A court-appointed adjudicator has denied a $213-million claim against a fund operated by the failed fund manager Bridging Finance Inc. (BFI) — finding that a “secret” loan guarantee purportedly provided by the fund wasn’t valid. The ruling potentially clears the way for retail investors to recover more of their losses.
Last May, retail investors received an interim distribution of $321 million from the receiver of Bridging and its funds, which have been in receivership since April 2021, after the Ontario Securities Commission (OSC) raised concerns about possible misconduct at the firm.
The receiver, PricewaterhouseCoopers Inc. (PwC), had initially hoped to pay out $491 million to investors, but the amount was pared back due to a large, unresolved claim against the firm’s flagship fund, the Bridging Income Fund (BIF), from Cerieco Canada Corp.
The company argued that it was owed $213 million (plus interest and costs) from the BIF, based on a loan guarantee that, it said, was provided by the fund in connection with a real estate development project (The One project located at One Bloor St. West in Toronto), which ultimately failed.
The company claimed that its loan to that project was guaranteed by several entities connected with the project, including the Bridging fund. The guarantee, it said, was executed by Bridging co-founder Natasha Sharpe on behalf of the fund’s general partner, Sprott Genpar Ltd.
PwC initially rejected the company’s claim, but it appealed that decision. And, given that ongoing dispute, the Ontario Superior Court of Justice ordered the receiver to reduce its planned distribution to investors by $170 million, pending the outcome of that claim.
Now, the court-appointed claims officer who was charged with ruling on the merits of the claim, Douglas Cunningham, has also disallowed Cerieco’s claim, ruling that the purported loan guarantee was invalid.
In his ruling, Cunningham sided with PwC in finding that the loan guarantee wasn’t valid because Sharpe didn’t have the authority to provide a guarantee on behalf of the BIF.
He also found that there was no reason for the fund to guarantee the loan, as this required it to accept $200 million worth of risk for no upside. In addition, it noted that the fact that the purported “guarantee” was kept secret, and was not disclosed to the borrower, or reported in the fund’s financials, should have raised red flags for Cerieco.
“I conclude that Cerieco well knew Sharpe was acting unlawfully or at the very least suspected as much,” the decision noted — adding that the company didn’t take steps to confirm that she did have the authority to provide the guarantee, nor was the guarantee ever ratified by the fund’s limited partners.
“… having determined that Sharpe had no authority to expose BIF as she did, I have concluded that Cerieco’s claim must be disallowed…” it said.