) ) CryptoStar Corp. Plaintiff (Appellant) – v. –, 2023 ONSC 1824

CITATION : CryptoStar Corp. v. 611890 Alberta Inc., 2023 ONSC 1824 DIVISIONAL COURT FILE NO.: 242/22 COURT FILE NO.: CV-22-00677485-0000 DATE: 2023/03/21 ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT D.L. Edwards, Ryan Bell, and Leiper JJ. BETWEEN: ) ) CryptoStar Corp. Plaintiff (Appellant) – and – 611890 Alberta Inc., DBA Avila Energy, Avila Exploration & Development Canada Ltd. and Leonard Van Betuw Defendants (Respondents) ) ) ) ) ) ) ) ) ) ) ) ) Sara J. Erskine and Vincent DeMarco, for the Plaintiff (Appellant) Megan E.

Shortreed and Danielle Glatt, for the Defendants (Respondents) ) ) ) ) HEARD: March 1, 2023 at Toronto (via ZOOM) REASONS FOR DECISION RYAN BELL J. Overview [ 1 ] CryptoStar Corp. moved for the interim preservation of specific funds or, in the alternative, for the preservation of assets purchased using the specific funds.

Justice Black dismissed CryptoStar’s motion. [1] CryptoStar appeals, with leave. [ 2 ] CryptoStar submits that the motion judge applied the incorrect legal test under r. 45.02 (preserve a specific fund) and under r. 45.01 (preserve assets) of the Rules of Civil Procedure , [2] and erred in finding that CryptoStar had not set out the assets it sought to preserve. [ 3 ] The motion judge applied the correct legal tests in respect of rr. 45.01 and 45.02 to the facts as he found them. The motion judge did not err in law.

I find no palpable and overriding error in his application of the legal tests to the facts or in his

interpretation of the agreement between the parties. I would dismiss the appeal. Background and Findings of the Motion Judge [ 4 ] CryptoStar is a cryptocurrency mining company that generates cryptocurrency using computer hardware that continuously runs complex algorithms. This continuous operation – “mining” – requires substantial amounts of electric power. Pursuant to the agreement between CryptoStar and the respondents (collectively, “Avila”), Avila was to build and commission infrastructure and equipment at sites in rural Alberta where Avila would generate power to supply to CryptoStar.

CryptoStar was Avila’s first and only customer for electric power. All of Avila’s funds, lands, and assets are in Alberta. The Agreement [ 5 ] On April 17, 2020, following from a letter of intent dated April 3, 2020, CryptoStar and Avila entered into an original version of the Agreement. On April 12, 2021, the parties executed an Amended and Restated Power Supply Agreement.

[ 6 ] In s. 2.1 of the Agreement, Avila agreed to provide CryptoStar with power upon the payment by CryptoStar of USD $1,481,010 (plus tax) per 10 MW of power (an “Upfront Payment”). Each Upfront Payment included: (

i) the costs of “prepaid power” for the “first 6 months of supply”, after which CryptoStar was required to pay for power, invoiced monthly in advance; and (ii) the cost of “commissioning the required infrastructure and equipment.” The Upfront Payments did not include the cost of building the containers required to host CryptoStar’s equipment (the “hosting containers”). [ 7 ] As found by the motion judge, there is no express requirement in the Agreement that Avila segregate or hold the Upfront Payments pending the provision of prepaid power: “[i]n fact, the Agreement is explicitly structured so that Avila can access capital from the Upfront Payments to build infrastructure for power generation facilities.” As the motion judge explained, “[t]his reflects that, as both parties understood, prior to the Agreement Avila had no power generation business or infrastructure of any kind, such that power plants would have to be built in 10 MW increments.” [ 8 ]

Section 2.8 of the Agreement states that, in the event Avila fails to provide power within 120 days pursuant to s. 2.1(d), CryptoStar has the right to demand repayment of the Upfront Payments, “other than expenses actually incurred and paid by Avila for infrastructure and equipment.” Dealings Between the Parties Under the Agreement [ 9 ] Owing to CryptoStar’s financial circumstances, Avila agreed to allow CryptoStar an indulgence whereby Avila would supply power in three tranches of power totalling 4 MW, rather than the 10 MW contemplated in s. 2.1 of the Agreement.

CryptoStar made the Upfront Payments for these smaller tranches between September 2020 and July 2021. [ 10 ] CryptoStar then requested an additional 10 MW of power, but could not immediately afford the entire Upfront Payment. Avila agreed that CryptoStar could pay for the 10 MW in two instalments. CryptoStar paid for 5 MW of power, rather than the 10 MW for which it asked and was invoiced. [ 11 ] In total, CryptoStar paid Avila USD $1,332,819 plus GST for 9 MW of power. For its part, Avila purchased generators, turbines, transformers, breakers and cabling, as well as housing containers.

Aviva built a 3.5 MW power plant that was commissioned and operated at the “4-20 site” in Alberta until the site shut down in December 2021. CryptoStar received and consumed at least CAD $216,141 of power from the power plant at the 4-20 site. Treatment of the Upfront Payments [ 12 ] CryptoStar transferred all the Upfront Payments it made to Avila’s general bank accounts.

Avila’s evidence – which the motion judge described as “essentially unchallenged (subject to the legal argument...)” – was that these funds were then co-mingled with Avila’s pre-existing funds, and that the co-mingled funds were used to pay for all of Avila’s operating expenses, including the expenditures in connection with the power generation business. [ 13 ] The motion judge found that Avila did not and was not contractually obliged to set aside or hold the Upfront Payments in cash. Avila used the funds to defray the capital costs of building the power plants.

The Upfront Payments were not held in a segregated fund.

The motion judge accepted the evidence of Avila’s controller that the Upfront Payments were indistinguishable from the other funds with which they were co-mingled “from the moment they were deposited into Avila’s general accounts.” The motion judge found “inasmuch as the Agreement did not place any restrictions on the use of the Upfront Payments, Avila could and did use the funds as it saw fit, and did not track the trajectory and depletion of these payments from the general bank account.” [ 14 ] The motion judge found that the funds that Avila spent to install and generate power had to be incurred regardless of the source of revenues received.

These were booked to the “allowance for expenditures” for the project. CryptoStar was credited for its power consumption in the first six months of supply and was not to be charged per kWH over that period. Therefore, for revenue recognition purposes, Avila accrued the Upfront Payments as a liability in the form of “deferred revenue.” Standard of Review [ 15 ] The standard of review is set out in Housen v. Nikolaisen , 2002 SCC 33 , [2002] 2 S.C.R. 235, at paras. 6-10 and 36-37 . On a pure question of law, the standard of review is correctness.

The standard of review for findings of fact is that such findings are not to be reversed unless it can be established that the judge made a “palpable and overriding error.” Questions of mixed fact and law are subject to the palpable and overriding error standard, unless it is clear that the judge made an error of law or principle that can be identified independently in the judge’s application of the law to the facts of the case. [ 16 ] Appeal courts should exercise caution in identifying extricable questions of law because mixed questions, by definition, involve aspects of law. In Teal Cedar Products Ltd. v.

British Columbia , 2017 SCC 32 , at para. 45 , the Supreme Court of Canada cautioned that appeal courts “must be vigilant in distinguishing between a party alleging that a legal test may have been altered in the course of its application (an extricable question of law; Sattva , at para. 53), and a party alleging that a legal test, which was unaltered, should have, when applied, resulted in a different outcome (a mixed question).” Analysis The Motion Judge did not err in applying the test for an interim order for preservation of a specific fund [ 17 ] CryptoStar submits the motion judge erred in holding that the first branch of the test under r. 45.02 requires the specific fund be segregated, misapplied the second branch of the applicable test, and misinterpreted ss. 2.1 and 2.8 of the Agreement.

[ 18 ] I disagree. [ 19 ] Rule 45.02 provides: Where the right of a party to a specific fund is in question, the court may order the fund to be paid into court or otherwise secured on such terms as are just. [ 20 ] The test for an interim preservation of a specific fund under r. 45.02 requires the plaintiff to establish: (

i) a right to a specific fund; (ii) there is a serious issue to be tried regarding the plaintiff’s claim to the fund; and (iii) the balance of convenience favours granting the order: Sadie Moranis Realty Corporation v. 1667038 Ontario Inc. , 2012 ONCA 475 , at para. 18 . [ 21 ] The motion judge considered and applied the test as set out in Sadie Moranis , and considered the more recent decisions in Super A Hotels Investment and Management Group (Canada) Inc. v. 1205723 Ontario Inc. , 2015 ONSC 4405 and 3Genius Corporation v.

Locationary Inc. , 2016 ONSC 4092 . [ 22 ] In 3Genius , Belobaba J. applied the test for preservation of a specific fund as established in Sadie Moranis and found that there was a reasonably identifiable fund of money because the funds were: (

i) sufficiently differentiated by book-keeping entries showing the monies as “payable” and being held and in the possession of the respondent; and (ii) specified because pursuant to the sale agreement, the holdback amounts were “specified and undisputed” and “due and owing.” [3] Nevertheless, Justice Belobaba denied the moving party’s request for the preservation of a specific fund because its claim was, in essence, a claim for damages. [ 23 ] In Super A Hotels , Master Muir was satisfied that the plaintiff had met the test for a legal right to a specific fund with respect to a security deposit.

The deposit was required by a term of the lease agreement between the parties “to be held by the Landlord until the Tenant ha[d] completed its fixturing of the premisses...Upon completion of the fixturing...and upon successful opening of the Tenant’s business, the Landlord shall return the $200,000.00 security deposit to the Tenant.” [ 24 ] Master Muir did not, however, view the other advance payments in the same light, observing that there was nothing in the language of the agreements that required the defendant to hold or segregate the payments pending some future event and that the language of the agreements appeared to allow the defendant to use the funds as it saw fit.

Master Muir concluded that the plaintiff’s advance payments of rent and its contribution to the rezoning expenses were not “reasonably identifiable funds earmarked to this litigation” and the defendant was no longer in possession of the advance rental payments: ‘[i]n my view, the court cannot order the preservation of a fund under Rule 45.02 when the fund no longer exists.” [4] [ 25 ] In this case, the motion judge found that CryptoStar had failed to establish a specific fund as required for the “extreme remedy” under r. 45.02.

The motion judge observed that there was no clear contractual obligation for Avila to segregate or set aside – “notionally or otherwise” – the funds alleged to form the specific funds for purposes of r. 45.02. To the contrary, the understanding of the parties was that the funds, once co-mingled with other funds in Avila’s accounts, would be spent, together with other funds, on the power generation project. [ 26 ] As in 3Genius , the motion judge found that CryptoStar’s claim is, in essence a claim for damages, based on the potential refund available under s. 2.8 of the Agreement.

As the motion judge correctly noted, s. 2.8 of the Agreement contemplates the right to an amount and provides for the calculation of that amount, but does not specify that the amount, if owed, should be paid from the proceeds of the Upfront Payments. The motion judge found on the record before him that the condition precedent in s. 2.8 had not been met.

Finally, on the issue of whether there was a specific fund, the motion judge found that Avila was no longer in possession of the Upfront Payments and that Avila had spent in excess of the Upfront Payments on the items necessary to generate and deliver power to CryptoStar. [ 27 ] The motion judge was not persuaded that the second element of the test under r. 45.02 (serious issue to be tried relative to the return and preservation of the monies claimed) was met. He found that CryptoStar was only entitled to rely on s. 2.8 of the Agreement if no power was delivered.

In this case, the parties agreed that Avila built power plants and delivered power. [ 28 ] As for the balance of convenience, there was no substantive evidence before the motion judge to suggest that Avila was attempting to place assets beyond the reach of the court. The motion judge concluded: “I see nothing to justify tying up Avila’s assets at this stage nor any risk that those assts will leave Alberta between now and trial.” [ 29 ] The motion judge applied the correct legal test under r. 45.02. I see no error in his

interpretation of the agreement. The findings and conclusions of the motion judge were available to him; his reasons disclose no palpable and overriding error warranting this court’s intervention. I would not give effect to this ground of appeal.

The Motion Judge did not err in applying the test for an interim order for preservation of property [ 30 ] CryptoStar submits that the motion judge failed to apply the correct legal test for an interim order to preserve assets pursuant to r. 45.01 by finding that the assets were not the genuine subject matter of the dispute because resort to the assets was claimed in the alternative, and in failing to apply the second and third branches of the test. [ 31 ] Again, I disagree. [ 32 ] Rule 45.01(1) provides: The court may make an interim order for the custody or preservation of any property in question in a proceeding or relevant to an issue in a proceeding, and for that purpose may authorize entry on or into any property in the possession of a party or of a person not a party. [ 33 ] The test for r. 45.01 is the same as the r. 45.02 test set out by the Court of Appeal for Ontario in Sadie Moranis except that under r. 45.01, the first branch of the test requires an analysis of whether the assets sought to be preserved constitute the very subject

matter of the dispute: BMW Canada Inc. v. Autoport Limited , 2021 ONCA 42 , at paras. 42-44 . [ 34 ] The motion judge relied on 3Genius and found that CryptoStar’s claim in respect of the Upfront Payments is, in essence, a damages claim. This was a finding available to the motion judge. I agree with Avila that the motion judge’s finding that the

Schedule “C” assets – listed in CryptoStar’s reply factum – were not the genuine subject matter of the dispute necessarily follows. In addition, none of the assets listed in

Schedule “C” were unique. [ 35 ] CryptoStar’s argument that the motion judge failed to apply the second and third branches of the r. 45.01 test is without merit. The motion judge did not repeat his analysis as to whether there was a serious issue to be tried and balance of convenience. He did not need to because, as the motion judge stated, “[m]any of the same observations made in relation to Rule 45.02 apply equally to CryptoStar’s alternative request to freeze assets allegedly purchased from the ‘specific fund.’” [ 36 ] The motion judge correctly applied the r. 45.01 test.

CryptoStar has not demonstrated any palpable and overriding error of fact or mixed fact and law. I would not give effect to this ground of appeal. The Motion Judge did not err in finding that CryptoStar had not identified the assets it sought to preserve [ 37 ] CryptoStar has failed to demonstrate any palpable and overriding error in respect of the motion judge’s finding that CryptoStar failed to identify the specific assets it sought to preserve. The motion judge found as follows: CryptoStar has not identified or particularized the assets it alleges were purchased with the Upfront Payments.

Given that the Upfront Payments were co-mingled with other funds in Avila’s general accounts, and used in concert with those funds to purchase various equipment at a cost far exceeding the amount of the Upfront Payments, it seems impossible to distinguish particular assets to attach, and CryptoStar has made no attempt to do so. [ 38 ] These findings were available to the motion judge on the record before him. I would not give effect to this ground of appeal. Disposition [ 39 ] For these reasons, I would dismiss the appeal.

Costs of the motion for leave to appeal were left to be decided by the panel hearing the appeal. CryptoStar shall pay Avila costs of the motion for leave to appeal and the appeal in the total amount of $30,000 all inclusive. Ryan Bell J. I agree D.L. Edwards J. I agree Leiper J. Released: March 21, 2023 CITATION : CryptoStar Corp. v. 611890 Alberta Inc., 2023 ONSC 1824 DIVISIONAL COURT FILE NO.: 242/22 DATE: 2023/03/21

ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT BETWEEN: CryptoStar Corp. Plaintiff (Appellant) – and – 611890 Alberta Inc., DBA Avila Energy, Avila Exploration & Development Canada Ltd. and Leonard Van Betuw Defendants (Respondents) REASONS FOR JUDGMENT _____________________________________________ D.L. Edwards, Ryan Bell, and Leiper JJ. Released: March 21, 2023