Ontario
Superior Court of Justice
COURT FILE NO.: 11192/00A
COURT FILE NO.: 17470/11
COURT FILE NO.: 17719/11
DATE: 2013-12-13
BETWEEN:
Three Hundred Pine Street North Ltd.
Plaintiff
-and -
Pine Street Murb Inc., A.T. Cornell, Mark McCormick, Denis J.H. Carriere, Mel W. McCormick, Roger Denommee,
Jaacqueline Clare, Garry Sullivan, Andy Humber, Raoul N. Nelson, Arthur W. Mick, Harold R.D. Dredhart, Douglas Cramer, Estate of Clifford Cornell, Estate of Florence Reid, Ruth Wiwchar, Robert G. Boyd and Tim-Tex Developers Ltd..
Defendants
COURT FILE NO.: 11192/00A
Daniel P. Condon, for the Plaintiff
Marc A.J. Huneault, for the Defendants Mark McCormick, Denis J.H. Carriere, Mel W. McCormick, Jacqueline Clair, Any Humber, Raoul N. Nelson, Arthur W. Mick, Douglas Cramer, Estate of Florence Reid, Ruth Wiwchar and Robert G. Boyd
J. Kenneth Alexander, for the Defendant Pine Street Murb Inc.
-and-
Pine Street Murb Inc., A.T. Cornell, Mark McCormick, Denis J.H. Carriere, Mel W. McCormick, Roger Denommee,
Jaacqueline Clare, Garry Sullivan, Andy Humber, Raoul N. Nelson, Arthur W. Mick, Harold R.D. Dredhart, Douglas Cramer, Estate of Clifford Cornell, Estate of Florence Reid, Ruth Wiwchar, Robert G. Boyd
Plaintiffs by Crossclaim
and by Counterclaim
Marc A.J. Huneault, for the Plaintiffs by Crossclaim and by Counterclaim Mark McCormick, Denis J.H. Carriere, Mel W. McCormick, Jacqueline Clair, Andy Humber, Raoul N. Nelson, Arthur W. Mick, Douglas Cramer, Estate of Florence Reid, Ruth Wiwchar and Robert G. Boyd
J. Kenneth Alexander, for the Plaintiff by Crossclaim and by Counterclaim Pine Street Murb Inc.
-and-
Estate of Clifford Cornell and Tim-Tex Developers Ltd.
Defendants by Crossclaim
-and-
Donald Reid, Michael Dobson carrying on business as Dobson & Reid, Donald Reid in his personal capacity and John Spina
Third Parties
Daniel P. Condon, for the Defendants by Crossclaim
Muriel C. Moscovich, for Third Parties Donald Reid, Michael Dobson carrying on business as Dobson & Reid and Donald Reid in his personal capacity
Daniel R. Bernstein, for the Third Party John Spina
AND BETWEEN
Morgan Cornell and Barclay Cornell in their capacities as Executors and Trustees under the Last Will and Testament of Clifford J. Cornell, Deceased and Three Hundred Pine Street North Limited
Applicants
-and-
Pine Street Murg Inc., Mark McCormick, Denis J.H. Carriere, Mel W. McCormick, Jacqueline Clare, Andy Humber, Raoul N. Nelson, Arthur Mick, Harold R.D. Dredhart, Douglas Cramer, The Estate of Florence Reid, Ruth Wiwchar and Robert G. Boyd
Respondents
AND BETWEEN
Mark McCormick, Denis J.H. Carriere, Mel W. McCormick, Jacqueline Clare, Andy Humber, Raoul N. Nelson, Arthur Mick, Douglas Cramer, The Estate of Florence Reid, Ruth Wiwchar and Robert G. Boyd
Applicants
-and-
Morgan Cornell and Barclay Cornell in their capacities as Executors and Trustees under the Last Will and Testament of Clifford J. Cornell, Deceased and Three Hundred Pine Street North Limited
Respondents
-and-
DONALD REID and JOHN SPINA
Intervenors
COURT FILE NO.: 17470/11
Christopher A.L. Caruana, for the Applicants Three Hundred Pine Street North Limited/Cornells
J. Kenneth Alexander, for the Respondent Pine Street Murb Inc.
Marc A.J. Huneault, for the Respondents Mark McCormick, Denis J.H. Carriere, Mel W. McCormick, Jacqueline Clair, Andy Humber, Raoul N. Nelson, Arthur Mick, Douglas Cramer, Estate of Florence Reid, Ruth Wiwchar and Robert G. Boyd
COURT FILE NO.: 17719/11
Marc A.J. Huneault, for the Applicants
Christopher A.L. Caruana, for the Respondents
Written Submissions: August 31, 2013
DECISION ON MOTION
Cornell J.:
[1] These proceedings originated in 2000 when the plaintiff commenced the foreclosure action. Certain of the investors currently represented by Mr. Huneault (the “Investors”) defended the claim and brought a counterclaim and crossclaim. In 2011, separate competing shareholder oppression claims were brought by the warring parties.
[2] I have been case managing these files for a number of years. On February 8, 2013, I directed that a reference be conducted in this action and the two companion applications in order to address a number of inter-related issues. By virtue of paragraph 2 of such order, the plaintiff was required to deliver an accounting for the year that the Pine Street Murb Inc. (the “MURB”) went into a cash flow positive position as well as statement of accounts for the three years before and after such year.
[3] In due course, the plaintiff delivered the required statements of account for the seven years in question. After receiving and reviewing this material, the Investors took the position that certain improper assumptions had been made in the preparation of such accounts with respect to, among other things, the imputation of notional rent and the capitalization of expenses. Without these assumptions being made, the Investors further take the position that it was clear from the accounts that the MURB had never been in a cash flow positive position prior to the issuance of the plaintiff’s claim for foreclosure.
[4] In my capacity as case management judge, I conducted a telephone conference on June 26, 2013 to address this issue. Following that conference, I made an order that all parties were to deliver written submissions to permit me to determine whether the MURB had attained a case flow positive position prior to 2000 (the “Threshold Issue”) which may have resulted in there being no need for the reference to be conducted. For the reasons which follow, I have determined that this Threshold Issue cannot be resolved by way of a preliminary determination and accordingly I order that the reference is to proceed.
Background
[5] The MURB was the product of the efforts of the late C.J. Cornell (“Cornell”) who put together an Offering Memorandum to entice any interested party to invest in the thirty-five unit MURB. The Offering Memorandum stated that it was to be a “carefree investment”. In support of this, a cash flow guarantee was to be provided which would make the developer responsible for operating losses. There is a potential conflict between the terms of the Offering Memorandum and the actual Cash Flow Guarantee which was prepared on December 30, 1983 in that paragraph 1.02 of such document provided that the guarantee ended on December 29, 1991 whereas the Offering Memorandum indicates that the developer would continue to be responsible after that date in the event that the MURB had not yet attained a cash flow positive status.
[6] During the course of the preparation of its accounts, the plaintiff increased income by way of imputed or notional rent which the plaintiff alleges could have been charged but for the introduction of rent control. Further adjustments are made as a result of the introduction of GST during the time period in question, adjustments are made for hydro expenses and as well as capital costs of $50,260 in 1995 for a roof repair are removed from current expenses. Without these adjustments, the plaintiff’s accounts confirm that the “Actual operating results as shown in the syndicate’s actual financial statements 1992 to 2000 report negative cash flows for the whole 9 years”. If this statement is accepted as being true and the various adjustments sought by the plaintiff are not permitted, then it is clear from the plaintiff’s own statements that the MURB had not attained a cash flow positive status prior to the year 2000. That being the case, the Investors say that absent a cash flow positive position for the MURB prior to that date, the developer was not in a position to claim operating losses from the Investors and accordingly the plaintiff’s mortgage was not in default at the time the claim for foreclosure was issued in 2000.
[7] The issue to be determined at this stage is whether the Threshold Issue can be determined in a summary manner so as to avoid the need for a reference and which would ultimately lead to the plaintiff’s action for foreclosure being dismissed.
Analysis
[8] During the course of the operation of the MURB, financial statements for the period from 1992 until 2000 were regularly prepared. These original financial statements indicate that during this period of time, the MURB had not attained a cash flow positive status.
[9] Pursuant to my order of February 2013, the plaintiff was directed to prepare various accounts in order to permit the reference to be conducted and to assist in the determination of various related issues which are set out in such order. The plaintiff retained Charles Furnivall (“Furnivall”) to prepare these accounts. The Furnivall accounts differ from the MURB’s original financial statements by indicating that the MURB had become case flow positive by 1997. In order to attain this cash flow positive status, Furnivall imputes notional rent as income to the MURB and makes further adjustments for hydro expenses, the introduction of GST and the removal of capital costs in an amount of $50,260 incurred in 1995 for a roof repair. In making these adjustments, Furnivall relies upon the second half of paragraph 1 of the Offering Memorandum which states with respect to the “carefree investment” concept “…with no financial recourse to the investor other than costs that could arise as a result of requirements legislated municipally, provincially or federally and beyond the control of the developer and investors”.
[10] A significant legislative change occurred in 1986 whereby the Residential Rent Regulation Act of 1986 came into effect retroactive to July 1, 1985.
[11] The financial projections contained in the Offering Memorandum indicated that the MURB would become cash flow positive by December 1991. This was premised upon the monthly rents being increased by the maximum of 6% per annum, the amount permitted when the MURB was created. The 1986 legislative change provided that rent increases were to be less than 6% on an annual basis.
[12] The Investors respond by saying that the changes made to the rent control legislation in 1986 are of no consequence in that the market conditions for rental premises in Timmins during those years would have precluded annual increases of even modest amounts, let alone 6% per annum. In support of this position, they have included certain information and statistics provided by CMHC in their written submissions.
[13] The Investors take further issue with the assumptions made and the approach taken by Furnivall. In particular, they take issue with the following:
(1) Furnivall’s contractual interpretation of the effect of page 5 of the Offering Memorandum;
(2) Furnivall has made the assumption that rental revenue is a cost. The Investors make the obvious observation that a cost is an expense. It is not revenue;
(3) Vacancies and local market forces on rental income (i.e. supply and demand);
(4) Utility rates did not increase 77% in Timmins or anywhere else in Ontario. Rather the increased hydro expenses incurred represent a decision made by Clifford Cornell to have the Corporation absorb the hydro expenses in an attempt to keep the vacancy rate down in a declining market;
(5) His assumptions that Clifford Cornell properly and professionally managed the MURB;
(6) The basis for Furnivall’s Legislated Maximum Rental Income and Annual Rent Increases 6% is flawed;
(7) The MURB, due to poor market conditions, vacancies, or poor management or some combination thereof could not even maintain rental increases pursuant to the lower rental increases permitted under the 1986 legislation (less than 6%). As such, the change in legislation was a non-factor.
[14] Apart from this, the Investors question the independence of Furnivall given the fact that he is the personal accountant for Mr. Morgan Cornell, the Estate Trustee for the Estate of Clifford Cornell.
[15] The Investors have included a letter dated June 13, 2013 from Collins Barrow which raises various concerns with the approach taken by Furnivall. The plaintiff responds by saying that while the original financial statements which were prepared reflect the fact that the MURB was never cash flow positive for taxation purposes, that is not the end of the question. The plaintiff states that the material issue for present purposes is a determination of cash flow under either or both the Offering Memorandum and the Cash Flow Agreement. The plaintiff correctly points out that the interplay between the Offering Memorandum and the Cash Flow Guarantee is one of the issues which is to be determined upon the reference.
[16] In the world of commerce, it is common practice to have two sets of financial statements, one for accounting purposes and one for tax purposes. In this case, I agree with the plaintiff that the original financial statements which appear to have been prepared for tax purposes do not preclude adjustments from being made to determine whether the MURB ever attained a cash flow positive status within the meaning of the Offering Memorandum or the cash flow guarantee that had been provided by the developer.
[17] The Investors assert that they were induced to purchase the units in the MURB based upon a key representation that it would be a “carefree investment”. In the plaintiff’s written submissions, it refers to various answers given by various Investors as to the basis upon which they made the decision to invest in the MURB. These answers make no reference to such representation. This discovery evidence raises a question as to whether the inducement of a “carefree investment” was a key representation for all or any of the Investors.
[18] The Investors take the position that given the language of the Offering Memorandum, Furnivall was incorrect in imputing notional income to the MURB due to the change which was made in the rent control legislation as such income is not a “cost”. The plaintiff takes a different view and indicates that the loss of potential rental income can be properly characterized as a cost of doing business. I accept that this is an argument which is open to the plaintiff to make.
[19] Both the plaintiff and the Investors make various comments about the MURB’s vacancy rate and market forces. The information provided by CMHC is not evidence that I can rely upon. This is not an issue which lends itself to resolution on a summary basis, rather, a full hearing is required before a proper determination on this and other issues can be made.
[20] The Investors raise further issues with respect to the approach taken by Furnivall to hydro costs, the ongoing management by Clifford Cornell, the treatment of other costs for accounting purposes and the independence of Furnivall. All of these issues need to see the light of day within the reference framework.
Conclusion
[21] It is clear from this review and my order of February 8, 2013 that there are many and varied inter-related issues which require a step by step determination. Confirmation of this can be found in the fact that apart from the requirement that the plaintiff provide a detailed accounting, there are some further twelve issues which are identified in the February 2012 order that are to be determined upon the reference.
[22] It is not possible to resolve the Threshold Issue in a summary fashion in favour of the Investors. Accordingly the reference shall proceed. In view of this, the time period specified in paragraph 5 of the order of February 8, 2013 is hereby amended to provide that the Investors and the MURB shall be permitted to deliver a statement of objections verified by affidavit on or before February 14, 2014. Paragraph 6 of the order is amended to provide that the plaintiff shall be permitted to file an amendment of statement of accounts together with supporting documentation with responding affidavit in the nature of a reply to the objections by March 14, 2014.
Costs
[23] The plaintiff is awarded the costs related to the written submissions made in connection with the Threshold Issue. I would encourage the parties to try to settle these costs. If they cannot, the plaintiff may serve and file with my office written costs submissions, together with a bill of costs, by January 17, 2014. The Investors may serve and file with my office responding written costs submissions by January 31, 2014. The cost submissions shall not exceed two pages in length, excluding the Bill of Costs.
The Honourable Mr. Justice R. Dan Cornell
Released: December 13, 2013
COURT FILE NO.: 11192/00A
COURT FILE NO.: 17470/11
COURT FILE NO.: 17719/11
DATE: 2013-12-13
BETWEEN:
Three Hundred Pine Street North Ltd.
– and - Plaintiff
Pine Street Murb Inc., et al
Investors
- and -
Pine Street Murb Inc., et al
Plaintiffs by Crossclaim and by Counterclaim
-and-
Estate of Clifford Cornell and Tim-Tex Developers Ltd.
- and - Investors by Crossclaim
Donald Reid, et al
Third Parties
DECISION ON MOTION
Cornell J.
Released: December 13, 2013