CERIECO.
[38] However, the statement of claim only goes so far as to assert that CERIECO wants an investigation to be ordered which may give rise to further claims, including with respect to the purported subordination of CERIECO's security interest in the Project (including with reference to the KEB Agreement).
[39] Read in context and as a whole, what is being alleged is that CERIECO has suffered prejudice because of the very existence of the Subordination Agreements, among other things. There is no direct assertion that the KEB Agreement, or the standstill provision contained in it, is unenforceable or invalid, and no relief is sought to set aside that agreement or provision or have either of them declared unenforceable. Nor are the key counterparties to the KEB Agreement, the Senior Lender and Lenders, named as parties to this action.
[40] The parties point to competing authorities on this question of whether an issue has been raised by the pleadings such that it can be said to be “in play” in the context of a pleadings motion such as this. Some of the cases involve releases and others involve standstill or forbearance agreements. A bar in a release is reasonably analogous to a standstill provision, such as is contained in the KEB Agreement. These types of provisions operate in the same way in terms of the Rule 21.01(3)(d) and 25.11 analysis when considering whether to dismiss or stay an action.
[41] The moving Mizrahi Defendants rely on the case of Urban Mechanical Contracting LTD v. Broccolini Construction (Toronto) Inc. et al., 2019 ONSC 7385, 6 C.L.R. (5th) 91 at paras. 42-3. In that case, each side had alleged that the other side had breached the minutes of settlement. The plaintiff argued that this called into question the enforceability and validity of the settlement, even though there was no plea about enforceability and no claim for a remedy arising from the alleged breaches. The court found that mere allegations of breach were not enough to put the enforceability of the contract in issue and that general assertions, which might imply enforceability issues, could not be relied upon to defeat a Rule 21.01(3)(d) motion.
[42] Conversely, in a case where the enforceability and validity (unconscionability) of a settlement agreement and release were directly pleaded and at issue, it has been held to be inappropriate to determine the merits of those issues on a Rule 21.01(3)(d) motion, which the court observed is substantively distinct from a summary judgment motion, even though there may be some evidence before the court. See Connor v. Scotia Capital Inc., 2018 ONCA 73, [2018] O.J. No. 394 at paras. 2-5; citing Miguna.
[43] Likewise, in a recent case dealing with equitable claims for mortgage enforcement (said to be barred by "standstill" provisions similar to the one at issue here), the Ontario Court of Appeal held that it was not appropriate for the motions judge to have dismissed such claims as "bound to fail" under Rule 21, when the scope and enforceability of the standstill provisions were themselves at issue in the action. See McDowell v. Fortress Real Capitol Inc., 2019 ONCA 71, 91 B.L.R. (5th) 181 at paras. 81-84. In McDowell, as in Connor, the appellants were directly challenging the interpretation and enforceability of the standstill provision. The Court of Appeal concluded that it was an error for the motion judge to decide the merits of the enforceability issue on a Rule 21 motion.
[44] The plaintiff argues, based on Connor and McDowell, that the court is effectively pre-judging the merits of the enforceability of the standstill provision and that is not appropriate on a Rule 21.01(3)(d) motion. That might be so if the issue had been raised by the pleadings and was “in play”, but it is not here. Rather, CERIECO asserts that:
a. If the court makes the order under the oppression remedy to direct an investigation into the matters described, the investigation may give rise to further claims, including with respect to the purported subordination of CERIECO's security interest in the Project as described below; and
b. The existence of the Subordination Agreements has caused it damage (in its ability to collect on its Subordinated Indebtedness and realized upon its Collateral).
[45] The pleading upon which the plaintiff relies to suggest that it has put the enforceability of the KEB Agreement “in play” is, at best, one step removed from the directly alleged forgery and fraud associated with the execution of the purported Release and SCA Amendment and dependent upon further review and investigation. CERIECO says, in particular, that it does not know whether the Senior Lenders were aware of the limitations on what they say Bosco’s (and, in turn 102 Canada’s) authority was to sign the KEB Agreement as agent for CERIECO. This is something that CERIECO suggests might be discovered through an investigation, if ordered.[^1]
[46] It is understandable that CERIECO would want to gather some further evidence or grounds upon which to implicate the Senior Lenders in all of this, and it is prudent to tread carefully and not make unsupported allegations of that nature. Something should not be pleaded if there is no basis for doing so.
[47] However, unless and until there is a basis for a challenge and one is made, the enforceability and validity of the KEB Agreement and the standstill provision are not “in play.” This motion must be decided on the basis of the pleading as it currently stands. I find that the statement of claim does not put the enforceability and/or validity of the KEB Agreement in issue.
(ii) Are the Necessary Parties Before the Court?
[48] The main counterparties to the KEB Agreement, namely the Senior Lenders, are not party to this action, in which it is now being suggested that the enforceability and/or validity of that agreement may be challenged. The plaintiff has stated to the court that it is not at this time seeking to have the KEB Agreement set aside.
[49] There is no question that the Senior Lenders are persons whose presence would be necessary to enable the court to adjudicate effectively and completely the question of the enforceability and/or validity of the KEB Agreement and that they would have to be joined as parties to this proceeding under Rule 5.03 for that to occur. As this action is currently constituted, that question could not be adjudicated.
(iii) Is There an Evidentiary Basis Upon Which to Challenge the KEB Agreement?
[50] If the threshold question of the enforceability and/or validity of the KEB Agreement was in issue, and since the basis on which the action is said to be frivolous, vexatious and an abuse of process is derived entirely from the existence of that agreement, it might have been open to the court to consider on this motion whether those allegations were untenable or doomed to fail, and to receive evidence for that limited purpose.
[51] While evidence may be led as part of a motion pursuant to Rule 21.01(3)(d) or Rule 25.11, evidence is admissible only with respect to the issue of whether the claim is frivolous, vexatious, or an abuse of process. The court is not to weigh evidence going to the merits: See Miguna, at para. 34; Baradaran, at para. 15; and Dosen v. Meloche Monnex Financial Services Inc. (Security National Insurance Company), 2021 ONCA 141, 457 DLR (4th) 530 at para. 28.
[52] This "evidence may reveal that a claim that is not facially deficient is nevertheless frivolous, vexatious or an abuse of process when it is considered in its full context." Mayer, at para. 73. It also assists the Court in "mak[ing] factual determinations" and fulfilling its task of "tak[ing] 'a hard look at the factual background, and especially the position and conduct of the parties'". Salasel v. Cuthbertson, 2015 ONCA 115, 124 OR (3d) 401 at para. 9. See Bobel v. Humecka and Patten, 2019 ONSC 1876, at para. 18. All of this informs the key issue of whether the pleading "lacks ... legal merit" or "would put the administration of justice into disrepute." Conversely, on a Rule 21.01(1)(b) motion, "[n]o evidence is admissible", and the Court may not make factual findings. See McDowell at paras. 82-84.
[53] Each side has raised issues about the propriety of the evidence that the other has put forward on this motion, arguing that it does not meet the limited purpose criteria and should be disregarded by the court.
[54] Since the enforceability and/or validity of the KEB Agreement (and the standstill provision contained in it) has not been put in issue through the pleadings, the evidence about this issue does not add anything to the determination of the issues on this motion and is not determinative of the outcome.
[55] The plaintiff’s working theory is that Bosco (102 Canada) fraudulently signed documents on behalf of CERIECO without proper authority. The plaintiff contends generally that the resolutions validating this authority were forged and that Sam knew or should have known that Bosco did not have authority to sign agreements for CERIECO. CERIECO has not provided any particulars to substantiate this allegation, even when particulars were demanded.
[56] The plaintiff proffered no evidence or particulars to support the bald allegation in paragraph 77 of the statement of claim, that Bosco was never held out as having actual or apparent authority to bind CERIECO on his own without specific approval from Wang. This is despite the contemporaneous documents (produced by the plaintiff in response to requests to inspect documents and tendered by the Mizrahi Defendants as exhibits to an affidavit on this motion) that indicate that Bosco did purport to sign documents as an authorized representative of CERIECO. Further, these documents include a legal opinion from counsel acting for CERIECO at the time as to the validity of the KEB Agreement.
[57] CERIECO chose not to avail itself of the evidentiary privileges available under Rule 21.01(3)(d) to address this narrow issue of actual or ostensible (apparent) authority upon which the KEB Agreement was signed on behalf of CERIECO. This is consistent with the court’s finding that the question of the enforceability and validity of that agreement has not been put in issue.
[58] Instead, CERIECO has raised unrelated credibility assertions against one of the Mizrahi Defendants’ representatives that, in turn, has led to a counter-assertion of other forged and fraudulent documents. These types of assertions do not inform the analysis on this motion as they are not relevant to the narrow scope of permitted evidentiary review, nor would it be appropriate for the court to be drawn into an assessment of contradictory evidence, making credibility findings and drawing adverse inferences, all of which the Court of Appeal has clearly said should not be done on pleadings motion such as this.
[59] Fortunately, none of that needs to be done to decide this motion. The enforceability and/or validity of the KEB Agreement has not been put “in play” or at issue in this action. Since the threshold issue has not been decided in favour of CERIECO, the remaining issues need to be considered and decided.
B) Are the Pleaded Claims Covered by the Standstill Provision?
[60] The Standstill provision is very broad. As already described earlier in this endorsement, s. 13 states:
…no CERIECO Party shall take, direct, initiate, pursue, continue, support or otherwise participate in, either directly or indirectly, any Enforcement Action in connection with or in respect of the Subordinate Indebtedness, CERIECO Agreements or the Subordinate Security against or in respect of any Credit Party or against or in respect of all or any part of the Collateral nor against any party or parties who may be entitled to claim contribution and indemnity against the Owner.
"Enforcement Action" means the exercise of any remedy available to any of the CERIECO Parties (subject always to the standstill provisions contained in Section 13 hereof) or the Senior Lender and shall include the commencement of power of sale, foreclosure or other judicial or private sale proceedings, appointing or applying for, or obtaining or consenting to the appointment of, a receiver, a manager or a receiver and manager or other person having similar powers in respect of the Beneficial Owner or the Registered Owner or all or any part of the Collateral, taking possession or control of all or any part of the Collateral, giving notice of intention to enforce security, or undertaking, commencing, giving notice of or taking any action or proceeding seeking payment or recovery of all or any part of the Subordinate Indebtedness (subject always to the standstill provisions contained in Section 13 hereof) or the Senior Indebtedness, as the case may be, or damages in lieu thereof, or accepting a transfer of any property in lieu of foreclosure, or the exercise of any other rights or remedies available to a creditor under its security or otherwise at law or in equity, including without limitation, any bankruptcy or insolvency proceedings or any participation in or any actions in furtherance of the foregoing. [emphasis added]
[61] CERIECO commenced this action against the Owner (one of the Credit Parties), in which it I have no difficulty concluding that it is, among other things, exercising remedies for alleged conspiracy, fraud, oppression and breach of contract, including damages in lieu of payment or recovery of the Subordinate Indebtedness. The claims asserted in this action are in respect of CERIECO’s subordinate debt, loan agreements, and security. These claims and remedies fall squarely within the standstill provision and comprise the core allegations in the statement of claim.
[62] CERIECO argues that the oppression remedy claim somehow takes this outside of the standstill provision. The oppression remedy is, as the name suggests, a remedy. It does not change the underlying nature of the actions complained of or the commercial agreements that contextualize the relationship of the parties. CERIECO loaned money to the Owner, took security for that loan and wants to be repaid through enforcement of the loan agreements or underlying security, or wants damages in lieu of those direct enforcement remedies. This is precisely the type of Enforcement Action that it agreed not to take under the standstill provision.
[63] If there are elements of the pleaded claims that do fall outside of the standstill provision, for example, the claim that the purported Release and SCA Amendment were procured by fraud and the consideration purportedly given to CERIECO for those agreements was diverted to the personal benefit of some of Bosco and Sam, those claims can be re-packaged and asserted separately, but the prohibited Enforcement Action claims cannot be pursued on the coattails of those claims.
C) Do the Mizrahi Defendants Have Standing to Enforce the Standstill Provision?
[64] The standstill provision (at s. 13 of the KEB Agreement) clearly contemplates that there may be an “an application for injunction relief, a suit for specific performance and/or a claim in damages” by the Owner against any CERIECO Party who breaches its covenants and agreements in the standstill provision:
….Should any CERIECO Party hereafter breach any of its respective covenants and agreements herein set forth, then in addition to its respective exposure to an application for injunction relief, a suit for specific performance and/or a claim in damages sought by the Senior Lender and/or the Owner against it, it is understood and agreed that the Owner shall automatically be deemed to be in default under the Senior Credit Agreement and the Senior Security. [emphasis added]
[65] CERIECO seeks to rely on a general provision later in the KEB Agreement, at s. 27, under the heading “Owner Confirmations” that states:
Nothing in this Agreement shall create any rights in favour of, or obligations to, the Owner, and the covenants and agreements of the Senior Lender and the CERIECO Parties herein shall not be enforceable by the Owner.
[66] The plaintiff does not dispute the rule that the specific terms of a contract prevail over general terms. See Ventas Inc. v. Sunrise Senior Living Real Estate Trust, 2007 ONCA 205, 85 O.R. (3d) 254 at para. 24.
[67] First, the plaintiff tries to suggest that it is s. 27 that is the specific section, and that s. 13 is the general section. That is neither supported by the wording of the standstill provision (clearly contemplating such proceedings by the Owner in s. 13 in relation to the specific standstill covenants in that section) or by the placement of these two sections in the agreement, the general s. 27 being among other general sections at the end of the KEB Agreement, the specific exception being found embedded within s. 13, the very section at issue.
[68] Second, the plaintiff urges the court to take a strained interpretation of the standstill provision, namely that the Mizrahi Defendants do not have standing to bring a motion to enforce the KEB Agreement because s. 13 only acknowledges a right to bring an application for injunctive relief, a suit for specific performance and/or a claim in damages. This is unduly formalistic. This motion is akin to a mandatory order seeking specific performance of the standstill provision by CERIECO, specifically within the contemplation of the parties. That it seeks this relief by a motion rather than by an application or an action is not a meaningful distinction in this context.
[69] Furthermore, I would add that on a traditional standing analysis, the Owner (among the Mizrahi Defendants) has a direct and personal legal interest in the enforcement of the standstill provision[^2] because of the concluding paragraph, which provides that “Should any CERIECO Party hereafter breach any of its respective covenants and agreements herein set forth … it is understood and agreed that the Owner shall automatically be deemed to be in default under the Senior Credit Agreement and the Senior Security.”
[70] The Owner has standing to bring this motion. While the Senior Lenders might have brought this motion as well, they are not parties to this action, and it is thus not surprising that the Owner would be the one to do so.
D) Are there Equitable Considerations that Tip the Balance?
[71] A temporary stay under section 106 of the Courts of Justice Act, which the moving parties seek as an alternative to dismissal here, depends on "the equities of the situation". Catalyst Fund Limited Partnership Il v. Imax Corporation, 2008 CanLII 48809 (ON SC), 92 OR (3d) 430, at paras. 21-23;27; see also Resolute Forest Products Inc. v. 2471256 Canada Inc. DBA Greenpeace, 2017 ONSC 5383, at para. 23 (noting there is a "lower threshold" for a temporary stay).
[72] CERIECO argues that it would be extremely unfair if the Mizrahi Defendants were able to impose a stay or dismissal at such an early stage, before any discovery or other pre-trial steps have been taken, “on the basis of a provision within an agreement that CERIECO alleges was itself entered into without its knowledge or authority.” The allegations are not this direct in relation to the KEB Agreement. The implications of what has, and has not been alleged in the statement of claim, are discussed earlier in this endorsement.
[73] The standstill provision is contained in a commercial contract dealing with priorities and subordination between lenders who advanced hundreds of millions of dollars to the Owner and the Project. What is unfair is for the plaintiff to bring the very type of Enforcement Action that the standstill provision prohibits and to make vague, unspecified and broad sweeping allegations about the possibility of it being unenforceable or invalid as a basis for allowing those claims to continue through what will no doubt be lengthy and expensive discoveries and pre-trial steps.
[74] The plaintiff has not identified any injustice to it. A stay would not "immunize" the moving parties' conduct, as suggested by the plaintiff. It merely delays the plaintiff's ability to seek redress for it during the prescribed Standstill Period; precisely what the standstill provision provides for. Unsubstantiated speculation that this could, as a practical matter, result in CERIECO never being permitted to take Enforcement Action in respect of its Subordinated Indebtedness because the Senior Lenders may never be repaid in full is not a prejudice that can be considered on this motion.
[75] Meanwhile, to the extent not prohibited by the standstill provision, the plaintiff is free to seek relief against those defendants alleged to have been involved in the conduct complained of in the statement of claim. The example of the fraud claims involving the purported Release and SCA Amendment have been addressed already. The Mizrahi Defendants have agreed those claims can be carved out of any order made on this motion.
[76] If there was a concern about the passing of a limitation period as a potential ground of prejudice, the Mizrahi Defendants have also indicated that they would be willing to toll any limitation periods that might apply in the interval following any stay or dismissal based on the standstill provision, so that any viable claim is preserved and could be re-asserted upon the expiry of the Standstill Period provided for in s. 13 of the KEB Agreement.
[77] Having considered the potential prejudices identified and the responses, nothing has been brought to the court’s attention that would negate the otherwise sound basis for granting the Mizrahi Defendants’ motion.
Dismissal vs. Stay
[78] The Mizrahi Defendants have expressed a preference for a dismissal order rather than a stay because of the concern that, in theory, while the action remains extant, even if stayed, it might be asserted by the Senior Lenders that the automatic deemed default by the Owner under the standstill provision has been triggered. So far, no such assertion has been made.
[79] In any event, as a practical matter, since there are some limited aspects of the claim that are distinct and not covered by the standstill provision that will need to be disentangled from the claims that are subject to the standstill provision, and as long as the appropriate tolling arrangements are put in place, it might be less cumbersome to strike the statement of claim under Rules 21.01(3)(d) and 25.11 and grant leave to the plaintiff to immediately thereafter assert the claims that are not covered by the standstill provision in a new statement of claim.
[80] Accordingly, the action will be stayed for 30 days from the date of this endorsement to afford the parties time to enter into a tolling agreement (if the plaintiff deems that to be necessary) and for the plaintiff to draft a new statement of claim that complies with the standstill provision.
a. Any aspects of the relief sought by the plaintiff as against the Mizrahi Defendants that does not involve the enforcement of claims against the Owner for recovery of its debt or enforcement of security granted therefore may proceed by way of a new statement of claim. This includes claims regarding the alleged forgery and fraud associated with the signing of the purported Release and the SCA Agreement and payments made to Sam and Bosco in connection therewith.
b. The stay will automatically expire and this action will be automatically dismissed on the 31st day after the date of this endorsement, effective as of that day. If no satisfactory tolling agreement is reached, then the stay will continue until the end of the Standstill Period provided for in s. 13 of the KEB Agreement
[81] If the parties run into difficulties completing what must be done within the 30 days, a 9:30 scheduling appointment may be requested before me to extend the stay, and for any other procedural terms as may be considered necessary and appropriate to give effect to this endorsement.
Costs
[82] The parties agreed at the conclusion of the hearing to try to reach an agreement on costs. The court was advised that they have been unable to do so and that they wish to make written submissions regarding costs after being advised of the outcome. They advised the court that they have now exchanged their costs outlines.
[83] Reluctantly, since the parties were not able to agree on costs, an opportunity for brief page-limited written cost submissions will be afforded.
[84] The moving defendants may deliver written cost submissions of up to 4 pages double spaced, together with their costs outline and any relevant settlement offers by no later than November 18, 2022. The plaintiff’s responding written cost submission of no more than 5 pages double spaced shall be delivered by no later than December 7, 2022. The moving defendants’ reply cost submissions of no more than 1.5 pages double spaced shall be delivered by no later than December 15, 2022. Each party is responsible for filing their own cost submissions with the court and uploading them onto CaseLines on the day they are delivered or the following day. Once the final submission has been delivered, filed and uploaded, each party shall send their submissions by email with attached PDF files to my assistant at: linda.bunoza@ontario.ca
[85] This endorsement and the orders and directions contained in it shall have the immediate effect of a court order without the necessity of the issuance and entry of a formal order.
Kimmel J.
Date: November 2, 2022
[^1]: This is CERIECO’s position. Whether or not that would be the proper scope of an investigation ordered under the oppression remedy is not a matter that is before the court on this motion.
[^2]: The general law on private interest standing was not addressed by either side, but is not controversial. See Maghdoori v. Sanjari, 2022 ONSC 4624, at para. 28. See also Carroll v. Toronto-Dominion Bank, 2021 ONCA 38, 153 O.R. (3d) 385, at para. 33, leave to appeal refused, 2021 CanLII 61407 (SCC).