Alleging bad faith against a lender

V2 Investment Holdings Inc. v. Sam Mizrahi, 2025 ONSC 1715
Is it bad faith for a creditor to refuse to sign an intercreditor agreement?

Summary: A lender sought judgment against Sam Mizrahi on an almost $13 million loan. The loan provided bridge financing for Mr. Mizrahi’s condominium development project in Ottawa, which is currently under CCAA protection. Mr. Mizrahi did not dispute the amount of the loan, but alleged that the lender had acted in bad faith by, among other things, failing to enter into an intercreditor agreement with the project’s senior secured creditor which would have subordinated the lender’s security interest in the property. Mr. Mizrahi alleged that this caused him damage and led to the CCAA application. The Court allowed the lender’s application against Mr. Mizrahi and rejected his arguments that the lender acted in bad faith. The evidentiary record showed an extensive back-and-forth between the lender, Mr. Mizrahi and their respective counsel about the terms of potential amending and intercreditor agreements, without any definitive consensus being reached. There was no trickery or apparent bad faith in any of this. The negotiations reflected an effort on the lender’s part to obtain some further consideration or added security in regard to the accommodations Mr. Mizrahi was seeking — a reasonable request given Mr. Mizrahi’s continuing default and the obvious increased risk of non-payment. Not all negotiations come to fruition.

V2 Investment Holdings Inc. (the “Lender”) sought judgment in respect of a $12.9 million loan made to Sam Mizrahi (the “Borrower”) in October 2019 (the “Loan”). The Loan, which was guaranteed by corporations related to the Borrower, matured on December 31, 2023. The Borrower failed to repay the loan by the maturity date, or since.

The Loan provided bridge financing for the Borrower’s condominium development (the “Project”) at 1451 Wellington Street in Ottawa (the “Property”). The Property is owned by WellingtonCo, a company owned by the Borrower. The Project is currently under court protection pursuant to an order dated October 15, 2024 under the Companies’ Creditors Arrangement Act.

The Loan was secured by a demand debenture granted by WellingtonCo in favour of the Lender (the “Debenture”). Among other things, the Debenture granted a charge over the Property in favour of the Lender (the “V2 Mortgage”). Article 8.01(1) of the Loan agreement provided that, among other things, the V2 Mortgage and other Security (as defined in the Loan Agreement) would not be registered on title to the Property until there was a default under the Loan. The purpose of this restriction was to protect WellingtonCo’s ability to complete the Project. It was specifically provided in the Loan agreement that in the event of default the Lender may register any or all of the security on title to the property. However, the agreement also imposed a best-efforts obligation to obtain the consent of the senior mortgagees.

The Borrower, while not disputing the amount due under the Loan, alleged that the Lender, subsequent to the maturity of the loan, acted in bad faith by breaking the alleged promise to refrain from registering a mortgage charge on title to the Property, and in failing to enter into an intercreditor agreement with the Project’s senior secured lender which would have subordinated the Lender’s security interest in the Property. The Borrower alleged that this caused damages, or potential damages, to the Borrower and led to the CCAA application in respect of the Project.

After the Borrower failed to make the payments due to the Lender in 2022, the Borrower and the Lender entered into an amending agreement which, among other things, extended the maturity date of the Loan. Notwithstanding the extension, the Borrower again failed to repay all amounts due under the Loan when it came due on the amended maturity date. Furthermore, on December 1, 2021, WellingtonCo further encumbered the Property without the Lender’s consent. As a result of such defaults, the Lender and the Borrower engaged in negotiations concerning a potential second amending agreement and an intercreditor agreement between the Lender and another mortgagee, but ultimately did not reach any such agreement.

WellingtonCo subsequently sought creditor protection under the CCAA as a means to facilitate completion of the Project by securing debtor-in-possession financing and ensuring priority for the construction lenders’ further advances. The Borrower argued that such course of action would not have been necessary had the Lender entered into a standstill and intercreditor agreement.

The evidentiary record showed that the Lender and the Borrower were engaged in an extensive back-and-forth about the terms of potential amending and intercreditor agreements, without any definitive consensus being reached. The Borrower and the Lender negotiated at length and through their lawyers and did not come to an agreement that they were both prepared to sign. There was no trickery or apparent bad faith in any of this. The negotiations reflected an effort on the Lender’s part to obtain some further consideration or added security in regard to the accommodations the Borrower was seeking. The request could hardly be said to be unreasonable given the Borrower’s continuing default and the obvious increased risk of non-payment. The Loan documentation specifically allowed the Lender to register a mortgage on title to the Property in the event of default. It could not be said the Lender acted unreasonably or for an ulterior purpose in so doing. Not all negotiations come to fruition.

The Court allowed the application and granted judgment against the Borrower in respect of the Loan.

Judge: Justice Hackland

Professionals involved:

• Gordon Capern and Ryan Shah of Paliare Roland for V2 Investment Holdings

• Steven Weisz and Michael Osborne of Cozen O’Connor for Sam Mizrahi, Mizrahi Development Group (1451 Wellington) Inc., Mizrahi Developments Inc., and 2659100 Ontario Inc.