The SID CCAA Record

The Fourth Report: The Companies' Response, Item by Item

On June 19, 2024, eight days after the Fourth Report, the companies' counsel delivered to the Monitor's counsel a table identifying more than thirty misstatements, omissions and errors in it, with references to the transcripts and documents the Monitor already held. The letter is Exhibit O to the affidavit of Robert Clark sworn June 20, 2024. Its principal items are summarized below.

Companies' position

The letter asked for "the Monitor's prompt attendance to the issues identified", which "will necessitate the issuance of a supplementary or revised Investigative Report". No revised report was issued.

Motion Record of the Applicants (Jun 20, 2024), including the affidavit of Robert Clark, Exhibit O, cover letter; Supplement to the Fifth Report (Jun 23, 2024), s.2.0 para 2
The Fourth Report statesThe companies' response of June 19, 2024
Recurring transfers to the principals and their companies form "a pattern of unjustifiable defalcation of funds".All or substantially all of the first mortgage proceeds (about $81.5 million) went to acquire the properties and "were never available for any other use". About $16.8 million of promissory note proceeds likewise went to closing costs and other payments. About $13.6 million was spent on renovations. The notes and second mortgage documents contain no constraints on the use of funds. The Fourth Report does not distinguish borrowed funds from rental income, which totalled eight figures. The practice of reimbursing principals for business purchases "has continued under the oversight of the Monitor, without any objection by the Monitor". Motion Record of the Applicants (Jun 20, 2024), including the affidavit of Robert Clark, Exhibit O, item A.1
About $6 million net was paid to the principals personally.About $4.4 million reimbursed business expenses incurred on the companies' behalf. A further $1.1 million or so was authorized dividends and card expenses incurred for Joint Captain Real Estate Inc. A representative sample of receipts was enclosed. For scale: the $1.1 million of dividends and card expenses compares with $11.6 million left for the sellers after the lenders were repaid on the Core Sale. Motion Record of the Applicants (Jun 20, 2024), including the affidavit of Robert Clark, Exhibit O, item A.12 Motion Record of the Applicants (Jun 20, 2024), including the affidavit of Robert Clark, Exhibit O, items A.1 and A.5
About $7.4 million net was paid to non-Applicant companies owned or controlled by the principals.About $6.6 million of the $7.4 million had been explained in writing: about $2.9 million of expense reimbursements and about $3.7 million of an authorized dividend, services rendered, and transfers made to preserve liquidity that were later used for the companies' benefit. For five of the entities named, the Fourth Report's own appendix shows that the companies owe money to them, not the reverse. Motion Record of the Applicants (Jun 20, 2024), including the affidavit of Robert Clark, Exhibit O, item A.1
Funds were used for expenses that "appear personal in nature", including travel and private jets.The travel and retreat expenses were generally incurred when the companies anticipated closing the Core Sale, had significant equity and were current on substantially all interest. The networking trips sought American lenders and investors before federal legislation in December 2022 closed that avenue. The private jet payment was miscoded in one company's ledger and was neither sent to nor received by the director named. None of management generally took any salary or other compensation from the companies. For scale: the Fourth Report puts these expenses at "in excess of $1 million". That is 1.4 per cent of the $69.7 million of disbursements it reviewed, and under 1 per cent once the roughly $81.5 million of mortgage proceeds that went directly to the real estate lawyers is counted. It is less than the $1.58 million the Monitor and its counsel billed in April and May 2024, and about one eleventh of what the Core Sale left for the sellers after the lenders were repaid. Fourth Report of the Monitor, redacted (Jun 11, 2024), s.2.1 para 3 and s.2.5 para 1; Sixth Report of the Monitor (Jul 24, 2024), s.7.0 Motion Record of the Applicants (Jun 20, 2024), including the affidavit of Robert Clark, Exhibit O, item A.3
Payments to SID Renos and SID Management could not be adequately explained, and vendor rebates were unjustified.SID Renos provided all construction management; the companies had no employees to do so. A summary and copies of every invoice for about $827,233 of vendor rebates were delivered on May 28, 2024. An asset management fee at industry rates "would have been significantly higher". The $210,000 transfer to SID Management was returned to the companies between May 25 and June 1, as their bank statements show. Motion Record of the Applicants (Jun 20, 2024), including the affidavit of Robert Clark, Exhibit O, item A.4
The companies did not identify which card expenses were business expenses.Substantially all of the principals' personal credit card statements were delivered on March 15, 2024. The Monitor "appears to suggest that unless the Applicants' four-member management team can identify and provide voluminous underlying support for the tens of thousands of individual transactions" over several years, the payments "should be deemed a misappropriation of funds". Motion Record of the Applicants (Jun 20, 2024), including the affidavit of Robert Clark, Exhibit O, item A.5
The companies did not keep appropriate records; "tens of millions of dollars" were missing from the 2022 ledger.Those amounts are real estate closings, which the Fourth Report itself says were "never deposited into and/or disbursed from the Applicants' bank accounts and were therefore not recorded in the general ledgers". The companies delivered the statements of adjustment and trust ledgers for each property. "No reference to this voluminous disclosure is made in the Report." Motion Record of the Applicants (Jun 20, 2024), including the affidavit of Robert Clark, Exhibit O, item A.6
The companies kept borrowing when their solvency "was highly questionable", from mid-2022.The Fourth Report elsewhere states that the Core Sale proceeds were not depleted until about November 2022, which matches the broker's testimony. Borrowing in 2023 was limited. Letters of intent dated November 20, 2022, August 17, 2023 and October 5, 2023 evidencing the refinancing efforts were delivered to the Monitor. Motion Record of the Applicants (Jun 20, 2024), including the affidavit of Robert Clark, Exhibit O, item A.7
Investors were misled about the use of funds and the terms of the notes.The Fourth Report "misattributes conduct to the Applicants when the conduct at issue was that of Windrose/Lion's Share". The companies generally did not deal with lenders, did not provide or review the marketing materials, and did not draft the notes, which were produced from the broker's template. Windrose prepared the investor disclosure form, was responsible for lender communications, and held weekly webinars with lenders without the companies. "Given that no interviews were conducted of any lenders, it is unclear how the Monitor has reached any conclusions regarding the lenders' expectations or understanding". Motion Record of the Applicants (Jun 20, 2024), including the affidavit of Robert Clark, Exhibit O, item A.8
The companies failed to respond to information requests in a timely manner.The companies "have tried, and continue to try" to comply, with limited resources strained by running the business and responding to extensive daily inquiries. Statements said to be missing for two accounts were not available from the bank; the Monitor, which obtained statements from other institutions directly, appears to have been unable to obtain them either. Motion Record of the Applicants (Jun 20, 2024), including the affidavit of Robert Clark, Exhibit O, item A.9
Second mortgages were registered contrary to statutory declarations.Nothing suggests the issue extended beyond three of 407 properties. The companies advised the broker before each second mortgage; the broker never said whether it sought the first mortgagee's consent. Motion Record of the Applicants (Jun 20, 2024), including the affidavit of Robert Clark, Exhibit O, item A.10
$11,082,375.97 of Core Sale proceeds was paid to the companies as promissory notes."The Monitor's various statements are generally factually incorrect." The trust ledger shows the line as "Disbursements Before Promissory Notes". The amounts were repayments to third party lenders, as the broker confirmed in her interview. After those repayments, $2,709,979.55 was due to the Applicant vendors. The only payment to a principal was for a property that principal personally owned and sold in the transaction. "There was no basis" for the Monitor's conclusion. Motion Record of the Applicants (Jun 20, 2024), including the affidavit of Robert Clark, Exhibit O, item A.12
Rent of about $156,000 left one company with under $37,500 in January 2024.The January 2024 deductions "were specifically applied in consultation with, and with the approval of, the Monitor", and included irregular arrears payments. The Monitor had statements showing customary deductions and "elected not to refer to such statements, without explanation". Motion Record of the Applicants (Jun 20, 2024), including the affidavit of Robert Clark, Exhibit O, item B.5
Many properties remain uninhabitable despite the renovation company's work.The business buys distressed homes to renovate; the fully renovated homes were sold in the Core Sale. Completing the rest was a principal purpose of the filing, and the DIP loan contemplated about $4.1 million of renovations. SID Renos completed about 100 unit renovations between April and June 2024. Motion Record of the Applicants (Jun 20, 2024), including the affidavit of Robert Clark, Exhibit O, items B.7 and B.16
$5,092,714.16 of payments coded "DEFT SETTLEMENT" were not fully explained.The Monitor asked about two transactions and never particularized the rest. The bank applies that label to electronic transfers generally, including payments to contractors and repayments sent to the broker at its request. Motion Record of the Applicants (Jun 20, 2024), including the affidavit of Robert Clark, Exhibit O, item B.12
Pre-filing sales to non-arm's length buyers "appear unusual".The properties were sold at market value, in many instances with multiple offers, to the most favourable offer. Proceeds were used to pay down debt. Motion Record of the Applicants (Jun 20, 2024), including the affidavit of Robert Clark, Exhibit O, item B.15

The left column summarizes the Fourth Report as the letter does. Quotations in the right column are from the letter. Lines marked "For scale" are comparisons drawn by this site from the cited sources and are not part of the letter. The letter states that it is non-exhaustive and that the lack of a response to any finding is not an admission.

Matters adverse to the companies' position