ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NOS.: 47120, 47121 & 50996

DATE: 2013/06/17

B E T W E E N:

BANK OF MONTREAL

Allyson Fox, for the Plaintiff

Plaintiff

• and -

BRIAN KENT MORRIS, MICHAEL BRADY and CENTURY 21 FIRST CANADIAN CORP

Scott Gallagher, for the Defendant, Brian Morris

Jeffrey Klein, for the Defendant, Century 21 First Canadian Corp.

Defendants

HEARD: February 27, 2013

LEITCH, J.

[1] On this motion, the plaintiff seeks to amend its three statements of claim to assert damages for fraud and/or fraudulent misrepresentation as against the defendants Brian Kent Morris (“Mr. Morris”) and Michael Brady (“Mr. Brady”).

[2] Mr. Morris and the defendant Century 21 First Canadian Corp. (“Century 21”), which the plaintiff alleges is vicariously liable for Mr. Brady’s actions, oppose the plaintiff’s motion to amend the statements of claim.

[3] Both Mr. Morris and Century 21 submit that for seven years they have defended the plaintiff’s allegations of negligence and the plaintiff now seeks to advance a new cause of action after the limitation period has expired. On the other hand, the plaintiff denies that it is asserting a new cause of action.

Background Facts

[4] Each of the actions relate to the plaintiff’s alleged damages for mortgages advanced against three different properties.

[5] In its Notice of Motion, the plaintiff states that the actions against the defendants are as follows: against Mr. Brady for negligence relating to his preparation of appraisals which misrepresented the market value of the three properties subject to mortgages in favour of the plaintiff; against Century 21 for negligence relating to its supervision of Mr. Brady; and, against Mr. Morris for negligence in his representation of the plaintiff and his undisclosed representation of the vendors in three-way closings relating to each of the three properties (whereby the plaintiff’s mortgage funds were allegedly used by a third party to purchase the properties and to immediately resell to the mortgagors at an inflated price).

[6] The three actions were consolidated on November 8, 2010. The consolidated action was set down for trial on November 16, 2010.

[7] Mr. Brady filed a Consumer Proposal in Bankruptcy on January 21, 2011 that resulted in a stay of the actions against him. The plaintiff obtained an order lifting the stay on November 2, 2011.

[8] Mr. Morris has acknowledged negligence. He has defended the claim against him on the basis that the plaintiff was contributorily negligent.

[9] Century 21 has defended the allegations of negligence against Mr. Brady and the allegation that it was vicariously liable for Mr. Brady’s actions.

[10] A pretrial conference was held on November 10, 2011. A trial scheduled for 2012 was adjourned.

[11] The plaintiff sought to amend its statements of claim on May 1, 2012 by adding a claim for damages for fraud and/or fraudulent misrepresentation and for a declaration that the plaintiff’s claims against Mr. Brady fall within s. 178 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, and that they consequently survive Mr. Brady’s discharge from bankruptcy.

The Applicable Rules

[12] Rule 26.01 of the Rules of Civil Procedure, O. Reg. 575/07, s.6 (1), provides that on motion, at any stage of an action, the court shall grant leave to amend a pleading on such terms as are just unless prejudice would result that could not be compensated for by costs or an adjournment

[13] Rule 25.06(1) requires that every pleading contain a concise statement of the material facts on which the party relies for the claim but not the evidence by which those facts are to be proved.

[14] Rule 25.06(2) permits any party to raise any point of law in a pleading, subject to the restriction that conclusions of law be pleaded only if the material facts supporting them are pleaded.

[15] Rule 25.06(8) requires that the pleading contain full particulars where fraud, misrepresentation, breach of trust, malice or intent is alleged. However, knowledge may be alleged as a fact without pleading the circumstances from which it is to be inferred.

Position of the Plaintiff on the Motion

[16] The plaintiff submits that the allegations of fraud and fraudulent misrepresentation arise from the same set of facts and circumstances as the allegations of negligence originally pleaded. As a result, the plaintiff’s position is that a claim supporting an allegation of fraud and/or fraudulent misrepresentation has previously been pled. Therefore, the proposed amendments to the statements of claim simply amount to different legal conclusions drawn from the same set of facts. Accordingly, the plaintiff asserts that the defendants will not suffer any undue prejudice as a result of the proposed amendments.

[17] Given the plaintiff’s position, it submits that the fact that the limitation period has expired is of no consequence and, in any event, the amended statement of defence filed in response to the amended statements of claim can raise the limitation defence.

Position of Century 21 on the Motion

[18] The position of Century 21 is that the proposed amendment cannot be sustained based on the facts previously pleaded. Putting it another way, the original pleading is insufficient to support this new and different cause of action.

[19] Century 21 submits that the amended pleading does not include every fact that must be proved to entitle the plaintiff to succeed in fraud and/or fraudulent misrepresentation, noting in particular that the intention to deceive was not pleaded nor has it been alleged that Century 21 had knowledge of something being untrue. In other words, it is Century 21’s position that there is no suggestion or allegation in the pleading that anything was purposefully done by Mr. Brady.

[20] Century 21 further submits that this new cause of action cannot be asserted after the limitation period has expired.

Position of Mr. Morris on the Motion

[21] Mr. Morris’s position is similar to that of Century 21. He asserts that nowhere in the original pleading is it alleged that he intended to deceive the plaintiff nor is there any allegation with respect to his state of mind.

[22] Mr. Morris also asserts that the expiry of the limitation period defeats the pleading of this new cause of action.

The Limitation Issue

[23] Funds were advanced by the plaintiff under the three mortgages in issue before January 1, 2004. Thereafter, the mortgages went into default and the subject properties were sold with a shortfall, which the plaintiff claims, from the defendants.

[24] The law is clear that, with respect to claims discovered after January 1, 2004, the common law special circumstances doctrine is no longer applicable: see Joseph v. Paramount Canada’s Wonderland (2008), 2008 ONCA 469, 90 O.R. (3d) 401 (C.A.); Combined Air Mechanical Services Inc. v. Flesch, 2010 ONSC 400, [2010] O.J. No. 206 at paras. 38-41.

[25] On this motion, there is no suggestion that the alleged fraud was discovered before January 1, 2004.

[26] The plaintiff’s position is that the material facts in support of a claim for fraud were pleaded when the statements of claim were issued. Therefore, the fraud was discovered no later than the date of issuance of the statements of claim in 2005 and 2006.

[27] The applicable limitation period is two years from the date of discovery of the fraud. Therefore, the limitation period has expired.

[28] There is a presumption of non-compensable prejudice if new causes of action are raised after the expiry of a limitation period: see Ascent Inc. v. Fox 40 International Inc., 2009 36994 (Ont. S.C.) at para. 22.

[29] If I find that the plaintiff now seeks to plead a new cause of action, the plaintiff concedes that leave to amend its statements of claim cannot be granted because the prejudice to the defendants cannot be compensated for by an adjournment or costs.

The Issue on the Motion

[30] This motion raises the issue of whether, in the proposed amendments, there is a new cause of action. If a new cause of action is found, the amendments cannot be allowed as the limitation period has expired creating a presumption of non-compensable prejudice. If, however, sufficient facts have already been pleaded so that a finding can be made that the new allegations are not a new cause of action, the amendments may be allowed.

Disposition

[31] In action #47120, paragraph 17 of the existing statement of claim alleges that Mr. Brady and Century 21 were negligent and that their negligence caused the claimed damages. Subparagraphs (a) to (f) particularize specific allegations of negligence and allege that: Mr. Brady represented that there were two comparable properties that had certain values when those properties did not in fact exist; Mr. Brady represented that a third property had a value of $312,000 when it had been last purchased for $103,000 in 1987; Mr. Brady and Century 21 negligently misrepresented the property value at $310,000 “when they knew or ought to have known that such a valuation was unsupported”; Mr. Brady and Century 21 failed to exercise the degree of skill expected of a professional appraiser “by not accurately stating the property value and not providing existing comparable properties and accurately representing the property values of such properties”; and, the property was appraised by Mr. Brady and Century 21 at a value of $310,000 when its true value was substantially less.

[32] The proposed amendment to the statement of claim in action #47120 in relation to Mr. Brady is that, in the alternative, the foregoing representations were made fraudulently by Mr. Brady with the intention to deceive the plaintiff.

[33] The statement of claim in action #47120 further alleges, in paragraph 19, that Mr. Morris was negligent. Subparagraphs (a) to (e) particularize specific allegations of his negligence: that Mr. Morris was in a conflict of interest; that he breached his fiduciary duty; that he failed to make full disclosure of all relevant material information; and, that he represented that the mortgaged property had a value of $310,000.

[34] The proposed amendment to the statement of claim in action #47120 in relation to Mr. Morris is that, in the alternative Mr. Morris made fraudulent representations and/or omissions to deceive the plaintiff.

[35] In action #47121, paragraph 17 of the existing statement of claim alleges that Mr. Brady and Century 21 were negligent and their negligence caused the claimed damages. Subparagraphs (a) to (f) particularize specific allegations of negligence and allege that Mr. Brady represented certain properties as being comparable properties based on sales in 2000 when in fact none of those sales occurred; Mr. Brady and Century 21 negligently misrepresented the property value at $350,000 “when they knew or ought to have known that such a valuation was unsupported”; Mr. Brady and Century 21 failed to exercise the degree of skill expected of a professional appraiser “by not accurately stating the property value and not providing appropriate comparable properties and accurately representing the property values of such properties”; and, the property was appraised by Mr. Brady and Century 21 at a value of $350,000 when its true value was substantially less.

[36] The proposed amendment to the statement of claim in action #47121 in relation to Mr. Brady is that, alternatively, the foregoing representations were made fraudulently by Mr. Brady with the intention to deceive the plaintiff.

[37] The statement of claim in action #47121 further alleges, in paragraph 19, that Mr. Morris was negligent. Subparagraphs (a) to (e) particularize specific allegations of his negligence: that Mr. Morris was in a conflict of interest, breached his fiduciary duty, failed to make full disclosure of all relevant material information, and represented the value of the mortgaged property at a value significantly more than its real value causing the plaintiff to issue its mortgage commitment based on that representation..

[38] The proposed amendment to the statement of claim in action #47121 in relation to Mr. Morris is that, in the alternative, Mr. Morris made fraudulent representations and/or omissions to deceive the plaintiff.

[39] In action #50996, paragraph 33 of the existing statement of claim alleges that Mr. Brady and Century 21 negligently misrepresented the property value at $134,000 when they ought to have known that such a valuation was unsupported. It is further alleged, in paragraph 34, that Mr. Brady and Century 21 were negligent in valuing the property at substantially more than its fair market value.

[40] The proposed amendment to the statement of claim in action #50998 in relation to Mr. Brady includes allegations that Mr. Brady fraudulently misrepresented the value of the property, was fraudulent in his appraisal, and submitted a false appraisal to the plaintiff knowing that the plaintiff would rely on it to approve the mortgage application.

[41] The statement of claim in action #50996 alleges in paragraph 25 that Mr. Morris was negligent and breached his fiduciary duty. Subparagraphs (a) to (f) particularize specific allegations of negligence and/or breach of fiduciary duty and allege that Mr. Morris: failed to make full disclosure; failed to advise the plaintiff that the property had recently been purchased by its borrower for an amount less than what the plaintiff advanced pursuant to the mortgage; and, failed to advise the plaintiff that the market value of the property was not sufficient to properly secure the mortgage.

[42] The proposed amendment to the statement of claim in action #50996 in relation to Mr. Morris is an allegation that the misrepresentations and/or omissions were made fraudulently and/or negligently by Mr. Morris.

[43] The original statements of claim allege that Mr. Brady’s appraisals reference fictitious properties and sales. In relation to Mr. Morris, they allege that he failed to disclose to the plaintiff prior acquisitions and pre-arranged sales of the subject property.

[44] The plaintiff now seeks to allege that Mr. Brady fraudulently prepared his appraisal and made fraudulent representations with the intention to deceive the plaintiff and that Mr. Morris also made fraudulent representations and/or omissions to deceive the plaintiff.

[45] Are the alternative pleadings that Mr. Brady and Mr. Morris fraudulently made representations simply asserting a different legal conclusion or are the plaintiffs now pleading a new cause of action?

[46] A new cause of action is not asserted if the amendment: (a) pleads an alternative claim for relief arising out of the same facts previously pleaded and no new facts are relied upon; (b) amounts to different legal conclusions from the same set of facts; (c) provides particulars of an allegation already pleaded; (c) provides additional facts upon which the original right of action is based; (d) does not alter the nature of the claim; or, (e) arises from the core factual nexus as the facts and circumstances become clearer and mature: see Fitzpatrick Estate v. Medtronic Inc. (1996), 1996 8118 (ON SC), 137 D.L.R. (4th) 262 (Ont. C.J. (Gen. Div.)); Randolph v. Graye, [1995] O.J. No. 777 (C.J. (Gen. Div.)); Denton v. Jones (No. 2) (1977), 1976 831 (ON SC), 14 O.R. (2d) 382 (H.C.); Phommachanh v. Toronto Transit Commission (2002), 2002 49427 (ON SC), 59 O.R. (3d) 15 (S.C.) as cited in Gladstone v. Canadian National Transportation Ltd. (2009), 2009 38789 (ON SCDC), 252 O.A.C. 117 (S.C. (Div. Ct.)).

[47] In my view, the allegations of fraudulent representation and/or omissions raise a new cause of action. Furthermore, this new cause of action cannot be sustained based on the facts previously pleaded.

[48] Rule 25.06(8) requires full particulars where fraud or fraudulent misrepresentation is alleged. In Toronto Dominion Bank v. Leigh Instruments Ltd., 1998 14806 (ON SC), [1998] O.J. No. 2637 (C.J.), Justice Winkler as he then was observed that an allegation of civil fraud is the most serious civil tort, stating at para. 477 that:

Fraud is the most serious civil tort which can be alleged, and must be both strictly pleaded and strictly proved. The main distinction between the elements of fraudulent misrepresentation and negligent misrepresentation has been touched upon above, namely the dishonest state of mind of the representor. The state of mind was described in the seminal case of Derry v. Peak (1889), 14 App. Cas. 337 (H.L.) which held fraud is proved where it is shown that a false representation has been made knowingly, or without belief in its truth, or recklessly, without caring whether it is true or false. The intention to deceive or reckless disregard for the truth is critical.

[49] This comment of Justice Winkler was quoted in Demers v. Desrochers, 2010 ONSC 4906, [2010] O.J. No. 3870 and in Ascent.

[50] I am satisfied that the proposed amendments are alleging a very different cause of action than what was alleged in the original pleadings.

[51] In relation to Mr. Brady, the original pleadings make clear that the plaintiff alleges that his appraisals were deficient and inaccurate and that his valuation opinion was unsupported. The appraisals were not described as false or fraudulent. The allegations in the pleadings that Mr. Brady’s appraisals rely on sales that did not occur and properties that did not exist do not support an allegation of fraud or fraudulent misrepresentation. The original pleadings raise allegations of negligence, inadvertence or carelessness. They did not allege that Mr. Brady had any intent to deceive the plaintiff nor did they allege that he had knowledge that something was untrue or had a reckless disregard to whether something was true.

[52] In relation to Mr. Morris, the original pleadings sound in negligence. Again, there is no allegation that Mr. Morris intended to deceive the plaintiff.

[53] There is no allegation in the existing statements of claim that Mr. Brady or Mr. Morris made false representations knowingly or recklessly without caring whether their representations were true or false.

[54] These are not circumstances where it can be concluded that the same set of facts can ground a claim in more than one area of law, such as breach of contract and negligent misrepresentation as discussed in Ivany et al. v. Financier Telco Inc. 2011 Carswell Ont. 9752 (ONSC) at para. 46.

[55] I agree with Century 21 and Mr. Morris that this case is on all fours with Ascent and cannot be distinguished, as the plaintiff suggests, simply because the plaintiff does not seek to plead any additional facts in the proposed amendments. The observations of Master Dash in Ascent, at para. 5, are equally appropriate here:

there is nothing in the original statement of claim that alleges that the promises or representations by the defendants were knowingly false or fraudulent at the time they were made or made with an intention to deceive. To amount to fraud there must be allegations in the statement of claim that a false representation was made knowingly or without belief in its truth or recklessly without caring whether it is true or false. “The intention to deceive or reckless disregard for the truth is critical.” None of those allegations were pleaded in the original statement of claim, nor were the words “fraud” or “fraudulent misrepresentation” mentioned.

I come to the same conclusion as Master Dash did in Ascent, at para. 11, that “the allegations of fraudulent misrepresentations… [are] not simply an alternate claim for relief or a different legal conclusion based on facts already pleaded”. In addition, these proposed amendments are analogous to those considered in Timbers Estate, 2011 ONSC 3639, [2011] O.J. No. 2696 where it was concluded that the material facts necessary to support the tort of conspiracy were not pleaded in the original claim and the proposed amendments could not be made to the statement of claim.

[56] For the foregoing reasons the plaintiff’s motion is dismissed. If necessary, counsel may make brief written submissions on costs within 30 days.

Justice L. C. Leitch
Justice L. C. Leitch

Released: June 17, 2013