DATE HEARD: January 21, 22, 25, 28, 29, February 13, 19 and written submissions March 4, 14 and 19
ENDORSEMENT RELEASED: August 20, 2013
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: JINGZHU “FREEMAN” CHEN v. SEAN WATTS and PIRA SAED EBRAHIMI
AND RE: SEAN WATTS v. CINDY YEWON CHUN, HYELYEON LEE, FREEMAN CHEN, NICHOLAS KINNEY and JOE DOE
BEFORE: Master R. Dash
COUNSEL: Jack Copelovici, for the plaintiff/defendant Jingzhu Freeman Chen
Sean Watts, defendant/plaintiff in person
Pira Saed Ebrahimi, defendant in person
REASONS FOR DECISION
1These are the reasons constituting my report on two references directed to the master and heard by me. The references concern an accounting for monies owing, contributions made and ownership holdings on two Toronto properties as among Jingzhu “Freeman” Chen (“Chen”), Sean Watts (“Watts”) and Pira Saed Ebrahimi (“Ebrahimi”) and three London properties as between Chen and Watts. The evidence included affidavits of all three parties supporting their respective accountings and objections to the accounting of the other parties, transcripts of cross-examinations on those affidavits, seven days of viva voce evidence and subsequent written submissions. Mr. Watts was represented by counsel through the hearings for directions, but ultimately represented himself at the hearing of the reference.
THE ORDERS OF REFERENCE
2With respect to action CV-10-402370 (the “Chen Action”) Spence J. on December 1, 2010 ordered the accounting with respect to the two Toronto properties, 15 Marowyne Drive (“Marowyne”) and 129 Bishop Avenue (“Bishop”). On March 8, 2012 Strathy J. in the Chen Action added to the reference the determination of the terms and conditions of sale of Bishop, however that determination was made by me at a hearing for directions on March 29, 2012 and the property was subsequently sold. With respect to CV-10-403998 (the “Watts Action”) Chapnik J. on June 28, 2011 ordered the accounting with respect to the three London properties, 76 Edgar Drive (“Edgar”), 532 Canterbury Drive (“Canterbury) and 55 Essex Boulevard (“Essex”). The reference in the Watts Action does not deal with all issues in that action which still must be tried, nor does it concern the various named defendants other than Chen. The orders of reference direct that I determine the costs of the reference, although in the Chen Action, Spence J. ordered Watts to pay costs of $1,300 to Chen and Strathy J. ordered Ebrahimi to pay costs of $1,130 to Chen, which must be accounted in determining the entitlements of the parties.
THE PURCHASES
3I find that Chen and Watts agreed to purchase properties in London and Chen, Watts and Ebrahimi agreed to purchase properties in Toronto, renovate them as needed and either rent out units in the houses by way of traditional tenancies (the London properties) or as home stay units where home stay locator services would place overseas students in units in the houses for a fee that included room, board and orientation assistance (the Toronto properties, although Bishop became a traditional rental property).
4The purchases of Marowyne, Canterbury and Edgar closed in May 2007, Bishop closed in August 2007 and Essex never closed, the agreement to purchase having been transferred to a third party. Each property was placed in the name of only one of the parties, Marowyne in the name of Watts, Bishop in the name of Ebrahimi, Canterbury and Edgar in the name of Chen. Notwithstanding title, it was clearly understood that the London properties were owned 50% each by Chen and Watts and the Toronto properties owned 1/3 each by Chen, Watts and Ebrahimi (subject to adjustments for contributions).
THE AGREEMENT AND ITS EFFECT ON ENTITLEMENT TO CERTAIN EXPENSES CLAIMED
5I have been provided with a “General Real Estate Partnership Agreement” dated May 1, 2007 signed by Chen, Watts and Ebrahimi respecting the Toronto properties (the “Agreement”). Although no lawyer was involved in its preparation and it was modified from an on-line precedent, mainly by Watts, all parties agree that the agreement governs their partnership respecting the Toronto properties. The Agreement recited that each of three partners contributed to the capital of the partnership in an amount equal to “the portion of down payment made”, that a record of relative contributions be made when a property was purchased and initial relative contributions would be 33.3% each. A bank account was to be established for management expenses and revenues and no partner would be entitled to interest on his capital contribution or to withdraw any part of his capital account or to receive any distribution except to pay business expenses.
6The Agreement provided that the net rental profits and losses were to be shared 33.3% each. If additional funds were required for operating costs, they were to be contributed by the partners in proportion to their capital interests (which I find to be 33.3.% each). If any partner was unable or unwilling to pay their proportionate contribution then any remaining partner able and willing to do so may make a contribution in excess of their proportionate share and treat the contributions as additional capital or as a loan to the defaulting partner.
7The Agreement referred to Watts as the “managing partner”, Chen as the “investing partner” and Ebrahimi as the “up-front partner.” I find on the evidence that as managing partner Watts was responsible for finding properties to purchase, arranging renovations, leasing, borrowing and banking. The Agreement required all partnership funds to be deposited in its name in an account designated by the managing partner and “all withdrawals are to be made by the managing partner.” I find Watts convinced the other partners to invest in the partnership because of his representations that he was experienced in the management of rental properties (and in fact he did have some experience) and that he would “manage” the partnership properties. I find that as investing partner, Chen was expected to front capital, renovation and operating costs not covered by the initial investments and rental income. I find that as “up-front partner”, Ebrahimi was charged with the responsibility of running the day to day aspects of the Toronto properties including home stay at Marowyne and looking after the students’ needs. Watts and Ebrahimi were expected to put in more time with the management of the properties than Chen since Chen was expected to put in more capital contributions.
8Although not in the Agreement, it was understood by all parties that Watts and Ebrahimi, who had limited cash, would each invest $10,000 toward the purchase of the Toronto properties and Chen would pay the balance. It was also understood that despite the wording of the Agreement, Chen would cover any shortfalls in renovation and operating costs and be repaid through monthly profits (rents in excess of costs). There is a disagreement on the length of time that Chen was expected to cover shortfalls. Watts testified that the houses were a long term investment and it would take up to two years before they could expect an ongoing profit, whereas Chen thought that he would be covering shortfalls for only a few months and thereafter the rents would cover expenses. Chen believed he would be paid back in full within two years without interest. I conclude that while Watts’ assessment was more realistic and turned out to be more accurate, that expectation was never made clear to Chen. This difference in expectation was a major source of friction between Chen and Watts and prompted Chen to initiate an early sale of the London properties.
9In exchange for Chen paying a greater share, and as a quid pro quo therefor, Watts was to manage the properties and Ebrahimi the day-to-day home stay work. In the result all three would equally share in profits. It was agreed that the partners would share 1/3 of all profits and 1/3 of all losses and after repayment of excess contributions by one or more of the partners, they would equally share the balance of any equity when a property was sold.
10I find that there was no agreement that the partners would receive a disproportionate share of income or profits or other compensation for doing what they were required to do. This means that Watts is not entitled to compensation for the time he spent doing management. Compensation for management could have been included in the Agreement if that was the intention. Managing the properties was his “job” as managing partner. For that, he would have become entitled to an equal share of profits should they materialize, but he is not entitled to additional compensation for that work. On the other hand, Watts would have been entitled to compensation for time spent doing “hands-on” renovation work, where he saved the partnership money by doing some work himself rather than hire contractors. Unfortunately, Watts did not keep accurate or contemporaneous time sheets or other records of his time and he has lumped together management services and renovations in his accounting without differentiating the time spent on each. I am therefore not satisfied that he has proven any entitlement to compensation for renovation work. Even if I were to have considered awarding either management or renovation fees as a legitimate partnership expense, there is no evidence of what an appropriate rate should be for a person with the experience and expertise of Watts. Of course Watts is entitled to be reimbursed by the partnership for out-of-pocket expenses paid for by him out of his personal funds, including payments to third parties for labour or materials respecting the renovations.
11There was never an agreement that Ebrahimi would be paid for her home stay work, although it was anticipated she would get a reduction in her rent for living in the unit at Marowyne and later at Bishop. I do not accept that there was any agreement that she live in the properties, which would otherwise produce rental income for the partnership, rent free. I do not accept Ebrahimi’s assertion that she has “paid” her rent through contributions to mortgage, insurance and other operating costs. On the other hand she is entitled to a credit for all payments made by her to mortgage, taxes, insurance, renovations, upkeep and other operating costs as proper partnership expenses. (It is unworkable to consider her claim as 2/3 of expenses paid by her to be reimbursed by the partners. It is better accounting to allocate 100% of the expenses to her credit against the partnership.) The fair market value of the three rooms occupied by Ebrahimi would be $1500 to $1650 per month. I find that fair rent, reduced to compensate her for operating the home stay, to be $1,200 per month – in fact an amount suggested by her. In other words she is to repay, by way of debit to the partnership, $1,200 for each month of her occupation in Marowyne (May 2007 to June 2009) and Bishop (July 2009 to July 2012) and in turn be credited with legitimate expenses paid by her related to those units. The $1,200 per month is to be inclusive of utilities, just as home stay fees included utilities. As a result, payment for utilities as well as snow removal and grass cutting for the benefit of the entire property (both her own rooms as well as those of home stay or tenants) at Marowyne and Bishop are a legitimate partnership expense and she is entitled to credit for such expenses paid by her.
12I find that none of the parties are entitled to compensation for their time and work done in property management, home stay management, renovation and repair or accounting. The Agreement does not provide for such credit, there was no agreement among the parties that any of them be so credited, there are no contemporaneous time sheets and there is no evidentiary basis for attributing an appropriate hourly rate.
13Food expenses are not a legitimate expense to be claimed personally by Ebrahimi. To the extent food was for the home stay students, the home stay fees included an allowance for food and she should have managed the home stay payments such as to cover those costs. Clearly she is not entitled to recoup food costs for herself and her family and there is no clear delineation between the cost of food consumed by her family and the portion consumed by the students. If Pira “topped up” what the students were otherwise entitled to pursuant to their home stay agreements, then that is on her own account as it was never authorized by the partners.
14I find Chen is entitled to his excess capital contributions and contributions to renovations and operating costs not covered by rental income, but he is not entitled to compensation for his time, nor interest on his excess contributions.
15Neither Watts nor Chen were able to locate a copy of the agreement respecting the London properties, however they both agree that it is identical to the Toronto Agreement save that profits and losses were to be divided equally as between Chen and Watts. Chen was to contribute 65% and Watts 35% of the down payment and purchase costs and thereafter expenses would be shared 50% each.
THE BREAKDOWN OF THE PARTNERSHIP AND WATTS’ UNSUSTAINABLE CLAIMS RESPECTING TRAVEL AND DELEGATION OF MANAGEMENT
16I find that the partnership broke down as a result of Watts returning to Korea in October 2007 and abdicating his management responsibilities under the Agreement. I accept the evidence of both Ebrahimi and Chen that they expected Watts to remain in Toronto to carry out his responsibilities to manage the partnership properties and that they did not anticipate that he would return to Korea. Watts was, after all, the partner with experience in real estate, leasing and property management. He did not tell them at the time the partnership was formed of his intention to return to Korea. I accept Ebrahimi’s evidence that the expectation was that Watts would live in Bishop and handle the home stay thereat and possibly buy a house in Toronto to live in. Watts’ evidence is that a Korean address on the partnership Agreement should have been sufficient to convey that information. I disagree. The return to Korea and abdication of management flies directly in the face of his responsibility as managing partner as out in the Agreement. Watts played a significant role in drafting the Agreement and it would not have been difficult for him to specify in the Agreement that he would be returning to Korea and to modify his responsibilities as managing partner in accordance with his true intentions. Such a significant shift in the dynamics of the partnership should have been conveyed unambiguously to the partners or written into the Agreement.
17It was a breach of Watts’ obligation to manage the properties to delegate management to “tenant managers”, who received reduced rent in exchange for management responsibilities, without the agreement of the partners. The partners had not agreed to that delegation or to the reduced rent. While Chen makes a compelling argument that Watts should be debited for the amounts by which rents were reduced, I am not prepared to go that far since losses attributable to mismanagement or failure to manage is not within the purview of this reference. It was the expectation of his partners that Watts would remain in Toronto to directly manage home stays at Bishop, while Ebrahimi did the day to day work associated with home stays at Marowyne. It was a breach of Watts’ commitment when he returned to Korea to leave Ebrahimi with all of the work related to Bishop. It was not possible for her to run a home stay program at both properties given her outside full time job. As a result it was necessary to turn Bishop into a rental property at a loss of income to the partnership. Again, however, assessing such loss is beyond the terms of this reference. I also note that Watts left before the renovations on Bishop were completed, a further dereliction of his management responsibilities.
18It was a breach of Watts’ obligation to manage the properties to delegate banking responsibilities to Ebrahimi without the agreement of the partners. The Agreement provided that Watts was charged with banking responsibilities as managing partner. It was his evidence that he gave banking authority to his partners and although he retained the ability to conduct on-line banking from Korea, he rarely looked at the banking transactions on-line to ensure rents were being deposited and expenses paid. On cross-examination Watts stated that after October 2007 he “didn’t have to do anything”.
19Paragraph 9 of the Agreement stated: “All funds of the Partnership shall be deposited in its name in an account designated by the managing partner.” Watts failed to open an account in the name of the partnership. Proper management would have required one or more accounts to be opened and used only for partnership properties, either one per property or at least one for Toronto properties and one for London properties. Watts failed to do this. To the contrary banking was done by each of the partners through a number of bank accounts in the name of different partners that not only were not organized by property, but which intermingled partnership and personal funds. It was Watts’ responsibility to organize a proper banking system for the partnership. His failure to do so created disorganization and hindered the ability of the partners, and the court, to do a proper accounting. It has created problems in separating partnership and personal expenses. The Agreement also provided that “all withdrawals are to be made by the managing partner.” It is unknown why Watts included that term in the Agreement, but it is clear he was in breach of the term. Watts failed to keep concurrent records and his accounting was put together after the fact. Watts admitted that “in hindsight” his was “bad management.” Further, Watts admitted in an email: “I feel I am responsible for most problems. I am sorry.”
20It was a breach of Watts’ obligation to manage the properties to delegate responsibilities to deal with property repairs, prepare accounting and deal with legal, tax and conveyancing issues to his cousin Jim Fielders in his absence without the agreement of the partners. The partners had not agreed to that delegation, or at least not to be responsible for paying Fielders to do Watts’ work. Chen and Ebrahimi formed the reasonable expectation that Fielders was helping out in Watts’ absence on a voluntary basis, as “a friend”, with no expectation of compensation. I have reviewed Fielders’ invoice # 1163 dated June 27, 2011 for what he described on the invoice as “Property Management Services” and covers services from 2008 to 2010. It includes preparation of accounting records for London and Toronto properties, assisting in sale of properties including managing repairs, meeting real estate agents and conveyancing lawyers, drafting agreements, communicating with mortgagees and dealing with tax issues. These were all management responsibilities of Watts and it is inconceivable that he should expect that the partnership should pay Watts’ cousin for doing Watts’ job. The account also includes $2,000 for “email reports to inform Sean Watts”, clearly not a partnership obligation. It also includes $3,000 for time spent organizing the sale of “Paperbirch and Castlegrove”, properties not owned by the partnership but owned personally by Watts. Watts also claims $10,000 to pay Fielders for kitchen cabinets. I find this is not a partnership debt as Watts had boasted to his partners that he had obtained the cabinets from his cousin for free. The “purchase” was not authorized by the partnership. Any promises to Fielders made by Watts are strictly on Watts’ own account. I find that the entire invoice from Fielders in the sum of $29,873.67 as well as any obligation to pay Fielders $10,000 or any sum for the cabinets is the sole responsibility of Watts. If Watts paid the expense personally he is not entitled to a credit from the partnership. If it was paid from partnership funds Watts must reimburse the partnership. If it has not been paid that is a debt between Fielders and Watts. Indeed the invoice is addressed to “Sean Watts”.
21On the other hand, if Fielders paid any actual out-of-pocket expense to third party suppliers or labourers on behalf of the partnership (such as for painting as set out in Ebrahimi’s accounting), that is a legitimate partnership expense.
22It also follows that all claims by Watts for expenses in returning from Korea to Toronto to deal with management issues cannot be claimed against the partnership. That includes travel costs from Korea to Canada, travel, housing and motel costs within Canada, and use of a cell phone. It was Watts’ responsibility to manage. It is disingenuous for Watts to charge to the partnership expenses for doing the job he contracted to do and which he would not have incurred if he had remained in Canada to perform his management responsibilities. Watts claims Chen approved of this expense in an email suggesting that the partnership would have to pay for the “real estate guru” to come to town; however in my view this was not an admission by Chen, but sarcasm. In any event it was never approved by Ebrahimi. It offends the court’s sense of justice that Watts would abandon his management responsibilities by returning to Korea and then demand that the partnership pay for his expenses when he returned to Canada to help manage.
23Watts blames Chen for the premature termination of the partnership by failing to support the shortfalls in operating costs and by selling the two London properties, Canterbury in July 2009 and Edgar in May 2012, which the partners had registered in Chen’s name, without the approval of Watts.
24The shortfalls were primarily covered by Chen until in or about October 2007 and thereafter primarily by Watts and Ebrahimi. After Watts left for Korea, Chen more or less stopped contributing or assisting with the tenants. As Ebrahimi put it, Chen and Watts left her “alone to do everything.”
25While Chen did stop contributing to the shortfalls on the properties by October 2007, I find he did so out of an unrealistic expectation that the properties should have been turning a profit within a few months and generating excess cash to repay his contributions. This was exacerbated by his frustration arising out of Watts failing to manage the properties after his return to Korea causing him and Ebrahimi to assume a greater share of management respectively in London and Toronto. While failing to continue his support for the operations of the properties was in my view a poor economic decision by Chen and a breach of his obligations as the “investing partner”, it does not, in my view, affect the accounting that has been referred to me. Simply put, if Watts and Ebrahimi made payments that were required of Chen, that means that Watts and Ebrahimi, rather than Chen get credit for those payments.
26Chen’s failure to continue contributing caused Watts and Ebrahimi to contribute financially more than they had anticipated and in some cases incurring debt to do so. They shall be entitled to recover as a debit against partnership assets all financial contributions made. They shall not be entitled to recover financing or bank charges. Similarly Chen and the other partners are not entitled to interest on their advances whether or not in excess of other contributors. I also remind Watts and Ebrahimi that despite the oral agreement for Chen to cover shortfalls (although in dispute whether it would be for a few months or a few years) the written Agreement paragraph 7(a) calls for equal contributions if the income from the properties is insufficient to cover operating costs. Paragraph 7(c) provides that if any partner contributes disproportionately because the remaining partners will not or cannot do so, then the excess contributions shall be treated as additional capital or a loan to the defaulting partners, but there is no agreement to pay interest on the contributions. Again, if interest was to be attributed, it could and should have been set out in the agreement. To the contrary, the Agreement specifically provides no interest will be payable on capital contributions. There is no other penalty in the agreement for failure to make equal or excess contributions.
THE CLAIM TO A PENALTY
27Watts purports to charge Chen with a penalty for selling the London properties prematurely by invoking paragraph 13 of the Agreement (meaning the agreement respecting the London properties which was never located but which is conceded to contain the same essential terms). Paragraph 13, entitled “Termination of the Partnership” provides that upon termination of the partnership within 6 months that is not mutually agreed upon, the properties shall be valued and sold and the partner “wishing to prematurely end the partnership” shall accept a 1/6 financial penalty and the partners wishing to “continue the partnership” shall receive an additional 1/6 share of net proceeds. The paragraph has the same terms for termination within 12 months accepting a 1/9 financial penalty, within 24 months a 1/12 penalty and within 60 months a 1/15 penalty. Those percentages were written for a 3-person partnership (Toronto) and it is likely the numbers may be different for a 2-person partnership (London) but there is no evidence of the applicable penalties in the missing London agreement.
28While Chen was clearly in breach of the Agreement by selling the London properties unilaterally and without consultation with his partners, I find that no penalty be assessed against Chen arising out of his sale of those properties. Paragraph 13 does not apply for the following reasons:
(a) The penalty under paragraph 13 applies to a termination of the “Agreement”, in effect a termination of the partnership, (wherein all “properties are to be valued and sold”) but not to a unilateral sale of one or more properties owned by the partnership.
(b) Even if it could be said that Chen’s actions amounted to a termination of the Agreement, I find that the Agreement was already in ongoing breach by Watts, and sale of the properties was an attempt by Chen to mitigate his losses.
CLAIM FOR IMPROVIDENT SALE
29Watts also complains that the sales by Chen of the London properties were improvident. Chen did not list the properties for sale or retain a realtor nor did he advertise privately. He simply sold to an acquaintance. There is no doubt that Chen did not use the most reasonable method for obtaining the highest price for the properties and failed to test the market. I am however unable to debit Chen with any sum representing the true market value of the properties, to the extent they exceed the actual sale price, for several reasons:
(a) The issue of improvident sale was not before the applications judge and in turn the determination of improvident sale was not referred to me. My jurisdiction on the reference is restricted to matters referred to me by the applications judge. In any event Watts indicated that he was moving before a judge to amend his application and seek a declaration of improvident sale or a reference to the master to make such determination. If that motion has been heard, I have not been informed of the result.
(b) While the method of sale by Chen certainly is a strong factor in determining whether it was improvident, there has been no evidence proffered by any of the parties of the fair market value of the properties, such as a formal property appraisal or even a valuation by a realtor. It would therefore have been impossible for me to determine whether the sale price was below the fair market value, and if so by how much and if any such difference exceeded the savings by not having to pay real estate commission on the sale.
30What was clearly improper however was Chen retaining the proceeds of sale himself and using the monies to repay his capital contributions. The clandestine sale of Edgar while this action was in progress was particularly egregious. The Agreement clearly sets out a method for distributing the proceeds of sale in paragraph 13 by paying all expenses and the “subtracting the amounts paid by each partner for their initial down payments and thereafter split the proceeds 1/3 to each partner. The London agreement would of course referred to splitting the proceeds 50% to each of the two partners.
SALE OF PARTNERSHIP PROPERTIES AND AVAILABLE FUNDS
31Canterbury was sold by Chen closing in July 2009. The trust ledger statement from the conveyancing lawyer indicates that the proceeds from Canterbury in the sum of $60,617.82 were paid to Chen. Chen admits retaining all of those funds. For purposes of this accounting Chen must repay the entire $60,617.82 to the partnership. Edgar was sold by Chen closing in May 2012. It appears from the evidence that $33,807 was received by Chen from the sale of Edgar although this appears inconsistent with the trust ledger statement from the conveyancing lawyer. Again, Chen must repay any sum received on that sale to the partnership for purposes of this accounting.
32I find that the agreement of purchase and sale of Essex was sold by Watts to a third party and Watts received $6,800 from that sale, which he retained. For purposes of this accounting Watts must repay the entire $6,800 to the partnership. I also note that Watts received approximately $9,000 as a rebate from the vendor of Canterbury and for purposes of this accounting Watts must repay that sum to the partnership; however if as he claims, the monies were used for changing windows, this would be an allowable expense to claim as a credit from the partnership if invoices exist to back up the claim.
33From the proceeds Chen and Watts shall each be entitled to repayment of their respective capital contributions to the London properties and any profits divided 50% each. If there is insufficient funds to repay all capital contributions each shall suffer a pro rata loss.
34In terms of the Toronto properties, Marowyne was sold under power of sale in March 2010 and proceeds of $50,090 were paid into court. That sum shall be credited to the partnership. It was sold under power of sale when none of the parties paid for the mortgage after Ebrahimi left the premises. She left because Watts was demanding that she sign a lease for $3,000 per month. After Ebrahimi left there were no further home stay students to pay for the mortgage and other expenses.
35Bishop was sold in July 2012 pursuant to court order and Watts’ former lawyer, Neal Roth, is holding in trust the proceeds of sale, said to be approximately $226,000. There has been no objection to the method of sale or amount of the proceeds. That sum shall be credited to the partnership.
36Each of the partners contributed capital to the purchase of the properties although Chen paid a much larger share. Each of Chen, Watts and Ebrahimi paid personally for various expenses that could not be covered by rental income including from time to time labour and materials for renovations and repairs, mortgage, taxes, insurance, utilities and other operating costs. The shortfalls were primarily covered by Chen until in or about October 2007 and thereafter primarily by Watts and Ebrahimi.
37Each of Chen, Watts and Ebrahimi are entitled to be repaid their respective capital contributions to the Toronto properties and any profits thereafter divided 1/3 each. If there is insufficient funds to repay all capital contributions each shall suffer a pro rata loss.
ALLOWANCE OR DISALLOWANCE OF CERTAIN EXPENSES
38Most items should no longer be in dispute as a result of the rulings made earlier in this endorsement and rulings to follow herein. I will determine any remaining disputed line items if necessary. I have determined that none of the partners can claim for their time spent for management, renovations or any other purpose. The only deductions will be for actual payments made to third parties that are supported by proper records, whether it be for labour, materials, mortgage, taxes, property insurance or other operating costs. Some third party payments are not partnership expenses. I have already determined that the invoiced “debt” to Jim Fielders and payment to him for the cupboards are not partnership expenses, but rather personal expenses to Watts. While I have debited Watts with the $9,000 rebate on Canterbury, he may, if proven to have been used for changing the windows thereon, it would be a legitimate partnership expense. The cost of appraisals for partnership properties under consideration is a legitimate partnership expense, even if incurred prior to the establishment of the partnership, however gas and meals during the search for properties, while possibly tax deductible to Watts is not to be debited to the partnership. No other expenses allegedly incurred prior to the date the properties were purchased will be allowed, other than materials that were eventually used in the renovation of partnership properties. It is inconceivable that other costs, particularly labour related to renovations, could have been incurred before the parties took possession of the partnership properties. Charges allegedly paid by Watts and Ebrahimi for property inspections to obtain mortgages will be permitted if invoices are part of the documentation filed. The claim by Watts for “inspectors’ fees” on Canterbury however will not be allowed since during the hearing Watts was unable to produce supporting bills although given time to do so.
39The payment by Watts to various lawyers including Worrd, Steinberg, Cohen and Devry Smith were in my view made to protect Watts’ interests and were personal to him and not chargeable as a partnership expense. Of course bills paid to conveyancing lawyers on purchases and sales are properly partnership expenses.
40I have determined that Ebrahimi’s payment for utilities was a partnership expense, but not food. While Watts can claim for food and beer given to the workers as a quid pro quo for discounted labour charges, Watts cannot claim for his own food. The fairest division would be to allow 50% of Watts’ proven food expenses. I have determined that Watts cannot claim for his travel expenses incurred coming from Korea or staying in Canada. I would go further and disallow any travel costs said to be incurred by any of the partners in locating properties to purchase, attending for renovations, repairs or other problems or collecting rents. This may be an allowable deduction on each party’s tax returns as an expense to earn partnership income, but it should not be treated as a partnership expense for purposes of this accounting. (I note that none of the parties provided income tax returns for the relevant years to demonstrate how they presented income or losses from rental properties.)
41I accept that life insurance payments made by Chen were legitimate partnership expenses as such payments were understandably required by the bank as security for the mortgage on partnership property. Given the unnecessary plethora of bank accounts I would not allow bank service charges as a legitimate partnership expense. I would have come to a different conclusion if partnership bank accounts had been opened as required by the Agreement, but these were personal accounts. I have disallowed interest paid to financial institutions on personal borrowing to make partnership payments. I also disallow notional interest to any of the partners on payments made. With some reluctance I accept that payments to Exclusive Rentals by Chen for management and leasing services is a justified partnership expense, given Watts’ departure to Korea. I accept Ebrahimi’s costs for transporting and storing Bishop furniture as a necessary partnership expense. The furniture used to support multiple tenancies had to be stored when a single tenant wanted the entire premises free of furniture. The cost of evacuating the remaining tenant in Bishop is also a legitimate partnership expense. I do not accept Ebrahimi’s travel and storage costs related to her move from Marowyne to Bishop as a partnership expense. To the extent that Ebrahimi had to move because of Watts’ demand for a $3,000 per month lease, those expenses are a matter between her and Watts.
42Cash withdrawals will not be allowed as expenses as such, but only those cash payments used for legitimate partnership expenses that are supported by proper evidence. Cash withdrawals and bank transfers will only be allowed if the expense has been properly explained in the supporting documents or oral evidence.
POCKETING RENTAL MONIES
43Each of the partners accuses the others of “pocketing” some of the rental payments without accounting for it or depositing the monies in an account used for partnership purposes. Watts is accused of absconding with rental monies to Korea. Of course, Watts had little involvement in rent collection, other than first and last months rent, and only sporadically after that. Ebrahimi had the greatest involvement in rent collection and depositing rental and home stay payments. She would have had opportunity not to account for all rent, however I find Ebrahimi to be an honest and straightforward witness and I believe her when she says she accounted for all rental payments that came into her possession. I have some suspicions about Chen pocketing rent. In November 2007 he demanded that the London tenants pay all rent directly to him and they cease communicating with Watts. He himself ceased communicating with Watts, although he was clearly upset by Watts leaving and failing to account and by the failure of the properties to turn a profit in a narrow time frame. He demonstrated his dishonesty by selling the London properties without informing Watts and then by taking all of the funds himself rather than making a distribution in accordance with the Agreement. That said, it does not rise above the level of “strong” suspicion. There is no proof Chen took rental monies for which he failed to account. It is insufficient for Watts to give evidence of what he would have expected total London rents would be based on notional anticipated rents and 100% occupancy. Projected notional rents are no more than speculation.
44The accusations by each partner against the other are no more than an unfounded “belief” that the other(s) pocketed rent based on suspicion. There is no proof that any rents were pocketed. I am not satisfied on a balance of probabilities that any of the partners pocketed rent and I am not prepared to attribute to any of the partners a debit for unaccounted-for rent. I come to this conclusion with some reluctance since none of the parties have provided sufficient accounting details about rents received, including names of tenants with each payment and since rental payments were put into different bank accounts without clear rationale for where the monies were deposited. On the other hand, if some expenses are claimed to have been paid personally by a party and the evidence filed demonstrates there were sufficient rental payments actually (not notionally) made to cover the payment, that would be considered in the accounting.
CREDIBILITY OF THE PARTIES
45Much has been said about the oral evidence given by the parties. As a witness Ebrahimi was frank, straightforward and forthright both in her evidence and in her accounting. I consider her accounting, although not without flaw, was the best attempt made of all of the parties to account for partnership income received and expenses paid by her. Chen and Watts in giving evidence were both evasive and avoided giving direct answers to questions – Watts through excessive speech making while giving his evidence in chief and in cross-examination, and Chen by failing to give more detailed information when called for through the terseness of his answers. Both in my view refused to admit the obvious from time to time, admitted to little or no wrong, painted themselves as the victim and blamed all of the partnership woes on the other. In my view this has to an extent clouded the reliability of some of their evidence and this is reflected in some of the findings in this endorsement. Watts’ illogical rationale and sometimes contradictory evidence respecting his role in management and its conduct from overseas and Chen’s surreptitious conduct on the sale of the London properties and retaining of the proceeds for himself cast further shadows on their respective credibility as witnesses. I accept Ebrahimi’s testimony where it conflicts with that of Watts or Chen.
CONCLUSION: THE COURT IS UNABLE TO COMPLETE THE ACCOUNTING
46Although I have made a number of findings on specific expenses items, I have found it impossible to complete the accounting for capital contributions and other expenses paid by each partner on the evidence before me.
47The partners paid for the expenses through a variety of different bank accounts, by credit card and by cash. Sometimes expenses were paid from partnership funds, there being sufficient rental income to meet the payments and sometimes from personal funds in excess of rental income. When expenses were paid from an account containing rental monies, the court must be careful to avoid double counting. Monies sometimes came from accounts where partnership and personal monies were intermingled. Sometimes monies were transferred from one partner to another (Watts to Ebrahimi primarily) and the second partner (Ebrahimi) used those funds with other monies to pay expenses. In some cases both parties account for the same monies. On at least one occasion Watts sent money to Ebrahimi to pay his credit card bills. Such payments to Ebrahimi are not deductible as a partnership expense as such, but rather the items on the credit card bill must be considered individually to see if they are legitimate partnership expenses, and if so whether it is attributable to the Toronto or London partnership, or if it is attributable to Watts’ personal expenses. Watts claims monies from the sale of his Paperbirch property went into the partnership properties. It is difficult for the court to trace what portion thereof, if any, was used for partnership purposes without a more detailed analysis.
48Each partner has used different accounting methods. Sometimes a partner has accounted only for his or her own contributions and sometimes it is intermingled with contributions made by others. Watts, who was charged with over-all management, did not keep contemporaneous accounts and his accounting is an after-the-fact reconstruction. Watts admits to the possibility that some expenses claimed may have been for materials used on his personal properties.
49Unfortunately, unless the parties can agree on their item by item accounting based on the findings made in this report but without the court’s further intervention, the parties will have to re-attend for the court to do the item by item accounting based on evidence already filed in a manner to be described further in these reasons.
DIRECTIONS FOR FURTHER ACCOUNTING IF NECESSARY
50In the result, if the parties are unable to agree on the accounting based on the findings and determinations made in this endorsement then any of the parties may contact me to set aside further dates for the hearing of this reference. At the resumption of the reference, the court will undertake a line by line accounting of all debits and credits and make determinations of each disputed line item at the hearing. The accounting will be based solely on the invoices, bank records and other documents currently in evidence and the affidavit and oral evidence already given by the parties. No further evidence will be permitted.
51The following items will be credited to the partnerships:
(a) With respect to the Toronto properties:
(i) The sum of approximately $50,090 plus accrued interest paid into court from the sale of Marowyne under power of sale;
(ii) The sum of approximately $226,000 plus accrued interest held in the trust account of Neal Roth from the sale of Bishop;
(iii) The sum of $1,200 per month debited to Ebrahimi for each month that she was in occupation of Marowyne or Bishop;
(iv) Any monies paid to Jim Fielders from partnership funds to be debited to Watts;
(v) Any other monies paid from partnership funds that the court determines were not proper partnership debts, to be debited to the partner whom the court finds to be responsible for the debt.
(b) With respect to the London properties
(i) The sum of $60,617 debited to Chen from the sale of Canterbury;
(ii) The sum of $33,807 debited to Chen from the sale of Edgar (if that amount is correct);
(iii) The sum of $6,800 debited to Watts from the assignment of the agreement of purchase and sale of Essex;
(iv) The sum of $9,000 debited to Watts from the rebate on Canterbury;
(v) Any other monies paid from partnership funds that the court determines were not proper partnership debts, to be debited to the partner whom the court finds to be responsible for the debt.
52Each party shall prepare an itemized list of money contributions to the partnership properties with consecutive numbering. The following rules shall govern the capital and other expenses to be listed:
(a) There shall be two separate accountings, one for Toronto properties and one for London properties.
(b) The items shall only be for actual out-of-pocket payments and shall not include any claims for payment of the party’s time.
(c) The parties shall not claim nor include in the itemized list any items excluded in this endorsement.
(d) The parties shall include only payments made from the party’s personal funds (including credit cards), whether made to an account from which partnership expenses were paid (referred to in this paragraph as a “partnership account”) or whether made directly to a third party supplier (such as labour, materials, mortgage, taxes, insurance, utilities or other operating costs) or to a vendor or lawyer’s trust account for closing funds on the purchase of the properties.
(e) The parties shall not list payments made to a third party out of accounts where the monies available for the payment came from rental or home stay income.
(f) Similarly a party shall not include expenses paid by her from monies supplied by another partner.
(g) If there is a claim for monies paid into a partnership account the claim shall only be for the portion used for partnership and not personal expenses.
(h) The parties shall not double count – in other words they shall not list both a payment to a partnership account as well as the payment to third parties from those funds. However, if there is a challenge made to payments into a partnership account that the monies were used for personal and not partnership purposes, they must be prepared to demonstrate at the hearing that the monies were used for partnership purposes.
(i) There shall be no references in the accounting to payments or challenges to payments made by other parties. The accounting by each party is to reflect only their own payments.
(j) No new evidence shall be permitted at the resumed hearing. All evidence to support any challenged expenses must be demonstrated from the affidavits, exhibits, accounting and documents filed at or prior to the reference hearing and from oral evidence at the hearing.
53The actual accounting to be submitted must be in a form consistent among all the parties. Therefore the accounting shall be set up in columns, with two separate lists for London properties and for Toronto properties, as follows:
(a) Column 1: consecutive item number of the expense claimed.
(b) Column 2: date of payment.
(c) Column 3: source of funds. For example this could be a named bank account on which a cheque was written, a specified credit card or cash.
(d) Column 4: payee. This could be a named bank account into which the payment was made or the name of a third party such as a mortgagee, material supplier, named labourer, lawyer’s trust account etc.
(e) Column 5: purpose of payment. For example the party could insert down payment or closing funds for a specific property, renovation on a specific property or properties, realty taxes, mortgage payment, house insurance, hydro, etc.
(f) Column 6: location of supporting documents. This is to assist the court in finding the back-up invoice, receipt, cancelled cheque, credit card bill, bank record etc. It could for example say “Chen affidavit tab 3” or “Watts affidavit volume 2 exhibit 148” or “court exhibit #6”. This may prove difficult particularly for Watts who neither tabbed nor paginated his exhibits for easy reference; however parties must make best efforts to lead the court as easily as possible to the back-up documents. If a party prefers, he or she may prepare a consolidated book of documents (i) clearly paginated or tabbed by document, (ii) containing ONLY documents to be referenced in the final accounting and (iii) containing ONLY documents that have already been produced to the court in the parties’ affidavits, accountings or court exhibits. They may NOT include new documents not previously produced.
54The court will then (a) total the credits available to the partnership for the Toronto properties and separately for the London properties, whether currently in cash in court or in a trust account or as a debit owing by a party to the partnership, (b) total the debits owing by each partner to the partnership, separately for Toronto and for London, (c) total the credits determined to be owing to each party from the partnership funds for capital contributions and other expenses, and (d) subtract debits from credits and determine whether any party owes a net balance to the partnership and if so the amount or whether any party is entitled to a net balance from the partnership.
55These amounts shall then be individually adjusted for monies owing between the partners that are not partnership debts but which are part of the referenced accounting such as costs already awarded by the court to one party against another.
56The court will then hear submissions as to the costs of the reference and further adjust the balances payable as between payor and payee of any costs awarded. The hearing took much longer than should have been required because of Watts’ difficulty in asking precise questions when examining, giving rambling dialogues when answering questions, his failure to keep proper contemporaneous records as managing partner, his poorly reconstructed accounting records, his improper accounting methodology and time spent looking for back-up material that should have been at his fingertips. This will be taken into account when determining costs of the reference. If any party attempts to again claim expenses which I have already excluded in this endorsement or for which no back-up documentation is available, thereby increasing the costs of the further accounting, will also be a factor in the determination of costs.
57The final step in the accounting will be to allocate the funds available as among the parties. If it should turn out that there will be no distribution to one or more of the partners but rather a net balance owing by that party to the remaining party or parties, an award will be made to require a repayment.
58The parties shall contact me within 60 days either to advise that they have settled the accounting and require only an order respecting the payment of monies out of court or other terms of the settlement or alternatively that further dates to complete the reference are required. A conference call will then be convened to determine the number of days required and fix dates for the hearing.
59If the parties agree on the accounting and distribution of funds, but are unable to agree on costs of the reference, they may advise me of the agreed terms and make submissions as to costs in writing.
Master R. Dash
DATE: August 20, 2013