Court File and Parties

COURT FILE NO.: CV-16-00547435 MOTION HEARD: 20170405 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Norman Wong, Plaintiff AND: Shane Smith and Nadine Smith, Defendants

BEFORE: Master B. McAfee

COUNSEL: Charles Haworth for the Plaintiff Shane Smith and Nadine Smith, Defendants, in Person Scott Rosen for the Proposed Defendants, Joseph Sereda and Sereda & Sereda James Riewald for National Holdings Ltd. (present for part of motion only)

HEARD: April 5, 2017

REASONS FOR DECISION

Nature of this Motion

[1] This is a motion brought by the plaintiff for leave to amend the statement of claim and leave to issue a certificate of pending litigation (CPL) against two properties: 795 Spillsbury Drive, Peterborough (the Spillsbury property) and 31 Wispi Shore Road, R.R. #5, Lindsay (the Wispi property) (collectively the properties).

Procedural History of this Motion

[2] On February 26, 2016, the plaintiff sought to “walk in” an opposed motion, brought on short notice, for leave to issue a CPL against the properties. The parties were directed to my ex parte court. While waiting to be reached, counsel for the plaintiff and counsel for the defendants agreed to an interim order that the defendants not sell, transfer or otherwise encumber the properties pending the hearing of the motion for a CPL or the agreement of the parties and/or further court order. The motion for a CPL was adjourned sine die on consent.

[3] On March 2, 2016, the plaintiff sought to “walk in” another motion, brought on short notice, for leave to issue a CPL against the properties and the additional relief of leave to amend the statement of claim. The parties were directed to my regular motions court. The reason for the urgency was that on February 26, 2016, a mortgage in the amount of $750,000. was registered on the Wispi property in favour of defendants’ counsel. The defendants sought an adjournment of this motion in light of the short notice. I granted the adjournment on the term that leave be granted leave to issue a CPL on the properties on an interim basis.

[4] The motion was subsequently adjourned a number of times as a result of health issues of then defendants’ counsel. The last adjournment was granted as a result of a new version of the proposed amended statement of claim having been provided to the defendants shortly before the February 28, 2017, return date.

[5] At the return of the motion on April 5, 2017, the defendants were not represented by counsel and the proposed defendants, Mr. Sereda and Sereda & Sereda were represented by Mr. Rosen. No further adjournments were sought by any party.

[6] No factum or case law were filed by the defendants or proposed defendants. No cross-examinations took place.

[7] Counsel for the first mortgagee on the Wispi property, National Holdings Ltd. attended for morning of April 5, 2017, only. It was agreed as between the plaintiff and National Holdings Ltd. that National Holdings Ltd. would not take a position on this motion without prejudice to the ability of National Holdings Ltd. to bring a motion to discharge the CPL at a later date, if necessary. Based on that agreement between the plaintiff and National Holdings Ltd., counsel for National Holdings Ltd. did not return to court following the lunch recess.

Motion for Leave to Amend the Statement of Claim

[8] The proposed defendants do not oppose the motion for leave to amend the statement of claim.

[9] The submissions of the current defendants focused on the merits of the proposed amendments and not any prejudice arising as a result of the amendments.

[10] Rule 26.01 of the Rules of Civil Procedure provides:

26.01 On motion at any stage of an action the court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.

[11] Having regard to the material before me and the submissions of the parties, the proposed defendants not opposing, I satisfied that no prejudice will result that could not be compensated for by costs or an adjournment.

[12] Leave is accordingly granted to amend the statement of claim in the form attached to the letter from plaintiff’s counsel dated February 23, 2017.

Leave to Issue a Certificate of Pending Litigation

[13] Pursuant to Rule 42.01 and section 103 of the Courts of Justice Act, R.S.O. 1990, c.C.43, the plaintiff seeks an order granting leave to issue a CPL in respect of the properties.

[14] In the statement of claim, including the amendments for which I have granted leave, the plaintiff alleges fraudulent conveyances with respect to the properties. In the alternative, the plaintiff alleges a resulting and/or constructing trust with respect to the Wispi property.

[15] On a motion for leave to issue a CPL the court must exercise its discretion in equity and look at all relevant matters between the parties.

[16] As stated by Master Muir in United States (Securities & Exchange Commission) v. Boock, 2010 ONSC 2340 (Ont. Master) at para 9:

The courts of this province have long held that an action to set aside a fraudulent conveyance is an action in which an interest in land is brought into question. See Bank of Montreal v. Ewing (1982), 35 O.R. (2d) 225 (Ont. Div. Ct.) at paragraph 1.

[17] Master Muir went on to review the two lines of authority concerning the test to be applied when determining whether leave ought to be granted to issue a CPL in an action to set aside a fraudulent conveyance:

…The first arises from the decisions of this court in Vettese v. Fleming, 1992 CarswellOnt 454 (Ont.Gen.Div.) and Nordic Insurance Co. of Canada v. Harkness, [2001] O.J. No. 1123 (Ont.S.C.J.). Those cases articulate the test as requiring the motion court to find, on the evidence before it, a prima facie case of fraud and that a trial judge could conclude that the impugned transfer was made with the intention to defeat the creditors and for no real consideration.

In Grefford v. Fielding, [2004] O.J. No. 1210 (Ont. S.C.J.) this court set out a somewhat different test, namely that the moving plaintiff must satisfy the court that its claim has a high probability of success; that the transfer was made with the intent to defeat or delay creditors (evidence that the transfer was for less than fair market value lightens this burden); and that the balance of convenience favours the issuing of a CPL in the circumstances. See Grefford at paragraph 26.

[18] The plaintiff was an investor with Synergy Group (2000) Inc. (Synergy) in 2005 and 2006. The defendant Shane Smith was one of the principals of Synergy. The plaintiff alleges that Synergy was marketing a tax scheme that was found to be a sham. The defendants deny that the plaintiff was defrauded and submit that the allegations of fraud have not been proven and that the matter is currently before the Federal Court of Canada.

[19] On July 4, 2014, the plaintiff obtained default judgment against Shane Smith, Synergy and Jean Breau in the amount of $134,966.74 plus costs in the amount of $5,438.65. Although the defendant Shane Smith takes issue with the judgment and submits that the plaintiff’s obtaining of the judgment was improper, the defendant has not taken steps to set aside the judgment.

The Spillsbury Property

[20] The Spillsbury property was purchased by the defendants Shane Smith and Nadine Smith, jointly on November 16, 2000. The defendants Shane Smith and Nadine Smith are spouses of one another. The Spillsbury property was held jointly until Shane Smith transferred his interest to Nadine Smith on October 18, 2004. The consideration was $1.

[21] In addition, also as stated by Master Muir in United States (Securities & Exchange Commission), the existence of one or more “badges of fraud” may give rise to an inference of an intent to defraud, in the absence of an explanation by the defendants.

[22] In Indcondo Building Corp. v. Sloan, 2014 ONSC 4018 (Ont. S.C.J.) at paragraph 52, badges of fraud are listed and include grossly inadequate consideration, embarking on a hazardous venture and a close relationship between the parties, all of which exist in the case before me. I was not referred to any evidence of the defendants explaining the circumstances surrounding the transfer of the Spillsbury property.

[23] Although the plaintiff’s investments with Synergy were after the date of transfer of the Spillsbury property, if there was an intention to defeat creditors, it does not matter if the intention was to defeat present or future creditors (Indcondo at paragraph 48).

[24] In my view, the plaintiff has satisfied his onus with respect to the Spillsbury property regardless of which line of authority is applied. There is sufficient evidence before me to establish a prima facie case of fraud and sufficient evidence upon which a trial Judge could conclude that the transfer of the Spillsbury property was made with the intention to defeat creditors and for no real consideration. The action as it relates to the Spillsbury property has a high chance of success and the balance of convenience favours the granting of leave to issue a CPL. Leave is accordingly granted to issue a CPL with respect to the Spillsbury property.

The Wispi Property

[25] The Wispi property was purchased by the defendant Nadine Smith on July 26, 2005. The defendants Shane Smith and Nadine Smith reside at the Wispi property as their matrimonial residence.

[26] The defendant Shane Smith was never on title on the Wispi property, although his name had been on the Transfer/Deed of Land and was crossed out prior to registration. There is no registered transfer from Shane Smith to Nadine Smith.

[27] As noted above, on February 26, 2016, a mortgage in the amount of $750,000 was registered on the Wispi property in favour of Sereda & Sereda. It is the defendants’ position that the mortgage was registered to secure Mr. Sereda’s legal fees. The motion for a CPL on the Wispi property was served on or about February 23, 2016. There is evidence before me that the mortgage had been in discussion since August 18, 2015, and that the defendant Nadine Smith had obtained independent legal advice concerning the mortgage on February 19, 2016. The mortgage was not registered until 6 months after it was first discussed and after service of the motion for a CPL.

[28] There is evidence before me concerning a discussion between counsel on February 26, 2016, while waiting for the “walk in” motion to be reached. It is Mr. Sereda’s evidence that he specifically told Mr. Radnoff that the defendants had signed a mortgage to secure his fees, that the mortgage was in the process of registration and that he did not know exactly when registration would take place. It is Mr. Radnoff’s evidence that Mr. Sereda told him he intended to register a mortgage at a later date and Mr. Sereda asked that the motion be adjourned. It is Mr. Radnoff’s evidence that he advised Mr. Sereda that the plaintiff would not agree to any mortgage for legal fees to be registered prior to registration of the CPL. Mr. Radnoff’s evidence is that at no time did Mr. Sereda mention while they were in court that Mr. Sereda was in the process of registering a $750,000. mortgage. Mr. Radnoff deposes that had he known about the mortgage when he was in court, Mr. Radnoff would have objected to the registration of the mortgage and asked for an order that Mr. Sereda be prevented from registering the mortgage. It is not the court’s role on an interlocutory motion for a CPL to assess credibility or decide disputed issues of fact.

[29] In addition to relying on allegations of fraudulent conveyances, the plaintiff also alleges that Shane Smith is an equal owner of the Wispi property on the basis of a resulting and/or constructive trust. The plaintiff seeks a tracing of funds advanced to purchase the Wispi property. It is alleged that the Wispi property was purchased from funds that the defendants unlawfully received from the tax scheme. In this regard, the plaintiff relies on the decision of Cambone v. Okoakih, 2016 ONSC 792 (Ont. S.C.J.). As stated by Justice Gray in Cambone at paragraphs 172-174:

Where the money to purchase an asset is furnished by one person, but the asset is placed in the name of another, the doctrines of resulting trust and constructive trust come into play.

Resulting trusts can arise in a number of ways, but of relevance here is where an asset is purchased by one person and is placed in the name of another. In that situation, it is presumed that the recipient holds his or her interest in trust for the person who purchased the asset and provided the funds for it, unless it was intended that there be a gift. The onus is on the recipient to prove the intention was to make a gift. Where there is more than one contributor to the purchase price, it is presumed that the trust is in favour of all of them. See Water’s Law of Trusts in Canada, (4th Ed., Carswell, 2012), chapter 10, pp. 394-475.

A constructive trust can also arise in a number of ways, but fundamentally it has been applied to prevent unjust enrichment, which arises where there has been enrichment of one party; corresponding deprivation to another; and no juristic reason for the enrichment and corresponding deprivation: see Waters, at pp. 534-540.

[30] There is a triable issue with respect to the source of funds to purchase the Wispi property. The Wispi property was purchased for $425,000.00. On this motion it is the defendants’ evidence that mortgage funds in the amount of $390,000.00 were advanced by the mortgagee 1427805 Ontario Inc. on closing. In another court proceeding, Kheen Investment Ltd. v. Smith, 2016 ONSC 3998 (Ont. S.C.J.) the Smiths took the position that no monies were advanced by 1427805 Ontario Inc. There is evidence before me that 1427805 Ontario Inc. had the same registered head office as Synergy. I was not referred to evidence concerning the source of the balance of the funds to purchase the Wispi property.

[31] Having regard to the record before me there is sufficient evidence before me to allow me to conclude that there is a triable issue with respect to an interest in the Spillsbury property on the basis of a resulting and/or constructive trust. I am satisfied that a declaration of a constructive and/or resulting trust and a tracing of funds are possible remedies at trial. Leave is accordingly granted to issue a CPL with respect to the Wispi property. In these circumstances it is not necessary for me to also determine whether the test for granting a CPL on the Wispi property has also been met on the further basis of alleged fraudulent conveyances by way of transfer and or mortgage.

Costs

[32] If any party seeks costs and if after reasonable attempts to agree on costs the parties are unable to agree, the parties may make arrangements to return before me to speak to the issue of costs by scheduling a re-attendance on a mutually convenient date to the parties, counsel and the court through the motions scheduling unit. Any re-attendance shall be scheduled, not necessarily heard, within 60 days of today’s date.

Order

[33] Order to go as follows:

1. Leave is granted to amend the statement of claim in the form of the draft amended statement of claim attached to the letter from plaintiff’s counsel dated February 23, 2017;
2. Leave is granted to issue a CPL on the properties.

I have signed an order accordingly.

Master B. McAfee Date: May 19, 2017