Krashnik Investments Limited v. 186 Old Kennedy Development Inc., 2022 ONSC 6249

November 23, 2022

Can a secured creditor be barred from making a claim in bankruptcy by a consent order made in a related receivership?

The Debtor, 186 Kennedy, owned lands in Markham, Ontario (the “Property”). The court-appointed Receiver marketed and sold the Property for $47,800,000 pursuant to a court-approved sale, which closed on September 11, 2020. On July 17, 2020, while the closing was pending, the Receiver filed an assignment in bankruptcy on behalf of 186 Old Kennedy.

There were three mortgages registered against the Property. The “259 Group” of companies held the second mortgage. A dispute arose as to the parties’ respective entitlement to the sale proceeds held by the Receiver. The Receiver was authorized to distribute $25,490,122.44 to the first mortgagee and $17,712,212.70 to the 259 Group, with a holdback of $1,750,000 to cover the dispute. The Receiver then sought an Order authorizing it to pay the balance of the sale proceeds ($3,262,814.22) into Court, subject to an Order authorizing an alternative distribution at the request of either 259 Group or the third mortgagee. The 259 Group sought an Order authorizing the distribution of $2,073,524.19 plus accrued interest and unpaid legal fees from the balance of sale proceeds following the interim distribution order.

The motion by the 259 Group was subsequently settled, and a consent order was issued to give effect to the settlement. Pursuant to the Consent Order, the Receiver was authorized to distribute $1,350,000 to the 259 Group and the net balance of funds to the third mortgagee. The Receiver was then discharged.

On September 22, 2021, the 259 Group filed a secured claim in 186 Old Kennedy’s bankruptcy in the amount of $723,741.22. The 259 Group relied on security under a 2017 General Security Agreement. This claim would have priority over the Trustee and the claims of unsecured creditors of 186 Old Kennedy, including the unsecured claim of the third mortgagee for payment of the unsatisfied balance of the indebtedness that was secured by the third mortgage. The issue before this Court was whether the 259 Group was barred from making the secured claim.

The 259 Group argued that the settlement of its motion was made on the basis of an agreement as to who had priority to the remaining proceeds available for distribution by the Receiver from the sale of the Property, and that the agreement was not a settlement of the amount of the indebtedness owed by 186 Old Kennedy to the 259 Group that may be secured by other security. The Trustee and former Receiver argued that by making the settlement and agreeing to the Consent Order, the 259 Group settled the amount of the indebtedness owed to it by 186 Old Kennedy and was precluded from relitigating its settled claim in the bankruptcy proceeding.

The Court held that it was open to the 259 Group to settle the dispute with the third mortgagee by agreeing to partially postpone its mortgage to the third mortgage on the basis that the third mortgage would have priority over the 259 Group mortgage to the holdback amount in excess of the negotiated amount to be paid to the 259 Group. To settle its motion, it was not necessary for the 259 Group to settle the amount of the indebtedness owed to it by 186 Kennedy for which it may have other security. The settlement of the amount of the indebtedness owed to the 259 Group by 186 Old Kennedy was not fundamental to the Consent Order. Accordingly, the 259 Group was not precluded by the doctrine of issue estoppel from making a claim to the Trustee for payment of the secured indebtedness it asserted was owing to it.

In the email correspondence that resulted in the settlement, counsel for the 259 Group expressly stated that the terms of settlement to be incorporated into a consent order were that the amount to be received by the 259 Group “shall be in satisfaction of the remaining amounts owing to the second mortgagee under the second mortgage that are in priority to the third mortgage”. The Consent Order provided that the sum of $1,350,000, which the 259 Group was entitled to receive from the funds held back by the Receiver, was an amount “representing the remaining funds owing to the 259 Group that are secured in priority to the Third Mortgagee by the” 259 Group Mortgage. 259 Group was settling its motion by agreeing to accept receipt of a negotiated amount of the holdback that would be in priority to the third mortgage with its claim to the remaining amount of the holdback to be subordinate to the third mortgage and paid to the third mortgagee.

It was open to the 259 Group to settle its motion on this basis without settling the amount of the indebtedness owed to it by 186 Old Kennedy. Accordingly, the 259 Group was not barred from making a secured claim to the Trustee.

Judge: Justice Cavanagh

Counsel: Catherine Francis of Minden Gross for Pollard & Associates as Trustee and former Receiver; Dominique Michaud and Philip Holdsworth of Robbins Appleby for the 2592898 Ontario Inc., 2620094 Ontario Inc., 2627235 Ontario Inc., 2638796 Ontario Inc. and 2646429 Ontario Inc.; Calvin Ho of Laishley Reed for Yi Zhou as Third Mortgagee

By Matilda Lici