Ontario Superior Court of Justice

Court File No.: CV-24-95643
Date: 2025/03/18

Application under section 243(1) of the Bankruptcy and Insolvency Act, RSC 1985, c B-3, and section 101 of the Courts of Justice Act, RSO 1990, c C.43

BETWEEN:

V2 Investment Holdings Inc.
Applicant

– and –

Sam Mizrahi, Mizrahi Development Group (1451 Wellington) Inc., Mizrahi Developments Inc., and 2659100 Ontario Inc.
Respondents

Applicant Counsel: Gordon Capern and Ryan Shah
Respondent Counsel: Steven J. Weisz and W. Michael G. Osborne

Heard: November 26, 2024 (Ottawa)
Released: March 18, 2025

Justice Charles T. Hackland

Overview

[1] In this Application, V2 Investment Holdings Inc. (the “Lender”) seeks judgment in respect of a $12.9 million loan made to the Respondent Sam Mizrahi (“Mr. Mizrahi” or the “Borrower”) in October 2019 (the “Loan”). The Loan, which was guaranteed by corporations related to the Borrower, matured on December 31, 2023. The Borrower failed to repay the loan by the maturity date, or since. These facts are not in dispute. The Lender seeks judgement for the amount due under the loan. For the reasons explained below, the Lender is clearly entitled to judgement for this liquidated debt.

[2] The Loan provided bridge financing for the borrower’s condominium development at 1451 Wellington Street in Ottawa (“the Project”), which is currently undergoing construction. This property is owned by WellingtonCo, a company owned by the Borrower. The Project is a mixed-use midrise condominium development known as “1451 Wellington – The Residences at Island Park Drive”. The Project is currently under court protection pursuant to an order of this court under the Companies' Creditors Arrangement Act (CCAA), which is dated October 15, 2024.

[3] The Borrower, while not disputing the amount due under the loan, alleges that the Lender, subsequent to the maturity of the loan, acted in bad faith by breaking an alleged promise to refrain from registering a mortgage charge on title to the Property on which the Project is being constructed, and in failing to enter into an inter-creditor agreement with the Project’s senior secured lender which would have subordinated the Lender’s security interest in the Property. This is said to have caused damages, or potential damages, to the Borrower and led to the CCAA application. It is argued such additional costs or losses should constitute an equitable set off against the judgement debt. The Borrower seeks an order converting this application to an action in which he can establish his allegations of equitable set-off.

Project Financing

[4] Prior to the CCAA proceedings, encumbrances on the property included:

(a) a mortgage held on behalf of Trez Capital Limited Partnership (“Trez”), as lender, in the amount of $68,000,000, registered on October 29, 2019 (the “First Trez Mortgage”);

(b) a mortgage in favour of Westmount Guarantee Services Inc. in the amount of $24,000,000, registered on October 29, 2019; and

(c) a further mortgage held on behalf of Trez, in the amount of $6,000,000 registered on December 1, 2021 (“the Second Trez Mortgage”).

[5] On or around October 31, 2019, the Borrower and the Lender entered into a loan agreement (the “Loan Agreement”) which contemplated the loan herein by the Lender (the applicant herein, owned by Henry Wolfond) to the Borrower, in the amount of $12,900,000, all of which has been advanced.

[6] The Loan, including any outstanding interest, was initially repayable in full on October 31, 2022 (the “Maturity Date”). Prior to the Maturity Date, the rate of interest applicable to the Loan was 10%, compounded annually and payable monthly in arrears. Following the Maturity Date, the interest rate became 16%.

[7] The Loan was secured by a demand debenture granted by WellingtonCo in favour of the Lender (the “Debenture”). Among other things, the Debenture granted a charge over the Property in favour of the Lender (the “V2 Mortgage”).

[8] Article 8.01(1) of the Loan Agreement provided that, among other things, the V2 Mortgage and other Security (as defined in the Loan Agreement) would not be registered on title to the Property until there was a default under the Loan.

[9] The purpose of this restriction was to protect WellingtonCo’s ability to complete the Project. Specifically, under article 9.2 of the First Trez Mortgage, WellingtonCo agreed that it would not permit the registration of any other encumbrances against title to the Property without the consent of Trez. As such, the registration of a further charge on title to the Property would put WellingtonCo in default of its obligations under the First Trez Mortgage – unless Trez consented in advance to the registration.

[10] It was specifically provided in the Loan Agreement that in the event of default the Lender may register any or all of the security on title to the property. However, the agreement also imposed a best-efforts obligation to obtain the consent of the senior mortgagees: section 8.01(1) provides:

(b) in the event of a continuing default under the Loan Agreement, the Borrower and WellingtonCo shall use best efforts to obtain the consent of the senior mortgagees to the registration of the Security on title to the Property (though such consent shall not be a condition to the registration of the Security).

Defaults: Additional Registrations and Indebtedness

[11] In June 2022, the Borrower failed to make his monthly interest payments under the Loan and advised the Lender that he would be unable to repay the Loan in full when it came due. The Borrower did not repay the loan in full on the Maturity Date of October 31, 2022, as required by the Loan Agreement.

[12] On March 31, 2023, the Borrower and the Lender entered into an amending agreement which, among other things, extended the Maturity Date of the Loan to December 31, 2023 (the “Amending Agreement”) and retroactively revised the schedule of monthly interest payments to be made by the Borrower through to December 2023. Notwithstanding the extension, the Borrower again failed to repay all amounts due under the Loan when it came due on the amended Maturity Date (on December 31, 2023), in breach of the Loan Agreement, as amended.

[13] From March 2023 through May 2024, the Borrower continued to make required monthly interest payments. However, starting in June 2024, the Borrower stopped making interest payments to the Lender. This represents a further act of default by the Borrower.

[14] Furthermore, on December 1, 2021, WellingtonCo granted the Second Trez Mortgage to Trez, without the Lender’s consent. Pursuant to the Second Trez Mortgage, WellingtonCo incurred additional debt to Trez, above WellingtonCo’s then existing $68 million indebtedness to Trez to fund construction of the Project. This constituted a default under the Loan Agreement.

Negotiations

[15] Following the extended Maturity Date of the Loan under the amending agreement (December 31, 2023), the loan remained in default (and continues in default). At this point the Lender and the Borrower (in particular, Mr. Wolfond and Mr. Mizrahi) engaged in negotiations concerning a potential second amending agreement and an intercreditor agreement between the Lender and Trez (which would have facilitated the Lender’s registration of the V2 Mortgage on title to the Property while preserving priority for amounts being advanced under the Trez mortgage).

[16] As matters transpired the Lender and Borrower never reached an agreement to further amend the Loan Agreement nor did the lender enter into a standstill and intercreditor agreement with Trez. Mr. Wolfond and Mr. Mizrahi were never able to agree on the terms for such agreements although protracted continuing negotiations were carried out concerning these issues, with the active involvement of their respective lawyers.

[17] Mr. Misrahi’s position on this application is that the Lender agreed, in a private meeting or dinner on March 3, 2024, to enter into these agreements and then, acting in bad faith, reneged on his promise, and proceeded subsequently to register the V2 Mortgage on title to the property. Once that occurred the construction lenders were forced to take steps to put the Project into receivership to maintain priority for future advances. What actually happened, as matters transpired, was that WellingtonCo. sought creditor protection under the CCAA as a means to facilitate completion of the Project by securing “DIP” financing and ensuring priority for the construction lenders’ further advances. Mr. Misrahi speculates this course of events would not have been necessary had the Lender entered into a standstill and intercreditor agreement with Trez. Mr. Mizrahi argues these additional legal proceedings will inevitably add costs to the project, will complicate the marketing of the condominium units and will inevitably reduce his profits on the project.

[18] The communications before the court, in the form of text messages between Wolfond and Misrahi and their lawyers, confirm that issues under discussion following their March 2024 meeting, were Mr. Wolford’s announced intention to register a mortgage on title to the Project as security for the Loan pursuant to his entitlement under the loan agreement and debenture, and also whether yet another extension of the loan agreement could be worked out and on what terms. There were negotiations focused on the signing of a standstill and intercreditor agreement with Trez, the purpose of which was to permit registration of the Lender’s V2 mortgage without jeopardizing the Project’s financing. In other words, such an agreement between the Lender and Trez would be required to ensure Trez’s continuing priority for its ongoing advances to finance the completion of the Project.

[19] On April 15, 2024, with the Borrower having failed to obtain Trez’s consent to the registration of the Lender’s mortgage, the Lender proceeded to register the V2 Mortgage on title to the Property as it was entitled to do under the terms of the Loan Agreement.

[20] The record of correspondence between Mr. Wolfond and Mr. Misrahi and their respective lawyers suggests that Mr. Misrahi conducted himself as if there was no such binding agreement between them. In particular, the text messages show that Mr. Misrahi and Mr. Wolfond were engaged in an extensive back-and-forth about the terms of potential amending and intercreditor agreements, with proposals being consistently negotiated and revised through April 2024, without any definitive consensus being reached, either before or after the registration of the V2 Mortgage on title to the Property on April 15, 2024. Importantly, these ongoing and ultimately inconclusive negotiations occurred after March 3, 2024, the date that the Borrower and the Lender are alleged to have formed a conclusive agreement.

[21] Following the registration of the V2 Mortgage on title to the Property, the Borrower continued his efforts to have Mr. Wolfond sign an amending agreement for the Loan, all of which were explicitly rejected by Mr. Wolfond. This course of conduct between Mr. Misrahi and Mr. Wolford shows that neither of them believed they had formed a binding agreement. For example, on April 18, 2024, when the Mr. Misrahi sent Mr. Wolfond a copy of his proposed amending agreement for Mr. Wolfond’s consideration, Mr. Wolfond replied to say it was “totally unacceptable.”

[22] In the court’s view, the evidence does not support Mr. Misrahi’s claim that he and the Lender (Mr. Wolfond) entered into a binding agreement to further extend the term of the Loan or to the terms of any standstill agreement with Trez. Rather, they disclose continued negotiations concerning a prospective agreement which was never concluded. In the final analysis, the Lender is putting forward in this application a claim on a liquidated debt in the sum of $12.9 million, the terms of which are not in dispute and which is admitted to be owing. There is no doubt the funds in question have been advanced and the loan has remained in default since maturity. The lender and the borrower have not arrived at any agreement to vary or waive the Lender’s rights on default, notwithstanding negotiations between them, assisted by their respective lawyers.

Interest Calculation

[23] As set out in section 4.01 of the Loan Agreement, following maturity of the Loan on December 31, 2023, the interest rate increases from 10 to 16%. While the Lender accepted 10% interest from the Borrower from the period of January 2024 to May 2024, Mr. Wolfond advised Mr. Misrahi he would continue to accept interest at the rate of 10% so long as the borrower continued to make the interest payments. Beginning in June 2024, and continuing through October 2024, the Borrower ceased to pay interest under the Loan. As a result of this default, the Lender is entitled to 16% interest from the date of default in paying interest payments, (i.e., from June 2024). There is no evidence to support an obligation to pay retroactive interest of 16% calculated from any time prior to the default in paying monthly interest.

Bad Faith

[24] Mr. Mizrahi’s principal defence to the loan debt on this Project is that Mr. Wolfond extended numerous accommodations to the Borrower over the course acted in bad faith by indicating he would sign an amending agreement to once again extend the term of the Loan and he would sign a standstill and intercreditor agreement with Trez at the time of registering the V2 mortgage on the property, allegedly providing these assurances to Mr. Mazrahi at a private meeting on March 3, 2024.

[25] As noted above, there is clear evidence before the court that Wolfond and Misrahi negotiated at length and through their lawyers about these two issues and did not come to an agreement that they were both prepared to sign. There was no trickery or apparent bad faith in any of this. Mr. Wolfond extended several accommodations to the Borrower, even after default on the extended term of the Loan, such as an interest rate reduction and a modified or “skinny” postponement arrangement to allow some trade creditors to be paid. The negotiations reflected an effort on Mr. Wolfond’s part to obtain some further consideration or added security in regard to the accommodations Mr. Mazrahi was seeking. He was open about this and the request could hardly be said to be unreasonable given the borrowers continuing default and the obvious increased risk of non-payment. This is not unusual or unreasonable or evidence of bad faith.

[26] The Borrower relies on the principle of honest performance as reflected in such Supreme Court decisions as C.M. Callow Inc. v. Zollinger, 2020 SCC 45 and Bhasin v. Hrynew, 2014 SCC 71. These cases have determined there is a duty on contractual parties to exercise contractual discretion in good faith and to not engage in dishonesty. In particular there is a duty to exercise discretion under a contract in a manner connected to the purpose for which the discretion was given. I do not see any contravention of that principle on the facts in the present case.

[27] This was a negotiation between a sophisticated and experienced real estate developer and a commercial lender, each working through lawyers, dealing with the ongoing financing needs in a troubled Project. The Loan documentation specifically allowed the Lender to register a mortgage on title to the property in the event of default. It can not be said the Lender acted unreasonably or for an ulterior purpose in so doing. Not all negotiations come to fruition. This negotiation did not. Whether this turns out to be a profitable Project remains to be seen. The Borrower may not have suffered any financial loss.

[28] The Borrower also sought to bring up another project of his, at 128 Hazelton Avenue in Toronto and also in receivership, in which one of Mr. Wolfond’s companies purchased a unit. The suggestion is that possibly Mr. Wolfond may have a hostile animus toward Mr. Misrahi due to something connected with this Toronto project which may have affected the negotiations in the present case. I find this line of inquiry to be patently irrelevant and devoid of any evidentiary foundation and was not put to Mr. Wolfond in cross examination. Moreover, the borrower’s affidavit addressing this issue was delivered late and in contravention of Rule 39 and will not be admitted.

Disposition

[29] This application is allowed, judgement is granted in respect of the Loan herein against Sam Mizrahi, Mizrahi Developments Inc. and 2659100 Ontario Inc. on a joint and several basis in the sum of $14,361,576.02 (as of February 28, 2025) together with any additional unpaid interest accrued to the date of this judgement, calculated in accordance with the court’s reasons herein and thereafter at the rate of 16% from the date of this judgement, payable forthwith to the applicant.

[30] The parties will submit a draft judgement with the requisite interest calculations forthwith and in the event of disagreement on any issue concerning the interest calculations or the form of the judgement, counsel may schedule an appointment before me, through trial co-ordination.

[31] The applicant is to serve its costs submission within two weeks of the release of the order and the respondents may reply with their submission within 2 weeks of receiving the Applicant’s submission.

Justice Charles T. Hackland
Released: March 18, 2025