Court File and Parties

Court File No.: CV-23-00706680-00CL Date: 2024-02-28 Ontario - Superior Court of Justice – Commercial List

Re: Royal Bank of Canada, Plaintiff And: Maxx Properties (No. 323) Ltd. and Blake Larsen, Defendants

Before: Peter J. Osborne J.

Counsel: George Benchetrit, for the Plaintiff Rahul Shastri, for Maxx Properties (No. 323) Ltd., Defendant/Debtor and for Blake Larsen, Defendant/Guarantor Daniel Shunock, for McDougall Energy Inc., Secured Creditor

Heard: February 28, 2024

Endorsement

[1] The Plaintiff, the Royal Bank of Canada, (the “Plaintiff” or “RBC”) seeks the appointment of a Receiver pursuant to s. 243 of the Bankruptcy and Insolvency Act and s. 101 of the Courts of Justice Act, of the assets, undertakings and properties of the Defendant, Maxx Properties (No. 323) Ltd., the Debtor, including the real property owned by the Debtor at 1510 and 1516 Markham Rd., Scarborough, ON.

[2] Defined terms in this Endorsement have the meaning given to them in the motion materials unless otherwise stated.

[3] RBC relies upon the Affidavit of Peter Gordon sworn September 25, 2023 together with exhibits thereto and the Supplementary Affidavit of Peter Gordon sworn January 19, 2024, together with exhibits thereto.

[4] The Debtor relies upon the affidavit of Mr. Blake Larsen affirmed February 26, 2024 together with exhibits thereto. Mr. Larsen is the president, sole officer and sole director of the Debtor. He is also the Guarantor of the indebtedness of the Debtor.

[5] Almost all of the relevant facts are not in dispute and are not contested. Indeed, the position of the Debtor is that it does not contest the contractual right of the Plaintiff to appoint a receiver in the event of default under the security documents, and that an event of default has occurred. In his Affidavit, Mr. Larsen deposes at paragraph 13 that: “I realize that the Bank is in a position to force the appointment of a Receiver”.

[6] The Debtor submits, however, that it should be given one more additional extension and a brief period of time until March 8, 2024, since there is a transaction at hand that is expected to close on that date and which, it is submitted, would yield sufficient funds to pay out RBC as well as a subordinate ranking creditor, McDougall Energy (who was present today as an observer and took no position on the motion).

[7] RBC seeks the appointment of a Receiver today notwithstanding the possibility of a new transaction, given the chronology of this matter and particularly the repeated indulgences and forbearances granted to the Debtor that have not resulted in any transaction.

[8] The test for the appointment of a receiver pursuant to s. 243 of the BIA or s. 101 of the CJA is not in dispute. Is it just or convenient to do so?

[9] In making a determination about whether it is, in the circumstances of a particular case, just or convenient to appoint a receiver, the court must have regard to all of the circumstances, but in particular the nature of the property and the rights and interests of all parties in relation thereto. These include the rights of the secured creditor pursuant to its security: Bank of Nova Scotia v. Freure Village on the Clair Creek, 1996 O.J. No. 5088.

[10] Where the rights of the secured creditor include, pursuant to the terms of its security, the right to seek the appointment of a receiver, the burden on the applicant is lessened: while the appointment of a receiver is generally an extraordinary equitable remedy, the courts do not so regard the nature of the remedy where the relevant security permits the appointment and as a result, the applicant is merely seeking to enforce a term of an agreement already made by both parties: Elleway Acquisitions Ltd. v. Cruise Professionals Ltd., 2013 ONSC 6866 at para. 27. However, the presence or lack of such a contractual entitlement is not determinative of the issue.

[11] The appointment of a receiver becomes even less extraordinary when dealing with a default under a mortgage: BCIMI Construction Fund Corporation et al v. The Clover on Yonge Inc., 2020 ONSC 1953 at paras. 43-44.

[12] As observed in Canadian Equipment Finance and Leasing Inc. v. The Hypoint Company Limited, 2022 ONSC 6186, the Supreme Court of British Columbia, citing Bennett on Receivership, 2nd ed. (Toronto, Carswell, 1999) listed numerous factors which have been historically taken into account in the determination of whether it is appropriate to appoint a receiver and with which I agree: Maple Trade Finance Inc. v. CY Oriental Holdings Ltd., 2009 BCSC 1527 at para. 25):

a. whether irreparable harm might be caused if no order is made, although as stated above, it is not essential for a creditor to establish irreparable harm if a receiver is not appointed where the appointment is authorized by the security documentation; b. the risk to the security holder taking into consideration the size of the debtor’s equity in the assets and the need for protection or safeguarding of assets while litigation takes place; c. the nature of the property; d. the apprehended or actual waste of the debtor’s assets; e. the preservation and protection of the property pending judicial resolution; f. the balance of convenience to the parties; g. the fact that the creditor has a right to appointment under the loan documentation; h. the enforcement of rights under a security instrument where the security-holder encounters or expects to encounter difficulties with the debtor; i. the principle that the appointment of a receiver should be granted cautiously; j. the consideration of whether a court appointment is necessary to enable the receiver to carry out its duties efficiently; k. the effect of the order upon the parties; l. the conduct of the parties; m. the length of time that a receiver may be in place; n. the cost to the parties; o. the likelihood of maximizing return to the parties; and p. the goal of facilitating the duties of the receiver.

[13] How are these factors to be applied? The British Columbia Supreme Court put it, I think, correctly: “these factors are not a checklist but a collection of considerations to be viewed holistically in an assessment as to whether, in all the circumstances, the appointment of a receiver is just or convenient: Pandion Mine Finance Fund LP v. Otso Gold Corp., 2022 BCSC 136 at para. 54).

[14] It is not essential that the moving party establish, prior to the appointment of a receiver, that it will suffer irreparable harm or that the situation is urgent. However, where the evidence respecting the conduct of the debtor suggests that a creditor’s attempts to privately enforce its security will be delayed or otherwise fail, a court-appointed receiver may be warranted: Bank of Montreal v. Carnival National Leasing Ltd., 2011 ONSC 1007 at paras. 24, 28-29.

[15] Accordingly, is it just or convenient to appoint a receiver in the particular circumstances of this case?

[16] In my view, it is, for the following reasons.

[17] The Credit Agreement entered into between RBC and the Debtor provides that the failure by the Debtor to pay any principal, interest or other amount when due is an event of default. If that occurs, the bank is entitled to demand immediate repayment and realize on any or all of the security.

[18] Similarly, the Mortgage provides that it is an event of default when the chargor fails to make payment of any instalment of principal, interest or taxes secured by the charge. The Mortgage also provides for the appointment of a receiver over the Real Property in the event of default. The GSA also provides that nonpayment when due of any principal or interest is an event of default, and the GSA allows for the appointment of a receiver upon default.

[19] The Credit Facilities have been in default since at least September, 2023. The total amount owed by the Debtor to RBC as of February 22, 2024 is in excess of $7.2 million.

[20] On September 5, 2023, RBC made formal written demand for payment on the Debtor and the Guarantor and delivered s. 244 BIA notices of its intention to enforce its security.

[21] The Debtor then began depositing collections and cash receipts in a bank account not at RBC, but rather at the Bank of Montréal, contrary to the agreed provisions of the GSA.

[22] The indebtedness was not repaid, with the result that RBC brought this motion first returnable on October 24, 2023, for the appointment of a receiver.

[23] Just prior to that first appearance, the Debtor delivered to the bank an agreement of purchase and sale dated October 16, 2023 for the sale of the Properties, conditional upon due diligence being performed by the purchaser. The scheduled closing date was January 25, 2024. The receivership motion was scheduled to be heard on November 23, 2023.

[24] Approximately three weeks prior to that hearing date, on November 1, 2023, the Debtor advised RBC that the due diligence condition in the agreement of purchase and sale had been waived, but that the closing date had been extended to January 31, 2024.

[25] On November 7, 2023, the Debtor advised RBC that it had “a bona fide firm deal” with an arm’s-length party and that “all arrears in priority payables will be made good within a week”. Accordingly, the Debtor sought from the bank a forbearance on the basis that the information provided “should be sufficient to allow for a forbearance agreement”.

[26] Indeed, it was, and on November 17, 2023, RBC, the Debtor and the Guarantor entered into a forbearance agreement made as of November 14, 2023. Pursuant to that forbearance agreement, RBC agreed not to take any steps to enforce the security until the earlier of January 31, 2024 and the occurrence of an event of default.

[27] Pursuant to the forbearance agreement, the Debtor was required to pay all regularly scheduled interest payments when due, and the Debtor and the Guarantor were required to give to the Monitor appointed by RBC over the business and affairs of the Debtor during the forbearance period (on consent), their full cooperation in facilitating the monitoring of the activity in the Debtor’s bank accounts as well as developments relating to the sale of the Properties.

[28] Moreover, the Debtor agreed to provide the Monitor with all information and documents that had been provided to the real estate broker in connection with the listing of the Properties for sale, and all materials provided to the purchaser under the agreement of purchase and sale with respect to its due diligence (including environmental reports, tax bills, insurance statements and all lease agreements and contracts relating to the Property).

[29] In addition, the Debtor was to transfer, forthwith, all funds in the Bank of Montréal account into an account at RBC, and all payments or other proceeds received by the Debtor were to be deposited into an RBC account. Finally, the Debtor was required to provide written evidence to the Monitor, upon request, that Priority Payables had been paid.

[30] Upon the occurrence of an event of default under the forbearance agreement, not cured within five days, the outstanding balance of the Indebtedness would become immediately due and payable, and the bank had the right to proceed with this motion to appoint a receiver as soon as possible. Importantly, pursuant to the forbearance agreement, and upon the occurrence of an event of default, the Debtor irrevocably consented to the appointment of a receiver.

[31] Events of default under the forbearance agreement (as well as the original security agreements) have occurred and continue to occur. In particular, the Debtor has failed to make the regularly scheduled interest payments; has failed to provide to the Monitor the information set out above; has failed to transfer the funds in the BMO account to RBC; has failed to provide evidence to the Monitor that Priority Payables have been paid; and has committed other defaults.

[32] Notice of the default under the forbearance agreement was sent on behalf of RBC to the Debtor in December 6, 2023, triggering the five day cure period. The defaults were not cured. On January 10, 2024, RBC notified the Debtor that if a satisfactory response was not provided, RBC would assume that the proposed transaction would not close and the bank would proceed accordingly.

[33] The transaction did not close. Yet still, however, the Debtor failed to respond to RBC in any way, with the result that on January 16, 2024, RBC advised the Debtor that it would seek a hearing date for this motion. On January 25, 2024, the Debtor advised RBC that the closing date for the transaction had been extended to March 8, 2024 as a result of a timing issue with the purchaser’s funding.

[34] That same day, the bank requested further information from the Debtor regarding the extension of the closing date, in response to which the Debtor provided a copy of a mortgage commitment letter which was highly conditional and the loan amount ($6 million) was materially lower than the purchase price in the agreement of purchase and sale, and also materially lower than the indebtedness owed to RBC.

[35] On January 30, 2024, at a scheduling appointment attended by both parties, today’s hearing was scheduled.

[36] There was still no response from the Debtor and no responding materials were filed until two days ago, when the Debtor filed an affidavit from Mr. Larsen stating that on January 25, 2024, he was advised by the agent involved in the transaction that the buyer required a six week extension to close as its financing had been delayed. The Debtor then agreed to the extension with the result that the transaction is now scheduled to close on March 8, 2024.

[37] RBC is extremely concerned about the continued erosion of the value of its security in all the circumstances. There is no question that the Debtor has defaulted on its obligations under the original security documents as well as under the forbearance agreement.

[38] The defaults are not merely technical. In addition to the fundamental fact that there has been no monetary repayment whatsoever since December, the Debtor continues to operate the gas station business at the Property and receive revenues. Yet, no repayment is being made to the bank, nor have the funds been transferred to an RBC account as was specifically agreed to. The inescapable inference is that the funds are being diverted on a continuing basis.

[39] At the same time, the information and documents requested by the Monitor, and agreed to be provided by the Debtor, have simply not been provided, again without any explanation whatsoever.

[40] The Debtor has been given multiple indulgences and forbearances for months, the entire fundamental premise for which was that his transaction was afoot and that it was unconditional. Now, it is sought to be extended yet again because the proposed purchaser does not have financing.

[41] The extension agreement attached to the affidavit of Mr. Larsen required the consent of RBC. Yet the record is clear that RBC was not even made aware of the request for an extension, let alone was its consent given, prior to that extension agreement being signed.

[42] The Debtor simply went ahead and executed the agreement. Even the agreement by the Debtor is odd and unexplained, since it is dated December 28, 2023, weeks before the extension was apparently sought. Whether that is a typographical error (oddly) or not is unexplained. Moreover, the record does not include any information or documents explaining how the request for the extension came about; for example, when it was requested, on what basis, and in what form. There are no documents.

[43] Even more substantively, there is no evidence whatsoever in the record as to the financial means of the proposed purchaser in order that the court (or RBC) can assess whether there is a reasonable prospect of the financing coming through for the Debtor or not.

[44] In the circumstances, and particularly in the circumstances of a continuing very material payment default, the continuing erosion of security, and the failure or refusal of the Debtor to comply with the terms to which it voluntarily agreed in the forbearance agreement to get an earlier forbearance, I am satisfied that the appointment of a Receiver now is appropriate.

[45] Moreover, I cannot accept the submission of the Debtor, made without evidence, that the appointment of a Receiver “will almost certainly” result in the transaction not closing. There is no basis for the conclusion that the purchaser would be any less motivated to close the transaction if that is its intention and ability, by way of submitting an offer to the Receiver who would consider it and if appropriate seek court approval for a sale pursuant to the Soundair Principles.

[46] The Fuller Landau Group Inc. is well qualified to act as Receiver and consents to the appointment in this case.

[47] The draft order is consistent with the Model Order of the Commercial List. While not determinative, that gives me additional comfort about the scope of the receivership and the terms of the proposed order. Counsel for the Debtor was candid in his submissions that while he opposed the appointment of a Receiver, he was content with the form of order if the court concluded, as I have done, that a Receiver should be appointed.

[48] Order to go in the form signed by me today which is effective immediately and without the necessity of issuing and entering.

Osborne J.