factum of emmanuel village residence inc

BETWEEN:

Court File No. CV-16-11424-00CL

ONTARIOSUPERIOR COURT OF JUSTICE

COMMERCIAL LIST

EMMANUEL VILLAGE RESIDENCE INC.

and


Applicant

Respondent

Application under section 101 of the Courts of Justice Act, R.S.O. 1990, c. C.43, as amended

FACTUM OF EMMANUEL VILLAGE RESIDENCE INC.

June 16, 2016 DLA PIPER (CANADA) LLPBarristers & Solicitors1 First Canadian Place100 King Street West, Suite 6000P.O. Box 367Toronto ON M5X 1E2

Jennifer A. Whincup (LSUC# 60326W)Tel: 416-365-3425Fax: [email protected]

Lawyers for the Applicant/Respondent

TO: ATTACHED SERVICE LIST

SERVICE LIST

TO: THORNTON GROUT FINNIGAN LLPSuite 3200, 100 Wellington Street WestP.O. Box 329, Toronto-Dominion CentreToronto, ON M5K 1K7

Leanne M. WilliamsIwilliams@tglca

Tel: 416-304-0060Fax: 416-304-1313

Asim Iqbalaiqbal@tglca

Tel: 416-304-0595Fax: 416-304-1313

Lawyers for BDO Canada Limited

AND TO: TORKIN MANESBarristers and Solicitors151 Yonge Street, Suite 1500Toronto ON M5C 2W7

Jeff [email protected]

Tel: 416-777-5413Fax: 1-888-587-9143

Lawyers for HMT Holdings Inc.

AND TO: SURE MORTGAGE CAPITAL INC.71 Simcoe Street, Unit 1804Toronto, ON M5J 2S9

[email protected]

Tel: 1-877-714-SURE (7873)

CAN: 21934684.1

- 2 -

AND TO: BENNETT JONES LLP3400 One First Canadian PlaceP.O. Box 130Toronto, OntarioM5X 1A4 Canada

Jonathan BellTel: 416-777-6511Fax: 416-863-1716

Plaintiffs in Court File No. CV-10-8597-00CL

AND TO: MINISTRY OF NATIONAL REVENUEc/o Department of Justice CanadaOntario Regional OfficeThe Exchange Tower130 King Street WestSuite 3400, Box 36Toronto, ON M5X 1K6

Diane Winters / Peter [email protected]@justice.gc. ca

Tel: 416-973-3172Fax: 416-973-0810

Lawyers for Canada Revenue Agency

AND TO: MINISTRY OF FINANCELegal Services Branch6th Floor, 33 King Street WestOshawa ON L1H 8H5

KEVIN O'[email protected]

Tel: 905-433-6934Fax: 905-436-4510

CAN: 21934684.1

- 3 -

AND TO: RETIREMENT HOMES REGULATORY AUTHORITYOffice of the Registrar160 Eglinton Avenue East, Fifth FloorToronto, ON M4P 3B5

Tel: 416-487-1223Fax: 416-440-3570

AND TO: BANK OF NOVA SCOTIAStandard Live Building120 King Street West, 5th FloorHamilton, ON L8P 4V2

Secured Party

AND TO: RCAP LEASING INC.5575 North Service Road, Suite 300Burlington, ON L7L 6M1

Secured Party

CAN: 21934684.1

BETWEEN:

Court File No. CV-16-11424-00CL

ONTARIOSUPERIOR COURT OF JUSTICE

COMMERCIAL LIST


and


Applicant

Respondent

Application under section 101 of the Courts of Justice Act, R.S.O. 1990, c. C.43, as amended

FACTUM OF EMMANUEL VILLAGE RESIDENCE INC.

PART I - INTRODUCTION

1. The Applicant/Respondent, Emmanuel Village Residence Inc. ("EVR") seeks an order

substantially in the form as Tab 3 to the Application Record appointing BDO Canada Limited as

receiver (in such capacities, the "Receiver") without security, for the purpose of completing a

going concern sale of EVR's business (the "Business") and the assets, undertaking and property

used in relation to the Business, including all proceeds thereof (the "Property").

2. EVR is the owner and operator of Emmanuel Village Retirement Residence ("Emmanuel

Village"), a retirement home community, which currently houses approximately 112 residents.

3. The Retirement Homes Regulatory Authority ("RHRA") has revoked EVR's license to

operate a retirement home ("License"), effective September 2, 2016. This decision was based

mainly on the fraud conviction of EVR's principal, Bryan Hunking ("Mr. Hunking").

4. The only way for Emmanuel Village to continue operating as a retirement home is to sell

the Business and Property as a going concern to another entity licenced by the RHRA to operate a

retirement home. One potential purchaser has been identified through a sale process conducted by

EVR (the "Potential Purchaser"). In its letter of intent, the Potential Purchaser has made the

completion of the sale condition on obtaining an approval and vesting order from the Court. It is

likely that this would be a condition that any potential purchaser would request.

5. It is in the best interest of the stakeholders of EVR, including its creditors as well as its

residents, to have an independent, court-supervised third-party appointed solely to evaluate EVR's

effort to sell the Property, to oversee the sale transaction, and to hold and distribute the sale

proceeds of the transaction.

6. While the appointment of a receiver under these circumstances may be unusual, it is just

and convenient to grant the order in the form as Tab 3 to the Application Record, given the fraud

conviction against the principal of EVR, the interests of the residents in having Emmanuel Village

continue to operate as a licensed facility, and the interests of stakeholders in maximizing the value

of having EVR sold as a going concern.

PART II - SUMMARY OF FACTS

Background of EVR

7. EVR is the owner and operator of Emmanuel Village in Kitchener, Ontario. Emmanuel

Village is a retirement community that houses between 110 and 130 residents and employs

approximately 50 individuals.

Affidavit of Judith Ann Hunking, sworn June 9, 2016, Application Record, Tab 2 ("Hunking

Affidavit") at para 4.

8. EVR is not insolvent

Hunking Affidavit at para 37.

9. Emmanuel Village, like all retirement home communities in Ontario, is regulated under the

Retirement Homes Act, 2010 (the "Act") and through the RHRA. The RHRA is not a

governmental body or a crown agency. It is an independent non-profit organization governed by a

Board of Directors. Businesses that meet the legal definition of a retirement home under the Act

must apply to the RHRA for a licence. This licensing process began in August, 2012.


10. In a 2015 audit of Emmanuel Village by the RHRA, the audit revealed that there were no

problems or circumstances requiring attention relating to any financial or health related matters.

There have been no significant complaints against Emmanuel Village, and it enjoys an occupancy

rate in excess of 90%, which is well above the average in the Waterloo Region and throughout

Ontario.

Hunking Affidavit at paras 11, 13.

EVR's License Revoked

11. On or about March 1, 2016, the RHRA sent an Order to Revoke a License (the "License

Order") to EVR, revoking EVR's License, effective July 4, 2016.

Hunking Affidavt at para 14-15.

12. In large part the RHRA relied on the fact that Mr. Hunking had pleaded guilty to a count of

fraud over $5,000 stemming from a series of investments he was involved with between 2000 and

2003.

Hunking affidavit at para 15.

13. Mr. Hunking is currently being held in custody pending his sentencing.

Hunking affidavit at para 34.

The Potential Purchaser

14. EVR has made several attempts to sell the Property both before and after receiving the

License Order and engaged Durham Capital Management o/a/ Sure Mortgage ("Sure

Mortgage"), to find a potential purchaser of the Business and Property who would be able to

continue to operate a retirement home at Emmanuel Village, which has resulted in a sale process.

Hunking Affidavit at para 18

15. On or about April 25, 2016, EVR received a letter of intent and deposit from.the Potential

Purchaser, who is a licensed operator of retirement homes. The offer is conditional on EVR

obtaining an approval and vesting order. If a sale is completed, there will be a surplus remaining

after satisfying all the claims of secured creditors, priority payables and trade creditors.


16. EVR's efforts to find a licensed purchaser of its business and Property allowed it to obtain

an extension to the revocation date of its License from July 4, 2016 to September 2, 2016. RHRA

granted this extension on several conditions, including that EVR provide notice to the RHRA of

the closing date of any sale transaction with the Potential Purchaser, or if the transaction with the

Potential Purchaser was cancelled.


17. If EVR is not able to find a successful purchaser without a court-supervised process, it risks

the revocation of its License as early as September 2, 2016, which would detrimentally effect the

current 112 residents of Emmanuel Village and their families, along with more than 50 employees.

Hunking Affidavit at paras 40-41.

18. Of EVR's four secured creditors, two are secured over leased equipment, and the

remaining two, HMT Holdings Inc. and Sure Mortgage, are supportive of the appointment of a

receiver by EVR to report on the sale process conducted by EVR, and complete a going concern

sale of the Business and Property, including distribution of the sale proceeds.


PART III - STATEMENT OF ISSUES, LAW & AUTHORITIES

The Court Should Grant the Appointment Order

19. Section 101(1) of the CJA provides for the appointment of a receiver by interlocutory order

where the appointment is "just or convenient". Section 101(1) of the CJA states as follows:

Injunctions and receivers

101.(1) In the Superior Court of Justice, an interlocutory injunction or mandatory order may begranted or a receiver or receiver and manager may be appointed by an interlocutory order, where itappears to a judge of the court to be just or convenient to do so.

Courts of Justice Act, RS01990, c C43, s 101(1)

20. While there is no guidance in the Courts of Justice Act or other legislation that provides for

the appointment of receivers, about what "just or convenient" means, courts have identified

several factors that may guide a judge in determining whether or not the appointment of a receiver

is warranted under the circumstances.

21. In determining whether it is "just or convenient" that a receiver should be appointed, there

are a number of factors that courts may take into consideration. These factors are enumerated in

Bennett on Receiverships, and adopted by case law:

There are a number of factors that figure in the determination of whether it is appropriate to

appoint a receiver. In Bennett on Receivership, 2d ed. (Toronto: Carswell, 1999), at p. 130, a

list of such factors is set out as follows:

a) whether irreparable harm might be caused if no order were made, although it is not

essential for a creditor to establish irreparable harm if a receiver is not appointed,

particularly where the appointment of a receiver is authorized by the security

documentation;

b) the risk to the security holder taking into consideration the size of the debtor's equity in the

assets and the need for protection or safeguarding of the assets while litigation takes

place;

c) the nature of the property;

d) the apprehended or actual waste of the debtor's assets;

e) the preservation and protection of the property pending judicial resolution;

f) the balance of convenience to the parties;

g) the fact that the creditor has the right to appoint a receiver under the documentation

provided for the loan;

h) the enforcement of rights under a security instrument where the security-holder encounters

or expects to encounter difficulty with the debtor and others;

i) the principle that the appointment of a receiver is extraordinary relief which should be

granted cautiously and sparingly;

j) the consideration of whether a court appointment is necessary to enable the receiver to

carry out its' duties more efficiently;

k) the effect of the order upon the parties;

I) the conduct of the parties;

m) the length of time that a receiver may be in place;

n) the cost to the parties;

o) the likelihood of maximizing return to the parties;

p) the goal of facilitating the duties of the receiver.

Paragon Capital Corporation Ltd v Merchants & Traders Assurance Company, 2002 ABQB

430 at para 27, citing Bennett on Receiverships, Tab 1.

22. This list is not exhaustive. Courts have also granted the appointment of receivers outside

of these circumstances, including where the appointment of a receiver is in the public interest, or

where a partnership that has no prospect of survival must be wound down.

King (Township) v Rolex Equipment Co., [1992] OJ No. 810, Tab 2

Red Burrito Ltd. v Hussain, 2007 BCSC 1277 at para 47, Tab. 3

23. In determining whether it is just and convenient to appoint a receiver under the CJA, a

court must have regard to all of the circumstances of the case, particularly the nature of the

property and the rights and interests of all parties in relation to the property.

Bank of Nova Scotia v. Freure Village on Clair Creek, [1996] O.J. No. 5088 at para. 10

(Gen. Div.), Book of Authorities, Tab 1 [Freure Village]

24. There are several reasons why the court ought to grant the appointment order:

(a) The fraud charge against EVR's principal have compromised EVR's ability to both

operate Emmanuel Village and sell it as a going concern;

(b) It is in the best interest of the residents of Emmanuel Village to have it continue to

operate as a licensed facility;

(c) It is in the best interest of the stakeholders to have an independent third party

evaluate and oversee the sale of EVR's Business and Property;

(d) It is in the best interest of the stakeholders to have EVR sold as a going concern in

order to maximize the value of EVR's Business and Property.

(e) If a receiver is not appointed, EVR will not be in a position to complete a sale with

the Potential Purchaser, or likely any purchaser, as it would not be able to obtain an

approval and vesting order; and

(0 If EVR is not able to complete a sale with a licensed purchaser, its License would

be revoked creating tremendous turmoil for the current residents, their families and

the employees of Emmanuel Village.

PART IV - ORDER REQUESTED

25 EVR respectfully requests an order substantially in the form attached as Tab 3 to the

Application Record.

11 9

ALL OF WHICH IS RESPECTFULLY SUBMITTED this 16th day of June, 2016.

Jennifer A. Whincup

-IYEA Piper (Canada) LLPBarristers & Solicitors1 First Canadian Place100 King Street West, Suite 6000P.O. Box 367Toronto ON M5X 1E2

Bruce Darlington (LSUC# 25310K)[email protected]: 416-365-3529Fax: 416-369-5210

Jennifer A. Whincup (LSUC# 60326W)[email protected]: 416-365-3425Fax: 416-369-5240

Lawyers for the Applicant/Respondent

SCHEDULE "A"

LIST OF AUTHORITIES

1. Paragon Capital Corporation Ltd v Merchants & Traders Assurance Company, 2002

ABQB 430

2. King (Township) v Rolex Equipment Co., [1992] OJ No. 810

3. Red Burrito Ltd. v Hussain, 2007 BCSC 1277 at para 47

SCHEDULE "B"

TEXT OF STATUTES, REGULATIONS & BY - LAWS

1. Courts of Justice Act, R.S.0.1990, c. C.43, s. 101(1)

Injunctions and Receivers

101.(1) In the Superior Court of Justice, an interlocutory injunction or mandatory order may be

granted or a receiver or receiver and manager may be appointed by an interlocutory order, where it

appears to a judge of the court to be just or convenient to do so.

TAB 1.

Paragon Capital Corporation Ltd. v. Merchants & Traders Assurance Company, 2002 ABQB430

BETWEEN:

Date: 20020429Action No. 0101 05444

IN THE COURT OF QUEEN'S BENCH OF ALBERTAJUDICIAL DISTRICT OF CALGARY

PARAGON CAPITAL CORPORATION LTD.

- and -Plaintiff

MERCHANTS &TRADERS ASSURANCE COMPANY, INSURCOM FINANCIALCORPORATION, 782640 ALBERTA LTD., 586335 BRITISH COLUMBIA LTD. AND

GARRY TIGHE

Defendants

REASONS FOR JUDGMENTof the

HONOURABLE MADAM JUSTICE B. E. ROMAINE

APPEARANCES:

Judy D. Burkefor the Plaintiff

Robert W. Hladun, Q.C.for the Defendants

INTRODUCTION

2002 ABQB 430

Page: 2

[1] On March 20, 2001, I granted an ex parte order appointing a receiver and manager ofthe property and assets of Merchants & Traders Assurance Company ("MTAC") and 586335British Columbia Ltd. ("586335"), including certain assets pledged by MTAC and 586335 toParagon Capital Corporation Ltd. MTAC, 586335 and the other defendants in this actionbrought an application to set aside this ex parte order. I declined to set aside, vary or stay the -J

ex parte order and these are my written reasons for that decision.

SUMMARY coes

[2] The ex parte order should not be set aside on any of the grounds submitted by theDefendants, including an alleged failure to establish emergent circumstances, a lack of candouror any kind of non-disclosure or misleading disclosure by Paragon. Hearing the motion toappoint a receiver and manager de novo, I am satisfied that the receivership should continue onthe terms originally ordered, and that the Defendants have not established that a stay of thatreceivership should be granted.

FACTS

[3] On March 15, 2000, Paragon loaned MTAC $2.4 million. The loan was for a term ofsix months with an interest rate of 3% per month, and matured on September 15, 2000. MTACwas to make interest-only payments to Paragon in the amount of $72,000.00 per month.

[4] The purpose of the loan was to allow MTAC to acquire 76% of the shares of GeorgiaPacific Securities Corporation ("Georgia Pacific"), a Vancouver-based brokerage business.That transaction was completed. As security for the loan, MTAC pledged the following:

a) an assignment of all of the property of MTAC and 586335, including the GeorgiaPacific shares;

b) a general hypothecation of the shares of Georgia Pacific owned by MTAC;

c) a power of attorney granted by MTAC to Paragon appointing an agent of Paragon to bethe attorney of MTAC with the right to sell and dispose of any shares held by MTAC;

d) an assignment of mortgage-backed debentures;

e) an assignment of a $200,000 US term deposit, which was stated to be held in the trustaccount of a lawyer by the name of Jamie Patterson;

.f) $250,000 to be held in trust by Paragon's counsel; and

g) $986,000 in an Investment Cash Account at Georgia Pacific.

Page: 3

Paragon filed a General Security Agreement executed by MTAC by way of a financingstatement at the Personal Property Registry on March 15, 2000. In addition, Paragon obtainedpersonal guarantees of the loan from Garry Tighe, Insurcom Financial Corporation, 586335and 782640 Alberta Ltd.

[5] The loan was not repaid and, pursuant to the terms of the General Security Agreement,Paragon appointed a private receiver in January, 2001.

[6] Subsequently, the parties entered into discussions resulting in a written ExtensionAgreement. The Extension Agreement acknowledged the balance outstanding under the loanon January 9, 2001 of $2,629,129.99 with a then per diem rate of $2,528.28 and acknowledgeddelivery of numerous demands and a Notice of Intention to Enforce Security pursuant toSection 244 of the Bankruptcy and Insolvency Act, R. S.C. 1985, c.B-3, as amended

[7] MTAC agreed pursuant to the Extension Agreement that all monies due andoutstanding would be repaid by February 22, 2001. If the funds were not repaid, Paragonwould be at liberty to enforce its security and take all steps it deemed necessary to collect thedebt. MTAC agreed it would not oppose Paragon's realization of its security, including theappointment of a receiver over its assets, and that it would, if requested, work with Paragonand any person designated by Paragon to attempt to realize on the value of the Georgia Pacificshares in a commercially reasonable manner.

[8] Pursuant to the terms of the Extension Agreement, the shares of Georgia Pacific ownedby MTAC were delivered to counsel for Paragon.

[9] It was also a term of the Extension Agreement that a discontinuance of the pendingaction would be filed and the appointment of the private receiver would be revoked. Both ofthese actions were undertaken by Paragon.

[10] The loan was not repaid by February 22, 2001. As of June 26, 2001, $2,850,192.62 wasoutstanding. Paragon issued a new Statement of Claim on March 2, 2001. On March 16, 2001counsel for MTAC, Insurcom, 782640, 586335, and Tighe filed a Statement of Defence andserved it upon Paragon's counsel.

[11] On March 20, 2001, Paragon applied for and was granted an ex parte order appointingHudson & Company as receiver and manager of all of the assets and property of MTAC and586335, including, specifically, the mortgage-backed debentures, $986,000 in a cash account,$200,000 in trust with a lawyer, the $250,000 paid to Paragon's counsel and the GeorgiaPacific shares. The application was made in private chambers, and no court reporter waspresent. However, counsel for Paragon made his application based on affidavit evidence of Mr.Hudson and others and supported by a written "Bench Brief', all of which has been disclosedto the Defendants. All of the above-noted facts and additional information contained in theaffidavits and Bench Brief were disclosed to me at the time of the ex parte application.

2002 ABQB 43

r-

Page: 4

ANALYSIS

Should the ex parte receivership order have been granted?

[12] Rule 387 of the Alberta Rules of Court provides that the court may make an ex parteorder if it is satisfied that the delay caused by proceeding by notice of motion might entailserious mischief. The applicant must act in good faith and make full, fair, and candiddisclosure of the facts, including those that are adverse to his position: Metropolitan LifeInsurance Company v. Hover, 1999, 237 A.R. 30 at paragraph 23, referring to Royal Bank v.W. Got & Associates (1994), 150 AR. 93 at 102-3 (Alta. Q.B.); (1997) AR. 241 (Alta. C.A.);leave to appeal granted [1997] S.C.C.A. No. 342.

[13] The Defendants submit that there was no urgency requiring an ex parte application.There was, however, affidavit evidence that led me to believe that the assets of MTAC and586335 that had been pledged as security for the loan to Paragon were at risk, and thatmischief could occur if an ex parte order was not granted.

[14] There was, by way of example, evidence that the mortgage-backed debentures were notwhat they seemed.

[15] There was evidence that Mr. Hudson had been advised by Mr. Tighe that his intentionwas to pay out the Paragon loan by transactions involving Georgia Pacific. Withoutelaborating on the status of Georgia Pacific at the time, as it is not a party to this litigation, theevidence with respect to potential activities involving this company was troubling, andjustified a concern that the shares that comprised this asset may be at risk.

[16] Further, Mr. Hudson deposed that Mr. Tighe was at first agreeable to Mr. Hudson andParagon's counsel speaking to various parties, including officers of Georgia Pacific andDeloitte & Touche, to gather information. However, he withdrew that consent when Mr.Hudson and Paragon's counsel were actually in Vancouver, intending to speak to those parties.

[17] There were also concerns arising over whether or not there actually was $200,000 heldin trust by Mr. Patterson, who had ceased practising law and left the country.

[18] There was evidence that the shares of Insurcom Financial Corporation, one of theguarantors of the Paragon loan, had been halted in trading and that the $986,000 that wassupposed to be held in a Georgia Pacific cash account as security for the Paragon loan wasmissing.

[19] The Defendants also submit that Paragon and its counsel and the proposed receiverfailed to be candid and make full disclosure of the facts in the application. However, it is clearfrom the affidavits filed and from the Bench Brief that the disclosure given at the time of the ex

-J

CO

2002 ABQB 430

1J;

Page: 5

parte order was extensive. It included reference to the fact that the proposed receiver, Mr.Hudson, had previously been appointed a private receiver for Paragon under the loandocumentation, and that he and Paragon's counsel had been involved in negotiating andfinalizing the Extension Agreement. In addition, counsel to Paragon disclosed that a defence tothe Statement of Claim had been filed by counsel for the Defendants, and described the natureof the defences. I cannot find that there was any breach by the applicant for the ex parte orderof its obligation of candour and frankness.

[20] In hindsight, it is regrettable that the application did not take place in open chambers sothat a record would be available. However, on the basis of the strength of the evidence beforeme, including evidence of the loan documentation and events that had transpired since the loanwas put in place, together with the extensive affidavits and Bench Brief, I was satisfied thatthere was a reasonable basis on which I could hear the application on an ex parte basis. I wassatisfied that there was reasonable apprehension of serious mischief and risk of disappearanceor dissipation of assets. These concerns included the concern of interference with the activitiesof a regulated firm in a sensitive industry, where third party rights may well be affected. Itherefore chose to exercise my discretion to grant the order ex parte, as is "within theprerogative of a judge to do in Alberta under our rules": Canadian Urban Equities Ltd. v.Direct Action for Life et al, [1990] A.J. No. 253 (Q.B.) at pages 7 and 8.

[21] The ex parte order contains the usual provision allowing any party to apply on twoclear days notice for a further or other order. The Defendants' right to bring their positionbefore the court on very short notice was therefore reasonably protected. The Notices ofMotion seeking orders to set aside or stay the ex parte order were not filed until May 8, 2001,and the motions were heard on their merits at the earliest time available to counsel to theparties and the court.

Should the receiver and manager appointed under the ex parte order been precluded fromacting in this case due to conflict?

[22] This issue is moot, given that on June 8, 2001 an order was granted replacing Hudson& Company as receiver and manager with Richter Allen and Taylor Inc. This was done withthe consent of all parties other than the Defendants, who objected to the replacement, whilecontinuing to maintain that Hudson & Company had a conflict. The Defendants make the samecomplaint about counsel to the former receiver and manager, who did not continue as counselfor the new receiver.

[23] Despite the complaint of conflict of interest, the Defendants have not raised anyevidence that the former receiver and manager or its counsel preferred Paragon to othercreditors, or failed in a receiver's duty as a fiduciary or its duty of care, other than to submitthat the receiver should not have been granted the power in the ex parte order to sell the assetscovered by the order. This power of sale was, of course, subject to court approval, and alsosubject to review at the time the application was heard on its merits. It was not exercisedduring the time the ex parte order was in place, and representations were heard on its propriety

2002 ABQB

Page: 6

for inclusion in the affirmed receivership order. While there may have been a potential forconflict in Hudson & Company's appointment, there is no evidence that Hudson & Companyshowed any undue preference to Paragon while serving as a receiver, or failed in its duties asreceiver in any way.

[24] The Defendants also submit that the Bench Brief used by Paragon's counsel in makingthe application for the ex parte order showed that such counsel was not impartial, but acted asan advocate on this application. Paragon's counsel did indeed advocate that a receiver shouldbe appointed by the court, as he was retained to do, and there was nothing improper in himdoing so. I have already said that full disclosure was made of the material facts in thatapplication, including the previous involvement of both the proposed receiver and Paragon'scounsel in this matter.

[25] I therefore find that there was nothing wrong or improper in the appointment of Hudson& Company as receiver or in Paragon's previous counsel acting as receiver's counsel, or intheir administration of the receivership. It may be preferable to avoid an appearance of conflictin these situations, but a finding of conflict or improper preference requires more than just theappearance of it. In situations where it is highly possible that the creditors will not be paid outin full, the use of a party already familiar with the facts to act as receiver may be attractive toall creditors. I note that it is not the creditors who raise the issue of conflict in this case, but thedebtors.

Should the ex parte order now be set aside?

[26] The general rule is that when an application to set aside an ex parte order is made, thereviewing court should hear the motion de novo as to both the law and the facts involved. Evenif the order should not have been granted ex parte, which is not the case here, I may refuse toset it aside if from the material I am of the view that the application would have succeeded onnotice: Edmonton Northlands v. Edmonton Oilers Hockey Corp., 1993, 15 Alta. L.R. (31d) 179

(paragraphs 30 and 31).

[27] The factors a court may consider in determining whether it is appropriate to appoint areceiver include the following:

a) whether irreparable harm might be caused if no order were made, although it isnot essential for a creditor to establish irreparable harm if a receiver is notappointed, particularly where the appointment of a receiver is authorized by thesecurity documentation;

b) the risk to the security holder taking into consideration the size of the debtor'sequity in the assets and the need for protection or safeguarding of the assetswhile litigation takes place;

c) the nature of the property;

2002 ABQB

Page: 7

d) the apprehended or actual waste of the debtor's assets;

e) the preservation and protection of the property pending judicial resolution;

f) the balance of convenience to the parties;

g) the fact that the creditor has the right to appoint a receiver under thedocumentation provided for the loan;

h) the enforcement of rights under a security instrument where the security-holderencounters or expects to encounter difficulty with the debtor and others;

i) the principle that the appointment of a receiver is extraordinary relief whichshould be granted cautiously and sparingly;

j) the consideration of whether a court appointment is necessary to enable thereceiver to carry out its' duties more efficiently;

k) the effect of the order upon the parties;

1) the conduct of the parties;

m) the length of time that a receiver may be in place;

n) the cost to the parties;

o) the likelihood of maximizing return to the parties;

p) the goal of facilitating the duties of the receiver.

Bennett, Frank, Bennett on Receiverships, 2nd edition, (1995), ThompsonCanada Ltd., page 130 (cited from various cases)

[28] In cases where the security documentation provides for the appointment of a receiver,which is the case here with respect to the General Security Agreement and the ExtensionAgreement, the extraordinary nature of the remedy sought is less essential to the inquiry :Bank of Nova Scotia v. Freure Village on Clair Creek, [1996] O.J. No. 5088, paragraph 12.

[29] It appears from the evidence before me that the Georgia Pacific shares may be the onlyasset of real value pledged on this loan. Shares are by their nature vulnerable assets. Theseshares are in a business that is itself highly sensitive to variations in value. At the time of theapplication, the business appeared to have been suffering certain financial constraints. Thebusiness is situated in British Columbia, and regulated by the Investment Dealers Associationof Canada and other entities, giving additional force to the argument of the necessity of a

2002 ABQB

Page: 8

court-appointed receiver. I also note the possibility that there will be a sizeable deficiency inrelation to the loan, increasing the risk to Paragon as security holder.

[30] The conduct of Mr. Tighe, the primary representative of the Defendants, supports theappointment of a receiver. Although the Defendants submit that the assets that are the subjectof the order are secure, there is troubling evidence that the mortgage-backed debentures appearto have questionable value, that the $200,000 that was supposed to be in Mr. Patterson's trustaccount does not exist, that the Georgia Pacific cash account that was supposed to contain$986,000 is not actually a cash account at all, but rather a trading account. Mr. Tighe'saffidavits and cross-examination on affidavits do little to clear-up these matters, and insteadadd to the apprehension that these assets are of less value than represented to Paragon or thatthey in fact do not exist.

[31] The balance of convenience in these circumstances rests with Paragon, which is owednearly $3 million. There is no plan to repay any of this indebtedness, and no persuasiveevidence that the appointment would cause undue hardship to the Defendants. As stated byGround, J. in Swiss Bank Corp. (Canada) v. Odyssey Industries Inc. [1995] O.J. No. 144 atparagraph 31, the appointment of a receiver always causes some hardship to a debtor wholoses control of its assets and risks their sale. Undue hardship that would prevent theappointment of a receiver must be more than this usual unfortunate consequence. Here, anyproposed sale of an asset by the receiver must be brought before the court for approval and itspropriety and necessity will be fully canvassed on its merits.

[32] I am satisfied that the order appointing a receiver and manager should continue to standon the same terms as the initial order.

Should the order be stayed?

[33] To be granted a stay of an order pending appeal, an applicant must establish:

a) that there is a serious issue to be tried on appeal;

b) that the applicant would suffer irreparable harm and no fair or reasonableredress would be available if the stay is not granted; and

c) that the balance of convenience is in favour of granting the stay after taking intoconsideration all of the relevant factors.

R.J.R. McDonald Inc. v. Canada (A.G.), [1994] S.C.J. No. 17 (S.C.C.); Schacter v. NationalPark Services, [1999] A.J. No. 599 (Q.B.).

[34] On the issue of whether there is a serious issue to be tried, the Defendants have filed adefence to the claim raising several issues, the major one being that the effective rate ofinterest under the loan exceeds 60% and is therefore usurious. Affidavit evidence purporting to

ca

2002 ABQB 430

Page: 9

indicate such an illegal rate of interest was filed and served on Paragon the day before thisapplication was heard. Counsel for Paragon submitted that the evidence is defective on itsface, but I was not able to make a determination of that question on the basis of the swornevidence before me. Another factor affecting this issue is that Paragon has brought anapplication for summary judgment, which had not been heard at the time of this application.Given my decision on the second and third parts of the test, I have assumed that there is atriable issue relating to the loan and, therefore, to the appointment of a receiver, despite theuncertainty existing at the time of the application.

[35] With respect to irreparable harm, the Defendants submit that company assets are beingtied up while the order is in force, and that therefore no payments are being made, allowingliabilities to inflate. The main assets that are the subject of this order are assets that werealready pledged as security for the loan to Paragon and therefore no irreparable harm can besaid to arise from this factor. The Defendants also submit that irreparable harm has been, andcontinues to be done to, Georgia Pacific's assets as a result of the order. The order affects onlythe Defendants' shares in George Pacific, and counsel for the Defendants does not representGeorgia Pacific. No objection to the order has been taken by Georgia Pacific itself, althoughmanagement for Georgia Pacific is aware of the receivership. There is no evidence that theorder is responsible for any harm to Georgia Pacific, aside from harm that may have arisenfrom the Defendants' precarious financial situation and the current status of this regulatedbusiness with the IDA.

[36] The balance of convenience in this case favours Paragon. The only asset that appears tohave any real value at this stage in the proceedings is the shares in Georgia Pacific, an assetthat is vulnerable by its nature, in a highly regulated business carried on in another jurisdiction.The order serves to maintain the status quo of that asset and prevent mischief caused by thepossibility of illegal or imprudent manipulation or interference with the affairs of GeorgiaPacific.

[37] Finally, the Defendants submit that, if a stay is not granted, the order be varied tomaintain the status quo of the three major assets. By requiring court approval of a sale of anyof the assets, the right of the Defendants to argue their position on a sale at an appropriate timeis reasonably protected.

[38] I therefore decline to grant a stay, or to vary the order as granted.

[39] If the parties are unable to agree on the matter of costs, they may be spoken to.

DATED at Calgary, Alberta this 29th day of April, 2002.

J.C.Q.B.A.

2002 ABQB 430 (CanLII)

CanLII - 1992 CanLII 7690 (ON SC) Page 1 of 7

22

1 1King (Township) v. Rolex Equipment Co.,1992 CanLII 7690 (ON SC)

Date: 1992-04-22

Other 8 OR (3d) 457; [1992] 03 No 810 (QL)

citations:

Citation: King (Township) v. Rolex Equipment Co., 1992 CanLII 7690 (ON SC),

<http://canlii.ca/t/g14j4>, retrieved on 2016-05-27

Corp. of the Township of King v. Rolex Equipment Co.,Daily Disposal Services Inc., Carmine, Petriglia, Beltrame,Petriglia, Petriglia, Titan Excavating Ltd., Petrison Corp.,

Blue Mountain Masonry Inc., Caranci andPetrex Equipment Co.

[Indexed as: King (Township) v. Rolex Equipment Co.]

8 O.R. (3d) 457[1992] O.J. No. 810Action No. 60101/90Q

Ontario Court (General Division),B. Wright J.April 22, 1992

Debtor and creditor -- Receivers -- Mortgagor using property for waste dump -- Municipalityobtaining mandatory order that mortgagor remove waste -- Mortgagor abandoning property --Township applying for order appointing receiver to remove waste -- Mortgagee opposingappointment -- Receiver appointed -- Costs of receivership having priority over interest ofmortgagee.

Environmental law -- Mortgagor using property for waste dump -- Municipality obtainingmandatory order that mortgagor remove waste -- Mortgagor abandoning property -- Townshipapplying for order appointing receiver to remove waste -- Receiver appointed -- Costs ofreceivership having priority over interest of mortgagee.

A mortgagor of property in the Township of King deposited non-hazardous construction sitewaste on his property. The township obtained an order requiring the waste to be removed andthe mortgagor to post security in default of which the township was entitled to judgment. Themortgagor failed to remove the waste or to provide the security. He also defaulted under the

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L

mortgage and abandoned the property. The mortgagee did not take possession. Although thetownship and the Ministry of the Environment were both empowered to remove the waste,there was uncertainty about the priority that the costs of removal would have in the ranking ofclaims against the mortgaged property. The township moved as a matter of public interest forthe appointment of a receiver and for an order that the costs of the removal of the waste be afirst lien and charge upon the subject lands in priority to all other liens and encumbrances. Thefirst mortgagee opposed the appointment of the receiver.

Held, the motion should be granted.

On behalf of the residents of the township who wished the waste removed, the township had asufficient interest, and, accordingly, it had status to apply pursuant to s. 101 of the Courts ofJustice Act for the appointment of a receiver. To determine whether it was just and convenientin this case to appoint a receiver, it was necessary to decide whether receivership costs takepriority over the interests of a secured creditor who opposes the receivership. The general ruleis that the courts have no power to authorize expenses to the property at the expense of priormortgagees without the approval of the mortgagees. This case, however, came within twoexceptions to the general rule. First, if the receiver has expended money for the necessarypreservation or improvement of the property, the receiver may be given priority for such anexpenditure over secured creditors. Here, without the removal of the waste from the property,the property was worthless because it could not be sold. Second, the interest of the residents ofthe township outweighed the detriment to the mortgagee. It is against the public interest that acommunity must continue to contend with a garbage dump because a secured creditor with thegreatest interest in the property refuses to take any action to deal with the property.

MOTION for the appointment of a receiver.

Cases referred to Robert F. Kowal Investments Ltd. v. Deeder Electric Ltd. (1975), 1975CanL11 681 (ON CA), 9 O.R. (2d) 84, 21 C.B.R. (N.S.) 201, 59 D.L.R. (3d) 492 (C.A.)Statutes referred to Courts of Justice Act, R.S.O. 1990, c. C.43, s. 101, 101(1) EnvironmentalProtection Act, R.S.O. 1990, c. E.19 Municipal Act, R.S.O. 1990, c. M.45 Rules andregulations referred to Rules of Civil Procedure, 0. Reg. 560/84, rule 60.02(1)(d) Authoritiesreferred to Bennett, Frank, Receiverships (Toronto: Carswell, 1985), p. 91 Clark, RalphEwing, Clark on Receivers, 3rd ed., (Cincinnati: W.H. Anderson, 1959), vol. 1, s. 22, p. 25,and vol. 2, ss. 638, 640, pp. 1070-71, 1078

C.M. Loopstra, Q.C., for the Township of King, plaintiff.

Julian D. Heller, for Roger Wood and Diane Wood, interveners.

Frances J. Carnerie, for the Ministry of the Environment,intervener.

BLENDS WRIGHT J.:--Residents of King Township complain that an illegal garbage dumpin their midst is depreciating the value of their properties. A local property owner has allowedsolid waste to be dumped on his land and the community wants the waste removed.

King Township requests that the court appoint a receiver with authority to remove the wasteand sell the land. The township also asks for an order that costs of the removal and sale be "afirst lien or charge upon the subject lands, in priority to all other liens and encumbrances

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CanLII - 1992 CanLII 7690 (ON SC) Page 3 of 7 24

affecting the subject lands". All secured creditors have received notice of the request for areceivership. The first mortgagee opposes the appointment of a receiver.

Comprised of construction site garbage, the waste is non- hazardous. The estimated cost ofremoval of the waste is $275,000. The township previously obtained a mandatory orderrequiring the owner of the land to remove the waste. The order stated that if the owner failedto remove the waste, he was ordered to provide security to the township in the sum of$275,000 and the township was at liberty to enter the lands and remove the waste. In defaultof providing the security, the township was entitled to judgment in the amount of $275,000.

The owner failed to remove the waste and did not provide any security. He has defaulted on avendor take-back mortgage with a judgment against him for approximately $1.4 million. Hehas abandoned the property.

The mortgagee has not taken possession of the property. The mortgagee maintains that theremoval of the waste is the responsibility of either the township under the Municipal Act,R.S.O. 1990, c. M.45, or the Ministry of the Environment under the Environmental ProtectionAct, R.S.O. 1990, c. E.19.

King Township admits that it has authority under the Municipal Act to remove the waste andcollect the expenses of removal as municipal taxes. But the township claims it does not havethe financial resources to effect the removal of the waste. The parties believe that thetownship's expenses of removal under the Municipal Act would not take priority over themortgagee's interest. The result of a sale of the property in a recessionary market would notsatisfy the mortgagee's default judgment and, therefore, the township claims it would beburdened with the expenses of the waste removal. The township maintains that its taxpayersshould not bear the burden of paying for the waste removal, hence the request for theappointment of a receiver whose costs would take priority over the mortgagee's interest.

The township submits that the property cannot be sold until the waste is removed; that theremoval benefits the mortgagee; and, that in the end result, whether the waste is removed bythe mortgagee or a receiver, or the Ministry of the Environment, it is the mortgagee who willultimately bear the cost of removal. Since the mortgagee refuses to take possession of theproperty and remove the waste, and since the persons affected most by the non-removal of thewaste are the residents of King Township, the township urges the court to appoint a receiver toremove the waste.

The Ministry of the Environment concedes that the Environmental Protection Act gives thedirector authority to have the waste removed and to collect the expenses of removal asmunicipal taxes. The township argues that the wording of the Environmental Protection Actgives the Ministry of the Environment priority for its costs over the mortgagee's interest. Themortgagee disputes the township's interpretation. Counsel for the Ministry of the Environmentwas not able to advise the court what position it takes on the question of priority.

Officials of the Ministry of the Environment have investigated the waste and concluded that itcontains all solid waste which is non-hazardous and is of no danger to the public. TheMinistry of the Environment has decided that the removal of the waste has only an aestheticvalue. The Ministry maintains that its funding is limited to the removal of illegally dumpedwaste where there is a hazard to the public. It argues that it cannot fund the removal of non-hazardous waste from numerous sites where waste has been dumped illegally because it does


CanLII - 1992 CanLII 7690 (ON SC) Page 4 of 7 2j

not have sufficient funds. It contends that its waste removal program must concentrate onremoving hazardous waste. In this case, it has decided that it is not in the public interest that itutilize its funds to remove this waste which is not a public hazard.

There is no lack of legislative authority to remove the waste. Both King Township and theMinistry of the Environment are empowered by legislation to remove the waste. The problemis not the removal of the waste, but who pays for its removal. The uncertainty in thelegislation as to payment of the expenses of removal in priority to the interests of securedcreditors is deterring both authorities from exercising their discretion to remove the waste.

A question arises under both the Municipal Act and the Environmental Protection Act whetherclean-up costs take priority over secured creditors. I am not convinced, on the authoritiesprovided to me by counsel, that under the Municipal Act costs of removal of waste do not takepriority.

I am perplexed that the director under the Environmental Protection Act is exercising adiscretion not to remove the waste, alleging that funds are not available to do so, when theMinistry apparently has not considered whether its legislation provides it with priority as tocosts expended. It may well be that the director is acting on a faulty premise.

The question of priority for the authorities' expenses is not before me. But, because of theuncertainty surrounding the question, I suggest the legislation should be reviewed. Authorityto carry out a task is of little value if part of the arsenal, namely, the costs of performing thetask, is missing. The legislation has proven ineffective in this case as evidenced by thereluctance of either authority to act in a situation which involves a public interest.

It may be that in matters between private parties, interests of secured creditors should takeprecedence. But, in situations like the present, where the interests of the public outweighprivate interests, and a secured creditor refuses to take any initiative in seeing that the waste isremoved, it may be appropriate that public authorities' costs take priority over securedcreditors' interests.

Or, where as in this case, the secured creditor is an innocent vendor who took back a mortgageand the real culprit is the purchaser whose illegal acts caused the problem, it may be that theburden of the cost should be spread to all the taxpayers. These are matters for consideration bylegislators and require clarification.

Does the township have status?

Section 101(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43, provides:

101.(1) In the . . . Ontario Court (General Division) . . . a receiver . . . may be appointed by aninterlocutory order, where it appears to a judge of the court to be just or convenient to do so.

Usually, the applicant for the appointment of a receiver is a secured creditor. The township isnot a secured creditor. In his book Receiverships (Toronto: Carswell, 1985), Frank Bennettstates at p. 91:

The jurisdiction under section 114 of the Courts of Justice Act will most often be invoked by asecurity holder. However, there are no restrictions as to the type of case wherein a receivermay be appointed. Apart from enforcement under a security instrument, the jurisdiction can be



COemployed in a partnership dispute, by an execution creditor for the appointment of anequitable receiver, by shareholders of a corporation which is mismanaged or simply by a partyto an action where it is necessary to preserve and protect the property that is in disputepending a declaration or a judgment. In these situations, the court will consider whether theproperty is in peril or wasting, whether there are irreparable damages and the costs of thereceivership if an appointment is made.

The township is an execution creditor. Rule 60.02(1)(d) of the Rules of Civil Procedure, 0.Reg. 560/84, states:

60.02(1) In addition to anyother method of enforcementprovided by law, an order forthe payment or recovery ofmoney may be enforced by . . . .

(d) the appointment of a receiver.

The township's counsel did not refer to this rule and did not ask specifically for theappointment of an equitable receiver in aid of execution on the township's judgment of$275,000. The township may consider that the property is an asset of the owner against whomthe township has a judgment and as an execution creditor it has a right to apply for theappointment of a receiver to deal with that asset to satisfy its judgment. However, theevidence discloses that the owner has no equity in the land since the mortgagee has ajudgment against the owner which is in excess of the market value of the land. Theappointment of an equitable receiver will not garner any part of the township's judgment fromthe debtor's interest in the land. There is some evidence that other defendants may have assetswhich a receiver could call in and realize upon in satisfaction of all or part of the judgment.King Township's draft order references the owner's property but does not refer to any otherassets of any of the defendants.

In the event that a receiver is appointed, I suggest counsel for the township should considerwhether it would be worthwhile for the receiver to pursue any assets of the defendants for thepurpose of paying the costs of the waste removal. If any of the defendants who wereresponsible for the dumping of the waste have assets of any value, they should be sold to helpdefray the removal costs and lessen the costs to the mortgagee. The defendants John andAnthony Petriglia are represented by A. Riswick, who chose not to participate in this aspect ofthe proceedings.

The township appears not to be asking that an equitable receiver be appointed in aid ofexecution on its judgment. The township requests that, in the public interest, a receiver beappointed to oversee the removal of the waste and to ensure that the expenses of removal arecharged against the value of the land and not to the residents of the township.

In my view, where anyone can demonstrate a sufficient interest in a matter, they have a rightto apply to the court pursuant to s. 101 of the Courts of Justice Act for the appointment of areceiver. In this case, the township has demonstrated that, on behalf of the residents of thetownship, it has a sufficient interest in having the waste removed. Is this an appropriate case



for the appointment of a receiver? As the legislation provides, is it just and convenient to doso?

Just or convenient?

To determine whether the appointment of a receiver is just and convenient on the facts of thiscase, I must decide whether receivership costs can take priority over the interests of a securedcreditor who opposes the receivership. In Robert F. Kowal Investments Ltd. v. Deeder ElectricLtd. (1975), 1975 CanI,II 681 (ON CA), 9 O.R. (2d) 84, 21 C.B.R. (N.S.) 201, the Court ofAppeal adopted the general rules of receivership and accepted the exceptions to the rules asset out in Ralph Ewing Clark, Clark on Receivers, 3rd ed., vol. 1, s. 22, p. 25, and vol. 2, ss.638, 640, pp. 1070-71, 1078. The court recognized that the list of exceptions is not exhaustive.The general rule is: receivership property cannot be used in such a way as to subject themortgagee to the expenses of the receivership; a court has no power to authorize expenses tothe property at the expense of prior mortgagees without the sanction of the mortgagees.

One of the exceptions is: if the receiver has expended money for the necessary preservation orimprovement of the property, he may be given priority for such an expenditure over securedcreditors. Without the removal of the waste from this property, it is worthless because itcannot be sold. Therefore, money must be expended to improve the property by the removalof the waste in order to preserve the property's market value. Without such improvement byremoval of the waste, the property has no market value. I conclude that the facts of this casefall within this exception; it is necessary for a receiver to expend money on the property for itsimprovement and preservation.

The facts of this case give rise to a further exception to the general rule. This is not a disputebetween private parties, but an issue which concerns the public interest. Although areceivership will benefit all interested parties in that the waste will be removed, the benefit tothe public, the residents of King Township, outweighs the detriment to the mortgagee inhaving the receivership expenses take priority over the mortgagee's interest. If a receiver is notappointed, the garbage dump will remain a blight on the landscape of the township. It isagainst the public interest that a community must continue to contend with a garbage dump intheir midst because a secured creditor with the greatest interest in the property refuses to takeany action to deal with the property.

The mortgagee argues that it should not be responsible for expenses which will decrease itsreturn from the sale of the property in a depressed market. But the fact that the current marketis depressed is irrelevant. Anyone with investments in real estate is subject to a fluctuatingmarket and the risk of depreciating land values. Without the presence of the waste on the land,the mortgagee on a power of sale in the current depressed market would suffer a loss from theoriginal sale price.

It is inevitable that the mortgagee will pay the cost of removal of the waste whether a receiveris appointed or the mortgagee removes the waste on its own. Neither the township nor theMinistry of the Environment intends to remove the waste. The public has a right to have thewaste removed. I conclude that if the mortgagee decides not to remove the waste, it is just andconvenient to appoint a receiver to remove the waste and that the receivership costs ofremoval should be paid in priority to the interests of the mortgagee.



28I suggest there are at least two reasons why the mortgagee may prefer to take responsibility toremove the waste rather than have a receiver appointed. The cost of a receivership will likelybe more expensive than if the mortgagee arranged to have the waste removed. The mortgageemay also be concerned with the timing of the sale of the property. If a receiver is appointed,the receiver would proceed to remove the waste and sell the property as soon as the waste isremoved. Since the market is depressed, the mortgagee could proceed to remove the waste andsell the property on its own timetable when the market improves.

This case requires that the mortgagee be given some time to decide whether to remove thewaste. The mortgagee will be given 30 days from the date of this judgment to advise counselfor King Township whether the mortgagee will remove the waste within a reasonable timeperiod. If the mortgagee decides not to remove the waste, an order will go appointing areceiver whose expenses of removal will take priority over the mortgagee's interest. I may bespoken to if counsel are unable to agree on a reasonable time period for removal of the waste,or on the terms of an order for the appointment of a receiver, or on costs.

Order accordingly.

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CanLII - 2007 BCSC 1277 (CanLII) Page 1 of 12

29

CRed Burrito Ltd. v. Hussain, 2007 BCSC1277 (CanLII)

Date: 2007-08-23

Docket: S065322

Other 33 BLR (4th) 205

citation:

Citation: Red Burrito Ltd. v. Hussain, 2007 BCSC 1277 (CanLII),

<http://caniii.ca/t/1smdt>, retrieved on 2016-06-09

IN THE SUPREME COURT OF BRITISH COLUMBIA

Citation: Red Burrito Ltd. v. Hussain,2007 BCSC 1277

Between:

And

Date: 20070823

Docket: S065322Registry: Vancouver

Red Burrito Ltd.

Shahid Hussain andMuhammad Zubair Hingora

Before: The Honourable Madam Justice D. Smith

Reasons for Judgment

Plaintiff

Defendants

Counsel for the plaintiff J. Rost

Counsel for the defendants J. Adelaar

Date and Place of Trial/Hearing: August 3, 2007

http://www.canlii.org/en/bc/bcsc/doc/2007/2007bcsc1277/2007bcsc1277.html?autocompl... 06/09/2016


0Vancouver, B.C.

Overview

[1] The plaintiff, Red Burrito Ltd. ("Red Burrito") operates four Mexican foodrestaurants in the Greater Vancouver area. On February 24, 2006, Red Burritoentered into a "Letter of Understanding" with the defendant Shahid Hussain toconvert a grocery business operated by Hussain and the second defendant,Muhammad Zubair Hingora ("Papaya Market"), into a fifth Red Burrito restaurantin Vancouver.

[2] The Letter of Understanding provided the restaurant would be owned andoperated by a new holding company ("Newco"), with Hussein and Red Burrito asequal shareholders. Red Burrito was to be the managing partner and fund theremodelling and start-up costs of the restaurant. Hussein was to be the on-sitemanager and oversee the renovations to the premises. He was also to arrangefor the assignment of Papaya Market's leasehold interest to Newco. The leasehad a remaining term of four years and a five year option to renew.

[3] The incorporation of Newco and the assignment of the lease were nevercompleted. Despite those omissions, the restaurant opened on June 29, 2006.Problems arose between the parties and on or about August 8, 2006, Hussainlocked out the principals of Red Burrito. Hussein continues to operate therestaurant with the assistance of his former partner Hingora.

[4] In this summary trial application Red Burrito seeks the following relief: (i)a declaration that Red Burrito and Hussein operated the Mexican restaurant as apartnership; (ii) that the leasehold interest in the premises is an asset of thepartnership; (iii) a declaration dissolving the partnership; (iv) an order that theaffairs of the partnership be wound up and the partnership assets be sold; (v) anorder appointing a receiver without bond or security to conduct the sale of theassets and prepare an accounting, with Red Burrito having a right of first refusalon the sale; and, (vi) an order for costs.

[5] Hussain submits the action cannot be determined on a summary trialbasis as there is a counterclaim for damages for breach of contract and quantummeruit and the determination of this application will not resolve the action.However, I am satisfied the issues raised in the Amended Statement of Claimcan be heard by way of summary trial and that their resolution will advance theresolution of the balance of the litigation.

[6] The application raises the following issues:

(a) Was there a partnership between Red Burrito and Hussain?

(b) If there was, is the leasehold interest in the premises an asset ofthe partnership?

(c) What is the appropriate relief for the breakdown in thepartnership?



Background

[7] The principals of Red Burrito are Tracy Huang and Tony Riviera. In thefall of 2005, Huang, who was a friend of Hussain, introduced Hussain to Riviera.The two men discussed going into business together by converting the PapayaMarket into a Red Burrito restaurant.

[8] Hingora was not included in those discussions or the subsequent jointventure. Instead, he agreed to sell his partnership interest in the Papaya Marketto Hussain and to assign his interest in Papaya Market's lease to Newco. To thatend, Hingora executed the assignment and accepted $1,825 from Red Burrito asreimbursement for the deposit initially paid to the landlord of the premises.

[9] On February 24, 2006, Red Burrito and Hussain signed a Letter ofUnderstanding in which the parties agreed to enter into a partnership to operate aRed Burrito restaurant at the leased premises of Papaya Market. The Letter ofUnderstanding provided it was "to serve as a letter of agreement between RedBurrito Inc. (hereinafter referred to as: RB) and Shahid Hussain".

[10] The terms of the Letter of Understanding included: (i) Papaya Market'sexisting lease was to be assigned to a new holding company ("Newco"); (ii) theshares of Newco would be owned equally by Hussain and Red Burrito; (iii) RedBurrito would remodel the premises after the lease assignment was completed;(iv) Hussain was to manage the restaurant; (v) Riviera would be the managingpartner of Newco; (vi) Red Burrito would open a bank account for the day-to-daymanagement of the restaurant; and, (vii) Red Burrito would have a right of firstrefusal in the event of any sale of the business. The Letter of Understandingconcluded with the proviso that that: "This agreement is subject to final approvalby the board of directors of Red Burrito Inc." The document was signed byHussain and Riviera.

[11] On March 14, 2006, Red Burrito's board of directors approved the Letterof Understanding between Hussain and Red Burrito.

[12] Papaya Market closed its doors on May 3, 2006. During May and June2006, its premises were converted into a Red Burrito restaurant. Red Burritoestimates it invested capital of over $70,000 (about $43,000 is acknowledge byHussain) in improvements and equipment for the restaurant. Hussain obtainedthe business licence and permit to operate the restaurant, and oversaw the on-site improvements.

[13] On June 29, 2006, Vancouver's fifth Red Burrito restaurant opened.

[14] Hussain managed the restaurant. His salary, the salaries of therestaurant's employees, and the restaurant's miscellaneous expenses were paidout of the revenue produced by the restaurant. A separate bank account for thebusiness was never opened. Red Burrito ran the restaurant's revenues andexpenses though its own bank account.


CanLII - 2007 BCSC 1277 (CanLII)

[15] Each of the parties to the Letter of Understanding blames the other for thefailure to complete the agreement's formalities, including the incorporation ofNewco, the assignment of the lease, and the opening of a separate bank accountfor the business. Serious accusations were made by both Riviera and Hussainagainst the other. I have concluded, however, that it is unnecessary for me todetermine the cause of the failures or to resolve the validity of the accusationsas, in my view, those findings are not essential to the determination of the issuesin this application. I do find, however, that the parties' conduct since Red Burritowas locked out of the restaurant to have sufficiently poisoned any chance theymight be able to henceforth operate the restaurant together.

[16] On or about August 8, 2006, Hussain changed the alarm codes and locks,and denied Huang and Riviera access to the restaurant. Hussain has sinceremained in sole possession of the premises and continues to operate therestaurant as if he was its sole owner. He has also called upon his formerpartner, Hingora, for assistance in the restaurant's operation.

[17] Since being locked out, Red Burrito has received no income or benefitfrom the restaurant.

Discussion

1. Was there a partnership between Hussain and Red Burrito?

[18] Red Burrito contends the Letter of Understanding constituted a jointventure with Hussin and their partnership was created when they acted on thejoint venture by converting the premises of Papaya's Market into a Red Burritorestaurant and opened the restaurant for business. It further submits thatHussain's unilateral action of locking out the principals of Red Burrito did notchange the status of the parties to the Letter of Understanding or the investmentof Red Burrito in the joint venture.

[19] Hussain submits the Letter of Understanding did not create a partnershipas it was merely an agreement to agree. He contends that the formation ofNewco, the assignment of the Papaya Market's lease to Newco, and the creationof a separate bank account for the business, were conditions precedent to theparties having an agreement and that in the absence of an agreement there wasno partnership. Hussain further submits that in the event the Court finds that theLetter of Understanding constitutes an agreement, Red Burrito repudiated thatagreement when it commenced the within action. That action, Hussain submits,converted Red Burrito's status from that of investor to that of creditor. In thatregard, Hussain acknowledges that Red Burrito is entitled to compensation on aquantum meruit basis for at least the extent of the monies it invested into orloaned the proposed joint venture.

(a) A partnership at common law

[20] The definition of joint venture was explained by J. Anthony VanDuzer:

Page 4 of 12

32


CanLII - 2007 BCSC 1277 (CanLII)

The Law of Partnerships and Corporations, 2d ed. (Toronto: Irwin Law,2003) at 67:

Joint ventures are not a distinct form of business organization, nor arelationship that has any precise legal meaning. Functionally, the term"joint venture" is used to describe a relationship among persons whoagree to combine their money, property, knowledge, skills, experience,time, or other resources for some common purpose. Usually jointventurers agree to combine their money, property, knowledge, skills,experience, time, or other resources for some common purpose.Usually the joint venturers agree to share the profits and losses from theventure, and each has some degree of control over it. Thedistinguishing feature of a joint venture is that it is an arrangement setup for a limited time, for a limited purpose, or for both. "Joint venture" isused loosely to refer to all sorts of legal arrangements given effect incorporations and partnerships and in relationships based exclusively oncontract.

[21] At common law a partnership is formed if parties to a venture go intobusiness together with a view to sharing the venture's profits. The partnershipexists even in the absence of an express agreement and even where there is anagreement but all of the terms of the agreement have not been completed: seePitrie v. Racey (1963), 37 D.L.R. (2d) 495 (B.C.S.C.); Mathews v. Maurice(1923), 54 O.L.R. 64 (H.C.); and, Khan v. Miah, [2001] 1 All E.R. 20 (U.K.H.L.).

[22] In Pitrie, the court concluded that although the three defendants hadagreed to form a company under which to operate a business, when they beganto carry on the business with a view to sharing the profits of the business, beforethe company was incorporated, they were carrying on business as partners.

[23] Similarly, in Mathews, the court held that a plaintiff and defendant, whohad entered into an agreement to operate a theatre and to equally divide theprofits from that undertaking, were in fact partners even though a term of theagreement that a company would be formed to operate the undertaking was notcompleted. The court concluded that upon the company being formed thepartnership would end and the undertaking turned over to the company, but if theplans to incorporate had been abandoned the partnership may have continuedfor an indefinite period.

[24] In Khan, the plaintiff and two defendants agreed to become partners inthe operation of a restaurant. Khan provided most of the capital while the tworespondents functioned as the manager and chef respectively. Premises weresecured, improvements made, and equipment, furniture and supplies acquired.The parties' relationship broke down and the respondents opened the restaurantwithout the plaintiff. The House of Lords upheld the trial judge's finding that theparties had operated as a partnership, which included the leasehold interestwhere the restaurant operated. At ¶24, Lord Millet stated:

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4The acquisition, conversion and fitting out of the premises and thepurchase of the furniture and equipment were all part of the jointventure, were undertaken with a view of ultimate profit, and formed partof the business which the parties agreed to carry on in partnershiptogether. ... The work of finding, acquiring and fitting out a shop orrestaurant begins long before the premises are open for business andthe first customers walk through the door. Such work is undertaken witha view of profit, and may be undertaken as well by partners as by a soletrader.

[25] Thus, at common law a partnership exists where two or more act on plansto carry on a venture, with a view to sharing the venture's profits, regardless ofwhether an express or formal agreement to do so has been entered into.

(b) A partnership as defined by the Partnership Act

[26] Section 2 of the Partnership Act, R.S.B.C. 1996, c. 348, (the "Act')defines a partnership as "the relation which subsists between persons carryingon business in common with a view of profit." This language appears to codifythe ingredients of a partnership as identified by the common law.

[27] In Continental Bank of Canada v. R., 1998 Canl...11794 (SCC), [1998] 2S.C.R. 298, the court discussed the essential elements of a partnership in thecontext of s. 2 of Ontario's then Partnership Act, which employed the samelanguage as s. 2 of the Act. At ¶22, the court listed the three ingredients as: (i)carrying on a business; (ii) in common; (iii) with a view to profit. It stated furtherat ¶23 that, "[t]he existence of a partnership is dependent on the facts andcircumstances of each particular case. It is also determined by what the partiesactually intended."

[28] The indicia of a partnership were set out at ¶24. They include "thecontribution of money, property, effort, knowledge, skill or other assets to acommon undertaking, a joint property interest in the subject-matter of theadventure, the sharing of profits and losses, a mutual right of control ormanagement of the enterprise, the filing of income tax returns as a partnershipand joint bank accounts."

[29] Section 4 of the Act sets out rules for determining a partnership and whatdoes not, by itself, constitute a partnership. However, in light of thecircumstances of this case I find this section of the Act not particularly helpful.

[30] Red Burrito relies on the indicia of a partnership set out in the commonlaw and as well as the judicially recognized indicia set out in Continental Bank.Hussain submits that in the absence of the parties completing the terms of theLetter of Understanding, there is no agreement between the parties and thereforethe existence of indicia of a partnership is immaterial.



[31] I have concluded that Red Burrito and Hussain were involved in a jointventure to open a Red Burrito restaurant and that regardless of their failure tocomplete the formalities of the Letter of Understanding, including the formation ofNewco, the assignment of Papaya Market's lease to Newco, and the opening of aseparate bank account in the name of Newco, they acted upon their plans byconstructing, equipping and opening a Red Burrito restaurant at the premisespreviously leased by Papaya Market, with a view to sharing the profits of that jointventure.

[32] Both the common law and statutory criteria for a partnership existed. TheLetter of Understanding expressly referred to the joint venture as a partnershipand the parties conducted themselves as one. Red Burrito and Hussain plannedto carry on business together, as evidenced by the Letter of Understanding.They acted on their plans by Red Burrito contributing the start-up capital to theventure and by Hussain contributing the leasehold interest. Both contributedeffort, knowledge and skills. Both were involved in the management of the jointventure — Red Burrito as the managing partner and Hussain as the on-sitemanager. The restaurant was opened and the parties operated the businesstogether from June 29, 2006, until on or about August 8, 2006, when Hussainunilaterally locked out the principals of Red Burrito. During that period, therevenues from the joint venture went to pay its expenses. It was clear the partiesintended to operate the business with a view to sharing in its anticipated profits.

[33] Red Burrito's commencement of this action cannot change its status fromthat of investor/partner to one of creditor. The central issue is not whether theLetter of Understanding constituted an enforceable agreement but whether theparties conducted themselves as partners for the purpose of carrying onbusiness together with a view to sharing in its profits.

[34] Based on this evidence I am satisfied that Red Burrito and Hussainconducted themselves as a partnership.

2. Is the lease a partnership asset

[35] An express term of the Letter of Understanding was that Papaya Market'slease was to be assigned to Newco, of which Red Burrito and Hussain would beequal shareholders. It was therefore contemplated by the parties to the jointventure that they would each own an equal interest in the assigned lease andthat it would be an asset of the joint venture.

[36] Red Burrito's consideration for the joint venture was the start-up capital.Hussain's consideration was the assignment of the leasehold interest in thepremises. It follows from the finding that the parties conducted themselves as apartnership, that the balance of the leasehold interest was a partnership asset.

[37] Furthermore, Hingora has no beneficial interest in the lease and at best isa bare trustee of the partnership's interest in the lease. The nature of a baretrustee was discussed in the leading text Waters' Law of Trusts in Canada, 3rd

ed., at pp. 32-3:



The usually accepted meaning of the term "bare", "naked" or "simple"trust is a trust where the trustee or trustees hold property without anyduty to perform except convey it to the beneficiary or beneficiaries upondemand.

The bare trust is a situation where (i) the trustee has never had activeduties to perform or has ceased to have such active duties, and awaitstransference to the beneficiaries, or where (iii) the trustee has nopersonal interest in the trust property.

[38] Hingora clearly falls into the definition of a bare trustee havingsurrendered his interest in the lease to Hussain, having executed an assignmentof his interest in the lease, and having accepted a refund from Red Burrito for hisshare of the security deposit on the premises. The only beneficial owners of theleasehold interest were Red Burrito and Hussain.

3. The appropriate relief

[39] Section 38 of the Act provides that the court may decree a dissolution ofthe partnership:

38(1) On application by a partner, the court may decree a dissolutionof the partnership in any of the following cases:

(d) when a partner, other than the partner suing, wilfully orpersistently commits a breach of the partnership agreement orotherwise so conducts himself or herself in matters relating to thepartnership business that it is not reasonably practicable for theother partner or partners to carry on the business in partnershipwith him or her;

(f) whenever circumstances have arisen that, in the opinion ofthe court, render it just and equitable that the partnership bedissolved.

[40] The remedies available to the partners on dissolution of the partnershipare set out in ss. 42 and 47. They provide:

42(1) On the dissolution of a partnership, every partner is entitled, asagainst the other partners in the firm and all persons claiming throughthem in respect of their interests as partners,



(a) to have the property of the partnership applied in payment ofthe debts and liabilities of the firm, and

(b) to have the surplus assets after the payment applied inpayment of what may be due to the partners respectively afterdeducting what may be due from them as partners to the firm.

(2) For the purposes of subsection (1), any partner or the partner'srepresentatives may, on the termination of the partnership, apply to thecourt to wind up the business and affairs of the firm.

47 Subject to any agreement, in settling accounts between thepartners after a dissolution of partnership, the following rules must beobserved:

(a) losses, including losses and deficiencies of capital, must bepaid first out of profits, next out of capital, and lastly, if necessary,by the partners individually in the proportion in which they wereentitled to share profits;

(b) the assets of the firm, including the sums, if any, contributedby the partners to make up losses or deficiencies of capital, mustbe applied in the following manner and order:

(i) in paying the debts and liabilities of the firm to personswho are not partners;

(ii) in paying to each partner rateably what is due from thefirm to that partner for advances as distinguished fromcapital;

(iii) in paying to each partner rateably what is due fromthe firm to that partner in respect of capital;

(iv) the ultimate residue, if nay, must be divided amongthe partners in proportion in which profits are divisible.

[41] As stated, I am satisfied it is no longer practicable for the principals ofRed Burrito and Hussain to work together as partners and that the partnership isat an end. Hussain's conduct by unilaterally changing the locks, excluding RedBurrito from the management of the restaurant, and denying Red Burrito fromsharing in any benefit from its investment over the past two years, has effectivelyended any potential working relationship between the parties. In light of thesecircumstances, I find the only just and equitable remedy for the parties' ongoingdispute is a winding up of the partnership and an order for sale of the partnershipassets, including the leasehold interest.


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[42] Clancy J. in Jo Lynne Enterprises Ltd. v. Dallo Enterprises Ltd., 2000BCSC 1676 (CanLII), imposed such a remedy in similar circumstances. Thatcase involved ongoing litigation between various partners, serious allegations ofmismanagement and impropriety between the partners, and a level of acrimonythat made any long term planning for the business an impossibility. At ¶34,Clancy J. concluded that, "an ongoing partnership relationship among thepartners is impossible. ... [The partnership] is dysfunctional and without long termprospects. No fair and just settlement, other than winding up, has beenproposed."

[43] At ¶33, Clancy J. cited the leading text Lindley& Banks on Partnership,17th ed., (London: Sweet & Maxwell, 1995), where the learned authors observedat pp. 680 and 681:

It has already been seen that, in the event of a general dissolution, eachpartner is normally entitled to insist that all the partnership property issold, even if the firm's debts and liabilities could be discharged withoutsuch a sale.

[44] Counsel for Hussain submits the dissolution and winding-up of thepartnership should be postponed pending the resolution of the balance of thelitigation issues. However, Clancy J. in Jo Lynn rejected this argument as in hisview a winding up was inevitable and there was a risk of prejudice to thepetitioners if they were forced to await the outcome of the litigation. Theseconcerns are apposite in this case, where Red Burrito continues to have nocontrol over the use of its investment and has no involvement in the managementof the business in order to ensure that it will receive its just and equitable share ofthe partnership's benefits.

[45] The final issue to be determined is whether a receiver should beappointed to facilitate the winding up of the partnership.

[46] In Jo Lynn, Clancy J. concluded that the allegations made against thepetitioners were sufficiently serious to create an environment where the petitionerpartners could no longer trust the respondent partners, and therefore "the onlysensible solution" was to appoint an independent receiver. At ¶42, he again citedfrom a passage in Lindley& Banks on Partnership at 669:

Where one partner seeks to have a receiver appointed against his co-partners, the first thing to ascertain is, whether the partnership betweenthem is still subsisting, or has already been dissolved; for if it is stillsubsisting no receiver will be appointed unless some special groundsfor the appointment can be shown, or unless it is plain that an order fordissolution will be made; whilst if a partnership is already dissolved, theCourt usually appoints a receiver, almost as a matter of course.



[47] It is well-established that the party seeking an appointment of a receiverby the court must satisfy the court that it is just and convenient to do so: seeKorion Investments Corp. v. Vancouver Trade Mart Inc., [1993] B.C.J. No.2352 (S.C.).

[48] The relationship between the principals of Red Burrito and Hussain hasbeen poisoned for the reasons already stated. I am not persuaded they couldcooperate on a sale of the assets and division of the proceeds. As noted inLindley & Banks on Partnership in circumstances where a partnership isdissolved or where it is plain that an order for dissolution will be made, a receiverought to be appointed "as a matter of course".

[49] This partnership has no prospect of survival. Upon its dissolution, thebalance of the relief sought in the Amended Statement of Claim, including thedistribution of the net proceeds of sale, along with the damages sought in thecounterclaim for breach of contract and compensation based on quantum meruit,remain to be determined. The only practical remedy to ensure the orderly sale ofthe partnership assets is to appoint a receiver.

[50] The Court is advised that Grant Thornton Ltd. has consented to beappointed as receiver for the purpose of conducting the sale of the partnershipassets and their attendant accounting. That appointment is confirmed.

5. Conclusion

[51] Accordingly, the following orders shall go:

(a) A declaration that a partnership exists between Red Burrito and thedefendant Hussain in respect of the operation of a Red Burritorestaurant at premises previously occupied by Papaya Market inVancouver;

(b) A declaration that the leasehold interest in the restaurant premises is anasset of the partnership;

(c) A declaration that the partnership is hereby dissolved;

(d) An order that the affairs of the partnership be wound up and thepartnership assets be sold;

(d) An order appointing Grant Thornton Ltd. as a receiver without bond orsecurity to conduct the sale of the assets and prepare an accountingand that Red Burrito have a right of first refusal on the sale;

(e) An order that Red Burrito receive its costs of this application inaccordance with Appendix B of the Rules of Court.



[52] The balance of the relief sought in the Amended Statement of Claim andthe balance of the relief sought in the Counterclaim are adjourned subject tofurther application.

[53] Subject to submissions, Red Burrito is entitled to the costs of thisapplication at Appendix B.

"D. Smith J."

D. Smith J.

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EMMANUEL VILLAGE

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RESIDENCE INC.

RESIDENCE INC.

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