Court of Appeal for Ontario
Date: January 31, 2019
Docket: C64290, C64288, C64289, and C64286
Judges: Strathy C.J.O., Feldman and Brown JJ.A.
Between
Arlene McDowell and Saverio Aversa Plaintiffs/Appellants
and
Fortress Real Capital Inc., Fortress Real Developments Inc., Jawad Rathore, Vincenzo Petrozza, Centro Mortgage Inc., Ildina Galati, FFM Capital Inc., Rosalia Spadafora, Krish Kochhar, Tony Mazzoli, Saul Perlov, Derek Sorrenti, Sorrenti Law Professional Corporation, Olympia Trust Company and Financial Services Commission of Ontario Defendants/Respondents
And Between
Arlene McDowell Plaintiff/Appellant
and
Fortress Real Capital Inc., Fortress Real Developments Inc., Jawad Rathore, Vincenzo Petrozza, Empire Pace (1088 Progress) Ltd., Building & Development Mortgages Canada Inc., Ildina Galati, Derek Sorrenti, Sorrenti Law Professional Corporation, Olympia Trust Company and Michael Cane Defendants/Respondents
And Between
David Martino Plaintiff/Appellant
and
Fortress Real Capital Inc., Fortress Real Developments Inc., Jawad Rathore, Vincenzo Petrozza, ADI Developments (Link) Inc., ADI Developments Inc., Building & Development Mortgages Canada Inc., Ildina Galati, FFM Capital Inc., Rosalia Spadafora, Krish Kochhar, Tony Mazzoli, Saul Perlov, Derek Sorrenti, Sorrenti Law Professional Corporation, Olympia Trust Company and Her Majesty the Queen in Right of Ontario Defendants/Respondents
And Between
Bryan Madryga and Eileen Wallace Plaintiffs/Appellants
and
Fortress Real Capital Inc., Fortress Real Developments Inc., Fortress Kempenfelt Bay Developments Inc., Jawad Rathore, Vincenzo Petrozza, Harmony Village-Lake Simcoe Inc., City Core Developments Inc., Building & Development Mortgages Canada Inc., Ildina Galati, FMP Mortgage Investments Inc., Michael Daramola, Tonino Amendola, Graham McWaters, FDS Broker Services Inc., Glenn May-Anderson, Zafar Iqbal Khawaja, Derek Sorrenti, Sorrenti Law Professional Corporation, Olympia Trust Company, Grant Edwardh Appraisers and Consultants Ltd. and Ian G. McLean Defendants/Respondents
Counsel:
Kevin Sherkin and Mitchell Wine, for the appellants
Jeremy Devereux and Jennifer Teskey, for Fortress Real Capital Inc., Fortress Real Developments Inc., Jawad Rathore and Vincenzo Petrozza
Markus Kremer and Ziad Yehia, for Empire Pace (1088 Progress) Ltd.
Lisa Parliament and Lauren Ray, for Adi Developments (Link) Inc. and Adi Development Group Inc. (incorrectly named in the title of proceedings as Adi Developments Inc.)
Heard: June 14, 2018
On appeal from: The orders of Justice Paul M. Perell of the Superior Court of Justice, dated August 10, 2017, with reasons reported at 2017 ONSC 4791, 2017 ONSC 4789, 2017 ONSC 4790, and 2017 ONSC 4792.
Feldman J.A.:
A. Overview
[1] The appellants are small investors who were induced to invest in four syndicated mortgages promoted by Fortress Real Capital Inc. and Fortress Real Developments Inc. (the "Fortress Companies"). Two of those mortgages are in default, but certain terms of the mortgages purport to preclude the investors or their trustees from enforcing the mortgages now, and possibly forever. The other two mortgages were removed from title through power of sale proceedings and protection proceedings under the Companies' Creditors Arrangements Act, R.S.C. 1985, c. C-36. As a result of these sales, newly-incorporated companies linked to Fortress became the owners of the lands, free from the mortgages in which the appellants had invested.
[2] The appellants brought class proceedings against, among others, the individuals and corporations who had promoted and formally sold the investments, two principals of Fortress Real Capital Inc. and Fortress Real Developments Inc., who were directors and officers of those companies, the lawyer who had purportedly provided independent legal advice to the appellants in respect of their investments, the trustees who held the appellants' investments in trust, and the mortgagors who granted the syndicated mortgages. The appellants seek a remedy for the effective loss of their investments.
[3] The appellants' primary allegations are that the proposed defendants failed to properly disclose, or misled them about, key information regarding the development projects, particularly in relation to the risks of investing. They seek to enforce the two remaining mortgages, either directly or indirectly through the trustees, to rescind contracts relating to the investments, and to obtain damages for breach of fiduciary duty, breach of contract, misrepresentation, and negligence.
[4] Eight of the defendants in the four class actions brought motions to strike the pleaded claims against them under Rule 21 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. Four of those motions were settled, and four proceeded. The motion judge struck the pleadings against Fortress Real Capital Inc., Fortress Real Developments Inc., and Olympia Trust Company with leave to deliver Fresh as Amended Statements of Claim. Those orders are not under appeal.
[5] The motion judge dismissed three of the claims and did not grant leave to amend. Those were: 1) the claims against the individual respondents Jawad Rathore and Vincenzo Petrozza, who were directors and officers of the Fortress Companies at the relevant times; 2) the claims against the respondent Empire Pace (1088 Progress) Ltd., mortgagor of one of the remaining syndicated mortgages; and 3) the claims against the respondent Adi Developments (Link) Inc. and Adi Development Group Inc. (collectively "Adi"), mortgagor and guarantor of the other remaining syndicated mortgage. The appellants appeal those orders. They also appeal the costs orders awarded in favour of Empire Pace and Adi.
[6] For the reasons that follow, I agree with the motion judge that the claims disclose no reasonable cause of action against the respondents Jawad Rathore and Vincenzo Petrozza in their personal capacities. I would uphold his decision to dismiss those claims without leave to amend. However, I do not agree that the claims to enforce the mortgages against Empire Pace and Adi should be struck out on a r. 21 motion as disclosing no reasonable cause of action. As a result, I would set aside the orders striking the actions against Empire Pace and Adi together with the costs awards in their favour.
B. Facts
[7] The four proposed class actions concern investments in four land development projects. The pleaded facts are taken to be true for the purpose of determining whether the pleadings should be struck under r. 21 as disclosing no reasonable cause of action. The pleadings relied on for the purposes of these motions are four proposed draft pleadings that have been amended a number of times.
(1) The Empire Pace Ten88 Project, Scarborough
[8] In the brief descriptions of the four land development projects I provide below, I focus on the facts that are relevant to the orders under appeal.
[9] Arlene McDowell is the proposed representative plaintiff in the Ten88 Project class action. Empire Pace is an Ontario corporation incorporated in 2012 to own and develop the Ten88 Project in Toronto. Mr. Rathore and Mr. Petrozza are directors and officers of the Fortress Companies and are both shareholders of Empire Pace. While the pleading states that Empire Pace is a related company to Fortress, the pleading does not describe the legal basis for that assertion.
[10] On or before August 13, 2012, Empire Pace signed a loan agreement where it agreed to borrow an amount not to exceed $20 million from Fortress Developments, with part of the loan secured and part unsecured. Fortress assigned its interest in the secured portion of the loan to Olympia Trust Company in trust and to Mr. Sorrenti in trust. Mr. Sorrenti acted as both trustee for the investors' interests in the loan as well as the lawyer who purportedly provided (personally or through his law office) independent legal advice to the investors.
[11] Empire Pace entered into an agreement (the "Empire Pace Loan Agreement") with Olympia and Mr. Sorrenti, as trustees, under which a syndicated second mortgage was registered against the Ten88 property as security for their portion of the loan.
[12] Under the Loan Agreement, Empire Pace agreed to pay interest at 8% per annum, payable quarterly. The loan had a three-year term, maturing on August 10, 2015, with a right to extend the maturity date by six months. Empire Pace also agreed to pay a variety of other fees and charges and to share profits. One of the terms entitled Fortress to retain 35% of all amounts raised from investors as an advance on anticipated profits and for commissions and legal fees.
[13] Under the Empire Pace Loan Agreement, Mr. Sorrenti and Olympia Trust agreed to subordinate the syndicated mortgage to construction financing of up to $110M. They also agreed to grant partial discharges, postponements, and a standstill in certain circumstances.
[14] Empire Pace granted the syndicated second mortgage on August 15, 2012. The syndicated mortgage is a document registered on title against the Ten88 Project lands. It contains a priority, standstill, forbearance, and postponement provision. This provision precludes investors' representatives from acting upon their security in the event of default until all other project financing has been repaid, or until the lenders of that financing approve of the action in writing. The pleadings allege that this provision was given without consideration and was inadequately disclosed to investors in the syndicated mortgage.
[15] Ms. McDowell, who works in the information technology sector, decided to invest $25,000 in the syndicated mortgage after receiving information and promotional material about the Ten88 Project. She met with a mortgage agent and a notary to close her investment transaction. During the meeting, she had a phone conversation with Mr. Sorrenti, who provided her with legal advice respecting her investment. She alleges that the legal advice she was given was inadequate and not independent.
[16] At the meeting Ms. McDowell received, and in some instances completed or signed, a number of documents. Where the documents are relevant to this appeal, I will address them in more detail in my analysis.
[17] Construction on the Ten88 Project began in July 2013. In July 2014, Empire Pace borrowed $28M in construction financing from Meridian Credit Union. The security was a first mortgage on the property; Mr. Sorrenti and Olympia also delivered a postponement that was registered on title. Empire Pace exercised its right to extend the loan term by six months to February 10, 2016. On February 5, 2016, investors received a Memo advising that the Project was 75% sold with occupancy to begin in the spring or summer of 2017. The Memo also stated that the "Loan will now enter a period of interest accrual for the remainder of the term as also allowed by the standstill, postpone[ment] and subordinate provisions." Interest would be accrued from February 10 until the completion of the Ten88 Project, and would be paid with the principal upon completion.
[18] The appellants allege that as nothing in the documentation and agreements pertaining to the syndicated mortgage allows for a period of interest accrual, the loan has been in default as of February 10, 2016. Neither Mr. Sorrenti nor Olympia has taken any steps to enforce the syndicated mortgage since that time. Ms. McDowell commenced this proposed class action on September 9, 2016. In addition to alleging that Empire Pace is in default of the Empire Pace Loan Agreement, Ms. McDowell alleges that Empire Pace cannot enforce any standstill provisions in the syndicated mortgage document against her. She also alleges that Empire Pace made misrepresentations to her that she relied on in deciding to invest in the Project.
[19] In respect of Mr. Rathore and Mr. Petrozza, Ms. McDowell alleges that, as directing minds of Fortress, they should be held responsible for its wrongdoing. She further alleges that the individual respondents spoke on behalf of Fortress at investment seminars and stressed the safety and security of Fortress investments, and that they were negligent and should be held accountable for the appellants' losses because they obtained substantial monetary benefit from Fortress's activities. There is, however, no pleading that Ms. McDowell either attended a meeting or seminar where Mr. Rathore or Mr. Petrozza were present, or relied on any representation made by Mr. Rathore or Mr. Petrozza at a meeting or seminar.
(2) The Adi Sutton Project, Burlington
[20] David Martino is the proposed representative plaintiff in the Sutton Project class action. Adi Developments (Link) Inc. (formerly Adi Developments Sutton Inc.) and Adi Development Group Inc. are related Ontario corporations. Adi Developments (Link) Inc. was incorporated to develop a mixed-use project in Burlington, Ontario. Both Mr. Rathore and Mr. Petrozza have an interest in Adi.
[21] In August 2012, Fortress began to market investments in the Sutton Project. The Fortress defendants made presentations and the investments were marketed through brokers.
[22] On or before September 4, 2012, Adi Developments (Link) Inc. signed a loan agreement where it agreed to borrow an amount not exceeding $11.6M from Fortress Developments, with part of the loan secured and part unsecured.
[23] Fortress assigned its interest in the secured portion of the loan to Mr. Sorrenti in trust. Adi Developments (Link) entered into an agreement with Mr. Sorrenti (the "Adi Loan Agreement") under which a syndicated mortgage was registered against the Sutton property as security for Mr. Sorrenti's portion of the loan. Adi Development Group signed the Adi Loan Agreement as guarantor.
[24] The Adi Loan Agreement contained similar terms to those in the Empire Pace Loan Agreement. Notably, under the Adi Loan Agreement, Mr. Sorrenti agreed to subordinate his security to construction financing of up to $49.5M. He also agreed to grant partial discharges, postponements, and to standstill in certain circumstances.
[25] After the execution of the Adi Loan Agreement, Mr. Sorrenti agreed with Adi to a priority, standstill, forbearance, and postponement provision in the syndicated mortgage. It precludes investors' representatives from acting on their security in the event of default until all other project financing has been repaid, or until the lenders of that financing approve of the action in writing.
[26] Mr. Martino is a licensed mortgage agent who was an employee of the defendant FFM Capital Inc. He decided to invest $50,000 from an RESP account he had for his children's education after receiving promotional material about the Sutton Project. His clients and family members invested a further $510,000 in the syndicated mortgage. Much of it was RRSP money.
[27] Mr. Martino received, and in some instances completed or signed, a number of documents. Where those documents are relevant to this appeal, I will discuss them in more detail in my analysis. Mr. Martino was purportedly provided with independent legal advice by way of a phone call with Mr. Sorrenti or a lawyer in Mr. Sorrenti's office or under Mr. Sorrenti's direction.
[28] In July 2014, Adi began to sell units in the Sutton Project; in June 2015, construction began on the Project.
[29] On July 1, 2015, Adi extended the term of the loan to April 4, 2016. On October 14, 2015, Adi granted a mortgage in the amount of $16M to Aviva Insurance Company of Canada. Mr. Sorrenti subordinated the syndicated mortgage to the new mortgage from Aviva Insurance, as well as to two other mortgages granted by Adi, one to Sorrenti Law Professional Corporation and another to Cameron Stephens Financial Corporation. Those two mortgages totalled about $13.16M. Construction liens were also registered on title to the Sutton Project lands, which the appellants allege constituted default under the provisions of the Adi Loan Agreement.
[30] In April 2016, the investors were advised that the Project had entered an "ongoing standstill, subordinate and postponement arrangement" with a period of "interest accrual" in accordance with the standstill, postponement, and subordinate provisions of the syndicated mortgage loan.
[31] Mr. Martino alleges that Adi defaulted on the loan on April 4, 2016, when the principal and interest owing was not repaid. Nothing in any of the documentation and agreements pertaining to the syndicated mortgage provides for a period of interest accrual at any time, and Mr. Sorrenti has not taken any steps to act on Adi's default under the Adi Loan Agreement.
[32] In May 2016, the investors were advised that it was necessary to increase the postponement to construction financing from $49.5M to $121M. Investors were requested to authorize the postponement. Mr. Martino refused.
[33] Unbeknownst to investors, on April 5, 2016, Adi had already borrowed $75M from Meridian Credit Union to finance the construction of the Project on the security of a first mortgage of the property. Mr. Sorrenti had postponed the syndicated mortgage to Meridian's security five weeks before notifying investors.
[34] Mr. Martino commenced the proposed class action on September 27, 2016. He alleges that Adi, as borrower and as guarantor, is in default under the provisions of the Adi Loan Agreement, and that Adi cannot enforce any standstill provisions contained in the syndicated mortgage document against him. He also alleges that Adi made misrepresentations to him that he relied on in deciding to invest. Mr. Martino's allegations against Mr. Rathore and Mr. Petrozza are the same as those made in the Ten88 Project class action. And similarly, there is no pleading that Mr. Martino attended a meeting or seminar where Mr. Rathore or Mr. Petrozza were present, or relied on any representations made at such a meeting or seminar.
(3) The Collier Centre Project, Barrie
[35] The only facts about the Collier Centre Project that are relevant on appeal relate to the involvement of the respondents, Mr. Rathore and Mr. Petrozza. Ms. McDowell and Mr. Aversa's legal claims against Mr. Rathore and Mr. Petrozza are the same as those made in the Ten88 and Sutton Project class actions, but the Collier Centre pleadings contain different facts relating to the interactions between Mr. Rathore and Mr. Petrozza and the appellant Mr. Aversa.
[36] Arlene McDowell and Saverio Aversa are the proposed representative plaintiffs in the Collier Centre Project class action. Mady-Collier Centre Ltd. was incorporated to develop a mixed-use development in Barrie, Ontario. By agreement dated July 17, 2012, Mady-Collier agreed to borrow up to about $17M from Fortress Developments. Fortress assigned its interest in the secured portion of that loan to Olympia in trust and to Mr. Sorrenti in trust. Mady-Collier entered into an agreement with Olympia and Mr. Sorrenti under which a syndicated third mortgage was registered against the Collier Centre Project lands as security for their portion of the loan.
[37] Ms. McDowell decided to invest $80,000 in the syndicated mortgage after receiving information and promotional material about the Project. The material did not come from Mr. Rathore or Mr. Petrozza.
[38] Mr. Aversa, who works in construction, decided to invest $15,000 from his TFSA account. His wife, Adriana, also decided to invest $15,000 from her TFSA account. Mr. Aversa was introduced to the Collier Centre Project by an employee of the defendant FFM Capital Inc., who sent him a document prepared by Fortress describing the risk profile of the syndicated mortgage investment. He was invited to attend several Fortress seminars, at some or all of which Mr. Rathore and Mr. Petrozza spoke about the "appeal of the particular Fortress investment".
[39] Mr. Aversa attended at least one seminar where Mr. Rathore spoke. Mr. Rathore discussed his history in the business, the quality of the investments, and said that the investments were safe and secure. He stated that Fortress was solicited by many developers but only dealt with the best and most experienced.
[40] In December 2014, construction of the Collier Centre stopped. In January 2015, Mady-Collier filed for and obtained protection under the Companies' Creditors Arrangement Act. In 2015, the principals of Fortress incorporated Fortress Collier Centre Ltd., which purchased the assets of the Collier Centre in a transaction approved by order of the Ontario Superior Court of Justice. The order extinguished the investors' rights in the syndicated mortgage.
[41] Fortress Collier Centre has agreed that "all available cash flow after repayment of all construction and other financing required for acquisition, construction, development, leasing and sale of the [Collier Centre]...and after payment of all other costs to complete the [Collier Centre] not otherwise financed and appropriate reserves for future expenses and warranty claim, will be made available for repayment" to investors in the syndicated mortgage. Ms. McDowell and Mr. Aversa allege that this is an empty commitment, and that they have effectively lost their entire investment.
[42] On August 8, 2016, Ms. McDowell and Mr. Aversa commenced this proposed class action.
(4) The Harmony Simcoe Project, Barrie
[43] Again, the only facts about the Harmony Simcoe Project that are relevant to this appeal relate to the involvement of Mr. Rathore and Mr. Petrozza.
[44] The facts surrounding the syndicated mortgage used to finance the Harmony Simcoe Project are substantially similar to those of the other three projects. The default events were most similar to those in respect of the Collier Centre Project. The syndicated mortgage went into default and, ultimately, power of sale proceedings commenced by the first mortgagee removed the syndicated mortgage from title (the syndicated mortgage being the second mortgage registered against the Project lands at that time). The power of sale proceedings again transferred title to a company controlled by Fortress, Fortress Kempenfelt Bay Developments Inc. ("FKBD").
[45] Mr. Rathore was a director and officer of both Fortress Developments and FKDB at the relevant times. Mr. Petrozza was an officer of Fortress Developments, a director of Fortress Capital, and a director and officer of FKDB at the relevant times. Mr. Rathore and Mr. Petrozza both have interests in Harmony Village-Lake Simcoe Inc., the corporation that held title to the land underlying the Project until title was transferred to FKDB under power of sale proceedings. Mr. Petrozza signed the transfer of title to FKDB on behalf of FKDB.
[46] There are no facts pleaded relating to any specific interactions between the proposed representative plaintiffs, Bryan Madryga and Eileen Wallace, and Mr. Rathore and Mr. Petrozza. The appellants' allegations against Mr. Rathore and Mr. Petrozza are virtually identical to those in the other three actions, except for the specific representations made by Mr. Rathore to Mr. Aversa in the Collier Centre Project. Also, the allegations relate to Mr. Rathore and Mr. Petrozza's positions both as directors and officers of Fortress and of FKBD, while the allegations in the other three actions relate to their positions as principals of Fortress alone.
C. Decisions Below
[47] The motion judge delivered four separate sets of reasons, repeating much of the factual background and legal framework of the claims in each. He dismissed the claims in negligence, misrepresentation and breach of fiduciary duty against Jawad Rathore and Vincenzo Petrozza without leave to amend in all four proposed class actions. He found that the pleadings in all four actions failed to plead material facts to show that their conduct was tortious in itself or that it exhibited a separate identity of interest from that of their corporations. He found that the pleadings did not disclose a reasonable cause of action against Mr. Rathore and Mr. Petrozza in their personal capacity.
[48] The motion judge also dismissed the actions against Empire Pace and Adi for enforcement of the mortgages on two bases, and refused to grant leave to amend. First, the appellants did not have standing to enforce the syndicated mortgages, as the mortgages are documents under seal to which the appellants are not parties. The sealed contract rule prevents them from enforcing the mortgages, because it prevents non-parties from suing on sealed contracts. Second, even if the appellants could step into the shoes of their trustees and sue to enforce the mortgages in equity, their rights would be no better than those of the trustees, who are barred by the standstill provisions in the mortgage documents from enforcing the mortgages without the written approval of prior-ranking secured lenders. The motion judge also found that it was unclear how a syndicated mortgage could be enforced in a class action where some of the investors in the mortgage loan might opt out.
[49] The motion judge concluded that no purpose would be served by granting leave to amend the pleadings because the appellants would already have pleaded the consent of the prior-ranking lenders if it existed, and they did not.
[50] Further, the motion judge concluded that it was clear from the documents incorporated into the pleadings that the standstill provisions contained in the mortgage documents had been adequately disclosed to the appellants and to the parties to the Loan Agreements. He also made a finding that no additional consideration from Empire Pace and Adi was necessary for the inclusion of the standstill provisions.
[51] On those bases, the motion judge concluded that the mortgages were not currently enforceable and dismissed the actions against Empire Pace and Adi without leave to amend.
D. Issues
[52] The appellants raise the following issues on this appeal:
(1) Did the motion judge err in law by striking out the personal claims against the two principals, Mr. Rathore and Mr. Petrozza, as disclosing no reasonable cause of action?
(2) Did the motion judge err in law by finding that the sealed contract rule prevents the appellants from enforcing the syndicated mortgages at common law?
(3) Did the motion judge err in law by finding that the appellants cannot enforce the syndicated mortgages in equity through a class proceeding because:
(a) it is plain and obvious that the standstill provisions bar the appellants from enforcing the syndicated mortgages in equity, and
(b) it is plain and obvious that the mortgages are unenforceable through a class proceeding because some investors may opt out?
E. Analysis
Standard of Review
[53] All parties agree that the standard of review on an appeal from a motion judge's order that strikes a claim under r. 21.01(1)(a) or (b) is the correctness standard.
(1) Did the motion judge err in law by striking out the personal claims against the two principals, Mr. Rathore and Mr. Petrozza, as disclosing no reasonable cause of action?
[54] The claims against the individual respondents sought to hold them responsible, as the directing minds of the Fortress Companies, for Fortress's alleged breach of contract, breach of fiduciary duty, misrepresentation, and negligence. The motion judge followed this court's decisions in Normart Management Ltd. v. West Hill Redevelopment Co., 37 O.R. (3d) 97 (C.A.), at pp. 102-3, and AGDA Systems International Ltd. v. Valcom Ltd., 43 O.R. (3d) 101 (C.A), leave to appeal ref'd, [1999] S.C.C.A. No. 124, at pp. 112-13, which in turn followed ScotiaMcLeod Inc. v. Peoples Jewellers Ltd., 26 O.R. (3d) 481 (C.A.), in holding that a director or officer of a corporation will not be personally liable for actions taken on behalf of the corporation unless some of their conduct is tortious in itself or exhibits a separate identity of interest from that of the corporation. He held that none of the four pleadings disclosed any such conduct.
[55] In ScotiaMcLeod, at pp. 490-91, Finlayson J.A. described the requirements for finding directors or officers personally liable:
The decided cases in which employees and officers of companies have been found personally liable for actions ostensibly carried out under a corporate name are fact-specific. In the absence of findings of fraud, deceit, dishonesty or want of authority on the part of employees or officers, they are also rare. Those cases in which the corporate veil has been pierced usually involve transactions where the use of the corporate structure was a sham from the outset or was an afterthought to a deal which had gone sour. There is also a considerable body of case-law wherein injured parties to actions for breach of contract have attempted to extend liability to the principals of the company by pleading that the principals were privy to the tort of inducing breach of contract between the company and the plaintiff: see Ontario Store Fixtures Inc. v. Mmmuffins Inc., 70 O.R. (2d) 42 (H.C.J.), and the cases referred to therein. Additionally there have been attempts by injured parties to attach liability to the principals of failed businesses through insolvency litigation. In every case, however, the facts giving rise to personal liability were specifically pleaded. Absent allegations which fit within the categories described above, officers or employees of limited companies are protected from personal liability unless it can be shown that their actions are themselves tortious or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own. [Emphasis added.]
[56] The appellants submit that the motion judge erred in his conclusion because the following seven types of allegations that were pleaded were sufficient in law to meet the ScotiaMcLeod test:
While Fortress illegally operated as an unlicensed mortgage brokerage and assumed but failed to meet the statutory duties of a mortgage brokerage under the Mortgage Brokerages, Lenders and Administrators Act, 2006, S.O. 2006, c. 29, Mr. Rathore and Mr. Petrozza failed to carry out their statutory duty to ensure that Fortress met its statutory obligations;
They breached their common law duty of care as well as their fiduciary and statutory duties that arose because Fortress took on the duties of a mortgage brokerage under the Act;
They knew or ought to have known about Fortress's pleaded breaches of contract, duty of care, and fiduciary duty;
Knowing that Fortress's breaches would likely cause the appellants significant harm, they took no steps to prevent that harm;
They spoke on behalf of Fortress at investment seminars and stressed the safety and security of the Fortress investments;
They were negligent and did not meet the standard of care expected of them in the circumstances; and,
They acted outside the scope of their duties to Fortress.
[57] I agree with the motion judge that these allegations do not provide any particulars of tortious conduct separate from that of the companies. Nor do any of the pleadings contain sufficient particularity to be able to identify any such conduct.
[58] The appellants also submit that because the pleading sets out numerous claims of fraud, deceit and dishonesty by Fortress and that the two directors and officers knew or ought to have known about it, their conduct of permitting it to occur fits within the test.
[59] The respondents say first, that this assertion was not made to the motion judge; and second, that there is no specific pleading of fraud, deceit or dishonesty on the part of the respondents. Again, I agree that without specifically pleaded allegations of fraud, deceit or dishonesty by the individual respondents, it is not possible to assess whether any such alleged misconduct can lead to a finding of personal liability.
[60] Finally, the appellants point to the fact that in ScotiaMcLeod, the court allowed the action to proceed against the two most senior officers of Peoples. Finlayson J.A. described the basis for the claim against the senior officers, at p. 495:
It is alleged against them that they were directly and personally involved in the marketing of the debentures and that they were involved in making certain representations personally which were relied on by the appellants. The appellants have also made an allegation of negligent misrepresentation against both of them personally.
[61] The appellants submit that the four proposed statements of claim describe similar actions by Mr. Rathore and Mr. Petrozza and that these actions made them "directly and personally involved" in Fortress's improprieties.
[62] With respect to this submission, only the Amended Amended Statement of Claim in the Collier Centre action contains a pleading alleging that the respondents made representations to one of the appellants. At paras. 116-18, the appellants plead:
Thereafter, Aversa was invited to several Fortress seminars, some or all of which featured Rathore and Petrozza as the speakers extolling the appeal of the particular Fortress investment.
Aversa attended at least one seminar at which Rathore spoke. Rathore talked about his history in the business, the quality of the investments and that the investments were safe and secure. He also spoke about Fortress' commitment to charitable endeavors.
Rathore stated Fortress was solicited by many developers but only dealt with the most experienced and best ones.
[63] There is, however, no pleading that Mr. Aversa relied on any representation made by Mr. Rathore. Nor is there a specific pleading of negligent or fraudulent misrepresentation by him, or that the representations were being made personally and not on behalf of Fortress.
[64] As there is no pleaded legal basis for a personal claim against the two principals, I would not give effect to this ground of appeal. I also agree with the motion judge that there is no basis to grant leave to amend. The pleading has been amended a number of times, and the law on this issue is clear. If there were any relevant allegations, they would have been made already; no purpose would be served by granting leave to amend: Piedra v. Copper Mesa Mining Corp., 2011 ONCA 191, 332 D.L.R. (4th) 118, at para. 98.
(2) Did the motion judge err in law by finding that the sealed contract rule prevents the appellants from enforcing the syndicated mortgages at common law?
[65] The relief the appellants claim against the respondents Empire Pace and Adi includes judicial sale of the lands underlying the two developments, the Ten88 Project and the Sutton Project, rescission of all agreements with respect to the appellants' investments in the projects, an equitable tracing order in respect of the investment funds Empire Pace and Adi received, payment of all principal and interest owing due to Empire Pace and Adi's default under the Loan Agreements, and damages for misrepresentation.
[66] Empire Pace and Adi moved for a declaration that the provisions of the syndicated mortgages prohibit the appellants from enforcing them and for an order dismissing the action against Empire Pace and Adi. The motion judge defined the issue between the parties as whether the appellants had standing to enforce the respective syndicated mortgages.
[67] The mortgages were entered into between Empire Pace and Mr. Sorrenti and Olympia Trust as trustees, and between Adi and Mr. Sorrenti as trustee. The appellants are not parties to the syndicated mortgages.
[68] The motion judge referred in his reasons to s. 13 of the Land Registration Reform Act, R.S.O. 1990, c. L.4, which provides that a mortgage that is not executed under seal has the same effect for all purposes as if it had been executed under seal. As a result, the sealed contract rule applies to the syndicated mortgages. That common law rule provides that only the signatories to a contract under seal may sue or be sued on it.
[69] The appellants argue that the motion judge erred in law by finding that the sealed contract rule applies to both disclosed and undisclosed principals. They argue that the rule only applies to undisclosed principals, and that because Empire Pace and Adi knew that the trustees were acting on behalf of the appellants and the other investors, they are disclosed principals. As such, the appellants may sue on the mortgages.
[70] I would not give effect to this argument. The sealed contract rule was recently affirmed by the Supreme Court of Canada in Friedmann Equity Developments Inc. v. Final Note Ltd., 2000 SCC 34, [2000] 1 S.C.R. 842. In that case, an agent and bare trustee for the undisclosed beneficial owners of property entered into a mortgage with the mortgagee, a corporate lender. When the mortgage went into default, the mortgagee sued the beneficial owners personally on the covenant given by the agent in the mortgage.
[71] In Friedmann, as in this case, the operation of s. 13 of the Land Registration Reform Act had the effect of making the mortgage a document under seal. The mortgagee asked the court to set aside the sealed contract rule and allow its action against the undisclosed principals to proceed. The court declined to do so. Instead it affirmed the rule.
[72] While the court discussed the rule in terms of its application to undisclosed principals, it is clear from the context of the court's discussion that the rule also applies to disclosed principals. The court began its explanation and analysis at para. 15 by stating the general rule in agency law as follows:
When a third party contracts with an agent and the contract is not under seal, the principal has the same rights and liabilities under the contract whether he or she was disclosed to the third party …Therefore undisclosed principals can sue and be sued in their own name on any simple contracts made on their behalf by their agents as long as those agents have acted within the scope of their delegated authority in so doing. [Emphasis added.]
[73] The general rule has been criticized because it allows people to sue one another on a contract even where one person is not named as a party to that contract. The court in Friedmann noted, however, that one could avoid the general rule's consequence either by expressly limiting liability to the named parties or by executing the contract under seal: at para. 18. One of the effects of executing a contract under seal, at common law, is that only a named party can sue on a covenant in the contract: at para. 20.
[74] The appellants' position is that while they were not named as parties to the syndicated mortgages, their specific identities and the fact that the syndicated mortgages were being held for their benefit was disclosed to Empire Pace and Adi because Empire Pace and Adi knew that the trustees were acting on behalf of investors and because they signed documents that identified each of the investors as a holder of a beneficial interest in the Loan Agreements. Whether that makes the appellants disclosed principals who were not made parties or undisclosed principals, the result must be the same. Had the contract not been executed under seal, as principals, they could have sued or been sued on it. The effect of the sealed contract rule is to both protect them from suit and preclude them from having the right to personally enforce the security at common law.
[75] The motion judge correctly found that the sealed contract rule prevents the appellants from suing to enforce the syndicated mortgages at common law.
(3) Did the motion judge err in law by finding that the appellants cannot enforce the syndicated mortgages in equity through a class proceeding?
[76] The motion judge acknowledged that in circumstances where a trustee who is a party to a sealed contract takes no steps to enforce the contractual obligations of the other party, the beneficiaries of the trust may enforce the rights of the trustee in equity by bringing the action and including the trustee as a party to the action.
[77] This right was recognized by the Supreme Court in Friedmann, where the court discussed the decision of the English Court of Appeal in Harmer v. Armstrong, [1934] 1 Ch. 65 (Eng. C.A.). Bastarache J. stated that the Harmer decision merely provides a procedural method for the beneficiaries of a trust to effectively force the trustee to enforce its rights under agreements under seal for their benefit: at para. 29. The equitable right is based on the law of trusts, not the law of contract, and therefore it does not constitute an exception to the sealed contract rule. Bastarache J. also explained that the equitable rule does not have the effect of creating a legal relationship between the beneficiary and the contracting third party. Therefore, the third party may not use the rule to sue the beneficiary, and, importantly for this case, when the beneficiary sues to enforce the contract, it is to enforce the agreement "according to its tenor" (emphasis added), meaning the beneficiary is asserting the trustee's rights and not his or her own: at paras. 28, 30.
[78] Based on his reading of the syndicated mortgages, the motion judge found that the trustees, having granted the specific standstill provisions in the respective syndicated mortgages, would not themselves be able to enforce those mortgages without the written consent of the prior-ranking mortgagees in accordance with the terms of the standstill provisions. The standstill provisions read:
13. Priority, Standstill, Forbearance and Postponement
The Chargee acknowledges that the Chargor will be arranging for additional financing to facilitate the development of the project on the Lands which shall include but not be limited to soft and hard cost financing, marketing financing, additional equity and surety bonding/financing to be secured by real estate charge(s) and personalty [and any and all renewals and replacements thereof] [1] (the "Senior Security"). The current amount of the loans to be evidenced by the Senior Security are $100,000,000 [2] (the "Total Senior Security") which Total Senior Security shall increase from time to time as may be necessary to reflect any necessary adjustments to the project as to scope of the project or anticipated costs (the "Total Adjusted Senior Security"). The Chargee agrees with the Chargor as follows: […]
C. STANDSTILL/FORBEARANCE
- The Chargee hereby covenants and agrees that from and after the date hereof, to and until the date of repayment of the outstanding indebtedness secured under the Total Adjusted Senior Security and the complete discharge thereof (which period of time is hereinafter referred to as the "Standstill Period"), the Chargee shall not take, direct, initiate, pursue or otherwise participate in (either directly or indirectly) any collection, realization or enforcement proceedings or remedies against (or otherwise affecting) the Chargor (nor against any party or parties who may be entitled to claim contribution or indemnity against the Chargor), nor against the Lands (or any portion thereof), nor against any chattels, fixtures, rents, leases and/or other personal property situate upon, within, or affixed to, or otherwise relating to the Lands or the Condominium complex (or any portion thereof), as a result of any breach, default or non-compliance with any covenants, conditions, representations, warranties, terms and/or provisions of this Chargee (or any portion thereof) save and except any enforcement proceedings or remedies first approved of in writing by all of the holders of the Total Adjusted Senior Security, which approval may be unreasonably withheld.
[79] The motion judge rejected the appellants' submission that in an equitable enforcement action, the appellants could challenge the interpretation and enforceability of the standstill provision. He further found that, in any event, there would be no merit to any such challenge: the standstill provision's meaning is plain, and it requires the prior consent of the senior security holders to any proceeding enforcing the lenders' security. Finally, he found that based on the pleadings and the documents incorporated by reference into the pleadings, the standstill provision was adequately disclosed to the parties to the Loan Agreements as well as to the appellants themselves.
(3) (a) Is it plain and obvious that the standstill provisions bar the appellants from enforcing the syndicated mortgages in equity?
[80] As Brown J.A. recently explained in Brozmanova v. Tarshis, 2018 ONCA 523, at paras. 10-13, there are two types of procedures available under the Rules of Civil Procedure to dispose of a contested claim. One involves leading evidence to prove or disprove the claim as pleaded; the other is to dismiss all or part of the claim on the basis that, regardless of the evidence, the claim cannot succeed as a matter of law.
[81] In my view, the motion judge erred by proceeding to decide the equitable claims for mortgage enforcement using r. 21 (among the latter type of law-based procedures), and by dismissing them as bound to fail in law.
[82] In drawing his conclusion that the claims for equitable enforcement of the mortgages against Empire Pace and Adi disclose no reasonable cause of action, the motion judge made three findings which required an evidentiary basis: 1) that properly interpreted, the standstill provision in the syndicated mortgages barred the appellants from enforcement; 2) that the standstill provision in the syndicated mortgages was adequately disclosed to the parties to the Loan Agreements; and 3) that the standstill provision in the syndicated mortgages was adequately disclosed to the appellants.
[83] Regarding the first finding, the Supreme Court of Canada held in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 50, that the interpretation of a contract is a question of mixed fact and law. Therefore, a party is entitled to lead relevant evidence regarding the surrounding circumstances of the contract's formation or its context to aid in its interpretation. Interpreting the standstill provision in this case is no exception: to determine its effect on the appellants' ability to enforce the syndicated mortgages in equity in the particular circumstances of this case, relevant evidence may be available.
[84] The second two findings are clearly factual. The motion judge relied on the documentary record before him in making those findings, but again, the appellants are entitled to lead evidence both to aid in the interpretation of those documents and to prove what was disclosed and when.
[85] Even without further evidence, with respect, the motion judge's finding that the standstill provisions were adequately disclosed does not bear scrutiny. A review of the relevant documents shows that while a standstill provision is referred to in most of the key documents, the various references to a standstill provision are worded in different ways: for example, the Adi Loan Agreement contains a provision in which the trustee, Mr. Sorrenti, agreed "to enter into such standstill agreements as shall be reasonable in the circumstances" (emphasis added).
[86] Since the effect of the standstill provisions, on their face, is to make the appellants' security essentially unenforceable and ensure that they will never recover their investment in the event of default, one could argue that the standstill provision that was ultimately granted in the syndicated mortgages was not reasonable in the circumstances or that its actual effect was not disclosed to the investors. Whether any non-disclosure would affect the enforceability of the standstill provision in equity by or on behalf of the trustees will be an issue of law to be determined once the evidentiary findings are made.
(3) (b) Is it plain and obvious that the mortgages are unenforceable through a class proceeding because some investors may opt out?
[87] The motion judge did not find that it was plain and obvious that the claim could not succeed because the appellants have a very small interest in the loans to Empire Pace and Adi and because some investors could opt out of the proposed class action. He only raised the issue. In my view, the determination of this issue is premature and not a reason to strike the claim on a r. 21 motion.
Other Grounds
[88] The appellants have pleaded relief other than enforcement of the syndicated mortgages against the Empire Pace and Adi respondents. The other relief they seek includes: payment of all principal and interest owing under the Loan Agreements (which are not under seal themselves, but any enforcement of which may be affected by the existence of the sealed syndicated mortgages); rescission of all agreements respecting their investments in the syndicated mortgages; equitable tracing of all of their investment funds; and damages for Empire Pace and Adi's misrepresentation of certain information respecting the investments, including the value of the mortgaged properties. The motion judge dismissed the actions against Empire Pace and Adi without addressing the viability of any of these claims. The only one he referred to was the rescission claim, which he assumed the appellants would elect to abandon if they ultimately chose to enforce the syndicated mortgages. As these claims were not struck out by the motion judge, they will remain in the Empire Pace and Adi actions together with the equitable mortgage enforcement claims.
F. Conclusion
[89] For the reasons outlined above, I would uphold the motion judge's decision to strike the claims against Mr. Rathore and Mr. Petrozza without leave to amend. However, I would allow the appeal with respect to the balance of the orders.
G. Costs of the Motions
[90] The appellants also sought to appeal the costs orders made in favour of the Empire Pace and Adi respondents. As I would allow the appeal in respect of those claims, I would also set aside the costs awards.
H. Costs of the Appeal
[91] It was agreed at the hearing that the parties would attempt to agree on the costs of the appeal following release of these reasons.
[92] If the parties are unable to agree on the costs of the motion or the appeal, they may make brief (maximum three pages) written submissions to the court. The appellants' submissions shall be made within three weeks following release of these reasons and the respondents' within two weeks thereafter.
Released: January 31, 2019
"K. Feldman J.A."
"I agree. G.R. Strathy C.J.O."
"I agree. David Brown J.A."
[1] The language in the square brackets is only included in the Adi mortgage document, registered against the Sutton Project lands.
[2] This amount is from the Empire Pace mortgage document, registered against the Ten88 Project lands. The amount included in the equivalent provision in the Adi mortgage document, registered against the Sutton Project lands, is $45,000,000.
