CITATION: Kapital Produce Limited et al. v. Farm Credit Canada, 2025 ONSC 3006
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Kapital Produce Limited, Kapital Produce (2000) Inc. and M.O.S. Enterprises Limited Plaintiffs
– and –
Farm Credit Canada Defendant
Myron W. Shulgan, K.C., and Stephen R. Marentette, for the Plaintiffs
Chris Burr and Jake Harris, for the Defendant
HEARD: April 30 and May 14, 2025
ruling on motion
hebner j.:
1The plaintiffs (the debtors) were historically in the business of operating hydroponic greenhouses specializing in growing, marketing and selling produce. Since 2007, the defendant, Farm Credit Canada (“FCC”), provided financing for the plaintiffs’ operations through various credit facilities. In or about 2013, the plaintiffs were indebted to the defendant in the sum of approximately $34 million. By the time this action was commenced in May of 2023, the plaintiffs had reduced their debt to approximately $12 million. As of April 15, 2025, under its various credit facilities, the plaintiffs owe the defendant the total sum of $12,509,552.80. The per diem interest rate on that debt is $924.56.
2The defendant holds security from the plaintiffs in the form of several mortgages and PPSA registrations.
3This motion was brought by the debtors for an order granting leave to the debtors to pay the full amount owing to FCC into court and an order discharging the encumbrances held as security by FCC.
Background
4The events leading up to this litigation are described in the decision of Horvat J. dated April 17, 2025 (2025 ONSC 2403), in an action commenced by FCC as applicant against the debtors as respondents. In that application FCC sought an order for the appointment of a receiver (the receivership application). I take the following background facts from that decision.
5In 2021, the debtors did not require all of their greenhouses. They leased the use of their surplus greenhouses to cannabis growers from the Niagara region. 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. The debtors did not advise FCC that a portion of the premises were being leased to a third party.
6In July of 2022, the media reported 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. FCC learned of the raid in the newspapers.
7In September of 2022, two principals of the debtors (Mr. Mastronardi and another person) were 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.
8On November 10, 2022, FCC demanded payment of its outstanding debt. The demand was triggered by various alleged events of default.
9In December of 2022, the director of federal prosecutions confirmed that it would revoke the management and restraint orders and withdraw the criminal charges against the debtors’ principals. In January of 2023, the criminal charges were formally withdrawn and the management and restraint orders were revoked.
10Following the withdrawal of the charges and the revocation of the orders, the debtors 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.
11Between December of 2022 and March of 2023, the parties attempted to resolve the outstanding issues by entering into a formal forbearance agreement to give the debtors time to pursue refinancing or sale options. During this time, FCC agreed that the debtors would only be required to make interest payments on the debt. The debtors made three payments in January of 2023 on account of principal and interest totaling $695,642.06. These payments accounted for all the arrears outstanding under the credit agreement.
12FCC requested evidence of the source of the payments and eventually filed two suspicious transaction reports with the Financial Transactions and Reports Analysis Centre of Canada. The source of the funds was Mr. Mastronardi's personal assets, advanced to the debtors by way of shareholder loan. This information was unacceptable to FCC, and FCC requested further particulars.
13In March of 2023, FCC advised the debtors that it would not accept any further interest payments without proof of a source of funds. Ultimately, no forbearance agreement was agreed to by the parties.
Receivership Application
14On March 31, 2023, FCC commenced an application against the debtors seeking the appointment of a receiver. The application bears court file number CV-23-32020. The intent of FCC was to proceed with the sale of the greenhouses in an unused state if a receiver was appointed.
15For reasons released April 17, 2025, Horvat J. dismissed the application. In paras. 40 and 41 of her reasons, Horvat J. said:
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.
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.
16FCC has appealed the decision to the Court of Appeal.
This Action
17This action was commenced by statement of claim of the debtors in May of 2023 seeking damages for FCC's breach of the terms of the credit agreement. The debtors plead in their statement of claim that in January of 2023, the federal government acknowledged that neither the debtors nor their principals were complicit in any wrongdoing arising from the alleged illegal nature of the conduct of their tenants.
18The debtors plead that they were up to date in making payment of all installments payable under the loans with FCC and there were no events of default. They plead that they were entitled to continue to enjoy access to the credit facilities provided for in the credit agreement once they were cleared of any wrongdoing. They plead that FCC’s refusal to reinstate the debtors’ access to credit constitutes a breach of the terms of the agreement and they claim damages as a result.
This Motion
19The debtors have a new lender who is prepared to provide credit facilities for their operations. They seek to pay the full amount owing to FCC as calculated by FCC in its most recent Statement of Indebtedness ($12,509,552.80) and have the security held by FCC discharged. The security consists of four mortgages registered against land and five PPSA registrations set out in the draft order filed by the debtors.
20FCC wants its money. FCC wants the debtors to pay them the full amount owing so they can terminate the debtor/creditor relationship. However, FCC is not prepared to accept payment from the debtors unless two conditions are met.
21Firstly, FCC asserts that it needs to know the source of the funds used to pay the debt so as to ensure the funds are not proceeds of crime. Secondly, FCC seeks either a full and final release from the debtors or payment of a further sum of $500,000 to cover its costs to defend the debtor action, appeal the receivership order and discharge the security.
Analysis
22I focus on the two conditions demanded by FCC.
Source of Funds
23There is no trust between FCC and the debtors. The debtors are reluctant to give FCC the identity of the new lender because they are afraid that FCC will contact the new lender and, to use the debtors’ terminology, do or say something to scupper the deal. Moreover, the debtors assert that FCC keeps “moving the goalpost”. At the motion, in addition to insisting on the source of funding, FCC insisted on receiving copies of the new loan agreement and the commitment letter.
24Mr. Shulgan disclosed on the motion that the new lender is a Schedule III bank, namely a foreign bank authorized to operate in Canada as branches, with certain restrictions. He said that the payment to FCC would be done by way of wire transfer directly from the Schedule III bank lender. I note that Mr. Shulgan is an officer of the court and should be taken at his word.
25It is my view that Mr. Shulgan’s assurance on the payment being made directly from a Schedule III bank ought to be sufficient assurance to FCC that the monies are not originating from criminal activities. Accordingly, I do not see this condition as reasonable.
Additional $500,000
26The claim for legal expenses is grounded in the credit agreement, section 5.1, that reads as follows:
The Borrowers shall, in addition, reimburse FCC on demand for all fees, costs and out-of-pocket expenses including, without limitation, legal fees and disbursements (on a solicitor and own client or full indemnity basis) incurred by FCC following the Closing Date in connection with the exercising or defending of any or all of the rights, recourses, remedies and powers of FCC hereunder or under any Document or the realization on any assets or property of the Borrowers or Guarantors, or the taking of any proceedings for the purpose of enforcing the remedies provided herein or permitted in connection herewith.
27Firstly, I note that FCC is not entitled to a full and final release from the debtor under the credit agreement. Such a release would, of course, serve to prevent the debtors from proceeding with this action that claims damages against FCC for breach of the credit agreement.
28Secondly, I turn to the wording of section 5.1. The section requires the debtors to reimburse FCC for costs “incurred” in connection with “the exercising or defending of any … of the rights … of FCC hereunder … or the realization on any assets or property … or the taking of any proceedings for the purpose of enforcing the remedies provided herein….”
29Based on the plain language of the section, FCC is entitled to the costs incurred in the enforcement of its rights under the agreement. It is entitled to the costs of the receivership application even though it was unsuccessful. It is entitled to the costs of the appeal of the decision of Horvat J., again even if it is unsuccessful. It is entitled to the costs of discharging the security.
30I fail to see how the clause entitles FCC to the costs of defending this action brought by the debtors for breach of the agreement by FCC. Those costs were not and will not be incurred “in the exercise of” its rights under the agreement; they were not and will not be incurred in the “realization on any assets or property” of the debtors; and they were not and will not be incurred “for the purpose of enforcing the remedies” set out in the contract. They were incurred and, if this action continues, will be incurred to respond to the claim that FCC breached the agreement; that FCC did not comply with the deal.
31FCC prepared a loan payout statement dated April 1, 2025, with a projected payout date of April 15, 2025. The total owing by the debtors in the payout statement is $12,509,552.80 which sum includes fees of $234,412.92. The debtors assert that the fees figure includes the legal costs incurred to date and this assertion was not disputed by FCC. It is reasonable to assume then that the figure includes the costs of the receivership application and appeal. If the amount of the debt is paid into court, then there would be no need for a receivership and there should be no more costs incurred by FCC in pursuing a receivership. Moreover, as the amount set out in the loan statement is the projected payout for the date of April 15, 2025, it is reasonable to assume that the amount includes the anticipated costs of discharging the security. The only other costs incurred or to be incurred by FCC are those incurred in this action brought by the plaintiffs for breach of contract which I find are not covered by clause 5.1.
Conclusion
32For these reasons, I find that FCC’s objections with accepting the debt repayment are not reasonable. I find that the debtors are entitled to the relief requested in paragraphs 2 and 3 of their notice of motion. On May 14, 2025, the payout was calculated at $12,538,214.16 with a per diem interest of $924.56. Accordingly, the debtors may pay into court the sum of $12,538,214.16 plus interest at the per diem amount to the date of payment following which the encumbrances set out in the draft orders provided by the debtors shall be discharged.
33As the debtors were successful on the motion they are entitled to their costs. The bill of costs filed by the debtors discloses partial indemnity costs of $4,754.48. However, a second appearance was necessary to finish the argument on the motion and so I set the amount at $6,000 to be paid by FCC.
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Pamela L. Hebner
Justice
Released: May 20, 2025
CITATION: Kapital Produce Limited et al. v. Farm Credit Canada, 2025 ONSC 3006
COURT FILE NO.: CV-23-32159
DATE: 20250520
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Kapital Produce Limited, Kapital Produce (2000) Inc. and M.O.S. Enterprises Limited Plaintiffs
– and –
Farm Credit Canada Defendant
ruling on motion
Hebner J.
Released: May 20, 2025