CITATION: Standard Trust Company v. Metropolitan Trust Company of Canada, 2007 ONCA 897
DATE: 20071221
DOCKET: C44876
COURT OF APPEAL FOR ONTARIO
LASKIN, MACFARLAND AND EPSTEIN JJ.A.
BETWEEN:
STANDARD TRUST COMPANY, BY ITS LIQUIDATOR, ERNST & YOUNG INC.
Plaintiff (Appellant/ Respondent by way of cross-appeal)
And
METROPOLITAN TRUST COMPANY OF CANADA and METROPOLITAN LIFE INSURANCE COMPANY
Defendants (Respondents/ Appellants by way of cross-appeal)
M. Michael Title and Antonin I. Pribetic for the appellant
Reeva M. Finkel and Ivan Y. Lavrence for the respondents
Heard: June 25 and 26, 2007
On appeal from the judgment of Justice Donald R. Cameron of the Superior Court of Justice dated January 13, 2006, with reasons reported at (2006), 40 R.P.R. (4th) 27.
MACFARLAND J.A.:
[1] The appellant appeals from the judgment of Cameron J. dated January 13, 2006 wherein he awarded damages to the plaintiff in the sum of $203,000 plus interest. The appeal is on the question of damages alone, which the appellant says should be increased.
[2] The respondent cross-appeals the judgment and says that the action ought to have been dismissed.
OVERVIEW
The Appeal
[3] The liquidator of Standard Trust Company (“Standard”) brought action against Metropolitan Trust Company of Canada and Metropolitan Life Insurance Company (collectively, “Met”) for damages for breach of contract, negligent misrepresentation, breach of trust and breach of fiduciary duty. The claims arose as the result of certain mortgage advances made by Met on behalf of Standard to Darrow Development Limited (“Darrow”) in relation to a waterfront condominium development in Brockville, Ontario.
[4] At all times, the relationship between Standard and Met was governed by a Mortgage Administration Agreement (“MAA”) entered into in 1972 between Standard as the investor and Met as the trust company. Although the trial judge found that Standard and Met are both sophisticated and knowledgeable mortgage investors actively involved in the mortgage lending market, on this transaction Met acted on behalf of Standard. Met held Standard’s interest in trust and contracted to exercise the care and prudence it would exercise if the mortgage were held for its own account and as would be exercised by a prudent mortgagee. The agreement effectively gave Met a “carte blanche” in terms of the mortgage dealings on behalf of Standard once Standard agreed to commit.
[5] The mortgage went into default in April 1988 when thirty-four liens were registered against the property. Ultimately and at the urging of Standard, the lien trustee issued an order vesting title in 772792 Ontario Ltd. (“772792”), a company controlled by Richard Wachter (“Wachter”), a customer of Standard in a number of other unrelated transactions. Wachter also defaulted in January 1990.
[6] The trial judge found Met responsible for the losses suffered by Standard up to November 1988, when the loan was taken over by the Wachter interest. He assessed those losses at $203,000 and awarded judgment against Met in favour of Standard in that amount plus interest.
[7] The appellant claims entitlement to the full amount of the mortgage advances to Darrow to the point of its default in the total sum of $2,743,372.70 plus interest.
The Cross-Appeal
[8] The respondent claims that when Standard agreed to replace Darrow with Wachter it agreed to the substitution of one debtor for another which, in law, amounts to novation. Therefore, it is Met’s position that Standard has no losses to the date of that substitution and, in view of Standard having admitted that any losses suffered thereafter are too remote to be the subject of claims against Met, this action ought to have been dismissed.
The Facts
[9] In March 1987, Mr. Simpson of Met received the mortgage proposal from a broker, Coulter Financial Services Ltd., and used it to prepare his own proposal. He included a representation that there was $1.5 million invested and pre-sales of approximately fifty per cent of the residential units. He sent the proposal to several prospective lenders, including Standard.
[10] On May 6, 1987, well before Standard approved the loan, Mr. Gibson, a Vice-President of Met, received a phone call from a local Brockville developer well-known to Met. This developer told Mr. Gibson that despite his $5000 deposit, he would not close the transaction with respect to a unit in the project which was the subject of the loan under consideration, because he had bought elsewhere for less money. He also suggested careful examination of the legitimacy of the indicated committed purchasers. Although Gibson considered the information important and it caused him concern, other than place a memo in the file, he did nothing further in relation to the call nor did he bring it to anyone else’s attention.
[11] The trial judge found that had Standard known of this conversation, it might not have entered the transaction.
[12] Standard considered the proposal and on June 8, 1987, approved the loan subject to an amendment to show two commercial and thirteen residential pre-sales producing $4,489,375 net after commissions. Standard relied on representations contained in the proposal that deposits of $20,000 per unit were being paid.
[13] Between June 8 and 9, 1987, Standard’s requirement with respect to pre-sale proceeds changed; in its final form the Commitment Letter between Met and Darrow required the borrower to:
show pre-sales net proceeds to lenders of no less than $3,895,831.00 and takeout commitments from Vanguard Trust of not less than $3,761,450.00.
[14] Standard relied in particular on certain conditions in the Commitment Letter:
- The takeout financing was to be seventy per cent of the appraised value of all unsold units and funded on substantial completion of the project;
- That Morguard (Met) confirm to its satisfaction all agreements of purchase and sale with respect to all unit sales;
- Morguard (Met) shall receive an assignment of all agreements of purchase and sale for this project as well as an assignment of all sales deposits.
[15] By letter dated July 23, 1987 Met sent thirteen Agreements of Purchase and Sale plus three leases to Standard. On that letter, Mr. Thrower of Standard made a note that “all sales confirmed $20,000 deposit”. Mr. Thrower testified that this information was conveyed to him in a telephone conversation with Mr. Simpson of Met and satisfied him that the required deposits were paid.
[16] On the following day of July 24, 1987, Mr. Simpson wrote to Standard and provided detailed information in respect of the pre-sold units which represented that Standard’s condition in relation to net proceeds and takeout commitments had been met.
[17] The Commitment Letter also required Met to confirm to its satisfaction all Agreements of Purchase and Sale of the units. These agreements required a deposit of $5000 on the purchaser signing and a further $15,000 to be paid within five days of the purchaser being provided with a copy of the agreement signed by the vendor.
[18] The trial judge found while there were more than $3,895,000 in pre-sales, only two of the sales had a deposit of $20,000. Seven had put down only the initial $5000; several had put down nothing. Mr. Simpson of Met conceded he should have done more to confirm the pre-sales.
[19] Darrow defaulted under the mortgage on April 22, 1988 when thirty-four liens were registered totalling $1,664,096.84. On March 30, 1988 Standard was owed $2,549,408.30 inclusive of interest.
[20] Following the default efforts were made to sell the project for sufficient money to pay off the liens and recover the mortgage advances, but without success.
[21] On August 10, 1988 Met informed Standard that with respect to the project now being closed, in view of the project’s stage of development and the terms of the Commitment Letter, there ought to have been $422,500 in deposits for thirteen agreements for sale of residential units (13 x $32,500). However, there was only $60,000, leaving a shortfall of $362,500.
[22] On August 18, 1988 Standard wrote to advise Met that by not securing the deposit monies as required under the terms of the Commitment Letter, Met had breached the duty of care owed to Standard. Met was told Standard would hold it liable for any loss incurred. The property was valued at between $5 million and $6 million dollars as it was, at the time.
[23] After their efforts to sell the project “as is” were unsuccessful, Met and Standard agreed to build out the project to mitigate their losses. They received a number of offers, the best of which came from Wachter, a customer of Standard on several other projects. Wachter offered $6 million, plus a new second mortgage of $2.5 million. Met expressed concerns about Wachter’s experience, but eventually agreed to accept Wachter’s offer when pressed by Standard to do so. Met and Standard each agreed to provide fifty per cent of the additional funding.
[24] Ultimately an agreement was reached with Wachter whereby 772792 was to pay $500,000 subject to adjustments in cash, a first mortgage of $5.5 million, a second mortgage of $3 million but only $2.7 million to be advanced and a third mortgage for $500,000 to secure a profit sharing interest. On November 15, 1988, in accordance with the agreement between Met and Wachter as approved by Standard, the lien trustee sold the project to 772792 pursuant to a foreclosure and vesting order. All other interests were foreclosed. The sale was pursuant to the provisions of the Construction Lien Act. It was not a sale pursuant to the Mortgages Act. Darrow was not served and the trial judge noted there was no issue and no adjudication as between Met and Darrow.
[25] As of December 31, 1988 Darrow owed Standard $2,900,480.55 inclusive of interest.
[26] On January 5, 1989, a cheque for $19,000, being one half of the Trustee’s rebate, was received by Standard and credited to the Darrow loan. On January 20, 1989, the Supreme Court of Ontario released $521,442.63 for Darrow, which was equally divided between Standard and Met. Standard credited its half of $260,721.32 to the Darrow loan, leaving about $2,600,000 owing on the Darrow loan.
[27] On January 6, 1989 Standard paid itself by way of two cheques totalling $2,750,000. This was nothing more than a bookkeeping entry because Standard did not actually receive these funds, but the entry did note the Darrow account was being “Dis in full eff Jan. 25/89”. Although the maker of the note was not called to testify, it would be difficult to infer any meaning to the notation other than “discharged in full effective January 25, 1989”.
[28] In its annual reports filed with the Office of the Federal Inspector of Institutions, Standard reported in relation to the Darrow loan:
- On December 31, 1988, Darrow was noted as being in default of interest on the first mortgage for more than 6 months and 772792 was noted as giving a second mortgage for $1.5 million;
- On December 31, 1989, there was no mention of Darrow regarding loans in excess of $250,000 or loans in default, and 772792 was noted in reference to first and second mortgages with neither noted to be in default.
[29] On a printout of the Darrow loan made February 21, 1994, Darrow was written off as at January 25, 1989 and the account closed. This corresponds with the file notation referenced in paragraph 27 above.
[30] Met’s concerns about Wachter’s experience proved true. The project was fraught with difficulties from the outset of his involvement. Contrary to the advice of its professionals, Standard insisted that advances continue to be made to Wachter. In late 1989 mortgage interest fell into arrears and construction lien problems arose. The last mortgage advance was made on January 5, 1990, leaving a balance owing of $2,932,500, less a lien holdback of $67,500.
[31] Wachter defaulted on January 29, 1991 and on the same date Met gave Notice of Sale Under Mortgage for $3,149,929.34. The mortgagor foreclosed July 2, 1991. Met and Standard completed the building in 1994-1995 at a cost in excess of $1.2 million. There was a resulting net deficit of over $700,000.
[32] Met obtained judgment against Wachter on the second mortgage. There is no judgment against either Wachter or Darrow on the first mortgage of approximately $5.5 million. Met did not third party Darrow in this proceeding.
The Issues
[33] The main issue raised on the appeal is whether the trial judge erred in law in assessing damages solely on the basis of contractual principles.
[34] The trial judge concluded that Met had confirmed to Standard that $20,000 had been paid on each deposit when in fact that was not so. However, he went on to conclude that the issue of the deposits became academic when the agreement between Met and Darrow (the Commitment Letter) switched from the number of sales to the net proceeds of sale and takeout financing requirements. The trial judge found that the total net pre-sales were $460,000 below the minimum required in the terms of the Commitment Letter. It was for Met to confirm those numbers and in failing to do so, Met was in breach of its contract with Standard. In addition, the trial judge found that same conduct of failing to satisfy itself as to the purchases amounted to negligence on the part of Met in fulfilling its duty of care to Standard. He found Met liable for negligent misrepresentation.
[35] The trial judge further concluded that Met’s conduct constituted breach of the fiduciary duty owed to Standard and breach of trust. His conclusions in this regard are supported by the evidence and the language of the MAA.
[36] While Met had provided Standard with copies of the Agreements of Purchase and Sale, there was no way for Standard to determine whether deposits had been paid. Only Met had the ability to establish the legitimacy of those pre-sales, and Met was the sole contact with Darrow. By withholding information or providing inaccurate information, Met had the ability to unilaterally affect the rights of Standard, thus rendering Standard particularly vulnerable to the exercise of that absolute power or discretion. On this basis the trial judge concluded Met was more than a mere contractual agent of Standard; its obligation, he said, was indistinguishable from that of a trustee or fiduciary.
[37] The trial judge found that Standard would not have authorized the release of its funds July 24, 1987 if it had been aware of the true state of the pre-sales prior to that advance. However, he also concluded:
The loss sustained here was caused not so much because of the breach of trust respecting pre-sales, payment of pre-existing interest and an affidavit, as by the subsequent events such as the sale to Mr. Wachter. The sale itself to Mr. Wachter was reasonable mitigation. However Standard’s subsequent actions in Mr. Wachter’s interest were not.
[38] The trial judge accepted that the proper remedy for breach of trust was an award of damages on a restitutionary scale: Standard is entitled to be put in as good a position as it would have been had the breach not occurred. He also concluded, however, that Met’s breach in failing to establish the pre-sale on July 24, 1987 had little or no effect on the ultimate failure of the project.
[39] Further, the mortgage to Wachter was an entirely new transaction – a novus actus – which broke the chain of causation, constituting a new cause for which Met was not liable. The appellant concedes the events of the Wachter era are remote.
[40] At the conclusion of his reasons, the trial judge briefly reviewed the law in relation to breach of contract and stated:
I find that because of the negligent misrepresentation and breach of trust, Met is solely responsible for the loss until November 15, 1988.
[41] He went on to conclude that the amount owing on the mortgage to that point in time was $2,529,372.70.
[42] The appellant takes issue with the trial judge’s findings in relation to causation and submits that the trial judge confused the concepts of causation and mitigation. Standard argues that the issue is not “what caused the whole loss?” but rather “what caused the initial loss?” It is submitted:
Clearly, Met Trust’s liability caused the initial loss under the Darrow mortgage, which ended at the damages assessment date of either: (1) August 18, 1988 – the date of Standard’s notice or demand letter; or (2) November 15, 1988 – the date of the vesting orders transferring title to the Brockville property to Wachter.
[43] I disagree. The appellant’s argument is artificial and entirely misses the reality of the situation. What Standard wants is akin to the ancient parable of having one’s cake and eating it too.
[44] To look at the Darrow loan in isolation is to ignore reality. Here the appellant willingly substituted Wachter’s company for Darrow. It replaced Darrow with 772792 on its books; it has not pursued Darrow in any way for payment. Standard was clearly an eager participant in the events leading up to the November 15, 1988 vesting order.
[45] The trial judge’s conclusion that the non-disclosure of pre-sales really had little to do with the ultimate failure of this project is a critical finding against the appellant and one which is overwhelmingly supported in the evidence.
[46] As McLachlin J. (as she then was) noted in Canson Enterprises Ltd. v. Boughton & Co., 1991 CanLII 52 (SCC), [1991] 3 S.C.R. 534 at 556:
Foreseeability is not a concern in assessing compensation, but it is essential that the losses made good are only those which, on a common sense view of causation, were caused by the breach.
and
The question is whether, applying a common sense view of causation, the further losses sustained in the course of construction can be said to have resulted or flowed from the breach of fiduciary duty.
[47] The court emphasizes a “common sense view of causation” and that only those resulting losses – after the application of the “common sense view of causation” test be made good. The comment by Lambert J.A. of the British Columbia Court of Appeal at p. 182 of that judgment are instructive:
The rubric “breach of fiduciary duty” has come to encompass so many different types of liability that it is not now possible to determine the appropriate remedy by defining the wrong simply as a “breach of fiduciary duty”. It is necessary, instead, to look through the categorization of the wrong as a “breach of fiduciary duty” to the true nature of the wrong, and to move from there to the determination of the remedy. The nature of the wrong and the nature of the loss, not the nature of the cause of action, will dictate the scope of the remedy.
[48] Justice LaForest wrote separate concurring reasons in Canson and at p. 588 of the decision noted:
But, as those cases underline, equity cannot be rigidly applied. Its doctrines must be attuned to different circumstances. Quite obviously not all fiduciary obligations are the same. It would be wholly inappropriate to interpret equitable doctrines so technically as to displace common law rules that achieve substantial justice in areas of common concern, thereby leading to harsh and inequitable results. I whole heartedly reject the notion advanced by the appellants that the Court of Appeal fell “into error because of a misplaced concern with concepts of common sense and reasonableness”. I would have thought these concerns were central to both common law and equity.
[49] In my view the trial judge here did, as Canson directs, on a common sense and reasonable consideration of the evidence, conclude what the losses were that flowed from the breach.
[50] While the trial judge held Met responsible for Standard’s losses to November 15, 1988, the date of the vesting order transferring the property to 772792, he concluded those losses were modest.
[51] The substitution of 772792 for Darrow was a novus actus and the appellant concedes the losses thereafter to be remote. Standard not only agreed to the substitution, but urged the less willing Met to accept Wachter’s offer.
[52] The trial judge looked at matters as of November 15, 1988. He concluded at that point Standard was owed $2,529,372.70 after giving credit for certain amounts recovered. He then reviewed certain offers to take over the project which had been received by Met and Standard. The details concerning those offers were in evidence before the trial judge as part of the Agreed Statement of Facts which was Exhibit 16 at trial.
[53] He concluded, even accepting the lowest of those offers, Standard’s loss did not exceed $203,000. Had he used other higher offers there would have been no damage suffered by the appellant as of November 15, 1988. He merely used the Wood’s offer as a comparator and one which benefited the appellant.
[54] In conclusion, I see no error in the trial judge’s findings and I would dismiss the appeal.
The Cross-Appeal
[55] The main thrust of the cross-appeal is that there has been a novation between the lenders, Standard and Met, and between the lenders and Darrow, which had the effect of discharging any debt owed on the Darrow loan. On this basis the respondent argues the action ought to have been dismissed.
[56] The difficulty with the argument is that Standard is not a party to the Darrow loan; only Met is party to the loan agreements and the mortgage. Standard’s cause of action against Met arises because of the MMA contract between them, and not as the result of its dealings with any particular debtor.
[57] The argument may well be a valid one to any claim advanced by Met but it cannot, in my view, succeed against Standard on these facts.
[58] I would dismiss the cross-appeal. Costs to the respondent fixed in the all-inclusive sum of $50,000.
RELEASED: December 21, 2007 “JL” “J. MacFarland J.A.”
“I agree John Laskin J.A.”
“I agree G. Epstein J.A.”