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BETWEEN:

ONTARIO

SUPERIOR COURT OF JUSTICE COMMERCIAL LIST

7805586 CANADA INC.

and

-File No. CV-12-9877-00CL

Applicant

ALNIZ REHMTULLA, AZRA REHMTULLA, ART HOUSE DESSERT INC., 8172340 CANADA INC., AMIR REHMTULLA, BAXTER KITCHENS INC., and RPG RECEIVABLES PURCHASE

GROUP

Respondents APPLICATION UNDER SECTION 243 OF THE BANKRUPTCY AND INSOLVENCY ACT AND

SECTION 101 OF THE COURTS OF JUSTICE ACT

FACTUM OF CROWE SOBERMAN INC. IN ITS CAPACITY AS COURT APPOINTED RECEIVER OF ART HOUSE DESSERTS INC.

(returnable March 21, 2014)

LERNERS LLP

130 Adelaide Street West, Suite 2400 Toronto, ON M5H 3P5

Domenico Magisano LSUC#: 45725E Tel: 416.601.4121

Fax: 416.601.4123

Shannon M. Puddister LSUC# 55944G Tel: 416.601.2389

Fax: 416.601.2448

Lawyers for Crowe Soberman Inc., in its capacity as Court Appointed Receiver of Art House Desserts Inc.

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SERVICE LIST TO: CROWE SOBERMAN INC.

1200-2 St. Clair Avenue East Toronto, ON M4T 2T5 Hans Rizarri

Tel: 416.963.7175 / Fax: 416.929.2555 E-mail: hans.rizarri@crowesoberman.com

Court Appointed Receiver of Art House Dessert Inc. AND TO: HARRIS SHEAFFER LLP

4100 Yonge Street, Suite 610 Toronto, ON M2P 2B5 Barry Rotenberg

Tel: 416.250.3699 / Fax: 416.250.5300 E-mail: brotenberg@harris-sheaffer.com

Lawyers for FMPA Food Service Management & Purchasing Alliance Inc. an dfor 7805586 Canada Inc.

AND TO: CHAITONS LLP

5000 Yonge Street, 10th Floor Toronto, ON M2N 7E9 Mark G. Klar

Tel: 416.218.1131 / Fax: 416.218.1831 E-mail: Mark-k@chaitons.com

Lawyers for TD Bank

AND TO: LIPMAN ZENER & WAXMAN LLP 1220 Eglinton Avenue West Toronto, ON M6C 2E3 Sean N. Zeitz

Tel: 416.789.0652 ext. 307 / Fax: 416.789.9015 E-mail: szeitz@lzwlaw.com

Lawyers for the Business Development Bank of Canada AND TO: DOLGIN PROFESSIONAL CORPORATION

90 Allstate Parkway, Suite 604 Markham, ON L3R 6H3 Jordon Dolgin

Tel: 905.604.2541 / Fax: 905.604.2542 E-mail: jdolgin@dpclaw.ca

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AND TO: PALLET VALO LLP 77 City Centre Drive West Tower, Suite 300 Mississauga, ON L5B 1M5 Murray Gottheil

Tel: 905.273.3022 ext. 356 / Fax: 905.273.6920 E-mail: gottheil@palletvalo.com

Lawyers for RPG Receivables Purchase Group AND TO: WEIR FOULDS LLP

4100-66Wellington Street West

P.O. Box 35, Toronto-Dominion Centre Toronto, On M5K 1B7

Ralph H. Kroman

Tel: 416.647.5026 / Fax: 416.365.1876 E-mail: rkroman@weirfoulds.com Lawyers for Reiser (Canada) Co. AND TO: FELTMATE DELIBATO HEAGLE LLP

3600 Billings Court, Suite 200 Burlington, ON L7N 3N6 Tibor Sarai

Tel: 905.287.2205 / Fax: 905.273.6920 E-mail: tsarai@fdhlawyers.com

Lawyers for Amir Rehmtulla and 8172340 Canada Inc. AND TO: CANADA REVENUE AGENCY

c/o Justice Canada Tax Section

P.O. Box 36, Exchange Tower 3400-130 King Street

Toronto, ON M5X 1K6 Diane Winters

Tel: 416.973.3172 / Fax: 416.973.0810 E-mail: diane.winters@justice.gc.ca

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AND TO: HER MAJESTY THE QUEEN IN RIGHT OF THE PROVINCE OF ONTARIO AS REPRESENTED BY THE MINISTER OF FINANCE / ONTARIO MINISTRY OF REVENUE

Legal Services Branch P.O. Box 620

33 King Street West, 6th Floor Oshawa, ON L1H 8H5 Kevin J. O'Hara

Tel: 416.433.6934 / Fax: 416.436.4510 E-mail: kevin.ohara@ontario.ca

AND TO: HONDA CANADA FINANCE INC. P.O. Box 57100

Etobicoke, ON M8Y 3Y2 Fax: 416.523.3610

E-mail: bankruptcydocuments@asset.net

AND TO: CANADA REVENUE AGENCY, TORONTO WEST TAX SERVICES 5800 Hurontario St., 7th Floor

Mississauga, ON L5R 4B4 Mr. Richard Moon-Wan

E-mail: richard.moon-van@cra-arc.gc.ca AND TO: MINISTRY OF LABOUR

400 University Avenue, 9th Floor Toronto, ON M7A 1T7

AND TO: ALNIZ REHMTULLA

2923 Westoak Trails Boulevard Oakville, ON L6M 4V2

AND TO: AZRA REHMTULLA

2923 Westoak Trails Boulevard Oakville, ON L6M 4V2

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BETWEEN:

ONTARIO

SUPERIOR COURT OF JUSTICE COMMERCIAL LIST

7805586 CANADA INC.

and

-File No. CV-12-9877-00CL

Applicant

ALNIZ REHMTULLA, AZRA REHMTULLA, ART HOUSE DESSERT INC., 8172340 CANADA INC., AMIR REHMTULLA, BAXTER KITCHENS INC., and RPG RECEIVABLES PURCHASE

GROUP

Respondents APPLICATION UNDER SECTION 243 OF THE BANKRUPTCY AND INSOLVENCY ACT AND

SECTION 101 OF THE COURTS OF JUSTICE ACT

FACTUM OF CROWE SOBERMAN INC. IN ITS CAPACITY AS COURT APPOINTED RECEIVER OF ART HOUSE DESSERTS INC.

(returnable March 21, 2014)

PART I - INTRODUCTION

1. Pursuant to the Order of the Honourable Mr. Justice Wilton-Siegel dated October 31, 2012 (the "Appointment Order"), Crowe Soberman Inc. was appointed as receiver (the "Receiver) of the property, assets and undertaking Art House Dessert. Inc. ("AHDI"). Since the Appointment Order, the Receiver has spent considerable time locating and realizing on AHDI assets. Ultimately, many of the AHDI assets were sold (the "Sale') to Nutri-Health Corporation ("NHC") and by Order of the Honourable Mr. Justice D.M. Brown dated February 7, 2014 this Honourable Court approved the Sale and vested title in the assets subject to the Sale in and to NHC (the "Approval and Vesting Order). 3. While the Approval and Vesting Order was granted, certain ancillary relief sought in the

Receiver's motion was adjourned to this hearing; specifically: (a) an interim distribution of proceeds from the Sale; and,

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(b) a determination on the collection and/or accounting of certain receivables factored by RPG Receivables Purchase Group Inc. ("RPG").

4. The distribution of proceeds was adjourned to permit the Toronto-Dominion Bank ("TD") to make submissions on why a portion of the proceeds from the Sale ought to be allocated to them on account of their security in 7805566 Canada Inc. ("780").1

5. Since obtaining the Approval and Vesting Order, TD and the Receiver have resolved this issue on the basis that TD will receive the all-inclusive sum of $6,250 from the proceeds of the Sale with the balance of the proceeds available for distribution to AHDI stakeholders. For reasons described in the supplementary report of the Receiver, which will be filed prior to the hearing of this motion, the Receiver recommends approval of the settlement and the interim distribution of $6,250 to TD.2

6. The issues of collection and/or accounting of certain receivables that were collected by RPG remain outstanding. Specifically, the Receiver has concerns about RPG's relationship with both AHDI and 8172340 Canada Inc. ("817") and RPG's involvement in what appears to be an improper transfer of AHDI assets to 817.

PART!! - THE FACTS A. Background

7. AHDI was incorporated in March 2003 and was engaged in the production and distribution of baked goods to commercial customers such as hotels and restaurants. The directing minds of AHDI were Alniz Rehmtulla ("Alniz"), his wife, Azra Rehmtualla ("Azra") and Alniz's father, Amir Rehmtulla ("Arnie and together with Alniz and Azra are the "Rehmtullas").3

8. The Business Development Bank of Canada ("BDC") was AHDI's operating lender from its inception until the Appointment Order was obtained. As part of its financing arrangement with BDC, AHDI granted BDC security in all of its present and after acquired property, assets and undertaking (the "BDC Security). Shortly after the

Receivers Motion Record ("Motion Record"), Report"), pp 19-21, paras 50-64

2 Supplementary Report of the Receiver, dated 3

Motion Record, Tab B, First Report, pp11-12,

Tab B, First Report of the Receiver, dated January 6, 2014 ("First March 7, 2014 ("Supplementary Report"), p 2, para 7

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3

Appointment Order, AHDI assigned its debt and security to FMPA Food Service Management & Purchasing Alliance Inc. ("FMPA"), which remains AHDI's senior lender.4 9. AHDI's financial position began to deteriorate in early 2009. The deterioration of the AHDI business was largely due to a move into larger (and more expensive) premises at 1201 Fewster Drive, Mississauga, Ontario (the "Fewster Premises") and by the loss of a key client shortly after the move into those premises.5

10. By Master Receivables Purchase Agreement dated September 10, 2010, AHDI entered into a factoring arrangement with RPG (the "AHD! Factoring Agreement"). As a condition precedent to the AHDI Factoring Agreement, RPG asked, and BDC agreed, to subordinate its interest in AHDI's receivables. This arrangement was formalized through a priorities agreement between BDC, RPG and AHDI dated September 3, 2010 (the "Priorities Agreement")6. As indicated in RPG's responding motion, RPG had no interest in any AHDI assets other than its receivables.'

11. Pursuant to the Priorities Agreement, BDC, RPG and AHDI undertook to, among other things, perform all steps necessary to give full effect to the intent of that agreement.8 12. Despite repeated attempts to ameliorate AHDI's financial position (which included selling

60% of AHDI's shares to 7805586 Canada Inc.), it continued to experience financial difficulty. By February 2012, AHDI had defaulted on its loans with BDC and by March 2012, AHDI was in arrears for rent at the Fewster Premises and certain payments to the Workplace Safety and Insurance Board.9

13. Faced with continuing defaults, together with the arrears mentioned above, BDC demanded repayment of its loans, issued a notice of intention to enforce security pursuant to section 244 of the Bankruptcy and Insolvency Actl° (the "NITES"), and a notice of sale pursuant to section 63(5) of the Personal Property Security Act (Ontario)

4 Motion Record, Tab B, First Report, p 12, para 13 5 Motion Record, Tab B, First Report, p 12, para 14

6 Motion Record, Tab B, First Report, pp 12 & 21-22, paras 15 & 65 and Appendix 26

7 Responding Motion Record ("Responding Record") Tab 1, Affidavit of Rick Sabourin, sworn February 20, 2014 the "Sabourin Affidavit"), p 2, para 7

° Motion Record, Tab B, First Report, Appendix 26, p 213, clause 5.2 9 Motion Record, Tab B, First Report, pp 13 & 14, paras 18, 19, 23 & 26 10 R.S.C. 1985 c. B-3, as amended (the "BIA")

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(the "PPSA Notice").11 The NITES expired on March 22, 2012 and the PPSA Notice expired on April 22, 2012 (or the next business day thereafter).12

B. RPG is advised of BDC Enforcement

14. RPG received a copy of the PPSA Notice on or about April 4, 2012. Following receipt of the PPSA Notice, RPG engaged in discussions with some, or all, of the Rehmtullas regarding their intentions with respect to AHDI. According to Rick Sabourin ("Sabourin"), the President of RPG, the Rehmtullas advised RPG that AHDI would: continue operations; defend BDC's enforcement proceedings; and enter into negotiations with BDC to resolve their concerns.13

15. Despite these assurances, RPG was uncomfortable with AHDI's precarious financial position, but advised that it would continue to factor new receivables in the short term. Mr. Sabourin described this by stating that RPG would:

"[F]actor new receivables over the next few weeks, but requested the balance under the inventory facility be repaid (and it was on April 12th); [RPG] also stated [they] were not certain about continuing to factor receivables while the company appeared likely to fail" [emphasis added]14

16. On or about April 20, 2012 (a Friday) RPG was advised that AHDI "was going to cease operations and that a new company had been set up to carry on some or all of the business of the old company...".15 The day before, 817 was incorporated by the Rehmtullas.16

17. As part of the discussion between RPG and AHDI on April 20th, RPG outlined a number of potential issues regarding the Rehmtullas plan to continue AHDI's business through a new company. These issues included AHDI's compliance obligations under the Bulk Sales Act17 and related considerations about transferring AHDI inventory and equipment. According to RPG, the Rehmtuallas left the meeting stating that they "were going to think

11

R.S.O. 1990 c. P-10, as amended (the "PPSA") 12 Motion Record, Tab B, First Report, p 14, para 24 13 Motion Record, Tab B, First Report, p 14, para 27 14

Motion Record, Tab B, First Report, p 14, para 28 & Appendix 12 15 Motion Record, Tab B, First Report, p 15, para 30 & Appendix 12 16 Motion Record, Tab B, First Report, Appendix 11

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about the best options and speak with their advisors".18 At no time does it appear the issues raised by RPG were addressed, nor did RPG formally terminate the AHDI Factoring Agreement or the Priorities Agreement.

C. AHDI Closes, 8172340 Canada Inc. Takes Over and RPG Still Factors Receivables 18. On April 23, 2012 (the next business day after its meeting with RPG), 817 commenced

operations and provided AHDI customers with written correspondence advising that AHDI had ceased operations and that 1817] has been established to handle all your orders that were previously fulfilled by Art House Dessert Inc." The letter further advised that RPG would be factoring invoices for 817 and that the former AHDI customers should set up "another vendor account" for 817 invoices.19

19. The following day (April 24, 2012) 817 began issuing invoices to AHDI customers, which instructed those customers to direct payment for said invoices to RPG. Within a week, RPG and 817 entered into a new Master Receivables Purchase Agreement dated April 30, 2012 (the "817 Factoring Agreement").2°

20. Between May 2, 2012 and May 25, 2012, RPG purchased 363 invoices from 817 that were issued by 817 between April 24, 2012 and May 22, 2012 (the "817 Purchased Invoices"). The 817 Purchased Invoices totalled $79,551.67 and were purchased by RPG for $66,918.51.21 It appears that $5,799.25 of that amount was initially held back as part of RPG's reserve.

D. 780 Contacts RPG and Discovers the Transfer of Assets to 817

21. On or about May 23, 2012, 780 contacted RPG regarding AHDI's business and affairs. 780 advised that AHDI had vacated the Fewster Premises with all equipment and inventory and that Edward Duarte ("Duarte), one of 780's principals, was about to make arrangements to collect AHDI receivables from its customers. RPG advised that most, if not all, of AHDI's receivables have been purchased by RPG and were therefore not

18

Motion Record, Tab B, First Report, Appendix 12 19

Motion Record, Tab B, First Report, Appendix 13 20

Motion Record, Tab B, First Report, p 15, paras 32 & 33; Responding Record, Tab 1, Sabourin Affidavit, p 3, para 9

21 Responding Record, Tab 1, Sabourin Affidavit, p 5, para 17; The Receiver's independent calculation produced a substantially similar result: $66,918.51 see Motion Record, Tab B, First Report, p 24, para 76 & Appendix 34

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collectable by AHDI. RPG then contacted Amir, the principal of 817 to ask "what was going on"?"

22. By June 1, 2012, 780 retained Jack Copelovici ("Copelovici") as legal counsel and discovered that 817 had improperly assumed the AHDI business. At Appendix 33 of the First Report is a letter from Copelovici to RPG wherein he appears to confirm that RPG has not "paid any monies to 8172340 Inc. o/a Arthouse Dessert for the last two weeks" and further explains his understanding that RPG "will not be making any further payments to [817] in the future pending a resolution of the entire matter of entitlement". In its letter at Appendix 30 of the First Report, RPG denies providing Copelovici with the comfort mentioned above, but also admits that they never responded to Copelovici's letter or did anything to dissuade Mr. Copelovici from his understanding of their conversation.23

23. It appears that after receiving the letters from Copelovici, RPG contacted Amir again regarding the allegations of 780's interest in AHDI. On June 4, 2012, Amir responded to RPG's inquiries and the substance of the response appears to be contained as Exhibit "K to the Sabourin Affidavit.24 The Receiver notes the following:

(a) the e-mail at Exhibit "A" to the Sabourin Affidavit lists four attachments, only one of which (the letter from Alniz and Azra's counsel to 780) is attached to the Sabourin Affidavit. Based on the title of the attached documents, two of the remaining three documents appear to be letters from Copelovici (and could be, although it is not confirmed that, those letters are already produced in the First Report). The Receiver has not received or reviewed the final attachment, titled "List of Art House Dessert Inc. customers — May 2012.xls"; and

(b) while Amir states that 780 is not a shareholder of AHDI, the letter he attaches from Alniz and Azra's counsel seems to prove just the opposite. The letter from Rahul Kesarwani ("Kesarwani") dated June 1, 2012 does not disclaim 780's shareholding interest in AHDI. Rather, it states that Kesarwani is "advised that, [780 is] in default of your obligations pursuant to the Arthouse Desserts Inc.

22 Motion Record, Tab B, First Report, Appendix 30 23 Motion Record, Tab B, First Report, Appendix 30 & 33 24 Responding Record, Tab 1, Sabourin Affidavit, Exhibit "A"

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Shareholder Agreement". Implicit in Kesarwani's statement is that 780 is a shareholder of AHDI.

24. RPG admits that as a result of the correspondence received from 780 and Copelovici, it decided to "suspend" factoring any further receivables from 817. While it appears that RPG draws a distinction between "suspending" its factoring relationship with 817 and "terminating" that same relationship, the facts appear to be that RPG did not purchase any 817 invoices after May 25, 2012.25 It is also noted that RPG never "terminated" its factoring arrangements with AHDI.

25. While RPG "suspended" its factoring arrangement with 817, some customers continued to make payments to RPG as indicated on their invoices. In total, it appears that RPG received $72,924.08 in payments for invoices that were not factored and also held $7,584.95 in its reserve fund.

26. Notwithstanding the assurance provided to Mr. Copelovici on June 1, 2012, that no further payments would be made to 817, and the evident and obvious dispute regarding 817's conversion of AHDI assets, RPG paid a further $74,737.37 to 817 through a series of payments between July 25 and August 28, 2012.26

PART III - ISSUES AND THE LAW 27. The issues on this motion are:

(a) RPG breached an implied duty of good faith in fulfilling its obligations to AHDI under the AHDI Factoring Agreement. RPG knew or ought to have known that 817 was being established to evade enforcement efforts by BDC, and likely, for an improper purpose. Nevertheless, RPG preferred its own interests by ceasing to purchase further invoices from AHDI and, instead, entering into the 817 Factoring Agreement;

(b) RPG wrongfully converted the funds received from the accounts receivable. The tort of conversion is a strict liability tort dealing with situations in one party wrongfully interferes with the goods of another in a manner that is inconsistent with the owners right of possession. Even after receiving express notice of a

25

Responding Record, Tab 1, Sabourin Affidavit, p 4, para 14 26

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dispute as to the entitlement to funds it had received, RPG nevertheless remitted funds to 817 that were rightfully those of AHDI, and subject to BDC's security; and,

(c) RPG should pay $147,455.10 to AHDI on account of its wrongful acts. While the Receiver does not seek to disgorge any commissions charged by RPG, RPG ought to account for all amounts paid to 817 which ought to have been paid to AHDI.

Issue 1 - RPG Breached an Implied Duty of Good Faith in Fulfilling its Obligation sto AHDI Under the AHDI Factoring Agreement

28. It is trite law that the parties to an agreement must perform their obligations in accordance with the express and implied terms of that agreement. Included in the terms that may be implied in a contract is a duty of good faith.

29. The Ontario Court of Appeal has recently endorsed as an established principle that a duty of good faith arises when "necessary to ensure that the parties do not act in a way that defeats the very objects of the contract the parties have entered".27

30. In Transamerica Life Canada Inc. v. ING Canada Inc., Justice O'Connor, writing for the same court, described the implied duty as follows:

[C]ourts have implied a duty of good faith with a view to securing the performance and enforcement of the contract made by the parties, or as it is sometimes put, to ensure that parties do not act in a way that eviscerates or defeats the objectives of the agreement that they have entered into... 28

31. The courts have identified indicia that ought to be considered when assessing whether a duty of good faith may arise. Those include where:

(a) one party by their actions eviscerates or defeats the objectives of the contract they have entered into;

27 Barclays Bank PLC v. Devonshire Trust (Trustee ot), [2013] O.J. No. 3691 at para 134 28

Transamerica Life Canada Inc. v. ING Canada Inc., [2003], O.J. 4656 (C.A.) at para 53; See also Nareerux Import Co. Ltd. v. Canadian Imperial Bank of Commerce, [2009] O.J. No. 4553 at para 69

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(b) the parties' conduct fails to meet objective legitimate expectations and community standards of honesty, reasonableness and fairness;

(c) one party unilaterally nullifies contractual objectives, or causes significant harm to the other contrary to the original expectations of the parties; or,

(d) one party benefits from a conflict of interest.29

32. Good faith, while permitting a party to act self-interestedly, nonetheless qualifies this by positively requiring that this party, in its decisions and actions, have regard to the legitimate interests therein of the other.39 RPG failed to act in good faith when it disregarded the voluminous concerns that were self-evident, ceased factoring AHDI's invoices and entered into the 817 Factoring Agreement.

i. RPG Breaches the AHDI Factoring Agreement by Entering Into and Then Factoring Invoices Under the 817 Factoring Agreement

33. At the time RPG entered into the 817 Factoring Agreement, it knew or ought to have known that the Rehmtullas were, at best, seeking to evade their financial obligations to, among others, the BDC, and at worst, about to orchestrate a fraud. In particular, the following facts bear repeating (and are not disputed):

(a) RPG received the PPSA Notice on or about April 4, 2012, which was set to expire on April 22, 2012;

(b) shortly thereafter the Rehmtullas met with RPG and advised that AHDI was continuing their business and that they were in negotiations with BDC regarding the default. The Rehmtullas also advised RPG that AHDI would continue operations and defend BDC's enforcement proceedings;

(c) on Friday, April 20, 2012, the last business day before the NITES expired, the Rehmtullas advised RPG that AHDI would be ceasing operations and that some or all of AHDI's business would be continued by a new company. 817 had been incorporated the day before. RPG expressed concerns about the Rehmtullas'

29 TSP-Intl Ltd. v. Mills, [2005] O.J. No. 616 (QL) ("TSP-Intr) at para 81 reversed on procedural grounds only by the Ontario Court of Appeal TSP-Intl. Ltd. v. Mills, [2006] O.J. 2702 (C.A.) (QL)

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-complying with the Bulk Sales Act and regarding the transfer of the AHDI inventory and equipment;

(d) under the Priorities Agreement, BDC was entitled to a first charge on any receivables over and above those factored by RPG, and that RPG was obligated to take all steps necessary to give full force and effect to the intent of that agreement;

(e) on Monday, April 23, 2012, 817 (using the Arthouse Dessert name) advised AHDI customers that :

(i) AHDI had ceased operations;

(ii) 817 would be filling orders going forward; and,

(iii) all payments for product should be made to RPG and their notice would follow shortly; and,

(f)

on April 24, 2012, 817 (again using the Arthouse Dessert name) began invoicing AHDI customers for product and directed these customers to remit payments to RPG.

34. RPG received no response to their inquiries about how the Rehmtullas intended to deal with the Bulk Sales Act and the transfer of AHDI inventory and equipment. They also received no information as to how the Rehmtullas intended to deal with the Priorities Agreement. RPG also took no steps to notify BDC about the Rehmtullas purported restructuring, or at least to ensure that the Priorities Agreement was being complied with.

35. Rather, on April 30, 2012, RPG entered into the 817 Factoring Agreement. Over the course of the next 25 days, RPG factored a total of 363 invoices relating to specific, identifiable receivables from 817. The products to which these receivables relate were created using AHDI's inventory and equipment. In factoring the accounts receivables, RPG remitted a total of $66,918.51 to 817.

36. RPG should not have entered into the 817 Factoring Agreement. By doing so, and then by factoring invoices thereunder, it breached the AHDI Factoring Agreement and RPG's duty of good faith.

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ii. RPG's Further Breaches Under the AHDI Factoring Agreement

37. By May 23, 2012, RPG had been formally and expressly put on notice of an AHDI shareholder dispute. It appears that in response, RPG ceased factoring new 817 receivables on May 25, 2012. However, as 817 continued to issue invoices that instructed purchasers to remit payments to RPG, those payments continued to be made to RPG. A total of $72,924.08 was received by RPG relating to invoices issued by 817, but which were not purchased by RPG.

38. On June 1, 2012, it appears a conversation took place between counsel for 780 and RPG, during which RPG acknowledged the existence of a shareholder dispute and confirmed that it had not paid any money to 817 in the last two weeks (despite what appears to have been a $22,140.51 payment to 817 on May 25) and that it would not make "any further payments to [817] in the future pending a resolution of the entire matter of entitlement."

39. Notwithstanding this confirmation and rather than, for example, holding the funds in trust or interpleading them into court pending a resolution of the dispute, RPG paid a total of $80,295.45 to 817.

40. RPG's actions eviscerated the objectives of the AHDI Factoring Agreement and caused significant harm to AHDI. RPG is and was, of course, entitled to act in its own interest, but in doing it also had to consider the interests of AHDI and BDC. RPG failed to do so. 41. At the time it entered into the 817 Factoring Agreement, RPG had concerns about 817's

compliance with its legislative requirements and its dealings with AHDI's inventory and equipment. However, it abandoned those inquiries. RPG initially failed to ensure that the intent of the Priorities Agreement was being realized, first by assisting (inadvertently or otherwise) 817 take steps that jeopardized BDC's security interest. RPG later transferred funds to 817 that were subject to BDC's security as a result of 817's improper conversion of AHDI's assets. By that time, RPG was aware of the shareholder concerns and about 817's conduct. By acting in this manner, RPG disregarded the interests of AHDI (and BDC) in favour of its own monetary interests.

42. In sum, RPG acted in breach of its duty of good faith and fair dealing in performing the AHDI Factoring agreement and ought to be held accountable for the losses suffered by AHDI in the process.

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-Issue 2 - RPG Wrongfully Converted the Property of AHDI

43. The tort of conversion involves the wrongful interference with the goods of another in a manner that is inconsistent with the owners right of possession. The essential elements of the tort of conversion are as follows:

(a) the plaintiff has an ownership or possessory interest in the chattef; (b) the chattel is identifiable or specific; and

(c) the defendant intentionally commits a wrongful act in respect of the chattel inconsistent with the plaintiffs right of possession.31

44. The tort of conversion is one of strict liability. The requirement to prove a "wrongful act" does not include the need to prove blameworthy conduct. It is no defence against a claim for conversion that the wrongful act was committed in innocence, nor that that the defendant did not know, or could not by the exercise of any reasonable care have known, of the plaintiffs interest in the chattel.32 The "wrongful" aspect of the tort of conversion consists of acting in a manner that is inconsistent with the owner's right of possession.

45. In Metroland Printing, Publishing & Distribution Ltd. v. C./.B.C.,33 the Ontario Supreme Court considered a claim in conversion arising from the plaintiffs employee creating a number of unauthorized cheques, which were subsequently drawn on and collected by the defendant banks. Despite the assertion by the defendant banks that it was also the victim of the fraudulent cheque scheme, the tort of conversion was made out and summary judgment was granted against the banks. Justice Lederman, whose decision was upheld on appeal, wrote:

[16] With respect to both the CIBC and the collecting banks, the plaintiff alleges the tort of conversion. In Crawford and Falconbridge, Banking and Bills of Exchange, 8th Ed. (Toronto: Canada Law Book, 1986) volume 2, it is noted at p. 1386 that:

31 Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, [1996] 3 S.C.R. 727 (QL) ("Boma Manufacturing"); G.H.L. Fridman, Law of Torts in Canada (3rd Edition 2010), at pages 117 to 118 32

Boma Manufacturing, para 31 33

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-13-... [A] bank that collects a sum of money under an instrument for a person not entitled to it is treated as having converted the instrument. It has been repeatedly held that a bank converts an instrument by dealing with it under the direction of one not authorized, either by collecting it, or semble (although this has not yet actually been decided) by paying it, and in either case, making the proceeds available to someone other than the person rightfully entitled to possession.

[17] The tort of conversion is a strict liability tort. As a result, it does not matter whether the banks were innocent dupes. Furthermore, the defendants cannot argue any possible negligence or contributory negligence on the part of the plaintiff.34

46. While conversion is a strict liability tort, at the times the purported 817 receivables were initially factored, RPG knew or ought to have known that they were the property of AHDI, as described in paragraphs 31 through 33 above. Moreover, well after RPG was formally put on notice of a dispute as to the ownership of the accounts receivable on May 23, 2012, RPG continued to receive payments relating to the non-factored 817 invoices. RPG subsequently released those funds to 817. Those reserve funds, and the funds advanced to 817 under the 817 Factoring Agreement, should have been paid to AHDI and not to 817.

47. By failing to remit these amounts to AHDI, RPG converted AHDI's invoices. Issue 3 - Quantum of Damages

48. In summary, the Receiver recommends that this Court order RPG to pay AHDI $147,455.13, which amount relates to the following:

(a) $50,577.25, paid by RPG to 817 prior to May 25, 2012, in respect of factored receivables. This relates to amounts paid by RPG to purchase specific accounts receivables from 817 and includes a portion of the reserve funds associated therewith that were paid to 817 prior to being advised on May 23, 2012, of the dispute as to the entitlement of the funds. These invoices were subject to RPG's factoring fee, which the Receiver is not seeking on the basis that had RPG

34

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- 14

-continued to factor receivables under the AHDI Factoring Agreement, RPG would have been entitled to this amount;

(b) $16,582.43, paid by RPG to 817 on May 25, 2012 (after being notified of the AHDI shareholder concerns and the dispute as to who was entitled to the receivables), relating to additional factored receivables and reserve funds associated thereto; and,

(c) $80,295.45, paid by RPG to 817 in July and August, 2012, which related non-factored invoices, as well as the balance of the accumulated reserve funds, which were paid to 817 after receiving notice of the entitlement dispute on May 23, 2012.

49. To illustrate how these amounts are calculated, the Receiver has reproduced the chart found at paragraph 17 in the affidavit of the respondent's motion record, which details the particulars of amounts paid by RPG to 817. The amounts that comprise the first amount described above are shown highlighted in blue; those comprising the second are shown in green; and the amounts relating to third part are shown in orange.

Type Date Num Amount Purchases Reserves Non-Factored

Cheque 05/02/2012 W2120502 $17,474.16 $17,474.16 Cheque 05/07/2012 W2120507 $15,583.03 $15,583.03 Cheque 05/14/2012 W2120514 $17,520.06 $17,492.47 $27.59 Cheque 05/25/2012 W2120525 $22,140.51 $16,368.85 $213.58 $5,558.08 Cheque 07/25/2012 W2120725 $25,000.00 Cheque 07/27/2012 W2120727 $25,000.00 Cheque 07/31/2012 W2120731 $18,000.00 Cheque 08/12/2012 W2120828 $6,737.37 $7,371,37 $67,366.00 $147,455.13 $66,918.51 $7,612.54 $72,924.08 $50,577.25 $16,582.43 $80,295A5

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- 15 -PART IV - ORDER REQUESTED

50. The Receiver respectfully requests:

(a) an order that RPG Receivables Purchase Group Inc. account for and pay to the Receiver the sum of $147,455.10, being the amounts paid to 8172340 Canada Inc., but which should have been paid to Art House Dessert. Inc.;

(b) an order approving the settlement with and interim distribution of $6,250 to Toronto-Dominion Bank; and

(c) the Receivers costs of this motion.

ALL OF WHICH IS RESPECTFULLY SUBMITTED this 7th day of March, 2014.

Shannon Puddister Lerners LLP

Lawyers for Crowe Soberman Inc., in its capacity as Court Appointed Receiver of Art House Desserts I nc.

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SCHEDULE "A" LIST OF AUTHORITIES

1. Barclays Bank PLC v. Devonshire Trust (Trustee ot), [2013] O.J. No. 3691 (C.A.) 2. Transamerica Life Canada Inc. v. ING Canada Inc. (2003), 68 O.R. (3d) 457 (C.A.) 3. Nareerux Import Co. Ltd. v. Canadian Imperial Bank of Commerce, [2009] O.J. No.

4553 (C.A.)

4. TSP-Intl Ltd. v. Mills, [2005] O.J. No. 616 (S.C.); TSP-Intl. Ltd. v. Mills, [2007] O.J. 2702 (C.A.)

5. Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, [1996] 3 S.C.R. 727 6. G.H.L. Fridman, Law of Torts in Canada (3rd Edition 2010), pp. 117, 118

7. Metroland Printing, Publishing & Distribution Ltd. v. C.I.B.C., 2001 CanLII 28367 (ON SC)

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SCHEDULE "B"

RELEVANT STATUTES

Bankruptcy and Insolvency Act, R.S.C. 1985, c. 13-3, as amended, section 244 Advance notice

244. (1) A secured creditor who intends to enforce a security on all or substantially all of (a) the inventory,

(b) the accounts receivable, or (c) the other property

of an insolvent person that was acquired for, or is used in relation to, a business carried on by the insolvent person shall send to that insolvent person, in the prescribed form and manner, a notice of that intention.

Period of notice

(2) Where a notice is required to be sent under subsection (1), the secured creditor shall not enforce the security in respect of which the notice is required until the expiry of ten days after sending that notice, unless the insolvent person consents to an earlier enforcement of the security.

No advance consent

(2.1) For the purposes of subsection (2), consent to earlier enforcement of a security may not be obtained by a secured creditor prior to the sending of the notice referred to in subsection (1).

Exception

(3) This section does not apply, or ceases to apply, in respect of a secured creditor

(a) whose right to realize or otherwise deal with his security is protected by subsection 69.1(5) or (6); or (b) in respect of whom a stay under sections 69 to 69.2 has been lifted pursuant to section 69.4. 'dem

(4) This section does not apply where there is a receiver in respect of the insolvent person. 1992, c. 27, s. 89; 1994, c. 26, s. 9(E).

Personal Property Security Act, R.S.O. 1990, c. P.10. as amended. section 63 Disposal of collateral

63. (1) Upon default under a security agreement, the secured party may dispose of any of the collateral in its condition either before or after any commercially reasonable repair, processing or preparation for disposition, and the proceeds of the disposition shall be applied consecutively to,

(a) the reasonable expenses of the secured party, including the cost of insurance and payment of taxes and other charges incurred in retaking, holding, repairing, processing and preparing for disposition and disposing of the collateral and, to the extent provided for in the security agreement, any other reasonable expenses incurred by the secured party; and

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2

(b) the satisfaction of the obligation secured by the security interest of the party making the disposition, and the surplus, if any, shall be dealt with in accordance with section 64. R.S.O. 1990, c. P. 10, s. 63 (1). Methods of disposition

(2) Collateral may be disposed of in whole or in part, and any such disposition may be by public sale, private sale, lease or otherwise and, subject to subsection (4), may be made at any time and place and on any terms so long as every aspect of the disposition is commercially reasonable. R.S.O. 1990, c. P.10, s. 63 (2).

Secured party's right to delay disposition of collateral

(3) Subject to subsection 65 (1), the secured party may delay disposition of all or part of the collateral for such period of time as is commercially reasonable. R.S.O. 1990, c. P.10, s. 63 (3).

Notice required

(4) Subject to subsection (6), the secured party shall give not less than fifteen days notice in writing of the matters described in subsection (5) to,

(a) the debtor who owes payment or performance of the obligation secured;

(b) every person who is known by the secured party, before the date that the notice is served on the debtor, to be an owner of the collateral or an obligor who may owe payment or performance of the obligation secured, including any person who is contingently liable as a guarantor or otherwise of the obligation secured;

(c) every person who has a security interest in the collateral and whose interest,

(i) was perfected by possession, the continuance of which was prevented by the secured party who has taken possession of the collateral, or

(ii) is perfected by registration before the date the notice is served on the debtor;

(d) every person with an interest in the collateral who has delivered a written notice to the secured party of the interest in the collateral before the date that the notice is served on the debtor. R.S.O. 1990, c. P.10, s. 63 (4); 2000, c. 26, Sched. B, s. 16 (9).

!dem

(5) The notice mentioned in subsection (4) shall set out, (a) a brief description of the collateral;

(b) the amount required to satisfy the obligation secured by the security interest;

(c) the amount of the applicable expenses referred to in clause (1) (a) or, in a case where the amount of such expenses has not been determined, a reasonable estimate thereof;

(d) a statement that upon receipt of payment the payor will be credited with any rebates or allowances to which the debtor is entitled by law or under the agreement;

(e) a statement that upon payment of the amounts due under clauses (b) and (c), any person entitled to receive notice may redeem the collateral;

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-3

(f) a statement that unless the amounts due are paid the collateral will be disposed of and the debtor may be liable for any deficiency; and

(g) the date, time and place of any public sale or the date after which any private disposition of the collateral is to be made. R.S.O. 1990, c. P.10, s. 63 (5).

Date of giving notice

(6) If the notice to the debtor under clause (4) (a) is mailed, sent by courier or by any other transmission provided for in section 68, then the relevant date for the purpose of clause (4) (b), subclause (4) (c) (ii) and clause (4) (d) shall be the date of mailing, the date that the notice was sent by courier or the date of transmission, as the case may be, and not the date of the service. 2000, c. 26, Sched. B, s. 16 (10). Notice not required

(7) The notice mentioned in subsection (4) is not required where, (a) the collateral is perishable;

(b) the secured party believes on reasonable grounds that the collateral will decline speedily in value; (c) the collateral is of a type customarily sold on a recognized market;

(d) the cost of care and storage of the collateral is disproportionately large relative to its value; (e) for any reason not otherwise provided for in this subsection, the Superior Court of Justice, on an

application made without notice to any other person, is satisfied that a notice is not required;

(f) after default, every person entitled to receive a notice of disposition under subsection (4) consents in writing to the immediate disposition of the collateral; or

(g) a receiver and manager disposes of collateral in the course of the debtor's business. R.S.O. 1990, c. P.10, s. 63 (7); 2000, c. 26, Sched. B, s. 16 (1).

Secured party's right to purchase collateral

(8) The secured party may buy the collateral or any part thereof only at a public sale unless the Superior Court of Justice, on application, orders otherwise. R.S.O. 1990, c. P.10, s. 63 (8); 2000, c. 26, Sched. B, s. 16 (1).

Effect of disposition of collateral

(9) Where collateral is disposed of in accordance with this section, the disposition discharges the security interest of the secured party making the disposition and, if the disposition is made to a buyer who buys in good faith for value, discharges also any subordinate security interest and terminates the debtor's interest in the collateral. R.S.O. 1990, c. P.10, s. 63 (9).

!dem

(10) Where collateral is disposed of by a secured party after default otherwise than in accordance with this section, then,

(a) in the case of a public sale, if the buyer has no knowledge of any defect in the sale and if the buyer does not buy in collusion with the secured party, other bidders or the person conducting the sale; or (b) in any other case, if the buyer acts in good faith,

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4

the disposition discharges the security interest of the secured party making the disposition and, where the disposition is made to a buyer for value, discharges also any subordinate security interest and terminates the debtors interest in the collateral. R.S.O. 1990, c. P.10, s. 63 (10).

Certain transfers of collateral

(11) A person who is liable to a secured party under a guarantee, endorsement, covenant, repurchase agreement or the like and who receives a transfer of collateral from the secured party or is subrogated to the secured party's rights has thereafter the rights and duties of the secured party, and such a transfer of collateral is not a disposition of the collateral. R.S.O. 1990, c. P.10, s. 63 (11).

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7805586 CANADA INC. ALNIZ REHMTULLA et al. Applicant and Respondents

Court File No: CV-12-9877-00CL

ONTARIO

SUPERIOR COURT OF JUSTICE COMMERCIAL LIST

Proceeding commenced at TORONTO

FACTUM OF CROWE SOBERMAN INC. IN ITS CAPACITY AS COURT APPOINTED RECEIVER OF

ART HOUSE DESSERTS INC. (returnable March 21, 2014)

LERNERS LLP

130 Adelaide Street West, Suite 2400 Toronto, ON M5H 3P5

Domenico Magisano LSUC#: 45725E Tel: 416.601.4121

Fax: 416.601.4123

Shannon M. Puddister LSUC# 55944G Tel: 416.601.2389

Fax: 416.601.2448

Lawyers for Crowe Soberman Inc., in its capacity as Court Appointed Receiver of Art House Desserts Inc.

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