DATE: 20061208

DOCKET: C44571

COURT OF APPEAL FOR ONTARIO

RE:

LAURA LIORTI (Plaintiff/Respondent) – and –

J. ALEXANDER MENZIES and MENZIES & VON BOGEN (Defendants/Appellants)

BEFORE:

JURIANSZ, MACFARLAND and LAFORME JJ.A.

COUNSEL:

Eric R. Murray, Q.C. and Ranjan Das

for the appellants

Bernie Romano

for the respondent

HEARD:

December 1, 2006

On appeal from the judgment of justice Edward Belobaba of the Superior Court of Justice dated November 10, 2005.

E N D O R S E M E N T

[1] The appellants, a lawyer and law firm, appeal from a trial judgment finding them liable for breach of trust for paying monies out of their trust account without the authorization of the respondent, a client. The appellants arranged a second mortgage in the amount of $75,000 on the home of the respondent as “collateral security that stood secondary” to a mortgage given by Liorti Developments Corp. (“LDC”), a company owned and controlled by the respondent’s children.

[2] The appellants received the loan proceeds, deposited them in the law firm’s trust account to the credit of LDC, and paid them out on the instructions of Peter Liorti, the respondent’s son and principal of LDC. The trial judge found that the loan funds were advanced on the basis of the respondent’s mortgage as well as the LDC mortgage, that the law firm held those funds in trust for the respondent as well as LDC, and that no payments out of trust should have been made without the authorization or approval of the both parties. The respondent did not approve or authorize the payments out of trust.

[3] The trial judge was satisfied that the respondent’s mortgage “was understood by all to be a collateral security that stood secondary to the LDC mortgage.” The respondent had received independent legal advice as to that effect.

[4] We find the trial judge erred.

[5] The trial judge indicated his view that the question was not whether the respondent’s $75,000 mortgage was primary or secondary. He addressed the question whether the appellants received the loan funds in trust for both the respondent and LDC. His error was in not recognizing that the answer to the first question would determine the answer to the second. The fact that the respondent’s mortgage was “collateral security that stood secondary to the LDC mortgage” meant that the loan funds were advanced to the primary borrower, LDC. The consideration that the respondent received for giving the collateral mortgage was the advancing of funds to the primary borrower, her children’s company. The law firm properly held the funds in trust for LDC and paid money out of trust as instructed by LDC’s principal. There was no breach of trust.

[6] The appeal is allowed, the trial judgment is set aside and replaced with an order dismissing the respondent’s action. The cross-appeal for increased pre-judgment interest is dismissed. The appellants are entitled to their costs at trial, which we fix in the amount of $8,000 inclusive of disbursements in GST. Costs of the appeal including the motion in the Court of Appeal of fixed in the amount of $12,000 inclusive of disbursements in GST.

“R.G. Juriansz J.A.

“J.L. MacFarland J.A.”

“H.S. LaForme J.A.”