COURT FILE NO.: CV-23-00709368-00CL DATE: 20240403 SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL LIST

RE: C. HUNTER MILBORNE, MILBORNE REAL ESTATE INC., MILBORNE REALTY ADVISORS INC., AMANDACO02 INC. and TSURT HOLDINGS INC., Plaintiffs

AND:

ANDRZEJ KEPINSKI, 1021862 ONTARIO LTD., 1632842 ONTARIO LIMITED, KEPINSKI FAMILY TRUST, 2850427 ONTARIO LIMITED, 1000265903 ONTARIO INC., 2381827 ONTARIO INC., 2678514 ONTARIO INC., 2678517 ONTARIO INC., 2384212 ONTARIO INC., RALPH TERRIO, JANICE RASETA and NIAGARA GLOBAL DEVELOPMENTS LTD., Defendants

BEFORE: Penny J.

COUNSEL: Robert Thornton, Scott McGrath, Patrick Power, Allan Dick and Daniel Hamson for the Plaintiffs Duncan Boswell, Heather Fisher and Eunice Dapaah for the Defendants

HEARD: March 28, 2024

ENDORSEMENT

Overview

[1] Mr. Milborne and Mr. Kepinski are the shareholders of several companies whose main purpose is land development in Niagara Falls, Ontario. The two main projects are a land assembly in downtown Niagara Falls (the NFD project) and a Travelodge hotel and bird aviary, also in Niagara Falls (the NGD project).

[2] These two shareholders have had a falling out and cannot work together. Some of the properties which their companies own, or co-own with others, are subject to mortgages held by secured lenders and guaranteed by Mr. Milborne and Mr. Kepinski personally. Some of these loans are in default or have come due. Mr. Milborne and Mr. Kepinski cannot agree on what should be done. The situation is somewhat critical, as the secured lenders are poised to take enforcement action, which would likely have a detrimental effect on the parties’ plans for the development of the real properties in Niagara Falls they have acquired.

[3] Mr. Milborne seeks the court appointment of what is styled in the statement of claim and in the notice of motion as an “interim receiver” over Mr. Kepinski’s shares in the companies which own the projects. The plaintiff submits that only with control wrested from Mr. Kepinski will Mr. Milborne (working with the receiver) be able to refinance the companies’ debt and proceed with the development contemplated or explore a provident sale of the land holdings in a way that will maximize value to the stakeholders, including Mr. Milborne and Mr. Kepinski.

The Issues

[4] The parties disagree over the appropriate test to be applied for the appointment of a receiver in this case: whether it is the “just or convenient” test under s. 101 of the Courts of Justice Act or the RJR MacDonald test. The parties also disagree whether, in either case, the test has been met in these circumstances. Thus, the issues for determination on this motion are:

(1) what is the appropriate test to be applied to the appointment being sought; and, in any event,

(2) has the applicable test been met such that an appointment order should issue?

[5] For reasons I will explain below, I find that the applicable test is the RJR MacDonald test and that the appointment of a receiver over Mr. Kepinski’s shares is not, on the record presented, appropriate in the circumstances.

[6] Given the urgency of pending defaults under certain debt obligations, secured against the NFD project in particular, I have kept these reasons relatively brief in order to release my decision promptly.

Background

[7] Mr. Milborne and Mr. Kepinski formed a business relationship about 12 years ago. The primary focus of their business was the acquisition of real property in Niagara Falls, with the ultimate goal of selling the property to a developer or partnering with a third party to develop the lands themselves. There was no written agreement. Initially they each had an equal interest in the proposed developments. However, by 2019 Mr. Milborne had contributed $12.8 million to the business; Mr. Kepinski had contributed $2.8 million.

[8] Mr. Milborne became concerned about Mr. Kepinski’s apparent unwillingness or inability to contribute his share of the capital required for their plans. Mr. Kepinski had concerns of his own as well. The parties decided to enter into a memorandum of agreement (MOU) in March 2020 to address some of these concerns.

[9] Under the terms of the MOU, the parties’ ownership interest changed from the original 50/50 arrangement to 60% owned by Mr. Kepinski and 40% owned by Mr. Milborne. Mr. Kepinski was entitled to management fees in the amount of $300,000 per year, extending to the prior 7 years. Mr. Milborne was also entitled to management fees, but in an amount to be determined. As protection/incentive for Mr. Milborne’s share of the cash contributions, they agreed that a preferential rate of return of 15%, compounded annually would be paid, in priority to all other payments to Mr. Milborne and Mr. Kepinski, on the parties’ contributions. Further, in the MOU Mr. Kepinski specifically acknowledged that Mr. Milborne’s advances to March 2020 of about $12. 8 million “includes approximately $5.4 million advanced on behalf of” Mr. Kepinski. The MOU specifically provides that Mr. Milborne may, in his sole and unfettered discretion, determine whether or not to contribute additional funds on his own behalf or on behalf of Mr. Kepinski. The MOU does not address whether Mr. Kepinski has any obligation to contribute one way or the other; it is entirely silent on the point.

[10] The NGD, as noted, is a hotel and bird aviary. It generates about $1 million in net cash flow per year. Mr. Milborne and Mr. Kepinski each hold a 25% interest, through their holding companies. The other 50% is held by Mr. Terrio (25%) and Mr. Raseta (25%). The net cash flow from this property covers net lending and carrying costs; excess income is paid out by way of dividend to the shareholders in accordance with their respective interests.

[11] Last year, Mr. Kepinski, Mr. Terrio and Mr. Raseta wanted to sell this property and supported a transaction with a third party purchaser. Mr. Milborne opposed the transaction; he thought the purchase price was too low. Although he was given time to come up with a better offer, Mr. Milborne was unable to do so. Ultimately, however, the purchaser declined to close. The dispute remaining, as between Mr. Milborne and Mr. Kepinski only, is whether there was an oral agreement between them to use all dividends paid to them from NGD to support the NFD project. Mr. Milborne says they both agreed to this; Mr. Kepinski says they did not. Mr. Milborne used his dividend payments as a further contribution to the NFD; with one exception, Mr. Kepinski did not.

[12] The NFD project is a land assembly involving six contiguous city blocks near the future site of the Niagara University and other key tourist attractions in Niagara Falls. A ministerial zoning order was made in December 2022 applicable to the NFD lands that is said to have significantly increased their development potential and value.

[13] Some of the NFD lands are owned by companies jointly controlled by Mr. Milborne and Mr. Kepinski. Other lands are co-owned with other third parties. Mr. Milborne owns some portions through his own companies.

[14] Of significance in the present circumstances is that there are four secured lenders holding mortgages on NFD lands which in total exceed $12 million with a monthly carrying cost of over $150,000. The Dunn Capital loan of about $6.6 million is in default. Dunn has commenced default proceedings. Mr. Milborne’s company filed a defence and counterclaim. Mr. Kepinski’s company, which is also a mortgagor, has not yet defended this action. Mortgage payments on this loan are about $70,000 per month but no payments are currently being made.

[15] The Romspen loan is about $5.5 million. Mr. Milborne negotiated an extension of the maturity date of this loan. It came due on March 29, 2023. The monthly cost of this loan is about $55,000. Mr. Milborne is paying the carrying costs of this mortgage and paid the extension fee.

[16] There is also a loan from Quid Pro Quo Capital of about $2 million. The monthly cost of carrying this debt is about $26,000. This is paid by Mr. Milborne.

[17] Finally, the Celestial loan is also for about $2 million. This loan is in default; interest arrears owing on this loan exceed $800,000.

[18] In November 2023, Mr. Milborne commenced this action against Mr. Kepinski and his companies, asserting oppression under s. 248 of the OBCA and other causes of action including breach of contract, breach of fiduciary duty, conversion and unjust enrichment. The statement of claim is 60 pages long. The prayer for relief alone is 7 pages. Among other things, the claim seeks the appointment of a “receiver and manager and interim receiver and manager pending trial” over all of Mr. Kepinski’s beneficial interest in any corporations owning the NGD project and the NFD project.

[19] The notice of motion seeks, among other things, the appointment of B. Riley Farber “as interim receiver and manager” of Mr. Kepinski’s shares in the companies which directly or indirectly own the NDG project and the NFD project.

[20] The claim, in a “nutshell”, explains that Mr. Kepinski “has used fraud and deception to prey upon [Mr.] Milborne’s good nature”. Mr. Milborne seeks a forensic accounting to uncover the “true magnitude” of Mr. Kepinski’s misconduct “as well as a means to put an end to” Mr. Kepinski’s misappropriation of funds. It is alleged that Mr. Kepinski is insolvent and has misrepresented his personal net worth to others, including Mr. Milborne. The relief claimed is said to be “necessary to take control of” Mr. Kepinski’s assets, which are intermingled with the interests of Mr. Milborne, in order to preserve and protect Mr. Milborne’s investments and interests in their joint projects.

Analysis

What is the applicable test?

[21] The parties disagree on the applicable test for granting the order sought. This issue largely turns on the question of whether the receivership order sought is final or interlocutory.

[22] In Anderson v. Hunking, 2010 ONSC 4008, Strathy J. held that the test for the appointment of an interlocutory receiver is comparable to the test for interlocutory injunction relief as set out in RJR MacDonald. This requires:

(i) an assessment of the merits to ensure there is a serious issue to be tried;

(ii) a determination that the moving party would suffer irreparable harm if the motion is refused, where irreparable harm means harm not compensable by an award of monetary damages; and

(iii) an assessment of which party would suffer the greater harm from granting or refusing to grant the remedy pending a decision on the merits, i.e., the balance of convenience.

[23] In Hands-On Capital Investments Inc. v. DMCC Holdings Inc., 2023 ONSC 2417, Kimmel J. accepted and applied the Anderson approach. However, while the motion brought by the plaintiff in Hands-On was technically “interlocutory” in that it had been brought by notice of motion in the context of a wider application, the purpose of the receiver was to complete the winding up of the trust, which had already been initiated under a contractual authority granting the “right, authority and absolute discretion” to do so. On this basis, Kimmel J. concluded that the order being sought was final in nature. The receivership motion had to be viewed in the context of the status of the trust, “which is not operating and is in the process of being wound up.” The function of the receiver would be to carry out a particular function which would be “spent” once the wind up had taken place.

[24] The plaintiff advances a similar argument here. Although its claim seeks the appointment of an interim receiver pending the trial, and the notice of motion likewise seeks the appointment of an interim receiver, the plaintiff says he is really seeking the authority of the receiver to permanently take control of Mr. Kepinski’s shares, so that the receiver may, in conjunction with Mr. Milborne and the other investors, bring the projects to final fruition in some form.

[25] Notwithstanding counsel’s able arguments, I am unable to agree with the plaintiff’s position.

[26] This is a complex, wide ranging action. The fate of the NGD and NFD projects is but one of the issues in dispute. The language of the claim itself distinguishes between the appointment of a receiver and of an interim receiver pending trial. An interim receiver is precisely what the notice of motion has asked for. This is not a motion for partial summary judgment. The nature of the relief sought and the stage of the proceedings (no defence has been filed, no documentary or oral discovery has taken place) is such that, in the present context, the court could only grant interlocutory relief. This case is entirely unlike the Hands-On case where the very thing the receiver was being called upon to do would bring an end to the proceedings. That is simply not the case here. If the distinction between a final and interlocutory receivership order is have any meaning, it must be applied in these circumstances to conclude that the order sought is interlocutory. The RJR MacDonald test, not the “just or convenient” test, applies.

[27] As I will discuss below, however, it would not make any difference to the outcome either way.

Should an appointment order be made in the circumstances?

[28] As noted, the test for an interlocutory receivership is essentially the same as the three part test for an interlocutory injunction. However, as with the injunction example, the first branch of the test, the “merits”-base part, has a further gloss. Where the relief sought is in the nature of a Mareva order (that is, execution before trial and judgment), the merits test is elevated to the higher threshold of a strong prima facie case rather than a serious issue for trial. Strong prima facie case has been interpreted to mean, “likely to win”.

The Merits Requirement

What is the test?

[29] The plaintiff’s motion seeks to place control of Mr. Kepinski’s shares of his own corporations with a receiver appointed by the court; on the plaintiff’s theory, this would be for the duration of the proposed development or sale of the relevant projects. This appointment of a receiver is for the purpose of, and would have the effect of, depriving Mr. Kepinski of the benefits of his share ownership: the right to vote the shares, elect directors and officers etc.; and to receive dividends if declared. This is a form of execution before judgment: Ryder Truck Rental Canada Ltd. v. 568907 Ontario Ltd. (Trustee of) (1987), 16 C.P.C. (2d) 130, [1987] O.J. No. 2315 (H.C.). Therefore, the higher threshold, strong prima facie case, would apply. However, as will become clear in my analysis below, Mr. Milborne’s request would not meet either threshold for the merits-based requirement.

Has the merits requirement been met?

[30] Mr. Milborne and Mr. Kepinski have a disagreement about how the projects should be developed, who should contribute what amounts and what is owned by each to the other. Mr. Milborne’s chief complaint is that Mr. Kepinski has not contributed his “share” of the capital required to service the debt and other expenses necessary to advance the development projects. Mr. Milborne is unwilling to advance further funds without contributions from Mr. Kepinski. This creates a problem for the ongoing debt service and payment of other project-related expenses. Mr. Milborne alleges that Mr. Kepinski is insolvent and therefore incapable of making good on his obligations. [^1] In any event, he says, Mr. Kepinski has proved unwilling to contribute anything to support the projects. Mr. Milborne also complains that Mr. Kepinski has acted dishonestly and taken active steps to “sabotage” Mr. Milborne’s efforts to refinance critical components of the debt owing on the NFD project. The NFD project cannot be saved if this interference continues.

[31] The peculiar feature of the receivership request in this case is that it is not a receivership over Mr. Kepinski or his companies, nor is it a receivership over the development projects themselves (or the companies which own them). The only request is that the receiver take control of Mr. Kepinski’s shares in the corporations which directly or indirectly own the projects. Plaintiff’s counsel was unable to cite any precedent for this kind of relief; as far as they know, it has not been done before.

[32] The court’s remedial powers are not, of course, necessarily restricted to relief that has been granted by other courts in other circumstances. But what is especially unusual about the relief sought here is that the plaintiff asserts no legal or beneficial interest in Mr. Kepinski’s shares. The plaintiff is seeking the appointment of a receiver over property in which he has absolutely no legal or beneficial interest.

[33] The overarching objective of the appointment of a receiver is to enhance and facilitate the preservation and realization of a debtor’s assets, for the benefit of all creditors: Canadian Equipment Finance and Leasing Inc. v. The Hypoint Company Limited, 2022 ONSC 6186, para. 22. In exercising this extraordinary power, 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 to that property: Hypoint, para. 23; see also Bank of Nova Scotia v. Freure Village of Clair Creek (1996), 40 C.B.R. (3d) 274.

[34] Here, the plaintiff is not seeking to preserve or realize on Mr. Kepinski’s shares. He claims no interest, title or right in them. Mr. Milborne simply wants control over those shares taken away from Mr. Kepinski so that Mr. Kepinski can no longer “interfere” with what Mr. Milborne wants to do regarding the development projects.

[35] The MOU imposes no express obligation on Mr. Kepinski to advance funds to the projects commensurate with his 60% interest. It is hard to read the MOU as implying such an obligation either. At its highest, there is a recognition that Mr. Milborne’s contributions significantly exceeded those of Mr. Kepinski and that Mr. Milborne’s contributions included about $5.4 million advance “on behalf of” Mr. Kepinski. The 15% compounding priority return on the parties’ contributions is an express recognition of Mr. Milborne’s disproportionate contributions and his entitlement to compensation for those contributions. Further, the MOU makes clear that Mr. Milborne is under no obligation to make any contributions to the development projects. All of this is strongly suggestive of the conclusion that Mr. Kepinski has no ongoing obligation to contribute further capital to the projects either.

[36] These features of the relief sought in the context of the parties’ relationship and the nature of their dispute drive me to the conclusion that the request for the appointment of a receiver over Mr. Kepinski’s shares is neither supported by a strong prima facie case nor a serious issue for trial.

Irreparable Harm

[37] There is no evidence that Mr. Milborne will suffer irreparable harm if the request for the appointment of a receiver is not granted. He stated in cross examination that he has a “Plan B”. It is also clear that this dispute is all about money.

[38] On this record, there is no basis to conclude that there is any irreparable harm.

Balance of Convenience

[39] The balance here involves an assessment of the harm that will be suffered if the appointment is not made versus the harm that will be suffered if it is.

[40] The facts clearly demonstrate that these two men are in a serious business dispute. There are contractual obligations engaged, as well as duties of a fiduciary nature and allegations of conversion and unjust enrichment. The claim is in the early stages; there is no statement of defence and no oral or documentary discovery.

[41] When shareholders cannot work together, the almost universal remedy is, one way or another, a shareholder/corporate divorce. If they cannot agree on a viable path forward, or a means of parting company through a business solution, the ultimate remedy may be a court-ordered buy-out or a winding up.

[42] If the elimination of a warring shareholder’s right to disagree with the plans of another warring shareholder for the future of their jointly owned corporation could be achieved by the simple expedient of an interlocutory order appointing a receiver over that shareholder’s shares, it is hard to imagine a case involving a shareholder dispute in which this remedy would not be sought.

[43] I agree with the defendant that it is not appropriate to appoint an interim receiver on the basis that the parties have a business dispute. In 1324789 Ontario Inc. v. Marshall, 2019 ONSC 517, the court declined relief on this basis, noting that the moving party failed to provide “any case law in which a receiver was appointed to manage a commercial enterprise solely because the principals had had a falling out and could no longer work together”. That is the case here as well.

[44] The very reason that Mr. Milborne has not sought the appointment of a receiver over the development projects, or over Mr. Kepinski and his corporations, is the likely impact a receivership would have on the marketing and realizable value of the projects and the properties. Mr. Milborne is looking for the narrowest receivership possible that will still achieve the desired end of eliminating Mr. Kepinski from the equation. There is no evidence, nor is there any reason to conclude, however, that the “taint” of a receivership (especially given the ongoing disputes and litigation that would no doubt dog every report and recommended action by the receiver as events unfold) would not still infect the prospects for maximizing value in relation to these developments. Mr. Milborne is simply taking a calculated risk in this regard.

[45] In my view, the balance of convenience favours not granting the appointment order requested.

Just or Convenient

[46] Even if the appropriate test were not RJR MacDonald but “just or convenient”, I would have reached the same conclusion. The real problem is that Mr. Milborne does not want to put in more money without further contributions from Mr. Kepinski. However, under the terms of the agreement reached by these parties in March 2020 (however inadequate, with the benefit of hindsight), it appears that neither Mr. Milborne nor Mr. Kepinski is under a contractual obligation to advance more funds. This creates a big problem for the NFD project in particular. The remedy of a receivership is being sought, not to enhance and facilitate the preservation and realization of Mr. Kepinski’s assets for the benefit of all creditors, but to eliminate him (or severely restrict his scope for action) as an opponent in the business dispute these parties are involved in.

[47] On the facts presented in this record, I am not prepared to conclude that the appointment of a receiver for this purpose is just or convenient. Whatever remedies might be available to deal with the current problem, the appointment of a receiver in the form requested is not one of them.

Conclusion

[48] For the forgoing reasons the motion for the appointment of a receiver over Mr. Kepinski’s shares is dismissed.

Costs

[49] Mr. Milborne submitted a cost summary for about $94,000, partial indemnity. Mr. Kepinski submitted a cost summary for about $205,000, partial indemnity.

[50] I have considered the factors outlined in Rule 57 including the important considerations of the costs that the losing party might reasonably expect to pay and the conduct of the parties. In dismissing the plaintiff’s motion, I am not, and should not be taken as, indicating that Mr. Milborne’s concerns are without merit. It does appear as if Mr. Kepinski has proven unnecessarily difficult, especially given his limited financial contribution and other behaviours which are, to say the least, very concerning. I am simply determining that the specific remedy sought on this motion is not, as a matter of law, available or appropriate in the circumstances.

[51] I award Mr. Kepinski costs of $90,000 payable at the conclusion of these proceedings, when the allegations asserted in the claim have been dealt with on their merits and all other cost awards have been made.

Penny J. Date: April 3, 2024

[^1]: A great deal of time was spent in the written material and in oral argument on trying to prove or disprove Mr. Kepinski’s insolvency. Given his steadfast refusal to contribute funds to the development projects, it was never clear why it mattered whether this was because he was insolvent or just unwilling to put in more money. Counsel for the plaintiff was unable to provide any satisfactory answer to my questions in this regard. For the purposes of this endorsement, I find it is unnecessary to make any finding on this particular point. The important fact, not in dispute, is that Mr Kepinski has not made any material cash contribution after his initial $2.8 million and has provided no evidence of his willingness, or ability, to do so.