SUPERIOR COURT OF JUSTICE - ONTARIO

BARRIE COURT FILE NO.: 11-0701
DATE: May 7, 2012

RE: THE CORPORATION OF THE TOWN OF WASAGA BEACH, Applicant

AND:

RIVERDALE GROUP INC., ARNOTT CONSTRUCTION LIMITED, CAREVEST CAPITAL INC. and BERKLEY HOMES (BLUE WATER) INC., Respondents

BEFORE: THE HONOURABLE MR. JUSTICE G.M. MULLIGAN

COUNSEL:
Michael D. Stahr, Counsel for the Applicant

Doug Bourassa, Counsel for the Respondent Caravest Capital Inc.

Richard Macklin, Counsel for the Respondent Berkley Homes (Blue Water) Inc.

HEARD: April 26, 2012

ENDORSEMENT

[ 1 ] The Town of Wasaga Beach (“The Town”) brings an interpleader action with respect to the balance of a security deposit held by the Town in connection with a subdivision agreement with Riverdale Group Inc. (“Riverdale”). The Town seeks this relief because there are two parties claiming entitlement to these funds. The first is the Respondent Carevest Capital Inc. (“Caravest”) the secured creditor of Riverdale. Riverdale is the party that posted the security with the Town. The second interested party is the Respondent Berkeley Homes (Blue Water) Inc. (“Berkley”). Berkley acquired the property under power of sale from Carevest as mortgagee for Riverdale. Berkley completed the subdivision in accordance with its own subdivision agreement with the Town.

[ 2 ] The respondents Arnott Construction Limited and Riverdale Group Inc. were served but did not file any responding material.

[ 3 ] The respondents Carevest and Berkley consent to the Town being reimbursed for its own expenses of $15,000.00 and paying out the net amount of $256,185.00, the remainder of the Riverdale security deposit. These respondents further consent to this amount being paid to the successful respondent on this motion after the expiry of any appeal rights that the unsuccessful party may have.

[ 4 ] The following undisputed facts will provide context for the discussion that follows. Riverdale acquired certain lands in the Town and acquired funding from Carevest Capital Inc. in order to develop a residential subdivision. Carevest agreed to fund the project to the extent of 23 million dollars and secured its position by a charge, a general security agreement and various guarantees.

[ 5 ] Riverdale then entered into a subdivision agreement with the Town, June 30 th , 2006. Carevest as mortgagee was a signatory to the registered subdivision agreement.

[ 6 ] In accordance to the requirements of the subdivision agreement Riverdale posted as security with the Town the sum of $1,257,142.52 This amount consisted of the following:

(a) $555,853.03 being 25% of the estimated cost of internal works and

(b) $701,289.49 being 100% of the external works of the developer.

[ 7 ] Riverdale went into default and Carevest exercised its rights as mortgagee and sold the property to Berkley for 11 million dollars. Carevest financed this property as well by way of a vendor take-back mortgage from Berkley for 10 million dollars.

[ 8 ] Caravest has a judgment against Riverdale and a General Security Agreement remains in place.

[ 9 ] Berkley then entered into its own subdivision agreement with the Town on October 30, 2009. Once again Carevest was a signatory to this subdivision agreement as mortgagee.

[ 10 ] Berkley was required to provide security and did so in the amount of $550,594.25. Berkley completed its own obligations under the subdivision agreement.

[ 11 ] When Riverdale defaulted on its subdivision agreement there remained a balance of funds posted as security with the Town. On acquiring the property Berkley and the Town negotiated a new subdivision agreement and Berkley placed its own security deposit with the Town in accordance with the agreement. It appears that at the time of the new agreement with Berkley the issue of the remaining funds on hand was not addressed in the subdivision agreement. Nor was the issue raised by Carevest who as the mortgagee for Riverdale and the mortgagee for Berkley, signed both subdivision agreements as mortgagee.

[ 12 ] As appears from the examination from Ray Kelso, manager of planning development for the Town, there was some discussion between the Town and Berkley as to its entitlement to these funds. Carevest was not party to those discussions.

[ 13 ] When it became apparent to the Town that there were competing interests for these funds this interpleader application was commenced.

[ 14 ] The issue to be determined on this motion can be simply stated: who is entitled to these funds?

THE SUBDIVISION AGREEMENT

[ 15 ] Carevest argues that paragraph 4.2 of the Riverdale subdivision agreement provides a complete code as to what should be done with respect to the remaining funds. Paragraph 4.2 provides as follows:

Voiding Agreement

In the event that the Municipal Works contemplated by this Agreement or private works within the Lands have not been substantially completed with three (3) years from the date of signing this Agreement, the Owner shall be considered in default of this Agreement and the Municipality may at it option, declare this Agreement to be null and void. Any Securities help by the Municipality at the time of voiding of this Agreement by the Municipality shall be returned forthwith to the Owner , less the Municipality’s Services and its administrative, legal, engineering and consulting and associated expenses, save and except any delay caused by events totally outside the Owner’s control. [Emphasis added.]

[ 16 ] It is not disputed that the subdivision agreement was executed on the 30 th day of June 2006.

[ 17 ] Over three years later, and after Berkley had entered into a new subdivision agreement and posted its own security, the Town through its solicitor sent a letter dated November 27, 2009 to the respondents which stated in part, “The said agreement was dated June 30 th , 2006. The three year period for substantial completion has now expired, and the Town has voided the agreement and does declare the Agreement to be null and void.” The letter acknowledged that the Town had received competing claims and was satisfied that the funds ought to be paid into court for a judicial determination.

[ 18 ] It is the position of Carevest that section 4.2 provides a complete code as to how the funds should be distributed, the work was not substantially completed within the three year period, the owner (Riverdale) was in default and the Town declared the agreement null and void. Carevest submits that it is entitled to the funds owing to Riverdale as its secured creditor.

[ 19 ] Berkley points to paragraph 5.2 of the Riverdale subdivision agreement and argues that this contains an overriding provision. Section 5.2 provides in part,

Securities

In order to guarantee compliance with the conditions contained in the Agreement the Owner shall provide the Municipality [securities]… to cover the faithful performance for and the cost of the installation of such Works and other matters, and the performance of all obligations arising thereunder, together with all work affecting the Municipality

The securities will cover administrative matters of the Municipality as well and will be released in accordance with the applicable requirements of this Agreement. The Parties do not intend that the Municipality will draw upon the Securities of Letter(s) of Credit except in the case of default by the Owner of any of it obligations thereunder. It is to be noted that although securities that are contemplated under this Section and as are set out in the applicable Schedules are predominantly for the Works and matters to be provided, the Municipality may utilize the securities not only for the purposes for which they are predominantly intended, but also to ensure faithful performance for other obligations of the Owner as are stipulated in this Agreement. In other words, notwithstanding anything to the contrary in this Agreement, the Municipality may refuse to reduce securities or may in fact utilize securities to ensure that any or all of the Owner’s obligations are fulfilled but only to the extent of the value of securities posted or available to the Municipality. [Emphasis added.]

[ 20 ] Berkeley also grounds its position on a tacit agreement between the Town and Berkley. As Berkley states in its Factum at paragraph 30, “There was an understanding between the two parties [the Town and Berkley] to Subdivision Agreement Two that upon completion of the additional work Berkley would be paid the security forfeited by Riverdale when it failed to complete the work in the timeline agreed to under Subdivision Agreement One.”

[ 21 ] Prior to the motion both parties examined Ray Kelso, the Town’s manager of planning and development. Berkley points to the following questions and answers with respect to his position.

Q. Judging from the correspondence that I’ve taken you to, there was some understanding between the Town, the Town’s engineers, Berkley, and Berkley’s engineers that these funds had to be set aside under section 4.2 in respect to the sewer and water works to be available to the party that completed those sewer and water works?

A. Once the work had been completed the monies were to go back to the land owner. That was the agreement we had.

Q. I’m sorry? And you understood or to your understanding that landowner was?

A. Berkley Homes.

[ 22 ] However, Carevest points to the following questions and answers of Mr. Kelso:

Q. I want to direct your attention to Article 6.1 under the heading, “Construction of Private Municipal Works”. Can you read for the record the first sentence there?

A. Following the registration of this agreement, the owner shall cause to be constructed the Municipal and private works as shown…

Q. Can you read the last sentence of the last paragraph?

A. The owner agrees that all works shall be completed at the owner’s cost and shall be subject to the approval of the Municipality.

Q. Is it your understanding of that sentence that I just asked to you to read that the owner had the obligation to complete the works set out in schedule…

A. According to this agreement the owner agreed to do that, yes.

Q. Did the Town agree to pay the owner to do that?

A. No.

Q. Did the Town deliver to Berkley a work order requesting it to do any of the work in schedule E?

A. No.

Q. Did the Town enter into a contract with Berkley, hiring Berkley to do the work set out in schedule E?

A. No.

ANALYSIS

[ 23 ] When Riverdale defaulted on its obligations the Town retained in its possession the balance of Riverdale’s security deposit. The purpose of this deposit was to guarantee compliance with conditions in the subdivision agreement. In case of default the Municipality had the right to draw upon the security to complete the owner’s obligations under the provisions of paragraph 5.2. Had it done so it would have been able to reimburse itself for those expenses under the wording of paragraph 4.2. However, the Town chose not to do so. It entered into a new subdivision agreement with Berkley which covered all of the obligations which were of concern to it and it received a new security deposit from Berkley. It was only then that it triggered its option to declare the Riverdale agreement null and void pursuant to the provisions of paragraph 4.2.

[ 24 ] In my view, the overriding provisions in section 5.2 do not assist Berkley when that clause is looked at in its entirety. That clause only has application when the Municipality needs to “ensure that any or all of the owner’s obligations are fulfilled”. The Town, having entered into a new subdivision agreement with Berkley, had no more concerns about work uncompleted by Riverdale and only then triggered the repayment option requiring repayment to Riverdale.

[ 25 ] Prior to declaring the Riverdale subdivision agreement void the Town could have entered into a contract with a third party or even Berkley to do this work. However, once it declared the Riverdale agreement null and void it became obligated to return the funds to Riverdale. In my view an implied understanding between the Town and Berkley, that Berkley would get the remainder of the Riverdale deposit, cannot override the plain wording of the contract between the Town and Riverdale. It is clear that neither respondents, Carevest or Berkley, turned their minds to Riverdale’s security deposit when Carevest sold the property to Berkley under power of sale. Further neither of these respondents dealt with the issue when Berkley signed the new subdivision agreement with the Town, an agreement which was also signed by Carevest as Berkley’s mortgagee.

CONCLUSION

[ 26 ] In my view the net funds held by the Town pursuant to their interpleader action in the amount of $256,185 should be paid to Carevest as secured creditor for Riverdale as owner pursuant to Subdivision Agreement One between Riverdale and the Town.

COSTS

[ 27 ] At the conclusion of the hearing both respondents agreed that the successful respondent on the motion ought to be rewarded costs in the amount of $5,000 against the unsuccessful respondent. It is ordered that Berkley Homes (Blue Water) Inc. pay costs to Carevest Capital Inc. in the amount of $5,000 all inclusive forthwith.

MULLIGAN J.

Date: May 7, 2012