COURT OF APPEAL FOR ONTARIO

CITATION: 1427814 Ontario Limited v. 3697584 Canada Inc., 2013 ONCA 597

DATE: 20131002

DOCKET: C54974

Blair, Juriansz and Tulloch JJ.A.

BETWEEN

1427814 Ontario Limited

Plaintiff (Respondent)

and

3697584 Canada Inc., Réno-Dépôt Inc. and Kingfisher France SAS

Defendants (Appellants)

Counsel: Joel Richler, Erin Hoult and Will Morrison for the appellants Maurice J. Neirinck and Michael G. McQuade for the respondent

Heard: April 10, 2013

On appeal from the judgment of Justice Mary A. Sanderson of the Superior Court of Justice, dated January 6, 2012.

Reasons for Decision

By the Court:

[1] This is an appeal from the decision of Sanderson J. granting judgment in favour of the respondent, 1427814 Ontario Ltd. (“142”), for $3.5 million dollars in a mortgage sale action.

[2] The appellants were affiliates, part of a “big box” retailer conglomerate that was going to open a Réno-Dépôt outlet and assist 142 with the development of the lands. The appellants lent the respondent $10.7 million, secured by a mortgage, to buy 130 acres of land to develop. After developing the land, the respondent was to sell 10 acres to the appellants.

[3] After a certain point, however, the relationship between the appellants and the respondent soured. The appellants registered a caution against the property and eventually initiated power of sale proceedings. The appellant hired a broker, two appraisers, and a commercial real estate specialist, to assist in the sale of the property. The property was not listed on the Multiple Listing Service (“MLS”) nor was the property widely marketed. In fact, the appellants focused on a small group of elite and well-heeled commercial real estate investors they called the “inner circle”. This group was comprised of large real estate investment trusts (“REITs”). In addition, the trial judge found as a fact that other interested buyers were not afforded a meaningful opportunity to perform due diligence on the property. The property was eventually sold for $12.5 million and the respondent received some $700,000 out of the sale funds.

[4] The respondent initiated an action claiming that the sale was improvident and the appellants were liable to account for the difference between the sale price of $12.5 million and the lands’ fair market value.

[5] The trial judge found the fair market value of the property on the sale date was $16 million. She found that the appellants had failed to take reasonable precautions to obtain market value on the sale and awarded of the respondent damages in the amount of $3.5 million, representing the difference between the sale price and fair market value.

[6] On appeal the respondents advance a number of arguments.

(1) The Appellants’ Bad Faith

[7] The trial judge found the appellants acted in bad faith by failing to remove the Caution on the property after it was “crystal clear that keeping the Caution on title to protect its interest under the Agreement was no longer necessary or appropriate”. She found that the continued registration of the Caution “not only encumbered the title to the Lands, it also impaired their marketability and value.”

[8] The appellants argue that the trial judge was not entitled to make a finding of bad faith against them because, they say, the respondent had not pleaded they had acted in bad faith.

[9] We are satisfied that the trial judge was entitled to find bad faith on the part of the appellants, and that the unnecessary continued registration of the Caution provided a basis for that finding. The respondent may not have used the words “bad faith” in its statement of claim but had claimed punitive damages and had pleaded that the “conduct of the Defendants was…malicious, abusive, reckless and callous”. Moreover the appellants’ relied on their good faith in their defence of the action. While the appellants did object that the issue had not been pleaded, the issue was joined at trial. Both parties addressed the issue in their written closing submissions.

[10] That said, the finding it does not seem to have been an important part of the trial judge’s reasoning. She did not include the appellants’ bad faith in summing up the matters that the respondent had proved that supported her final conclusion.

[11] We would not give effect to this ground of appeal.

(2) The Appellants’ Liability For The Conduct of Its Experts

[12] The appellants argue that the trial judge failed to articulate the standards of care applicable to its experts, and erred by finding that certain conduct of its experts were unreasonable in the absence of expert evidence. They submit that the trial judge applied an overly burdensome standard of care to their experts with the benefit of hindsight.

[13] In this context, the appellants begin by taking issue with the trial judge’s observation that the two appraisals prepared by appraisers retained by the appellants and on which the appellants relied were patently unreasonable on their face. The appellants recognize that the trial judge went on to scrutinize all the appraisals in evidence carefully and that she ultimately preferred the evidence of the respondent’s appraiser. However, the appellants argue that if a lender is to be held vicariously liable there has to be evidence its appraisers were negligent not just wrong. Without a finding of negligence, they argue, there is nothing to attach to the mortgagee by way of blameworthiness. In this case, the appellants point out, there was no expert evidence that their appraisers and their other agents failed to meet the professional standards of care applicable to them.

[14] In advancing this argument the appellants rely on 651137 Ontario Ltd. v. Toronto-Dominion Bank, [1998] O.J. No. 2651 (Ont. Sup. Ct.). In that case Dambrot J. commented that “the test does not impose absolute liability on mortgagees for mere errors on the part of their appraisers. A mortgagee is not liable simply because the trier of fact concludes that the true market value is higher than the appraised value, and, as a result, higher than the listing price. Only if the appraiser fails to take reasonable care in reaching his or her conclusion would the mortgagee be responsible for the appraiser's blunder.”

[15] This comment is obiter as earlier in his decision, Dambrot J. had found that the plaintiff had not established that the mortgagee’s appraisals were inconsistent with the property’s true market value. In any event, we do not read Dambrot J. as suggesting that that where a mortgagee’s appraisal is below fair market value, a mortgagor must prove professional negligence on the part of the mortgagee’s appraiser in order to establish an improvident sale. The conduct of the mortgagee and the conduct of its experts must be considered together in the particular context and all the facts of the case.

[16] Here, the trial judge’s decision was not based on the mere fact that the two appraisals were lower than what she found to be the fair market value of the property and her comment she considered the appraisals were unreasonable on their face, but on a constellation of other facts involving much conduct by the mortgagee itself. The property was not listed on MLS, and the sale was poorly advertised; the appellants precluded several potential purchasers from meaningful participation in the sale process; the appellants unreasonably chose to deal meaningfully only with two potential purchasers, allowing only them to do any due diligence; the appellants imposed an additional unnecessary and unreasonable requirement that the buyer must be a member of the inner circle, capable of single-handedly completing the development. This narrowed the field of buyers to two; the appellants accepted an offer in circumstances where it would have been obvious to the purchaser that they were anxious to obtain an unconditional offer and was not negotiating with anyone else; the appellants negotiating strategy signaled to the purchaser their willingness to accept significantly less than the $14 million listing price; the appellants failed to seek out or deal with other potential buyers who would have been capable of paying fair market value; there was a substantial cushion between the offers being made and the amount the appellants were owed and so there was no urgency to sell the lands in order to protect repayment of the principal and interest owing to the appellants; the appellants accepted the $12.5 million offer in the face of advice from their broker that more advertising was needed and from its appraisers that exposure with adequate marketing of 6-12 months was required to achieve fair market value.

[17] The trial judge did not err in law by not addressing whether the mortgagee’s appraisers and other experts were professionally negligent. She properly focused on and applied the proper legal question: whether the appellants exercising their power of sale had fulfilled their duty to take reasonable precautions to obtain the fair market value of the mortgaged property on the day of the sale. She addressed the question in the overall context and considered all the facts of the case as she found them.

(3) The Trial Judge’s Findings of Fact

[18] The remainder of the appellants’ appeal consists of a number of attacks on the trial judge’s findings and inferences of fact. The assessing and weighing of the evidence leading to the making of findings of fact is the unique task of the trial judge. A trial judge’s findings of fact cannot be reversed in the absence of “palpable and overriding error”. The same degree of deference applies to the trial judge’s inferences of fact.

[19] Here, the trial judge carefully considered all the evidence in the record (which notably did not include the testimony of the primary decision-makers on behalf of the appellants). She concluded that on a balance of probabilities that “had [the appellants] taken reasonable precautions to achieve Fair Market Value, had the Lands been listed at Fair Market Value initially, and had they been adequately marketed over the necessary Exposure Period, that within that time frame, someone would have paid Fair Market Value of $16 million for the Lands.”

[20] As the trial judge applied the proper legal test, her conclusion is a finding of fact. There is no basis for interfering with that conclusion.

(4) Calculation of Damages

[21] The trial judge awarded damages equal to the difference between the actual sale price and the fair market value of the lands. The appellants submit she erred by failing to deduct various costs and expenses that would have been payable had the lands been sold later at a higher price.

[22] The appellants did not put to the trial judge the arguments and calculations regarding damages that they advanced in this court. In their written closing arguments at trial the appellants did not take issue with the measure of damages being the difference between the actual sale price and the fair market value of the lands. Rather they argued that the respondent had failed to prove another purchaser was willing to pay more than $12.5 million for the lands and so there were no damages.

[23] Whether it is appropriate in the circumstances of a particular case to apply discount factors to the difference between the actual sale price and fair market value, and if so the quantum of such discounts, are in our view questions of fact for the trial judge. We are not persuaded that the trial judge, on the basis of the arguments advanced before her, committed any error in assessing damages.

(5) Conclusion

[24] The appeal is dismissed. Costs are fixed in favour of the respondent in the amount of $50,000 inclusive of disbursements and applicable taxes.

“R.A. Blair J.A.”

“R.G. Juriansz J.A.”

“M.H. Tulloch J.A.”

Released: October 02, 2013