Court File and Parties

COURT FILE NO.: CV-21-661458-00CL DATE: 2023-06-05 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: ONTARIO SECURITIES COMMISSION Applicant

AND:

BRIDGING FINANCE INC., BRIDGING INCOME FUND LP, BRIDGING MID-MARKET DEBT FUND LP, SB FUND GP INC., BRIDGING FINANCE GP INC., BRIDGING INCOME RSP FUND, BRIDGING MID-MARKET DEBT RSP FUND, BRIDGING PRIVATE DEBT INSTITUTIONAL LP, BRIDGING REAL ESTATE LENDING FUND LP, BRIDGING SMA 1 LP, BRIDGING INFRASTRUCTURE FUND LP, BRIDGING MJ GP INC., BRIDGING INDIGENOUS IMPACT FUND, BRIDGING FERN ALTERNATIVE CREDIT FUND, BRIDGING SMA 2 LP, BRIDGING SMA 2 GP INC., and BRIDGING PRIVATE DEBT INSTITUTIONAL RSP FUND Respondents

BEFORE: Chief Justice Geoffrey B. Morawetz

COUNSEL: Miranda Spence, Steven Graff and Tamie Dolny, for the SMA 2 Unitholders Grant Moffat, John L. Finnigan and Adam Driedger, for the Receiver, PricewaterhouseCoopers Inc. Robert Staley, Mike Shakra and Thomas Gray, Unitholder Representative Counsel Émile St-Pierre, Québec Unitholder Representative Counsel Alex Fernet Brochu, for Thomas Canning (Maidstone) Limited, William Thomas, Robert Thomas & 2190330 Ontario Ltd. Ryan Taylor, for David Sharpe Asim Iqbal, for Potential Statutory Rescission Representative Counsel Steven Weisz, for the University of Minnesota Foundation

HEARD: May 11, 2023

Endorsement

[1] Blue Cross Life Insurance Company of Canada (“BCL”) and Canassurance Hospital Service Association (“Canassurance” and with BCL, the “SMA 2 Unitholders”) seek an order: (a) declaring that substantive consolidation does not apply to Bridging SMA 2 LP (“SMA 2”), and (b) approving a second interim distribution to the SMA 2 Unitholders equal to the cash held in the SMA 2 bank account, less a reserve of $16.3 million.

[2] SMA 2 is one of the Bridging funds over which PricewaterhouseCoopers Inc. was appointed as Receiver pursuant to orders dated April 30, 2021, and May 3, 2021 (the “Appointment Orders”). SMA 2 has two institutional unitholders (the “SMA 2 Unitholders”) and was created five months before the Appointment Orders were granted. As at the date of the Appointment Orders, $62 million of the $188 million that the SMA 2 Unitholders had invested in SMA 2 remained in cash, uninvested in Bridging’s loans.

[3] In July 2022, the Receiver brought a motion seeking approval of an interim distribution to the SMA 2 Unitholders in the sum of $78 million. This amount was calculated as the total cash held in the SMA 2 account less a reserve of $16.3 million.

[4] In an endorsement reported at 2022 ONSC 4472, the proposed interim distribution was reduced from $78 million to $46 million “until such time as a determination has been made as to whether substantive consolidation should be applied to the various Bridging Funds…” (para. 12).

[5] On August 16, 2022, the Receiver made the interim distribution of $46 million to the SMA 2 Unitholders.

[6] The SMA 2 Unitholders contend that the Court can and ought to conclude, based on the facts known to the parties today, that SMA 2 should not be substantively consolidated with the other Bridging Funds. The SMA 2 Unitholders request that the Court declare that substantive consolidation does not apply to SMA 2 and authorize a further interim distribution to the SMA 2 Unitholders.

[7] The Receiver opposes this motion on the basis that it is premature and duplicative. The Receiver is not recommending or seeking an order declaring that substantive consolidation should apply to SMA 2 or any other Bridging Fund at this time. The Receiver’s position is that the issue of substantive consolidation should be addressed as part of a single motion at the distribution phase of the receivership once the distribution issues are resolved and the Court will have the benefit of the information necessary to determine whether substantive consolidation is appropriate.

[8] Unitholder Representative Counsel supports the position of the Receiver.

[9] The issues on this motion are whether: (a) substantive consolidation ought to apply to SMA 2; and (b) the SMA 2 Unitholders are entitled to a further interim distribution.

Position of SMA 2 Unitholders

[10] There is no specific statutory provision authorizing substantive consolidation in Canada. The courts have relied on equitable jurisdiction and discretionary powers granted to them pursuant to the Bankruptcy and Insolvency Act ("BIA") and the Companies’ Creditors Arrangement Act (“CCAA”) as providing the authority to substantively consolidate insolvent estates.

[11] There is no reported example of a court substantively consolidating corporate estates in a receivership proceeding initiated pursuant to s. 129 of the Securities Act (Ontario).

[12] The legal test for substantive consolidation requires the court to consider the following factors: (i) Are the elements of consolidation present? (ii) Do the benefits of consolidation outweigh the prejudice to particular creditors? (iii) Is consolidation fair and reasonable in the circumstances?

[13] As set out in Redstone Investment Corporation (Re), 2016 ONSC 4453 at para. 71, the following elements (each, an “Element” and collectively “Elements of Consolidation”) must be considered as part of the overall analysis of the appropriateness of imposing substantive consolidation: (a) difficulty in segregating assets; (b) presence of consolidated financial statements; (c) profitability of consolidation at a single location; (d) co-mingling of assets and business functions; (e) unity of ownership interests; (f) existence of inter-corporate loan guarantees; and (g) transfer of assets without corporate formalities.

[14] The SMA 2 Unitholders submit at [50] – [80] of their factum that the Elements of Consolidation are not present. A summary of the argument follows.

[15] The Receiver has stated that it is not difficult to determine which assets are currently held by each Bridging Fund. The cash held by each Bridging Fund is segregated into separate bank accounts. Bridging’s books and records clearly identify the Bridging loans in which each Bridging Fund holds an interest.

[16] All of the Bridging Funds maintained separate accounting records and financial statements. The Receiver is unaware of any financial statements or accounting records of Bridging that were prepared on a consolidated basis.

[17] The Bridging Funds’ assets consist of the cash in their separate bank accounts, and their interests in the various Bridging loans. The Receiver acknowledges that the Bridging Funds’ loan interests are separately recorded and have not been comingled.

[18] The SMA 2 Unitholders are the sole investors in SMA 2.

[19] The Receiver is unaware of any guarantees granted by the Bridging Funds for the benefit of other Bridging Funds.

[20] Transfers of loan interests among the Bridging Funds were recorded in a schedule to the Master Agency Agreement (as defined in the Sixteenth Report). The Receiver has not reported on any example of assets being transferred among Bridging entities without observing corporate formalities or recording such transfers.

[21] The SMA 2 Reimbursement Agreement, which has been court approved and executed, provides that it will encompass subsequent interim distributions. The SMA 2 Unitholders agree that any interim distribution made pursuant to this motion will be subject to the SMA 2 Reimbursement Agreement, and the Receiver has confirmed the SMA 2 Unitholders’ financial ability to satisfy any such reimbursement obligations.

[22] The bulk of the increase in the SMA 2 Cash Reserve – $11 million – is attributable to a contingent claim in the amount of $50 million plus interests and costs that was filed on a joint and several basis as against all of the Respondents (the “Contingent Claim”).

[23] The Contingent Claim is based on an action commenced by Thomas Canning (Maidstone) Limited (“Thomas Canning”) and related parties against BFI on April 4, 2019. It arises from certain loans made by BFI to Thomas Canning and the enforcement of those loans that took place in or around 2017.

[24] The action was amended on June 16, 2022, to name all of the Respondents as defendants. The only claim made against SMA 2 is for indemnity and unjust enrichment, on the basis that the Bridging Funds generally received a benefit from the actions taken by BFI in 2017 (more than three years before SMA 2 came into existence). The SMA 2 Unitholders submit that the Contingent Claim therefore appears to have a low chance of success as against SMA 2, such that it is not necessary to maintain any reserve for this claim in light of the SMA 2 Reimbursement Agreement.

Position of the Receiver

[25] The Receiver does not support a further interim distribution to the SMA 2 Investors at this time. This position is supported by Unitholder Representative Counsel.

[26] The Receiver submits that the parties disagree on two fundamental issues that are central to this motion: (a) first, the SMA 2 Investors submit that none of the Elements of Consolidation are present in this case. As detailed in the Sixteenth Report and certain of the Receiver’s previous reports to the Court, there is evidence that aspects of certain Elements of Consolidation are present in this case; and (b) second, the SMA 2 Investors submit that the Court can make a declaration that substantive consolidation does not apply to SMA 2 notwithstanding the absence of a complete record setting out the overall and relative economic impact that substantive consolidation (or a lack thereof) would have on the Bridging Funds and their stakeholders. In the Receiver’s view, determining if substantive consolidation should not apply to SMA 2 requires the same assessment referenced in Redstone of the overall and relative economic impact that the relief sought would have on all stakeholders.

[27] The Receiver submits that in this case, it is not possible to determine the relative benefits and prejudice to the Bridging Funds and their stakeholders that will result from substantive consolidation until the following Distribution Issues are resolved: (a) the development and approval of a Claims adjudication process to address any disputed Claims in the Claims and Unitholdings Identification Procedure; (b) the determination of the validity and quantum of any disputed Claims in the Claims and Unitholdings Identification Procedure; (c) the determination of the amount of the reserves for any contingent claims in the Claims and Unitholdings Identification Procedure; (d) the determination of whether or how any valid claims in the Claims and Unitholdings Identification Procedure should be allocated among the Bridging entities; (e) the determination of the priority of various claims against the Bridging entities (both as between them and relative to the claims of Unitholders); (f) the final determination of the Unitholder Priority Motion (Reported at 2023 ONSC 715) (including any potential appeals); (g) the development and approval of a method to allocate recoveries (including any litigation recoveries, some of which may disproportionately favour certain Bridging Funds over others absent substantive consolidation); (h) the development and approval of a cost-allocation methodology for all Loan recovery costs and receivership costs (including as it relates to any Unitholders with valid trust claims); (i) reaching satisfactory arrangements with the applicable taxing authorities to address various tax issues, including to ensure that the Receiver does not incur personal liability for any distributions to stakeholders if distributions are made in the within proceedings; and (j) the development and approval of a distribution methodology.

[28] The Receiver contends that the SMA 2 Investors have not demonstrated that, if the issue of substantive consolidation is deferred until the distribution phase of this proceeding, they will suffer prejudice that outweighs the potential prejudice to other stakeholders of a premature distribution of the proceeds of the Property.

[29] The Receiver’s arguments are set out in their factum:

[18] Throughout their written submissions, the SMA 2 Investors suggest that none of the Elements of Consolidation are present in this case. That is not supported by the Sixteenth Report and the Receiver’s previous reports to the Court. Although it is clear that certain Elements of Consolidation are not present (such as consolidated financial statements, unity of interests in ownership, and the existence of intercompany loan guarantees), aspects of certain other Elements of Consolidation are clearly implicated on these facts as set out below.

[19] The principal assets of each Bridging Fund are its cash on hand and Loan Interests and there is no difficulty in segregating these assets between the Bridging Funds based on the books and records maintained by Bridging. Each Bridging Fund holds its cash in a separate bank account and, while SMA 2 owns positions in Loans in which other Bridging Funds also hold separate positions, the specific Loan Interest of each Bridging Fund is determinable by the Receiver.

[20] However, it is not clear at this stage how certain future assets (such as litigation and/or insurance recoveries) should be allocated amongst the Bridging Funds or how potential claims between Bridging Funds should be addressed. The allocation of these future assets (and any costs associated with their recovery) will be informed by the manner in which the Distribution Issues are resolved and will be addressed at the distribution phase of the proceeding.

[21] At first glance, the Element of comingling of assets and business functions may not appear to be present in this case: each Bridging Fund holds its cash in a separate bank account, the Loan Interests held by each Bridging Fund are separately recorded pursuant to the Master Agency Agreement, the assets and liabilities of each Bridging Fund are separately recorded in its accounting records and, for all Bridging Funds other than SMA 2, in its audited financial statements, and the units issued by each Bridging Fund were separately recorded.

[22] However, the role played by BFI, and its principals, in the Bridging business requires further consideration of this Element, which also engages the Element of profitability of consolidation at a single location.

[24] The manner in which the assets of the Bridging Funds were managed by BFI engages the Element of comingling of assets and business functions. The Receiver understands that Loan Interests were allocated at the discretion of BFI. Although the Receiver understands that occasionally investment decisions may have been made in consultation with the SMA 2 Investors with respect to SMA 2, and in consultation with the sole institutional Unitholder in SMA 1 with respect to SMA 1, BFI ultimately had the sole discretion to make investment decisions on behalf of all Bridging Funds. Loan Interests were approved at origination by BFI, primarily taking into consideration the Investment Strategy and available cash in each Bridging Fund at the time of origination. Although the Fair Allocation Policy was intended to form the basis for the allocation decisions of BFI, it is unclear to the Receiver whether the Fair Allocation Policy was followed in practice.

[25] Following the initial allocation of Loan Interests at origination, BFI would later amend allocations on an ad hoc basis in its sole discretion, in some instances when the subject Loan was at risk of default. Each such transfer of a Loan Interest took place at the face value of the Loan Interest and no discount was applied to account for the creditworthiness of the Borrower or any other factor that might affect full repayment of the Loan. This would have the effect of shifting risk amongst the Bridging Funds. The commercial rationale for these transfers of Loan Interests is not clear to the Receiver and, in many instances, such transfers were likely overvalued.

[26] By transferring Loan Interests in this manner, BFI was effectively managing the affected Bridging Funds on a consolidated basis, without regard to the interests of the Bridging Fund that was the purchaser of an overvalued Loan Interest at face value.

[27] The Receiver disagrees with the submission of the SMA 2 Investors that this Element is not present in this case. Although each transfer of a Loan Interest was recorded in a schedule to the Master Agency Agreement, it is unclear how the economic interests of Unitholders in each Bridging Fund were protected or otherwise accounted for when BFI determined that a Loan Interest should be transferred.

[28] As noted above, transfers of Loan Interests were carried out by BFI in its sole discretion and had the effect of spreading risk amongst the Bridging Funds. BFI, as manager of all of the Bridging Funds, effectively negotiated with itself when transferring Loan Interests. The Receiver has significant concerns that Loan Interests were transferred indiscriminately amongst the Bridging Funds (including at times when the underlying Loans were demonstrating signs of impairment) as a mechanism to strategically allocate risk or anticipated losses.

[30] The Receiver submits that in addition to applying the Elements of Consolidation, courts must also consider the relative prejudice to stakeholders and whether consolidation is fair and reasonable in the circumstances (the second and third stages of the Redstone test).

[31] The Receiver concludes its arguments at [30] and [35] – [37] of its factum as follows:

[30] The overarching theme that emerges from the leading case law is that the Court must consider the overall and relative economic impact that substantive consolidation will have on all stakeholders. Substantive consolidation cannot be addressed in a vacuum as it relates to a single member of a broader corporate group.

[35] The Receiver remains of the view that it is not yet able to fully brief the Court and stakeholders on whether the benefits of consolidation outweigh the prejudice to stakeholders or whether consolidation is fair and reasonable in the circumstances. This is in part due to the fact that the Distribution Issues have not yet been resolved as referenced at paragraph 55 of the Sixteenth Report. For example, it is unclear how the relative prejudice to Unitholders can be determined absent greater clarity with respect to, among other things: (i) the impact of the Unitholder Priority Motion and the corresponding constructive trust claims of those Unitholders with Potential Statutory Rescission Claims (including the corpus of the constructive trust and whether that extends to the Property of SMA 2); (ii) the validity and priority of Claims filed in the Claims and Unitholdings Identification Procedure; and (iii) the impact of any such valid Claims on recoveries for the stakeholders of the Bridging Funds (including SMA 2).

[36] Until the Distribution Issues are resolved, it will not be possible to determine the magnitude of financial gain or loss for each Bridging Fund (and therefore the stakeholders of each Bridging Fund) that would result from substantive consolidation. As such, the Receiver remains of the view that it is not in a position to properly assess the economic impact that substantive consolidation will have on stakeholders, including the thousands of retail Unitholders who have not received any distributions to date.

[37] The Receiver is also of the view that it cannot provide a recommendation to the Court regarding the fairness or reasonableness of substantive consolidation without a more complete understanding of the economic impact that substantive consolidation would have on the various Bridging Funds.

Position of Unitholder Representative Counsel

[32] Representative Counsel submits that there have been no intervening material developments helpful to the SMA 2 Unitholders since that order was made. To the contrary, there have been material developments unhelpful to the position advanced by the SMA 2 Unitholders, including developments that negatively impact the amount of funds available for distribution.

[33] Representative Counsel’s arguments are set out in their factum as follows:

[13] The Receiver's Report indicates that the determination of the above Proven Claims, which was a direct qualification to its calculation for the SMA 2 Unitholders' first distribution, has not yet been made.

[14] In addition to the result of the Unitholder Priority Motion, the Supplemental Receiver's Report describes further material developments which impact the amount of claims and the calculation of the SMA 2 Cash Reserve. This includes claims filed against SMA 2 and claims for which SMA 2 may have proportionate liability.

[24] The Receiver is not yet able to fully brief the Court and stakeholders on whether the benefits of consolidation of some or all of the Bridging Funds outweigh the prejudice to stakeholders. This is in part due to a number of issues related to distribution as more fully described in the Receiver's Report and the Fifth Report (the "Distribution Issues").

[25] While all of the Distribution Issues impact the ability of the Court to assess this factor, many have a potentially significant impact on Unitholder recoveries. First, the determination of which Unitholders have a Potential Statutory Rescission Claim (as defined in the Unitholder Priority Motion reasons), and the quantum thereof, is, in accordance with the Unitholder Priority Motion reasons, to be determined at a later date. In light of the priority granted to such claims in the Unitholder Priority Motion reasons, that determination may substantially impact the remainder of the funds available for the other Unitholders and other creditors. As such, without that determination, this Court is unable to balance the prejudice and benefits of a substantive consolidation finding.

[26] Second, the claims process against the Bridging Funds is not yet complete. Among other things: (a) there may be material disputed claims, and the determination of the validity and quantity of any disputed claims is still outstanding; and (b) the priorities of any such claims may still need to be determined, including the final determination of the issues raised in the Unitholder Priority Motion.

[27] Third, issues of allocation remain outstanding, including: (a) the allocation of any valid claims among the Bridging Funds, particularly where overlapping claims have been asserted; (b) an allocation methodology for recoveries, including litigation recoveries which may disproportionately favour certain Bridging Funds; and (c) a cost-allocation methodology for all loan recovery and receivership costs.

[35] In light of the foregoing, a second interim distribution to the SMA 2 Unitholders is not appropriate at this time. There have been no intervening material facts helpful to the SMA 2 Unitholders since this Court's decision in July 2022, which found that only a reduced interim distribution was appropriate.

[37] As in other cases, the Receiver's recommendation should be given significant weight. The SMA 2 Unitholders note that receivers often seek the approval of interim distributions; however, the Receiver is not supportive of this proposed second distribution to the SMA 2 Unitholders and has expressly stated that it is not yet able to fully brief the Court on the relevant considerations to be able to determine whether such a distribution is appropriate. It would be highly unusual to make the Order against the Receiver's recommendation and concerns.

Discussion

[34] At this point in time no determination has been made as to whether, some or all of, the Bridging funds will be substantively consolidated. Further, no determination has been made as to whether substantive consolidation ought to apply to SMA 2.

[35] Counsel to SMA 2 has set out arguments to the effect that substantive consolidation ought not to apply to SMA 2.

[36] The Receiver and Representative Counsel have responded that the factual record is incomplete such that no determination of whether substantive consolidation will apply to some or all of the Bridging Funds or to SMA 2 can be made at this time.

[37] It is also necessary to consider whether or not the situation is different than the situation addressed in the Endorsement of August 16, 2022, at paras 12 – 13, when the proposed distribution to the SMA 2 Unitholders from $78 million-$46 million on the basis that it was premature to make a larger distribution until the issue of substantive consolidation was determined.

[38] The question that flows from the August 16, 2022, Endorsement is whether I am in a position to make such a determination at this time.

[39] The SMA 2 Unitholders say that I am. The Receiver and Representative Counsel say that I am not.

[40] The SMA 2 Unitholders have raised a number of legitimate arguments. However, I have concluded that it is premature to order an interim distribution at this time.

[41] The Receiver has a unique role to play in this matter. The Receiver has to consider the interests of all parties. The Receiver has set out a list of ten Distribution Issues that need to be addressed in order to determine the relative benefits and prejudice to the Bridging Funds and their stakeholders. The Receiver does not support a further distribution to the SMA 2 Unitholders at this time.

[42] In my view, the Receiver’s view must be given deference. In Marchant Realty Partners Inc. v. 2407553 Ontario Inc., 2021 ONCA 375, in the context of a motion for leave to appeal, Jamal J.A. (as he then was) stated at para. 19:

19. As already noted, commercial court judges also give substantial deference to the decisions and recommendations of a receiver as an officer of the court. If the receiver’s decision are within the broad bounds of reasonableness and the receiver proceeded fairly, after considering the interests of all stakeholders, the court will not intervene: Ravelstone, at para. 3; Regal Constellation Hotel, at para. 23. A court “will assume that the receiver is acting properly unless the contrary is clearly shown”: Regal Constellation Hotel, at para. 23.

[43] In my view, the position of the Receiver is within the bounds of reasonableness and further analysis is required in order to determine how the various funds were, in fact, operating and the status of the Contingent Claim will also have to be addressed. The sheer size of the Contingent Claim has the potential to significantly affect any distribution.

[44] Finally, the existence of the Reimbursement Agreement did not affect my determination of the issue in my Endorsement of August 16, 2022, and nothing has occurred that would cause me to revisit this issue.

[45] Notwithstanding the disposition of this motion, the issue identified by the SMA 2 Unitholders needs to be addressed and accordingly, the Receiver is directed to address the Distribution Issues set out at paragraph [27] above and to report its progress in a Report to this Court within the next 120 days. A case conference can then be scheduled to address issues relating to SMA 2.

[46] The motion of the SMA 2 Unitholders is dismissed. By agreement of the parties, no costs were sought and none are awarded.

Chief Justice Geoffrey B. Morawetz Date: June 5, 2023