Editor’s Note: Corrigendum released on January 4, 2007. Original judgment has been corrected with text of corrigendum appended.
MEMORANDUM
RE: Albert Reichmann v. Zeev Vered et al C42790
The above-mentioned judgment was released on August 8, 2006. In paragraph 40, there is a quote attributed to Martland J.; it should be Dickson J. Please replace pages 15 and 16 with the attached.
COURT OF APPEAL FOR ONTARIO
SIMMONS, ARMSTRONG and LAFORME JJ.A.
B E T W E E N :
ALBERT REICHMANN
Allan Sternberg and Robert Watson, for the appellant
Plaintiff (Appellant)
- and -
ZEEV VERED and RON ENGINEERING AND CONSTRUCTION (INTERNATIONAL) LTD.
David W. Scott, Q.C., for Zeev Vered
Stephen Victor, Q.C., for Ron Engineering and Construction (International) Ltd.
Defendants (Respondents)
Heard: June 30, 2006
On appeal from the order of Justice Donald R. Cameron of the Superior Court of Justice dated November 16, 2004.
ARMSTRONG J.A.:
1The issue in this appeal concerns the dissolution of a constructive trust imposed by the court on the shares of Ron Engineering and Construction (International) Ltd. (“Ron International”). The constructive trust was imposed for the benefit of the partners in a joint venture established for the financing and development of the City Hall of Jerusalem. The appellant appeals the order that granted the dissolution of the constructive trust.
Factual Background
2Albert Reichmann and Zeev Vered were long time friends who, from time to time, engaged in business ventures together. Mr. Reichmann was the chairman, chief administrative officer and a principal shareholder of Olympia & York Developments Limited (“O & Y”). Mr. Vered was the head of a construction and consulting engineering business in Ottawa that was carried on by Ron Engineering and Construction Ltd. (“Ron Canada”).
3O & Y and Mr. Vered, through Ron Canada, had participated in at least five joint ventures in the United States and three others in the Ottawa area. These joint ventures involved the construction and ownership of medium to large scale commercial projects. Typically, O & Y provided the financing and Ron Canada, or one of its affiliates, developed the projects. The agreements for all the joint ventures were oral agreements.
4In 1988, Mr. Reichmann entered into an oral agreement with Ron Canada through Mr. Vered, for the financing and construction of a new city hall for Jerusalem. Mr. Reichmann was to arrange for up to thirty million dollars U.S. to be loaned by the joint venture to the city for the project. Ron Canada was to provide the personnel and facilities for the project management. Ron International was the vehicle through which the joint venture was to operate. Ron International was a company with no assets. Mr. Vered owned 98% of the shares of Ron International. The remaining 2% of the shares were owned by Mr. Vered’s son, Gilat.
5The profits of the joint venture were initially to be shared on the basis of 60% to Mr. Reichmann or O & Y and 40% to Ron Canada or Mr. Vered.
6The design of the project commenced in June 1988. A building permit was issued in the spring of 1990 and the excavation and foundation work were commenced. O & Y provided some monies by way of loan to Ron International for further loan to the City of Jerusalem in accordance with Mr. Reichmann’s obligation to provide financing for the joint venture.
7By 1991, the scope of the project was expanded by Jerusalem and the city needed an additional thirty million dollars U.S. in financing which it sought from Mr. Reichmann. Mr. Reichmann turned down the request but agreed to assist in finding other sources of funds. Much of what followed is not relevant to the present issue before the court. It is sufficient to note that O & Y, due to its own financial difficulties, was unable to provide up to thirty million dollars U.S. to satisfy Mr. Reichmann’s obligation under the joint venture agreement. This resulted in discussions and negotiations among a number of representatives of all of the interested parties including Mr. Reichmann, O & Y, Mr. Vered and the City of Jerusalem.
8At the end of the day, Mr. Vered took the position that Mr. Reichmann was not entitled to any share in the joint venture. Mr. Vered adopted the stance that O & Y’s withdrawal of its financing for the City of Jerusalem constituted a fundamental breach which entitled Mr. Vered to treat it as a repudiation of the joint venture agreement by Mr. Reichmann.
9In June 1994, Mr. Reichmann commenced an action against Mr. Vered and Ron International for the following:
(a) repayment of $1,869,578 advanced by O & Y for over-head or administrative costs of the project;
(b) an accounting of all sums paid to the defendants pursuant to the project agreements;
(c) payment by the defendants to Mr. Reichmann for his share of the profits; and
(d) pre-judgment interest and costs.
10On May 30, 1995, Chilcott J. of the Superior Court of Justice ordered that the trial should proceed on a bifurcated basis with the court to decide in the first phase the threshold issue of Mr. Reichmann’s entitlement, if any, to be paid any monies or to be provided with an accounting. The second phase was to deal with the accounting, if so ordered, and related issues as well as counterclaims of Mr. Vered and Ron International.
11The first phase of the trial proceeded before Cameron J. in the spring of 2000. The trial dealt solely with the following issues:
(a) Is Mr. Reichmann, rather than O & Y, entitled to share in the profits of the Joint Venture; and
(b) Did Mr. Reichmann or O & Y repudiate or release
(i) their claim to an interest in the Joint Venture profits; and
(ii) O & Y’s right to recover the $1.5 million it loaned to the Joint Venture to finance its expenses?
12The trial judge concluded inter alia:
(i) Mr. Vered failed to establish that Mr. Reichmann was no longer entitled to share in the joint venture.
(ii) Mr. Reichmann did not undertake or agree to surrender O & Y’s claim to the US $1.5 million advanced to Ron International.
(iii) On December 1, 1991, Mr. Reichmann and Mr. Vered agreed that Mr. Vered’s share of the joint venture would be increased to 50%.
(iv) As between Mr. Reichmann and Mr. Vered, Ron International was the joint venture vehicle.
(v) At paragraph 296 of the reasons for judgment, the trial judge said:
Mr. Vered owned 98% of the shares of Ron Inter-national; his son owned the remainder. In view of the Joint Venture Agreement, Mr. Vered and his son held those shares in trust for the benefit of the joint venturers in proportion to their respective interests. There is no suggestion that Mr. Vered did not control the election of the board. Mr. Reichmann was the beneficial owner, or the assignee of the beneficial owner, of one of those Joint Venture interests; Mr. Vered, or Ron Canada as his assignee, was the beneficial owner of the other.
13The formal judgment of the court provided for declarations inter alia:
(i) that Mr. Reichmann continued throughout to own an interest in the joint venture;
(ii) that the loan made by Olympia & York to Ron International remains owing;
(iii) that Mr. Reichmann is entitled to an accounting from both defendants of the profits of the joint venture; and
(iv) that Mr. Reichmann is entitled to payment from both defendants of the amount found due on the accounting.
14The formal judgment makes no reference to Mr. Vered’s holding shares of Ron International in trust for the benefit of the joint venture partners. However, neither the appellant nor the respondents have raised this as an issue. All appear to accept that a constructive trust was imposed on the shares of Ron International by the reasons for judgment of October 27, 2000 and confirmed by the reasons for judgment of March 21, 2003.
15The second phase of the bifurcated trial proceeded before Cameron J. in May, June, August and September 2002. Judgment was granted on March 21, 2003. In the result, the trial judge ordered the defendants to pay O & Y $1,528,539 and to deliver to Mr. Reichmann a revised accounting of the profits of the joint venture with Mr. Reichmann to be paid his share of the profits. The trial judge also declared that the joint venture interests shall be revised to 65% for Ron Canada and 35% for Mr. Reichmann as a result of the reduced participation by Mr. Reichmann in the joint venture.
The motion to discharge the constructive trust
16In September 2004, Mr. Vered and Ron International moved to discharge the constructive trust imposed by the court upon Mr. Vered in respect of the shares of Ron International.
17Prior to bringing the motion to discharge the constructive trust, the respondents paid the amount owing on the O & Y loan in accordance with the reasons for judgment of March 21, 2003. Also, Mr. Reichmann was paid his share of the joint venture net profits in accordance with the aforesaid judgment.
18The motion was brought before the trial judge. The trial judge summarized the purpose of the motion at paragraph 5 of his reasons for judgment as follows:
The reason for this motion is to enable Mr. Vered and Ron Canada to take advantage of losses accumulated in Ron International since the 1993 reorganization in activities which are said do not relate to the Joint Venture. The losses were created by the legal fees of Mr. Vered and Ron International in this action and interest on the O & Y loan. The losses were funded by loans from Mr. Vered and other Ron Canada companies which total about $5 million. The losses could be used to reduce the tax liability of other Ron Canada companies by as much as $1.5 million if they are accepted by Canada Revenue Agency. The use of the losses would be effected by an amalgamation of Ron International with a company or companies with profits and then setting off the losses against the profits in the amalgamated company for the purpose of determining its taxable income.
19Counsel for Mr. Vered and Ron International submitted to the trial judge that the constructive trust had been imposed to secure the repayment of the O & Y loan and the payment to Mr. Reichmann of his share of the joint venture net profits. Since all payments had been made, the constructive trust had served its purpose and was no longer required.
20Counsel for Mr. Reichmann submitted to the trial judge that the discharge of the constructive trust would be tantamount to the expropriation of his legitimate interest in the shares of Ron International.
21The trial judge ordered the dissolution of the constructive trust. He observed that Mr. Reichmann, “never asserted a property interest in the shares and never claimed they had a value beyond his share of profits”. The trial judge further commented that Mr. Reichmann provided no evidence that the discharge of the constructive trust would deprive him of a benefit.
22The trial judge also observed at paragraph 13 of his reasons for judgment:
Ron International was contributed by Ron Canada and Mr. Vered to the Joint Venture as the vehicle through which the Joint Venture would operate. The Joint Venture Agreement was totally silent on the issue of ownership of the shares of the Joint Venture vehicle, Ron International, once all loans had been repaid, expenses paid and profits distributed. There was no perceived residual economic value to the shares.
23However, the trial judge also made the following statement in paragraph two of his reasons:
In 1988, Mr. Reichmann or O & Y was to be a shareholder of the joint venture vehicle Ron International. No shares were ever registered in his or its name.
There was no further elaboration of this point.
The appellant’s position on this appeal
24The appellant made the following submissions:
(i) The trial judge erred in dissolving the constructive trust. Mr. Reichmann’s share ownership was not created by the declaration or imposition of the con-structive trust. Mr. Reichmann owned the shares in Ron International from the outset as a result of the formation of the joint venture.
(ii) The constructive trust was imposed simply because Mr. Vered failed to change the share register of Ron International to reflect Mr. Reichmann’s interest and for no other reason.
(iii) The fact that the trial judge found that after the pay out to Mr. Reichmann, the shares of Ron International had no value to him is irrelevant. Valuable or worthless, the shares were the property of Mr. Reichmann.
(iv) Mr. Vered’s desire to dissolve the constructive trust for the purpose of amalgamating Ron International with another corporation or corporations to gain a signif-icant tax advantage was not a proper basis for the court to exercise its discretion. The manner in which Mr. Vered chooses to organize his financial affairs to take advantage of possible tax losses and Ron International is not an appropriate consideration for the court in the litigation between Mr. Vered and Mr. Reichmann.
(v) The effect of the dissolution order is to grant a benefit to Mr. Vered at Mr. Reichmann’s expense, i.e. to render Mr. Vered’s expenses of defending the lawsuit tax deductible. This, too, was an improper basis for the court to exercise its discretion to dissolve the constructive trust.
(vi) Mr. Vered was in breach of his obligations to Mr. Reichmann to make full disclosure of the financial affairs of Ron International in respect of a number of requests to do so. Such conduct disentitled Mr. Vered to the court’s exercising its discretion in his favour.
(vii) Mr. Vered as the controlling shareholder of Ron International and the manager of the joint venture was required to organize the financial affairs of Ron International and the joint venture in such a way that Mr. Reichmann enjoyed equivalent tax benefits. Mr. Vered’s failure to do so disentitled him to the exercise of the court’s discretion in his favour.
The respondents’ position on the appeal
25Counsel for the respondents make two general submissions. First, the respondents submit that the court has a “wide scope” within which to exercise its equitable jurisdiction. Equitable remedies are flexible and seek what is just in all the circumstances of the case. See Soulos v. Korkontzilas, [1997] 2 S.C.R. 217 at para. 34; and Pettkus v. Becker, [1980] 2 S.C.R. 834 at 847-848. In the circumstances of this case, the trial judge has obtained a just result and this court ought not to interfere.
26Second, the respondents submit that the beneficiary of a constructive trust is required to choose between the remedies he or she seeks – either to exercise his or her proprietary rights in the subject matter of the trust or to rely on the personal liability of the trustee to account as the appellant did in the case at bar. Once the accounts have been taken and the amounts found owing paid, the constructive trust will be discharged.
27Counsel for the respondents was not able to cite any judicial authority for the above proposition. However, he referred us to the following passage from A. J. Oakley, Constructive Trusts, 3d ed. (London: Sweet and Maxwell, 1997) at 8:
If the beneficiary instead chooses to rely on the personal liability of the constructive trustee to account, he will in effect be claiming equitable compensation for breach of trust from the constructive trustee. In the event that the beneficiary had chosen to employ this remedy in any of the situations which have just been used as illustrations, he would in each case have recovered the value of whatever interest he had been held to have in the subject-matter of the constructive trust, valued as at the moment at which the constructive trust took effect, together with interest thereon. (This is also the measure of recovery in the alleged second type of constructive trust, better regarded as an example of equity imposing a personal liability to account in the same manner as a trustee.) Since such reliance on the personal liability of the constructive trustee to account is normally alternative to reliance on the proprietary rights held by the beneficiary in the subject-matter of the constructive trust, payment by the constructive trustee of the appropriate sum will have the effect of discharging these proprietary rights; consequently, the constructive trustee will thereafter be absolutely beneficially entitled to the property upon which the constructive trust was imposed. (footnotes omitted)
28Based on the above analysis, counsel for the respondents argues that the appellant did not choose to pursue any proprietary interest in the shares of Ron International but chose to seek an accounting. The appellant, having obtained an accounting and payment of the amount found due to him, was estopped from pursuing his claim to ownership of the shares.
Analysis
29In respect of the appellant’s principal argument that his claim to ownership of the shares in Ron International can be traced directly to the formation of the joint venture, I am unable to agree. The record of the various proceedings suggests otherwise. This is amply demonstrated by the statement of claim issued by the appellant. In the prayer for relief, Mr. Reichmann sought the repayment of a loan to O & Y, an accounting in respect of the joint venture and payment of his share of the profits of the joint venture. No claim is advanced in respect of the ownership of shares in Ron International. Perhaps of more importance, the appellant does not plead that he was a shareholder of Ron International. The appellant simply described Ron International in his statement of claim as, “a closely held Ontario business corporation” with its head office in the City of Ottawa. It would seem logical that if the appellant considered himself to be a shareholder in Ron International he would have so pleaded. A reference to a closely held Ontario business corporation is consistent with a recognition that the shares of the corporation were owned by Mr. Vered and his son.
30The October 27, 2000 judgment of the court simply states that the appellant continued throughout to own an interest in the joint venture. The joint venture was not Ron International. The joint venture was a partnership between Mr. Reichmann and Ron Canada. Ron International was simply the vehicle through which the joint venture operated, as found by the trial judge.
31I acknowledge that the trial judge said, at the outset of his brief reasons on the motion to discharge the constructive trust, that in 1988 either Mr. Reichmann or O & Y was to be a shareholder of the joint venture. There is passing reference in the trial judge’s reasons for judgment of October 27, 2000 to the possibility of O & Y becoming a principal shareholder of Ron International (see para. 25 of the reasons). There is also reference to an unsigned memo of November 23, 1988 from O & Y’s files that stated: “we will have to sort out as to who owns Ron International” and “Ron International may be owned 100% by AR” (see para. 127 of the reasons). There is another reference to Albert Reichmann as a potential shareholder of Ron International contained in a draft letter of advice to Mr. Vered in October 1990 (see para. 133 of the reasons).
32At the end of the day, the trial judge did not make any finding that the appellant was the owner of shares in Ron International. His imposition of the constructive trust was consistent with an intention to insure that there was some security for the payment of what may ultimately found to be owing by Mr. Vered and/or Ron Canada from the joint venture. Counsel for the appellant argues that the notion of security for payment to Mr. Reichmann was pointless because Mr. Vered had transferred all the joint venture funds out of Ron International. Whether or not the imposition of a constructive trust was no more than an academic gesture does not, in my view, alter what the trial judge was attempting to do in the circumstances.
33I agree that it may have been more helpful for the trial judge to have expressly said that he had imposed the constructive trust as a remedial measure to provide security for the payment of amounts found owing to Mr. Reichmann and O & Y after the accounting. However, the fact that he dissolved the constructive trust after the payments were made to O & Y and Mr. Reichmann can lead to no other conclusion. Support for this conclusion can be found in the statement of the trial judge at para. 3 of his reasons on the motion:
I stated at paragraph 295 of my March 2003 reasons that if the net amount was paid promptly, “in my opinion Mr. Reichmann will have been fairly compensated under this judgment for the failure to account”. I had no thought that Mr. Reichmann’s shares might have some value. He never asserted a property interest in the shares and never claimed they had a value beyond his share of profits.
34Having determined that Mr. Reichmann’s claim to the ownership of the shares does not arise from the formation of the joint venture, I turn to the other issues raised by his counsel. Since there is considerable overlap in each of the remaining grounds of appeal, I propose to deal with them on a somewhat global basis.
35As recorded above, counsel for the appellant argued that the finding of the trial judge that the shares of Ron International had no value to Mr. Reichmann was irrelevant. Valuable or worthless, the shares were the property of Mr. Reichmann. In one sense, I agree with counsel. However, in my view, the trial judge was merely considering all of the circumstances in arriving at the conclusion to dissolve the constructive trust. That the shares had no particular value to Mr. Reichmann was simply a factor in his deciding to exercise his discretion in favour of Mr. Vered.
36The appellant’s argument, that it was inappropriate to dissolve the constructive trust in order to provide a significant financial or tax advantage to Mr. Vered fails to take into account that what the trial judge was really doing was dissolving a constructive trust that had served its purpose. In my view, the fact that Mr. Vered derived a benefit from the dissolution is of no consequence particularly in view of the trial judge’s comments (already quoted above) at paragraph 13 of his reasons:
Ron International was contributed by Ron Canada and Mr. Vered to the Joint Venture as the vehicle through which the Joint Venture would operate. The Joint Venture Agreement was totally silent on the issue of ownership of the shares of the Joint Venture vehicle, Ron International, once all loans had been repaid, expenses paid and profits distributed. There was no perceived residual economic value to the shares.
37Finally, counsel for the appellant argued that Mr. Vered was in breach of his obligation to the joint venture in failing to make timely financial disclosure to the appellant and failed to organize the financial affairs of the joint venture in such a way as to provide equivalent benefits to Mr. Reichmann by means of tax losses. In my view, these arguments have no merit. While disclosure was apparently withheld from the appellant for a period of time, he eventually received the disclosure he required and more importantly, the monies to which he was entitled. In respect of Mr. Vered’s failure to manage the financial affairs of the joint venture in order to provide an equivalent tax benefit to Mr. Reichmann, there is simply no evidence to suggest that he should or could have done so.
38Underlying all of the arguments of the appellant is the simple proposition that the trial judge had no jurisdiction to discharge or dissolve a constructive trust previously imposed in earlier proceedings.
39In Soulos v. Korkontzilas, McLachlin J. at para. 34 said, when speaking of the importance of a constructive trust:
Equitable remedies are flexible, when their award is based on what is just in all the circumstances of the case.
It seems to me that this applies equally to the dissolution of a constructive trust that had served its purpose and is no longer necessary.
40I also find support for this approach in Pettkus v. Becker at pages 847-848 where Dickson J. observed:
The great advantage of ancient principles of equity is their flexibility: the judiciary is thus able to shape these malleable principles so as to accommodate the changing needs and mores of society, in order to achieve justice. The constructive trust has proven to be a useful tool in the judicial armoury. See Babrociak v. Babrociak (1978), 1 R.F.L. (2nd) 95 (Ont. C.A.); Re Spears and Levy et al (1975), 52 D.L.R. (3d) 146 (N.S.C.A.); Douglas v. Guaranty Trust Company of Canada (1978), 8 R.F.L. (2nd) 98 (Ont. H.C.); Armstrong v. Armstrong (1978), 93 D.L.R. (3d) 128 (Ont. H.C.).
41Although there does not appear to be any Canadian authority directly on point, I find the theory advanced by A. J. Oakley in his text, Constructive Trusts, referred to above is persuasive. It seems to me that since the appellant chose to pursue his claim for his share of the profits of the joint venture against the constructive trustee directly that the receipt of payment from the trustee should in the circumstances of this case at least, have the effect of discharging whatever proprietary rights the appellant may have had in the shares of Ron International.
42There may well be cases where the beneficiary has a claim against the constructive trustee and a proprietary claim to the subject-matter of the constructive trust. However, this is not one of those cases.
Conclusion
43I see no basis for interfering with the trial judge’s discretion in dissolving the constructive trust. I would therefore dismiss the appeal.
Costs
44I would award the respondents their costs of this appeal on a partial indemnity scale fixed at $20,000 inclusive of disbursements and GST.
RELEASED:
“AUG –8 2006” “Robert P. Armstrong J.A.”
“RPA” “I agree Janet Simmons J.A.”
“I agree H.S. LaForme J.A.”