Court File and Parties

COURT FILE NO.: CV-22-00686724-00CL DATE: 20230608 SUPERIOR COURT OF JUSTICE – ONTARIO – COMMERCIAL LIST

APPLICATION UNDER SECTION 67(1) of the PERSONAL PROPERTY SECURITY ACT, R.S.O. 1990, c. P. 10, as amended

RE: 1261271 B.C. LTD., Appellant AND: HANOVER PV LIMITED PARTNERSHIP, SOLBLACK SFN INC., MINTEN SFN LIMITED PARTNERSHIP, 7550 LASALLE LIMITED PARTNERSHIP, 5868 ORR LAKE LIMITED PARTNERSHIP, BOOST POWER II LIMITED PARTNERSHIP, ENVIRO PARK SOLAR LTD., HAY BAY SOLAR LP, GREAT WEST ENERGY LIMITED PARTNERSHIP, GREAT WEST ENERGY II LIMITED PARTNERSHIP, HANOVER PV GP INC., MINTEN SFN GP INC., 7550 LASALLE GP INC., 5868 ORR LAKE GP INC., BOOST POWER II GP INC., HAY BAY GP INC., GREATWEST ENERGY GP INC., AND GREAT WEST ENERGY II GP INC., Respondents

BEFORE: Peter J. Osborne J.

COUNSEL: Jeffrey Levine, for the Appellant Chris Burr and Jake Harris, for the Respondent

HEARD: February 23, 2023

Endorsement

[1] 1261271 B.C. Ltd., (“271” or “the Applicant”), seeks a declaration that its security interest in the assets of the Respondents is valid and enforceable, as security for the obligations of the Respondents owed to the Applicant.

Background and Parties

[2] 271 is a British Columbia Corporation. It was incorporated for the sole purpose of funding a secured loan to the Respondents to satisfy existing unsecured loans together with fresh requirements for new liquidity.

[3] The Respondents are Ontario corporations and limited partnerships. They operate solar power generating businesses in Ontario. Those businesses, and their predecessor owners, are the genesis for this dispute.

[4] The dispute itself is but one step in a lengthy series of proceedings, largely between the Chandler Group (defined below) which owns the Respondent parties, and 1784 Solar Ltd. (“1784”).

[5] Certain of the Respondents are described as FIT 2 Entities. “FIT” refers to “feed-in-tariff”, and the FIT 2 projects were solar power projects which had the second generation of contracts under Ontario’s Feed-in-Tariff Program. That Program was developed to promote and encourage greater use of renewable energy sources.

[6] The Respondents referred to as FIT 2 Entities include Hanover PV Limited Partnership, Solback SFN Inc., Minten SFN Limited Partnership, 7550 LaSalle Limited Partnership, 5868 Orr Lake Limited Partnership and Boost Power II Limited Partnership, and their associated general partners. They do not include the Respondent Enviro Park Solar Ltd. (Enviro Park) that is not owned or controlled by the Chandler Group.

[7] The FIT 2 Entities comprise the majority of the debtors in this Application. They were originally, and are again now, controlled by the Chandler Group. That control was indirect through Blackstone Energy Solutions Inc. (“BSES”) and Blackstone Solar Financing Holdings Ltd. (“BSFHL”), two of six companies collectively referred to as the “Blackstone Companies”. The Blackstone Companies were and are owned by Bruce Chandler, Curtis Chandler, Chandler Capital Management, LLC and the Jake MacLeod Family Trust (collectively, the “Chandler Group”).

2015 Sale and Reorganization – Chandler Group, Lavender Glen and the 1784 Parties

[8] In 2015, the Chandler Group sold the shares of the Blackstone Companies to an arm’s-length entity called Lavender Glen for total consideration of $3.8 million. A significant portion of the purchase price, however, was not payable on closing. As a result, the purchaser, Lavender Glen, pledged the shares of the Blackstone Companies back to the Chandler Group pursuant to the terms of the Blackstone Share Pledge Agreement dated April 10, 2015 (the “Pledge Agreement”) as collateral for the future payments owing as against the balance of the purchase price. That Pledge Agreement prohibited Lavender Glen from entering into certain transactions without the consent of the Chandler Group.

[9] While funds in respect of the share purchase were still owing to the Chandler Group, Lavender Glen subsequently undertook a corporate reorganization (the “Reorganization”) in 2015 without the knowledge or consent of the Chandler Group. This had the effect of transferring ownership of the FIT 2 Entities to Strathcona Energy FIT 2 LP, and away from the Blackstone Companies, the shares of which were still pledged.

[10] The effect of the Reorganization was to, among other things, insert a new entity, Strathcona Energy Power Generation LP, (together with Strathcona Energy FIT 2 LP, the “Strathcona Entities”), in between the Blackstone Companies and the FIT 2 Entities. The Chandler Group took the position that this Reorganization constituted a breach of the Pledge Agreement in that the security in the form of the shares pledged for the significant balance of the purchase price owing on the sale to Lavender Glen of the Blackstone Companies was effectively removed.

[11] Further complicating the scenario was the fact that Lavender Glen was itself indebted to two Arizona-based companies, 1784 Capital Holdings LLC and 1784 Solar, LLC, (collectively, “the 1784 Parties”) with respect to a revolving line of credit. As security for that credit, Lavender Glen had pledged shares it owned. Lavender Glen defaulted on the indebtedness to the 1784 Parties and as a result, control of the Strathcona Entities was subsequently transferred by Lavender Glen to the 1784 Parties in March, 2017.

[12] The result was that those entities, which indirectly controlled the FIT 2 Entities, were (together with other entities) no longer owned or controlled by Lavender Glen.

The Litigation and The Gilmore Order

[13] Proceedings ensued. The Toronto Dominion Bank brought an interpleader application relating to funds held in bank accounts of the FIT 2 Entities. Initially, those funds were claimed both by the Chandler Group and by 1784. By interpleader judgment of McEwen, J. dated November 28, 2017, TD paid the funds into court pending the outcome of the dispute between and among the Respondents as to who owned which entities.

[14] The Chandler Group then asserted, by pleading dated February 16, 2018, that the Reorganization constituted a breach of the Pledge Agreement and sought a declaration that the Reorganization was oppressive and prejudicial to the Chandler Group and an order that it be set aside and unwound.

[15] Gilmore, J. granted the relief sought. By order dated February 17, 2022, Gilmore, J. declared that the Reorganization breached the terms of the Pledge Agreement and was oppressive, unfairly prejudicial to and unfairly disregarded the interests of the Chandler Group (the “Gilmore Order”). The Reorganization was ordered to be set aside and unwound such that BSES and BSFHL directly owned the interests in the FIT 2 Entities that they held prior to the Reorganization. Finally, Gilmore, J. declared that the appointment of Bruce Chandler as officer and director of the Blackstone Companies made in 2016 by way of exercise of Pledge Agreement rights, was proper and valid.

[16] The parties then had a dispute about the interpretation and scope of the Gilmore Order and specifically whether it applied to an entity known as Hay Bay Solar LP (“Hay Bay”). That issue was heard and determined by me. By order dated January 31, 2023, I declared that the effect of the Gilmore Order was to set aside and unwind the Reorganization in all respects and for all purposes, including for greater certainty with respect to the entity in question. Counsel for the Applicant advised at the hearing of this Application that that order is under appeal but that appeal in no way renders the subject of this Application moot and nor does it otherwise affect the relief sought.

[17] What follows from all of the above that is relevant to this Application is the fundamental fact that the FIT 2 Entities were:

a. originally owned and controlled by the Chandler Group; b. sold by the Chandler Group to Lavender Glen in 2015, and their shares were pledged back to the Chandler Group as security for the unpaid portion of the purchase price on the sale pursuant to the Pledge Agreement; c. transferred to the Strathcona Entities as part of the 2015 Reorganization; d. transferred to the 1784 Parties on the default of unrelated obligations owing to those parties by Lavender Glen; and were e. part of the Reorganization unwound and set aside by the Gilmore Order.

The 1784 Loans and the 2021 Security

[18] The issue on this Application arises since, during the period in which 1784 controlled the FIT 2 Entities, 1784 advanced various loans to those entities (as well as to Enviro Park, which as noted above is not a FIT 2 Entity nor owned or controlled by the Chandler Group).

[19] To be clear, 1784 controlled the Respondents (save for Enviro Park) from March 2017 until February, 2022 when the Gilmore Order was made.

[20] Those loans were made on an unsecured and largely undocumented basis.

[21] By the beginning of 2021, the FIT projects were indebted to the 1784 Parties for approximately $1 million, excluding interest, in respect of loans advanced since March, 2017 when 1784 controlled the Respondents for operating and financing expenses including expenses to keep secured facilities in favour of Laurentian Bank of Canada in good standing.

[22] However, also by this time in 2021, 1784 was not prepared to further support the FIT projects “on the same, unsecured, basis, and wanted to be repaid.” (Affidavit of Shane Albers, para. 52 and Applicant’s factum, para. 18).

[23] Accordingly, the principal of 1784, Mr. Shane Albers, incorporated the Applicant, 271. The express purpose of incorporating 271 was to provide a new secured revolving line of credit to the Respondents (including Enviro Park). That transaction closed, and the security interest was granted on May 11, 2021 (the “2021 Security”). The secured loan was guaranteed by each FIT 2 Entity.

[24] Immediately upon closing, the Respondents (at the direction of 1784 which controlled them) directed that proceeds of an initial advance under the revolving line of approximately $1.4 million be paid to 1784 in satisfaction of all debt due to 1784, inclusive of interest.

[25] As a result, the previously unsecured indebtedness of the FIT 2 Entities to 1784, immediately became a fully secured obligation of each FIT 2 Entity as part of the 2021 Security.

The Positions of the Parties

[26] The parties dispute the validity of that 2021 Security.

[27] 271, as Applicant, takes the position that it has a valid security interest in the assets of the Respondents. It asserts that during the period from 2017 to 2022, 1784 controlled the Respondents, and that Mr. Albers had all required corporate authority to cause the Respondents to enter into the loan agreement with 1784 and grant a security interest over their assets.

[28] The Respondents further argue that the Gilmore Order had no retroactive effect and in addition, the Respondents received value for the grant of security in 2021 and benefited from the efficiencies of being included in a larger portfolio of Fit 2 Entities and other 1784 entities. Finally, they argue that the Respondents benefited from the additional liquidity and access to funds facilitated by the granting of the 2021 Security.

[29] The Respondents oppose the validity of the 2021 Security, arguing that it is a thinly veiled collateral attack on the Gilmore Order based on purported security that was granted during the period in which Justice Gilmore held that 1784 was breaching its fiduciary duties to, and acting oppressively and prejudicially towards, the FIT 2 Entities.

[30] The Respondents submit that the 2021 Security constitutes a preference; a fraudulent conveyance; and is but another example of the conduct that Justice Gilmore has already determined to have been oppressive and prejudicial. They argue that by this Application, 271 seeks a declaration that the security it indirectly caused the FIT 2 Entities to grant to itself is valid, in order that 271 can enforce that security against the assets of the FIT 2 Entities by way of foreclosure.

Analysis

[31] For the reasons that follow, the Application is dismissed.

[32] I accept the position of the Applicant that in many respects, all parties to this Application are unfortunate victims of the situation created when Lavender Glen defaulted on its respective obligations to both the 1784 Entities on the one hand and the Chandler Group on the other hand.

[33] That is not, however, sufficient to justify the relief requested.

[34] There is no dispute regarding many, if not most, of the facts set out above.

[35] The sale of the Blackstone Companies by the Chandler Group to Lavender Glen occurred in 2015. Upon default of the payment of the balance of the purchase price, and pursuant to the terms of the Pledge Agreement, on September 16, 2016, the Chandler Group passed shareholder resolutions removing the directors and officers of each of the Blackstone Companies, and appointing Bruce Chandler as the sole director and officer of each.

[36] That ought to have been sufficient for the Chandler Group to control its interests in each of the FIT 2 Entities and, therefore, the ability of each to enter into any loan agreements or grant security. However, that ability was frustrated by the effect of the Reorganization as described above which had removed control of the FIT 2 Entities from the Blackstone Companies and placed it in the Strathcona Entities which were then controlled by Lavender Glen.

[37] The following year, in 2017, the 1784 Entities exercised their creditor rights and took control of the FIT 2 Entities.

Collateral Attack on and Circumvention of The Gilmore Order

[38] The Gilmore Order is clear in setting aside and unwinding the Reorganization such that the relevant Blackstone Companies shall directly own the interests in the FIT 2 Entities they held prior to the Reorganization. (My earlier decision about whether the scope of that Reorganization with respect to the Hay Bay subsidiary, is not relevant to this issue).

[39] The Gilmore Order is equally clear in declaring that the appointment of Bruce Chandler as director and officer of the Blackstone Companies in 2016 was proper and valid.

[40] The Respondents do not challenge the Gilmore Order in this Application, and nor could they. However, they effectively submit that the security they granted to themselves ought to be valid so they can enforce against the assets of the FIT 2 Entities to the extent of the indebtedness secured by the 2021 Security.

[41] I agree with the position of the Respondents that this amounts, in substance, to a collateral attack on the Gilmore Order. I cannot reconcile the validity of the 2021 Security granted or caused to be granted by the principal of the 1784 Entities in his capacity as director and officer of the FIT 2 Entities, with the Gilmore Order.

[42] The granting of the 2021 Security is dependent upon two things. First, it is dependent upon the Reorganization, since it was the Reorganization that placed the FIT 2 Entities under the control of the Strathcona Entities (in breach of the Pledge Agreement). The Reorganization was clearly and unequivocally set aside and unwound by the Gilmore Order “such that the relevant Blackstone Companies shall directly own the interests in the FIT 2 Entities they held prior to the Reorganization”.

[43] Second, the granting of the 2021 Security is dependent upon the actions or purported actions of Shane Albers in his capacity as director and officer of the FIT 2 Entities. He became a director and officer in 2017 pursuant to the exercise of rights upon the loan default by Lavender Glen. His assuming those roles as officer and director was inconsistent with the effect of the September 16, 2016 appointment of Bruce Chandler as director and officer of the Blackstone companies (declared to have been valid by the Gilmore Order) and which ought to have, and in fact would have, included effective control over the FIT 2 Entities, but for the Reorganization which was set aside and unwound.

[44] As noted, the Applicant itself (271) did not even exist until 2021. However, Mr. Albers and the 1784 Entities had been expressly aware since February 16, 2018 that the Chandler Group was asserting its challenge to control of the FIT 2 Entities by 1784. The relief sought by the Chandler Group in its Statement of Defence and Counterclaim on that date is clear: see paras. 81 (a) – (h).

[45] Against that knowledge, however, they incorporated 271 for the admittedly express purpose of advancing the secured loan and granting the 2021 Security to 1784 (i.e., themselves).

[46] Indeed, 271 sent its demand for repayment and Notice of Intention to Enforce Security pursuant to section 244 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c.B-3 (the “BIA”) on January 21, 2022, together with a foreclosure notice pursuant to the Personal Property Security Act, R.S.O. 1990, c.P.10, as the interpleader application commenced by the Toronto Dominion Bank was already pending. That Notice referred to the intention of 271 to take all of the assets of the FIT 2 Entities. The Chandler Group immediately objected to the Notice and took the position that the 2021 Security was not valid. There can be no serious argument that the Applicant was not aware of the position of the Respondents or the arguments upon which it was based.

[47] 271 relies on correspondence from counsel to the Respondents dated June 13, 2017 which states that “Mr. Chandler will not exercise any authority granted by the Voting Trust Agreement”. In my view, this does not amount to an admission or concession by the Respondents, that 1784 had carte blanche to do as it wished with respect to the FIT 2 Entities.

[48] That letter itself goes on to state, immediately following the quote relied on, that “[Mr. Chandler] will continue to exercise the authority he holds in respect of the companies he and our other clients sold to Lavender Glen under a share purchase agreement ….” It further states that: “…. my clients availed themselves of the rights granted to them by the Pledge Agreement…. appointing Bruce Chandler as their sole director …. Using the powers granted to him under the Pledge Agreement and inherent to his capacity as director, Mr. Chandler has been managing the Blackstone Companies since September 2016 and continues to do so today….. In any event, 1784 has no right to manage the businesses of any of the Blackstone Companies and their subsidiaries; Mr. Chandler alone has that right. He has no intention of ceding that to your client.” (Chandler Affidavit, Ex. 30 of Ex. C).

[49] In my view, the letter does not assist the Applicant for those reasons. It does not represent any concession or admission by the Respondents that they were not challenging the corporate authority in respect of the FIT 2 Entities or their control by 1784.

[50] The indebtedness of the FIT 2 Entities to 1784 already existed. That is not challenged on this Application by the Respondents. However, the 2021 Security converted that unsecured debt to secured debt that was guaranteed by each FIT 2 Entity.

[51] Immediately upon the new facility being granted, 1784 caused the FIT 2 Entities to draw down on the new secured credit agreement and pay out the prior, unsecured debt.

[52] In my view, the granting of the 2021 Security is a collateral attack on the Gilmore Order intended to circumvent its effect. I am reinforced in this conclusion by the findings of Gilmore, J. that the Reorganization should be set aside and unwound because it was oppressive and unfairly prejudicial to the Chandler Group.

[53] The Gilmore Order, based in equity, remedied the oppression and unfair prejudicial conduct and ought not to be rendered, at least in part, to be of no force or effect by the granting of security effectively by 1784 to itself, for the admittedly express purpose of making prior unsecured debt now secured and guaranteed by each FIT 2 Entity.

[54] In addition, I find that for the reasons set out above, the act of granting the 2021 Security was a further act of oppression causing prejudice by 1784. The act was undertaken in admitted self-interest, taken with the knowledge of the challenge to the control of the FIT 2 Entities being made by the Chandler Group. It was taken with a view to prejudicing the Chandler group by making the already-existing 1784 unsecured debt now secured and subject to the rights granted to 1784 pursuant to the terms of the 2021 Security.

Fraudulent Preference

[55] The Chandler Group submits that the granting of the 2021 Security is a fraudulent preference pursuant to the Assignments and Preferences Act, R.S.O. 1990, Ch. A.33 (the “APA”), since it satisfies the requirements of subsection 4(2):

a. a gift, conveyance, assignment or transfer or delivery over; b. an intent to give a creditor and unjust preference over creditors or over any one of them; and c. at the time of the gift or conveyance, the debtor was in insolvent circumstances or unable to pay his or her debts in full or knew that he or she was in insolvent circumstances.

[56] There is no dispute that the granting of a security interest constitutes a transfer. I observe also that a “charge on property” is expressly included within the preferences provisions of the BIA.

[57] I would equally conclude here that preferential intent is established. The record is clear that 1784 was unwilling to provide additional funding without its indebtedness being secured, as a result of which it required guarantees and security (see references to the evidence of Shane Albers noted above). The very objective of the granting of the 2021 Security was to create the preference now been challenged.

[58] I would similarly have little difficulty concluding that, at the time the 2021 Security was granted, the FIT 2 Entities were unable to pay their debts in full and the security interest was granted to a non-arm’s length party. The fact that they were unable to pay their debts and the concern about their ongoing ability to do so was the very rationale for the security in the first place and the concern of 1784 and its principal, Mr. Albers.

[59] However, the challenge here is that the Chandler Group were not “creditors”. The Respondents argue that Ontario courts have held that the APA is remedial legislation and “should receive a fair, large and liberal interpretation to ensure the attainment of its object”: Mitchell Jenner & Associates Inc. v. Saunders, 2011 ONSC 2930 at para. 81, quoting with approval Westinghouse Canada Ltd. v. Buchar (1975), 9 O.R. (2d) 137 at para. 141).

[60] In my view, I do not need to go that far given my finding that in the circumstances of this case, a declaration that the 2021 Security was valid would amount to a collateral attack on the Gilmore Order which would have the effect of circumventing entirely the key provisions thereof.

[61] The Respondents further submit that the BIA is illustrative in that s.95(1)(b) impugns non-arm’s-length preferences “as against the trustee”. It submits that if the BIA did apply, a trustee would readily obtain a finding that the 2021 Security was a preference since if a payment has the effect of giving a preference, intent is presumed, and in the case of a non-arm’s-length transaction such as is present here, no intent to prefer need be proved at all. It would be absurd, the Respondents submit, to validate a security interest here which would be easily invalidated by a trustee in bankruptcy.

[62] Again, in my view I do not need to address the BIA argument given my findings above.

Fraudulent Conveyance

[63] The Respondents further submit that the granting of the 2021 Security is also a fraudulent conveyance under the Fraudulent Conveyances Act, R.S.O. 1990, c.F.29 (the “FCA”).

[64] Section 2 provides that every conveyance made with intent to defeat, hinder, delay or defraud creditors or others of their just and lawful actions, suits, debts, accounts, damages, penalties or forfeitures is void as against such persons and their assigns. [emphasis added].

[65] The 2021 Security is clearly an encumbrance which is included in the FCA definition of “conveyance”. The FCA applies to parties other than pure creditors (i.e., “creditors and others”). In addition, the FCA does not require that the entities granting the security or making the conveyance (i.e., the FIT 2 Entities) to have been insolvent circumstances at the time.

[66] The remedy provided in the FCA is that the granting of the security ought to be void as against the aggrieved party.

[67] In the circumstances of this case and for the reasons set out above, I am also satisfied that the 2021 Security constitutes a fraudulent conveyance and is therefore declared to be void.

Enviro Park

[68] As noted above, Enviro Park is the one Respondent that is not one of the FIT 2 Entities. Even if I am wrong in my findings and conclusions as set out above that the 2021 Security is invalid generally, in my view it is invalid to the extent that it purports to secure indebtedness of the FIT 2 Entities used to repay unsecured indebtedness of Enviro Park to 1784.

[69] That unsecured debt was in the approximate amount of $330,000. It was advanced to Enviro Park to fund an ongoing dispute with its landlord. Enviro Park remains under the ownership and control of 1784. Mr. Albers admitted that it continued to be cash flow positive (transcript, page 24 lines 21 – 25).

[70] In my view it would be inequitable and unfair to grant relief that had the effect of making the FIT 2 Entities liable on a secured basis to 1784 for the indebtedness of Enviro Park, an entity that was in remains under 1784 control. That same entity was and remains at arm’s-length to the Chandler Group which never had any interest in it.

Result and Disposition

[71] For all of the above reasons, I find that the 2021 Security is invalid. For greater certainty, I make no finding, and nor was one sought, that the underlying unsecured debt is invalid. Nothing in this Endorsement has the effect of relieving the FIT 2 Entities of those debt obligations.

[72] The parties were not in a position to address costs at the conclusion of the hearing of this Application. The parties should attempt to agree on entitlement to and quantum of costs. If they are able to do so, they should advise me no later than June 15, 2023 via email to my Judicial Assistant, Ms. Mary Sibenik (mary.sibenik@ontario.ca). If they are unable to agree on costs, they shall file submissions on costs, in each case not to exceed a maximum of three pages in length, together with a bill of costs if costs are claimed, no later than June 23, 2023 also via email to the same address.

[73] Order to go in accordance with this Endorsement.

Osborne J. Date: June 8, 2023