COURT FILE NUMBER 1401-12431 Clerk’s Stamp COURT COURT OF QUEEN’S BENCH OF ALBERTA JUDICIAL CENTRE CALGARY APPLICANT ACCESS MORTGAGE CORPORATION (2004) LIMITED RESPONDENT ARRES CAPITAL INC. DOCUMENT BENCH BRIEF ADDRESS FOR SERVICE McCarthy Tétrault LLP AND CONTACT Barristers and Solicitors INFORMATION OF PARTY Suite 4000, 421 - 7th Avenue S.W. FILING THIS DOCUMENT Calgary AB T2P 4K9 Attention: Walker W. MacLeod / Theodore Stathakos Phone: 403-260-3710 / 3568 Fax: 403-260-3501 Email: [email protected] / [email protected] BENCH BRIEF OF ALVAREZ & MARSAL CANADA INC. APPLICATION TO DETERMINE CLAIMS IN RESPECT OF THE GRAYBRIAR FUNDS, TO BE HEARD BY THE HONOURABLE MR. JUSTICE C.M. JONES ON SEPTEMBER 21, 2018 AT 10:00 A.M. McCarthy Tétrault LLP Bishop & McKenzie LLP 4000, 421 – 7th Avenue SW #2200, 555 – 4th Avenue SW Calgary, Alberta, T2P 4K9 Calgary, Alberta, T2P 3E7 403-260-3500 403-237-5550 W.W. MacLeod K.L. Okita T. Stathakos Counsel to Alvarez & Marsal Canada Inc., in Counsel to Terrapin Mortgage Investment its capacity as court-appointed receiver of Corp. Arres Capital Inc. Demiantschuk Burke & Hoffinger LLP 1200, 1015 – 4th Street SW Calgary, Alberta, T2R 1J4 403-252-9937 J. Burke, Q.C. I. Tharani Counsel to the Related Parties 213575/498357 MT DOCS 18289550v5 TABLE OF CONTENTS I. INTRODUCTION.................................................................................................................3 II. STATEMENT OF FACTS....................................................................................................4 A. Overview .........................................................................................................................4 B. The Sale to Plaintiff Order ...............................................................................................5 C. The Graybriar Investors...................................................................................................6 D. Terrapin...........................................................................................................................6 E. The Related Parties.........................................................................................................7 III. ISSUES...............................................................................................................................7 IV. LAW AND ARGUMENT...................................................................................................8 A. The Terrapin Claim..........................................................................................................8 B. The Related Parties’ Claim............................................................................................12 V. RELIEF REQUESTED ......................................................................................................19 LIST OF AUTHORITIES ...........................................................................................................21 - 3 - I. INTRODUCTION 1. This Bench Brief is submitted by Alvarez & Marsal Canada Inc., in its capacity as court- appointed receiver (the “Receiver”) of Arres Capital Inc. (the “Debtor”), pursuant to the Order issued by the Honourable Madam Justice J. Strekaf under the Civil Enforcement Act (Alberta)1 on February 13, 2015, as subsequently amended and restated pursuant to the Order issued by the Honourable Madam Justice B.E.C. Romaine on October 23, 2017 (the “Receivership Order”) in Court File No. 1401-12431 (the “Receivership Proceedings”).2 On July 26, 2017, the Debtor was assigned into bankruptcy pursuant to the Order issued by the Honourable Madam Justice K. Eidsvik in Court File No. 25-094212 and the Receiver was appointed as trustee of the estate of the Debtor. 2. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Claims Process Order, including Appendix “A” thereto, issued by the Honourable Madam Justice B.E.C. Romaine on June 4, 2018. 3. This submission of the Receiver pertains to the determination of Claims to the Graybriar Funds. In the Claims Process, the Receiver disallowed the Applicants’ Claims. The Receiver says that the Applicants’ Claims to the Graybriar Funds are unfounded. 4. One of the Applicants, Terrapin Mortgage Investment Corp. (“Terrapin”), claims a priority entitlement to the Graybriar Funds based on an alleged equitable mortgage. The Receiver says that this alleged equitable mortgage did not arise at law and, even if it did, it would not give Terrapin priority to the Graybriar Funds. 5. The other Applicants are Persons related to the Debtor: Staci Serra (“Staci”), Wesley Serra (“Wesley”), and 875892 Alberta Limited (“875892”, and together with Staci and Wesley, the “Related Parties”). Staci and 875892 are related to the Debtor because of their relationship to Wesley, who is the Debtor’s sole owner.3 Staci is Wesley’s spouse and Staci owns and controls 875892.4 The Related Parties claim a priority entitlement to the Graybriar Funds as a result of alleged assignments of the Debtor’s receivables that the Debtor supposedly made to one or more of them (the “Alleged Assignments”). 1 RSA 2000, c C-15. 2 Second Receiver’s Report, at paragraphs 1-2 [Compendium, page 717]. 3 Third Receiver’s Report, at paragraph 8 [Compendium, page 909]; Affidavit of Michael John Cassidy Ellis, sworn July 12, 2018 at paragraph 7 [Compendium, page 49]. 4 Second Receiver’s Report, at paragraphs 26, 28 [Compendium, pages 724-25]; Affidavit of Michael John Cassidy Ellis, sworn July 12, 2018 at paragraphs 6, 8 [Compendium, page 49]. - 4 - 6. The Receiver says that these Alleged Assignments do not give any of the Related Parties any priority entitlement to the Graybriar Funds because (1) the Alleged Assignments are security interests that were not registered pursuant to the Personal Property Security Act (the “PPSA”);5 (2) there is insufficient evidence that the Related Parties gave consideration for the Alleged Assignments, such that the Related Parties do not qualify as creditors of the Debtor; and (3) the Alleged Assignments by the Debtor were impermissible pursuant to the Trust Agreements (defined below). 7. In short, and as set out in detail below, the Receiver contends that the Graybriar Investors have priority over Terrapin and the Related Parties as far as the Graybriar Funds are concerned. The Graybriar Investors made loans which were secured by first and second ranking mortgages (the “Graybriar Mortgages”) duly registered under the Land Titles Act (the “LTA”)6 against title to condominium units (the “Graybriar Units”) in the condominium development community referred to as “Graybriar”. The Graybriar Funds are derived from the sale of the Graybriar Units. The Debtor held the Graybriar Mortgages in trust for the Graybriar Investors. As a result, the Graybriar Investors have priority entitlement to any funds owed to the Debtor as a result of the sale of the Graybriar Units, including the Graybriar Funds. II. STATEMENT OF FACTS A. Overview 8. Over the course of the administration of the Debtor’s estate, one of the Receiver’s main difficulties has been identifying assets of material value for the benefit of creditors. The Receiver has located funds totalling approximately $1,617,020.90 (the “Funds”) that are composed of the following: (a) Graybriar Funds: $1,382,020.90 which arises from the sale of the Graybriar Units; and, (b) Court Funds: $235,000 posted in Court to stay the operation of a summary judgment order against the Debtor. 5 RSA 2000, c P-7 (Book of Authorities, Tab 1). 6 RSA 2000, c L-4 (Book of Authorities, Tab 2). - 5 - 9. This Application pertains to the Graybriar Funds. The Receiver, for the benefit and on behalf of the Debtor’s creditors and stakeholders, advances a simple position regarding the Graybriar Funds. 10. The Graybriar Funds are derived from the sale of the Graybriar Units. The Debtor held first and second ranking mortgages against the Graybriar Units by virtue of the Graybriar Mortgages. The Graybriar Mortgages were held by the Debtor in trust for the benefit of the Graybriar Investors pursuant to agreements between them and the Debtor (collectively, the “Trust Agreements”).7 11. The Graybriar Units were subject to certain subordinately registered builders’ liens in favour of creditors that were vested off title pursuant to the Graybriar Sale Approval Orders (discussed below). Once it is confirmed that either the Lien Claims have been satisfied or the Debtor is entitled to receive the Graybriar Funds in priority to any lien claimants, the Receiver proposes to distribute the Graybriar Funds to the Graybriar Investors subject to their pro rata entitlement in accordance with the terms and conditions in the Trust Agreements. B. The Sale to Plaintiff Order 12. Graybriar was the owner of certain Lands upon which the Graybriar Units were constructed. The Debtor provided certain funds to Graybriar which were secured pursuant to the Graybriar Mortgages and the Debtor held the Graybriar Mortgages as trustee for and for the benefit of the Graybriar Investors pursuant to the Trust Agreements.8 The Graybriar Mortgages attached to, encumbered, and were perfected against all of the Graybriar Units. 13. Pursuant to an Order granted by Master W.H. Breitkreuz on February 3, 2014, as amended by Master L.A. Smart on February 7, 2014 (the “Sale to Plaintiff Order”),9 the Debtor’s offer to purchase the Graybriar Units was accepted. 14. The Sale to Plaintiff Order was made without notice to the Graybriar Investors.10 After learning of