Hermanns v. Ingle, 2002 CanLII 41669 (ON CA)

DATE: 20020402 DOCKET: C28603 M27537, M27923

COURT OF APPEAL FOR ONTARIO

CARTHY, SHARPE and CRONK JJ.A.

B E T W E E N :

KARL HERMANNS, REGINA HERMANNS, FRANK HERMANNS, JORG HERMANNS, GERD HERMANNS by his Litigation Guardian, REGINA HERMANNS, HANNOVERIAN FARMS U.S. INC., and BARCREST FARMS OF AMERICA INC.

John Dwight Ingle, in person, for the Appellants/Respondents to Cross-Appeal

Plaintiffs/Respondents (Appellants to Cross-Appeal)

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JOHN DWIGHT INGLE, NORTH CANADIAN INSCO GROUP LTD. and LANDO KRIEGER GOLDBERG INC., Trustee of the Estate of Barcrest Farms Inc.

Defendants/Appellants (Respondents to Cross-Appeal)

AND BETWEEN :

Peter R. Jervis and Cynthia B. Kuehl, for the Respondents/Appellants to Cross-Appeal

NORMAN J. STONEBURGH

Plaintiff/Respondent (Appellant to Cross-Appeal)

Margaret A. Cowtan for Norman J. Stoneburgh, Respondent/Appellant to Cross-Appeal

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NORTH CANADIAN INSCO GROUP LTD. and JOHN D. INGLE

Defendants/Appellants (Respondents to Cross-Appeal)

Heard: December 20, 2001

On appeal from the judgment of Justice B.C. Hawkins dated October 29, 1997, reported at [1997] O.J. No. 4400.

BY THE COURT:

I. BACKGROUND

1John Dwight Ingle (“Ingle”) and North Canadian Insco Group Ltd. (“Insco”) were defendants in two actions involving Ingle’s receivership and management of Barcrest Farms Inc. (“BFI”), a corporation established by the Hermanns family to conduct a large horse farming operation near Milton, Ontario, known as Barcrest Farms. The actions involved numerous complex accounting matters and issues related to Ingle’s conduct as receiver and manager. The salient background may be summarized as follows.

2The Hermanns were breeders, trainers and traders of horses, primarily Hannoverian horses, which performed in jumping and dressage events. Upon their arrival in Canada in 1980, they incorporated BFI and, through it, purchased Barcrest Farms, a property known as the “Wilkinson Farm”, and a hotel in North Bay. When the hotel business suffered losses, the Hermanns caused BFI to mortgage Barcrest Farms to the Bank of Montreal for $600,000 and to Stoneburgh for $100,000, and contemporaneously granted debenture security to the Bank of Montreal. They also caused BFI to mortgage the Wilkinson Farm to Charles Orenstein for $300,000.

3By late 1985, the Hermanns family continued to experience significant financial difficulties, creditors were pressing for payment and the mortgagees of the two farm properties had commenced enforcement proceedings under their security. The Hermanns’ lawyer introduced them to Ingle who proposed steps to address the financial crisis, including (a) the assignment of BFI into bankruptcy, (b) the acquisition by Ingle’s company, Insco, of the debenture against Barcrest Farms, (c) Insco’s private appointment of Ingle, following its acquisition of the Bank’s debenture, as the receiver and manager of BFI, (d) the negotiation by Ingle of settlements with the Hermanns’ creditors and, (e) the financing of the Barcrest Farms operations by Ingle for two or three years until the receivership could be terminated.

4These arrangements were agreed upon by the Hermanns family and, in January 1986, Ingle was appointed by Insco as receiver of BFI. Within a matter of months the relationship between Ingle and the Hermanns family had imploded: various improprieties were alleged against Ingle in his conduct of the receivership, two professional accounting firms – appointed by the courts to act as BFI’s receiver – served for brief periods, various assets of BFI or the Hermanns family were transferred or sold by Ingle, and Ingle resumed his role as receiver and manager of BFI and evicted the Hermanns family from their property.

5Matters came to a head in late March 1987 when various assets of BFI and the Hermanns family, including many valuable horses, household effects and other personal items, were sold at auction. Two lawsuits ensued.

6The first action was commenced by Hermanns family members, together with Barcrest Farms of America Inc. and Hannoverian Farms U.S. Inc. (the “Hermanns Group”), against Ingle, Insco and the trustee in bankruptcy of BFI to obtain, amongst other relief, an accounting by Ingle of his stewardship as receiver and manager of the assets of BFI and damages for breach of fiduciary duty, trespass, conversion and illegal distress, together with punitive and exemplary damages. In the second action, commenced against Insco and Ingle by Stoneburgh on his own behalf and on behalf of all unsecured creditors of BFI, a similar accounting was sought regarding the receivership of BFI.

7The two actions were tried together and, by judgment dated October 29, 1997, Justice Hawkins ordered, in part, that a reference be conducted for the purpose of taking the accounts of Ingle and Insco in the receivership of BFI and, on the accounting, the Hermanns Group and Stoneburgh (collectively, the “respondents”) be credited with various items having a total value of $1,051,788 (the “Credits”). The trial judge further directed that no receiver’s fees be allowed to Ingle, and Ingle return certain items of property to the Hermanns family or their counsel.

8On this appeal, Ingle and Insco seek to set aside the trial judgment and to obtain judgment in their favour or, in the alternative, an order directing a new trial. In particular, they challenge various findings made by the trial judge regarding the Credits, and the trial judge’s denial of any receiver’s fees.

9By cross-appeal, the respondents originally sought an order varying the trial judgment by crediting them with the additional amount of $2.7 million, together with interest thereon, concerning the Wilkinson Farm, and directing Ingle to account for any further profits from the sale or disposition of that property and to reconvey to them all interest which he may have in it.

10In their factum on the cross-appeal, it became clear that the respondents seek declarations that Ingle and Insco breached their fiduciary duties and trust obligations thereby entitling the respondents to the equitable remedy of tracing in connection with the Wilkinson Farm as against Ingle and Insco and certain corporations and individuals whom the trial judge identified as acting on behalf, or to the benefit, of Ingle in connection with the Wilkinson Farm. The Hermanns family also seek an award of punitive damages in the amount of $200,000. In their factum, and in a motion brought by them before this court, the respondents further indicate their intention to seek leave, if necessary, to amend their original notice and supplementary notice of cross-appeal to obtain the requested declaratory relief.

11On March 23, 2001, Ingle and Insco served a notice of abandonment of appeal and a consent to judgment as sought on the cross-appeal. However, in light of the claims for declaratory relief and the equitable remedy of tracing set out in their factum on the cross appeal, as described above, the respondents elected to proceed with their cross-appeal. This triggered a motion by Ingle and Insco before this court for an order quashing the cross-appeal or, in the alternative, setting aside their notice of abandonment of appeal and consent to judgment. At the outset of oral argument before this court the latter relief was granted, the notice of abandonment and consent to judgment was set aside, and Ingle was granted leave to represent Insco, as agent, on the appeal and cross-appeal.

II. THE APPEAL

12In support of his contention that the trial judgment should be set aside, Ingle argues that the trial judge erred by:

(a) declining to separate the liability issues from the issues concerning the accounting sought by the respondents;

(b) interpreting Ingle’s duties as a privately-appointed receiver as extending to the respondents, in addition to Insco as the debenture holder;

(c) relying upon mistaken or erroneous values for certain assets in allowing the Credits on the directed accounting; and

(d) declining to award any receiver’s fees.

13We agree that there is no merit to these arguments.

14In connection with the first argument, it was within the discretion of the trial judge to determine if it was appropriate to segregate the liability issues from the accounting issues. His decision not to do so was not a reversible error.

15Ingle’s remaining arguments may also be dealt with summarily. The trial judge, after an extensive two month trial, held that:

Ingle’s total lack of comprehension of his obligations as a receiver and manager shouts from the opening lines of his written argument concerning the sale of Barcrest Farm: ‘The sale of Barcrest Farm by the Bank of Montreal is outside the scope of this proceeding and need not be dealt with by the court for the following reasons’ … How the receiver and manager appointed by the debenture holder and selling a major asset of the debenture debtor can suggest that the transaction is beyond the purview of this action is simply astonishing.

1. .…

Ingle has displayed a total lack of comprehension of his duties as a receiver … His demeanour throughout the trial was one of insouciant indifference although he failed utterly to grasp the gravity of the situation.

16There was overwhelming evidence to support these conclusions. Many examples of Ingle’s improper conduct and lack of appreciation of his responsibilities as a receiver were detailed by the trial judge. By way of illustration only, the trial judge found that Ingle, acting through Insco, purchased, for full value, the debt owed to the Bank of Montreal under its debenture, with the expectation of receiving large receiver’s fees and interest on his investment. The trial judge commented that this step, and associated subsequent conduct by Ingle involving the charging by him of receiver’s fees in an amount close in value to the aggregate amount of the purchased debt, was an “egregious departure” from the well-established principle that “nobody must allow himself to get into a position where his interest conflicts with his duty”. (See Nugent v. Nugent, [1908] 1 Ch. 546 (C.A.), at p. 549, per Lord Justice Fletcher Moulton, as referenced by the trial judge in this case).

17Ingle testified at trial, and argues on this appeal, that his obligation as a privately appointed receiver was only to account to the debenture holder, Insco, and that he did not have any obligation to account to other creditors or the respondents unless a surplus was realized, which could be determined solely by him, in the managed estate. Contrary to this assertion, and as discussed later in these reasons in connection with the cross-appeal, Ingle owed clear duties to other creditors and the respondents in the receivership of BFI, including the duty to act honestly, to avoid conflict of interest, and to be scrupulous in accounting for any surplus. In his position on this appeal, Ingle chose to ignore those duties and sought to justify his complete failure to appreciate the nature, scope and gravity of his duties as a privately appointed receiver and manager.

18There was also evidence to support the trial judge’s findings regarding the nature and quantum of the Credits, and his conclusion that Ingle’s conduct as receiver including, in particular, what the trial judge described as his “appalling state of record keeping”, disentitled Ingle to any receiver’s fees. We see no basis on which to interfere with the trial judge’s findings in these respects.

III. CROSS-APPEAL

(1) Breach of Trust Obligations: The Wilkinson Farm

19The Orenstein mortgage on the Wilkinson Farm fell into arrears leading to the commencement of proceedings by Orenstein in 1985 for possession of the property and payment of the mortgage debt. The following year, Orenstein received an offer to purchase the property for $320,000, but Ingle and Insco successfully blocked the sale in court proceedings, alleging that the proposed sale was improvident, Insco wished to protect the security for itself and the other creditors of BFI, and another purchase offer for $500,000 was in hand.

20Later in 1986, Orenstein sold the Wilkinson Farm to a numbered company then controlled by Ingle’s nephew for $320,000, the same amount for which Orenstein had originally proposed to sell the property. Thereafter, the Wilkinson Farm was the subject of a number of transactions, many or all of which involved Ingle, one or more of his relatives, or companies which he controlled or in which he had an interest.

21The trial judge found that several months after its acquisition from Orenstein, the Wilkinson Farm was sold to another Ingle-related company for $700,000. The property, or some part of it, appears to have again been acquired by Ingle’s nephew in 1989 and mortgaged that year to a financial institution for $1,150,000. In January 1990, Ingle’s nephew’s company sold part of the Wilkinson Farm to a third party for the sum of $2,720,000. In 1991, Ingle’s nephew’s company purported to sell another part of the Wilkinson Farm to a company owned by Ingle’s sister, for the sum of $20,000.

22On these facts, the trial judge concluded:

The significant fact is that the Wilkinson Farm property was sold to Ingle’s nephew’s company not for the $500,000 price which Ingle used to stop the sale [by Orenstein in 1986] but for the very $320,000 which Ingle alleged to be improvident!

1. .…

I have no hesitation whatever in holding that the purchase of the Wilkinson Farm by Ingle’s Nephew’s Company (664832 Ont. Ltd.) was tantamount to a purchase by Ingle himself and that that purchase and all subsequent dealings were directed by, and for the benefit of Ingle. I find it astonishing that Ingle would kill the intended sale [by Orenstein] purporting to express concern for the unsecured creditors of BFI (which he should, indeed, have had as the receiver of BFI’s assets) and airily dismiss this claim at trial saying, in his written submissions, “the sale of the Wilkinson Farm by Orenstein to 664832 Ont. Ltd. is outside the scope of these proceedings and need not be dealt with by the court …”

2. .…

[I]ngle ought not to have purchased the property.

23The trial judge directed that the sum of $149,000 in connection with the Wilkinson Farm be included in the Credits to be afforded the respondents on the accounting. This amount represented the difference between the purchase offer of $500,000 allegedly received by Insco, and relied upon by it and Ingle to block the Orenstein sale in 1986, and the sum of $351,000 owed to Orenstein on his mortgage.

24In reliance on Nugent v. Nugent and Soulos v. Korkontzilas (1995), 25 O.R. (3d) 257 (Ont. C.A.), the trial judge also held, correctly in our view, that a receiver may not purchase property of which he is receiver without permission of the court.

25The respondents argue that the trial judge should further have found, as alleged by the Hermanns Group in their statement of claim in the first action, that Ingle and Insco breached fiduciary and trust duties owed by them to BFI and the Hermanns Group, thereby entitling the respondents to the equitable remedy of tracing, allowing them to trace the profits made by Ingle and Insco on the Wilkinson Farm. In support of this argument, they assert that once the debenture debt owed to the Bank of Montreal had been extinguished, Ingle and Insco became trustees of the assets of BFI and, in that capacity, were required to act in the best interests of BFI, with all profits or surplus realized flowing to BFI. We agree, for the following reasons.

26Ingle was appointed by Insco as receiver and manager of BFI pursuant to the debenture granted by BFI to the Bank of Montreal in the 1980’s, as subsequently purchased by Insco. The total debt owing to the Bank as of the date of Insco’s debenture purchase was $230,000.

27The sale in July 1986 of part of the Wilkinson Farm, following its improper acquisition by Ingle’s nephew’s company, and other assets belonging to the Hermanns Group and BFI, generated proceeds greatly in excess of the debt under the debenture purchased by Insco. This had the effect of extinguishing the debt owed under the debenture.

28At all times, Ingle and Insco owed a duty to BFI and its creditors not to act in a conflict of interest or to secretly profit from the sale of assets of BFI, and to act honestly. These duties applied regardless of whether the relation between Ingle, as a privately appointed receiver and manager, and BFI was fiduciary in nature. Moreover, from the time that Ingle took possession of the Wilkinson Farm (through others acting on his behalf or whom he controlled), Ingle and Insco became constructive trustees for BFI in relation to any surplus proceeds realized after the debenture debt was extinguished. F. Bennett, in Bennett on Receiverships, 2nd ed. (Toronto: Carswell), states (at pp. 183 and 185):

With respect to the debtor and execution creditors, the [privately appointed] receiver … may become a trustee for surplus moneys realized over and above that which is owing to the security holder and, to that extent, the receiver has a duty to turn over such moneys. The receiver also has a duty to account to the debtor for what it has taken into possession, sold and applied to the secured debt.

1. .…

[T]he receiver’s standard of care is measured by analogy to that of a mortgagee in possession. The receiver is appointed to manage the property of the debtor so long as it is necessary to retire the debt to the security holder.

2. .…

[T]he receiver must exercise the duties with the utmost integrity and must not place itself in a position of possible conflicts of interest. [Emphasis added]

(See also Soulos v. Korkontzilas and Ostrander v. Niagara Helicopters Ltd. (1973), 1 O.R. (2d) 281 (H.C.J.)).

29Insco and Ingle breached their trust duties in various ways. The trial judge found that Ingle engaged in self-dealing in relation to the Wilkinson Farm. In so doing, he acted in conflict with his duties as receiver and both he and Insco secured profits upon disposition of part of the Wilkinson Farm in 1990 for $2,720,000 and in 1991 for $20,000. Neither party, to date, has fully accounted for the Wilkinson Farm or the proceeds generated therefrom.

30An award of the equitable remedy of tracing is discretionary. It depends upon all of the circumstances of the case and the established facts. In this case, having regard to the findings of the trial judge regarding the conduct of Ingle and Insco and the breaches by Ingle and Insco of their duties to the Hermanns Group, BFI and the unsecured creditors of BFI as represented by Stoneburgh, we conclude that the respondents are entitled in equity to trace proceeds realized from the Wilkinson Farm through Ingle, Insco and the companies and individuals controlling such companies identified by the trial judge as being Ingle-related until such time as the property was sold to a bona fide third party purchaser. We are also of the view that Ingle and Insco should be required to account for and disgorge to the respondents any profits from the sale or other disposition of the Wilkinson Farm in which they have been involved in any way, and to reconvey to BFI any and all interest which Ingle and Insco, or either of them, may have in the Wilkinson Farm, directly or indirectly. In tracing the Wilkinson Farm, and the proceeds realized by Ingle and Insco from it, the $149,000 credit already allowed to the respondents by the trial judge in connection with the Wilkinson Farm must be taken into account. The companies identified by the trial judge as acting for the benefit of Ingle, are as follows:

North Canadian Insurance Company 663235 Ontario Limited Mansewood Town Industrial Estates Ltd. 947338 Ontario Inc. 664832 Ontario Inc. Insco

(2) Punitive Damages

31In their factum on their cross-appeal, the individual members of the Hermanns Group also seek an award of punitive damages in the sum of $200,000.

32No substantial oral argument was advanced before this court in support of such an award. Moreover, in the exercise of his discretion, the trial judge made no award of punitive damages. In these circumstances, and in view of the other relief granted by these reasons to the Hermanns Group, including the individual members of the Hermanns family, we are not prepared to interfere with the trial judge’s decision on this issue.

IV. DISPOSITION

33Accordingly, the appeal is dismissed, the respondents’ motion to amend their notice and supplementary notice of cross-appeal to claim the declaratory relief and the remedy of tracing described in their factum on the cross appeal is granted, and the cross-appeal is allowed, in part. The respondents are entitled to their costs of the appeal and cross-appeal, on a partial indemnity basis.

34By order of this court dated March 6, 2000, paragraph 3 of Ingle’s and Insco’s notice of appeal was quashed, on consent, with costs of that motion reserved to this panel. The respondents are also entitled to their costs of that motion, on a partial indemnity basis.

35In order to comply with the rule that now requires this court to fix costs, the respondents are requested to file with this court, in proper form, their respective bills of costs for partial indemnity in relation to the appeal, cross-appeal and attendance on March 6, 2000 within 10 days from this date. Insco and Ingle may make submissions in writing thereon within 10 days thereafter, and the respondents may file their respective replies, if any, within 5 days thereafter.