An Ontario bankruptcy trustee has launched an investigation after a developer failed to pay millions of dollars owed to investors who financed a housing development north of Toronto.
Grant Thornton LLP was appointed in June as bankruptcy trustee to oversee the Eden housing project in King City, Ont., which was completed last year.
The trustee is investigating why cost overruns revealed after the houses were built and sold meant no money was left to repay $7-million to a group of individual lenders.
FAAN Mortgage Administrators Inc. made the bankruptcy application. It is overseeing the loan on behalf of the 129 investors who financed the project through a syndicated mortgage arranged by project consultant Fortress Real Developments Inc.
FAAN was appointed last April to take control of $560-million in outstanding syndicated loans that Fortress helped arrange from 11,000 individual investors for an array of construction projects.
Some of the largest loans Fortress arranged have gone unpaid after developers were unable to complete the projects, leading to large losses for investors.
Eden is different because it was finished, yet lenders were not repaid.
FAAN said in its bankruptcy application that companies associated with the residential project “have not provided satisfactory information explaining the abrupt downturn of the Eden borrower’s financial position and the resultant disappearance of $7-million from the Eden borrower’s coffers.”
The case has been complicated by a lack of financial information about the project and a lack of clarity about who owns the company that developed it.
In court filings, FAAN said a presale fact sheet from Fortress told investors a numbered company that owned the Eden project was co-owned by PACE Developments Inc., a large developer in Richmond Hill, Ont., and its president, Dino Sciavilla.
Mr. Sciavilla said in an interview on Thursday that his son owned the numbered company, and PACE was only the “construction manager” and did not own the project. Mr. Sciavilla said he personally was not an owner of the numbered company.
An incorporation report for the numbered company lists Dino Sciavilla as chief executive officer and Peter Sciavilla as president, but its ownership is not disclosed.
In documents filed in court, FAAN said the developer built 28 houses on Dew Street in King City that were sold for a total of $26.1-million.
FAAN said none of the $5.94-million in principal owed to mortgage investors was repaid after the houses were sold between August, 2017, and May, 2018. The lenders are owed a further $1.5-million in interest, for a total of $7.4-million.
Fortress officials told investors in June, 2018, that PACE provided assurances the syndicated mortgage lenders would be fully repaid within months, FAAN said. However, PACE unexpectedly reported in early July that there were cost overruns and no money remained for the investors.
FAAN said it asked for financial reports for the project and an explanation of the reversal in finances, but “has not received timely and/or satisfactory responses."
Fortress lawyer Scott Fenton said Fortress “accurately relayed the repayment information it received from the developer/borrower PACE Developments” as of last June. He said Fortress was a consultant on the project and not an owner, and had to rely on the developer’s information.
Mr. Sciavilla said on Thursday the investors were not paid because the project did not make a profit.
“There were no funds to pay – the houses were sold under-price ... for the mortgages that were on them," he said. "That’s unfortunately what happened.”
FAAN managing director Naveed Manzoor told the court his firm decided to seek an order putting Eden into bankruptcy because the Bankruptcy and Insolvency Act gives a trustee broad investigative powers.
In an affidavit filed with the court application, Mr. Manzoor said FAAN is not keen to take the alternative step of seizing the houses in King City because they have been sold to “innocent third-party purchasers.”
As well, FAAN said trying to seize the 28 properties “is likely to involve complicated, expensive and time-consuming contested proceedings between multiple parties.”
Mr. Sciavilla said investors will be repaid through a legal action against the lawyer who did the work for the house sales on behalf of the developer. He said the lawsuit alleges the lawyer should not have allowed the ownership to be transferred while mortgages were still registered against the houses.
Mr. Sciavilla would not identify the lawyer, but said he expects investors will be repaid through the lawyer’s liability insurance.
It is unclear whether that will happen, because the legal action was filed on behalf of the homebuyers whose properties are encumbered with the syndicated mortgage. FAAN has not sued the lawyer on behalf of investors, and said in its court filing it is still considering its legal options.