COURT OF APPEAL FOR ONTARIO

CITATION: Gillani v. Karmali, 2014 ONCA 325

DATE: 20140425

DOCKET: C56943

Epstein, Pepall and van Rensburg JJ.A.

BETWEEN

Navroz Gillani

Plaintiff (Respondent)

and

Shiraz Karmali

Defendant (Appellant)

H. James Marin, for the appellant

Michael McQuade, for the respondent

Heard: March 18, 2014

On appeal from the judgment of Justice James M. Spence of the Superior Court of Justice, dated March 21, 2013, with reasons reported at 2013 ONSC 1691.

Pepall J.A.:

[1] The appellant appeals from a judgment awarding damages of $57,000 to the respondent based on breach of a constructive trust by the appellant.

Background

[2] In 2001 and 2002, Salim Damji promoted a fraudulent investment scheme involving the sale of shares in corporations referred to collectively as STS. STS was engaged in selling a teeth whitening product that apparently, Colgate Palmolive was going to purchase. Investors were given the opportunity to subscribe for STS shares that would be issued when they were offered to the public. The share subscriptions were offered by individuals known as “collectors”.

[3] Many members of the Ismaili community, to which the parties belonged, were eager to buy shares in STS. Prior to the events in issue in this litigation, the respondent had made three investments and subscribed for $45,500 worth of STS treasury shares. To effect the third of these investments, he wrote a cheque for $35,000 in favour of Mr. Damji, the promoter. The cheque was clearly stated to be “in trust”. Later, the respondent sought to obtain more shares in STS. This latter share subscription is the focus of the judgment under appeal.

[4] The respondent, age 45, is related by marriage to the appellant, age 69: the respondent’s wife is the stepdaughter of the appellant’s brother. The appellant and the respondent discussed the proposed share subscription. The appellant was not a collector himself, but arranged for the respondent to meet with Mr. Suleman, who was a collector[^1]. Mr. Suleman, age 67, had been a friend of the appellant for about 35 years; indeed, they had held a joint bank account together since the late 1980s. According to the trial judge, Mr. Suleman was “in a position to arrange to place a subscription through Kassam Juma[^2] (who served as an intermediary for Mr. Damji) and to settle the terms that would be acceptable” (at para. 29).

[5] The trial judge rejected the respondent’s testimony that he did not meet with Mr. Suleman, that his purchase was to be of the appellant’s personal shares, with the purchase monies to be held in trust, and that the appellant would guarantee any loss. Indeed, the trial judge specifically found that there was no evidence that the appellant agreed to hold the purchase funds in trust or that he guaranteed against any loss on the shares. Rather, the trial judge concluded that the respondent “obtained an agreement to enable him to purchase shares of STS at $1.50 per share when the STS shares were issued. The amount that he was to be able to invest was to be $35,000 or, implicitly, whatever other amount Mr. Suleman might negotiate” (at para. 35).

[6] The respondent’s wife provided a cheque to Mr. Suleman for the purchase of STS shares. It was dated November 9, 2001 and was in the amount of $57,000. The cheque was made payable to the appellant. Unlike the respondent’s earlier cheque for $35,000 in favour of Mr. Damji, this cheque was not stated to be “in trust”, and the trial judge found that the money was not to be held in trust. That said, the trial judge found that the appellant, the respondent and Mr. Suleman understood that the $57,000 cheque was for the purpose of subscribing for the purchase of STS shares.

[7] There was no evidence or finding that suggested that the $57,000 was not to be intermingled with other funds. There was no evidence or finding as to when the subscription had to be effected.

[8] Mr. Suleman testified that he tried to give the cheque to Mr. Damji’s intermediary, Kassam Juma, so that it could be put towards the purchase of STS shares on behalf of the respondent, but it was refused. Mr. Suleman notified the appellant. The two men decided to hold on to the funds in the hope that Mr. Juma would ultimately accommodate the investment and the shares could be subscribed for at a later date. On November 9, 2001, the appellant deposited the cheque and four other cheques for a total aggregate amount of $115,500 into the joint bank account he shared with Mr. Suleman.

[9] Soon after, the joint account was reduced to approximately $20,000. However, the funds in the account were later replenished. According to Mr. Suleman, funds were regularly transferred back and forth between his line of credit account and the joint account. The trial judge concluded that “many and, perhaps virtually all” of the transactions recorded in the bank statement for the joint account were for Mr. Suleman alone.

[10] Mr. Suleman testified that subsequently, Mr. Juma agreed to sell more shares. That said, Mr. Suleman also testified that he learned that Mr. Juma would not accept the $57,000 cheque for a purchase on behalf of the respondent. On December 24, 2001, Mr. Suleman wrote a cheque for $115,000 payable to “Salim Damji I/T”, which the trial judge concluded probably meant “in trust”. The cheque was signed by the appellant. It cleared the joint account on December 28, 2001. The signature for deposit on the back of the cheque was that of Salim Damji.

[11] Mr. Suleman testified that the cheque for $115,000 incorporated the $57,000 payment by the respondent to subscribe for the shares. The trial judge did not reject that evidence. He concluded, however, that because the cheque recited Mr. Suleman’s name on the ‘memo’ line, any claim against Mr. Damji and STS would belong to Mr. Suleman. At para. 66 of his reasons, the trial judge determined that the respondent was entitled to believe that Mr. Suleman would apply the $57,000 to purchase for him an entitlement to receive shares from STS, but that the $57,000 was never applied in that way. On the other hand, at para. 79 of his reasons, he determined that on December 24, 2001, the appellant paid to subscribe for shares in STS for the respondent on the terms of his arrangement.

[12] Before the fraud was discovered, Mr. Suleman prepared a distribution list for the STS shares that described the investors and the particulars of each investment. This list itemized the respondent’s investment of $57,000.

[13] The initial public offering never occurred and no shares were ever issued by STS. The fraudulent investment scheme promoted by Mr. Damji was discovered in April 2002. It was said to have defrauded investors of amounts approaching $100 million. Mr. Suleman testified that he personally lost $1.5 million and the appellant testified that he lost $250,000. In April 2002, Mr. Damji pleaded guilty and was convicted of fraud.

[14] The respondent never recovered his $57,000 investment. At trial, he sought to find the appellant liable for this loss.

[15] The trial judge did not suggest in his reasons that either Mr. Suleman or the appellant knew of, or were complicit in, Mr. Damji’s fraud.

Trial Judge’s Reasons

[16] The trial judge found the appellant liable on the following basis:

• there was a constructive trust between Mr. Suleman and the respondent;

• the appellant shared with Mr. Suleman the responsibility for purchasing and delivering the STS shares to the respondent;

• the appellant agreed with Mr. Suleman to the plan to deposit the cheque in their joint bank account and await a later opportunity to deal with the purchase of shares;

• when he learned that the subscription would not be accepted right away and neither he nor Mr. Suleman could tell how long it would be until the funds could be applied to the subscription, the appellant took no steps to cause the funds to be returned to the respondent and his wife, nor did he do anything to ensure that the funds were kept available for the purchase;

• although the joint account was replenished, most of the funds were applied by Mr. Suleman “to other purposes”; and

• the appellant therefore facilitated the breach by Mr. Suleman of the constructive trust and was therefore also responsible for that breach. The doctrine of “trustee de son tort” applied to the appellant’s conduct. He became a constructive trustee and his conduct constituted a breach of that constructive trust.

Analysis

[17] The appellant advanced five grounds of appeal; however, in my view in order to dispose of the appeal, only two of these grounds need to be addressed.

(a) The Pleadings

[18] The appellant submits that the respondent did not plead a theory of constructive trust in his statement of claim, and the trial judge erred in finding liability and awarding damages on the basis of a theory that was not pleaded.

[19] The version of events proffered by the respondent on the one hand, and the appellant on the other, differed significantly.

[20] The version of events pleaded by the respondent was as follows:

• Mr. Damji wrongfully and fraudulently made misrepresentations, or caused them to be made, with a view to fraudulently inducing members of his community and others to purchase shares. He represented and assured them that their payments would be received and held in trust.

• Mr. Damji misappropriated the trust monies.

• The appellant approached the respondent and, as a favour to the respondent, offered to sell his own personal shares in STS at the rate of $1.14 per share, a “family price” and less than the prevailing rate.

• The appellant promised to reimburse the respondent for any loss.

• The respondent agreed to purchase the shares. His $57,000 was to be held in trust by the respondent pending receipt of the appellant’s shares.

• The respondent did not receive the shares.

• When the respondent discovered Mr. Damji’s fraud, he confronted the appellant, who disclosed that the $57,000 had been used for other business ventures.

[21] Based on this version of events, the respondent pleaded that the appellant wrongfully breached their agreement; fraudulently misappropriated or wrongfully converted the $57,000 for his own benefit and that of Mr. Suleman; unjustly enriched himself by using the $57,000; and breached his duty to the respondent to hold the $57,000 in trust, as described. The respondent also pleaded that the appellant owed him a fiduciary duty and breached it by misappropriating the $57,000 and using it for one or more business ventures without the respondent’s knowledge or consent. The remedies the respondent sought included a tracing order and the imposition of a constructive trust in his favour against the corporations or business ventures in which his $57,000 was in any way used or invested.

[22] The trial judge did not find that any of the allegations the respondent made were proven, with the exception of the allegations he made about Mr. Damji, who was not a party to the action.

[23] Consistent with his pleading, the respondent’s opening statement did not refer to liability based on a constructive trust:

My client essentially pleads that he made a contract with this man, pursuant…arrangement [sic], pursuant to which he agreed to acquire from him some shares in the STS fraudulent entity of Mr. Damji, from [the appellant] personally. That his monies were to be held in trust pending receipt of the shares, and that [the appellant] guaranteed to him that he would not suffer any loss by reason of this transaction… it’s a credibility case, you’ll have to decide between Mr. Gilliani, on the one hand… and on the other hand Mr. Karmali….

[24] The trial judge found that, contrary to the assertions and testimony of the respondent, there was no agreement to buy the shares from the appellant, no agreement to hold the $57,000 in trust, and no guarantee against the risk of loss. There was no express finding of a breach of fiduciary duty or that the appellant had misappropriated the respondent’s funds and used them in one or more business ventures. Nor was there a finding that the appellant had been unjustly enriched at the respondent’s expense. Nonetheless, the trial judge went on to find that the claim the respondent had made out against the appellant was a claim of breach of constructive trust based on the doctrine of trustee de son tort.

[25] I agree with the appellant that the theory of liability relied upon by the trial judge was not pleaded. The only reference to a constructive trust is in the request for relief found in paragraphs 1(b) and 24(d) of the statement of claim, and this relates to the imposition of a constructive trust as a remedy and not as a basis for liability. There is no reference whatsoever to trustee de son tort.

[26] Moreover, the appellant was caught by surprise as the theory of the case on which the trial judge found liability was similarly not advanced in the respondent’s opening submissions. In my view, the trial judge erred in deciding liability and awarding damages on a basis that was not pleaded. It is fundamental to the litigation process that lawsuits be decided within the boundaries of the pleadings so that the parties know the case they have to meet and can address the issues through their evidence at trial: see Wilson v. Beck, 2013 ONCA 316, 307 O.A.C. 10, at para. 27, citing Rodaro v. Royal Bank of Canada (2002), 2002 CanLII 41834 (ON CA), 59 O.R. (3d) 74 (C.A.), at para. 60.

[27] I would therefore give effect to this ground of appeal.

(b) Breach

[28] The appellant also submits that even if breach of constructive trust had been pleaded, the trial judge erred in finding such a breach by the appellant.

[29] I agree.

[30] Even if for the purposes of this appeal I assume, without deciding, that there was a trust, there was no evidentiary basis for finding any breach.

[31] The trial judge found that the appellant facilitated the breach by Mr. Suleman of the constructive trust by agreeing to the plan to deposit the cheque in the joint bank account and await a later opportunity to deal with the purchase of the shares. In doing so, the appellant “took no step to cause the funds to be returned to the Gillanis when it turned out that the subscription would not be accepted right away and neither he nor Mr. Suleman could tell how long it might be until the funds could be subscribed” (at para. 72). The trial judge concluded that since the appellant did nothing to ensure that the funds were kept available for the subscription, he thereby facilitated Mr. Suleman’s withdrawal of the funds from the joint account.

[32] The breach of trust the trial judge identified was the failure to return the money. However, there was no finding that there was an express or implied term that the money would be returned. There was no evidence that either Mr. Suleman or the appellant failed to carry out any obligation under any terms of a trust or other arrangement. There was no restriction on where the funds were to be deposited. The trial judge stated, at para. 79, that on December 24, 2001, the appellant paid to subscribe for shares in STS for the respondent on the terms of his arrangement.

[33] The appellant did not guarantee delivery of the shares, nor was there any agreement as to when the share subscription was to occur. There was no evidence that Mr. Suleman or the appellant were required to keep the funds separate. Indeed, Mr. Suleman testified that he only received a commission if and when the Colgate transaction went through. Whatever he collected, he sent to Mr. Damji.

[34] There is nothing in the record that would suggest that the appellant participated in any wrongdoing by Mr. Suleman or did anything wrong himself. Moreover, as mentioned, both the appellant and Mr. Suleman suffered significant losses themselves. Based on Air Canada v. M & L Travel Ltd., 1993 CanLII 33 (SCC), [1993] 3 S.C.R. 787, at p. 789, whether personal liability may be imposed on a stranger to a trust depends on whether the stranger’s conscience is sufficiently affected to justify the imposition of liability. Here, the record could not sustain such a conclusion. The money was delivered to subscribe for shares and any trust purpose was achieved. The loss arose not because of anything the appellant did, but because of the fraud perpetrated by Mr. Damji.

[35] I would therefore also give effect to this ground of appeal.

Disposition

[36] I would allow the appeal, set aside the judgment and dismiss the action. I would reverse the costs award below and order the respondent to pay the appellant’s costs of this appeal in the amount of $24,000 inclusive of disbursements and applicable taxes.

Released:

“SEP” “S.E. Pepall J.A.”

“APR 25 2014” “I agree Gloria Epstein J.A.”

“I agree K. van Rensburg J.A.”

[^1]: The Ontario Securities Commission had advised Mr. Suleman that his involvement with the distribution of STS shares may trigger the application of the registration and/or prospectus requirements under the Securities Act, R.S.O. 1990, c. S. 5.

[^2]: He is occasionally referred to as Kassu in the record.