Executive Summary: Key Legal and Evidentiary Issues

• Competing trust and proprietary claims over a $2,857,831.58 portion of an $11,200,000 fund arising from the power-of-sale disposition of development lands and subsequent settlement.
• Characterization and legal effect of a $10,857,831.58 “loan” to the Shroff company (256) as a de facto equitable charge over its 50% limited partnership interest, used to defer capital gains but also to secure the joint venturers’ investment.
• Priority between two trust structures: (a) the limited partnership/joint venture trust (55% CIM Hwy 7 Holding LP / 45% Kingsberg Developments 2017 Holdings Inc.) and (b) the “debt trust” over Facilities #1 and #2 (with Facility #2 for $2,857,831.58 in priority).
• Effect of the power of sale and settlement with third party claimant Kronenfeld on 256’s entitlement, and whether funds that never reached 256 could nonetheless be treated in law as repayment of its “loan” obligation.
• Application of partnership law priority rules to resolve whether Cimberg’s over-contributions as limited partner could set off or outrank the plaintiffs’ debt-claim against 256’s 50% share.
• Weight and relevance of the sole live witness’s (lawyer Harvin Pitch’s) evidence in interpreting the transactional documents and understanding the tax-driven structuring, versus the objective legal effect of the documents themselves.

Factual background and structure of the development venture

The case arises out of a complex real estate development and financing structure for lands on Highway 7 East in Markham, Ontario. In mid-2017, joint venturers Cimberg Developments Inc. (Cimberg) and Kingsberg Development Corporation (later renamed Kingsberg 9999 Holding Inc.) acquired a 50% interest in development lands originally held by a Shroff-controlled company. Kingsberg’s contribution was the discharge of its existing $4,000,000 second mortgage, and Cimberg’s contribution was $8,000,000 in new development funding, for a total of $12,000,000 injected into the project. The landholding structure was reorganized so that a limited partnership, 6910 Hwy 7 LP (6910), held title to the property. The units of this limited partnership were split 50/50 between Cimberg (for the new investors) and another Shroff-controlled entity, 2563111 Ontario Inc. (256), which guaranteed the first mortgage. In substance, the joint venturers controlled the “new money” and salvaged money in the project, while 256 nominally retained a 50% position in the limited partnership.

Trusts, loan facilities, and tax-driven structuring

To implement this structure and protect their investment, the parties created two interlinked trust arrangements. First, the joint venturers appointed Cimberg, as a limited partner in 6910, to act as trustee for two subsidiary holding vehicles: CIM Hwy 7 Holding LP (with a 55% beneficial share) and Kingsberg Developments 2017 Holdings Inc. (with a 45% beneficial share). This was effectively a proprietary trust through which the joint venturers’ 50% interest in the lands was held, managed, and funded. Second, to secure their capital and priority over 256’s position, the joint venturers used a tax-motivated “loan” structure. On May 5, 2017, Cimberg executed a $10,857,831.58 loan agreement naming 256 as borrower. On paper, this “loan” was the consideration for 256’s transfer of a 50% beneficial interest in the lands, even though the real economic consideration consisted of Kingsberg’s discharged $4,000,000 second mortgage and Cimberg’s $8,000,000 injection. The loan bore no interest, had no instalment schedule, and no fixed term; repayment was tied to the project’s completion or realization, and was designed to defer 256’s capital gains tax on the deemed disposition of half the property. The “loan” was subdivided into two non-revolving facilities. Facility #1 was for $8,000,000 (economically aligning with Cimberg’s new money). Facility #2 was for $2,857,831.58, representing a discounted version of Kingsberg’s $4,000,000 exposure, given priority over Facility #1 under a First Trust Declaration. Under that declaration, any partial repayment of the loan would first reduce Facility #2 before Facility #1, thereby putting Kingsberg’s discounted claim ahead of Cimberg’s larger advance. Additional security instruments (such as a general security agreement and pledges of partnership units) were contemplated but not fully implemented; in practice, the key operative documents were the loan agreement itself and an irrevocable payment direction requiring that all partnership payments otherwise due to 256 (up to $10,857,831.58) be made to Cimberg as trustee. This combination of instruments functionally created an equitable charge over 256’s 50% interest in the limited partnership and any funds payable to it from the project, up to the face value of the “loan.”

OnePiece’s collateral interest and the Second Trust Declaration

Shortly after the First Trust Declaration, OnePiece Developments Inc. (later renamed OnePiece (WB) Developments Inc.) acquired a 60% interest in Facility #2. This acquisition arose in the context of an entirely separate development known as Villarboit, another Shroff project. OnePiece was purchasing Kingsberg’s interest in Villarboit for $1,650,000, and the parties cross-collateralized the transaction by giving OnePiece 60% of Kingsberg’s Facility #2 position—effectively 60% of the priority “sliver” over 256’s interest in the Highway 7 project. That arrangement was memorialized in a Second Trust Declaration, under which Kingsberg held 60% of Facility #2 in trust for OnePiece. In substance, OnePiece accepted the risks of Villarboit but, in return, took a significant slice of Kingsberg’s secured priority against 256’s 50% share in the Highway 7 limited partnership. Although CIM Hwy 7 later argued that OnePiece’s rights under this Second Trust Declaration were tied narrowly to obligations in the Villarboit project, the court found that the declaration expressly treated Facility #2 as the same facility held under the First Trust Declaration, such that OnePiece stood in the shoes of a priority lender against 256’s Highway 7 interest, subject only to the 60/40 allocation between OnePiece and Kingsberg.

Collapse of the project, power of sale, and Kronenfeld litigation

The Highway 7 project soon became unworkable when 256 refused to contribute its 50% share of ongoing project expenses and carrying costs. Although Cimberg and its backers attempted for some time to service the $24,000,000 first mortgage, the mortgagor eventually defaulted, and the lender, DUCA Financial Services Credit Union, exercised its power of sale. After paying out the first mortgage, the power-of-sale process generated net proceeds of $16,200,000. A new complication emerged when a third-party investor, Simion Kronenfeld, who claimed to have paid a $200,000 deposit to purchase the same lands from a Shroff entity, commenced litigation alleging either double-selling or some other wrongful conduct. In 2022, the various parties, including the Shroff entities and the joint venturers, reached a settlement with Kronenfeld. Under that settlement, $11,200,000 of the net proceeds was allocated to Cimberg Developments Inc. and $5,000,000 to Kronenfeld, with an additional $1,500,000 in charitable donations split between them ($1,000,000 from Kronenfeld and $500,000 from Cimberg). Notably, 256 was explicitly excluded from receiving any part of the settlement funds under a court order made January 13, 2022. In effect, the settlement diverted all of the net sale proceeds that would otherwise have flowed to the mortgagor and the limited partners into the hands of Cimberg and Kronenfeld, and then out again to charities and the parties themselves.

Origin of the interpleader: the escrowed fund and competing claims

From the $11,200,000 allocated to Cimberg in the settlement, $10,700,000 remained after the charitable donation. Of that, $7,842,168.42 was distributed to the two holding companies (CIM Hwy 7 Holding LP and Kingsberg Developments 2017 Holdings Inc.) based on their 55/45 split, while $2,857,831.58—the precise amount of Facility #2—was held back and placed in trust by Teplitsky Colson LLP (Teplitsky LLP) pending resolution of competing claims. OnePiece, having obtained 60% of Facility #2 under the Second Trust Declaration, asserted that it was entitled to $1,714,698.95 (60% of $2,857,831.58), with the remaining $1,143,132.63 (40%) payable to Kingsberg. Together, the plaintiffs claimed the entire $2,857,831.58 from the escrowed fund as priority repayment under the loan/“debt trust” structure. CIM Hwy 7, acting through the interests of the Cimberg backers in the limited partnership trust, opposed this distribution. It took the position that because 256 was cut out of the settlement and “received no funds,” the escrowed money could not legally be treated as repayment of 256’s loan. On this view, none of the funds were caught by the loan security, and instead the entire $11,200,000 should be treated as flowing into the limited partnership/joint venture trust and divided simply 55/45 between CIM Hwy 7 and Kingsberg Developments 2017 Holdings Inc., leaving nothing specially reserved for the plaintiffs.

Key legal issues regarding entitlement to 256’s share

The core entitlement issue was whether the $2,857,831.58 in escrow represented money that, in law and equity, was payable in respect of 256’s 50% interest in the limited partnership, such that it must be applied under the First and Second Trust Declarations to Facility #2. The court needed to decide: first, whether the “loan” was truly a loan or a disguised purchase price/equitable charge over 256’s share; second, whether the net proceeds from the sale and settlement could be seen as repayments of the loan to 256 even though 256 never received them directly; and third, how partnership law priorities and trust obligations affected the allocation of 256’s share between the plaintiffs and CIM Hwy 7. To address these questions, the trial judge examined the transaction documents, the practical flow of funds, and the commercial and tax context. Crucially, the court accepted that the $12,000,000 consideration for the 50% interest, the transfer of that interest, and the $10,857,831.58 loan were all components of a single integrated transaction. The purpose of documenting them as a “loan” was to enable 256 to defer its capital gain, but in substance the loan instruments simultaneously secured the joint venturers’ priority to all of 256’s economic interest in the property up to $10,857,831.58.

Impact of the evidence from the Kronenfeld solicitor

The only live witness at trial was lawyer Harvin Pitch, who had acted for Cimberg in the Kronenfeld litigation and also, in other matters, for Kingsberg. He described the loan and joint venture documents as an “elaborate code” to make the acquisition of 50% of the lands appear as a loan for tax purposes, while in reality conveying underlying benefits and risks to the new investors. His evidence confirmed the tax planning rationale and supported the conclusion that 256 and Mr. Shroff accepted that the loan had to be repaid before 256 could see any money from the project. While the court treated some of his statements as contextual rather than determinative, his testimony reinforced the understanding that 256 had effectively bargained away its share until the loan facilities were satisfied. At the same time, Pitch’s evidence undermined CIM Hwy 7’s suggestion that his advice or the settlement terms somehow relieved Cimberg of its obligations under the debt trust. He acknowledged that he had assumed the settlement funds would be distributed 55/45 among the holding companies simply because he was instructed that way; he was not retained to adjudicate competing trust claims and could not, in any event, fairly advise both sets of beneficiaries. The court therefore treated his distribution assumptions as incidental and not controlling.

Application of mortgages and partnership law to the proceeds

From a legal-structural perspective, the court began by tracing the money. Under Ontario’s Mortgages Act, the mortgagor is ordinarily entitled to the surplus after a power-of-sale realization, and that surplus would then be allocated through the chain of interests (mortgagor company, limited partnership, partners, and any encumbrances). Here, the mortgagor’s position led ultimately to the limited partnership 6910 and its two 50% limited partners: Cimberg on one side and 256 on the other. Absent the loan and trust structure, each limited partner would have been entitled to half the net proceeds from the realization of the property. In turn, Cimberg’s 50% interest was held in trust for CIM Hwy 7 and Kingsberg Developments 2017 Holdings Inc. on a 55/45 basis under the joint venture agreement. However, the joint venturers had already overlaid an additional debt trust on 256’s 50% interest by way of the $10,857,831.58 loan and payment direction. That loan—though tax-motivated in its form—gave the joint venturers control over 256’s 50% share up to the loan amount. When the DUCA sale and subsequent settlement with Kronenfeld were completed, the full $11,200,000 allocated to Cimberg as trustee could only be justified consistently with the transactional documents by recognizing that 256’s 50% share was being diverted to satisfy the loan. In this way, the funds paid directly to Cimberg were, in legal effect, repayment or settlement of the “loan,” despite never passing through 256’s hands. Once that was accepted, it followed that $2,857,831.58 of those proceeds belonged in priority to Facility #2 under the First Trust Declaration, and the beneficiaries of that facility—Kingsberg and OnePiece under the Second Trust Declaration—became the persons entitled to that sum.

Rejection of CIM Hwy 7’s technical arguments

CIM Hwy 7 advanced several technical arguments seeking to deny the operation of the loan trust and preserve the escrow for itself and its co-beneficiary in the joint venture trust. First, it argued that because a January 2022 court order in the Kronenfeld action stated that 256 would receive none of the settlement funds, there was in law no repayment by 256 of the loan, and thus the plaintiffs’ priority interest could not be triggered. The court rejected this, reasoning that the consent order was not a judicial adjudication of entitlement and therefore did not create an issue estoppel regarding the proper legal characterization of the proceeds. Moreover, 256’s contractual and equitable position vis-à-vis the loan documentation—and its conscious decision to forego its 50% share—meant that the settlement could not be understood without recognizing the loan’s practical and legal effect. Second, CIM Hwy 7 relied on Pitch’s advice and directions to pay the net funds 55/45 to the holding companies as endorsing the exclusivity of the joint venture trust. The court found this unpersuasive, both because Pitch lacked a mandate to resolve inter-beneficiary disputes and because any lawyer’s distribution assumption could not override the terms of the trust and loan documents themselves. Third, CIM Hwy 7 attempted to justify keeping the entire 256 share by arguing that Cimberg had over-contributed to project costs and should be compensated out of 256’s portion. The court accepted that Cimberg had indeed paid more than its proportional share of expenses, but noted that under the Partnerships Act those over-contributions were advances by a partner (Cimberg) to the partnership and ranked behind debts owed to non-partners. The plaintiffs, as beneficiaries of Facility #2 and not partners in 6910, occupied a higher statutory priority than Cimberg’s advancing of funds. In short, even if a set-off in the partnership made sense commercially, it was subordinate in law to the plaintiffs’ priority as debt creditors.

Outcome and financial result

The court ultimately concluded that the entire $11,200,000 settlement amount flowing to Cimberg could be justified only if it was treated as the realization of both halves of the limited partnership interest, with 256’s half being captured and redirected by the loan and trust structure. Within that framework, the $2,857,831.58 held in escrow corresponded precisely to the priority Facility #2 and therefore had to be paid to its beneficiaries—OnePiece and Kingsberg—under the First and Second Trust Declarations. The plaintiffs, OnePiece (WB) Developments Inc. and Kingsberg 9999 Holding Inc., were therefore the successful parties. The judge ordered that they are entitled to the full $2,857,831.58 held by Teplitsky LLP in trust, together with any accrued interest on that amount, but left the matter of legal costs to be determined later if the parties could not agree, so the total quantum of any costs award could not be determined from this decision.