Ambassador Electric Inc. v. Fernwood Builders (London) Ltd. et al., 2014 ONSC 3738

2014 ONSC 3738

COURT FILE NO.: CV-14-20337

DATE: 20140624

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Ambassador Electric Inc.

Plaintiff

– and –

Fernwood Builders (London) Ltd., Jacquelyn Nicole Shore and Stephen Cameron Shore

Defendants

Kimberley J. Wolfe, for the Plaintiff

Gregory D. Wrigglesworth, for the Defendants

HEARD: April 29, 2014

verbeem j.:

Nature of the Motion

[1] On January 14^th, 2014, the plaintiff secured an ex parte order, from Patterson J., for authorization to issue and register a Certificate of Pending Litigation (“the CPL”) with respect to three parcels of real property owned by the defendant, Fernwood Builders (London) Ltd. (“Fernwood”) and one parcel of real property owned by the individual defendants (alleged to be officers and directors of Fernwood).

[2] Pursuant to the terms of that order, the CPL was issued on January 14, 2014, and subsequently registered on the title to the respective properties.

[3] The CPL was discharged, on consent, with respect to the three properties owned by Fernwood, one of which was a vacant lot, known municipally as 264 Cameron Court, Belle River, Ontario (“the vacant lot”).

[4] The plaintiff agreed to discharge the CPL with respect to the vacant lot, in order to facilitate its sale to an arm’s length purchaser, on the condition that the net proceeds of the sale (in the amount of $ 1,781.63) be held in trust pending the determination of whether the plaintiff has a reasonable claim to an interest in that land.

[5] The CPL continues to be registered on title to land owned by the individual defendants known municipally as 1558 County Road 31, Lakeshore, Ontario (the “Farm Property”).

[6] On this motion, the defendants request an order:

(a) discharging the CPL, under s. 103 (6) of the Courts of Justice Act, R.S.O. 1990, c. C. 43 (“the CJA”); and

(b) Authorizing the release of the net proceeds of the sale of the vacant land, in a manner directed by the defendants.

The Nature of a CPL

[7] A CPL is a mechanism by which a party who asserts an otherwise unregistered claim to an interest in land, can provide effective notice of its proprietary claim to non-parties, and thereby protect its claim, pending the determination of the alleged interest, on its merits. A CPL does not, in and of itself, create a right or interest in the land

[8] Section 103 of the CJA constitutes a complete code for obtaining a CPL, as well as for its discharge. It provides that a CPL can issue only in circumstances where an interest in land is in question and where the party at whose instance the certificate is issued has a reasonable claim to that interest in land (see: ss. 103(1) and 103(4)) of the CJA).

[9] Section 103(6) of the CJA specifies the grounds upon which a CPL may be discharged, as follows:

The court may make an order discharging a certificate,

(a) where the party at whose instance it was issued,

(i) claims a sum of money in place of or as an alternative to the interest in the land claimed,

(ii) does not have a reasonable claim to the interest in the land claimed, or

(iii) does not prosecute the proceeding with reasonable diligence;

(b) where the interests of the party at whose instance it was issued can be adequately protected by another form of security; or

and the court may, in making the order, impose such terms as to the giving of security or otherwise as the court considers just.

[10] On this motion, the defendants rely solely on the ground set out in s. 103(6)(a)(ii), and assert that the plaintiff does not have a reasonable claim to an interest in the lands subject to the CPL.

Nature of the Action

(a) Legislative Framework Relevant to Plaintiff’s Claim

[11] The plaintiff’s action is founded in breach of contract, and breach of the statutory trust provisions of the Construction Lien Act, R.S.O. 1990, c. C. 30. (“the Act”).

[12] Section 8(1) of the Act impresses all sums owing to, and received by, a contractor on account of a contract for an improvement, with a trust in favour of subcontractors who have supplied materials and services to the improvement and are owed amounts by the contractor.

[13] Section 8(2) of the Act deems the contractor to be the trustee of the trust fund set out in s. 8(1), and prohibits the trustee from using or converting any portion of the trust fund to its own use, or any use inconsistent with the trust, until all subcontractors have been paid all amounts related to the improvement, owed by the contactor.

[14] Section 13 of the Act operates to make every officer, director, or person with effective control of a corporation, that breaches a trust obligation under the Act, personally liable for that breach of trust, if the person assents to, or acquiesces in, conduct that he or she knows (or reasonably ought to know) amounts to a breach by the corporation.

[15] Section 39 of the Act empowers a beneficiary of a statutory trust to request, in writing, specific information from a contractor, which may assist with, and enable, the enforcement of remedies under the Act. The contractor is obligated to provide the information, as requested, within 21 days of the request.

(b) Factual Background

[16] Ambassador Electric Inc., carries on business as a supplier of electrical services and materials. In 2013 it was retained by Fernwood to supply electrical services and materials to three distinct building project sites (“the projects”), specified below.

[17] Fernwood was the general contractor for two of the three projects and was an owner/builder on the third. Ambassador alleges that at all material times, the individual defendants were officers, directors and shareholders of Fernwood.

[18] Ambassador completed its work on each of the projects by the end of September of 2013, and invoiced Fernwood, as follows:

Project

Completion Date

Invoice Amount

Eltringham Residence

September 15, 2013

$ 14,351.00

Wentoniuk Residence

September 23, 2013

$ 17,639.00

Cockburn Residence

September 28, 2013

$ 24,577.50

[19] Ambassador provided evidence with respect to the source of payment for each project (building mortgages in relation to the Eltringham and Cockburn projects, and a completed sale in relation to the Wentoniuk project).

[20] Fernwood has not paid any amounts to Ambassador, in relation to any of the projects. Ambassador alleges that Fernwood, at the direction of the individual defendants, used the amounts it received on account of the projects to maintain and improve the vacant lot and Farm Property.

[21] The defendants did not dispute, through evidence, that Fernwood was paid in full, as contractor, by the owners of the Eltringham Residence and the Cockburn Residence, on account of improvements; nor that it sold the Wentoniuk Residence on September 27, 2013, for a purchase price of $411,104.

[22] The defendants did not challenge Ambassador’s contention that it was retained by Fernwood, in its role as contractor, to supply materials and services to each of the projects; that Ambassador supplied material and services; and that to date, Fernwood has not paid the Plaintiff for the materials and services it supplied.

[23] The defendants, through the evidence of Stephen Shore, deny that the payments received by Fernwood, in relation to the projects, were used to maintain or improve the vacant lot or the Farm Property.

[24] For the purpose of this motion, I find that Ambassador has met its onus to prove the existence of the alleged trust, and its status as a beneficiary thereof, under s. 8 of the Act.

[25] The evidence establishes the requisite elements in that regard. Specifically, the contractor, Fernwood, received moneys on account of its contracts for the projects, Ambassador provided services and materials to the projects and Ambassador was not paid from the trust funds (see: St. Mary’s Cement Corp. v. Construc Ltd. (1997), 1997 CanLII 12114 (ON SC), 32 O.R. (3d) 595 (Ct. J. (Gen. Div.)).

[26] Once the existence of the s. 8 trust and the plaintiff’s status as a beneficiary are established, the onus shifts to the defendant, Fernwood, as the statutory trustee, to demonstrate that payments made out of the trust funds were to the beneficiaries of the trust, or fell within exceptions provided for in the Act (see: St. Mary’s Cement and Sunview Doors Limited v. Academy Doors & Windows Ltd. (2007), 63 C.L.R. (3d) 219 (Ont. Sup. Ct.)). Failing that, a breach of the statutory trust provisions is made out.

[27] There was no evidence, at all, concerning the disposition of the proceeds received by Fernwood, on account of the projects, other than that which established that Ambassador was not paid from those funds, and Mr. Shore’s general assertion that none of those funds were used in connection with the vacant lot or the Farm Property.

[28] That is not a proper accounting. For the purpose of this motion, based on the evidence, I find that Fernwood has completely failed, in its duty as a statutory trustee, to account with respect to the proceeds it received in relation to the projects.

(c) Nature of the Interest in the Subject Lands Claimed by Ambassador

[29] The plaintiff correctly asserts that Fernwood was obligated to hold the proceeds it received in relation to the projects, as trust funds for the benefit of its subcontractors, including Ambassador, pursuant to s. 8(1) of the Act (collectively “the trust funds”).

[30] Ambassador posits that, at the direction of the individual defendants, Fernwood used the trust funds to maintain other property that it owned, including the vacant lot, and to maintain and improve the Farm Property, owned by the individual defendants. On that basis, Ambassador claims against the individual defendants, under s. 13 (1) of the Act.

[31] Based on its allegations that the trust funds were misappropriated, Ambassador asserts an interest in the Farm Property and the vacant lot, through remedial claims of tracing and the imposition of constructive trusts, with respect to each of the properties.

[32] It is common ground that the individual defendants were in the process of constructing a substantial personal residence on the Farm Property, during the course of the events giving rise to the action. The construction has not been completed.

[33] The defendants deny that the trust funds were used to maintain or improve the Farm Property or vacant lot, but have not otherwise accounted for the disposition of the trust funds.

[34] The parties agree that in October of 2013, independent of the projects, Ambassador supplied materials and services in furtherance of the construction of the residence on the Farm Property, at the request of Stephen Shore. Ambassador does not rely on that fact to support its claim to an interest in the Farm Property.

[35] Its only claim to an interest in the subject lands is derived from the remedial claims it asserts as a consequence of the alleged breach of trust. The order of Patterson J., on January 14, 2014, was made on that basis.

Pending Disclosure under s. 39 of the Construction Lien Act

[36] This motion came before me, together with a companion motion by the plaintiff for an order compelling the defendants to provide specific information, including the state of accounts, in relation to the each of the projects, pursuant to s. 39 of the Act.

[37] The disclosure motion resulted in a consent order that Fernwood provide the requisite information and state of accounts with respect to each of the projects by May 13, 2014.

[38] The plaintiff acknowledges that its claim to an interest in the vacant lot and the Farm Property is contingent on establishing that the defendants actually used the trust funds to maintain or improve the Farm Lands and the vacant lot, respectively.

[39] If the information produced under s. 39 of the Act and a proper and fulsome accounting, consistent with Fernwood’s obligations as a trustee, reveal that the trust funds were not used for that purpose, the plaintiff concedes that the CPL should be discharged.

[40] Despite my observation that the pending disclosure and accounting will likely determine their contest in this motion, the parties urged the court to determine this motion before the disclosure and accounting were made.

The Evidentiary Record

[41] The evidence on the motion included:

a) Two affidavits (and related exhibits) sworn by the defendant, Stephen Shore on March 12, 2014, and April 25, 2014, respectively; and

b) Two affidavits (and related exhibits) sworn by Roger Freeman, an officer of Ambassador, on January 7, 2014 and April 18, 2014, respectively. The former affidavit was the only evidence before Patterson J., when he authorized the CPL on January 14, 2014.

Neither affiant was cross examined.

Position of the Moving Parties/Defendants

[42] The defendants’ position that the CPL should be discharged is based on s. 103(3)(6)(a)(ii), specifically that the plaintiff does not have a reasonable claim to an interest in the subject land.

[43] In that regard their position is twofold:

As a matter of law, a breach of trust claim founded in s. 8 of the Act cannot give rise to a reasonable claim to an interest in land; and
As a matter of fact, the evidence indicates that the trust funds were not used to maintain or improve either the Farm Property or the vacant lot.

[44] In the alternative, they submit that the court should exercise its discretion under s. 103(6)(c) of the CJA, to discharge the CPL, even if it is found that the plaintiff does have a reasonable claim to an interest in the subject lands.

[45] The defendants do not suggest that the order authorizing the CPL was obtained through non-disclosure of material information, that the CPL should be discharged for any other reason listed in s. 103(6)(a), nor that an alternative form of security should be ordered.

Onus and Standard Applicable to a Motion to Discharge a CPL Under s. 103(6)(a)(ii)

[46] On a motion to discharge a CPL, the onus is on the moving party to demonstrate there is no triable issue in respect of the responding party’s claim to an interest in the subject land. The discharge motion is not an adjudication of the plaintiff’s alleged interest in the land (see: G.P.I. Greenfield Pioneer Inc. v. Moore (2002), 2002 CanLII 6832 (ON CA), 58 O.R. (3d) 87 (C.A.), at para. 20).

[47] In this instance, the defendants submit that the plaintiff’s allegation of a misappropriation of trust funds is akin to an allegation of fraudulent conduct. Accordingly, they submit that the threshold issue of whether the plaintiff has a reasonable claim to an interest in the subject lands must be evaluated in accordance with a much higher standard than the “triable issue” test, traditionally applied.

[48] According to the defendants, in order to preserve the CPL, Ambassador must demonstrate:

a high probability of success in the main action;
that a conveyance was made with the intent to defeat or delay creditors; and
that the balance of convenience favours maintaining the CPL, in the circumstances of this particular case.

[49] In that regard, they rely on Lancorp Construction Co. Ltd. v. Royal Vista Homes (Weston) Ltd. (2008), 77 C.L.R. (3d) 301 (Ont. Sup. Ct.), where the court applied the test for obtaining a CPL in a fraudulent conveyance action as set out in Grefford v. Fielding (2004), 2004 CanLII 8709 (ON SC), 70 O.R. (3d) 371 (Sup. Ct.).

[50] In my view, the Grefford test is not applicable in this instance.

[51] In Grefford, the plaintiffs commenced an action for damages framed in breach of contract, negligence, and fraud pertaining to a short term bridge loan. While the action was pending the individual defendant transferred real property to his spouse.

[52] The plaintiffs brought a second action to set aside that transfer under s. 2 of the Fraudulent Conveyances Act, R.S.O. 1990 c. F. 23, before the first action was determined on its merits.

[53] In the context of the second action, the plaintiffs secured an ex parte order permitting the registration of a CPL with respect to the real property that was transferred.

[54] In determining a subsequent motion to discharge the CPL, Smith J. formulated the three part test set out above. That test was specifically created to apply to situations where a party claims a CPL in a subsequent fraudulent conveyance action, where: (i) the party did not claim an interest in the subject land in the original action; and (ii) the original action had not been reduced to judgment.

[55] The “high probability of success in the main action” criterion applied to the original action, not to the action in which the CPL order was made.

[56] That standard was appropriate, as the viability of the plaintiffs’ fraudulent conveyance action was entirely contingent on the plaintiffs securing judgment in the original action, thereby establishing themselves as “creditors” of the original defendant, at the time he transferred the subject land to his spouse.

[57] The circumstances in Grefford, which justified a departure from the “triable issue” test in GPI Greenfield, are not present here.

[58] This matter relates to a single action, primarily founded in the breach of a statutory trust, with corresponding remedial proprietary claims. The determination of the plaintiff’s claim to an interest in the subject lands is not contingent on whether it is successful in establishing liability against the defendants on some other grounds, in some other proceeding.

[59] In the result, the analytical framework set out in GPI Greenfield applies to the determination of the issues on this motion. The defendants carry the onus to demonstrate that there is no triable issue with respect to the plaintiff’s claim to an interest in the Farm Property and vacant lot.

Is the Plaintiff Precluded, in Law, From Asserting a Claim to an Interest in the Farm Property?

[60] Ambassador’s supply of materials and services to the Farm Property in October of 2013, anchors the defendants’ position that, as a matter of law, the plaintiff cannot advance a claim to an interest in the Farm Property.

[61] The defendants submit that as a result of that supply, Ambassador had the opportunity to claim a lien under the Act. It did not, and its lien rights expired. The defendants suggest that any ability the plaintiff had to advance a claim to an interest in the Farm Property ended with the expiration of its potential lien claim. They characterize the CPL as the plaintiff’s attempt to revive its expired lien rights. Such a scheme, they suggest, is not permissible at law.

[62] In that regard the defendants rely on Rafat General Contractor Inc. v. 1015734 Ontario Ltd. (2005), 2005 CanLII 47733 (ON SC), 81 O.R. (3d) 798 (Sup. Ct.). There, the plaintiff supplied labour and materials for a construction project, for which it was not paid. It did not register a claim for lien. After its lien rights expired, it commenced a breach of trust claim, under the Act. As a corollary, it moved for a CPL over the lands to which it supplied labour and materials.

[63] In dismissing the motion, Sproat J. held, at para. 3:

The scheme of the Construction Lien Act, R.S.O. 1990, c. C. 30 (“the Act”) is that it provides a comprehensive code as to how liens are preserved. It would subvert the statutory requirements as to how and when a claim for lien must be registered to allow contractors to ignore the time limits, lose their statutory lien and then assert an interest in the land and obtain a Certificate of Pending Litigation. Further, a claim based on the trust provisions does not give rise to a tenable claim to an interest in the subject land.

[64] Ultimately, the court declined to authorize a CPL, as it found that the plaintiff lacked a reasonable interest to a claim in land.

[65] The defendants suggest that the applicable proposition to be extracted from Rafat is that a claim to an interest in land cannot be founded on a trust claim under the Act. As a consequence, the plaintiff’s claim to an interest in the Farm Property fails as a matter of law and the CPL must be discharged. They emphasized that only the lien provisions of the Act give rise to an in rem right.

[66] For reasons set out below, I disagree with the defendant’s interpretation of Rafat, in general, and with their view of the results of its application in this instance.

[67] In Rafat, the court determined that the breach of a statutory trust under the Act does not, in and of itself, vest, in the beneficiary, an in rem claim to the very land to which the beneficiary supplied materials and services. It did not conclude that a party pursuing a claim under the trust provisions of the Act is precluded from asserting a claim to an interest in land founded in the nature of the remedy sought, as a result of the alleged breach of trust. That issue was not before the court.

[68] Conversely, in Firenze Exteriors Inc. v. Westwing Construction Group Inc., [2005] O.T.C. 165 (Sup. Ct.), Master Albert found that a CPL can be maintained where a proprietary interest in land is claimed as a remedy for an alleged breach of a statutory trust under the Act. That case dealt with allegations that s. 8 trust funds were diverted by the defendant contractor to pay for the construction of a personal residence for its principal.

[69] In Firenze, the plaintiffs were sub-contractors and beneficiaries of the trust provisions and claimed a remedial constructive trust over the land upon which the personal residence was built. The court refused to discharge the CPL registered by the plaintiffs over the “personal residence” land, concluding that there was a triable issue regarding the plaintiff’s claim therein (arising for the nature of the remedy sought).

[70] Firenze was followed in Robertson v. Fieldstone Homes Limited (2009), 89 R.P.R. (4th) 150 (Ont. Sup. Ct.) (Master). In that instance, the plaintiffs/homeowners alleged that a contractor they retained to construct their home used the funds they advanced for that purpose, to fund the construction of a personal residence for its principal.

[71] The plaintiffs asserted a remedial constructive trust over the principal’s residence and obtained an ex parte order permitting the issuance and registration of a CPL. The defendants moved to discharge the CPL. Relying, in part, on Firenze, the court dismissed the motion, finding that there was a triable issue regarding the plaintiff’s claim to an interest in the land to which the building funds were allegedly misappropriated.

[72] The circumstances of each of these cases, and Firenze in particular, are strikingly similar to those in this instance. They seem to unequivocally dispel the defendants’ contention that the plaintiff cannot, at law, claim an interest in land, as contemplated by s. 103(6)(a)(ii) of the CJA, owing to its assertion of in personam rights, as distinct from in rem rights, under the trust provisions of the Act.

[73] The defendants argue that Firenze was wrongly decided, and, in any event, has effectively been overruled by this court’s decision in Rafat.

[74] In my view, the principles expressed in Rafat and Firenze, respectively, are not inconsistent. The decision in the former flows from the nature of the claimant’s right, while the decision in the latter flows from the nature of the remedy sought as a consequence of an alleged breach of an in personam obligation.

[75] Indeed, the court in Rafat specifically stated it that it did not need to determine if Firenze was correctly decided in order to determine the issues before it. Instead, the court distinguished Firenze on the basis that it dealt with an alleged breach of trust and diversion of funds from a construction project to construction of a personal residence. It was not a case where lien rights arose, were allowed to expire, and then an interest in the same land was later asserted.

[76] Ambassador does not take issue with the result or reasoning in Rafat. However, it correctly observes that the circumstances in that case are not analogous to those before the court on this motion.

[77] Instead, it points to Firenze and Robertson, where, as in this case, the plaintiffs’ claims to an interest in land arose from their respective requests that a constructive trust be imposed on real property to which the misappropriated trust funds were alleged to be traced. There is substantial authority to support that proposition.

[78] A constructive trust is a proprietary remedy, which may, in appropriate cases, be ordered as a consequence of a breach of an in personam obligation owed by one party (including a trustee) to another (including a beneficiary) (see: Johnston v. Adam, 2011 ONSC 3808, 5 R.F.L. (7th) 176 at paras. 20-24).

[79] A reasonable claim to an interest in land, for the purpose of securing a CPL, can be made out where the evidence and circumstances of the claim disclose a reasonable claim to a proprietary remedy such as a constructive trust. For example, In Transmaris Farms Ltd. v Sieber (1999), 86 O.T.C. 190 (Ct. J. (Gen. Div.)), Blair J. held, at para. 62:

Under the CJA, section 103, a certificate of pending litigation may be issued by the court where a proceeding is commenced in which an interest in land is in question…(I)f reasonable claims are put forward in an action for a constructive trust or a fraudulent conveyance in respect of a property, a certificate of pending litigation may issue pending trial. The party seeking the certificate need not prove its case at this point. The test is met where there is sufficient evidence to establish a reasonable claim to an interest in the land based upon the facts and on which the plaintiff could succeed at trial.

[80] Finally, in GPI Greenfield, the Court of Appeal recognized that a CPL may be granted where the underlying cause of action is founded in the breach of an in personam obligation. While observing that an order authorizing a CPL, is not a decision in rem, the court stated:

Although obtaining and registering a CPL may have the effect of turning the action in which it was obtained from an action in personam into an action in rem, it is only if the result of the action is a determination of the title to the property, or some interest therein, that the action would result in a judgment in rem. See McTaggart v. Toothe (1884), 10 P.R. 261 at p. 262 (Ont. Ch.).

[81] In the result, given the proprietary nature of the remedy it seeks, the in personam nature of the claim asserted by the plaintiff does not, as a matter of law, preclude it from advancing a claim to an interest in the Farm Property and vacant lot, sufficient for the purpose of maintaining a CPL.

Is There a Triable Issue Regarding the Plaintiff’s Claim to an Interest in the Subject Lands?

[82] It is now appropriate to consider whether, on the evidence, the defendants have demonstrated that there is no triable issue in relation to the plaintiff’s claim to an interest in the Farm Property and vacant lot.

[83] The defendants contend that the evidentiary record militates against a finding that the plaintiff has a reasonable claim to an interest in either the Farm Property or the vacant lot.

[84] They submit that the plaintiff has not offered any direct evidence that establishes that the trust funds were, in fact, used to maintain or improve the vacant lot or Farm Property. Conversely, Mr. Shore deposed that the funds Fernwood received on account of the projects were not used to maintain or improve those lands. He was not cross examined on his affidavit evidence.

[85] In their submission, Mr. Shore’s evidence provides an adequate explanation regarding the financing for the maintenance of the vacant lot and Farm Property and the construction of the personal residence on the latter. Those methods did not involve the use of trust funds, and accordingly, the CPL should be discharged.

[86] I consider that evidence below.

The Farm Property Evidence

[87] Mr. Shore deposed that from a “maintenance perspective”, the Farm Property is fiscally self-sustaining. The property is used, in part, to board animals for hire, and to produce hay, which is sold commercially. He asserts that the money generated from those undertakings fully services the carrying costs associated with the property including mortgage payments, property taxes and utilities.

[88] The defendants acknowledge the ongoing construction of a personal residence located on the Farm Property, but Mr. Shore states that no trust funds were used to pay for same. Indeed, some tradespersons who supplied materials and services in furtherance of the construction have not been paid, at all.

[89] To the extent some tradespersons have been paid, those payments were made exclusively from the proceeds of a building mortgage registered against title to the Farm Property in favour of the United Communities Credit Union Limited (the “UC Mortgage”). That mortgage has a stated value of $1,026,000, as registered. However, the exact dollar amount drawn by the individual defendants against the mortgage was not specified in the evidence, and was a matter of which counsel was unaware.

[90] Mr. Shore deposed that contrary to the suspicions of the plaintiff, the UC mortgage was not made for the purpose of liquidating the equity in the Farm Lands, in an effort to defeat creditors. Rather, it was made to facilitate the payment of some trades, to date, and to finance completion of the construction of the residence.

[91] Ambassador was critical of the evidence, or lack thereof, proffered by the defendants. The only evidence suggesting that trust funds were not diverted to the subject properties comes from the defendant, Mr. Shore, in the form of a general self–serving denial. Ambassador submits this limited evidence is insufficient. Fernwood is a trustee and must be held to properly account for the disposition of the trust funds.

[92] An accounting of the trust funds is notoriously absent from the evidence tendered by the defendants. The plaintiff has requested an accounting of the trusts funds, and has made several requests for information under s. 39 of the Act, which remained unanswered at the time the motion was heard.

[93] Ambassador submits that an adverse inference should be drawn from the defendants’ failure to account. The actual purpose for which the trust funds were used lies within the exclusive knowledge of the personal defendants. Given Fernwood’s failure to account, it cannot credibly rely on the plaintiff’s inability to conclusively prove, at this point, that the specific trust funds were used in relation to the Farm Property or the vacant lot. The onus is on Fernwood to conclusively prove they were not. I agree.

[94] The court, in Firenze, drew an adverse inference against the defendants in similar circumstances (presumably on the basis that an account may have demonstrated that trust funds were used in the construction of the personal residence).

[95] Given Fernwood’s failure to account, I am inclined to draw a similar adverse inference, although such an inference is not necessary to dispose of this motion. Independent of an adverse inference, the evidence before me, taken as a whole, does not establish the lack of a triable issue with respect to the plaintiff’s claim to an interest in the land.

[96] The evidence tendered by the defendants lacks essential information and requisite detail, which ought to have been provided.

[97] There is no independent objective evidence substantiating Mr. Shore’s allegation that any improvements made to the Farm Property were funded exclusively through draws on the building mortgage, and not by a misuse of the trust funds.

[98] Specifically, information evidencing the number of draws on the mortgage, the draw dates, the quantum of draws and evidence of the specific disposition of the proceeds of the draws has not been tendered. No evidence was tendered regarding the amounts paid to date for materials and services involved in the construction, nor in the amounts still outstanding in that regard. The lack of any evidence on these points does not assist the defendants in discharging their onus on this motion, and prevents any meaningful analysis of Mr. Shore’s assertion that the building mortgage has funded all construction at the Farm Property.

[99] I was also troubled by the lack of specific and objective evidence, with respect to the suggestion that the Farm Property is fiscally self-sustaining. The defendants did not adduce any evidence with respect to:

i) The quantum of the monthly maintenance expenses associated with the Farm Property – specifically, the mortgage payment, taxes, insurance and utilities;

ii) The nature and extent of the boarding operation – such as the number of animals boarded, the monthly revenue from the boarding operation, to whom the revenue is paid, the timing of payment of the revenue and the corresponding expenses associated with the boarding operation;

iii) The nature and extent of the straw production, the timing of the straw production and sale process, the revenue generated from the straw production during the material times, to whom that revenue was paid, and the corresponding expenses associated with the hay production cycle; and

iv) The amounts drawn on the building mortgage, the timing of the amounts drawn on that mortgage, the amount currently outstanding on the building mortgage, whether and to what extent the maintenance expenses associated with the Farm Property grew as a result of draws on that mortgage, and whether there were concordant increases in revenue under either the boarding operation or the straw operation (or both) sufficient to fund the increase in monthly maintenance expenses.

The Vacant Lot Evidence

[100] According to Mr. Shore, the vacant lot was acquired in November of 2011, together with 17 other lots, and was financed through a vendor take-back mortgage. Several of the lots were sold prior to November of 2013. At that point, the remaining lots (including the vacant lot) were the subject of a refinancing and a private mortgage, with a new arm’s length mortgagee, that was registered on title. The original take-back mortgage was discharged.

[101] Mr. Shore asserts that under the terms of both mortgages, interest accrued in the ordinary course, but was not payable until the lot was sold. At that point, accrued interest, together with the principal, was paid out to the mortgagee, from the proceeds of sale. Accordingly, there were no ongoing monthly expenses for mortgage interest associated with the maintenance of the vacant lot.

[102] Neither mortgage was placed in evidence.

[103] Mr. Shore stated that the payment of municipal taxes is dealt with in a similar fashion. Pending the sale of the lot, the taxes were not paid and accumulated in an arrears position. The tax arrears were paid in November of 2013, as a requirement of the re-financing. That payment was funded by the proceeds of the now current mortgage. He asserted that no further taxes were paid by Fernwood, pending the sale of the vacant lot.

[104] It is common ground that Fernwood sold the vacant lot and conveyed title to the third party purchaser (Brouillette Builders) on or about March 28, 2014. Ambassador agreed to discharge the CPL, to facilitate the closing on the condition that the net proceeds from the sale were held in trust pending the determination of the CPL entitlement.

[105] Prior to agreeing to discharge the CPL, as it relates to the vacant lot, a mortgage discharge statement, dated February 27, 2014, was forwarded to the plaintiff. Curiously, the discharge statement evidences that Fernwood had paid all interest due under the mortgage, up to January 25, 2014. This is contrary to Mr. Shore’s sworn evidence (in his affidavit of March 12, 2014) that no interest payments were made, after the mortgage was registered in November of 2013.

[106] That inconsistency was referred to in the affidavit of Roger Freeman, sworn April 18, 2014. Mr. Shore swore a further affidavit on April 25, 2014, in reply to the content of the Freeman affidavit sworn April 18, 2014. He did not offer any evidence to explain, or otherwise reconcile, the discrepancy between his previous evidence that, as of March 12, 2014, no interest had been paid under the November 2013 mortgage with the content of the mortgage discharge statement evidencing interest paid to January 25, 2014.

[107] That was a striking omission, considering the primary answer to Ambassador’s claim that the trust funds were used to maintain the vacant lot, was that no mortgage interest was required to be paid, or was in fact paid, on the vacant land, at all, after the November 2013 mortgage was registered.

[108] His evidence in that regard is inconsistent with the mortgage discharge statement. His failure to address that inconsistency, in his reply affidavit, does little to assist the defendants in meeting their onus on this motion.

[109] Finally, while Mr. Shore provided evidence in a general manner regarding the refinancing that occurred in November of 2013, he offered no evidence on the specific terms of either the vendor take-back mortgage nor the new mortgage (other than his contention that no interest was payable until the property was sold).

[110] It appears from the discharge statement that the principal balance of the new mortgage was $ 60,000. There was no evidence adduced regarding the principal balance of the vendor take-back mortgage, at the time of the refinancing. Therefore, I cannot conclude that principal amounts were necessarily the same.

[111] Mr. Shore did not provide specific evidence regarding the source of funds used to discharge the vendor take-back mortgage in November of 2013. He states, only, that a new mortgage was arranged at that time, and that a discharge of the vendor take-back mortgage was registered.

[112] He did not state that the discharge of the latter was solely funded through proceeds of the former. He did not provide evidence regarding the respective amounts of the two mortgages. He did not specifically state that trusts funds were not used to discharge the vendor take-back mortgage.

Analysis

[113] In determining whether there is a triable issue regarding whether the plaintiff has a reasonable claim to an interest in land, for the purpose of this motion, the court must not simply rely on the pleadings or accept affidavits uncritically.

[114] I have outlined the problematic nature of Mr. Shore’s evidence, above.

[115] After considering the evidence and submissions from counsel, I remain troubled by the fact that the moving parties are uniquely possessed of specific and highly relevant information, which they have not disclosed through a proper accounting of the trust funds.

[116] Apart from its relevance to the issue before the court on this motion, Fernwood has a statutory obligation and a fiduciary duty to provide an accounting. It did not do so prior to the hearing of this motion. There is no evidence before the court explaining Fernwood’s failure to account.

[117] Instead, the defendants put forth evidence summarily denying that any trust funds were used to maintain or improve the Farm Property and the vacant lot. An alternative explanation of how the maintenance and improvement of these properties were funded was offered, without placing into evidence information essential to a reasonable understanding and evaluation of their explanation.

[118] The lack of evidence, in that regard, does not permit the court to evaluate the accuracy of Mr. Shore’s general assertions. The evidentiary issues previously set out cause me concern, with respect to the accuracy and reliability of Mr. Shore’s evidence, as distinct from Mr. Shore’s credibility.

[119] In the context of Fernwood’s failure to account, and in the absence of relevant and necessary evidence in Mr. Shore’s affidavits, his general assertion that the trust funds were not used for the maintenance or improvement of the subject lands ought not be dispositive of the plaintiff’s claim to an interest in the those lands at this stage. The defendants carry the onus to establish there is no triable issue concerning the plaintiff’s claim to an interest in land. In my view, unless and until they provide a proper accounting of the trust funds, and/or complete, detailed, reliable and internally consistent evidence to support Mr. Shore’s blanket denials, a triable issue remains.

[120] In the result, the defendants have failed to discharge their onus on this motion. The evidentiary record, taken as a whole, does not support a finding that there is not a triable issue regarding Ambassador’s claim to an interest in the subject lands. Accordingly, it is not appropriate to discharge the CPL on the basis of s. 103(6)(a)(ii) of the CJA.

Residual Discretion to Discharge the CPL – [s. 103 (6)](https://www.canlii.org/en/on/laws/stat/rso-1990-c-c43/latest/rso-1990-c-c43.html)(c) [CJA](https://www.canlii.org/en/on/laws/stat/rso-1990-c-c43/latest/rso-1990-c-c43.html)

[121] Having found that, for the purpose of this motion, there is a triable issue regarding the plaintiff’s claim to an interest in the subject lands, it is appropriate to consider whether the relative equities between the parties, nonetheless, favour discharging the CPL, under s.103 (6)(c) of the CJA.

[122] The test for the exercise of such discretion is set out in Clock Investments Ltd. v. Hardwood Estate Ltd. (1977), 1977 CanLII 1414 (ON SC), 16 O.R. (2d) 671 (Div. Ct.), at p. 3:

[T]he governing test is that the Judge must exercise his discretion in equity and look at all of the relative matters between the parties in determining whether or not the certificate should be vacated.

[123] In 572383 Ontario Inc. v Dhunna (1987), 24 C.P.C. (2d) 287 (Ont. H. Ct. J.) (“Dhunna”), Donkin M. set out (at pages 3 and 4) a non-exhaustive list of eight factors which had previously been considered in cases determining CPL discharge motions.

[124] The factors include: (i) whether the plaintiff is a shell corporation, (ii) whether the land is unique, (iii) the intent of the parties in acquiring the land, (iv) whether there is an alternative claim for damages, (v) the ease or difficulty in calculating damages, (vi) whether damages would be a satisfactory remedy, (vii) the presence or absence of a willing purchaser, and (viii) the harm to each party if the CPL is or is not removed with or without security (see: Dhunna, at paras. 10-18).

[125] The action in Dhunna involved a claim for specific performance of a contract for the sale of land. The factors, as set out, do not lend themselves to a crisp application in this case, given the nature of the plaintiff’s claim to an interest in subject lands.

[126] An express consideration of all of the factors expressed in Dhunna is not required in the appropriate exercise of discretion under s. 103 (6)(c) of the CJA (see: Roseglen Village for Seniors Inc. v. Doble, 2010 ONSC 4680, 100 C.P.C. (6th) 183, at para. 8).

[127] However, the court must examine all of the relevant matters between the parties, and exercise its discretion in equity. The primary factor to consider on all motions for an order granting leave to issue a CPL is the harm done to the defendants if the certificate is issued or to the plaintiff if the certificate is not issued (see: Bayerische Landesbank Gironzentrale v. Sieber (2008), 2008 CanLII 28753 (ON SC), 47 C.B.R. (5th) 117 (Ont. Sup. Ct.), at para. 70.). That principle applies, with necessary modifications to a motion to discharge a CPL.

“Harm” To the Defendants

[128] No specific submissions were made with respect to the harm to the defendants should the net proceeds from the sale of the vacant lot remain in trust pending trial. The amount involved is relatively nominal. There is no basis, under s. 103(6)(c), to order the funds released in a manner directed by the defendants, disclosed by the evidence.

[129] While the presence of a CPL does not vest a proprietary interest in the Plaintiff, its practical effect can be harsh from the perspective of the owner of the land which is the subject of the certificate.

[130] The presence of the CPL will likely constrain the individual defendants’ ability to dispose of, or otherwise encumber, the Farm Property.

[131] According to Mr. Shore, the individual defendants wish to sell the Farm Property. It has been listed for sale. Mrs. Shore has, apparently, entered into an agreement to purchase a residence, with a closing date that was pending at the time this motion was heard.

[132] In submissions, counsel for the defendants, suggested that Mrs. Shore’s pending purchase transaction could be jeopardized if she is prevented from accessing the equity in the Farm Property.

[133] In considering the exercise of my discretion under s. 103 (6)(c ) of the CJA, I placed very little weight on this suggestion for a number of reasons:

1. The Purchase Transaction Was Entered Into After Defendants had Notice of the CPL

[134] Until, at least, December of 2013, Mr. and Mrs. Shore resided at 1153 Jillian Court, in Belle River Ontario (not the Farm Property). In December of 2013 the Shores apparently moved out of the Jillian Court residence and listed that property for sale (list price $ 424,900). The particulars of their current living arrangements were not set out in the evidence.

[135] By January of 2014, the Farm Property was also listed for sale, on an unfinished basis.

[136] Mrs. Shore entered into an agreement to purchase a new home on April 5, 2014. By that time, the CPL had been issued and served on the defendants, including Mrs. Shore.

[137] Accordingly, she entered into the pending transaction with prior knowledge that her ability to access the equity in the Farm Property was, from a practical perspective, impaired.

2. Lack of Any Evidence Supporting The Basis For The Concern

[138] There was no evidence that the Defendants’ actually have a concern that the purchase transaction is jeopardized by the CPL. Instead, the evidence with respect to Mrs. Shore’s pending transaction appears to have been led to demonstrate that the individual defendants are not attempting to put their assets beyond the reach of their potential creditors, including the beneficiaries of the s. 8 trust.

[139] No evidence was led with respect to:

(a) what, if any equity the individual defendants have in the Farm Property;

(b) the marketability of the Farm Property, independent of the CPL, given its unfinished state;

(c) the likelihood of the Farm Property being sold, and that transaction completed on or before the scheduled closing of the purchase transaction;

(d) potential alternative sources of financing for the pending purchase transaction, including the quantum of equity in the Jillian property, whether that property was the subject of an agreement of purchase and sale, and if so, the terms of same.

3. Defendants’ Concern Regarding Purchase Transaction is the Result of Defendants’ Failure to Account

[140] The alleged hardship with respect to the pending purchase originates from Fernwood’s continuing failure to account for the trust funds.

[141] If the defendants’ contention that the trust funds were not used to maintain or improve the Farm Property is accurate, the alleged mischief posed by the CPL could have been extinguished by a full and proper accounting.

4. Potential Liability Under s. 103 (4) of the [CJA](https://www.canlii.org/en/on/laws/stat/rso-1990-c-c43/latest/rso-1990-c-c43.html)

[142] If it is ultimately determined that the plaintiff does not have an interest in the land, and that its claim in that regard was not “reasonable”, the plaintiff will be liable for the damages sustained by any person as a result of its registration.

[143] The CJA, by its terms, provides some measure of protection to guard against potential adverse financial effects of the CPL, if the plaintiff is unsuccessful.

“Harm” To the Plaintiff

[144] If the CPL is discharged, at this point, the potential prejudice to the plaintiff is significant. The individual defendants are actively marketing the Farm Property for sale.

[145] If the CPL is discharged, the plaintiff will lose its only mechanism to provide notice to potential purchasers of its claim to an interest in the Farm Property. If the property is sold, in the absence of the CPL, the ability of the plaintiff to advance a remedial constructive trust claim with respect to the Farm Property will be frustrated.

[146] Fernwood is a trustee, and must account for the disposition of the trust funds. It has not done so, without explanation. That strongly militates against the defendants’ position, when the relative equities between the parties are weighed.

[147] In reviewing all of the circumstances of the case and the relative positions of the parties, I do not find this to be an appropriate case to exercise discretion under s. 103(6)(c) of the CJA to discharge the CPL notwithstanding that the moving parties have failed to demonstrate the lack of a triable issue with respect to the plaintiff’s claim to an interest in the subject lands.

Costs

[148] Both the moving parties and responding party wished to proceed with this motion, notwithstanding that an accounting of the trust funds had not been made, and s. 39 information not provided. The responding party was successful on the motion. Costs of the motion will follow the event.

[149] The moving parties (as a group) and the responding party each delivered a motion record, a supplementary motion record with additional evidence, a factum and a brief of authorities. The argument on the motion lasted one hour. The responding party proposed partial indemnity costs of $ 1,500 inclusive of disbursements and HST, which I find to be an exceptionally reasonable sum in all of the circumstances.

Disposition

[150] In the result, an order will go:

(a) Dismissing the motion; and

(b) Awarding costs to the responding party fixed in the amount of $ 1,500 inclusive of disbursements and HST payable forthwith, by the moving parties, on a joint and several basis.

Original signed “Gregory J. Verbeem”

Gregory J. Verbeem

Justice

Released: June 24, 2014