Javeri v Windsor Park High Performance Execution Team Corp, 2021 ABQB 1005

Court of Queen’s Bench of Alberta Citation: Javeri v Windsor Park High Performance Execution Team Corp, 2021 ABQB 1005 Date: 20211215 Docket: 2101 10178 Registry: Calgary Between: Chengis Javeri Plaintiff/Applicant - and - Windsor Park High Performance Execution Team Corp. and Brava Development Corp. Formerly Known As Canterra Custom Homes Inc. Defendants/Respondents _______________________________________________________ Memorandum of Decision of the Honourable Madam Justice D.L. Shelley _______________________________________________________ Background [ 1 ] Mr. Javeri sold Lands to Windsor Park in 2016.

The Lands have since been developed by Windsor Park. Part of the consideration for the sale was a vendor-take-back mortgage (the VTB Mortgage) granted to Mr. Javeri with a stated principal sum of $2.2 million (which was adjusted to $1.9 million after determining that the Lands could not support as many units as anticipated). [ 2 ] Mr. Javeri agreed to subordinate the VTB Mortgage to construction financing which was obtained from Paragon Capital Corporation Ltd. (Paragon) in the principal sum of $6.1 million. Paragon assigned that financing to the company now known as Arpium

Capital Corp. (Arpium). [ 3 ] The VTB Mortgage was guaranteed by Brava Development for a guarantee fee of $180,000.00 (the Guarantee Fee). The Guarantee Fee reduced the principal under the VTB Mortgage by the amount of the fee, which was to be paid out of the construction financing.

This fee reduction was subject to a clause in the VTB Mortgage (the Clause) stating: In the event the Guarantor becomes bankrupt or insolvent as defined in the Bankruptcy and Insolvency Act (Canada) , the Guarantee Fee shall be forfeited and the Lender shall be entitled to repayment of the full Principal Sum as secured hereunder (the “Adjusted Repayment Amount”). [ 4 ] Therefore, the Guarantee Fee reduced the principal owing on the VTB Mortgage to $1.72 million. [ 5 ] The VTB Mortgage also contained a clause permitting the Lender to appoint a receiver and/or manager of the Lands on default. [ 6 ] Windsor Park failed to repay the outstanding principal and interest on maturity, October 7, 2019.

Demand Letters [ 7 ] Mr. Javeri sent a demand letter to Windsor Park on December 10, 2020, for payment of the outstanding VTB Mortgage amount of $1.72 million plus interest. He attached a Notice of Intention to Enforce Security pursuant to

section 244 of the Bankruptcy and Insolvency Act , RSC 1985, c B-3 ( BIA ) which stated that the total amount of indebtedness secured was $1,740,063.54. [ 8 ] Mr. Javeri sent a formal demand letter to Brava on July 16, 2021 for payment of the loan security in the amount of $1.72 million dollars plus interest. Also attached was a Notice of Intention to Enforce Security, with the total amount of indebtedness secured stated to be $1,732,109.84. Procedural History of this Action [ 9 ] Mr. Javeri filed a Statement of Claim on August 13, 2021 against Windsor Park and Brava.

The claim alleged that Windsor Park defaulted on its obligations under the VTB Mortgage and failed to pay the amount indicated in the demand letter: $1.72 million plus interest. It also alleged that Brava failed to make payments on the Guarantee. It stated that Brava was insolvent within the meaning of the BIA , as it did not have enough assets to cover its liabilities and had failed to meet its obligations as they came due. [ 10 ] Among other relief, Mr.

Javeri asked the Court for a declaration that the security was valid and enforceable; judgment against the Defendants in the amount of $1,732,109.84 plus interest; a declaration that Brava was insolvent; further judgment against the Defendants for the Guarantee Fee plus interest; and an Order appointing a Receiver over Windsor Park, Brava, and the Lands. [ 11 ] On September 28, 2021, Mr. Javeri applied for an Order appointing Hudson & Company Insolvency Trustees Inc. as Receiver and Receiver-Manager of Windsor Park. He also asked for a declaration that Brava was insolvent and for

summary judgment against Brava pursuant to its guarantee (in the amount of $1,916,527.61 plus interest). [ 12 ] The application was to be heard on October 12, 2021. However, it was adjourned to October 15. Justice Whitling granted a Consent Order adjourning the issues of the declaration and

summary judgment against Brava to October 28, and declaring that “The sum of $90,000, representing half of the Guarantee Fee as defined in the Commercial Mortgage . . . shall be forfeited and added back to the mortgage principal, regardless of the ultimate outcome of the [October 28] hearing . . .”. [ 13 ] At the hearing of this matter on October 28, the Application for the appointment of a Receiver remained adjourned. Therefore, the Applicant sought a declaration of insolvency and

summary judgement against Brava. [ 14 ] A draft Order was prepared by Mr. Javeri and consented to by counsel for Windsor Park in advance of the October 28 hearing before me. Counsel for Mr. Javeri stated that Arpium (the first mortgagee) and 1863387 Alberta Ltd (the third mortgagee, also guaranteed by Brava) took no position on the application.

Submissions were made at the hearing and via written materials submitted afterwards on the following issues: whether the Guarantee Fee was paid and, if so, by whom; whether the Clause in the VTB Mortgage constituted a penalty on Windsor Park as a mortgagor in default; and whether the Clause offends the common law anti-deprivation rule. Issues [ 15 ] This application raises the following issues: 1. What is the nature of the Guarantee Fee and was it paid; 2. Does the Clause offend the anti-deprivation rule? and 3. Can Mr. Javeri obtain

summary judgment in the amount of $1.9 million when the statement of claim sought judgment in the amount of $1,732,109.84? Position of the Parties

Mr. Javeri [ 16 ] Mr. Javeri takes the position that the Guarantee Fee was a form of security taken on the Brava guarantee, whereby Windsor Park promised to reimburse him for paying Brava $180,000 in the event of Brava’s insolvency. This promise/security was in the form of the mortgage against the Lands in the full amount of $1.9 million, which Mr. Javeri “continued to hold” against Windsor Park. [ 17 ] Mr. Javeri submits that Brava has already received the benefit of the Guarantee Fee. However, he has been unable to confirm whether or not the money contemplated in the fee was actually paid to Brava. Mr.

Javeri asserts that the Guarantee Fee was “presumably paid”, or else Brava would have cited lack of payment as a defence. Mr. Javeri also asserts that the Guarantee Fee was “effectively” paid via a reduction of the principal balance on the VTB Mortgage. [ 18 ] Mr. Javeri submits that the Clause does not offend the anti-deprivation rule. He argues that the Clause does not have the effect of creating a debt that would not exist but-for the insolvency, and that it does not remove value from the insolvent Windsor Park’s estate.

Javeri submits that this situation does not fall within the application of the anti-deprivation rule, as the Clause is triggered by Brava’s insolvency, a third party to the VTB Mortgage. Furthermore, he submits that, although the Clause increases Brava’s guarantee obligation, that increase is offset by the $180,000 benefit it received, so no value is being removed from Brava’s estate in any event. Windsor Park [ 19 ] Windsor Park submits that the Guarantee Fee reduced the balance of the principal amount on the VTB Mortgage, so long as Brava remained solvent. It disagrees with the Mr.

Javeri’s characterization of the Clause as a form of “security”. It submits that Mr. Javeri has not provided evidence that the Guarantee Fee was actually paid or that any money was exchanged. [ 20 ] Windsor Park argues that the Clause violates the anti-deprivation rule, given that the effect of the Clause is to remove property from Brava’s estate that would otherwise be available to its creditors upon a declaration of insolvency.

It submits that the Guarantee Fee is unenforceable and it no longer consents to the enforcement of the Clause. 186 Alberta [ 21 ] 186 Alberta submits that the Clause offends the anti-deprivation rule from both the perspective of Brava and Windsor Park. It operates to increase the principal amount on the VTB Mortgage upon the insolvency of Brava (for which Brava remains liable), effectively reducing the value of Brava’s estate available to other creditors such as 186 Alberta. It also argues that Windsor Park’s default under the VTB Mortgage was

an act of insolvency that gave rise to Brava’s liability under the guarantee. Essentially, Brava’s act of insolvency (failure to pay the VTB Mortgage on demand) was triggered by the Windsor Park’s insolvency, with the effect of also removing value from Windsor Park’s estate if the Guarantee Fee is added to the mortgage balance. It submits that this also violates the anti-deprivation rule, and as such the Clause should be void as against both Windsor Park and Brava. Analysis [ 22 ] Mr.

Javeri’s latest description of the Guarantee Fee (as a form of security) is inconsistent with how the arrangement was described in the Statement of Claim, Application, and supporting Affidavit. The Application stated that the Guarantee Fee reduced the principal owing under the VTB Mortgage, but would be added back to the principal in the event of Brava’s insolvency. Mr.

Javeri’s supporting Affidavit states: “Assuming the Guarantee Fee is added back to the principal, the amount still owing to me under the VTB Mortgage as at September 3, 2021 is $1,916,527.61, calculated as follows . . .”. [ 23 ] The Applicant’s brief confirms that the declaration of insolvency is tied to the amount owing under the mortgage: “this declaration is relevant as it has an impact on the quantum owed under Javeri’s mortgage”. [ 24 ] This is supported by the two demand letters asking for $1.72 million in satisfaction of the VTB Mortgage balance and guarantee. [ 25 ] There is no evidence that the Guarantee Fee was ever paid to Brava. [ 26 ] I find that there is a question concerning the proper characterization of the Guarantee Fee and whether it was paid.

This is one reason why I decline to award judgment in an amount that includes the amount of the Guarantee Fee. [ 27 ] Furthermore, at common law, the anti-deprivation rule renders void any contractual provision, triggered by an event of insolvency, that removes value from the insolvent’s estate to the prejudice of creditors. It is an effects-based test ( Chandos Construction Ltd v Deloitte , 2020 SCC 25 at para 31 ). [ 28 ] Mr.

Javeri raises the Supreme Court’s comment in Chandos that the anti-deprivation rule will not be offended where a commercial party protects themselves “against a contracting counterparty’s insolvency by taking security, acquiring insurance, or requiring a third-party guarantee” (at para 40). [ 29 ] However, if the Guarantee Fee is being added back in after the mortgagor defaults and the guarantor is declared insolvent, it cannot be considered security for repayment of a debt.

It is increasing the amount of the mortgage, and effectively removing value from the estates of Windsor Park and Brava, who are now both liable for the mortgage debt. [ 30 ] Mr. Javeri’s failure to establish that the Guarantee Fee was a form of security rather than, for example, a fee paid to obtain a security (the Guarantee) is a further reason why I decline to award judgment in an amount that includes the amount of the Guarantee Fee.

D.L. Shelley J.C.Q.B.A. [ 31 ] Removing value from these estates has the potential to affect recovery by subordinate creditors. While the other two mortgagees had notice of this application, no other creditors of Windsor Park were served with notice. Given the Court’s understanding of the likely value of the Lands, it is the unsecured creditors (including trades people) who would be most affected by the removal of value.

The lack of notice to those who would be most likely to be affected by this Application is another reason not to the award the requested judgement at this time. [ 32 ] A further reason for not awarding the requested judgment at this time is that the mortgage statements, demand letters, and statement of claim all refer to the sum $1.72 million as the principal amount claimed, an amount that is $180,000 less than the principal amount for which a judgment is now sought. Conclusion [ 33 ] The Application for

summary judgement against Brava in the amount of $1,916,527.61 plus interest is dismissed. [ 34 ] The formal demand for payment and Notice of Intention to Enforce Security which were served on Brava reference the amount of indebtedness as $1,732,109.84, which did not include the Guarantee Fee and which amount is not in question. Brava has not made payment of that amount. There is evidence that Brava is insolvent and therefore the requested declaration of insolvency is granted. Heard on the 28 th day of October, 2021, followed by further written submissions dated November 4, 2021.

Dated at the City of Calgary, Alberta this 15 th day of December, 2021. Appearances: Daniel Jukes Miles Davison LLP for the Applicant Taylor Grantham and Natalie Reeder Stonetree Law for the Respondent Brava Development Group Kimberly Howe Goodfellow Scheuttlaw For the Third Mortgagee, 1863387 Alberta Ltd. and Jose Cuzzani