Court File and Parties

COURT FILE NO.: CV-12-445-899

DATE: 2012-05-02

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Mere Investments Inc., Roy Murad and Moss Development Ltd., Applicants

AND:

Proprietes Far Hills Inc. / Far Hills Properties Inc., Respondents

BEFORE: Mr. Justice Michael G. Quigley

COUNSEL: Wendy Greenspoon, for the Applicants

Judy Hamilton, for the Respondents

HEARD: April 25, 2012

ENDORSEMENT

[1] Mere Investments Inc., Roy Murad and Moss Development Ltd. bring this application under Rule 14.05(3)(e) and (g) against the respondents, Proprietes Far Hills Inc./Far Hills Properties Inc.. They seek declaratory relief requiring the respondent to contribute 50% of all carrying costs associated with a 22 lot residential subdivision located near Barrie, Ontario.

[2] This application arises out of the alleged failure of the respondent to contribute 50% of the carrying costs of the first mortgage on the subdivision, an obligation that the applicant says the respondent took on and agreed to pay when he bought a 50% interest in the shares of Moss. Moss owns the subdivision and is the mortgagor under a $1.6 million first mortgage in favor of other lenders.

[3] Alternatively, the applicants asked for an order requiring Far Hills to reimburse the applicants for carrying costs allegedly already paid by the applicant, or, in the further alternative, a declaration granting a priority security interest in favour of Mr. Murad for the costs he paid, and which were not paid by the respondent. He requests that such priority be senior to the other priority in security that was granted to Far Hills for repayment of their $750,000 investment when the initial share sale was concluded.

[4] In a new further amended application record, Mere, Murad and Moss now also seek further alternative relief of a court order that Moss may sell the subdivision to a new potential purchaser for a price of $1.5 million. This is evidently the only offer that has been received for the property and a purchase price of that amount will pay off the first mortgagee, but it will also leave the remaining equity interests of the applicant and the respondent, the two shareholders of Moss Developments Limited, effectively valueless. Mere, Murad and Moss ask that this order be granted even though there has been no shareholders meeting of Moss, the owner of the project, called to discuss or approve of a court proceeding to pursue any of these alternative heads of relief, much less a directors meeting to approve of such a sale.

[5] Not surprisingly, David Wollach, who is the owner and principal shareholder of the respondent, Far Hills, has an entirely different version of these matters. He says he agreed to make an investment in the Barrie subdivision project to a maximum of $750,000, and not a penny more. He protests that he did not agree at any time to pay any additional amounts, much less 50% of the carrying costs of the financing for the property. Moreover, he claims that he was always to have a first priority over the return of his investment funds over any priority accorded to the applicants and that he was never told that there were or were anticipated to be circumstances that would have required him to make additional ongoing financial contributions. He rejects the validity of this request for court ordered relief in these proceedings and insists that Moss has no right to bring this application because of the absence of board approval, and that in any event, disputes between the parties respecting the share sale and the Shareholders Agreement are required under the terms of their governing documentation to be submitted to arbitration for resolution, and not to this court.

[6] This application was brought on an expedited timetable because the first mortgage on the Barrie property is presently in default. It has been in default since the end of February when Murad stopped making payments towards the carrying costs of that mortgage for himself and Moss, as well, he claims, for the respondent. The expedited schedule to bring the application was agreed between counsel recognizing that the end of April is a key date. April 30 is the date upon which the rights of the first mortgagee crystalize to pursue its power of sale remedies respecting the subdivision. The applicants wanted the court to decide the question before that date.

[7] It is important that the foundations for the applicant's claim are the equitable principles of unjust enrichment, constructive trust, and subrogation, rather than the contractual documentation agreed to by the parties at the time of the share sale, that is, the Agreement of Purchase and Sale, the Shareholders Agreement and the Priority Agreement.

[8] The applicants rely on the doctrine of unjust enrichment on the theory that the respondent has been and continues to be unjustly enriched to their deprivation by their continuing payment of the first mortgage carrying costs when they claim there is a complete absence of juristic reason for that enrichment. They rely on the doctrine of constructive trust to give them additional rights relative to the property. They say that is an appropriate remedy in the face of this alleged unjust enrichment on the basis that monetary compensation would be inadequate, and that there is a direct link between their allegedly disproportionate payment of the carrying costs relative to the first mortgage and the property which is the subject matter of the constructive trust: see Peter v. Beblow, 1993 CanLII 126 (SCC), [1993] 1 S.C.R. 980, at para 25; Pettkus v. Becker, 1980 CanLII 22 (SCC), [1980] 2 S.C.R. 834, at pages 847-848; and Lac Minerals Ltd. v. International Corona Resources Limited, 1989 CanLII 34 (SCC), [1989] 2 S.C.R. 574 at pages 104-106; Sorochan v. Sorochan, 1986 CanLII 23 (SCC), [1986] 2 S.C.R. 38 at paras. 4, 14 and 31.

[9] Finally, in a new argument presented without notice on the hearing of the application, counsel relied on principles of subrogation to claim that fairness in the circumstances of this particular case requires that the applicants should be subrogated to the rights of the original first mortagees in priority to the interests of Far Hills: see C.E.D. Mortgages XIII.5 at para 819; VII.1 at para. 479-481, 485-486 and cases cited there. They say they ought to have this subrogation priority having paid the amounts due to the first mortgagee on behalf of the respondent because of its failure to honour its alleged obligation to make payments on its own for 50% of the mortgage carrying costs.

[10] As for the terms of the contracts between these parties, the applicants say that those agreements cannot serve as a foundation for a finding of juristic reason that would deprive the applicant of the equitable remedies it seeks. As such, they claim that the contractual terms cannot defeat their equitably based claims.

[11] With respect, I disagree for several reasons. Those reasons require, individually and collectively, that this application be dismissed. I gave brief oral reasons at the conclusion of the hearing and promised to prepare a more fulsome, albeit still brief explanation of those reasons. These are those expanded reasons for my decision to dismiss the application.

[12] Dealing first with the procedural aspects of the claim, I agree that Rule 14.05 (3) (e) and (g) could potentially serve as a foundation for a determination of the respective interests and priorities of the parties in the mortgaged property, and might permit an adjustment of priorities as between the parties in some circumstances. However, to the extent that the principal relief sought is effectively damages for an alleged failure of the respondent to pay amounts that the applicant says he was contractually obliged to pay, to my mind the applicant ought to be commencing an action. In my view, an application based on Rule 14.05 (3)(e) and (g) cannot extend to permit declaratory relief to be granted pursuant to an application when it demands that the respondent make payments to the applicant or to the first mortgagee in the absence of contractual language requiring that such payments be made, language that I find to be manifestly absent. I do accept, however, that declaratory relief could be granted adjusting the respective security interests and priorities of the parties if there was otherwise a foundation for such relief to be granted in this case.

[13] Turning to the heart of their submissions, the applicants rely on doctrines of unjust enrichment, constructive trust and subrogation to support their entitlements to the relief claimed.

[14] For the doctrine of unjust enrichment to apply, the applicant must satisfy three elements: (1) that the respondent was enriched, (2) that the applicant was correspondingly deprived, and (3) that there is no juristic reason for the enrichment: see Peter v. Beblow, above. The applicant says that the respondent was enriched as a result of Mere advancing nearly half a $1 million to cover the cash flow needs of Moss as of December 2011, while the respondent contributed nothing. Therefore, the applicant says that the respondent saved the expense and benefitted from the payments that were made by Mere to keep the first mortgage in good standing: Garland v. Consumers Gas Company Limited, 2001 CanLII 8619 (ON CA), [2001], 57 O.R. (3d) 127 at para. 111. Correspondingly, the applicant says that Mere has been deprived as a result of being the only shareholder to advance monies to Moss to cover its carrying costs of the first mortgage. Finally, the applicant claims that there is no juristic reason for the enriched responded to retain that benefit based on the circumstances of the case.

[15] Mr. Roy Murad claims to have understood that the parties had an agreement that all cash flow needs of Moss would be met by obtaining further third-party financing, and that if such financing could not be obtained, then all cash flow shortfalls would be contributed to on a 50-50 basis by the applicant and the respondent. The problem to my mind in the context of otherwise all-embracing contractual arrangements concluded between them coincident with the respondent buying half of the shares of Moss, is that there is simply no stipulation whatsoever to that effect in the Shareholders Agreement.

[16] The Share Purchase Agreement and the Shareholders Agreement between these parties contain important provisions relative to this dispute and to this issue. The key provisions are Articles 5 and 10 of the Shareholders Agreement. Article 5 provides as follows:

Financing and Distributions

5.1 Funding

The Shareholders agree that they will actively pursue and work towards attaining satisfactory bank credit and financing for the Corporation (the “Required Funds”), it being the intention that such financing be sought in the highest amount possible so that no further equity investments will be required of the Shareholders.

5.2 Shareholder Loans

As of the date hereof each Shareholder shall be credited with a Shareholder Loan of $750,000. Each shareholder’s shareholder loan shall be secured by a general security agreement and a collateral mortgage on the project. Mere acknowledges and agrees that Far Hills’ collateral mortgage shall rank prior to Mere’s collateral mortgage.

5.3 Use of Proceeds

Mere shall use the proceeds from Far Hills acquisition of shares of the Corporation for the following purposes:

(i) to repay a portion of Mere’s investment in the Project; and

(ii) the balance shall be employed to complete the Project.

5.4 No Liability

Mere acknowledges Far Hills shall not be required to advance any further funds to the Corporation towards the completion cost of the Project.

5.5 No Indemnity

Further, Far Hills shall not be required to indemnify Roy Murad in respect of the guarantee provided by him to the first mortgage lender to the Project. (my emphasis)

[17] Also of relevance here are the arbitration provisions set out in Article 10 of the Shareholders Agreement. Except as otherwise expressly provided in the Agreement, Article 10.1 stipulates that any dispute, difference or question arising among any of the parties concerning the construction, meaning or effect or the implementation of the Shareholders Agreement or any part of that Agreement is to be settled by an arbitrator. That person may be mutually agreed upon by the two shareholders, but if they are unable to agree the arbitrator is to be appointed under the provisions of the Arbitration Act of Ontario or similar legislation. The provision goes on to affirm that the decision of any such arbitrator appointed under the terms of the Agreement or the Arbitration Act is to be final and binding on the parties with no appeal lying therefrom to any court.

[18] The first problem with the applicants’ allegations that the respondent is unjustly enriched is whether any enrichment can be said to have occurred. I do not dispute that payments may have been made by the applicant towards the carrying charges on the first mortgage, notwithstanding the evidentiary deficiencies that make it difficult to ascertain whether the payments alleged to have been paid by Mere were in fact paid by it, or for this particular project. Exhibit G to the affidavit of Roy Murad purports to be a breakdown of the interest and fees paid with respect to the financing, but this is documentation that has no detail in it, and it is not clear on the face of that Schedule what the composition is of the total amounts paid, that is, what component represents interest and what component represents fees. But what it seems to me is clear is that none of the components reflected on that Schedule represent repayments of principal.

[19] I am prepared to accept for the purposes of the applicants’ argument that the amounts were paid. However, in so far as it was admitted by the applicant that those payments were merely of the carrying charges, that is the interest and fees due to the first mortgagee in respect of the first mortgage and not in respect of principal, it is not plain that those payments would have or could have enriched the respondent, at least in the absence of a contractual understanding that he also was to pay his proportionate share. It is not as if those payments caused the principal amount of the encumbrance to decline, and thus caused Far Hills equity investment to increase in value. Further, and more importantly as mentioned above, even if enrichment could be shown to have taken place, a point as I indicated on which I am not satisfied, the doctrine of unjust enrichment would not apply in the event that a juristic reason could be found for the enrichment.

[20] In Rathwell v. Rathwell, 1978 CanLII 3 (SCC), [1978] 2 S.C.R. 436, Dickson J. acknowledged that a contract or other disposition of law could constitute a juristic reason for the benefit or enrichment. Thus, if there was an obligation, contractual or otherwise, agreed to by the parties, which resulted in enrichment to one of them at the expense of the other, this would constitute a juristic reason for the enrichment, thus obviating the application of the unjust enrichment doctrine. It would supercede and displace the potential application of the equitable doctrines on the basis simply of the contractual terms agreed by the parties.

[21] In this case, both parties to the contracts were sophisticated investors capable of understanding and appreciating the binding nature of the Agreements, not to mention the meaning of those agreements. Counsel for the applicant acknowledged in argument that there is no direct obligation to be found in the words of the contractual documents, the Agreement of purchase and sale, the Shareholder’s Agreement or the Priority Agreement, requiring the respondent to pay 50% of the carrying costs of the first mortgage on the Barrie project. At its highest, she acknowledges that this was an implied obligation, but she says that Mr. Murad understood that the parties had agreed that the cash flow needs of Moss would be met by obtaining further third-party financing and if unobtainable, shortfalls would be provided for on an equal basis by each of the shareholders. However, clearly Mr. Wollach did not have the same understanding. Further, it appears plain to me that the contractual documentation is more supportive of his interpretation than Mr. Murad’s.

[22] To my eye, the affidavit evidence to the contrary of David Wollach, combined with the absence of any contractual language reasonably capable of supporting the existence of such an obligation refutes that position. Mr. Wollach swore in his affidavit that his proposed investment to acquire 50% of the shares of Moss for a price of $750,000 was represented to be effectively risk-free, given the alleged presale of the lots comprising the subdivision. He states in his affidavit that there was an expectation of a significant profit of 20% per annum for each of the 2 investors. He insisted that Far Hills agreed to make that investment solely on condition that Roy Murad would increase his investment into Mere by $300,000 to bring it up to $1,500,000, with Far Hills then purchasing 50% of the shares of Moss for the $750,000 purchase price.

[23] However Mr. Wollach also insisted in his affidavit that it was agreed that Far Hills shareholder loan, secured by a mortgage, was to stand in priority in all respects to the shareholders loan and mortgage outstanding in respect of Mere. Further, he was adamant that Far Hills did not agree to make any further payment towards the subdivision costs as was suggested in Mr. Murad’s affidavit. It was clear to him from the outset that the obligation of Far Hills was to be limited to $750,000 as set out in the Shareholders Agreement, the Share Purchase Agreement, and the Priority Agreement, and he is equally insistent that he had no obligation to contribute any funds to the company, nor that there was any entitlement for Mere Investments to make cash calls upon the shareholders.

[24] After the share purchase, the relationship between Mr. Wollach and Mr. Murad deteriorated. In October of 2011 certain legal relations between other companies they owned were terminated. Litigation has now been commenced in respect of those matters. It was only a month later, in November of 2011 after disputes started to arise between them, that Mr. Wollach claims he first received a letter from Mere Investments asking him to match the shareholder advances that were then being made by Mr. Murad towards the carrying costs of the first mortgage on the Barrie project. Mr. Wollach stated that that was the first attempt by Mere to make a cash call on the shareholders of Moss. He did not respond because it was his firm view that Far Hills had no obligation to make any further capital contributions to Moss.

[25] Mr. Wollach concluded his affidavit by affirming in the strongest of terms that he did not agree to make any further contributions to the project or to meet the “cash flow needs” of the project as Mr. Murad asserted in paragraph 10 of his affidavit. Wollach says that is absolutely false and contradictory to his instructions to Murad, and to his own counsel, William Friedman, not to mention that it is not borne out by the agreements between the parties.

[26] In his cross-examination, Mr. Wollach was questioned concerning his understanding relative to Article 5.1. He stated that that it was a general statement which could include needs for additional financing or could refer to refinancing. He said that it could mean many things and was nothing but a general statement of intent – but equally, Mr. Wollach insisted that he did not understand it to mean that there was additional financing to be had that he was expected to provide. He did understand that the existing mortgage could achieve maturity and at that point need to be replaced, and he thought that is what the paragraph referred to. His response is clear, unequivocal and instructive when questioned as to why he thought that the clause in question was not referencing a need for further equity to be obtained from each of the two shareholders:

“Because the undertaking of Murad was always that our investment is the investment guaranteed, that's a maximum investment, there is no intention was any additional monies were to be provided in this investment.”

[27] In this case, apart from my view that the orders for payment of sums sought by the Applicants are not properly the subject matter of an application brought under Rule 14.06 (e) and (g), in my view the language of Article 5 supports Mr. Wollach’s construction of the contracts and thus necessarily provides a juristic reason for any enrichment that may have occurred, assuming the presence of such enrichment and deprivation, both elements necessary for the application of the equitable doctrines sought to be invoked here by the applicants but which are far from conclusively established in my view.

[28] There is no reasonable basis in my view to construe Article 5.1 as imposing any obligation on either of the shareholders of Moss to provide funding on their own in the event that moss was unable to obtain funding as stipulated in that provision. Further, the priority status of Far Hill’s investment in the shares of Moss is plainly stated in Article 5.3. However, most important in my view relative to the construction of Article 5 and towards determining whether the provisions imposed the obligation contended by the applicants, is article 5.6. That provision makes it plain that Far Hills is not required to “indemnify Roy Murad in respect of the guarantee provided by him to the first mortgage lender to the Project.”

[29] This is the central interpretive point on which I find that the applicants request for equitable relief cannot succeed. The parties agreed that Far Hills was not required to indemnify Mr. Murad for the guarantee he provided relative to the first mortgage debt. This provision has two significations. First, it makes plain that Mr. Murad was indeed responsible for the first mortgage debt due to the first mortgagee and had given a personal guarantee of that indebtedness. Against that background, and having regard to the totally equivocal language of Article 5.1, it is clear to me that Mr. Murad did indeed have the obligation to continue to service the mortgage debt, but that obligation was specifically removed from Far Hills by the inclusion of language precluding Far Hills from any obligation to indemnify Mr. Murad. This deals with the first aspect of the applicants request for equitable relief.

[30] However, the second aspect is equally compelling to me. Article 10 plainly and unreservedly ousts the jurisdiction of this court to adjudicate on disputes arising between the parties. This is such a dispute, and on the plain words of the contract, the parties are required to submit that dispute to arbitration, not to this court in an effort to invoke equitable doctrines to displace the dispute resolution process agreed to by the parties.

[31] As will be evident from the foregoing reasons, I do not believe that the applicants had the right to bring this dispute to the court having failed to make use of the arbitration process that their contractual agreement contemplates. Of equal importance, in bringing the dispute to this court without having sought board approval, and without asserting any oppression or similar corporate governance wrong to support a bypassing of ordinary corporate governance procedures, they acted in a high handed and spurious manner, totally disregarding the plain contractual rights of their other equal 50% shareholder.

[32] For the forgoing reasons, the application is dismissed. The respondent is entitled to its costs, but in that regard, it is also plain that the respondent is entitled to a full recovery of its legal costs based on the clear language of Article XIII of the Share Purchase Agreement and Agreement of Purchase and Sale.

[33] In section 1.D of that Article, the vendor, Mere, agreed to indemnify Moss and Far Hills from and against “all actions, suits, proceedings, demands, assessments, reassessments, fines, penalties, fees, judgments, costs and expenses of whatsoever nature incident to the foregoing, including without limitation legal fees on a solicitor and his own client basis and court costs”. Clearly, apart from the merits of the application which I have found to be wanting, and having regard to the contractual stipulation that bound the parties to proceed to arbitration to settle disputes, the contract itself provides for substantial indemnity costs. Given the amount of material that was prepared for the application, it would be expected their fees would be significant, and they are. However, I find that the costs on a substantial indemnity basis exceed what would reasonably be expected by the other party, so I fix costs including disbursements and taxes at $22,500.00.

Michael G. Quigley, J.

Date: May 2, 2012