ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO: CV-09-393452
DATE: 20121207
B E T W E E N:
Circoflex Corporation, Devco Group Inc. and Skylite Residential Inc.
Plaintiffs
- and -
Royal Bank of Canada
Defendant
Larry J. Levine,Q.C.,
for the Responding Party/Plaintiffs
Rachel Moses,
for the Moving Party/Defendant
HEARD: December 5, 2012
GOLDSTEIN J.:
INTRODUCTION
[1] The Plaintiffs are a group of companies owned by Moe Zadeh. Each Plaintiff borrowed money from the Defendant bank. In November 2006 the Plaintiffs breach the loan agreements. The Defendant could have declared the loans in default and tried to collect; instead the Defendant transferred the loans into Special Accounts. Special Accounts is a branch of the Defendant responsible for dealing with delinquent borrowers. The loans were then re-negotiated and in May 2007 the Plaintiffs were given more funds and more time to pay off the loans. The loans for two of the Plaintiffs were amended again in September 2007. Those Plaintiffs were given, again, more funds and more time. Eventually the loans were either paid off or put in good standing.
[2] The Plaintiffs say that the Defendant should never have put the loans into Special Accounts. They say that by doing so, the Defendant cost the Plaintiffs damages and lost business opportunities. They say that because of the inexperience of Mr. Zadeh the Defendant should have known that he was in a vulnerable position. They commenced an action against the Defendant, seeking $15 million in general damages and $2 million in punitive damages.
[3] The Defendant brought a motion for summary judgment on the basis that the action is completely without merit. At the close of oral submissions I indicated that I would grant summary judgment and with written reasons to follow. These are those reasons.
FACTS
[4] Mr. Zadeh is an engineer and an entrepreneur. He holds graduate and undergraduate degrees in engineering from the University of Waterloo. He is the sole officer, director, and directing mind of the three Plaintiffs.
[5] Circoflex Corporation (“Circoflex”) manufactures circuit boards. Mr. Zadeh started the company in 1996. In 2004 the Defendant provided an operating loan of $150,000.00 to Circoflex that was repayable on demand. In November 2004 it provided another loan to Circoflex: a $160,000.00 demand instalment loan that was repayable by August 31, 2005.
[6] In 2003 Devco Group Inc. (“Devco”) acquired land in Belleville, Ontario for the purposes of developing a shopping mall, which it still owns. In 2005 the Defendant provided a demand loan of $1,360,000.00 to Devco to finance the development. The loan was repayable by October 31, 2005. That loan was later increased to $2,025,000.00 and the payout was extended to December 31, 2006. A letter of credit for $130,000.00 was also provided.
[7] In 2005 Skylite Residential Inc. (“Skylite”) acquired land in Orillia, Ontario. It developed a residential apartment building. In March 2006 the Defendant extended a term facility for $3,400,000.00 insured by the Canada Mortgage and Housing Corporation and a revolving facility of $300,000.00 repayable on demand. The term facility was increased twice so that it was eventually $4,450,000.00. It was repayable on the earlier of either the receipt of financing proceeds or April 1, 2007.
[8] Although the banking relationship between Circoflex, Devco and the Defendant has ended, the Defendant still has a mortgage on the Skylite property.
[9] By November 2006 all three Plaintiffs were in breach of their loan agreements. Devco had failed to pay trade creditors, and there were liens on the Belleville property. It was a term of the loan agreement that there be no liens registered. Circoflex had failed to pay back its loan by August 31 2005.
[10] The most serious breach concerned Skylite. The residential building it was developing in Orillia was the recipient of a grant from the Ministry of Municipal Affairs and Housing. Skylite did not report to the project monitor or to the Defendant that it had received part of the grant. Under the terms of the CMHC insurance where a grant was received from the Ministry the amount that could be advanced by the Defendant was reduced by a corresponding amount. The Defendant continued to advance funds, and, in fact, advanced more than $100,000.00 than it would otherwise have been permitted to if Skylite had reported the Ministry grant. As it turned out, the Ministry funds were diverted to Rafa Corporation, another of Mr. Zadeh’s companies, to develop a property in Owen Sound, Ontario.
[11] Once the loans were in Special Accounts, they received special attention from the Defendant. The loans were re-negotiated with new terms in May 2007. Payment dates were extended. New monthly fees and higher interest rates were charged on the Circoflex and Devco loans, but the Skylite loan was unchanged except for a monthly management fee. Eventually the Circoflex and Devco loans were repaid. The Defendant still holds a long-term mortgage on the Orillia property developed by Skylite. All three Plaintiffs are now in financial health.
[12] In December 2009, the Plaintiffs issued the Statement of Claim. The key allegation is set out in Paragraph 14:
The transfer of the Plaintiffs’ accounts to ‘special loans’ was at worst recklessly indifferent to the Plaintiff’s interests and therefor fraudulent and at best negligent and was damaging in the extreme to the interests of the Plaintiffs.
ANALYSIS
[13] Ms. Moses argues on behalf of the Defendant that the Plaintiffs have failed to demonstrate a cause of action known to law. The transfer to Special Accounts was done openly and with full knowledge of the Plaintiffs. The transfer changed none of the existing legal and contractual relationships between the Defendant and the Plaintiffs. There was nothing in the loan agreements to prevent an internal administrative transfer of the accounts from one department of the Defendant to another. Ms. Moses further argues that the claim is statute-barred by reason of the limitation period, since the movement to special loans took place in November 2006 and the claim was issued in December 2009, more than a year after the limitation period expired.
[14] Mr. Levine, for the Plaintiffs, argues that Mr. Zadeh had no experience in real estate and was something of a business ingénue. As a result, the Defendant owed a special duty to him. In other words, there was a fiduciary relationship that was created. The movement of the loans to Special Accounts caused significant damage to the Plaintiffs and the proximate cause was the breach of these fiduciary duties.
[15] I must first determine whether the record is sufficient for me to consider the question of summary judgment. The test is set out in Combine Air Mechanical Services Inc. v. Flesch, [2011] O.J. No. 5431, 108 O.R. (3d), 2011 ONCA 764 (C.A.):
50 We find that the passages set out above from Housen, at paras. 14 and 18, such as "total familiarity with the evidence", "extensive exposure to the evidence", and "familiarity with the case as a whole", provide guidance as to when it is appropriate for the motion judge to exercise the powers in rule 20.04(2.1). In deciding if these powers should be used to weed out a claim as having no chance of success or be used to resolve all or part of an action, the motion judge must ask the following question: can the full appreciation of the evidence and issues that is required to make dispositive findings be achieved by way of summary judgment, or can this full appreciation only be achieved by way of a trial?
[16] The parties are required to put “their best foot forward”. The Defendant has put forward a large record of documents and an affidavit. Mr. Zadeh filed a lengthy affidavit and was cross-examined on it. I am satisfied that I can obtain a full appreciation of the evidence based on the record, especially given that the real issue as pleaded is whether the movement of the loans to Special Accounts was done fraudulently or negligently and resulted in damages. The basic facts – the loans were made, the terms were breached, the accounts were moved, the loans were re-negotiated – are not contested. Although the fiduciary duty argument was raised in the factum, it was not pleaded and there are no facts set out in the Statement of Claim that would support such a claim. I am satisfied that the facts set out in Mr. Zadeh’s affidavit regarding the alleged fiduciary duty are sufficient for me to gain a full appreciation of that issue. Accordingly, I am satisfied that this is an appropriate case for summary judgment.
[17] The evidence is that Special Accounts is simply an administrative section of the Defendant. I agree with Ms. Moses that there is no evidence that the transfer to Special Accounts changed any of the legal and contractual relationships between the Plaintiffs and the Defendant. The evidence is clear that what changed the legal and contractual relationship between the Plaintiffs and the Defendant were the defaults by the Plaintiffs. The transfer was done openly. There can be no fraud or negligence in simply moving an account. In any event, there have been no particulars of fraud provided by the Plaintiffs, either in the Statement of Claim or in the evidence filed on this motion. In the absence of such particulars, the allegation must fail: see Rule 25.06(8) of the Rules of Civil Procedure. I appreciate that this is a summary judgment motion, not a pleadings motion, but he failure to comply with the Rules has some bearing on whether or not there is a triable issue.
[18] Turning to the issue of whether there was a fiduciary relationship between the Plaintiffs and the Defendant, Mr. Levine relies on the venerable case of Lloyd’s Bank v. Bundy, [1974] 3 All E.R. 757 (C.A.) where Lord Denning famously set out the basis upon which a court will intervene to protect a vulnerable client:
Gathering all together, I would suggest that through all these instances there runs a single thread. They rest on "inequality of bargaining power". By virtue of it, the English law gives relief to one who, without independent advice, enters into a contract or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infirmity, coupled with undue influences or pressures brought to bear on him by or for the benefit of the other. When I use the word "undue" I do not mean to suggest that the principle depends on proof of any wrongdoing. The one who stipulates for his own excessive sum may be moved solely by his own self-interest, unconscious of the distress he is bringing to the other. I have also avoided any reference to the will of the one being "dominated" or "overcome" by the other, One who is in extreme need may knowingly consent to a most improvident bargain, solely to relieve the straits in which he finds himself. Again, I do not mean to suggest that every transaction is saved by independent advice. But the absence of it may be fatal. With these explanations, I hope this principle will be found to reconcile the cases.
[19] The evidence set out by the Plaintiffs simply does not support the allegation that a fiduciary relationship was created, either at the time the parties entered into a banking relationship, at the time the loans were moved to Special Accounts, or at the time the loans were re-negotiated while in Special Accounts. Mr. Zadeh deposes that he was inexperienced in real estate and that the Defendant offered to work with him. The relationship between a bank and a customer is a commercial relationship unless special circumstances exist, such as discretion to manage funds or a situation of vulnerability. There is no evidence that the Plaintiffs were in a position of vulnerability vis-à-vis the Defendant: Lac Minerals Ltd. v. International Corona Resources Ltd., 1989 34 (SCC), [1989] 2 S.C.R. 574.
[20] Mr. Zadeh’s evidence does not come close to the type of evidence that would be required to establish vulnerability. He may have been new to real estate, but he was not new to business. He has a graduate degree in engineering. His first business, Circoflex, had been operating for several years prior to the first loan from the Defendant.
[21] The evidence seems clear that the Defendant was well justified in sending the loans to Special Accounts. I see no negligence whatsoever. The Defendant chose not to take collection action against the Plaintiffs, although it would have been well within its rights to do so. I agree with the Defendant that the monitoring and expertise provided by Special Accounts resulted in the survival of the Plaintiffs, all of which, on the evidence, are doing well now. The Plaintiffs have been unable to put forward particulars of the damages. In fact, there were no changes to the fees and interest rates charged by the Defendant upon the transfer to Special Accounts. There were new loan facilities that resulted in extra charges and higher interest. Mr. Levine argues that those extra charges and interest constitute the damages to the Plaintiffs, but those terms were negotiated between the parties. The alternative to the new loan facilities was likely insolvency. As well, there is no evidence that the new facilities carried anything other than market rates of interest.
[22] I also point out that Mr. Zadeh had signed a personal loan guarantee for $2,000,000.00. The Defendant’s decision to send the loans to Special Accounts rather than take collection proceedings likely spared him significant personal costs. I acknowledge that Mr. Zadeh is not a party to these proceedings, but he is clearly the principal and driving force behind all three corporate Plaintiffs.
[23] Finally, the proximate cause of the changes to the loan agreements was not the transfer, but rather the breaches by the Plaintiffs, which they acknowledge. I therefore find that the Plaintiffs suffered no damages.
[24] I also agree that the claim is statute-barred. The Limitations Act, 2002, S.O. 2002, c. 24, Sched. B sets out a two year limitation period from the day the claim was discovered. If the action rests on the foundation that the movement of the loans to Special Accounts was fraudulent or negligent, then the limitation period would have run from the day that the Plaintiffs became aware of the transfer: Lawless v. Anderson, 2011 ONCA 102, 276 O.A.C. 75 (C.A.). The burden is on the Plaintiffs to show that the Statement of Claim was issued within the limitation period: Ferrara v. Lorenzetti Wolfe, 2012 CarswellOnt 957, 2012 ONSC 151 (Sup.Ct.). Since the Plaintiffs obviously knew that their loans had been moved to Special Accounts almost immediately, the limitation period began in November 2006. Even if the time began to run from the moment that the damages were crystallized – the higher interest costs and the management fees – that was May 2007, still outside the period.
COSTS
[25] If the parties are unable to agree on costs, the Defendant may submit, within 14 days, a brief costs submission (not exceeding 2 pages) and a bill of costs. The Plaintiffs may submit, within 10 days after that, a brief costs submission (also not exceeding 2 pages) in reply.
GOLDSTEIN, J.
DATE: December 7, 2012
COURT FILE NO: CV-09-393452
DATE: 20121207
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
Circoflex Corporation, Devco Group Inc. and Skylite Residential Inc.
Plaintiffs
- and -
Royal Bank of Canada
Defendant
JUDGMENT
GOLDSTEIN J.
Released: December 7, 2012