Reasons for Judgment

Court File No.: CV-23-32020
Date of Release: 2025-04-17
Ontario Superior Court of Justice

Between:
Farm Credit Canada (Applicant)
– and –
Kapital Produce Ltd., Kapital Produce (2000) Inc., Kapital Produce (2006) Ltd., and M.O.S. Enterprises Limited (Respondents)

Appearances:
C. Burr, for the Applicant
M. Shulgan, S. Marentette, and A. Chaudhry, for the Respondents

Heard: November 15, 2024

Justice: Jacqueline A. Horvat

Overview

[1] Farm Credit Canada (“FCC”) brings an application solely for the appointment of a receiver, without security, of all the assets and undertakings of the respondents, Kapital Produce Ltd., Kapital Produce (2000) Inc., Kapital Produce (2006) Ltd. and M.O.S. Enterprises Limited (collectively, the “Debtors”), pursuant to s. 243 of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (“BIA”), and s. 101 of the Courts of Justice Act, RSO 1990, c C.43.

[2] The Debtors owe FCC approximately $12.2 million under a credit agreement. FCC asks that a receiver be appointed because of numerous alleged events of default under the credit agreement and because it is just and convenient to do so. The Debtors deny that any actionable events of default occurred. They argue that the assets held by FCC as security are of a significantly greater value than the debt owed to it and appointing a receiver who would cause a forced sale is neither just nor convenient in these circumstances.

[3] For the reasons that follow, I agree with the Debtors that it is not just or convenient in the circumstances of this case to appoint a receiver. The application is dismissed.

Background

[4] The Debtors are privately-owned corporations, incorporated under the laws of the Province of Ontario. The Debtors carry on business as growers of greenhouse vegetables in two large hydroponic commercial greenhouses located in Kingsville, Ontario (the “Premises”). The greenhouses comprise 90 acres and are valued at approximately $80 million collectively. Ollie Mastronardi is the director and officer of each of the Debtor companies.

[5] FCC is a financially self-sustaining Federal Crown corporation that reports to Parliament through the Minister of Agriculture and Agri-Food. FCC is required by parliamentary directive to only do business with individuals and businesses that demonstrate personal integrity. It is mandated to be committed to partnerships based on complete disclosure in all respects of its borrowers’ business and the impacts of FCC’s partnerships on the reputation of federal government institutions.

[6] Since 2007, FCC has made several loans to the Debtors pursuant to various credit agreements. These loans were used by the Debtors to fund operating costs, equipment acquisitions and construction projects. The most recent arrangement between FCC and the Debtors is found in a credit agreement dated February 21, 2019 (the “Credit Agreement”). FCC is the senior secured lender of the Debtors, holding first ranking security over all the Debtors’ present and after-acquired real and personal property.

[7] The Debtors fulfilled their payment obligations to FCC until FCC stopped accepting payments from the Debtors, as described below. Over the years, the Debtors paid interest on their loans and paid $22 million in principal payments, reducing their debt from $34 million to approximately $11.6 million.

[8] As of the date of the hearing of this application, the aggregate outstanding debts and obligations of the Debtors to FCC amounts to approximately $12.2 million, with interest continuing to accrue (the “Indebtedness”). The Indebtedness under the Credit Agreement is secured by a comprehensive collateral package (the “Collateral”), which includes the following:

• a continuing collateral mortgage dated May 2, 2011 against real property owned by the respondents, Kapital Produce Ltd. and M.O.S. Enterprises Limited, granted in favour of FCC; and
• general security agreements granted by the Debtors in favour of FCC over all present and after-acquired property.

[9] In 2021, the Debtors leased the use of their greenhouses to cannabis growers from the Niagara region. The portions of the greenhouses the Debtors leased were, at the time, surplus to the Debtors’ needs. Those growers produced copies of licences that they stated were in the process of being transferred by Health Canada from a Niagara operation to permit use of the Debtors’ greenhouse facilities. These tenants made improvements to the greenhouses, estimated to have been between $2-5 million, increasing the value of the greenhouses, according to the Debtors. During the lease, the Debtors continued to produce vegetables in the greenhouses separate from the cannabis growers. The Debtors did not advise FCC that a portion of the Premises were being leased to a third party.

[10] On July 7, 2022, it was reported in the media that on June 28, 2022, the Ontario Provincial Police Joint Forces Cannabis Enforcement Team executed two search warrants at the Premises and seized more than 45,000 illegal cannabis plants, or 8 tons of processed illegal cannabis, estimated to be worth more than $61 million (the “Raid”). FCC learned of the Raid from the newspaper and not from the Debtors.

[11] Prior to the Raid, one of the greenhouse leases was terminated by the Debtors, and, at the time of the Raid, the Debtors were in the process of terminating the second greenhouse lease because it did not appear that the tenants would keep rent payments current.

[12] In September 2022, Mr. Mastronardi and another principal of the Debtors were each charged with drug-related criminal offences resulting from the Raid. The Ontario Provincial Police also registered Management and Restraint Orders against the assets of the Debtors, which effectively forbade any third party to provide additional funds to the Debtors because those lenders would not have security over the Debtors’ assets.

[13] On September 20, 2022, FCC sent a letter to the Debtors (the “Default Notice”) that enumerated eight alleged events of default and formally noted the Debtors in default. The Default Notice also advised that FCC was not accelerating the loan or taking enforcement steps and that FCC was prepared to enter into a time-limited forbearance agreement, provided that the Debtors met two conditions to FCC’s satisfaction: providing proof of insurance for the Collateral and disclose the source of funds used for debt service payments (the “Disclosure Conditions”). FCC acknowledges that prior to the Raid, it had no reason to be suspicious of the source of funds of the Debtors’ payments.

[14] The Debtors continued to pay installments to FCC after receiving the Default Notice.

[15] On November 10, 2022, FCC demanded repayment of the Indebtedness and issued notices of intention to enforce security with respect to each Debtor pursuant to s. 244 of the BIA and notices of intent by secured creditor pursuant to the Farm Debt Mediation Act, SC 1997, c 21 (the “Demand Letter”). FCC in the Demand Letter alleged additional events of default and that the Debtors were in breach of covenants contained in the Credit Agreement.

[16] In December 2022, the Director of Federal Prosecutions confirmed that it would revoke the Management and Restraint Orders and withdraw the criminal charges against Mr. Mastronardi and the other principal.

[17] In January 2023, the criminal charges were formally withdrawn, and the Management and Restraint Orders were revoked. The Debtors then asked FCC to reinstate its financing. FCC refused and instead continued to pursue its demand that the Debtors make payment of the balance owing on the loan because of alleged defaults under the terms of the Credit Agreement.

[18] Between December 7, 2022 and March 15, 2023, the parties exchanged correspondence and attempted to consensually resolve the outstanding issues by entering into a formal forbearance agreement to give the Debtors some time to pursue refinancing or sale options.

[19] During this time, FCC agreed that the Debtors would only be required to make interest payments on the Indebtedness. The Debtors made three payments in January 2023 on account of principal and interest, aggregating to $695,642.06, which accounted for substantially all the arrears outstanding under the Credit Agreement. FCC requested evidence of the source of these payments and eventually filed two suspicious transaction reports with the Financial Transactions and Reports Analysis Centre of Canada.

[20] Following June 2022, Mr. Mastronardi was the source of the funds used by the Debtors to pay FCC. Mr. Mastronardi used the proceeds from the sale of shares he held in a separate company. He provided FCC with particulars of the share sale and of the manner in which he acquired the shares. For the payments made in January 2023, the source of funds was Mr. Mastronardi’s personal assets, advanced to the Debtors by way of shareholder loan. These sources were unacceptable to FCC, and FCC requested further particulars.

[21] On March 2, 2023, the Debtors made an additional interest payment; however, FCC advised the Debtors that it would not accept the March payment, or any further payments, without proof of funds.

[22] Ultimately, no forbearance agreement was agreed to by the parties.

[23] On March 31, 2023, FCC commenced this application seeking the appointment of a receiver.

[24] Since FCC made its demand for payment, the Debtors have made efforts to raise funds from other institutions and private lenders but have been unsuccessful. They have also attempted to sell at least one of the greenhouses to satisfy the debt owed to FCC but, to date, have been unsuccessful. They continue to conduct business in the ordinary course by growing vegetables in each of the greenhouses and employing approximately 180 to 230 workers through the growing season.

[25] FCC intends to proceed with a sale of the greenhouse in an unused state if a receiver is appointed.

The Law

[26] The question for this court is: is it just or convenient to appoint a receiver in the circumstances of this case? See Canadian Equipment Finance and Leasing Inc. v. The Hypoint Company Limited, 2022 ONSC 6186, para 22; Re: 2039882 Ontario Limited o/a Shelter Cove, 2024 ONSC 5153, para 22; Royal Bank of Canada v. CFNDRS Inc., 2017 ONSC 7661, para 8; and Gold Candle Ltd. v. GSR Mining Corporation, 2016 ONSC 4472, para 2.

[27] The appointment of an equitable receiver is an intrusive remedy that generally should be granted sparingly: Gold Candle, at para. 9. However, courts have not regarded the nature of the remedy as extraordinary or equitable if the relevant security document permits the appointment of a receiver: Elleway Acquisitions Ltd. v. The Cruise Professionals Ltd., 2013 ONSC 6866, para 27; and Royal Bank of Canada v. CFNDRS Inc., at para. 8.

[28] Each case depends on its own facts, and the court must have regard to all the circumstances of the case, including the nature of the property and the rights and interests of all parties in relation thereto. Other factors include the following:

• 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;
• 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;
• the nature of the property;
• the apprehended or actual waste of the debtor’s assets;
• the preservation and protection of the property pending judicial resolution;
• the balance of convenience to the parties;
• the fact that the creditor has a right to appointment under the loan documentation;
• the enforcement of rights under a security instrument where the security-holder encounters or expects to encounter difficulties with the debtor;
• the principle that the appointment of a receiver should be granted cautiously;
• the consideration of whether a court appointment is necessary to enable the receiver to carry out its duties efficiently;
• the effect of the order upon the parties;
• the conduct of the parties;
• the length of time that a receiver may be in place;
• the cost to the parties;
• the likelihood of maximizing return to the parties; and
• the goal of facilitating the duties of the receiver.

See Shelter Cove, 2024 ONSC 5153, paras 24-26, citing Pandion Mine Finance Fund LP v. Otso Gold Corp., 2022 BCSC 136, para 54. See also Bank of Montreal v. Carnival National Leasing Ltd., 2011 ONSC 1007, paras 23-24; Royal Bank of Canada v. CFNDRS Inc., at para. 8.

[29] While courts have identified lists of factors to be taken into consideration in the just and convenient analysis, “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”: Shelter Cove, at paras. 24-26, citing Pandion Mine Finance Fund LP, at para. 54. The case law identifies as an “important factor” whether there is a security agreement that permits the appointment of a receiver: Elleway Acquisitions Ltd., at para 27; Royal Bank of Canada v. CFNDRS Inc., at para. 8.

Analysis

[30] Under section 2.2 of Schedule B of the Credit Agreement (“Schedule B”), “[u]pon the occurrence of an Event of Default that is continuing and after the expiry of any applicable cure period,” FCC “will to the extent permitted by law” have various rights, including, under section 2.2(a), making an “application to any court of competent jurisdiction for the appointment of a Receiver.” Section 2.1(d) of Schedule B states the following:

2.1 Events of Default
The right of the Borrowers to apply for further Advances shall cease, at the option of FCC, and all Obligations and Indebtedness hereunder or pursuant to any other Document, whether any such Obligation or Indebtedness is absolute or contingent, matured and/or unmatured, shall become immediately due and payable and the Security Documents shall become immediately enforceable when any of the following events (each such event an “Event of Default”) occurs:
(d) Default in Covenants
If the Borrowers fail in the observance or performance of any of the terms, conditions, provisions or covenants to be performed or observed by it hereunder or contained in any Document, and such Default shall have continued for a period of thirty (30) days after written notice thereof has been delivered to the Borrowers by FCC, or is not capable of being cured within such notice period, in which case an Event of Default shall have occurred upon the breach of such covenant without the requirement of notice or lapse of time.

[31] The alleged defaults that FCC relies on include: leasing substantially all of the Debtors’ greenhouse to a third party without notice to or consent from FCC; being offside the Fixed Charge Coverage Ratio, as defined in the Credit Agreement; discontinuing the Debtors’ growing business in 2021 without notice to or the consent of FCC; permitting an unlicensed cannabis grower to operate out of the Premises at the time of the Raid; failing to promptly notify FCC of the Raid; failing to comply with an Environmental Compliance Approval contrary to s. 186(3) of the Environmental Protection Act, RSO 1990, c E.19, resulting in a fine of $50,000 by the Ministry of the Environment; and failing to promptly notify FCC of the environmental conviction and fine.

[32] In response, the Debtors say, and the evidence supports, that most of the alleged defaults, including leasing to unlicensed cannabis growers and discontinuing its business, were cured prior to the 30-day cure period and are not events of default within the meaning of section 2.1(d) of Schedule B. In my view, a plain reading of both sections 2.1(d) and 2.2(a) of Schedule B requires FCC to give the Debtors notice of an alleged event of default and provide them with 30 days’ notice of FCC’s intention to rely on the event. If the alleged event is not cured within those 30 days, then it becomes an actionable event of default. I do not accept FCC’s assertion that each of the events they seek to rely on are actionable events of default under the Credit Agreement. The Debtors took steps to cure the alleged defaults that were within their power to cure within the required time, and, in my view, those events are not actionable events of default within the meaning of Schedule B. FCC is left to rely on the Debtors being offside the Fixed Charge Coverage Ratio, the environmental conviction and fine, and the failures to notify.

[33] In addition to those listed above, the Default Notice also states that the Debtors “are in breach of the integrity provisions of the Credit Agreement in Section 9.30 as a result of permitting an unlicensed cannabis producer to grow significant volumes of illegal cannabis” in the Debtors’ facility. The relevant parts of section 9.30 of Schedule B, the integrity provision, state as follows:

FCC lends only to individuals or businesses with integrity who respect and adhere to applicable municipal bylaws, provincial and federal laws and regulations, who hold all permits and licenses required by law, and whose activities respect and care for:

• the environment by exercising reasonable care to safeguard the environment through stewardship of land, air quality, and water;
• animal welfare through application of the National Farm Animal Care Council (NFACC) Codes as a foundation for animal care;
• labour standards by upholding requirements set through Canada's labour laws including for seasonal workers; and
• in general, society and human rights.

FCC does not lend to individuals or businesses who:

• willfully neglect applicable operating laws and regulations;
• engage in any money laundering activities or are involved in financing terrorist activities; or
• are involved in illegal or other activities that could harm FCC's reputation and/or do not align with our expressed commitment to sustainability.

[34] There is nothing in the Credit Agreement that prohibits or prevents the growing of cannabis by the Debtors or on the Premises. The integrity provision, on a plain reading, focuses exclusively on the conduct of the Debtors and not on the conduct of a third party. There is no evidence before this court that the Debtors conducted their business at any point in breach of the integrity provision, that they were aware that the party leasing the Premises was growing cannabis without a valid licence, or that they “permitted” an unlicensed cannabis producer to grow illegal cannabis in their facility. The evidence supports the contrary. The cannabis growers produced copies of licences that they stated were in the process of being transferred by Health Canada from a Niagara operation to permit use of the Debtor’s greenhouse facilities. I do not accept that there was a breach of the integrity provision that results in an actionable event of default in these circumstances. Further, by the time the Demand Letter was issued, the leases had been terminated and the Debtors had resumed use of the Premises for their own business purposes.

[35] For the purposes of this application, however, I will assume that at least one of the events alleged by FCC qualifies as an actionable event of default under section 2.1 of Schedule B and triggers section 2.2 of Schedule B. FCC’s right under the Credit Agreement to make “application to any court of competent jurisdiction for the appointment of a receiver” is not absolute, however, and FCC must still satisfy the just or convenient test. The fact that the Credit Agreement permits FCC to seek the appointment of a receiver “to the extent permitted by law” is just one, albeit an “important factor”, to consider in the just or convenient analysis: Elleway Acquisitions Ltd., at para 27; Royal Bank of Canada v. CFNDRS Inc., at para. 8.

[36] FCC explained during argument that this application is being brought because the conduct of the Debtors led FCC to want out of the relationship with the Debtors. Based on the timeline of events and the number of alleged defaults, FCC says that it has been prejudiced but does not detail how it has been prejudiced. FCC says that it has lost patience with, and confidence in, the Debtors and that the only way to get FCC out of the arrangement with the Debtors is for an independent third party to be appointed as receiver. FCC’s greatest concerns with the Debtors are their failures to disclose information to FCC, especially concerning the source of its funds.

[37] The evidence before me is that following June 2022, Mr. Mastronardi was the source of funds for the Debtors’ payments to FCC. Mr. Mastronardi sold shares he held in a company that provided him with the funds, and he provided FCC with particulars of the share sale and of the manner in which he acquired the shares. For the payments made in January 2023, the source of funds was Mr. Mastronardi’s personal assets, advanced to the Debtors by way of shareholder loan.

[38] FCC says that it was not satisfied with the support for the source of funds provided by the Debtors in response to the Default Notice as it did not satisfy FCC’s standard proof of funds requirements for its customers. The Debtors argue that they provided all the information in response that was requested and based on the record before me, there was no reasonable basis for FCC to be concerned about the source of funds with which the Debtors were making payments. I agree with the Debtors. It is unclear to me what exactly FCC finds unacceptable about Mr. Mastronardi, his share sale, or his personal assets as the source of funds for the post-September 2022 payments or what would satisfy FCC.

[39] In support of its application for the appointment of a receiver, FCC does not argue, and there is no evidence before me of, irreparable harm, urgency, or any real or perceived risk of dissipation of the Debtors’ assets or diminution in value of the assets if a receiver is not appointed. There is no evidence of any risk to FCC if a receiver is not appointed, nor of not maximizing the assets of the Debtors, and there is no evidence before me to support an argument that the appointment of the receiver is necessary to protect and secure the Collateral, apart from a bald assertion by FCC. In addition, in balancing the interests of FCC and the Debtors, I have considered the following:

• FCC holds security (approximately $80 million) that is significantly more than the amount owing to it (approximately $12.2 million). The representative from FCC acknowledged during his cross-examination that the value of the security that FCC holds in the Debtor’s debt is significantly greater than the amount owing to FCC by the Debtors;
• the risk to FCC, taking into consideration that the value of the security that FCC holds in the Debtor’s debt is significantly greater than the amount owing to FCC, is low;
• the nature of the Premises and Collateral, being two large greenhouse operations that are currently in partial operation;
• the lack of evidence of any apprehended or actual waste of the Collateral;
• the lack of any evidence of chaos or the need to protect the Collateral in this case;
• the lack of evidence of any real or immediate risk of dissipation of assets and diminution in value of those assets;
• the principle that the appointment of a receiver should be granted cautiously;
• FCC has a right to appointment under the Credit Agreement;
• the effect of the order upon each of the parties;
• the conduct of the parties, including the alleged events of default committed by the Debtors, in particular, leasing to an unlicensed cannabis grower;
• the Debtors are pursuing a sale of at least one of the two greenhouses in order to pay the debt owing to FCC;
• FCC intends to proceed with a sale of the greenhouses in an unused state if a receiver is appointed;
• the cost to the parties; and
• the likelihood of maximizing return to the parties.

[40] Balancing these factors leads me to conclude that it would not be just or convenient to appoint a receiver in the circumstances of this case at this time. The appointment of a receiver in this case is an extreme remedy given FCC admittedly simply wants an end to the relationship and presents no evidence of harm, urgency, or any real or perceived risk of dissipation of the Debtors’ assets or diminution in value of the assets if a receiver is not appointed.

[41] The Debtors should be free to continue to pursue all other options, including other lenders and/or the sale of one or both greenhouses in an operating state to maximize the sale price, to pay the Indebtedness to FCC.

Conclusion

[42] In the result, FCC’s application is dismissed. This decision does not prevent FCC from seeking the appointment of a receiver in the future or pursuing other remedies under the Credit Agreement.

[43] If the parties are not able to agree on costs, brief written submissions of no more than five pages may be served on the other party and filed with the court within the next 20 days.

Released: April 17, 2025

Jacqueline A. Horvat