COURT FILE NO.: CV-19-627410-00CL

DATE: 20221103

SUPERIOR COURT OF JUSTICE – ONTARIO

IN THE MATTER OF THE BANKRUPTCY OF 186 OLD KENNEDY DEVELOPMENTS INC. OF THE CITY OF MARKHAM, IN THE PROVINCE OF ONTARIO

RE: KRASHNIK INVESTMENTS LIMITED and GABEL INVESTMENTS LIMITED, Applicant

AND:

186 OLD KENNEDY DEVELOPMENT INC., Respondent

BEFORE: Justice Cavanagh

COUNSEL: Catherine Francis, for the Pollard & Associates Inc. as Trustee and former Receiver

Dominique Michaud and Philip Holdsworth, for the 2592898 Ontario Inc., 2620094 Ontario Inc., 2627235 Ontario Inc., 2638796 Ontario Inc. and 2646429 Ontario Inc.

Calvin Ho for Yi Zhou as Third Mortgagee

HEARD: October 4, 2022

ENDORSEMENT

Introduction

[1] Pursuant to the endorsement of Justice Osborne dated June 23, 2022, a hearing was scheduled to determine whether 2592898 Ontario Inc., 2620094 Ontario Inc., 2627235 Ontario Inc., 2638796 Ontario Inc. and 2646429 Ontario Inc. (collectively, the “259 Group”) are barred from making a secured claim to Pollard & Associates Inc. as trustee of the estate of 186 Old Kennedy Development Inc.

[2] For the following reasons, I conclude that the 259 Group is not barred from making this claim.

Factual Background

[3] By order of Justice Gilmore dated January 31, 2020 and effective March 3, 2020 (the “Appointment Order”), Pollard & Associates Inc. (in this capacity, the “Receiver”) was appointed as receiver and manager of the assets, undertaking and properties of 186 Old Kennedy Development Inc. (“186 Kennedy”).

[4] 186 Old Kennedy owned lands known municipally as 186 Old Kennedy Road and 51 Victoria Ave., Markham (collectively, the “Property”). The Receiver marketed and sold the Property for $47,800,000. The sale was approved by order of Justice Conway dated June 10, 2020. The sale closed on September 11, 2020.

[5] On July 17, 2020, while the closing was pending, the Receiver filed an assignment in bankruptcy on behalf of 186 Old Kennedy. Pollard & Associates Inc. is the trustee of the estate of 186 Old Kennedy Inc. (in this capacity, the “Trustee”).

[6] There were three mortgages registered against the Property:

a. Krashnik Investment Limited and Gabel Investments Limited were the first mortgagee (the “First Mortgagee”);

b. 2592898 Ontario Inc., 2620094 Ontario Inc., 2627235 Ontario Inc., 2638796 Ontario Inc. and 2646429 Ontario Inc. (collectively, the “259 Group”) held a second mortgage (the “259 Group Mortgage”); and

c. Yi Zhou (the “Third Mortgagee”) held a third mortgage on behalf of a group of investors.

[7] A dispute arose as to entitlement to the funds in the Receiver’s possession representing proceeds from the sale of the Property. By Order of Justice McEwen dated September 18, 2020 (the “Interim Distribution Order”), the Receiver was authorized to distribute $25,490,122.44 to the First Mortgagee and $17,712,212.70 to the 259 Group, with a holdback of $1,750,000 to cover the dispute.

[8] On or about October 22, 2020, the Receiver brought a motion returnable November 2, 2020 for Order authorizing the Receiver to pay the balance of the sale proceeds, being the amount of $3,262,814.22, into Court, subject to an Order of the Court that authorizes an alternative distribution at the request of either 259 Group or the Third Mortgagee.

[9] The 259 Group brought a motion to be heard at the same time as the Receiver’s motion seeking an Order authorizing the distribution of $2,073,524.19 plus accrued interest and unpaid legal fees from the balance of sale proceeds following the interim distribution order.

[10] In response to the motion by the 259 Group, the Third Mortgagee filed a responding motion record including the supporting affidavit of Mr. Zhou disputing, on certain grounds, the amount of the claim by the 259 Group to the distribution requested.

[11] The motion by the 259 Group was settled. A consent order was issued on November 2, 2020 (the Consent Order”) to give effect to the settlement. Pursuant to the Consent Order, the Receiver was authorized to distribute $1,350,000 to the 259 Group and the net balance of funds to the Third Mortgagee. The Consent Order provides that upon filing a certificate certifying that all outstanding matters to be attended to in connection with the receivership have been completed to the satisfaction of the Receiver, the Receiver is discharged. The Receiver has been discharged.

[12] On September 22, 2021, the 259 Group filed a secured claim in 186 Old Kennedy’s bankruptcy in the amount of $723,741.22. The 259 Group relies on security under a General Security Agreement dated September 29, 2017 executed by 186 Old Kennedy in favour of 2592898 Ontario Inc. This claim would have priority over the Trustee and the claims of unsecured creditors of 186 Old Kennedy, including the unsecured claim of the Third Mortgagee for payment of the unsatisfied balance of the indebtedness that was secured by the Third Mortgage.

[13] Pursuant to the Order of Justice Osborne dated June 23, 2022, this hearing was scheduled for the purpose of determining whether the 259 Group is barred from making the secured claim by:

a. The settlement of the indebtedness allegedly owed by 186 Old Kennedy to the 259 Group;

b. The Approval, Distribution and Discharge Order; and

c. The amended Proof of Claim filed by the 259 Group in the Monitor’s Claims Procedure.

Analysis

[14] The question to be answered at this hearing is the one identified by Justice Osborne in his June 23, 2022 endorsement.

[15] To answer this question, I must determine whether the 259 Group, by agreeing with the Third Mortgagee and the Receiver to settle the motion by the 259 Group that was scheduled for hearing on November 2, 2022 and by seeking and obtaining the Consent Order to give effect to the settlement, finally settled the amount of the secured indebtedness owed to it by 186 Old Kennedy.

[16] The 259 Group submits that the settlement of its motion was made on the basis of an agreement as to who has priority as between the 259 Group and the Third Mortgagee under their respective mortgages to the remaining proceeds available for distribution by the Receiver from the sale of the Property, and that the agreement is not a settlement of the amount of the indebtedness owed by 186 Old Kennedy to the 259 Group that may be secured by other security.

[17] Pollard, as Trustee and former Receiver, submits that the dispute between the 259 Group and the Third Mortgagee involved serious issues as to the quantum of the indebtedness owing to the 259 Group. Pollard submits that by making the settlement and agreeing to the Consent Order, the 259 Group settled the amount of the indebtedness owed to it by 186 Old Kennedy (subject only to the right to claim a $25,000 forbearance fee from another party) and that the 259 Group is precluded from relitigating its settled claim in the bankruptcy proceeding.

[18] The Third Mortgagee supports the position of the Trustee.

Legal principles

[19] In Cyr v. The Cataraqui Cemetery Company, 2022 ONSC 4070, the application judge was called on to interpret his judgment in another proceeding. The application judge set out the principles governing the interpretation of a court order:

Both parties accept that the principles governing the interpretation of a court order are correctly summarized by the British Columbia Court of Appeal in Yu v. Jordan, 2012 BCCA 367, at para. 53:

[53] In my view, the interpretation of a court order is not governed by the subjective views of one or more of the parties as to its meaning after the order is made. Rather an order, whether by consent or awarded in an adjudicated disposition, is a decision of the court. As such, it is the court, not the parties, that determines the meaning of its order. In my view, the correct approach to interpreting the provisions of a court order is to examine the pleadings of the action in which it is made, the language of the order itself, and the circumstances in which the order was granted.

[20] I propose to review the materials filed for use on the motion scheduled for hearing on November 2, 2020 to assist me to identify the issue to be decided on this motion. I will then address the language in the Consent Order. Finally, I will address the circumstances surrounding the settlement and the Consent Order when they were made.

Materials filed for the hearing of the motions scheduled for November 2, 2020

[21] After the interim distributions provided for by the Interim Distribution Order were made, the Receiver retained the holdback amount of $1,750,000 representing remaining proceeds from the sale of the Property.

[22] The Receiver delivered a Notice of Motion for the motion scheduled for November 2, 2020. On its motion, the Receiver requested an order authorizing the Receiver to pay the balance of the proceeds from the sale of the Property, being the amount of $3,262,814.22, into Court, subject to an Order of the Court that authorizes an alternative distribution at the request of either 259 Group or the Third Mortgagee.

[23] In support of the Receiver’s motion, the Receiver delivered the Third and Final Report dated October 21, 2020. In this Report, the Receiver states at paragraph 27 that prior to the Receiver’s motion returnable on September 18, 2020, counsel for the 259 Group and Zhou agreed that the 259 Group Mortgage ranks in priority to the Third Mortgage. The Receiver reports at paragraph 29:

Counsel for the 259 Group and Zhou have informed the Receiver and its counsel that attempts to resolve the remaining dispute over the quantum of indebtedness properly payable to the 259 Group have been unsuccessful. As a result, the 259 Group has filed a motion to be heard contemporaneously with the Receiver’s motion for discharge in which it seeks payment of all indebtedness it purports as owing to it.

[24] In the 259 Group’s Notice of Motion for its motion to be heard on November 2, 2020, the 259 Group sought an order authorizing the distribution of $2,073,524.19 plus accrued interest from November 2, 2020 and unpaid legal fees up to the date of distribution to it as the second ranking mortgagee in respect of the Property.

[25] In its Notice of Motion, the 259 Group states the position taken by the Third Mortgagee with respect to its claim, that is, that (a) the interest component of the outstanding balance contravenes section 8 of the Interest Act; (b) the forbearance payment does not have priority over its mortgage claim; and (c) that the bonus is in contravention of section 17 of the Mortgages Act. The 259 Group states that the Third Mortgagee’s position is incorrect and that “259 Group is entitled to all amounts claimed as owing pursuant to the Commitment Letter and 259 Mortgage”.

[26] Mr. Zhou delivered a responding motion record that included his affidavit sworn October 26, 2020. In his affidavit, Mr. Zhou addressed the remaining forbearance payment of $25,000 described in Mr. Liu’s affidavit, the fees claimed on the 259 Mortgage, the alleged contravention of the Interest Act, and the claim for additional bonus interest alleged to contravene the Mortgages Act.

[27] When the motions were scheduled to be heard, there was no dispute about the relative priority of the two mortgages. It was accepted that the 259 Mortgage had priority over the Third Mortgage. The issues raised by the Third Mortgagee were challenges to the amount of indebtedness owed to the 259 Group that was secured by the 259 Mortgage. If the Third Mortgagee were to succeed on the challenges to the indebtedness secured by the 259 Group Mortgage, this would affect the amount the Receiver would be authorized to distribute to the 259 Group and to the Third Mortgagee out of the holdback amount.

[28] Although the record on the motions to be heard on November 2, 2022 included evidence that focused on the challenges by the Third Mortgagee to the amount of the indebtedness secured by the 259 Group Mortgage, the issue to be determined on the motions scheduled for hearing on November 2, 2020 was more narrow. The issue was who, as between 259 Group and the Third Mortgagee, was entitled to receive (under their respective mortgage security) the funds held back in the amount of $1,750,000 representing the remaining proceeds in the hands of the Receiver from the sale of the Property.

Language of the November 2, 2020 Order

[29] The Court’s Order dated November 2, 2020 was made on consent of the Receiver, the 259 Group, and the Third Mortgagee to give effect to the agreement to settle the motion by the 259 Group. The Consent Order, in paragraph 8, reads:

8. THIS COURT ORDERS that the Receiver is authorized to distribute the balance of the proceeds held by the Receiver from the sale of the Debtor’s property, after payment of the fees and expenses of the Receiver and its counsel and the accruals provided for herein as follows:

(a) To the 259 Group, the sum of $1,350,000.00 from the funds held back by the Receiver representing the remaining funds owing to the 259 Group that are secured in priority to the Third Mortgagee by the mortgage registered as instrument number YR2739089 (the “259 Group Mortgage”). This distribution is without prejudice to the rights, if any, of 259 Group to claim a $25,000 forbearance fee owing in respect of the 259 Group Mortgage from any person or entity other than the Receiver and the Third Mortgagee;

(b) To the Third Mortgagee, the balance of the funds held by the Receiver, together with any further amounts which may be recovered by the Receiver prior to its discharge, net of the costs of recovering such amounts up to the amount of the indebtedness owing to the Third Mortgagee.

[30] The words “representing the remaining funds owing to the 259 Group that are secured in priority to the Third Mortgagee by the” [259 Group Mortgage] in paragraph 8(a) were included in the Consent Order and must be given meaning. I return to the language of the Consent Order after I consider the circumstances surrounding the settlement and the Consent Order.

Circumstances surrounding the settlement and the Consent Order

[31] The settlement was confirmed in an email dated October 29, 2020 from counsel for the 259 Group to counsel for the Receiver and counsel for the Third Mortgagee that reads:

Further to my call with Tim this morning, I am happy to report that the second and third mortgagee (sic) have reached an agreement to settle my client’s motion for a further distribution. The terms of the settlement to be incorporated into a court order on consent are as follows:

1. The second mortgagee shall receive a further distribution of $1,350,000 from the funds currently held back by the Receiver. This amount shall be in satisfaction of the remaining amounts owing to the second mortgagee under the second mortgage that are in priority to the third mortgage. The $25,000 forbearance fee shall remain owing under the second mortgage; and

2. The third mortgagee shall receive a distribution of the balance of the holdback funds after payment of the $1,350,000 to the second mortgagee and payment of the amounts owing to the Receiver and the reserve for future work of the Receiver.

[32] Counsel exchanged correspondence about the settlement. Counsel for the Receiver asked about the meaning of the proposed term that “The $25,000 forbearance fee shall remain owing under the second mortgage” and, in response, counsel for the 259 Group advised:

We are trying to separate the forbearance fee from the other funds that are owing in priority to the third mortgagee. Here the forbearance fee is still owing to my client but will not be repaid from the sale proceeds that the Receiver is holding as there are insufficient funds to pay out the third mortgagee. What we are trying to achieve is that the payment of $1,350,000 will not preclude the 259 Group from submitting a claim for the unpaid forbearance fee in the CCAA claims process being run by KSV.

[33] Counsel for the Receiver circulated a draft order for approval. The proposed draft Order provided in paragraph 8(a):

(a) To the 259 Group, the sum of $1,350,000.00 from the funds held back by the Receiver, without prejudice to the rights, if any, of 259 Group to claim a $25,000 forbearance fee from any person or entity other than the Receiver or the Third Mortgagee;

[34] Counsel for the 259 Group responded by email and suggested additional language:

My suggested language for paragraph 8 (a) is below:

(a) To the 259 Group, the sum of $1,350,000.00 from the funds held back by the Receiver representing the remaining funds owing to the 259 Group that are secured in priority to the Third Mortgagee by the mortgage registered as instrument number YR2739089 (the “259 Group Mortgage”). This distribution is without prejudice to the rights, if any, of 259 Group to claim a $25,000 forbearance fee owing in respect of the 259 Group Mortgage from any person or entity other than the Receiver or the Third Mortgagee; [emphasis added]

[35] There were no communications between counsel concerning the proposed added language. The Consent Order included the additional language suggested by counsel for the 259 Group.

Interpretation of the agreement to settle the motion by the 259 Group and the Consent Order

[36] The question to be determined on the motions scheduled for hearing on November 2, 2020 was who as between the 259 Group and the Third Mortgagee was entitled to receive distributions under their respective mortgage security from the $1,750,000 of remaining proceeds held by the Receiver from the sale of the Property and in what amounts. There was no issue on this motion about other security held by 259 Group for the indebtedness owed by 186 Kennedy.

[37] The Receiver and the Third Mortgagee submit that the 259 Group is precluded by the doctrine of issue estoppel from relitigating the amount of the indebtedness owed to it by 186 Kennedy because the amount of such indebtedness was settled and reflected in the Consent Order. I disagree.

[38] In Danyluk v. Ainsworth Technologies Inc., 2001 SCC 44, the Supreme Court of Canada set out the preconditions to the operation of issue estoppel, at para. 25: (1) that the same question has been decided; (2) that the judicial decision which is said to create the estoppel was final; and (3) that the parties to the judicial decision or their privies were the same persons as the parties to the proceedings in which the estoppel is raised or their privies. In Danyluk, the Supreme Court of Canada held, at para. 24, that the question out of which the estoppel is said to arise must have been fundamental to the decision arrived at in the earlier proceeding. The estoppel extends to the material facts and the conclusions of law or of mixed fact and law that were necessarily (even if not explicitly) determined in the earlier proceedings.

[39] In response to the 259 Group’s motion, the Third Mortgagee had raised challenges to the amount of the mortgage debt owing to the 259 Group. Nevertheless, it was open to the 259 Group to settle the dispute with the Third Mortgagee by agreeing to partially postpone the 259 Mortgage to the Third Mortgage on the basis that the Third Mortgage would have priority over the 259 Group Mortgage to the holdback amount in excess of the negotiated amount to be paid to the 259 Group. To settle its motion, it was not necessary for the 259 Group to settle the amount of the indebtedness owed to it by 186 Kennedy for which it may have other security. The settlement of the amount of the indebtedness owed to the 259 Group by 186 Old Kennedy was not fundamental to the Consent Order. For this reason, the 259 Group is not precluded by the doctrine of issue estoppel from making a claim to the Trustee for payment of the secured indebtedness it asserts is owing to it.

[40] The language used by counsel for the 259 Group in the email correspondence that resulted in the settlement, which was reflected in the Consent Order, shows that this is the basis upon which the 259 Group settled its motion. In the email from counsel for the 259 Group confirming the terms of the settlement, counsel for the 259 Group expressly stated that the terms of settlement to be incorporated into a consent order are that the amount to be received by the 259 Group “shall be in satisfaction of the remaining amounts owing to the second mortgagee under the second mortgage that are in priority to the third mortgage”. The Consent Order provides that the sum of $1,350,000 which the 259 Group was entitled to receive from the funds held back by the Receiver is an amount “representing the remaining funds owing to the 259 Group that are secured in priority to the Third Mortgagee by the” [259 Group Mortgage].

[41] This language shows that 259 Group was settling its motion by agreeing to accept receipt of a negotiated amount of the holdback that would be in priority to the Third Mortgage with its claim to the remaining amount of the holdback to be subordinate to the Third Mortgage and paid to the Third Mortgagee. It was open to the 259 Group to settle its motion on this basis without settling the amount of the indebtedness owed to it by 186 Old Kennedy. On my reading of the emails evidencing the settlement agreement and the language of the Consent Order, it did so.

[42] I do not agree that this interpretation of the agreement to settle the motion by the 259 Group and the Consent Order is contradicted by paragraph 8(b) of the Consent Order which provides that the Third Mortgagee is entitled to receive any further amounts which may be recovered by the Receiver prior to its discharge. This provision does not address claims by the 259 Group outside of the receivership.

Disposition

[43] For these reasons, I conclude that the answer to the question identified in the Endorsement of Osborne J. dated June 23, 2022 is that the 259 Group is not barred from making a secured claim to the Trustee.

[44] The parties reached agreement on costs. In accordance with their agreement, costs of this motion on a partial indemnity scale are fixed in the amount of $20,000 inclusive of HST and shall be paid by the Trustee to the 259 Group. The Third Mortgagees are entitled to costs fixed in the sum of $4,686.68 (inclusive of HST) from the estate of 186 Old Kennedy Development Inc.

Cavanagh J.

Date: November 3, 2022