Executive Summary: Key Legal and Evidentiary Issues

• Propriety of proceeding with a receivership application where a co-lender (Hallmark) was not named as a party but was aware of and consented to the application.
• Effect of a technically defective s. 244 BIA notice that omitted the co-lender, and whether any “substantial injustice” was caused so as to bar reliance on s. 243 BIA.
• Interaction between the requested receivership (including an investigatory component) and the existing Parallel Action, and whether the receivership would improperly duplicate discovery rights.
• Application of the “just or convenient” test under s. 243 BIA and s. 101 CJA, including factors such as insolvency, default under debentures, withdrawn audit opinions, and regulatory concerns about EMIC’s principal.
• Appropriateness of appointing an investigative receiver to address an informational imbalance where EMIC and its principal control key financial information, including related-party balances and missing records.
• Allegations of misconduct by one applicant (threatening texts/emails) and whether such conduct should prevent the court from granting receivership relief to protect all investors and creditors.

Background and parties

The case arises from the financial distress of Equityline Mortgage Investment Corporation (EMIC), a mortgage investment corporation incorporated under Ontario’s Business Corporations Act and operating under the Income Tax Act definition of a mortgage investment corporation. EMIC is part of the “EquityLine Group,” which also includes Equityline Services Corporation (ESC) and EquityLine SPV Limited Partnership (ESLP). EMIC’s mortgage portfolio was managed and administered day-to-day by ESC, including oversight of EMIC’s mortgage loans and banking arrangements. As of EMIC’s Q3 2023 financial statements, approximately $3.82 million was shown as owing from ESC to EMIC, raising questions about the status and collectability of related-party receivables.

The applicants – Alexandra Lozovski, Eric Barapp, 2806569 Ontario Inc., Nick Ranieri, Nelli Griu and Vladislav Andreyev – are investors and/or shareholders in EMIC. Several other original applicants withdrew from this Commercial List application and instead pursued their own civil claims in separate actions, all tying into a broader “Parallel Action” that includes EMIC, ESC, Elle Mortgage Corporation (Elle), and every director and officer of EMIC among the defendants.

EMIC is one respondent. The other respondent, Elle, is a mortgage lender with two directors/officers, Elliot Kirshenblatt and Terry Waldman, that holds certain mortgage assets on an approximate 80/20 basis with ESC, an EMIC affiliate. Elle has been enforcing its defaulted mortgage assets and did not oppose the appointment of a receiver over EMIC, provided the receivership order did not stay or interfere with Elle’s enforcement efforts. Elle and the applicants agreed to work out carve-out language to protect Elle’s enforcement rights, with liberty to return to the judge via case conference if they could not agree.

Investments, debenture structure and events leading to default

The lead evidentiary narrative comes from applicant Nick Ranieri, who invested in EMIC through a debenture structure. Ranieri loaned money to EMIC together with Hallmark Housekeeping Services Inc. (Hallmark). Under the relevant loan documents, “Lender” was defined to mean both Ranieri and Hallmark jointly, with no powers given for one to act unilaterally on behalf of the other. The security package for this investment included:

• A General Security Agreement in favour of the lenders; and
• An assignment of certain EMIC mortgage loans as collateral.

The debenture issued on February 23, 2024, to Ranieri and Hallmark had a principal amount of $800,000 and a maturity date of April 22, 2024. Ranieri’s investment actually put at issue approximately $400,000 plus interest, secured by that debenture, the GSA, and the assigned mortgages. Ranieri’s evidence was that the mortgages assigned as collateral had either been discharged without notice, with proceeds withheld, or transferred to other entities, leaving him uncertain as to what, if any, collateral remained to secure his claim.

EMIC stopped making payments to the applicants around July 2024. On July 26, 2024, the Jamaican Stock Exchange issued a notice of market suspension for EMIC’s Class A Preferred Shares as a result of EMIC’s auditors withdrawing a recently filed audit report, further undermining confidence in EMIC’s financial reporting and solvency.

Contractual enforcement rights and statutory notice

The debenture contained contractual enforcement rights. In particular, Article 6.3(a)(iv) provided that, on an event of default, the Lender could take various enforcement steps, including instituting court proceedings for the appointment of a receiver. Relying on this clause, Ranieri issued a notice under s. 244 of the Bankruptcy and Insolvency Act (BIA) around October 29, 2024, signalling his intention as a secured creditor to enforce on all or substantially all of EMIC’s property.

Section 244 BIA requires a secured creditor intending to enforce security on all or substantially all of an insolvent business’s property (whether inventory, receivables or other property) to deliver a prescribed form notice and to wait ten days before enforcing, unless the debtor consents to earlier enforcement. EMIC argued that the s. 244 notice was defective because it was sent in the name of Ranieri alone and did not name Hallmark, even though the debenture defined both as “Lender.”

The applicants responded that s. 187(9) BIA prevents proceedings from being invalidated by formal defects or irregularities unless they result in substantial injustice that cannot be remedied. On the evidence, EMIC always knew the debt was jointly held by Ranieri and Hallmark, and there was no suggestion that the omission of Hallmark’s name in the s. 244 notice impaired EMIC’s ability to negotiate or reorganize its affairs. The court accepted that, even if the notice was technically deficient, there was no substantial injustice and the defect did not bar a receivership application under s. 243 BIA.

Hallmark’s role and the non-joinder issue

A key preliminary issue was whether the application could proceed at all without Hallmark as a party, given that the loan and security were held jointly by Ranieri and Hallmark and the documents defined them together as the Lender. The court raised concerns about whether Hallmark even knew of the application, and, with leave, the applicants filed additional affidavit evidence from or about Hallmark.

Hallmark’s evidence was that it had demanded and received payment from EMIC after the maturity date of the debenture, was aware of the receivership application, supported it, and chose not to participate. EMIC argued that all co-lenders must be joined, relying on Alberta Treasury Branches v. Ghermezian and similar Ontario authority, which generally emphasize that all parties to a contract should be before the court so it can fully adjudicate the contractual dispute and bind all interested parties.

The judge distinguished those authorities. This was not a claim to adjudicate or determine the full contractual rights and obligations under the debenture; it was an application by one secured creditor (among other investors) seeking the appointment of a receiver. Applying the proportionality principle in the Rules of Civil Procedure and the Supreme Court’s guidance in Hryniak v. Mauldin, the court concluded it would be disproportionate and unnecessary to dismiss or stand down the application solely because Hallmark had not been formally added, especially once it was clear that Hallmark was aware of, supported, and did not wish to be directly involved in the application. The application was therefore permitted to proceed notwithstanding Hallmark’s non-joinder.

Parallel civil actions and alleged duplication of discovery

In addition to this receivership application, the investors had already commenced civil proceedings – the “Parallel Action” – against EMIC, ESC, Elle, and numerous other parties, seeking damages and other remedies. Several of the applicants in the receivership proceeding were also plaintiffs in that civil action, and additional separate actions had been started by former applicants who had withdrawn from this Commercial List proceeding.

EMIC argued that appointing a receiver, especially with investigatory powers, would effectively allow the applicants to duplicate and even expand the discovery rights available to them in the Parallel Action under the Rules of Civil Procedure. EMIC asserted that it was already accepted that EMIC was insolvent and in default, and that extensive documentary and oral discovery in the Parallel Action would be the proper vehicle to investigate what happened to investor funds and mortgage assets.

The court rejected that submission. It emphasized that civil actions can take years, whereas a receiver could be appointed immediately to investigate EMIC’s books, bank accounts and mortgage portfolio, locate and preserve assets, and determine what, if anything, is available to be realized and distributed to creditors. The investigatory work of a receiver, acting as an officer of the court, is not duplicative of ordinary civil discovery in actions where the parties are adversaries and damages are the main remedy.

Legal test for appointing a receiver and key factors applied

The application was brought under s. 243(1) BIA and s. 101 of the Courts of Justice Act. Under both provisions, the core test is whether it is “just or convenient” in all the circumstances to appoint a receiver. The court relied on prior authority such as Bank of Montreal v. Sherco Properties Inc. and Canadian Western Bank v. 2563773 Ontario Inc., which set out non-exhaustive factors for this assessment, including:

• Irreparable harm if no order is made;
• Risk to the security holder and need to protect or safeguard assets;
• Nature of the property;
• Waste or dissipation of assets;
• Preservation and protection of property pending judicial resolution;
• Balance of convenience;
• Contractual right to a receiver under the security documents;
• Difficulties faced by the secured creditor in enforcing its rights;
• Cautious use of the remedy;
• Whether court appointment is necessary to allow the receiver to perform efficiently;
• Conduct of the parties;
• Likely duration and cost of the receivership; and
• Likelihood of maximizing return and facilitating the receiver’s duties.

The court also referred to East Guardian v. Mazur, which recognizes that an investigatory receiver can be appropriate even without proven fraud, where there is an informational imbalance and the debtor controls the relevant records. The judge emphasized that EMIC and its principal, Sergiy Shchavyelyev, held all critical information, including why the 2023 audited financial statements were withdrawn, the details of corporate accounts, and the large amount purportedly owed by ESC to EMIC, while investors had limited visibility.

Financial irregularities, regulatory concerns and missing records

Several red flags reinforced the need for a receiver. EMIC’s auditors, Grant Thornton LLP, had first issued a qualified audit opinion and then withdrew the 2023 audited financial statements. Adam Fisher, a licensed insolvency trustee with Harris & Partners Advisory Inc. (the proposed receiver), described certain debts shown as owing from Sergiy’s service corporation to EMIC as “highly problematic and irregular” and emphasized the importance of reviewing the withdrawn 2023 statements and related records.

Moreover, the Financial Services Regulatory Authority of Ontario (FSRA) had refused to renew Shchavyelyev’s mortgage brokerage licence. FSRA concluded that his past conduct and false or incomplete information in licensing matters showed he was not suitable to be licensed and that he had contravened multiple statutory and regulatory obligations, including failure to notify FSRA of errors and omissions insurance lapses and failure to ensure the brokerage complied with reporting and E&O requirements. Shchavyelyev did not contest FSRA’s proposal or request a hearing, further underlining regulatory concerns.

In cross-examination, Sergiy testified that EMIC’s entire mortgage portfolio was fully in default and in collections. Although the applicants had requested a ledger and other key financial documents for EMIC, Sergiy had not provided them. This pattern of non-disclosure and the absence of core financial records convinced the court that only a receiver, armed with court authority, could properly investigate and untangle EMIC’s financial affairs for the benefit of creditors and investors.

Alleged misconduct by an applicant and the “clean hands” argument

EMIC also argued that the receivership should be denied because certain applicants did not come with “clean hands.” In particular, Sergiy alleged that applicant (and lawyer) Eric Barapp had sent him “disgusting threats” by text message, including telling him to commit suicide. The record contained examples of grossly inappropriate texts and emails, and Barapp did not file any evidence to rebut that characterization.

The judge acknowledged that the communications were entirely inappropriate, but held that this misconduct by one applicant did not justify denying receivership relief to the group of investors and other creditors seeking to understand what happened to their money and to secure whatever assets remained. The appointment of an independent, licensed insolvency trustee as receiver would protect all stakeholders and limit direct dealings between Barapp and Sergiy.

Scope of the receivership and carve-outs for Elle

The receivership order followed, in substance, the Commercial List Model Receivership Order, with additional investigative powers. Harris & Partners Advisory Inc. was appointed as receiver and manager over EMIC’s properties and assets. The court recognized that the receiver would not only preserve and realize assets but also perform a substantial investigatory role: reviewing financial statements and ledgers, tracing funds, assessing the status and value of mortgage loans, and clarifying inter-company balances, particularly amounts owing from ESC.

At the same time, the court accepted Elle Mortgage Corporation’s request that the order contain carve-out language to ensure that the receivership did not stay or interfere with Elle’s ongoing enforcement of certain mortgage assets it held jointly (on an approximate 80/20 basis) with ESC. Counsel for Elle and the applicants were given the task of settling the precise carve-out wording, with liberty to seek the judge’s assistance by way of a case conference if needed.

Outcome and relief granted

EMIC had brought a motion to stay the receivership application or strike some of the applicants (Ranieri, Lozovski and Barapp), arguing overlap with the Parallel Action and raising procedural objections such as non-joinder of Hallmark and alleged defects in the s. 244 notice. That motion was dismissed. The court held that the application could proceed despite Hallmark not being named, that any defect in the s. 244 notice did not cause injustice and thus did not invalidate the proceeding, and that it was “just or convenient” under both s. 243 BIA and s. 101 CJA to appoint a receiver in light of EMIC’s defaults, insolvency, withdrawn audit opinions, regulatory problems, full default of the mortgage portfolio, and lack of transparency about EMIC’s finances.

Accordingly, the receivership order was granted in the form sought by the applicants (subject to the Elle carve-out), and EMIC’s motion was dismissed. The applicants, as moving parties for the receivership, were therefore the successful party in this decision. The reasons do not specify any monetary judgment, damages award, or quantified costs order in their favour, and no total amount of costs or damages can be determined from the decision; the relief granted is the appointment of a court-supervised receiver rather than a stated sum of money.