COURT OF APPEAL FOR ONTARIO

CITATION: Lo Faso v. Ferracuti Estate, 2013 ONCA 123

DATE: 20130227

DOCKET: C55395

Winkler C.J.O., Pepall J.A. and G.P. Smith J. (ad hoc)

BETWEEN

Gaetano Lo Faso

Plaintiff (Appellant)

and

David Ferracuti as Estate Trustee of the Estate of Anthony Ferracuti, Anthony Ferracuti Investments Limited, Dallas Investments Limited, Cravit & Ferracuti Interior Design Inc., 518391 Ontario Inc., Drumlin Developments Limited, David Ferracuti Investments Ltd., Heather Ferracuti, Gerald Borean, Parente Borean, and Mauro (aka Maurizio) Marchioni

Defendants (Respondents)

Paul J. Pape and Nicolas M. Rouleau, for the appellant

Sean E. Cumming and Colby Linthwaite, for the respondents

Heard: November 21, 2012

On appeal from the order of Justice Gordon D. Lemon of the Superior Court of Justice, dated April 2, 2012, with reasons reported at 2012 ONSC 2081.

Pepall J.A.:

[1] The appellant appeals the order of the motions judge dated April 2, 2012, in which he granted partial summary judgment in favour of the respondents. In granting the respondents’ motion, the motions judge dismissed the appellant’s claims to an interest in property municipally known as 2301 Haines Road, Mississauga (“Haines Road”) and to an interest in the shares of the respondent company 518391 Ontario Inc. (“518”). He also dismissed the appellant’s motion for a certificate of pending litigation (“CPL”). Although not requested before the motions judge, the appellant requests partial summary judgment from this court declaring that he is the beneficial owner of Haines Road. He asks that all other matters be directed to trial. In the alternative, he asks this court to issue a CPL on Haines Road and to remit all matters to trial.

Background Facts

[2] The appellant, Gaetano Lo Faso, is a judgment creditor of a bankrupt company named Kelton and Ferracuti Consultants Limited (“Kelton”). In 1993, he obtained a judgment from Kelton in the amount of $63,637.20, in addition to costs of $278,000, plus interest. He registered the judgment with the Sheriff that same year, and later renewed that registration. The appellant took no active steps to enforce his judgment between 1994 and 2000.

[3] Anthony Ferracuti, whose estate is one of the respondents to this appeal, was the guiding mind of the judgment debtor Kelton and of 518. Kelton was the sole shareholder of 518. 518 held the Haines Road property that is in dispute in trust for Kelton. 518 therefore held the legal title to the property, and was its registered owner, while Kelton held the equitable title and beneficial interest in the property. 518 was a bare trustee of Haines Road for Kelton.

[4] In 1989, North American Life Assurance Company (“North American”) was granted a $2,150,000 first mortgage on Haines Road, which was guaranteed by Mr. Ferracuti. The January 31, 1990 Kelton financial statements showed the property’s net book value as being less than the principal amount outstanding on the first mortgage. As such, as of that date, the evidence suggests that there was no equity in the property. Mr. Ferracuti’s evidence was that the realty taxes were in arrears and the first mortgage went into default on or about September 1, 1991. In November 1991, North American sued 518 and Mr. Ferracuti, as personal guarantor, for default on the first mortgage. On February 7, 1992, Haines Road was offered to North American in exchange for a release of 518 and Mr. Ferracuti.

[5] North American declined the offer and instead renegotiated the first mortgage guaranteed by Mr. Ferracuti and obtained a second mortgage on Haines Road in the amount of $10,000,000. This second mortgage secured a new obligation, which was to pay North American 25% of the net amount received by 518 from a sale of Haines Road before November 1, 1999, and failing a sale, 25% of the appraised value of the property at that time.

[6] Kelton ceased to operate in 1993 but continued to hold the beneficial interest in Haines Road.

[7] In 1998, 518 negotiated a lease of Haines Road with the Ontario Government’s Parole Office, but substantial leasehold improvements were required.

[8] There was no equity in Haines Road at this time. TD Bank agreed to lend the $200,000 required to make the improvements provided that Mr. Ferracuti’s wife, Heather Ferracuti, gave a personal covenant secured by a $200,000 mortgage on the Ferracutis’ family home, and 518 granted TD Bank a further mortgage on Haines Road together with a postponement of North American’s second mortgage. Mr. Ferracuti stated that the choice he faced was either to walk away from Haines Road and be exposed to a further lawsuit on his personal guarantee, or ask his wife to bail him out. He chose the latter.

[9] Mrs. Ferracuti agreed to bail her husband out: she would guarantee and provide security for the $200,000 loan from TD Bank, and, in exchange, assume ownership of 518 and Haines Road. Mr. Ferracuti stated that in accordance with his deal with Mrs. Ferracuti, she owned the shares in 518 and 518 owned Haines Road. After the transfer, 518 was treated as the full owner of the property. Had these transactions not been effected, North American would have sold the property at a loss.

[10] While there is documentation relating to the transfer of the shares in 518 from Kelton to Mrs. Ferracuti, there is no document transferring the beneficial interest in Haines Road from Kelton to 518. Similarly, there is no document to that effect signed by any of Kelton, 518, Mr. Ferracuti or Mrs. Ferracuti.

[11] By September 1999, 518 had not received any offers to purchase Haines Road. An appraiser was therefore hired to conduct an appraisal of Haines Road, pursuant to 518’s second mortgage agreement with North American. The appraised value of Haines Road was $1,900,000. This was $200,000 less than the encumbrances on the property.

[12] In 2006, the appellant was attempting to enforce his judgment against Kelton. On September 27, 2006, he obtained a court order to examine Mr. Ferracuti in aid of execution. On September 28, 2006, 518 granted a mortgage to Mr. Ferracuti on Haines Road. If valid, this mortgage would take priority over the appellant’s judgment.

[13] On October 13, 2006, Kelton made an assignment into bankruptcy.

[14] The appellant obtained orders under s. 38 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”), authorizing him to take proceedings for his own benefit to recover Kelton’s interests in various properties including Haines Road.

[15] Mr. Ferracuti died on November 18, 2009.

[16] Prior to Mr. Ferracuti’s death, on March 20, 2009, the appellant commenced an action seeking, among other things, a declaration that Kelton (and hence the appellant) is the beneficial owner of Haines Road and a declaration that the transfer and acquisition of Haines Road to and from 518 constituted a fraudulent conveyance, preference, reviewable transaction, or settlement, pursuant to the Fraudulent Conveyances Act, R.S.O. 1990, c. F.29, the Assignment and Preferences Act, R.S.O. 1990, c. A.33, or the BIA. He also claimed oppression as against Mr. and Mrs. Ferracuti as directors of Kelton.

[17] In his statement of claim, the appellant pleaded that Kelton was at all material times the sole shareholder of its wholly owned subsidiary, 518, until Kelton transferred its shares to Mrs. Ferracuti in 1999 for no or inadequate consideration. He claims the shares of 518 on the basis that they were fraudulently conveyed. He also maintains that while the shares in 518 were transferred to Mrs. Ferracuti, Kelton’s beneficial interest in Haines Road was never transferred and remains with Kelton. As such, the appellant claims that he is entitled to that property.

[18] The respondents brought a successful motion for partial summary judgment to dismiss the appellant’s claims to an interest in Haines Road and to the shares in 518.

Grounds of Appeal

[19] Before this court, the appellant advances two alternative grounds of appeal.

[20] The appellant submits that the motions judge erred by implicitly finding that Kelton transferred its beneficial interest in Haines Road to 518. He argues that the motions judge missed the issue of whether there ever had been a transfer of the beneficial interest in Haines Road and conflated it with the transfer of the shares in 518. The appellant argues that this court should grant summary judgment in his favour because there was no documentation evidencing any transfer of the Haines Road property from Kelton to 518, no evidence of a Land Transfer Tax payment, and no evidence of compliance with s. 2 of the Statute of Frauds, R.S.O. 1990, c. S.19.

[21] In the alternative, the appellant submits that if there was a transfer of Haines Road, this court should direct the action to trial to determine whether the purported transfer to Mrs. Ferracuti constituted a fraudulent conveyance, a breach of fiduciary duty owed to Kelton, or was oppressive to the appellant in his capacity as a creditor of Kelton.

Analysis

[22] In granting the respondents’ motion for partial summary judgment, the motions judge applied the correct legal test for determining whether to grant summary judgment. He determined that he had a full appreciation of the evidence and the issues. As such, as this court directed in Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764, 108 O.R. (3d) 1, at para. 71, leave to appeal to S.C.C. granted, [2012] S.C.C.A. Nos. 47-48, any factual determinations made by the motions judge in deciding the motion will attract review on the deferential standard of palpable and overriding error.

[23] The first issue to address is the transfer of the beneficial interest in Haines Road from Kelton to 518. While the Statute of Frauds was not pleaded, the parties made written and oral submissions on its requirements before the motions judge. He addressed those arguments at paras. 70, 71 and 72 of his reasons. He held that the transaction was a transfer of shares, not land, and as such, the non-payment of land transfer tax – a possible badge of fraud – was inapplicable. Furthermore, there were documents confirming the share transaction.

[24] It would appear that the motions judge thereby accepted Mr. Ferracuti’s and the respondents’ theory of the case that the transfer of the shares in 518 was necessarily incidental to the completion of the larger transaction, which was the transfer of control of Haines Road to Mrs. Ferracuti. This was done to finance leasehold improvements on Haines Road. As 518 had always been a bare trustee, a fact the appellant conceded, its shares were valueless. If ownership of Haines Road was not transferred to Mrs. Ferracuti, as suggested by the appellant, she would have received valueless shares in return for her personal covenant in favour of TD Bank, which was secured by a $200,000 mortgage on the family home. The respondents further submitted that the financial statements and income tax returns of Kelton and 518 also reflected the transfer.

[25] The difficulty with this theory and with the motions judge’s analysis is that it improperly conflates the transfer of Kelton’s shares in 518 with the transfer of Kelton’s beneficial interest in Haines Road. By necessity, these were two separate transactions.

[26] Because he conflated the two transactions, the motions judge failed to properly consider indicia reflecting an absence of any transfer of the beneficial interest. There was no evidence of compliance with s. 2 of the Statute of Frauds, which provides that no interest in lands shall be granted or surrendered unless by deed or note in writing signed by the party so granting or surrendering, or by the party’s agent. Furthermore, even if the Statute of Frauds may in certain circumstances allow for the use of an oral contract as a defence to an action, the motions judge made no finding of any oral agreement between Kelton and Mrs. Ferracuti that reflected the transfer of the beneficial interest. Moreover, there was no evidence of any payment of the land transfer tax which would have been payable on the transfer of the beneficial interest in Haines Road.

[27] The motions judge improperly conflated the two transfers, failed to consider material facts, and therefore erred in granting partial summary judgment. The appeal is allowed. It is therefore unnecessary to consider the appellant’s alternative ground of appeal.

[28] The appellant requests summary judgment in his favour even though such a motion was not brought below. While this court may grant such relief, in my view, this action should be tried. The parties should give consideration to their pleadings particularly with respect to the interplay between s. 2 and s. 4 of the Statute of Frauds.

[29] In conclusion, I would allow the appeal, set aside the motions judge’s order granting partial summary judgment, reinstate Herold J.’s order of April 20, 2010, and grant a CPL in favour of the appellant together with leave to register the CPL against title to Haines Road.

[30] The respondents are to pay the appellant’s costs fixed in the amount of $15,000 inclusive of disbursements and applicable taxes.

Released: February 27, 2013 “WW”

“S. E. Pepall J.A.”

“I agree W. Winkler C.J.O.”

“I agree Patrick Smith J. (ad hoc)”