Court File and Parties
COURT FILE NO.: CV-18-00599707 DATE: 20190626 SUPERIOR COURT OF JUSTICE – ONTARIO
RE: Lukasz Orwinski, Robert Kazanecki, Roma Budaniw, Ewa Kocan, Jan Kocan, Janina Levtchouk, Aleksander Mrozowski, Tadeusz Mierzejewski, Marta Orwinska, Kinga Orwinski, Krzysztof Orwinski, Anna Orwinski, Marc Podell, Tadeusz Siwon and Malgorzata Siwon, Plaintiffs
AND:
Hi‑Rise Capital Ltd., 54 Shepherd Road Inc. and 60 Shepherd Road Inc., Defendants
BEFORE: J.E. Ferguson J.
COUNSEL: Jameel Madhany and Lindsay A. Woods, for the Plaintiff John Birch and Kate Byers, for the Defendant Hi-Rise Capital Ltd. Anu Koshal, for the Defendants 54 Shepherd Road Inc. and 60 Shepherd Road Inc.
HEARD: June 11, 2019
Endorsement
1All parties seek summary judgment of this action. It is an appropriate summary judgment motion. The same issues are behind all of the parties’ motions and cross‑motions.
The Plaintiffs’ Position
2In 2015, the plaintiffs collectively loaned $1,475,500 to Hi-Rise Capital Ltd. (“HRC”) pursuant to the Loan Participation Agreements (“LPAs”) between each plaintiff and HRC for participation in a syndicated (subordinated) mortgage.
3HRC is a mortgage broker and administrator, and raises capital from individual investors.
4Each of the loans had a four year term and was secured by a second mortgage on a property in Oakville and the loans provided a rate of 10% interest per year. The plaintiffs also entered into Mortgage Administration Agreements (“MAAs”) with HRC through which they agreed to participate in the syndicated mortgage that HRC provided to 54 and 60 Shepherd Road Inc. (“54 Shepherd”). Under the MAAs, HRC was the trustee with respect to the second mortgage for each plaintiff.
5The syndicated mortgage was intended to act as pre-construction financing for a residential development project in Oakville being developed by 54 Shepherd.
6The LPAs contain an early redemption clause. The plaintiffs submit that they are entitled to demand early redemption of their loans subject to a redemption fee and return of interest paid to them. The section reads as follows:
3. Early Redemption of Participant’s Participation
The following redemption fees shall apply to early redemption of any amount of the Participant’s Participation:
i. On or before the first twelve (12) months from the date HRC receives the Participant’s Participation, if the Participant wants to redeem the Participant’s Participation, the Participant will pay to HRC a redemption fee equal to twenty percent (20% of the amount redeemed);
And in addition to the redemption fees described in this Section 3, the Participant shall pay to HRC an amount equal to the sum of all interest payments received by the Participant relating to the amount redeemed.
7On May 11, 2018, the plaintiffs demanded early redemption of their investment with HRC. Their position is that HRC is obligated to redeem and that HRC is responsible for the payment to them.
8HRC has refused to honour the redemption provision. HRC is contractually obliged to repay the loans. Moreover, in the interim, some of the plaintiffs’ loans have matured. HRC has not redeemed any of the loans despite its contractual obligation to do so. The plaintiffs submit that HRC is in breach of the LPAs.
9The plaintiffs also submit that HRC is obliged as their fiduciary to take steps to enforce the second mortgage. I note that this is not pleaded in the statement of claim nor the amended statement of claim and it is therefore not appropriate to deal with this submission.
10The plaintiffs further submit that, if it is found that HRC is not obligated to repay them, it is then 54 Shepherd’s responsibility to do so as the mortgagor and recipient of the funds.
11The plaintiffs also submit that they have standing to bring their claims (even those whose participation was done using their registered funds) and that the action of Marc Podell (“Podell”) is not res judicata or an abuse of process.
HRC’s Position
12HRC brings this cross-motion for an order granting summary judgment in its favour and dismissing the plaintiffs’ claims against it.
13HRC submits that there are three bases upon which summary judgment should be granted in its favour and some or all of the plaintiffs’ claims ought to be dismissed:
(i) the contractual provision (section 3) relied upon by the plaintiffs does not impose any positive obligation on HRC to provide early redemption of their mortgage loans and, consequently, HRC has not breached any contractual obligations that it may owe to the plaintiffs;
(ii) all but one plaintiff lacks standing to bring some of the claims advanced against HRC because the plaintiff’s investment was done using their registered plans (RRSPs and TFSAs); and
(iii) the claim of Podell is res judicata or an abuse of process.
14With respect to the first submission, pursuant to the contractual provisions, there is no positive obligation on HRC to redeem. In any event, HRC has not received the requisite funds from the borrower (54 Shepherd) under the syndicated mortgage with which it could pay the plaintiffs. In addition, as an administrator under the syndicated mortgage, HRC has no right to enforce that mortgage absent the consent of the first mortgagee, which has not been provided. Further, there is a postponement of interest from HRC to First Ontario (first mortgagor) and a Subordination and Standstill Agreement between HRC and First Ontario. Under this agreement, HRC agreed to subordinate and postpone the syndicated mortgage and acknowledged the full priority of the first mortgage over 54 Shepherd.
15Each of the plaintiffs have acknowledged receiving and signing detailed disclosure statements received through their broker, which clearly disclosed the risks associated with their participation in the syndicated mortgage. The repayment of their loan was contingent on the successful development of the project, the generation of sale proceeds, and the full payment of prior-ranking encumbrances.
16With respect to the second submission all the plaintiffs (except one) are not the legal owners of all of their mortgage loans, since their participation was made by a registered plan administrator and trustee at their direction and on behalf of a trust governed by their registered plans. Consequently, those plaintiffs do not hold those mortgage loans in their own names and are not the legal owners of those loans. None of the plaintiffs have received authorization from the administrator and trustee of their registered plan (i.e., the legal owner of their mortgage loan) to commence this action.
17With respect to the third submission, Podell previously commenced and settled two actions against HRC and the other defendants in small claims court. Those actions relate to Podell’s participation in the same syndicated mortgage and he advanced similar claims to those advanced in this action. When he settled the earlier actions (in respect of which HRC agreed to waive its costs as part of the settlement), Podell should have informed HRC of his intention to bring further claims if, in fact, he wished to be able to pursue such claims despite the dismissal of the earlier litigation. However, Podell did not do so. Podell’s claims in this action are, therefore, res judicata or an abuse of process.
54 Shepherd’s Position
1854 Shepherd brings this cross‑motion for an order granting summary judgment in its favour and dismissing the plaintiffs’ claims against it.
1954 Shepherd is the developer of the OpArts Lofts, a ten-storey, 201 unit condominium building located at 54 and 60 Shepherd Road in Oakville.
20The plaintiffs are investors who entered into the LPAs and MAAs with HRC through which they agreed to participate in the syndicated mortgage that HRC provided to 54 Shepherd.
2154 Shepherd submits that there is no cause of action against it. This is because the plaintiffs do not plead that Shepherd is a party to the LPAs, because it is not. 54 Shepherd has no obligations under the LPAs. Further, if 54 Shepherd did have any such obligations (which it denies), the plaintiffs are not entitled to an early redemption under the LPAs for the same reasons as are submitted by HRC.
22On this motion, each of the plaintiffs have sworn an affidavit stating that they “entered into a Mortgage Administration Agreement and Loan Participation Agreement… with Hi-Rise Capital Ltd.”. None of the plaintiffs have provided any evidence that they have any contractual relationship with 54 Shepherd.
23In R. v. Imperial Tobacco Ltd., 2011 SCC 42, the Supreme Court of Canada held that in order to establish a cause of action against a party, a plaintiff must plead a reasonable cause of action against that party:
It is incumbent on the claimant to clearly plead the facts upon which it relies in making its claim. A claimant is not entitled to rely on the possibility that new facts may turn up as the case progresses. The claimant may not be in a position to prove the facts pleaded at the time of the motion. It may only hope to be able to prove them. But plead them it must. The facts pleaded are the firm basis upon which the possibility of success of the claim must be evaluated. If they are not pleaded, the exercise cannot be properly conducted. [1]
24The plaintiffs have failed to plead any cause of action as against 54 Shepherd. The plaintiffs are seeking to enforce an early redemption of their investments pursuant to section 3 of the LPAs, but there is no allegation that 54 Shepherd is a party to the LPAs; no allegation that 54 Shepherd has an obligation to provide an early redemption under section 3 of the LPAs; and no allegation that 54 Shepherd is otherwise bound by the LPAs.
2554 Shepherd submits that any suggestion that it is responsible for the redemption “is at odds with a plain reading of the early redemption clause, which does not make reference to 54 Shepherd”. They also claim that “[i]t is commercially absurd to read into the clause an obligation that the plaintiffs recover from a third party.”
26In Asset Based Lending in Canada, the authors confirm that in the type of commercial agreement at issue here (a LPA), investors have no privity of contract and cannot enforce any rights as against the borrower:
A participation is the acquisition by a third party, from the lender, of an interest in a loan… The lender is the “lead” and the third party acquiring the interest in the loan is the “participant.” The relationship is frequently formalized by an agreement in writing known as a participation agreement….
Generally, there exists no relationship between the borrower and the participant that is enforceable directly by the participant... [2]
2754 Shepherd makes the same submissions as HRC regarding Podell.
Issue 1: Are the Plaintiffs Entitled to an Early Redemption
28The plaintiffs are not entitled to an early redemption. The LPAs, read together with the disclosure forms that each plaintiff signed before making their investment, make it clear that the plaintiffs willingly assumed the risks inherent in this type of investment. There is no unqualified right to redeem. To find that the entire agreement clause precludes reliance on the disclosure forms would also be “commercially absurd”.
29The Supreme Court of Canada has held that the aim of contractual interpretation is to determine the intentions of the parties at the time the contract was formed, having regard to the language of the agreement and the entire factual matrix in which it was formed. [3] The relevant principles were summarized by the Court in Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673:
When interpreting a contract, the court aims to determine the intentions of the parties in accordance with the language used in the written document and presumes that the parties have intended what they have said. The court construes the contract as a whole, in a manner that gives meaning to all of its terms, and avoids an interpretation that would render one or more of its terms ineffective. In interpreting the contract, the court must have regard to the objective evidence of the “factual matrix” or context underlying the negotiation of the contract, but not the subjective evidence of the intention of the parties. The court should interpret the contract so as to accord with sound commercial principles and good business sense, and avoid commercial absurdity. [4]
30I agree that the plaintiffs’ claim is based on a narrow interpretation of section 3 of the LPAs which they claim gives them an unqualified right of redemption. They ignore the contract as a whole, including other relevant provisions of the LPAs, as well as the factual matrix in which the LPAs were signed (including the disclosure forms which clearly set out and emphasized the risks behind the investment). Section 11 of the LPAs sets out that HRC is the trustee and administrator, not the borrower. HRC receives and disburses money as administrator and trustee and can only pay out the funds that it has. HRC has received no further funds from 54 Shepherd. Under Section 11, the plaintiffs also acknowledged that HRC has not guaranteed the repayment or their participation. When this is taken into account, it is clear that the parties did not intend to grant investors an unqualified right of redemption. The “officious bystander” would think that the only reasonable objective interpretation of section 3 was that it was subject to the disclosed risks behind the investment; otherwise, what was the purpose behind the high risk disclosure?
31Prior to signing the LPAs, each plaintiff reviewed and signed the two forms prepared by the Financial Services Commission of Ontario: an Investor/Lender Disclosure Statement for Brokered Transactions (Form 1) and an Investor/Lender Disclosure Statement for Brokered Transactions – Addendum for Construction and Development Loans (Form 1.1) (collectively, the “disclosure forms”). The plaintiffs expressly acknowledged in the disclosure forms that they understood that their investments were not guaranteed and that the risk of their investment was commensurate with the return (in this case, a fixed interest rate of 10% per annum – well above the market rate). These forms state:
Caution
All Mortgage Investments carry a risk.
In general, the higher the rate of return, the higher the risk of the investment. Inexperienced investors are not advised to enter into mortgage investments.
This mortgage investment cannot be guaranteed by the mortgage brokerage. If you are not prepared to risk a loss, you should not consider mortgage investments.
The mortgage brokerage cannot make payments to you except from payments of principal and interest made by the borrower under the mortgage. Therefore, the mortgage brokerage cannot continue mortgage payments to you if the borrower defaults.
If this investment is for a mortgage to fund a development, construction, or commercial project, the repayment of this investment may depend on the successful completion of the project, and its successful leasing or sale.
If you are one of several investors in this mortgage, you may not be able to enforce repayment of your investment on your own if the borrower defaults.
32The disclosure forms are not just part of the factual matrix in which the LPAs were signed; they are a condition precedent for them. These forms are required by law to “provide the prospective investor/lender with important information” about the investments. The information in the forms also “must be disclosed at least two business days” before the investment is made, so investors have time to consider the risks and benefits of their investment.
33The plaintiffs claim that “the disclosure forms do not form part of the LPAs” and “do not have any contractual force as related to the plaintiffs’ right to early redemption of the loans”. This is incorrect. The Court of Appeal for Ontario has held that where an agreement involves the execution of multiple contracts, the interpretation of one agreement must be considered in light of the terms of all of the agreements:
While the Mutual Undertaking was not signed at the same time as the Asset Purchase Agreement, the commitments it contains were contemplated in the latter Agreement and formed part of the same global transaction. In these circumstances, the court must have regard not only to the language of the particular contract that is being interpreted (the Mutual Undertaking or the Non-Competition covenant), taken as a whole, but to the surrounding contracts as well. [5]
34These disclosure forms are part of the “larger composite whole” of the agreement. [6] They define the “contours of the exact bargain between the parties”. [7]
35In addition to the disclosure forms, other provisions of the LPAs make it clear that the plaintiffs’ investments are not guaranteed, that their interest payments may be deferred, and that repayment of their loans will be subordinate to prior charges. Each plaintiff expressly acknowledged these risks in section 1 of the LPAs:
1. Acknowledgments of the Participants
i. The Participant [ i.e., the investor] understands that sometime in the future, the Borrower will renew or replace the first charge/mortgage on the properties…
ii. The Participant understands that during the course of the Project, the Borrower anticipates obtaining additional construction financing secured by the Property which is expected to take priority to the first charge/mortgage, changing its position to a second charge/mortgage.
iii. The Participant understands, consents, and agrees that the other charges/mortgages and/or development agreements may be registered in priority to the first/second charge/mortgage against the Property….
iv. The Participant hereby confirms, understands, and agrees that the second charge/mortgage in which the Participant has invested shall be required to postpone and standstill to prior charges/mortgages if required, in priority financing….
vi. The Participant hereby confirms, understands and agrees that HRC may elect to defer the interest payment payable to the Participant and capitalize interest payments until deemed reasonably necessary…
vii. The Participant hereby confirms, understands and agrees that the second charge/mortgage in which the Participant has invested shall be required to postpone and standstill to permit the registration of certain agreements….
36To focus narrowly on the language of section 3 of the LPAs is contrary to fundamental principles of contractual interpretation with regard to the contracts as a whole and the underlying factual matrix. It is clear that the LPAs do not provide investors with a guaranteed right of redemption. There were risks associated with these investments, all of which were fully disclosed to the plaintiffs. The plaintiffs expressly acknowledged and assumed these risks in exchange for the chance to obtain above-market interest on their investments. I agree that now that these risks have materialized, the plaintiffs are trying to re-write the bargain between the parties and force an early redemption, contrary to the clear terms and intention of the agreements.
Issue 2: Standing
37The issue is whether the plaintiffs have standing to bring the action with respect to the fact that all but one have used or partly used their registered plans to fund the investment. In view of the fact that I have ruled that the plaintiffs’ action is dismissed because there is no mandatory right of redemption, I need not rule on this complex issue.
Issue 3: Estoppel and Res Judicata with respect to Podell
38Issue estoppel is a branch of res judicata that precludes relitigation of issues previously decided in another court proceeding. [8] Three preconditions must be satisfied in order for issue estoppel to apply to a claim:
(a) the issue must be the same as the one decided in the prior decision;
(b) the prior judicial decision must have been final; and
(c) the parties to both proceedings must be the same, or their privies (known as the mutuality requirement). [9]
39Regarding abuse of process:
(a) the abuse of process by the relitigation doctrine is only applicable in circumstances where there has been a prior judicial determination of the issues raised in a subsequent proceeding; [10] and
(b) the courts retain discretion to decline to apply the doctrine of abuse of process where it would be unfair to do so. [11]
40The plaintiffs submit that issue estoppel and abuse of process fail on the basis that:
(a) the issue in the small claims proceeding was not the same as the one before this court; and
(b) in any event, there was no judicial determination of Podell’s small claims court actions such that this action constitutes relitigation.
41The plaintiffs also submit that it would be unfair to dismiss Podell’s claim as an abuse of process. When Podell proposed a without-costs dismissal of the small claims court actions in order to pursue the superior court action, he did not have the benefit of advice from a lawyer. Podell believed that, in order to commence a claim in the superior court, he had to dismiss the small claims actions. He dismissed those claims to avoid any issue concerning abuse of process.
42In balancing all of the evidence, Podell’s claim is not barred on this basis. In the small claims court actions he was seeking the interest payments. In this action he is trying to enforce an obligation to redeem. Further there was no judicial determination of his small claims court actions.
Conclusion
43The plaintiffs’ motion is dismissed and the defendants’ cross‑motions are granted. The plaintiffs’ action against the defendants is also dismissed.
44The plaintiffs can provide brief submissions on costs within 30 days and the defendants with any reply 14 days thereafter. The submissions may be sent to my assistant by email at Lorie.Waltenbury@ontario.ca. If there is a problem with this timeline because of summer vacations, please let my assistant know.
J.E. Ferguson J. Date: June 26, 2019
[1] R. v. Imperial Tobacco Ltd., 2011 SCC 42 at para. 22. [2] Alison Manzer, Carla Potter & Howard Ruda, Asset Based Lending in Canada, 2nd ed. (Markham: LexisNexis, 2015), at pp. 264-265. [3] Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at paras. 46-58; Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673 at para. 16 [Salah]. [4] Salah at para. 16. [5] 3869130 Canada Inc. v. I.C.B. Distribution Inc., 2008 ONCA 396 at para. 33 [I.C.B.]; See also Salah at para. 16; and Downey v. Ecore International Inc., 2012 ONCA 480 at para. 38 [Downey]. [6] Salah at para. 16. [7] Downey at para. 38. [8] Toronto (City) v. C.U.P.E., Local 79, 2003 SCC 63 at para. 23. [9] Ibid. [10] Taylor Made Advertising Ltd. v. Atlific Inc., 2012 ONCA 459 at para. 35; Northern Cables Inc. v. Philpott, 2016 ONSC 5152 at para. 36. [11] Engels v. Merit Insurance Brokers Inc. et al., 2007 ONCA 179 at paras. 30-35.
