Ontario Securities Commission v. Bridging Income Fund LP et al., 2025 ONSC 951

COURT FILE NO.: CV-21-00661458-00CL
DATE: 2025-02-24
ONTARIO SUPERIOR COURT OF JUSTICE – COMMERCIAL LIST
IN THE MATTER OF AN APPLICATION UNDER SECTION 129 OF THE SECURITIES ACT

BETWEEN:
Ontario Securities Commission, Applicant
– and –
Bridging Income Fund LP, Bridging Mid-Market Debt Fund LP, SB Fund GP Inc., Bridging Finance Inc., Bridging Finance GP Inc., Bridging Income RSP Fund, Bridging Mid-Market Debt RSP Fund, Bridging Private Debt Institutional LP, Bridging Real Estate Lending Fund LP, Bridging SMA 1 LP, Bridging Infrastructure Fund LP, Bridging MJ GP Inc., Bridging Indigenous Impact Fund, Bridging Fern Alternative Credit Fund, Bridging SMA 2 LP, Bridging SMA 2 GP Inc., and Bridging Private Debt Institutional RSP Fund, Respondents

Appearances:
Grant Moffat, Adam Driedger, Erin Pleet and Daniel Alievsky for the Applicant
Robert Staley, Doug Fenton and Thomas Gray for the Unitholders
Brendan Monahan, Christopher Keliher and Brittiny Rabinovitch for CERIECO Canada Corp.
Geoffrey Hunnisett and Ben Muller for BlackRock Parties
Steven Weisz and Dilina Lallani for University of Minnesota Foundation
Miranda Spence for the SMA2 Unitholders

Heard: February 3, 2025
Justice: Mark L. Osborne

Reasons for Judgment

Overview

1. There are three motions before the Court.

2. The Receiver wishes to make an interim distribution of recovered funds to Unitholders, net of certain reserves, and wishes to do so based on its calculation of entitlements. The Receiver proposes to treat the claims of Unitholders and creditors equally. The Receiver also seeks approval of its report and activities.

3. The Unitholders, through their Representative Counsel, support an interim distribution, but disagree with the Receiver’s calculation, and bring their own motion for a declaration that the funds are subject to a constructive trust in their favour, with the result that the claims of Unitholders would be paid in priority to the claims of creditors.

4. One of the creditors who has filed a claim in the claims process, Cerieco, opposes both motions and takes the position that while an interim distribution may be appropriate, the reserve for its claim should, pending a determination of that claim, be sufficient to cover the claim in full.

5. Another group of associated creditors, the BlackRock Parties, settled their claim with the Receiver the night before the hearing of this motion. They support the distribution motion of the Receiver and the calculations on which it is based, provided that the settlement of its claim is approved, failing which they support the position advanced by Cerieco. Accordingly, the Receiver also seeks authorization to make a distribution to the BlackRock Parties in accordance with the settlement.

6. For the reasons that follow, the interim distribution to Unitholders (and ancillary relief) is approved, but the proposed quantum of the distribution must be reduced to hold back a sufficient reserve until the Cerieco Claim is determined. The BlackRock distribution is approved. The motion for a constructive trust is deferred to be considered if and as necessary, following a final determination of the Cerieco Claim.

7. The ancillary relief (approval of the Receiver’s report activities) is unopposed, and is also approved.

8. Defined terms in this Endorsement have the meaning given to them in the motion materials unless otherwise stated.

The Three Motions before the Court

9. On the first motion, PricewaterhouseCoopers Inc. (“PwC”), in its capacity as Receiver and Manager of the Property of each of the Respondents, seeks:

   a. an Interim Unitholder Distribution Order: i. authorizing and directing the Receiver to make a partial interim distribution to Unitholders of approximately $473 million of the cash held by the Bridging Funds; and ii. approving the Interim Distribution Calculation pursuant to which the amount to be distributed to Unitholders has been determined; and

   b. an order approving the 24th Report and the activities, decisions and conduct of the Receiver as set out therein.

10. On the second motion, the Receiver seeks an order:

a. authorizing and directing the Receiver to settle the BlackRock Claim and accept the Unjust Enrichment Claim against the Bridging Mid-Market Debt Fund LP ("MMF") in accordance with the Claims and Unitholdings Identification Order; and

b. authorizing and directing the Receiver to make a distribution to ABR PI Investments, Ltd., Global Credit Opportunities (Canada) L.P., Global Credit Opportunities Fund, L.P., GCO Lux (Origination) DAC, and Global Credit Opportunities Luxembourg Multi-Feeder Fund SCSP (collectively, the “BlackRock Parties”) of approximately $6,500,000 from cash held by MMF (the “BlackRock Distribution”) in full and final satisfaction of the Unjust Enrichment Claim.

11. On the third motion, Representative Counsel for the Unitholders of the Bridging Funds seeks a Constructive Trust Order providing that:

a. all of the proceeds of Bridging Income Fund LP, Bridging Mid-Market Debt Fund LP, Bridging Private Debt Institutional LP, Bridging Income RSP Fund, Bridging Mid-cap Market Debt RSP Fund, Bridging Indigenous Impact Fund, Bridging Fern Alternative Credit Fund and Bridging Private Debt Institutional RSP Fund (collectively, the “Subject Bridging Funds”) are subject to a constructive trust in favour of the Unitholders who hold units in each of those funds; and

b. providing that any such constructive trust has priority over any non-Unitholder claim against the Subject Bridging Funds.

12. As part of the first motion, the Receiver seeks to implement the proposed partial interim distribution in a manner that treats certain Unitholder Claims and Disputed Bridging Fund Claims on a pari passu basis. In the third motion, the constructive trust sought to be imposed by Representative Counsel over the Subject Bridging Funds would grant a priority to Unitholders over non-Unitholders. The orders sought in each of these two motions are therefore inconsistent with one another.

13. Moreover, the relief sought in both of those two motions is opposed by Cerieco Canada Corp. (“Cerieco”). Cerieco’s position is supported by BlackRock unless the settlement of BlackRock’s claim is approved, in which case BlackRock supports the position of the Receiver.

14. As further described below, Cerieco asserts a pre-receivership claim against Bridging Income Fund LP (“BIF”) in the principal sum of $213 million pursuant to an alleged guarantee said to have been executed by BIF in 2017. The claim of Cerieco is one of the Disputed Bridging Fund Claims referenced above. Accordingly, Cerieco:

a. opposes the relief sought by the Receiver which, if granted, would reduce Cerieco’s maximum entitlement pursuant to its claim to approximately 22% of the value of the claim as filed; and

b. opposes the relief sought by Representative Counsel, since the Subject Bridging Funds over which the constructive trust is sought to be imposed includes the proceeds of BIF, which, if granted, would effectively eliminate any recovery by Cerieco on its claim at all.

15. The position of the Receiver is also supported by the University of Minnesota Foundation (a Unitholder) and by the SMA2 Unitholders.

16. The Receiver relies on the 24th Report and the First and Second Supplements thereto, dated January 31, 2025 and February 2, 2025, respectively, each together with Appendices. Representative Counsel relies on the Sixth Report of Representative Counsel dated November 27, 2024, together with Appendices thereto. Cerieco relies on the Affidavit of Melissa Ferrari affirmed December 20, 2024 and the responses to written interrogatories requested of and received from the Receiver. No other party filed materials (save for a compendium of previously filed materials from the SMA 2 Unitholders. Those Unitholders support the Receiver and oppose substantive consolidation of the Bridging Funds.).

17. I observe that the first motion was originally returnable before the Court on December 9, 2024, at which time the Chief Justice granted the 2024 Permitted Transfers Order and adjourned the balance of the relief sought, including issues involving the proposed Interim Unitholder Distribution and the Interim Distribution Calculation and approval of the 24th Report and related activities, in order to give affected stakeholders a full opportunity to respond, as they have now done.

Background

18. The background to, and context for, these motions is described in the Reports of the Receiver and earlier Endorsements of this Court made in this complex proceeding.

19. For the purposes of these motions, it is sufficient to observe that the Bridging Funds were managed by Bridging Finance Inc. (“BFI”) and marketed through their Offering Memoranda as stable investment vehicles focused on asset-backed lending to midmarket Borrowers. They attracted significant investor interest. Today, there are approximately 26,000 Unitholders who own units in the Bridging Funds. The net asset value (“NAV”) of the Bridging Funds was approximately $2 billion by April, 2021.

20. The Ontario Securities Commission commenced an investigation that ultimately revealed that representations in the Offering Memoranda were materially inaccurate. The 24th Report notes that the OSC concluded that the Offering Memoranda omitted critical information about significant risks, unauthorized use of assets held by the Bridging Funds, and fraudulent and other improper acts by the principals of Bridging. As a result, the OSC sought and obtained on April 30, 2021, the appointment of the Receiver pursuant to s. 129 of the Securities Act, RSO 1990, c S.5.

21. The Receiver is of the view that it is appropriate to make the proposed interim distribution now since cumulative cash on hand in the Bridging Funds (net of costs and a prior distribution to the SMA 2 Unitholders) totalled approximately $698 million as of October 31, 2024. The Receiver anticipates further recoveries from remaining Loans and other Assets, with the result that additional funds can be distributed at a later date.

The Disputed Claims

22. This Court previously approved a Claims and Unit Holdings Identification Procedure pursuant to which three Claims against the Bridging Funds (in addition to Unitholder Claims) were identified:

a. the Cerieco Claim pursuant to which Cerieco claims $213 million from BIF plus accrued interest and costs, on the basis that BIF is bound by a guarantee executed in 2017 by its general partner to secure a construction loan to Mizrahi Commercial (The One) LP in connection with a proposed major residential, retail and commercial 85 storey development at Bloor and Yonge Streets in Toronto that was partially owned by certain principals of Bridging (the “One Bloor Project”);

b. the BlackRock Claim pursuant to which BlackRock claims unjust enrichment against MMF in the amount of $33,038,079 plus interest and costs on the basis that MMF was unjustly enriched by the transfer to it from BFI of the amount claimed, utilizing certain proceeds of a loan from BlackRock to BFI; and

c. the Canning Claim pursuant to which the Canning Claimants claim $50 million plus interest and costs against all of the Respondents, on the basis of an alleged claim in breach of contract and fraudulent misrepresentation related to a former lending relationship between Bridging on the one hand and Thomas Canning (Maidstone) Limited (“TCL”) on the other hand, and the subsequent Court-supervised sales process conducted for the TCL assets.

23. All three of these Claims were disallowed by the Receiver and were, until very recently, in the process of being adjudicated pursuant to the Claims Adjudication Process Order.

24. The Cerieco Claim was disallowed on the basis that the underlying alleged guarantee was made in secret, was never disclosed to BIF Unitholders, was not properly authorized and personally benefited Bridging principals Natasha Sharpe and Jenny Coco, since BIF had no interest in the One Bloor Project.

25. On February 5, 2024, Cerieco filed a Notice of Dispute in response to the disallowance of its claim. The Claims Adjudication Process Order grants the appointed Claims Officer the power to determine Disputed Bridging Fund Claims (which include the Cerieco Claim) and establishes the basis for appeals from final determinations of the Claims Officer.

26. The Cerieco Claim has not yet been determined by the Claims Officer. It is anticipated that a determination on the merits will be made this year.

27. The BlackRock Claim was disallowed on the basis that, among other things, MMF was not unjustly enriched since the books and records of Bridging reflect that the MMF Repayment included certain amounts that had previously been misappropriated from MMF by principals of BFI.

28. As noted above, just prior to the hearing of this motion, the Receiver and the BlackRock Parties reached an agreement in principle, supported by Representative Counsel, to resolve the BlackRock Claim. That is discussed further below since relief with respect to the BlackRock Claim is requested on these motions.

29. The disallowance of the Canning Claim by the Receiver was disputed by the Canning Claimants, and following a hearing before the Claims Officer, the Canning Claim was dismissed. The Canning Claimants filed an appeal from the decision of the Claims Officer, but as set out in the Supplement to the 24th Report of the Receiver, an agreement was reached between the Canning Claimants and the Receiver, in consultation with Representative Counsel, resulting in the Canning Settlement.

30. The Canning Settlement provides that the Canning Claimants are required to choose one of two mutually exclusive settlement payment options by March 28, 2025, in full and final satisfaction of the Canning Claim: the payment of a fixed amount in cash; or the purchase by the Canning Claimants of certain security held by Bridging on the Maidstone Property and the indebtedness secured thereunder.[^1]

31. The Supplement to the 24th Report states that the Canning Claimants intend to elect the Loan Purchase Option. Court approval of the Canning Transaction was granted on January 27, 2025: see Ontario Securities Commission v. Bridging Finance Inc., 2025 ONSC 539.

Approval of the Unjust Enrichment Claim Settlement and the BlackRock Distribution

32. The principal terms of the settlement of the BlackRock Claim are these:

a. the Receiver will seek Court approval to admit the Unjust Enrichment Claim and carry out the BlackRock Distribution;

b. the BlackRock Distribution is conditional upon, and shall occur at the same time as, the Interim Unitholder Distribution to the MMF Unitholders;

c. Representative Counsel shall withdraw its Constructive Trust Motion only as it relates to MMF for the purpose of facilitating the BlackRock Distribution;

d. if the Approval Order is not granted, or does not become final, the BlackRock Settlement Agreement shall automatically terminate;

e. the Secured Claim shall remain valid and enforceable and shall not be released or affected by the terms of the BlackRock Settlement Agreement;

f. once the Approval Order becomes final, and conditional upon the BlackRock Parties receiving the BlackRock Distribution, they will release the Receiver and their respective Related Entities and all of the Respondents other than BFI, BF GP and SB GP. The Secured Claim is unaffected by the release; and

g. the BlackRock Lenders shall provide Pierringer protection to the Released Parties for claims that do not sound in fraud.

33. As noted above, settlement of the BlackRock Claim is recommended by the Receiver and is supported by Representative Counsel to the Unitholders. It is unopposed, although I address this further below given the short service.

34. In determining whether to approve a settlement in the context of a receivership or insolvency proceedings, courts generally consider the following factors:

a. whether the settlement is fair and reasonable;

b. whether the settlement provides substantial benefits to other stakeholders; and

c. whether the settlement is consistent with the purpose and spirit of the relevant legislation.

See: Maple Bank GmbH (Re), 2016 ONSC 7218, para 8.

35. It is also appropriate, in the context of a motion for settlement approval in a receivership proceeding, for the Court to consider the Soundair Principles:

a. whether the party made a sufficient effort to obtain the best price and has not acted improvidently;

b. the interests of all parties;

c. the efficacy and integrity of the process by which the party obtained offers; and

d. whether the working out of the process was unfair.

See: Royal Bank of Canada v. Soundair Corp..

36. The Receiver submits that the amount of the BlackRock Distribution is reasonable having regard to the assessment by the Receiver of the risk that the Unjust Enrichment Claim would succeed. The settlement eliminates the costs and delay associated with the adjudication of the Unjust Enrichment Claim, provides finality and certainty for all stakeholders of MMF, and eliminates the need to hold back any funds on account of the Unjust Enrichment Claim from the proposed Interim Unitholder Distribution to MMF Unitholders.

37. The Receiver is satisfied in its business judgment that the BlackRock Settlement Agreement resolves the Unjust Enrichment Claim on terms that provide the best income for the Respondents and their stakeholders in the circumstances.

38. The BlackRock Settlement was reached only the night before the hearing of this motion, with the obvious result that the Service List and affected parties were short served and have had very little practical opportunity to consider their position and oppose the motion if they wished to do so.

39. The proposed Approval Order seeks to address this by providing that any party may object to the relief by notifying the Receiver within a seven-day period. If no objections are received, the Approval Order shall automatically become effective. If an objection is received within that period, the Approval Order shall not take effect subject to further order of the court and the Receiver shall not carry out the MMF Interim Distribution pending further order of the Court. The Receiver shall advise the Service List forthwith following the Effective Time as to whether or not it has received any objection.

40. I am satisfied that the Maple Bank factors and the Soundair Principles have been satisfied, such that the BlackRock Settlement should be approved pursuant to s. 129(5) of the Securities Act. I accept the business judgment of the Receiver that the proposed settlement represents the best income for the stakeholders, and that the terms are reasonable in all the circumstances, balancing the proposed quantum to be paid against the benefits to stakeholders of certainty and finality now, the minimization of further professional fees, and the delay in litigating the BlackRock Claim.

41. While not determinative, the support of the Unitholders through their Representative Counsel, is a factor that further weighs in favour of settlement approval.

42. Finally, I am satisfied in the circumstances that the proposed seven day objection period gives other stakeholders an opportunity, albeit not a lengthy one, to oppose the relief if they wish to do so, and if that occurs, the settlement will not be effective and the Interim Distribution in respect of MMF Unitholders will not be made pending further order of the Court. I observe that this same approach was endorsed by the Chief Justice earlier in this proceeding in respect of the 2024 Permitted Transfers Order: 2024 ONSC 6832.

43. For all of those reasons, the settlement of the Unjust Enrichment Claim and the BlackRock Distribution are approved.

Receiver’s Motion for the Interim Unitholder Distribution, the Interim Distribution Calculation and Substantive Consolidation

An Interim Distribution in Principle

44. As a result of its recovery efforts, the Receiver has realized on 28 Loans. In addition, the accumulation of foreign exchange gains and interest income, net of disbursements incurred and net of a previously approved distribution to unitholders of SMA 2, cumulative cash on hand in the Bridging Funds totalled approximately $698 million as of October 31, 2024.

45. The Receiver provided in its 18th and 22nd Reports, an update on the Distribution Matters that would need to be resolved, in whole or in part, prior to an interim distribution to Unitholders. The status of each of those Distribution Matters is set out in the motion materials and the 24th Report. Among other things, the following Distribution Matters have been completed or are proposed to be addressed on this motion:

a. Receiver’s Review of Unitholder Claims and Amendment Requests - completed;

b. Receiver’s Review of Third Party Claims – completed;

c. Adjudication Process for Disputed Bridging Fund Claims (i.e., the Cerieco Claim) - in progress;

d. Allocation of Third Party Claims, among Respondents – completed;

e. Method to Allocate Costs-included in proposed Interim Distribution Calculation;

f. Distribution Methodology - NCI Analysis - included in proposed Interim Distribution Calculation;

g. Substantive Consolidation - included in proposed Interim Distribution Calculation, which is based on the recommendation of the Receiver that Bridging Funds should not be substantively consolidated; and

h. Arrangements with Tax Authorities - included in proposed Interim Distribution Calculation, and in progress but will not delay proposed distribution.

46. Given the progress with respect to the Distribution Matters, and the significant amount of cash on hand, the Receiver is of the view that it is appropriate to make the proposed Interim Unitholder Distribution now.

47. No party opposes the proposed interim distribution in principle. I am satisfied that an interim distribution at this time is appropriate. The whole point of this receivership proceeding is to realize on assets of the Bridging Funds for the benefit of Unitholders. Provided that the interests of other stakeholders (such as creditors) are addressed, there is no reason not to authorize the distribution to those Unitholders entitled to receive it, particularly given the significant amount of cash that the Receiver has on hand.

48. The Receiver was appointed pursuant to s. 129 of the Securities Act. Section 129(5) provides that a receiver so appointed has the authority to wind up or manage the business and affairs of the person or company and has all powers necessary or incidental to that authority. The power to distribute the proceeds of the property is necessary and incidental to the administration of the Receivership Proceeding.

49. This Court has approved distributions to stakeholders in receivership proceedings under the Securities Act. See, for example: Whitehouse v. BDO Canada LLP, 2020 ONSC 144, 149 OR (3d) 85, at para. 55; Distribution Order of Hainey J. (June 20, 2019) in Ontario Securities Commission v Paramount Equity Financial Corporation et al., Court File No. CV-17-11818-OOCL; and Distribution Order of Conway J. (March 27, 2023) in Ontario Securities Commission v Money Gate Mortgage Investment Corporation, Court File No. CV-18-00608086-00CL.

50. Accordingly, I am satisfied that the Court has jurisdiction to authorize and direct the Receiver to carry out the Interim Unitholder Distribution, and that it is appropriate to exercise that jurisdiction at this time.

51. Several elements of the proposed Interim Unitholder Distribution require specific approval. Most are unopposed. Some critical elements of the Interim Distribution Calculation are, however, opposed.

Proposed Reserves

52. The Receiver proposes to hold back funds for various Reserves as fully described in the motion materials and the 24th Report in respect of the Disputed Bridging Funds Claims, and also to fund certain future expenses and contingent liabilities.

53. The proposed Reserves have been sized based on historical run rates and the Receiver’s estimate of the costs that will be incurred to complete the Receivership Proceeding. While the proposed quantum of the Reserves is certainly significant, I am satisfied that they are appropriate, subject to the terms of this decision. I am further satisfied that the proposed allocation is appropriate.

54. The Reserves for General Receivership costs ($24 million), General Operating Expenses ($10 million) and Fund Specific Expenses ($1.1 million) are allocated to the Bridging Funds in the same manner as the costs to which each of those Reserves relates.

55. The Litigation Costs Reserve ($45 million), the Loan Expenses Reserve ($5 million) and the Contingent Reserves ($24.6 million) are allocated based on Proportionate Allocation, as the amount of the costs to which each of those Reserves relates that will be allocable to each Bridging Fund is currently unknown. The allocation of such costs will be addressed by the Receiver once that information is known.

56. The Disputed Bridging Funds Claims Reserves are allocated based on the Direct Allocation methodology, and, as adjusted, relate only to the remaining Disputed Bridging Fund Claim (i.e., the Cerieco Claim).

57. I am satisfied that, as submitted by the Receiver, the proposed quantum of the Reserves, with the exception of the Disputed Bridging Funds Claims Reserve as further discussed below, is appropriate. I am also satisfied that the proposed allocation of the Reserves, which is consistent with the Cost Allocation Methodology set out below, is fair and equitable in the circumstances at this time.

Application of the Interest Stops Rule to the Proposed Reserves

58. I am satisfied that the interest stops rule should be applied to the calculation of the Disputed Bridging Funds Claims Reserves by accruing interest only to the Date of Appointment.

59. As observed by the Court of Appeal for Ontario in Nortel Networks Corporation (Re), 2015 ONCA 681, 127 OR (3d) 641, it is well settled that the pari passu principle applies in insolvency proceedings, to the effect that “the assets of the insolvent debtor are to be distributed amongst classes of creditors rateably and equally, as those assets are found at the date of insolvency” (see para. 23).

60. The Court of Appeal further observed that the primary purpose behind the common-law interest stops rule is fairness to creditors, and that another purpose is to achieve the orderly administration of an insolvent debtor’s estate. The interest stops rule has been consistently applied in bankruptcy and winding up proceedings (and indeed is codified in those statutes), in receivership proceedings, and, as confirmed in Nortel, CCAA proceedings.

61. I am satisfied that the same principles apply in this Securities Act receivership proceeding. It would be unfair for a claimant to gain an advantage from delays caused by court proceedings. All funds recovered and realized by the Receiver should be applied equally and proportionately to debts as they existed at the date of the winding up, with no allowance for interest accruing after that date. This approach ensures fairness and practicality.

Asset Allocation Methodology

62. The proposed Asset Allocation Methodology is appropriate. It allocates Asset Recoveries based on the proportionate interest of each Bridging Fund in the particular Loan or other Assets from which the proceeds were derived.

63. The Receiver recommends, and I accept, this approach since the books and records of Bridging reflect the proportionate interest of each Bridging Fund in a particular Asset. Moreover, the proposed Methodology is consistent with reporting made by the Receiver during the Receivership Proceeding pursuant to which Asset values have been allocated to individual Bridging Funds. Accordingly, the proposed Asset Allocation Methodology is also consistent with the expectations of stakeholders.

Cost Allocation Methodology

64. The proposed Cost Allocation Methodology is fair and equitable in the circumstances of this case. It would allocate costs as follows:

a. Fund Specific Expenses that are directly attributable to a specific Bridging Fund are allocated only to that Bridging Fund;

b. Loan Expenses are allocated to each Bridging Fund based on its interest in the subject Loan or Asset. According to the books and records of Bridging; and

c. General Receivership Costs and General Operating Expenses are allocated based on the proportionate share of Assets of each Bridging Fund, calculated as a percentage of total Assets for Bridging Funds.

65. This Court has previously set out the general principles applicable to the allocation of the costs of a receiver as set out below. See: Royal Bank of Canada v. Atlas Block Co. Limited, 2014 ONSC 1531, at para. 43:

a. the allocation of such costs must be done on a case-by-case basis and involves an exercise of discretion by a receiver or trustee;

b. costs should be allocated an affair in a controlled manner that does not readjust priorities between creditors or ignore the benefit or detriment to any creditor;

c. a strict accounting such costs is neither necessary nor desirable in all cases. To require receiver to calculate and determine an absolutely fair value for its services for one group of assets vis-à-vis another likely would not be cost-effective and would increase overall costs of the receivership;

d. a creditor need not benefit “directly” before the costs of an insolvency proceeding can be allocated against the recovery of that creditor;

e. an allocation does not require a strict cost/benefit analysis or that the costs be borne equally or on a pro rata basis; and

f. where an allocation appears prima facie fair, the onus falls on an opposing creditor to satisfy the court that the proposed allocation is unfair or prejudicial.

66. I am satisfied that the proposed Cost Allocation Methodology satisfies these factors. It ensures that each Bridging Fund pays only for costs that are directly attributable to it, related to recoveries from Assets in which that Bridging Fund has an interest, or are otherwise proportionate to the Bridging Fund’s economic interest in the activities of the Receiver that have been undertaken for the benefit of all Bridging Funds. It is also consistent with allocation of costs to the Bridging Funds prior to the Date of Appointment.

NCI Methodology

67. I am satisfied that the proposed NCI Methodology is appropriate as a mechanism to determine the amount to be distributed to each Unitholder. Such amounts are based on net cash invested (i.e., cash invested, net of cash distributions received by each Unitholder).

68. In this case, I accept the judgment of the Receiver that, given the difficulty in quantifying the damages resulting from the various claims of each Unitholder against the Bridging Funds (i.e., statutory and common law claims for rescission, damages and other remedies), the NCI Methodology is an appropriate proxy for such claims that most accurately represents the proportionate economic interest of each Unitholder in the Bridging Funds. It also fairly accounts for Unitholders that have already recovered their NCI prior to the Date of Appointment by excluding them from the proposed Interim Unitholder Distribution.

69. The proposed Interim Unitholder Distribution necessarily requires approval of the underlying proposed calculation by the Receiver of the amount to be distributed by Unitholders.

Substantive Consolidation

70. I am satisfied that substantive consolidation of the Bridging Funds is not appropriate for the purposes of the Interim Unitholder Distribution.

71. In Redstone Investment Corporation (Re), 2016 ONSC 4453 at paras. 47 and 78, this Court set out the factors to be considered in a determination of whether consolidation is appropriate:

a. the presence of the following Elements of Consolidation:

  i. difficulty in segregating assets;

  ii. presence of consolidated financial statements;

  iii. profitability of consolidation at a single location;

  iv. co-mingling of assets and business functions;

  v. unity of interests in ownership;

  vi. existence of intercompany loan guarantees; and

  vii. transfer of assets without observance of corporate formalities;

b. whether the benefits of consolidation outweigh the prejudice to particular creditors; and

c. whether consolidation is fair and reasonable in the circumstances.

72. Only three Elements of Consolidation are present here. The others are absent.

73. First, as to profitability of consolidation at a single location, BFI managed the Bridging Funds from the same location, and it was solely responsible for sourcing and managing the Loan Portfolio.

74. Second, as to a co-mingling of assets and business functions, and although the interest of each Bridging Fund in a particular Asset is separately recorded in the books and records (and were therefore not co-mingled), any interest of a Bridging Fund in the Loan was, as is observed by the Receiver, often partially or wholly transferred to another Bridging Fund at the sole discretion of BFI.

75. Each such transfer took place at the face value of the loan interest and, in the view of the receiver, was likely overvalued in many instances.

76. Third, with respect to the transfer of assets without observance of corporate formalities, BFI, as manager of Bridging Funds, effectively negotiated with itself when allocating and transferring loan interests between Bridging Funds. It is not clear to the Receiver (which observation is not challenged by any party), how this process accounted for or protected the interests of Unitholders in each Bridging Fund.

77. As to whether the benefits of consolidation outweigh the prejudice to particular creditors, and as fully set out in the 24th Report and the Supplements, the amount to be distributed to Unitholders would decrease by approximately $17 million due to an increase in the amount of the Disputed Bridging Funds Claims Reserves (which is the combined impact of the Canning Settlement and the BlackRock Distribution). Substantive consolidation would benefit BIF and BIF RSP, while it would be to the detriment of the other Bridging Funds.

78. I accept the submission of the Receiver that substantive consolidation of the Bridging Funds in the context of the proposed Interim Distribution Calculation would not be fair and reasonable in all the circumstances. In this regard, I observe that:

a. the only Unitholders that benefit from substantive consolidation are the Unitholders of BIF and BIF RSP, to whom the amount distributed would increase by $81 million, while the amount to be distributed to Unitholders in the other Bridging Funds (other than FERN, in respect of which there is no change), would decrease by $98 million;

b. the loan interest transfers do not appear to have materially benefited one or more Bridging Funds at the expense of the other Bridging Funds;

  i. the increase in the distribution to BIF and BIF RSP unitholders would result largely from the fact that other Bridging Funds would share the potential liability for the Canning Claim and the Cerieco Claim. This seems unfair with respect to both: With respect to the Canning Claim, the decision of the Claims Officer that none of the Bridging Funds other than BIF could be liable for the Canning Claim is a final order.

  ii. With respect to the Cerieco Claim, at the time the guarantee that is the foundation of the Cerieco Claim was granted, the only Bridging Funds then in existence were BIF and SMA 1. If the guarantee is ultimately determined to be valid, and the Cerieco Claim succeeds, substantive consolidation would reduce the distribution to Unitholders in the Bridging Funds other than BIF, BIF RSP and FERN, all as a result of the enforceability of a guarantee agreement that predates their existence and which was never assumed by such Bridging Funds; and

  iii. substantive consolidation would prejudice SMA 2 even though it did not exist at the time that most of the Elements of Consolidation present in this case (as described above) occurred.

79. For all of these reasons, and considering all of the Redstone factors, in my view, substantive consolidation of the Bridging Funds for the purposes of the Interim Unitholder Distribution is not appropriate.

Interim Distribution Calculation

80. In the main, the Interim Distribution Calculation for which approval is sought includes the following:

a. the treatment of all Unitholder Claims against BIF and MMF, and the respective Disputed Bridging Fund Claims against BIF and MMF, on a pari passu basis for the purpose of calculating the Disputed Bridging Funds Claims Reserves;

b. the holdback of other cash Reserves to fund future expenses and contingent liabilities;

c. use of the proposed Asset Allocation Methodology as a method to allocate Asset Recoveries, and the Cost Allocation Methodology as the method to allocate costs, both as among the Bridging Funds;

d. use of the NCI Methodology as the method of determining the amount to be distributed to each Unitholder; and

e. approval of the recommendation of the Receiver that the Bridging Funds should not be substantively consolidated in the context of the Interim Unitholder Distribution.

81. The settlement of the Canning Claim necessarily requires updates and adjustments to the proposed Interim Distribution Calculation set out in the 24th Report. In particular, the amount of $12 million reserved for the Canning Claim as part of the Disputed Bridging Fund Claims Reserve can now be removed, resulting in a corresponding increase in the Cash Available for Distribution in BIF. The Receiver has made those adjustments as set out in the Supplement, and corresponding adjustments in respect of the BlackRock Settlement.

82. Given my determinations above with respect to those factors indicated, the issues that remain are whether:

a. as proposed by the Receiver, the Unitholder Claims and the Disputed Bridging Fund Claims (and therefore the corresponding Reserves) should be treated on a pari passu basis;

b. as proposed by Representative Counsel for the Unitholders, Unitholder Claims should be impressed with a constructive trust such that they enjoy a priority over the Disputed Bridging Fund Claims; or

c. as proposed by Cerieco, the proposed quantum of the Interim Unitholder Distribution should be reduced and adjusted to reserve for the Cerieco Claim as asserted, pending a determination.

83. The Receiver submits that the Disputed Bridging Funds Claims Reserves (as adjusted to reflect the settlements of the Canning Claim and the BlackRock Claim) establish the amount that would otherwise be distributed now on account of the Cerieco Claim, if that claim was finally determined to be valid. This is accurate, if one assumes that the Cerieco Claim enjoys no priority as a creditor claim over claims of equity.

84. The Receiver submits that since this is a receivership commenced pursuant to the Securities Act, the definitions of “equity interest” and “equity claim” found in each of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (“BIA”), and in the Companies’ Creditors Arrangement Act, R.S.C., 1985, c. C-36 (“CCAA”), do not apply.

85. There are no equivalent provisions found in the Securities Act. Moreover, the object of the Securities Act is to provide protection to investors from unfair, improper fraudulent practices and to foster fair and efficient capital markets and confidence in those capital markets (s. 1.1).

86. It follows, the Receiver submits, that since the BIA and CCAA do not apply to this Receivership Proceeding, and since the Securities Act does not address the relative priority of Unitholder Claims and the Disputed Bridging Fund Claims, the relative priority of each should be determined with reference to the law in effect before the 2009 amendments to the BIA and CCAA that added the definitions of “equity interest” and “equity claim” and related provisions.

87. Over a hundred years of corporate law stands for the general proposition that shareholders are not entitled to recover from assets until after all ordinary creditors have been paid in full.

88. However, the Receiver submits that the pre-2009 jurisprudence under the BIA and CCAA (i.e., in our Canadian bankruptcy and insolvency regimes) does not universally apply this ancient corporate law principle, and that in certain circumstances, the characterization or nature of the claims of each of shareholders and creditors is such that the claims of shareholders ought not to be automatically subordinated to claims of creditors.

89. Clearly, there are examples in the case law of situations in which the relative priority of claims of shareholders and creditors requires a more nuanced analysis. See, for example: Royal Bank of Canada v. Central Capital Corp., 132 D.L.R. (4th) 223 (Ont. C.A.) (“Central Capital”); Blue Range Resource Corporation, 2000 ABQB 4, 259 AR 30, at paras. 17, 22 and 23; National Bank of Canada v. Merit Energy Ltd., 2001 ABQB 583, 294 AR 15, at paras. 55-56; Menegon v. Philip Services Corp., at para. 29; and I. Waxman & Sons Limited (Re) (2008), 89 O.R. (3d) 427 (S.C.), at para. 25.

90. As observed by the Court of Appeal for Ontario in Central Capital, the pre-2009 case law was clear that subordination of shareholder claims to creditor claims was not automatic and the “true nature” of claims advanced by a shareholder is also relevant in considering the priority of those claims relative to claims of “ordinary creditors”.

91. The Receiver relies on the decision of this Court in Ontario (Securities Commission) v. Consortium Construction, 1993 CarswellOnt 908 (OCJ (Gen. Div) (Comm. List)) (“Consortium”) as an example of a Securities Act receivership proceeding (and one that pre-dated the 2009 amendments to the BIA and CCAA).

92. In Consortium, the Court considered a situation where a sale of securities by Consortium without a prospectus was found to have violated the relevant provisions of the Securities Act. As a result, and since the prohibition on the sale of securities without a prospectus is central to achieving the policy of investor protection, those contracts were void for illegality, with the further result that the investors had a restitutionary right to recover their investments since Consortium had been unjustly enriched. It followed that this restitutionary right conferred upon all investors the status of creditors, regardless of what their status might otherwise have been (see paras. 45–55).

93. Applying the ratio of Consortium to the present case, the Receiver submits that violations of the policy objectives of the Securities Act (as have already been found by the Capital Markets Tribunal), support the treatment of Unitholder claims on an equal basis with other creditor claims in the context of a distribution.

94. The Receiver points to the findings of the Capital Markets Tribunal that the Securities Act has been violated, and that the principals of the Bridging Funds misappropriated monies from the Bridging Funds that belonged to those Funds or to Unitholders. The Receiver submits that these facts, together with misrepresentations made in the BIF and MMF Offering Memoranda, and as a result of fraudulent and wrongful acts, trigger (among other things), statutory rights for Unitholders of BIF and MMF to claim rescission or damages.

95. The Receiver submits that pursuant to the BIF and MMF Offering Memoranda, Unitholders in British Columbia and Québec, or Unitholders in Alberta who purchased Units under an “accredited investor” exemption, are granted contractual rights of action for damages or rescission that are the same as, or similar to, the misrepresentation rights provided under s. 130.1 of the Securities Act.

96. For all of these reasons, the Receiver submits that subordinating BIF and MMF Unitholder Claims to the Disputed Bridging Fund Claims for the purpose of the Interim Distribution Calculation is not supported by the provisions of the Securities Act, and would undermine the protective purpose of that statute. It would do so by subordinating claims (i.e., the Cerieco Claim) that arise from the very type of misconduct that the Securities Act seeks to prevent.

97. The Receiver further submits that if the Cerieco Claim specifically is determined to be valid (which is denied by the Receiver), the argument summarized above would be directly applicable: the reasoning of the Capital Markets Tribunal (applicable to the BlackRock Claim) would apply equally to the Cerieco Claim. The result would be that such use of investor money in BIF would be contrary to the stated objectives of BIF as disclosed to its Unitholders, and nothing in its Offering Memorandum would suggest to a reasonable investor that their investment would be used to support an outside investment by the principals of Bridging.

98. This, together with other alleged representations (see factum of Receiver at para. 37), would give rise to claims by Unitholders for rescission or damages in accordance with s. 130.1 of the Securities Act, as well as rescission, damages and other remedies available at common law. The Receiver submits: “In the Receiver’s view, it is reasonable to assume, for the purpose of the Interim Unitholder Distribution, that BIF and MMF Unitholders would be able to prove that they relied upon misrepresentations in the Offering Memorandum for each of BIF and MMF.

99. Finally, the Receiver relies upon the recent decision of this Court reflected in the Endorsement of Steele J. (June 24, 2024) in Chief Executive Officer of the Financial Services Regulatory Authority of Ontario v. First Swiss Mortgage Corp, Court File No. CV-23-00696362-00CL (“First Swiss”), where the Court endorsed a pari passu treatment for investors and creditors, emphasizing the need for equitable treatment where not doing so would produce unfair results.

100. The Court concluded in First Swiss that strict legal application of trust principles would unfairly reward certain investors over others based on timing or chance, and that courts have consistently allowed pooled and ratable asset distribution in cases requiring equitable treatment, particularly where strict legal applications would otherwise lead to unjust results (paras. 18–22).

101. The Receiver submits that application of the same principles here militates in favour of treating Unitholder Claims against BIF and MMF and the respective Disputed Bridging Fund Claims against BIF and MMF on a pari passu basis.

102. The challenge for me on this motion is that while the proposed treatment of Unitholder Claims against BIF and MMF and the respective Disputed Bridging Fund Claims against BIF and MMF on a pari passu basis may ultimately be the fair, equitable and appropriate result consistent with the objectives of the Securities Act, such a conclusion is premature today.

103. The fundamental problem is that the Cerieco Claim has not been finally determined, as is acknowledged by all parties. The disallowance by the Receiver is the subject of a pending hearing on the merits to be conducted by the Claims Officer this year. An appeal from any decision of the Claims Officer lies to this Court.

104. That entire process, which is far from completed, is proceeding pursuant to the earlier Claims Adjudication Order made by this Court in this Receivership Proceeding. That order was made not only with the consent of the Receiver, but at its request. It was also supported by Representative Counsel for the Unitholders. The order provides that Representative Counsel has a right to participate in the hearing before the Claims Officer and any appeals thereafter.

105. The claims process, already well underway, needs to be completed, and the validity of the Cerieco Claim finally determined, before the assumptions of the Receiver, while made in good faith, can be properly tested.

106. The straightforward yet fundamental problem with the position of the Receiver that, for the purposes of the Interim Unitholder Distribution, the Cerieco Claim should not be considered to be an “ordinary creditor claim” entitled to be paid in full before claims of Unitholders (i.e., equity claims), is that this position assumes the Receiver (and Representative Counsel for the Unitholders) are successful on the Cerieco Claim.

107. As set out above, the Receiver submits on this motion that the Cerieco Claim is based on a secret, undisclosed guarantee of Cerieco’s loan to facilitate construction of the One Bloor Project for the benefit of certain principals of Bridging, to the detriment of the Bridging Funds and their Unitholders, who received no consideration or benefit for such a guarantee.

108. It is that assertion that underpins the entire submission that the Cerieco Claim should not be treated as an ordinary course creditor claim paid in priority to Unitholder claims, since to do so would reward the very wrongdoing and misconduct that the Securities Act is intended to prohibit.

109. Cerieco denies all of this and maintains that the guarantee, and therefore its Claim, are valid.

110. The submission of the Receiver may one day be entirely correct. But to accept it today, while the claims process (to which all parties agreed and in which all will participate) remains ongoing, would be to circumvent that entire claims process and assume, prematurely, that the Cerieco Claim cannot succeed or that if it does so, the corresponding Reserve will not be sufficient to pay it in full. That is not appropriate.

111. The Receiver submits that the Cerieco Claim results from “fraudulent and wrongful acts” that it submits resulted in the granting of what it describes as “the secret guarantee”. The problem today is that that the Unitholder Claims are based (as summarized above) on the same fraudulent and wrongful acts - misrepresentations, and misuse of investor money in the Bridging Funds – that resulted in the loss of Unitholder investments, and the proposed relief requires me to assume that Unitholder Claims succeed and the Cerieco Claim does not (or at least does not succeed for the full quantum claimed).

112. Accordingly, I decline, for the purposes of the Interim Unitholder Distribution only, to approve the Interim Distribution Calculation on the basis that Unitholder Claims against the respective Disputed Bridging Fund Claims should be treated on a pari passu basis.

113. To be very clear, it may well be that they should be treated on a pari passu basis, but that decision should be made and appropriate adjustments implemented at the time of a subsequent distribution once the Cerieco Claim has been finally determined.

114. I recognize that this means that Unitholders in MMF, who have already waited a significant period of time for recoveries on their investments, will have to wait longer. However, the prejudice of that further delay is mitigated by the fact that investment income and interest continue to accrue on the funds held in trust by the Receiver, and such income will enure to whichever party or parties are ultimately held to be beneficially entitled to the funds.

115. On the other hand, if the Interim Distribution is approved on the proposed pari passu basis today, and the Cerieco Claim is ultimately finally determined to be valid and ultimately determined to be paid in full as a creditor claim against the Bridging Funds in priority to claims of Unitholders, it will not, however, be capable of being paid as such because the funds will have been distributed.

116. It is common ground between the Receiver and Cerieco that if the Receiver’s motion were granted today, it would reduce the maximum entitlement of Cerieco, even if it succeeded on its Claim, to approximately 22% of the value of its filed Claim. The Cerieco Claim, exclusive of interest and costs, is based on the value of its filed Claim of $213 million. The Receiver’s proposed Reserve for the Cerieco Claim is $49.2 million, or approximately $163.8 million less than the value of the Claim as filed.

117. For all of these reasons, and while the proposed Interim Distribution to Unitholders is appropriate and should be made at this time, it should be made based on the Interim Distribution Calculation approved as proposed save and except for the pari passu treatment of the Cerieco Claim, and Unitholder Claims with respect only to those affected Bridging Funds (i.e., BIF and BIF RSP).

118. I direct the Receiver to make such adjustments to the Interim Distribution Calculation as are necessary to give effect to these reasons before the Interim Distribution to Unitholders is made.

119. Given my decision above, it is unnecessary for me to address the other arguments advanced by Cerieco, including that the BIF Limited Partnership Agreement clearly provides that the net assets of the funds shall be distributed first to creditors and thereafter to Unitholders; or that the Limited Partnerships Act also provides for creditor priority in these particular circumstances.

Representative Counsel Motion for a Constructive Trust

120. Representative Counsel for the Unitholders seeks the imposition of a constructive trust over the subject Bridging Funds (which would include the proceeds of BIF). As noted above, Representative Counsel amended the scope of relief being sought at the hearing of these motions to withdraw its request for a constructive trust to the extent that such amendment was necessary to give effect to the BlackRock Settlement. Subject to that exception, however, it seeks the imposition of the constructive trust today.

121. The Receiver submits that if the relief sought by Representative Counsel in the form of the imposition of a constructive trust on the assets of the Bridging Funds for the benefit of Unitholders is granted, the Interim Distribution Calculation would need to be further revised to reflect the fact that Unitholders would receive a higher amount than currently contemplated.

122. In the circumstances, the Receiver therefore submits that the motion of Representative Counsel for the imposition of a constructive trust should be deferred, since any increase in the amount to be distributed to Unitholders can be addressed as part of a subsequent distribution.

123. Cerieco submits that the constructive trust motion should be dismissed, since it would eliminate its ability to recover on its claim at all.

124. In my view, the constructive trust motion should be deferred as proposed by the Receiver and addressed if and as necessary in connection with the subsequent distribution.

125. Once the Cerieco Claim is finally determined, being the only remaining Disputing Bridging Claim still outstanding, the issue of whether a constructive trust should be imposed on either of the two principal grounds relied upon by Representative Counsel for the Unitholders (unjust enrichment and wrongful conduct) can be addressed as necessary. There are no other outstanding Disputed Bridging Claims (and Representative Counsel consented to the settlement of each of the Canning Claim and the BlackRock Claim, as discussed above).

126. I do note the submission of Cerieco that the constructive trust motion should also be dismissed on the basis that it is res judicata, and that the decision of the Court of Appeal for Ontario made in this proceeding in connection with the 2022 Unitholder Priority Motion (2023 ONCA 769) determined that there was no legal or equitable basis to impose a constructive trust or recognize any priority.

127. Representative Counsel submits that the issue before the Court of Appeal, and in respect of which it made a determination, was whether a constructive trust ought to be imposed in favour of Unitholders who had Potential Statutory Rescission Claims, such that they had priority over General Unitholder Claims. Representative Counsel submits that the issue determined was therefore one of relative priority between and among Unitholders, and there was no determination about relative priority between Unitholders on the one hand and those parties asserting a Disputed Bridging Claim on the other hand.

128. In my view, this issue also can and should be determined if necessary, following a final determination of the Cerieco Claim. That would satisfactorily address the argument of Cerieco that if a constructive trust were imposed, it would amount to a collateral attack on the Claims Adjudication Order and would result in a situation where Cerieco was unable to recover any value from BIF even if it were ultimately successful in in its Claim.

Approval of the 24th Report, the First and Second Supplements and the Activities of the Receiver

129. Approval of the 24th Report, the Supplements and the activities of the Receiver described therein is unopposed. While I have declined to approve the Interim Distribution calculation insofar as it affects the Cerieco Claim and directed the Receiver to make necessary adjustments for the reasons set out above, I am satisfied that the activities of the Receiver should be approved.

130. Those activities are consistent with the mandate given to the Receiver in the original appointment order. I am satisfied that in this extremely complex Securities Act receivership, the activities of the Receiver as set out in the 24th Report and the Supplements were undertaken in good faith, are reasonable, appropriate and have been accretive to the progress achieved to date for the benefit of Unitholders and other stakeholders.

131. This Court has previously observed that periodic requests to approve reports of a monitor in a CCAA proceeding or a receiver appointed pursuant to the Bankruptcy and Insolvency Act or the Courts of Justice Act are appropriate and that there are good policy and practical reasons to grant such approvals which include allowing the Court officer to move forward with the next steps in the proceeding. See, for example, Target Canada Co, (Re), 2015 ONSC 7574, at paras. 2 and 23. In my view, there is no reason why the same principles ought not to apply to a receivership proceeding commenced pursuant to the Securities Act.

132. For these reasons, the 24th Report, the Supplements and the activities of the Receiver set out therein are approved, subject to the required adjustments to the Interim Distribution Calculation as set out above.

Result and Disposition

133. For all of these reasons, the motions of the Receiver are granted in part.

134. The Interim Unitholder Distribution is approved, but the Interim Distribution Calculation must be adjusted such that the Reserve in respect of Disputed Bridging Fund Claims (i.e., the Cerieco Claim) is maintained in an amount sufficient to satisfy the Cerieco Claim until it has been finally determined.

135. The BlackRock Settlement is approved, and the acceptance of the Unjust Enrichment Claim against MMF is approved, and the BlackRock Distribution is approved in full and final satisfaction of the Unjust Enrichment Claim.

136. Subject to the above, the 24th Report and the activities described therein are approved.

137. The constructive trust motion of the Unitholders is deferred to be determined if necessary, following a final determination of the Cerieco Claim.

138. Orders to go to give effect to these reasons.

Osborne J.

[^1]: BFI, as agent on behalf of BIF, advanced the 258 Loans to 258 Ontario, secured by charges on real property owned by 258 Ontario located in the municipality of Lakeshore-Maidstone, County of Essex, Ontario (the "Maidstone Property"). 258 Ontario defaulted on its obligations under the 258 Loans, and the Receiver sought and obtained the appointment of a receiver over 258 Ontario. Bridging's involvement in the financing for the acquisition of the Maidstone Property by 258 Ontario formed the basis of the Canning Claim.