Giftcraft: the seller's note stays behind RBC

On November 9, 2026, Justice Dunphy of the Commercial List answered KPMG Inc.'s motion for directions on the proceeds of Ripskirt, an online retailer of wrap skirts, dresses and cover-ups whose business the receiver sold out of the Giftcraft receivership, with one direction: "The claim of Elsasser Holding to a distribution of a portion of the sale proceeds of the Ripskirt Transaction is denied, and the Receiver is authorized to distribute the proceeds to RBC free and clear of any claim of Elsasser Holding" (Endorsement of Justice Dunphy, Nov. 9, 2026, para. 18; First Report, July 8, 2025, paras. 19–20).

Elsasser Holding Company, Inc. had sold the Ripskirt business to the Giftcraft group in 2022. Part of the price was a holdback that Giftcraft was unable to pay when it came due in 2024; in its place came an unsecured promissory note of US$3.5 million dated September 2024, which Elsasser Holding postponed in favour of Royal Bank of Canada, the group's secured lender, by a subordination agreement dated September 24, 2024 (Endorsement of Justice Dunphy, Nov. 9, 2026, paras. 2, 10; Fourth Report, Aug. 14, 2026, para. 36). The company argued that the agreement gave it a pro rata share of the sale proceeds, beside RBC's capital loans, once Ripskirt was sold (Claimant's Factum of Elsasser Holding Company, Inc., Oct. 9, 2026, para. 2). The court found that position "entirely without merit," and called the suggestion that the receiver's court-approved sale could alter the agreement's scheme of priorities "an absurd one" (Endorsement of Justice Dunphy, Nov. 9, 2026, paras. 9, 14).

The claimant's case reached the court on paper. A director attended to argue for it, and the court refused leave under Rule 15.01 for a lay representative, declined to adjourn a motion set down more than three months earlier, and decided the question on the factum and reply factum the director had filed. It then fixed RBC's costs at $31,070 "all inclusive," on the partial-indemnity scale, payable jointly and severally by Elsasser Holding and the director personally (Endorsement of Justice Dunphy, Nov. 9, 2026, paras. 6–9, 19–20). The note, the agreement and the reserve the receiver kept against the claim were set out here on September 12.

The claim as the company argued it

Elsasser Holding's factum of October 9, signed by the director, says in its list of authorities: "No case law is cited. Elsasser Holding relies on the text of the Note and the Subordination Agreement" (Claimant's Factum of Elsasser Holding Company, Inc., Oct. 9, 2026, Sched. "A"). The factum set the note's definition of a change of control, which includes "the sale or other disposition of all or substantially all of the assets of RipSkirt," beside the court's approval of a transaction "for the sale of substantially all of the assets of Ripskirt," and concluded: "The definition and the transaction match." RBC's contrary reading, in the factum's words, "depends on adding a word, 'voluntary', that does not appear in the definition" (Claimant's Factum of Elsasser Holding Company, Inc., Oct. 9, 2026, paras. 12, 32–33).

The agreement attaches a proviso to a change in control as a payment event: "provided that the Lender has provided its prior consent to such Change of Control" (Third Report, Aug. 14, 2026, App. "E", p. 79). The factum met it with the receiver's own recommendation of the sale, which reported that RBC "supports the Ripskirt Transaction": "A lender that supports the sale of its collateral, in a proceeding it started, has consented to that sale" (Claimant's Factum of Elsasser Holding Company, Inc., Oct. 9, 2026, para. 42; Second Report, Jan. 19, 2026, para. 66(e)). In the alternative, it said the transaction was a "Sale" under the agreement, which would rank Elsasser Holding second, after RBC's capital loan facility and ahead of its operating loan facility (Claimant's Factum of Elsasser Holding Company, Inc., Oct. 9, 2026, para. 49).

The reply factum of October 30 answered an RBC factum of October 23 that is not in the record. As the reply describes it, RBC argued that Elsasser Holding must prove Delaware law, and that the change-of-control provision applies only to "a going-concern sale in the ordinary course of business." The reply answered that the claim arose under the subordination agreement, which is governed by Ontario law, and that the receiver had itself described the Ripskirt deal as "a going-concern sale" (Claimant's Reply Factum of Elsasser Holding Company, Inc., Oct. 30, 2026, paras. 1, 3, 7–8; Second Report, Jan. 19, 2026, para. 66(f)).

The receiver took no position on the respective entitlements of Elsasser Holding and RBC to the Ripskirt proceeds. Its supplemental report of November 3 recommended that, if Elsasser Holding were found entitled to a portion, its entitlement be calculated on the net sale proceeds, after deductions for professional fees and expenses, and not on the gross (Supplemental Report to the Third Report, Nov. 3, 2026, para. 4).

Read as a whole

The endorsement cites no case law and does not mention Delaware law or the going-concern question; it works from the note and the agreement. Elsasser Holding's position, the court wrote, "clearly runs directly contrary to the intent of the Subordination Agreement which it turns on its head subordinating a secured claim with security over all of the debtor companies to his company's own unsecured claim against but one of them. While there are some awkwardly expressed terms in the Subordination Agreement, its meaning is quite unmistakable when read as a whole" (Endorsement of Justice Dunphy, Nov. 9, 2026, para. 9).

RBC is not a party to the note, the court observed, but s. 11 of the note made certain of the holder's rights "subordinated to Lender and subject to Lender's rights pursuant to the Subordination Agreement," and gave the agreement priority in any conflict. As the endorsement sets the agreement out, the obligations owed to Elsasser Holding "shall, save as herein provided, be subordinated and postponed in all respects and for all purposes" to RBC's debt, and Elsasser Holding agreed not to acquire security for the note (Endorsement of Justice Dunphy, Nov. 9, 2026, paras. 11–12).

"Unfortunately, the paragraphs of the Subordination Agreement are not numbered," the endorsement says, and it locates them by page. The third paragraph on the agreement's second page bars any payment to Elsasser Holding until a sale by a borrower or guarantor or a change in control, each with RBC's prior consent, or the Release Date, when RBC has been paid in full and its facilities have ended (Third Report, Aug. 14, 2026, App. "E", pp. 78–79). The court read that paragraph as "the agreement of the debtor and Elsasser Holding with RBC that NO payments will be made prior to the earlier of the three listed events barring certain on-going payments that were authorized 'provided that the Lender has not made demand for repayment of the Outstanding Obligations' or the Debtor is not in default." Default and demand having both occurred, the court held, "This paragraph is of NO application thereafter apart from certain defined terms" (Endorsement of Justice Dunphy, Nov. 9, 2026, para. 15).

The claim rested on the next two paragraphs, the waterfalls for a "Sale" and for a "Change of Control." The second of them opens: "In the event of a Change of Control, the Debtor and Subordinated Creditor agree that the proceeds resulting from such Change of Control shall be paid as follows" (Third Report, Aug. 14, 2026, App. "E", p. 80). The reply factum had argued that RBC signed the agreement as a whole, and that in it the debtor and Elsasser Holding "agree with the Lender" that a sale which is also a change in control is treated as one, "including with respect to the distribution of proceeds" (Claimant's Reply Factum of Elsasser Holding Company, Inc., Oct. 30, 2026, para. 11). In the endorsement, the two waterfall paragraphs "record agreements between 'the Debtor and Subordinated Creditor' without reference to RBC. That is for the good and sufficient reason that neither defined term has any application after RBC has demanded upon its loan, commenced enforcement proceedings and a Receiver has been appointed" (Endorsement of Justice Dunphy, Nov. 9, 2026, para. 16).