Court File and Parties

COURT FILE NO.: CV-24-00713069-00CL DATE: 2024-07-19 ONTARIO - SUPERIOR COURT OF JUSTICE – COMMERCIAL LIST

IN THE MATTER OF COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED

AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF 2039882 ONTARIO LIMITED o/a SHELTER COVE

RE: 2039882 Ontario Limited, Applicant

BEFORE: Peter J. Osborne J.

COUNSEL: Jessica Wuthmann and Sharon Kour, for the Applicant Domenico Magisano and S. Jones, for KHL Investments USA Inc. R. Graham Phoenix, for Northpoint Commercial Finance Canada Inc. Patrick Corney, for Envirosearch Haddon Murray, for Basic Holdings Limited Kristi M. Ross and Adrienne Ho, Counsel to the Proposed Receiver Michael Shakra, Counsel to the Monitor, PwC David Filice, Proposed Receiver

HEARD: July 19, 2024

Endorsement

[1] KHL Investments USA, Inc. (“KHL”) seeks an order appointing The Fuller Landau Group Inc. as Receiver without security over the Property of the Company and real property at 38 Cheapside Rd., Selkirk, ON. KHL is both the senior secured lender, and the DIP Lender.

[2] The Company operates as Shelter Cove and owns and operates a land lease community in Selkirk consisting of 389 lots, of which approximately 160 have been serviced and leased to the Residents who have purchased modular homes installed on the lots. Many of those Residents are present in Court today and I recognize the importance of these matters to them and their community.

[3] KHL relies upon the affidavit of Martin Brodigan sworn July 17, 2024, together with exhibits thereto, as well as the Pre-Filing Report of the Proposed Receiver dated July 18, 2024.

[4] The Company relies on the affidavit of Mario Bevacqua sworn July 18, 2024 together with exhibits thereto. As confirmed at the hearing of this motion by counsel to the Company, the Company takes no position on the relief sought by KHL and counsel advise that they are not instructed to consent or oppose in the circumstances. Mr. Bevacqua is the sole director and officer of the Company.

[5] However, both Mr. Bevacqua and Mr. Barry Racippo were present in Court and advised that they, and each of them, in their respective personal capacities, were requesting an adjournment of the motion in order that they could have additional time to consider their positions. They filed an affidavit from Derek McNamara sworn July 17, 2024. Mr. McNamara, a retired barrister and solicitor (permission to resign granted by the Law Society) is a financial consultant. Messrs. Bevacqua and Ricippo are guarantors of the indebtedness owed by the Company to KHL. KHL opposes the request for an adjournment, as does the Monitor.

[6] In addition, Northpoint Commercial Finance Canada Inc. (“Northpoint”) brings a motion for an order lifting the stay of proceedings for the purpose of permitting Northpoint to access and repossess four prefabricated modular home units in the possession of the Company and on-site but currently unused, unserviced and unoccupied. No party opposes the relief sought by Northpoint.

[7] The Court-appointed Monitor has also filed the Fifth Report dated July 18, 2024. In the circumstances, the Monitor supports the relief sought by KHL.

[8] Defined terms in this Endorsement have the meaning given to them in the motion materials and/or the Fifth Report of the Monitor, and/or the Pre-Filing Report of the Proposed Receiver.

[9] Having heard from all affected parties, I declined the request for an adjournment and granted the relief sought by KHL and Northpoint. In my view, and in the particular if somewhat unique circumstances of this case, there was little practical alternative.

[10] The Company sought and was granted protection under the CCAA on January 18, 2024. The Court subsequently approved a SISP. Unfortunately, the SISP did not yield any Qualified Bid, and while the Company continued to market the Property for sale, it has not received any bid that, according to the Monitor, is capable of closing.

[11] The Company and therefore the Shelter Cove community, does not receive municipal services with the result that it owns a sewage treatment plant and a water treatment plant operated by Envirosearch. The evidence is to the effect that both plants are in a state of disrepair. In fact, presently the Company is trucking in potable water for residents and trucking out raw sewage.

[12] The simple yet fundamental reality is that the current stay of proceedings expires today. I observe that there is no motion before me for an extension of that stay. The Company submits candidly that in the circumstances, it is not in a position to seek an extension of the stay or indeed a continuation of the CCAA proceedings.

[13] Moreover, the DIP Facility expires in one week and the DIP Lender has confirmed that it is not prepared to extend the DIP Facility. I pause to observe that the DIP Facility is largely drawn down in any event. All of this yields the practical result that there is no funding available to continue operations of the Company or a restructuring proceeding. There is no Plan of Arrangement, nor is there even any germ of a plan.

[14] In my view, an adjournment of this matter would not be in the interests of the residents of the community generally. There is no funding to continue operations, even for a short period of time. Adjourning the motion for the appointment of a receiver, in circumstances where the current stay of proceedings under the CCAA expires and there is no available DIP financing, would lead to chaos, the possibility of multiple proceedings, and complete disruption to the lives and homes of the residents.

[15] Moreover, KHL confirms that no relief is being sought today, and indeed, none is granted, as against the guarantors in their respective capacities as such.

[16] Accordingly, and weighing all of the factors, I denied the adjournment request.

[17] For many of the same reasons as described above, I granted the receivership.

[18] The parties appeared on July 3, 2024 at a case conference on which date I scheduled the return of this motion for today, which KHL indicated it would be bringing.

[19] As noted above, the SISP did not yield a Qualified Bid, with the result that KHL was authorized to complete the transaction contemplated by its own credit bid. The indebtedness of the Company to KHL has been in default since July, 2023. Subsequent negotiations about a forbearance agreement were not successful.

[20] One of the reasons for allowing that period of approximately two weeks for the hearing of this motion was that on July 3, 2024, the Company was in negotiations with MILP, and the Company was optimistic that it might be able to complete negotiations, such that MILP could provide a viable offer. That did not occur, and on July 15, 2024, counsel for the Company advised that MILP had withdrawn its offer.

[21] Accordingly, KHL seeks the appointment of the Receiver today.

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

[23] 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 CanLII 8258 (“Freure Village”).

[24] 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.

[25] As set out 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.

[26] 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).

[27] 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. See also Freure Village at para. 10.

[28] Where the conduct of the debtor has led directly to a receivership application, the Court should place limited to no weight on objections from the debtor as to whether a receivership is the best remedy for the secured creditor: GE Commercial Distribution Finance Canada v. Sandy Cove Marine Co., 2011 ONSC 3851 at para. 23.

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

[30] In my view, it is.

[31] The security granted by the Company to KHL in this case expressly provides that upon default, KHL is entitled to appoint a receiver.

[32] The Monitor has confirmed that it will be seeking a termination of the CCAA Proceeding and a discharge of the Monitor, in the very near future following a brief period to facilitate a transition to a receivership, which, as noted above, the Monitor does not oppose.

[33] Courts have terminated CCAA proceedings and appointed receivers where the CCAA proceeding will not result in a restructuring that in turn will yield a beneficial outcome to both the debtor and creditors, and where the creditors have lost faith in the ability of the debtor to run its business, as is the case here: Canadian Imperial Bank of Commerce v. Community Pork Ventures Inc., 2005 SKQB 294 and General Electric Capital Canada Inc. v. Euro United Corp., 1999 CanLII 14848 (ONSC).

[34] The overall intent of KHL is to complete a credit bid with the Receiver as soon as practicable, having lost faith in the current management of the Debtor.

[35] Of paramount importance is the continuation of services to the residents, which involve on an interim basis the trucking in of water and the trucking out of sewage, and the repairs to the treatment plants which are ongoing, with the support of Envirosearch (indeed, repairs will be made this weekend, with funding from KHL and work by Envirosearch).

[36] Regrettably, the CCAA has not yielded a long-term solution to the water and sewage treatment issues, and nor has a suitable buyer capable and funded to close the transaction been identified. I am satisfied for these reasons, together with the immediate imperative of the expiry of the stay of proceedings and the lack of DIP financing, that it is not only just or convenient, but just and convenient that a Receiver be appointed.

[37] The Fuller Landau Group is qualified to act as a Receiver, has no disqualifying conflict of interest and has confirmed its consent to act in such a capacity.

[38] The appointment will stabilize the community and address the issues noted above, while providing funding as necessary for receiver certificates with a view to completing the KHL agreement of purchase and sale.

[39] The draft receivership order is consistent with the Model Order of the Commercial List. While not determinative of the issue, that is of assistance to me in concluding, having reviewed all of the evidence in the record, that the terms and scope of the proposed receivership are appropriate.

[40] I have also advised the Receiver that the Court expects it to maintain excellent communications and dialogue with the residents to keep them apprised of what is occurring with respect to their community.

[41] The relief sought by Northpoint is unopposed. While the repossession of the four modular home units represents in practical terms, execution, there is no opposition, the units are unserviced and unoccupied, and are simply physically sitting on the site unused. Northpoint recognizes its obligation to report back to the Receiver with respect to the units and any proceeds thereof, and will fulfil that obligation.

[42] For all of these reasons, I have signed the receivership order and the Northpoint order, both of which are effective immediately and without the necessity of issuing and entering.

Osborne J.