An Ontario court has appointed a law firm to represent the interests of investors in the receivership of a mortgage firm, following a series of syndicated mortgage investments falling into financial trouble.
Last month, at the request of the Financial Services Regulatory Authority of Ontario (FSRA), the Ontario Superior Court of Justice appointed B. Riley Farber Inc. as receiver over Sussman Mortgage Funding Inc., which raised over $100 million for syndicated mortgage investments — of which more than $73 million is now in arrears.
The court noted FSRA has received complaints from investors, including that interest payments have stopped, loans have not been repaid, and allegations of other irregularities — including that investor funds may have been diverted. These allegations have not been proven.
The receivership application was not contested; the firm consented to the appointment.
In its first report since being appointed, the receiver said its preliminary investigation found a primary cause of the firm’s financial difficulties was “liquidity imbalances (estimated to be in $60-million range) arising from the payment of interest to investors in respect of [investments] for which no interest was received from the borrower or … the borrower had previously repaid all advances.”
It also found “significant deficiencies” in the firm’s records that “will make it very difficult to fully reconcile the cash flows associated with the [syndicated mortgage loans] and the associated claims of investors.”
Since the receiver’s appointment, the court has also named the Toronto-based law firm Aird & Berlis LLP as representative counsel for investors in the case.
To start, the court concluded it was appropriate to appoint counsel to represent investors in the receivership in the interests of efficiency and to limit the costs of the proceeding.
“By representing the investors as a group, representative counsel will be more effectively able to advocate for the investors’ collective interests and work with the receiver and other stakeholders to ensure that the investors’ interests are fairly protected,” the court said in its decision.
The court considered two candidates for the role — Aird & Berlis and Paliare Roland Rosenberg Rothstein LLP — which were put forward by different groups of investors. A third group, which had approximately $42 million invested in the syndicated mortgages, said it would opt out of any court-appointed counsel.
While it found both firms suitable, the court based its decision on their different approaches. Aird & Berlis proposed up-front transparency on fees and mandate, while Paliare proposed more of a “wait and see” approach, with its role potentially including litigation beyond the receivership and deferring the setting of its compensation arrangements until later.
Ultimately, the court said it preferred the approach that offered greater up-front certainty regarding the role and costs of representative counsel.
A case conference in the receivership has been scheduled for June 26.