DBDC Spadina Ltd. et al. v. Walton et al.

[Indexed as: DBDC Spadina Ltd. v. Walton]

Ontario Reports

Ontario Superior Court of Justice,

D.M. Brown J.

August 12, 2014

121 O.R. (3d) 449 | 2014 ONSC 4644

Case Summary

Trusts and trustees — Constructive trusts — Applicants and respondents agreeing to invest in commercial real estate projects through companies which they jointly owned — Respondents commingling companies' funds with those of their own companies and using them for their own benefit and benefit of their companies — Respondents placing mortgages on two jointly owned properties without applicants' knowledge or consent and using proceeds for benefit of their own companies — Respondents unjustly enriched — Respondents breaching their contractual obligations and their fiduciary duties as directors of jointly owned companies — Appropriate remedy being imposition of constructive trusts in favour of applicants on properties owned by respondents' companies which were shown to have been acquired by or to have benefited from respondents' misconduct.

The applicants and the respondents agreed to invest in a number of commercial real estate projects. A separate company was incorporated for each project, and the applicants and the respondents each held 50 per cent of the shares of those companies (the "Schedule B companies"). The respondents were to provide management services for each project through their own company, RT Ltd. The applicants discovered that the respondents were not making their portion of the equity investments into the properties, were commingling the Schedule B companies' funds with those of RT Ltd. and their own companies (the "Schedule C companies"), and had placed mortgages on two properties without the applicants' knowledge or consent, contrary to the parties' agreement, and used the proceeds of those mortgages for their own benefit and the benefit of some of the Schedule C companies. RT Ltd. had submitted invoices totalling more than $30 million for management services, and had only done a small portion of the work, valued at $1 million. The applicants obtained an order for the appointment of an inspector, which was subsequently appointed as the receiver of the Schedule B companies. The applicants moved for a number of orders and remedies.

Held, the motions should be granted in part.

The applicants' request for an order for restitution and repayment by the respondents in the amount of $78,420,418 for breach of contract, unlawful misappropriation and unjust enrichment should not be granted at this time as adequate argument had not been placed before the court. Applying the different measures of damages for breach of contract, unlawful misappropriation and unjust enrichment could result in quite different damage awards.

The applicants were entitled to an order that the issued and outstanding shares in the Schedule B companies held by the respondents be cancelled where they had not contributed shareholder equity. The applicants were also entitled to an order appointing the receiver of the Schedule B companies as receiver over the respondents. The respondents had been unjustly enriched by the diversion of the applicants' equity contributions to themselves and some of the Schedule C companies. They had breached their contractual obligations to the applicants and their fiduciary duties as directors of the Schedule B companies. The appropriate remedy was the grant of constructive trusts in favour of the applicants in respect [page450] of eight properties owned by Schedule C companies which were acquired through the misuse of the applicants' funds or for which the applicants' funds were used to discharge registered encumbrances. The state of the evidence at this time did not permit the making of constructive trust orders for fixed amounts in respect of other Schedule C properties. However, the applicants had established a strong prima facie case of unjust enrichment of up to a possible claim of $22.6 million against the respondents in respect of those properties. The applicants should be granted leave to issue certificates of pending litigation against all Schedule C properties. The receiver of the Schedule B companies should be appointed as receiver over all Schedule C properties. Finally, a tracing order should be granted.

Cases referred to

B.M.P. Global Distribution Inc. v. Bank of Nova Scotia, [2009] 1 S.C.R. 504, [2009] S.C.J. No. 15, 2009 SCC 15, [2009] 8 W.W.R. 428, 94 B.C.L.R. (4th) 1, 268 B.C.A.C. 1, 386 N.R. 296, EYB 2009-156805, J.E. 2009-613, 304 D.L.R. (4th) 292, 58 B.L.R. (4th) 1; Boscawen v. Bajwa, [1995] 4 All E.R. 769 (C.A.); C.I. Covington Fund Inc. v. White, 2000 CanLII 22676 (ON SC), [2000] O.J. No. 4589, [2000] O.T.C. 865, 10 B.L.R. (3d) 173, 22 C.B.R. (4th) 183, 10 C.P.R. (4th) 49, 101 A.C.W.S. (3d) 504 (S.C.J.); DBDC Spadina Ltd. v. Walton, [2014] O.J. No. 2504, 2014 ONCA 428, 22 B.L.R. (5th) 97, 241 A.C.W.S. (3d) 121, affg [2013] O.J. No. 5004, 2013 ONSC 6833, 22 B.L.R. (5th) 79, 233 A.C.W.S. (3d) 841 (S.C.J.); DBDC Spadina Ltd. v. Walton, [2014] O.J. No. 3039, 2014 ONSC 3732 (S.C.J.); DBDC Spadina Ltd. v. Walton, [2013] O.J. No. 4486, 2013 ONSC 6251 (S.C.J.); DBDC Spadina Ltd. v. Walton, [2013] O.J. No. 5971, 2013 ONSC 6833 (S.C.J.); Garland v. Consumers' Gas Co., [2004] 1 S.C.R. 629, [2004] S.C.J. No. 21, 2004 SCC 25, 237 D.L.R. (4th) 385, 319 N.R. 38, J.E. 2004-931, 186 O.A.C. 128, 43 B.L.R. (3d) 163, 9 E.T.R. (3d) 163, 130 A.C.W.S. (3d) 32; Kerr v. Baranow, [2011] 1 S.C.R. 269, [2011] S.C.J. No. 10, 2011 SCC 10, 274 O.A.C. 1, 328 D.L.R. (4th) 577, 2011EXP-624, 411 N.R. 200, J.E. 2011-333, [2011] 3 W.W.R. 575, 64 E.T.R. (3d) 1, 14 B.C.L.R. (5th) 203, 300 B.C.A.C. 1, 93 R.F.L. (6th) 1, EYB 2011-186472; Kolari (Re) (1982), 1982 CanLII 2110 (ON SC), 36 O.R. (2d) 473, [1982] O.J. No. 3238, 39 C.B.R. (N.S.) 129 (Dist. Ct.); Tracy (Representative ad litem of) v. Instaloans Financial Solutions Centres (B.C.) Ltd., [2010] B.C.J. No. 1439, 2010 BCCA 357, 320 D.L.R. (4th) 577, 6 B.C.L.R. (5th) 280, [2010] 9 W.W.R. 11, 290 B.C.A.C. 193; Transmaris Farms Ltd. v. Sieber, [1999] O.J. No. 300, 86 O.T.C. 190, 30 C.P.C. (4th) 369, 85 A.C.W.S. (3d) 900 (Gen. Div.)

Statutes referred to

Business Corporations Act, R.S.O. 1990, c. B.16, s. 161(2)

Courts of Justice Act, R.S.O. 1990, c. C.43, s. 103

Rules and regulations referred to

Rules of Civil Procedure, R.R.O. 1990, rule 53.03, (2.1), (2.1) 2, (2.1)3, (2.1)4

MOTIONS by the applicant for various orders and remedies.

P. Griffin and S. Roy, for applicants.

N. Walton, respondent in person.

H. Cohen, for remaining respondents Ronauld Walton, the Rose & Thistle Group Ltd., and Eglinton Castle Inc.

M. Dunn and J. LaBine, for Schonfeld Inc., manager and inspector.

J. Simpson, for Harbour Mortgage. [page451]

D. Jackson and R. Fisher, for Christine DeJong, Michael DeJong, Christine DeJong Medical Professional Corporation, C2M2S Holding Corp. and DeJong Homes Inc.

L. Wallach, for Handelman/Sorga mortgagees.

G. Benchetrit, for Business Development Bank of Canada.

D. Michaud, for Equitable Bank.

A. Jackson, for Home Trust Company.

J. Marshall, for Firm Capital Credit Corp.

D.M. BROWN J.: —

I. Overview of the Motions and Return of Application

[1] Between September 2010 and June 2013, Dr. Bernstein, through his applicant companies, invested in a portfolio of 31 properties in Toronto with the respondents Norma and Ronauld Walton. Each property was held by a corporation -- the "Schedule B companies" -- jointly owned by Dr. Bernstein and the Waltons. The applicants contributed to the Schedule B companies $2,568,694 by way of equity, $78,490,801 by way of equity advances converted into debt, largely shareholder loans, and they advanced $23,340,000 under mortgages.[^1] Dr. Bernstein advanced mortgage funds against both Schedule B companies and what the parties have called "Schedule C properties", which were owned by companies -- Schedule C companies -- controlled by the Waltons in which Dr. Bernstein did not have an ownership interest.[^2]

[2] These motions by the applicants and respondents, and the return of the applicants' application, deal with further issues in the ongoing litigation between Dr. Bernstein and the Waltons concerning the need for the respondents to account for funds, and to be held accountable for funds, invested by Dr. Bernstein and his companies with them.

[3] As well, Christine DeJong Medical Professional Corporation, C2M2S Holding Corp. and DeJong Homes Inc., other investors with the Waltons, brought a cross-motion seeking relief in respect of one Schedule C Property, 3270 American Drive, Mississauga. [page452]

[4] In a separate, handwritten endorsement made at the end of the hearing on July 18, 2014, I made an interim order restraining any further dealings with the Schedule C properties in dispute until the release of these reasons.

II. Background

[5] Dr. Bernstein is the founder of diet and health clinics. Norma Walton is a lawyer and co-founder with her husband, Ronauld Walton, of the respondent the Rose & Thistle Group Ltd. (the "Rose & Thistle"). Called to the bar in 1995, Ms. Walton was a principal of Walton Advocates, an in-house law firm providing legal services to the Rose & Thistle group of companies. By decision dated May 16, 2014, the Law Society of Upper Canada's Hearing Division suspended Ms. Walton's licence for 18 months starting on July 1, 2014; the Law Society has appealed that decision as too lenient.

[6] Ronauld Walton is also a lawyer, a principal of Walton Advocates and a co-founder of Rose & Thistle.

[7] Newbould J., in his reasons of October 7, 2013 appointing Schonfeld Inc. as inspector of the Schedule B companies,[^3] set out many of the background events to this dispute [at paras. 5-9]:

Beginning in 2008, Dr. Bernstein acted as the lender/ mortgagee of several commercial real estate properties owned by the Waltons either through Rose & Thistle or through other corporations of which they are the beneficial owners.

Following several financings, Dr. Bernstein and the Waltons agreed to invest jointly in various commercial real estate projects. To date, Dr. Bernstein has invested approximately $110,000,000 into 31 projects[.]

Dr. Bernstein and the Waltons entered into separate agreements which provided as follows:

a. A new company would be incorporated for each project (the "Owner Company");

b. Dr. Bernstein (through a company incorporated for this purpose) would hold 50% of the shares of the Owner Company;

c. The Waltons (either directly or through a company incorporated for this purpose) would hold the other 50% of the shares of the Owner Company;

d. Each of Dr. Bernstein and the Waltons would contribute an equal amount of equity to each project; [page453]

e. The Waltons would manage, supervise and complete each project for an additional fee through Rose & Thistle. Rose & Thistle is not a party to the agreements;

f. The Waltons also agreed to be responsible for the finances, bookkeeping, accounting and filing of tax returns, among other things, of the Owner Company;

g. Each Owner Company was to have a separate bank account;

h. Dr. Bernstein would not be required to play an active role in completing each project, but his approval would be required for:

i. Any decisions concerning the selling or refinancing of each property;

ii. Any decisions concerning the increase in the total amount of equity required to complete each project; and

iii. Any cheque or transfer over $50,000.

i. The Waltons agreed to provide Dr. Bernstein with:

i. Ongoing reports on at least a monthly basis detailing all items related to each property;

ii. Copies of invoices for work completed each project monthly;

iii. Bank statements monthly; and

iv. Listing of all cheques monthly;

j. Upon sale of a property, Dr. Bernstein and the Waltons would receive back their capital contribution plus a division of profits; and

k. The agreements generally provided that Dr. Bernstein and Norma Walton were to be the sole directors of the Owner Company.

A review by James Reitan, director of accounting and finance at Dr. Bernstein Diet and Health Clinics, in the early summer of 2013 and into early September 2013 revealed that:

a. The Waltons were not making their portion of the equity investments into the properties;

b. The Waltons appeared to be taking on third party investors in the projects;

c. The Waltons were engaged in significant related party transactions in respect of the projects through and using Rose & Thistle;

d. Dr. Bernstein's approval was not being sought for any of the matters set out in subparagraph 7(h) above;

e. Dr. Bernstein was not receiving any of the required reporting, set out in subparagraph 7(i) above;

f. The mortgage payment for August 2013 for 1450 Don Mills did not go to the mortgagee, Trez Capital, but to Rose & Thistle. No documentation has been provided to confirm that the payment [page454] was made from Rose & Thistle to Trez Capital. There is no legitimate purpose for the payment going through Rose & Thistle;

g. Additional mortgages of $3 million each were placed on 1450 Don Mills Road and 1500 Don Mills Road on July 31, 2013 and August 1, 2013 respectively, of which Dr. Bernstein had no knowledge and which he did not approve;

h. It appears that there has been extensive co-mingling of the Owner Companies' funds with and into the bank accounts of Rose & Thistle;

i. Rose & Thistle has removed funds from the Owner Companies, which have been recorded as intercompany amounts owing from Rose & Thistle to the Owner Companies;

j. Rose & Thistle has rendered invoices to the Owner Companies, which in some cases have the effect only of reducing the intercompany amount owed by Rose & Thistle, for work and services that have yet to be performed;

k. The Waltons have entered into a series of transactions which have the result of reversing equity contributions made by them and immediately removing equity contributions by the Applicants; and

l. The Owner Companies have incurred significant interest and penalty charges for late penalties of utilities, without explanation.

On September 20, 2013, Dr. Bernstein appointed Schonfeld Inc. on behalf of the applicants to gather information related to the Owner Companies, the projects and the properties. Schonfeld Inc. has not been granted complete access to the documents (including bank statements, invoices and other documentation) related to 22 of 31 projects. Ms. Walton has indicated that she requires a further matter of weeks to make available the documents for the remainder of the projects.

[8] Most of the applicants' equity contributions were advanced directly to Schedule B companies, but some were paid to a Walton company, Rose & Thistle, for transfer to a Schedule B company, and some were paid directly to a real estate agent for the purpose of acquiring a Schedule B property.[^4]

[9] By order made October 7, 2013, Newbould J. appointed Schonfeld Inc. as inspector of the Schedule B companies pursuant to s. 161(2) of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16. In making that appointment, Newbould J. concluded:

In my view, on the record before me Dr. Bernstein has met the test required for an investigation to be ordered. To put on two mortgages for $6 million without the required agreement of Dr. Bernstein and then refuse to disclose what happened to the money except in a without prejudice mediation meets the higher test of oppression, let alone the lesser test of [page455] unfairly disregarding the interests of Dr. Bernstein. The other examples of the evidence I have referred, as well as the failure to provide monthly reports on the projects to Dr. Bernstein, are clearly instances of the Waltons unfairly being prejudicial to and unfairly disregarding the interests of Dr. Bernstein, a 50% shareholder of each of the owner corporations.

Ms. Walton contends in her affidavit that the appointment of an inspector would likely preclude the respondents from further discharging their accounting and reporting functions. I fail to see how this could be the case, and in any event the evidence is clear that the Waltons have failed to properly provide monthly reports.[^5]

[10] About one month later, on November 5, 2013, Newbould J. granted the applicants' request to appoint Schonfeld Inc. as the receiver [2013 ONSC 6833 (S.C.J.)] -- or what the parties styled as the manager -- of the Schedule B companies. That order was affirmed by the Court of Appeal on May 21, 2014.[^6] I will return to the November 5 reasons at various points in this decision, but for purposes of this background narrative I need only highlight the key findings of fact made by Newbould J. which led him to appoint the manager [at paras. 46-49]:

I do not see the picture as now being less clear [than on October 7]. To the contrary, it seems much clearer. I have referred to the concerns above in some detail. They include the following:

1. $2.1 million was improperly taken from the proceeds of the $6 million mortgages that never had Dr. Bernstein's approval, $400,000 of which was taken by Ms. Walton into her personal bank account. Ms. Walton was well aware that this was wrong. She is a lawyer and the agreements were drawn in her office. Her initial reaction when confronted about the mortgages by Mr. Reitan, who at the time did not know what had happened to the mortgage proceeds, that she would only discuss it in a without prejudice mediation is a clear indication she knew what she did was wrong and contrary to Dr. Bernstein's interests.

2. $268,104.57 was improperly paid from the Tisdale Mews account to pay for renovations to the Waltons' residence. No reasonable explanation has been provided.

3. The co-mingling of accounts and the cash sweep into the Rose & Thistle accounts was a breach of agreement and unfairly prejudicial to Dr. Bernstein and a disregard of his interests. This is particularly the case in light of the lack of current books and records that should have been prepared and available rather than requiring an Inspector to try to get to the bottom of what has occurred. A lack of records is in itself unfairly disregarding the interests of Dr. Bernstein, particularly taken the size of his investment. Blaming it on outdated [page456] computer software is hardly an answer. That should have been taken care of long ago.

4. The frenzied attempts in the past month since the Inspector was appointed to update ledgers and manufacture invoices should never have been necessary and in light of the evidence, obviously casts doubt on what is now being done to update the records. Dr. Bernstein should never have had to face this prejudicial situation.

5. The Waltons have not provided equal payments of money into any of the 31 properties. The claim that their equity was provided by way of set-off for fees and work, even if that were permissible under the agreements, is unsupported by any available documents to the Inspector. What little has been provided raises serious issues, as discussed above. As well, taking in new equity partners is not at all what Dr. Bernstein signed up for, and indicative of a lack of ability of the Waltons to fund their equity in accordance with the agreements.

6. Dr. Bernstein was entitled to monthly reports. It is now quite evident why that has not occurred.

Mr. Campion contended that a receiver/manager could not be ordered over any particular property without a finding of oppressive conduct regarding that property. I am not at all sure that such a proposition in this case is correct, but in any event there has been oppressive conduct regarding each property. The co-mingling of funds and the sweep of cash from each property's account into Rose & Thistle was oppressive in these circumstances in which there were no contemporaneous books and records kept that would permit Dr. Bernstein, or now the Inspector, to fully understand what occurred to the money from each property. The setting up of alleged fees owing to Rose & Thistle for the properties to substantiate the Waltons' equity contributions, even if permissible, without readily available documentation to substantiate the validity of the fees, was oppressive. The lack of records and reports for each property was oppressive.

It is contended on behalf of the respondents that they have the contractual right to manage the projects and thus no receiver/manager should be appointed. The difficulty with this argument is that the contracts have been breached and the Waltons have certainly not shown themselves to be capable managers. A basic lack of record keeping, compounded by co-mingling of funds and transferring them to Rose & Thistle, belies any notion of proper professional management. Ms. Walton acknowledges that accounting and other issues "have plainly caused him [Dr. Bernstein] to lose confidence in my management". That is a fundamental change to the relationship.

It is contended that the business will be harmed if a receiver/manager is appointed. Ms. Walton states in her affidavit that she believes that the dynamic nature of this portfolio will suffer and in the end suffer unnecessary losses. What is meant by the dynamic nature is not clear. I recognize that a receiver/manager can in certain circumstances have negative implications in the marketplace, particularly if it means that unsold properties will have to be put up for sale at less than market prices or be sold quickly. There is no indication that is the plan here at all and there is no court ordered sale being requested. [page457]

[11] As of the July hearing of these motions and application, the manager had sold 12 of the Schedule B properties over which it had been appointed for purchase prices totalling $127.013 million. After the payment of existing mortgages, those sales had netted $18.908 million. As of July 9, 2014, the total value of the construction liens registered against the sold properties was $1.228 million.

III. The Positions of the Parties and the Relief Requested

A. The applicants

[12] Later in these reasons I shall deal at length with the relief sought by each side. By way of summary of the issues engaged by these motions, the applicants advanced the following positions:

(i) the respondents had unjustly enriched themselves by improperly diverting funds from the Schedule B companies to Rose & Thistle and the Schedule C companies, and the diverted funds should be made subject to a constructive trust to be re-conveyed to the Schedule B companies. The diverted funds can be traced into the Schedule C properties and the court should declare a constructive trust over 44 Park Lane Circle and the Schedule C properties in favour of the Schedule B companies in the total amount of $23.6 million;

(ii) the Waltons were fiduciaries of the Schedule B companies and breached their fiduciary duty when they diverted the funds. That conduct also was oppressive conduct and should be remedied by granting the proprietary interest of a constructive trust in Schedule C companies/properties;

(iii) the Waltons' shares in the Schedule B companies should be cancelled and any entitlement to any finds flowing therefrom disallowed; and

(iv) a damages award in the amount of $78,420,418 should be made in any event against the respondents, together with certain ancillary relief including the appointment of a receiver over the property of the Waltons.

B. Norma Walton

[13] Norma Walton advanced three basic positions at the hearing: (i) the respondents had accounted for the moneys advanced to them by the applicants; (ii) the jointly owned Schedule B companies actually owed the Waltons' Rose & Thistle money, [page458] not the other way around; and (iii) the restrictions placed on the Waltons' ability to deal with their Schedule C properties by previous court orders should be removed and they should be entitled to sell those properties in order to satisfy the claims of all their creditors and investors, except for Dr. Bernstein.

IV. Structure of These Reasons

[14] At the heart of these motions, cross-motions and return of application lie two issues: (i) Did the Waltons use the funds advanced to them by the applicants as their contracts required? (ii) If they did not, did the Waltons use some or all of the funds advanced by the applicants to their own personal benefit, including the benefit of their Schedule C companies/ properties?

[15] For the reasons set out below, I conclude that the Waltons did not use the funds advanced to them by the applicants as their contracts required but, instead, the Waltons misused and misappropriated most of the funds advanced to them, diverting some of the funds to their own personal benefit and the benefit of their Schedule C companies. I further conclude that the Waltons have not provided the full accounting of how they in fact used those funds, notwithstanding the October 25, 2013 order of this court that they do so.

[16] The inspector conducted an extensive, but not exhaustive, analysis tracing how the Waltons used the funds advanced to them by the applicants. The inspector presented its findings on the amount of the "net transfer" of funds between the jointly owned Schedule B companies and Rose & Thistle, and the amount of the "net transfer" of funds between Rose & Thistle and the Walton-owned Schedule C companies and properties. Those net transfer analyses formed the focal point of the arguments by both parties, with the applicants contending that the Waltons had not explained the net transfers out of the Schedule B companies to Rose & Thistle, and with Norma Walton taking the position that she had. In light of that structure to the evidence and the parties' arguments, I plan to review the evidence in the following manner:

(i) first, I shall examine the evidence about how the funds advanced by the applicants were used by the respondents, in particular the evidence of the "net transfer" of funds from the Schedule B companies to Rose & Thistle and the net transfer of funds from Rose & Thistle to the Schedule C companies;

(ii) second, I will examine the evidence concerning the costs of construction actually incurred on behalf of the Schedule [page459] B company projects, focusing on the respondents' contention that the construction fees charged by Rose & Thistle to the Schedule B companies were legitimate and explained much of the apparent net transfer of funds to Rose & Thistle;

(iii) next, I will examine the evidence of the tracing which the inspector conducted of the applicants' funds into Schedule C companies and properties; and

(iv) finally, I will consider the evidence relating to the arguments made by the respondents explaining their use of the applicants' funds.

V. The Use of the Applicants' Funds: The "Net Transfer" Analysis

A. The reports of the inspector

[17] The inspector conducted a tracing analysis of some of the funds advanced by the applicants to the Schedule B companies. The scope of its analysis was described in the inspector's fourth interim report (April 23, 2014). The inspector identified the largest 53 advances by the applicants to the Schedule B companies and then examined the activity in the relevant Schedule B company bank account immediately following each advance. The inspector then looked for any contemporaneous transfer of funds from the relevant Schedule B company account to the Rose & Thistle bank account and, finally, examined the Rose & Thistle bank account to ascertain what activity occurred following the receipt of the funds transferred in from the Schedule B company account, in particular whether there was any contemporaneous transfer of funds from the Rose & Thistle account to a Schedule C company's account.

[18] In its fourth report, the inspector set out the following findings:

In all but two cases reviewed to date, a portion of those funds provided by the Applicants and deposited to the [Schedule B] Company Accounts were immediately (on the same day and/or during the next few days) transferred from the relevant Company Account to the Rose & Thistle account. In the two exceptions, all of the funds provided by the Applicants to the Company Account were used by the [Schedule B] Company immediately.

Funds transferred into the Rose & Thistle Account were then used in one or more of the following ways: (a) transferred to a Walton Account; (b) transferred to other [Schedule B] Company Accounts; and (c) used to make payments directly out of the Rose & Thistle Account. The accuracy with which a specific dollar contributed by the Applicants can be matched to a specific use depends primarily on the opening balance and the level of activity in the Rose & Thistle Account when the funds were transferred. When funds contributed to a Company were transferred into the Rose & Thistle Account, funds were also transferred into and/or out of the Rose & Thistle Account by [page460] or to other Companies or Walton [Schedule C] Companies. In such cases, it is possible to trace funds out of the Rose & Thistle Account into accounts held by the Companies or the Walton Companies but it is not possible to match exactly the funds transferred out of the Rose & Thistle bank account to the funds transferred in as the funds have been co-mingled.

In support of those observations, the inspector attached as Exhibit F to its fourth report a series of flowcharts which summarized the use of funds advanced by the applicants to various Schedule B companies.

[19] In its fifth report, dated July 1, 2014, the inspector reported that it had continued its tracing analysis and recorded the following further findings:

The Inspector's analysis to date supports the following conclusions:

(a) The Respondents directed transfers of $23.6 million (net) from the [Schedule B] Company Accounts to a bank account belonging to the Rose & Thistle Group Limited (the "Rose & Thistle Account") during the period from October 2010 to October 2013. These transfers occurred on a regular and ongoing basis during the period examined;

(b) During the same period, the Respondents directed transfers of $25.4 million (net) from the Rose & Thistle Account to companies that they own without the Applicants (the "Walton Companies" [or Schedule C Companies]). These transfers also occurred on a regular and ongoing basis during the period examined;

(c) In almost all cases, some or all of the amounts advanced to the Companies by the Applicants were transferred almost immediately to the Rose & Thistle account;

(d) In seven instances identified by the Inspector, all of the following occurred in a brief period of time:

(i) funds were transferred from one or more Company Accounts;

(ii) funds were then transferred to a Walton Company; and,

(iii) the relevant Walton Company purchased a property.

Based on the foregoing analysis, and the analysis set out below, the Inspector has concluded that the Respondents used new equity invested in, and mortgage amounts advanced to, the Companies by the Applicants to fund the ongoing operations of other Companies and the Walton Companies. Almost every time the Applicants advanced funds to one of the Companies, a significant portion of those funds was transferred to Rose & Thistle. In some instances, funds could be traced directly into a Walton Company. In other instances, funds could not be traced directly because the Applicants' funds were co-mingled with other funds in the Rose & Thistle Account. However, the Inspector has concluded that the Applicants' investment in the Companies was a major source of funds for the Walton Companies.

The Respondents have sought to justify the movement of funds from the Companies to Rose & Thistle on the basis that these transfers were payments for services rendered by the Respondents to the Companies. To date, [page461] the Respondents have not provided evidence to substantiate the majority of the alleged fees and the Inspector has found evidence that is not consistent with this explanation. In particular:

(a) the transfer of funds observed by the Inspector is more consistent with funds being taken as needed to fund obligations in the other Companies and the Walton Companies than funds being taken as payment for services rendered. In some cases, funds were transferred by Companies immediately after those companies acquired Properties and/or invoices were rendered for the exact amount transferred from a particular Company during the preceding period;

(b) there is no evidence that the Respondents possessed sufficient funds to pay for both the construction activity that they alleged to have carried out and the transfers observed to the Walton Companies; and,

(c) in some cases funds have been transferred from Companies, and the Respondents have delivered invoices for construction work, where little or no work had been done on the relevant Property. Moreover, the various Companies owned Properties in different stages of construction and development but none of the Companies retained any substantial cash reserve from the Applicants' initial investment to fund future construction costs.

[20] In her factum, Ms. Walton accepted the inspector's finding that the net amount of $23,680,852 had been transferred by the Schedule B companies to Rose & Thistle.[^7]

[21] However, Ms. Walton disputed the inspector's view that the respondents lacked sufficient funds to pay for both the construction activity they alleged they carried out and the transfers observed to the Schedule C companies. Ms. Walton deposed that every dollar transferred from the Schedule B companies to Rose & Thistle was for legitimate work completed and amounts owed to it. As well, Ms. Walton took the position that Schedule B companies currently owed the Rose & Thistle additional sums for services rendered, but not yet paid. In its supplement to its fifth report, the inspector responded:

In general terms, the Inspector agrees that construction and development work occurred at the properties identified by Ms. Walton. The Inspector has never asserted that Rose & Thistle did not perform any construction or development work. The Inspector is of the view, however, that Rose & Thistle has failed to provide documents to substantiate a level of construction and development work commensurate with the funds transferred to it from the Companies. In the Inspector's view, construction and development work on the scale alleged by the Respondents would be supported by a significant volume of relevant records including invoices from subcontractors, consultants and suppliers, timesheets, payroll records, progress draws and other similar documents. The supporting documents are (with [page462] limited exceptions) notably absent from the materials provided to the Inspector and the court[.]

B. The Froese Forensics limited critique report

[22] Ms. Walton retained Mr. Ken Froese, of Froese Forensic Partners ("Froese"), to prepare a response to the first four reports of the inspector. Froese prepared a forensic accounting report dated June 25, 2014 in the nature of a limited critique report. That report did not contain a statement of the expert's qualifications as required by rule 53.03(2.1)2 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.[^8] An acknowledgment of expert's duty form was filed only when Ms. Walton filed her reply factum. Although Froese did not swear an affidavit through which to tender his report, thereby rendering the report hearsay, in the result the applicants cross-examined him on his report. Under those circumstances, I am prepared to overlook those deficiencies in the Froese report, and I will accept it as an expert's report properly tendered under rule 53.03.

[23] The first area dealt with by Froese concerned the tracing analysis performed by the inspector. Froese had written to the inspector on May 30, 2014 requesting certain information. The inspector met with Froese on June 3 and 10, 2014. Froese made the following observations about the inspector's tracing analysis:

(a) Although the Inspector stated that the tracing analysis was based on the 53 largest advances by the Applicants, Froese identified four other mortgage advances made by the Applicants which were larger in amount;

(b) In respect of the 53 advances traced by the Inspector, Froese stated that $35.2 million of the $55.8 million was transferred from Schedule B Companies to the Rose & Thistle Account: "Our conclusion in reviewing the Inspector's tracing of the 53 Advances is that many of the advances are co-mingled in the Rose & Thistle clearing account and thus cannot be directly traced to Schedule C Companies";

(c) The net transfer from Rose & Thistle to Walton-owned Schedule C Companies identified by the Inspector as amounting to $25,464,492 should be reduced by $1 million to take into account certain unrecorded deposits;

(d) The net amount owing from Schedule C Companies to Rose & Thistle does not represent a direct tracing of the Applicants' funds to Schedule C Companies or an amount owing by Schedule C Companies to Schedule B Companies.

[24] Froese's general conclusion about the inspector's tracing analysis was as follows: [page463]

Although we concluded that there are very few examples of a direct tracing of advances from Dr. Bernstein to Schedule B Companies that traced to the Rose & Thistle clearing account and then to Schedule C Companies without co-mingling with other sources of funds, this does not negate the fact that, over all, net funds flowed to Schedule C Companies from Rose & Thistle, and that net funds flowed to Rose & Thistle from Schedule B Companies. Rather, in our view it means that each Schedule C Company needs to be evaluated from the perspective of:

1. the tracing analysis performed by the Inspector, in conjunction with our comments on the tracing for particular advances; and,

2. the overall net transfer position of each Schedule C Company, as reflected in the net transfers schedule prepared by the Inspector, as adjusted for additional relevant information.

(Emphasis added)

Froese commented specifically on the inspector's tracing analysis for seven of the properties owned by Schedule C companies. Froese did not offer any other analysis of the overall net transfer position of each Schedule C company, no doubt because he was not asked to do so by the respondents as part of his retainer.

[25] Froese also commented on the accuracy of the overall cash transfer analysis performed by the inspector found in Appendix B to the inspector's fourth report. Froese stated:

The Inspector's Cash Transfer Analysis includes transactions from September 1, 2010 to December 31, 2013 for Schedule C Companies and from October 1, 2010 to December 31, 2013 for Schedule B Companies. It is a helpful analysis in that it provides an overall perspective on net transfers between these periods, and on amounts potentially owing from Schedule C Companies to Rose & Thistle.

We have the following comments on the Inspector's Cash Transfer Analysis:

1. The Cash Transfer Analysis does not include all transactions between Rose & Thistle and the Schedule B and C Companies, such as proceeds on sale or refinancing of a property where funds are deposited directly to the Rose & Thistle clearing account from a source other than a bank transfer. For example, $341,189 was deposited to Rose & Thistle in relation to 620 Richmond Street, a property we understand was beneficially owned by Richmond Row Holdings, a Schedule B Company;

2. Some deposits are not included in the Cash Transfer Analysis, including $909,950 of deposits to Rose & Thistle from Norma Walton (see Schedule 2); and,

3. There may be other transactions relevant to evaluating amounts owing between the Schedule C Companies and Rose & Thistle, such as unpaid costs for services provided between the companies.

As we have not reconciled Rose & Thistle's bank account to the Cash Transfer Analysis, there may be deposits or transfers that are missing or miscategorized in the analysis.

(Emphasis added) [page464]

Presumably, Froese did not perform such a reconciliation because the respondents did not ask him to as part of the retainer. Froese testified that in preparing his report he received no audited financial statements or any form of prepared financial statements for the Schedule B companies, Rose & Thistle or the Schedule C companies.

[26] In the supplement to its fifth report (July 9, 2014) the inspector commented on this portion of the Froese report:

The Inspector and Froese both acknowledged that, in some cases, funds could be traced directly from the [Schedule B] Companies to the Walton [Schedule C] Companies. The Inspector and Froese also agreed that, on a net basis, there was a transfer of $23.8 million from the Companies to Rose & Thistle and a transfer of more than $25 million from Rose & Thistle to the Walton Companies.

Some transfers are possible to trace to specific funds (as is evidenced numerous times in the tracing of specific amounts to Walton Company property acquisitions which is acknowledged in the Froese Report) and some are not.

In all, Froese and the Inspector agree that some funds can be traced directly from the Companies to the Walton Companies immediately before the Walton Companies purchased a Property. Froese asserts that the amount that can be traced into some Walton Companies is lower than the Inspector[.]

The inspector also commented:

Froese states that the $23.8 million does not represent a direct tracing to Walton Companies from Companies, but does not offer an explanation as to where else the Walton Companies received funds from, except in a few instances. This is generally consistent with the Inspector's analysis.

C. Disputes over the transfers in and out of specific Schedule B companies

C.1 Certain transfers

[27] Froese commented on the inspector's treatment of several advances (or groups of advances) on which the inspector did not offer a specific response:

(a) Froese acknowledged that an $808,250 mortgage advance from Dr. Bernstein to Tisdale was transferred to the Rose & Thistle clearing account, but contended that because this transfer predated the agreement between Bernstein and the Waltons for that company, it should not be treated as a transfer from a Schedule B Company to Rose & Thistle;

(b) Although Froese acknowledged that 15 mortgage advances involved funds transferred from a Schedule B Company to Rose & Thistle which were co-mingled with other funds, Froese observed that 13 of the advances related to mortgagess which subsequently were fully repaid; [page465]

(c) With respect to Dr. Bernstein funds deposited to Liberty Village and Queen's Corner which Froese acknowledged were transferred to Rose & Thistle, Froese stated that there was substantially more co-mingling between Schedule B and Schedule C Companies than disclosed in the Inspector's analysis or, in the case of Queen's Corner, the advances did not trace to Schedule C Companies.

C.2 Twin Dragons (241 Spadina)

[28] In its analysis, the inspector traced $251,350 of an October 18, 2010 applicants' advance of $1,120,500 from Twin Dragons -- the Schedule B company which owned 241 Spadina -- to Rose & Thistle over the period October 25 to 29, 2010. The inspector also commented that transfers into the Rose & Thistle account from Schedule C companies during that period amounted to $32,050, while transfers out to Schedule C companies amounted to $114,780.

[29] Froese stated that the inspector's analysis did not include transfers in the same time frame from Rose & Thistle back to a second Twin Dragons bank account and deposits of non-Bernstein funds to Twin Dragons. Froese stated that transfers to/from Twin Dragons and Rose & Thistle in the five-day period under review netted to $350, or "essentially that almost none of the funds traced to a Schedule C Company".

[30] In its report, the inspector made two comments in response to the Froese analysis. First, the inspector stated:

Regarding Twin Dragons (Chart 1 of Appendix F) the $1,120,500 provided by the Applicants and deposited to the Twin Dragons bank account on October 18, 2010, most of the funds appear to have been used to close the acquisition of the Property. However, an amount of $150,000 from these funds was transferred from the Twin Dragons bank account to the Rose & Thistle bank account and was used to fund a cheque to Pointmark Real Estate in the amount of $150,000. According to Froese, this cheque relates to a deposit on the Property at 18 Wynford, which is owned by Wynford Professional Center Limited (one of the [Schedule B] Companies). The Inspector agrees with this aspect of the Froese analysis.

(Emphasis added)

Accordingly, this was an instance where funds advanced by the applicants to one Schedule B company for its use were diverted by the Waltons to another Schedule B company in breach of the Waltons' agreements with Dr. Bernstein.

[31] The second comment of the inspector concerned the Froese observations made in a chart he provided to the inspector that third parties had deposited share subscription amounts into a second Twin Dragons bank account between October 27 and 29, 2010. On September 24, 2010, Dr. Bernstein Diet Clinics Ltd. entered into an agreement with the Waltons and Twin Dragons Corporation in respect of the intended purchase and [page466] development of 241 Spadina Avenue, Toronto. That agreement stipulated that the ownership of Twin Dragons would be 50 per cent to Dr. Bernstein and 50 per cent to Ron and Norma Walton. Section 13 stated: "The only shares to be issued in the company will be as set out above, and neither party may transfer his or her shares to another party without the consent of all the other parties, which consent may be unreasonably withheld." As can be seen, the agreement contemplated that there would be no third-party investors in the Schedule B company or property.

[32] Froese provided the inspector with a chart which recorded share subscriptions totalling $250,000 received on October 27 and 29, 2010 from third parties -- Teresa and Joe Memme and Duncan Coopland.[^9] The inspector filed copies of the cheques for both investments: one was dated October 26 and the other October 27, 2010. Both were made out to Twin Dragons Corporation. Both were dated approximately one month after Dr. Bernstein had concluded his agreement with the Waltons in respect of Twin Dragons.

[33] Froese testified that he subsequently realized that the third-party investors had been removed from Twin Dragons, and he corrected his analysis on that point.[^10]

[34] Back on June 7, 2013, Mr. Reitan, on behalf of the applicants, had written to Norma Walton complaining that the records disclosed third-party equity contributions into Twin Dragons following the execution of the agreement with Bernstein. Ms. Walton responded on June 13, 2013 with a very aggressive letter in which she stated:

We do not have outside investors in the properties we jointly owned with Dr. Bernstein. As Mario explained, before Dr. Bernstein became a 50% owner of Spadina and Highway 7, we had attracted investment from third parties. The moment he became an investor, we shifted all of those responsibilities over to the Rose & Thistle Group Ltd. and that is where they currently remain[.]

[35] That was not an accurate statement by Ms. Walton. As noted, both the Memmes and Coopland wrote share subscription cheques to Twin Dragons one month after the execution of the agreement with the applicants. One can only conclude that they did so at the direction of Norma Walton. In its fifth report, the inspector stated: [page467]

The contract between the Applicants and the Respondents prohibits any third party investors in Twin Dragons and the Respondents assert that the third-party investments were deposited into the Twin Dragons bank account in error

In all, the documents reviewed and accounting treatment of the foregoing investments is not consistent with an erroneous investment in the wrong company as alleged by Ms. Walton.

[36] I accept that analysis by the inspector. The statement made by Ms. Walton in her June 13, 2013 letter to Reitan regarding third-party investors in Twin Dragons was not only inaccurate, it was misleading.

C.3 Bannockburn Lands Inc. (1185 Eglinton Avenue East)

[37] Froese stated that the inspector's analysis of the tracing of a mortgage advance to Bannockburn Lands Inc. -- the Schedule B company which owned 1185 Eglinton Avenue East -- omitted a deposit on March 28, 2011 into the Rose & Thistle clearing account from a Schedule C company, 1780355 Ontario Inc.: "Accordingly, there was more co-mingling between Schedule B and Schedule C Companies than disclosed in the Inspector's analysis."

[38] In its fifth report, the inspector provided a detailed response to the comments made by Froese. The inspector reported that after Froese had raised questions concerning Bannockburn, the inspector conducted a further review of the banking and accounting records of Bannockburn and Rose & Thistle. The inspector made the following points:

(a) In dealing with Froese's questioning of how the Inspector could be certain that the funds transferred to Rose & Thistle were the Applicants' funds, the Inspector stated:

Froese indicated that their review had identified another mortgage as part of the Bannockburn transaction and suggested that the mortgage could have possibly been a source of funds for the transfer. However, this is not correct. As is set out below, the mortgage in question is a vendor take-back mortgage and no funds were advanced;

(b) The Inspector reported that the Applicants had advanced their funds for the property by a cheque made payable to the Waltons' law firm, Walton Advocates. After dealing with closing adjustments on the acquisition of the Eglinton Avenue property, Walton Advocates transferred a net amount of $628,630.52 to Rose & Thistle on December 17, 2010. The Inspector stated:

As the mortgage referred to on the closing adjustments schedule was a vendor take-back mortgage, no cash was provided from this mortgage. Therefore, the funds of $628,630 transferred from Walton Advocates to [page468] Rose & Thistle can be directly traced to funds provided by the Applicants and this is consistent with the recording of the transaction in the accounting records of Bannockburn.

On cross-examination Froese agreed with that analysis by the Inspector;[^11]

(c) Although a few weeks following the acquisition of the property Rose & Thistle rendered an invoice to Bannockburn for "work completed" in respect of the property, the Inspector observed that the quantum of the invoice exactly matched the "excess" cash provided by the Applicants not required on closing in the amount of $628,632.52. The Inspector stated:

It appears, therefore, that the amounts on the invoice were calculated based on eliminating the intercompany receivable account between Bannockburn and Rose & Thistle which arose largely because of the cash transfers made from Bannockburn to Rose & Thistle.

(d) The Inspector stated that "a major use of funds by Rose & Thistle around the time of the $628,630 transfer from Walton Advocates was for payments to 364808 Ontario Ltd. totaling $484,349". 364808 Ontario was a Walton-owned Schedule C Company which owned a Davenport Road property purchased on July 5, 2002 by Norma and Ron Walton. Based upon the Inspector's review of the small balance in the Rose & Thistle bank account prior to the transfer from Walton Advocates, the Inspector concluded that "the Applicants' funds can be traced through to Rose & Thistle and were used to fund these payments to this Walton Company."

D. Summary of conclusions on the "net transfer" analysis

[39] The evidence set out above disclosed a substantial agreement between the inspector and Froese on the overall amounts of the net transfers from (i) Schedule B companies to Rose & Thistle; and (ii) from Rose & Thistle to Schedule C companies. The analysis performed by the inspector was more comprehensive than the limited critique Froese was retained to perform. Both the inspector (in respect of Twin Dragons) and Froese (in respect of Bannockburn) accepted certain criticisms made by the other of aspects of their respective analysis. On balance, I do not regard the specific critiques made by Froese to alter, in a material way, the findings made by the inspector on the quantum of the net transfers. Consequently, I make the following findings of fact about the "net transfer" analysis of the movement of funds from Schedule B companies to Rose & Thistle and from Rose & Thistle to Schedule C companies:

(i) The Waltons directed the transfer of $23.6 million (net) from the Schedule B Company Accounts to a bank account belonging to Rose & Thistle during the period from October 2010 to October 2013; [page469]

(ii) During the same period, the Waltons directed transfers of $25.4 million (net) from the Rose & Thistle Account to companies that they owned without the Applicants -- the Schedule C Companies; and,

(iii) In almost all cases, some or all of the amounts advanced to the Schedule B Companies by the Applicants were transferred almost immediately to the Rose & Thistle Account.

I further find that those transfers of funds from Schedule B companies to Rose & Thistle constituted breaches of the agreements between the applicants and the respondents which required that each Schedule B company, and the funds advanced to it, be used only to purchase, renovate and refinance the specific property owned by the Schedule B company.

[40] Froese opined that the comingling of Schedule B company funds and other funds in the Rose & Thistle account prevented, in most cases, the tracing of the applicants' funds through Schedule B companies to Schedule C companies. For reasons which I will discuss in section VI below, I do not accept Froese's opinion on that point. I also accept the point made by the inspector that Froese did not offer an explanation of where the Waltons' Schedule C companies otherwise sourced their funds, no doubt because he was not retained to express such an opinion. However, as will be discussed later in these reasons, Ms. Walton has not provided a satisfactory answer to that most basic of questions.

VI. Issues Concerning the Use of Funds for Schedule B Properties

[41] From the evidence filed, there is no doubt that the respondents caused funds, including funds advanced by the applicants, to be used to develop, renovate or construct several of the Schedule B properties. The question raised by the evidence was how much did the respondents spend in the way of legitimate costs on the Schedule B properties? As I will explain below, the respondents have never provided a satisfactory answer to that question, notwithstanding an October 2013 order of this court that they do so. Although the respondents contended that a significant part of the funds advanced by the applicants were used to pay invoices rendered by Rose & Thistle to Schedule B companies for legitimate construction costs, as the following review of the evidence will disclose the respondents have not provided concrete evidence to support the validity of the construction costs billed by Rose & Thistle despite repeated requests by the inspector. [page470]

A. The invoices for construction costs and management fees charged by Rose & Thistle to Schedule B companies

A.1 Overview

[42] The respondents relied heavily on invoices rendered by Rose & Thistle to the Schedule B companies to provide an explanation for $12,264,158[^12] of the $23.680 million net transfer of funds from the Schedule B companies to Rose & Thistle. In her April 28, 2014 affidavit, Ms. Walton deposed:

In my opinion, the only basis upon which the Applicants can advance a claim against my non-Bernstein assets is if I am unable to back up the invoices Rose and Thistle charged to the joint portfolio.

Because of the centrality of those invoices to the respondents' defence, I intend to spend some time reviewing how this issue has unfolded since October 2013.

[43] From the early stages of this proceeding, the inspector expressed concern that the Rose & Thistle invoices were not rendered on a regular basis and, instead, a significant number of invoices had been rendered just prior to and following its appointment. In his November 5 reasons, Newbould J. commented [at para. 46]:

The frenzied attempts in the past month since the Inspector was appointed to update ledgers and manufacture invoices should never have been necessary and in light of the evidence, obviously casts doubt on what is now being done to update the records.

In her factum, Ms. Walton acknowledged, in her own way, the frailty of the Rose & Thistle invoices:

When the Inspector was appointed by the court, Walton was forced to rush through a number of invoices for work Rose and Thistle had performed for the Schedule B properties and the joint portfolio. As a result of the rush to account for all the work provided to the joint portfolio, Walton is not sure that all work done has been invoiced and Walton made mistakes in some of the invoices provided.[^13]

A.2 The failure of the respondents to provide backup documentation for the Rose & Thistle invoices

[44] Before reviewing the evidence concerning the inspector's efforts to secure backup documentation for the invoices rendered [page471] by Rose & Thistle to the Schedule B companies, mention should be made of the inspector's comments on the state of the accounting system maintained by the respondents for their construction projects. In its first report (October 21, 2013), the inspector stated:

Ms. Walton has advised the Inspector that the books and records of the Companies are not current. Ms. Walton also advised the Inspector that, before her recent attempt to update the books and records of the Companies, they were last brought current in 2011.

The Inspector understands that Ms. Walton and Rose & Thistle have been working to bring the Companies' books and records up to date. As part of this process, Rose & Thistle has been inputting expense information into the ledgers in or around August and September 2013 relating to the period between January 2012 and August 2013. Rose & Thistle has also issued a number of invoices dated August and September 2013 for services rendered or expenses incurred by Rose & Thistle during the period from January 2012 to August 2013.

In this regard, the Inspector notes that the Companies' books and records are kept using QuickBooks accounting software. QuickBooks is a basic accounting package that is primarily marketed to small businesses. The Companies do not have any:

(a) comprehensive financial accounting and reporting system;

(b) cash flow forecasting, budgeting or reporting system; or,

(c) systematic cash controls.

Prior to the October 17 all-hands meeting hosted by the Inspector, Ms. Walton would only provide the Inspector with access to general ledgers for individual Companies once she and Rose & Thistle had completed their exercise of updating the ledger and issuing invoices from Rose & Thistle to such Company. At the October 17 meeting, Ms. Walton agreed to provide the Inspector with access to the ledgers for the remaining 11 Companies in their current state. That evening, the Inspector was provided with access to seven of the remaining 11 ledgers.

[45] Turning then to the issue of the Rose & Thistle invoices to Schedule B companies, as early as October 21, 2013 -- the date of the inspector's first report -- the respondents had provided invoices issued by Rose & Thistle to 27 of the Schedule B companies for which the general ledgers had been provided for an aggregate amount in excess of $32 million. At that time, the inspector requested "back-up documentation for the Rose & Thistle invoices that have been provided to date". The inspector stated:

The Inspector has requested, but not yet received, documentation to substantiate the invoiced amounts. Once these documents are provided, further due diligence is required to confirm that the invoices from Rose & Thistle relate to services provided to, or expenses incurred on behalf of, the [Schedule B] Companies. [page472]

By October 24, 2013, the inspector was reporting that the amount of the invoices rendered by Rose & Thistle to the Schedule B companies had risen to $34.6 million, or $10.6 million more than Rose & Thistle had received from the Schedule B companies.

[46] In its first report, the inspector gave an example of the difficulties it was encountering in securing from the respondents' documents to support the invoices rendered by Rose & Thistle to Schedule B companies. The property at 458 Pape Avenue was owned by Riverdale Mansion Inc. Rose & Thistle provided the inspector with invoices addressed to Riverdale for construction management fees of slightly more than $1.18 million for expenses which included "deposits for materials", "project management services", "site plan deposits and applications", and "steel rebar ordered and installed". When the inspector asked for documentation, including third-party invoices, to support the amounts invoiced,

Ms. Walton advised the Inspector that Rose & Thistle did not have third-party invoices for many of the invoiced expenses because Rose & Thistle performed much of the work itself and some of the expenses have not yet been incurred. In response, the Inspector requested that documents, such as material invoices and payroll records, be provided to validate the cost of work performed by Rose & Thistle and invoiced to Riverdale. As of the date of this report, no such documentation has been provided.

On October 18, 2013, the Inspector received a Credit Note from Rose & Thistle which showed that the invoice to Riverdale had been reversed except for $257,065.62 charged for work performed in 2011.

[47] Subsequent reports of the inspector disclosed not only the continuing difficulties in obtaining backup documentation to support the amounts claimed in the Rose & Thistle invoices, but also questioned the accuracy of the invoices. For example, in the inspector's second report (October 31, 2013), it reported that it had been provided with an invoice issued by Rose & Thistle to Dupont Developments Ltd. (1485 Dupont Street) which included an entry for construction management services in the amount of $175,300.30. The invoice stated that the construction management fee was "10% of hard costs". From that, the inspector reasonably assumed that Rose & Thistle had supervised construction which had cost approximately $1.75 million. However, Rose & Thistle staff provided the inspector with project budgets that indicated Dupont Developments had spent only $385,000 on construction. The inspector reported:

The Inspector also received a general ledger for Dupont Developments on October 24, 2013. The general ledger shows capitalized expenses of approximately $248,000, construction in progress of $36,000 and various consulting fees of approximately $563,000. [page473]

Based on the foregoing, it appears that Dupont Developments' construction budget (which is out of date), its general ledger (which was updated before being provided to the Inspector) and invoice from Rose & Thistle all show different construction expenditures in respect of the Dupont Project.

It also does not appear that Rose & Thistle is maintaining project budgets on an ongoing basis to track expenses and measure construction costs against the pro forma statement prepared when the property at 1485 Dupont was purchased.

[48] The difficulties encountered in obtaining proper accounting information from the respondents were exemplified by the correspondence from the respondents' former counsel, John Campion, to applicants' counsel on October 31, 2013, in response to a request for "information about an accounting". On behalf of his client, Mr. Campion responded: "I do not know what that reference is meant to encompass." Based no doubt on information provided by his clients, Mr. Campion wrote:

The Inspector has stated that they have not been provided with third-party invoices, contracts, payroll records or other contemporaneous documents. My client instructs me that other than the budgets that are being provided by Ms. Liu over the next three days, she is not aware of any request made that has not been fulfilled, as best it can be.

The Inspector keeps asking which filing cabinets he can review to obtain this information. The information he seeks can only be obtained through discussions with the staff mentioned above as all documentation is on computer and not contained in a filing cabinet.

As a result of the above, we believe that the Inspector has been given the kind of access to the Rose and Thistle documents that is available and reasonable under the order of Justice Newbould. Without wishing to criticize the Inspector, I am informed that he expects to have "physical copies of documents produced to him from a filing cabinet". This is not the way that Rose and Thistle stores its information. Upon request being made in an orderly manner, the Inspector has and will receive information and documentation as soon as it can be retrieved and ordered in a manner that meets his request.

[49] Again, no doubt based upon information provided by his clients, Mr. Campion wrote:

The Inspector has also met with Yvonne Liu, Project Manager, Construction and has provided to them information that has been requested, along with one construction budget. She is sending to the Inspector over the next three days all remaining budgets. The Inspector has spoken with and met with Mario Bucci, CFO of the Rose and Thistle Group, and Mr. Bucci has provided to the Inspector all information requested. Ms. Walton has offered to the Inspector to arrange a meeting with Carlos Carreiro, former Director of Construction of Rose and Thistle but the Inspector has not done so. Steve Williams, VP of Operations as also met with the Inspector and provided what the Inspector requested. [page474]

[50] As will be seen from the subsequent reports of the inspector which are set out below, the inspector never received the information it requested. As the inspector stated in the supplement to its fifth report (July 9, 2014), "Neither construction budgets nor any significant volume of third-party documentation has been provided to the Inspector."

[51] The inspector submitted its third report on January 15, 2014, in which it dealt at some length with the issue of the Rose & Thistle invoices:

The Inspector previously reported that Rose & Thistle Group Ltd. (Rose & Thistle) transferred approximately $24.2 million (net) from the Schedule B Companies to itself between September 2010 and October 2013. In support of these transactions, Rose & Thistle provided the Inspector invoices totaling approximately $30.6 million (plus HST) for management fees, maintenance fees and construction and project management. The Inspector's current analysis of these billings is outlined below.

Construction and project management billings

Of the total $30.6 million charged by Rose & Thistle, approximately $27.6 million was purportedly charged for construction supervision, project management and other project costs. Included in this amount is $6.6 million that is explained below in the "contributed equity" section, leaving support required for $21 million. Despite the Inspector's request, Rose & Thistle has still not provided evidence to support these billings. Therefore, the Inspector is still unable to comment on the validity of these billings at this time.

As Rose & Thistle has yet to provide evidence to substantiate more than $20 million of billings for construction and project related costs, the Inspector is expanding its work to include an analysis of funds transferred from Rose & Thistle to other non-Schedule B companies where those funds appear to have initially originated from Schedule B companies. This Inspector will report on this work as soon as it is able to do so.

Management fees

Rose & Thistle charged a management fee to Schedule B Companies based upon 4% of the gross revenues of individual properties that generated revenue. The agreements between the Applicant and the Respondents do not specifically state that the fee is to be charged. However, the agreements generally state that Walton (as defined in each agreement) is responsible for managing the properties, including all finance, bookkeeping, office administration, accounting, information technology provision. The Inspector has no comment on the legal issue of whether Rose & Thistle is entitled to charge for those services under the terms of the various agreements as they may be duly interpreted. The Inspector is of the opinion that a fee of 4% is a reasonable amount and is consistent with rates charged in the marketplace for similar services. Further, the Inspector worked with Rose & Thistle to reconcile the management fees charged on revenue producing properties. These fees amount to approximately $1 million in the aggregate.

Maintenance fees

Rose & Thistle charged maintenance fees to the Schedule B companies based upon a fixed monthly amount per property. This fee is purportedly [page475] charged to reimburse Rose & Thistle for the cost of providing maintenance employees to certain of the properties. The Inspector has no comment on the legal issue of whether Rose & Thistle is entitled to levy these charges under the terms of the various agreements as they may be duly interpreted. The Inspector is of the view that it can be appropriate for a real estate management service provider to seek reimbursement for costs that are not covered under its management fees when utilizing outside property management. However, the Inspector has not been able to verify or reconcile records of the fees charged to costs actually incurred by Rose & Thistle or for any set markup on such costs. These fees amount to approximately $2 million in the aggregate.

(Emphasis added)

[52] In its fourth report (April 23, 2014), the Inspector stated that Rose & Thistle had withdrawn some of the invoices which made up its original $30.6 million claim against the Schedule B companies, and now was alleging that it had invoiced those companies for $27,292,722. The inspector reported that as a result of the failure of Rose & Thistle to provide evidence to support the majority of those billings, it had expanded its work to include an analysis of the funds transferred from Rose & Thistle to bank accounts controlled by the Waltons (the "Walton accounts"). The inspector reported:

On February 21, 2014, counsel to the Inspector circulated a document prepared by the Inspector outlining the Inspector's analysis of funds flowing to and from the [Schedule B] Company Accounts to the Rose & Thistle Account and from the Rose & Thistle Account to the Walton Accounts.

The spreadsheet, which is referred to below as the "Cash Transfer Analysis", was circulated subject to the limitations noted in counsel's email . . . A summary version of the Cash Transfer Analysis, which shows the total amounts transferred to and from the Rose & Thistle Account to each Company Account and each Walton Account is attached as Appendix "B".

Neither the Applicants nor the Respondents have challenged the accuracy of the Cash Transfer Analysis[.]

In all, Rose & Thistle received approximately $23.6 million more from the [Schedule B] Companies than it transferred to the Companies[.]

. . . In total, the Walton Accounts received transfers totaling $64,712,258 from the Rose & Thistle account and transferred $39,247,766 to the Rose & Thistle account during the period examined. The Walton Accounts received a net transfer of $25,464,492 from Rose & Thistle. That is, Rose & Thistle transferred approximately $25 million more to the Walton Accounts than it received from the Walton Accounts during the period examined.

[53] By the time of its fifth report (July 1, 2014), the inspector was still reporting the failure by the respondents to provide appropriate backup documentation for the Rose & Thistle construction expense invoices:

The Inspector's analysis is impaired by the fact that the Respondents have not provided back-up documentation, including third party invoices, proof of [page476] payment and progress draws relating to the majority of the alleged construction expenses. Accordingly, the Inspector cannot perform a detailed reconciliation of the alleged construction expenses to the cash transfers to determine whether these transfers related to construction work that had been performed. The Respondents have instead provided reports from third-party quantity surveyors which will be addressed in a supplemental report.

Rose & Thistle provided the Inspector with invoices addressed to Riverdale (a Schedule B Company) totaling $1.18 million. The invoices listed, among other things, expenses related to "deposits for materials", "project management services", "site plan deposits and applications" and "steel rebar ordered and installed".

The Inspector asked for documentation, including third party invoices, to support the amounts invoiced to Riverdale. Ms. Walton advised the Inspector that Rose & Thistle did not have third-party invoices for many of the invoiced expenses because Rose & Thistle performed much of the work itself and some of the expenses have not yet been incurred. This would appear to be inconsistent with her statement that transfers from the Companies to Rose & Thistle were in the nature of payments for services that have been provided but not yet invoiced. The Inspector requested that documents, such as material invoices and payroll records, be provided to validate the cost of work performed by Rose & Thistle and invoiced to Riverdale. No such documentation has been provided.

(Emphasis added)

A.3 The inspector's observations on the Rose & Thistle invoices

[54] In its fifth report, the inspector made several comments about the invoices which Rose & Thistle had rendered to the Schedule B companies:

(a) There was no apparent co-relation between the amount of construction work performed on a Schedule B Property and the volume of funds transferred from that property. For example, in respect of the property at Fraser Avenue, the two Fraser companies made net transfers of approximately $9.2 million to Rose & Thistle, but little or no construction work was completed on the Fraser Properties before the Manager was appointed. By contrast, Twin Dragons successfully renovated and leased 241 Spadina and received a net transfer from Rose & Thistle of approximately $1.3 million. The Fraser property is dealt with further in Section V.A.5 below;

(b) The Inspector observed a pattern whereby the amounts invoiced by Rose & Thistle to the Schedule B Companies appeared to match the amount of cash previously transferred from the Schedule B Company to Rose & Thistle. For example, the Inspector reported that it appeared that the amounts invoiced from Rose & Thistle to Bannockburn (1185 Eglinton East) in 2010 and 2011 were calculated to match the net cash transferred from Bannockburn to Rose & Thistle during those years. The Inspector pointed to Wynford and Riverdale Mansion as other Schedule B Companies in respect of which a similar matching-invoice practice by Rose & Thistle took place. [page477] Those invoices had the effect of essentially eliminating the inter-company debt owed by Rose & Thistle to the Schedule B Company;[^14] and,

(c) In respect of the Schedule B Company, Riverdale Mansion, the Inspector reported that it had received a credit note from Rose & Thistle which showed the invoices to Riverdale had been reversed except for $257,065.62 charged for work performed in 2011. The Inspector stated: "The Credit Note was not accompanied by any return of funds. This would appear to reinforce the Inspector's conclusion that invoices rendered by Rose & Thistle to the Companies were calculated based on the net cash transferred from the Companies to Rose & Thistle rather than on the value of actual work, if any, performed by Rose & Thistle."

[55] In its report, Froese stated that any further analysis of the net unsupported or unexplained transfers from Schedule B companies to Rose & Thistle would require an evaluation of the quantity surveyor reports related to the Schedule B properties to address further work performed by Rose & Thistle for those properties. Froese noted that the quantity surveyor reports were not made available to it in sufficient time to address them.

A.4 The cost consultant reports filed by Ms. Walton

[56] Ms. Walton filed reports from two cost consultants commenting on work performed by Rose & Thistle for Schedule B properties. Intrepid Quantity Surveying Inc. prepared three reports dealing with 32 Atlantic Avenue, 241 Spadina Avenue and 18 Wynford Drive. The work on the Atlantic and Spadina properties had been fully completed; the building at 18 Wynford had been partially renovated.

[57] BTY Group prepared a set of 21 reports entitled "Audit Report On Incurred Cost To Date" for the following properties: (i) 1185 Eglinton East (Bannockburn); (ii) Cityview Drive (Cityview Industrial); (iii) 14 Dewhurst (Dewhurst Developments); (iv) 1500 Don Mills Road (Donalda Developments); (v) 65 Heward (Double Rose Developments); (vi) 1485 DuPont (DuPont Developments); (vii) 153 Eddystone (Eddystone Place); (viii) Fraser Avenue (Fraser Lands/Fraser Properties); (ix) 1450 Don Mills Road (Global Mills); (x) 14 Trent (Hidden Gem Developments); (xi) Lesliebrooke Holdings and Lesliebrooke Lands; (xii) 47 Jefferson (Liberty Village Lands); (xiii) 140 Queens Plate Crescent (Northern Dancer Lands); (xiv) 1003 Queen Street East (Queen's Corner Corp.); (xv) 875 Queen Street East (Red Door Developments); (xvi) 450 Pape (Riverdale Mansion); [page478] (xvii) Highway 7 (Royal Agincourt); (xviii) 1 Royal Gate Boulevard (Royal Gate Holdings); (xix) Skyway Drive (Skyway Holdings); (xx) 295 The West Mall (West Mall Holdings); and (xxi) 355 Weston Road (Weston Lands).

[58] The BTY Group were not independent experts. The record disclosed that they had acted as cost consultants for progress draws on some Schedule B properties during the course of demolition and construction work on them -- 241 Spadina, 1185 Eglinton[^15] and 18 Wynford.[^16]

[59] The authors of the cost consultant reports all purported to express opinions in their reports. Opinion evidence in civil cases must comply not only with the general rules of evidence, but also with rule 53.03 of the Rules of Civil Procedure. Rule 53.03(2.1) mandates that any report of an expert witness must contain seven categories of information. In the case of the reports prepared by Intrepid Quantity Surveying, they lacked the following mandatory information: area of expertise; qualifications; instructions provided to the expert; and an acknowledgment of the expert's duty signed by the expert. Those constituted material omissions of mandated information for expert reports and, in my view, rendered the reports prepared by Intrepid Quantity Surveying inadmissible as expert evidence.

[60] As to the reports prepared by BTY Group, they also suffered from the same omissions of material mandated information. As well, they did not disclose the name of the expert who had prepared the reports -- a singular omission which I have never seen before. By reason of those failures to include information mandated by rule 53.03(2.1), I conclude that the cost consultant reports prepared by BTY Group are inadmissible as expert evidence.

[61] Even had I admitted the reports prepared by Intrepid Quantity Surveying and BTY Group as expert evidence, for the reasons set out below their probative value in respect of the issues in dispute on these motions would have been quite minimal. [page479]

The reports prepared by Intrepid Quantity Surveying

[62] The three Intrepid Quantity Surveying ("IQS") reports possessed a similar structure, so let me use the March 10, 2014 report on 32 Atlantic Avenue as an example of the limited probative value of the opinions expressed in those reports. First, it was difficult to discern the purpose of the report. Rule 53.03(2.1)3 requires a report to contain "the instructions provided to the expert in relation to the preceding"; none appeared in the body of the report. Rule 53.03(2.1)4 requires a report to contain "the nature of the opinion being sought and each issue in the proceeding to which the opinion relates"; none was provided in the report.

[63] From the report, it appears that Ms. Walton had asked IQS to review the budget for the 32 Atlantic Avenue project. IQS reported that they had reviewed the file and had "provided our comments here for your reference". At the end of the report, IQS stated: "In our opinion, we believe the work in place for the construction work is reasonable based on information and invoices received to substantiate the cost to date."

[64] The IQS report focused on two aspects of the project's budget: construction costs of $3.045 million and management fees of approximately $150,000.

[65] The IQS review of the construction costs was based upon an undated vendor transaction list provided by the respondents. IQS requested copies of invoices to substantiate the items booked to the accounting system. Although it was provided with 89 per cent of the overall hard costs booked to the respondents' accounting system, it was not provided with the Rose & Thistle construction invoice for $216,330.57.

[66] The vendor transaction document attached to the IQS report recorded amounts incurred for various types of work from various suppliers. The legend for that document identified which invoices had been reviewed (presumably by the Rose & Thistle management) and which invoices remained outstanding. In its report for the Atlantic Avenue property, IQS noted that it had only been provided with proof of 20 per cent expended by way of an invoice and that it was relying primarily on the accounting summaries prepared by the respondents' accounting system, not on the actual underlying invoices.

[67] IQS reported that the respondents had provided time sheets which confirmed 20 per cent of the Rose & Thistle construction fees of $216,330.57, but it identified significant limits placed on its review of those Rose & Thistle construction fees. In [page480] particular, IQS could only rely upon "accounting summaries" provided by the respondents when reviewing the Rose & Thistle construction fees. Although the accounting summaries confirmed 88 per cent of the $216,330.57, IQS reported:

These costs may have been incurred by [Rose & Thistle properties] and entered into their accounts system, but we only have proof of 20 per cent expended by way of an invoice.

We have been provided with partial bank account records and cancelled cheques. A full review to ensure that the amounts booked have cleared the [Rose & Thistle properties] bank account was not part of the IQS scope of work.

The IQS report made clear that it lacked adequate backup documentation for most of the $216,333.57 in construction fees charged by Rose & Thistle. In my view, those limitations identified by IQS severely limited the utility of their reports in verifying the amounts Rose & Thistle was recorded as charging the Schedule B company which owned the project, Liberty Village.

[68] IQS reported that the budget identified management fees charged by Rose & Thistle of approximately $150,000. IQS stated:

We have not reviewed backup invoices to date, however we have been provided a summary breakdown of the fees.

These costs may have been incurred by [Rose & Thistle properties], but we do not have proof of the expenditure by way of an invoice.

The management fee is for time spent by [Rose & Thistle properties] employees to coordinate the construction activities and the consultants.

IQS also noted in respect of the management fees that it had not been provided with time sheets or accounting backup. IQS calculated that the management fee charged had amounted to 4.5 per cent of the total hard construction costs for the project which appeared to be reasonable based on the scope of work and a standard industry range of 2.5 per cent to 4.5 per cent for management fees.

[69] Similar limitations were contained in the other two IQS reports. IQS's report on the Twin Dragons project -- 241 Spadina[^17] -- noted that it had not been asked to review construction costs, so it had not reviewed copies of invoices to [page481] substantiate the items booked to the respondents' accounting system "as this was outside our scope of work. Costs booked to the vendor transaction list are assumed to be valid." IQS also observed, regarding the $133,209 management fee charged, that it had not reviewed the internal Rose & Thistle properties backup for the fee. The only opinion expressed by IQS in respect of the 241 Spadina budget was that the management fee of 3.47 per cent was reasonable based upon the scope of work and industry practices.[^18]

[70] In its report concerning 18 Wynford Drive, IQS noted that it had been provided with two invoices for construction costs from Rose & Thistle totalling $3.55 million, but IQS stated:

Both of the above two invoices can be traced back to the vendor transaction list. However the co-relation is not indicative of actual costs incurred as further details to substantiate actual backup to the costs incurred are not available.[^19]

[71] As to the management fee of $355,000 charged by Rose & Thistle for 18 Wynford, IQS opined that the management fee of 6.95 per cent was "in a higher range of what is expected based on the scope of work and industry standards". IQS ventured that industry standards of between 2.5 per cent and 4.5 per cent "would be more reasonable".

[72] In sum, the IQS reports did not assist the respondents in explaining or justifying the construction costs invoiced by Rose & Thistle to the examined Schedule B companies. The reports did not fill in the evidentiary gap identified by the inspector. Instead, they highlighted the unwillingness of the respondents to produce the backup documentation needed to test and verify the amounts charged by Rose & Thistle to Schedule B companies for both construction costs and management fees. [page482]

The reports prepared by BTY Group

[73] The BTY Group reports disclosed that Rose & Thistle had asked it to provide an opinion on the validity of the hard construction, soft construction and Rose & Thistle management costs for a number of properties "in comparison to other projects". Although the reports were styled as "audit reports", they disclosed that the information provided by Rose & Thistle to BTY Group consisted of the budgets, ledgers and summary of management fees for each project. The BTY Group relied on those Rose & Thistle accounting documents and summaries. BTY Group did not review any invoices or cancelled cheques to substantiate the payments noted in the accounting records of Rose & Thistle.

[74] In the case of its analysis of the management fees charged by Rose & Thistle to the projects, BTY Group recorded their understanding that no accounting records existed to substantiate the information provided by Rose & Thistle with respect to the management fees incurred on a project. As a result, the opinions of the BTY Group about the reasonableness of the management fees were based solely on its review of the summary of management costs provided by Rose & Thistle for a project as a percentage of the project budget. For example, as noted in its report of the management fee review for the 1185 Eglinton East (Bannockburn's) project:

We have not been privy to the calculation of the costs noted in this section and we acknowledge that there are no accounting records in place to justify the costs noted as being incurred on the project. Our opinion as to the reasonableness of the costs incurred to date is based on our experience of working on projects of a similar type and nature across several provinces in Canada.

The BTY Group, using its knowledge of other similar projects in the market, performed a comparative analysis which ranked each category of costs identified in the project's accounting summaries as either "not in line with", "in line with" or "below" current market conditions for those types of costs.

[75] As can be seen, the BTY Group reports did not examine whether costs recorded in the respondents' accounting records for a project were in fact incurred, including whether costs included in invoices from Rose & Thistle to a Schedule B company had been incurred. Put another way, the BTY Group reports assumed the accuracy of the accounting records of Rose & Thistle and the Schedule B companies. [page483]

[76] In the supplement to its fifth report, the inspector offered the following comments on the cost consultant reports prepared by the BTY Group:

[T]he fundamental question relating to the Rose & Thistle Invoices is whether Rose & Thistle actually performed the invoiced work and is entitled to the claimed payment. All but one of the cost consultant reports offered by the Respondents does not address this issue at all. The exception relates to the property at 32 Atlantic[.]

In particular, the BTY reports essentially compared the costs in Rose & Thistle's budget and accounting ledgers to the work that Rose & Thistle said it performed. BTY appears to have assumed that Rose & Thistle performed the relevant work and incurred the costs associated with it[.]

Since all of BTY's information appears to originate in the books and records of Rose & Thistle, the BTY reports do not contribute anything meaningful to the analysis of whether those books and records are accurate. BTY compares the assumed cost of the work against its understanding of market rates for the same work but it does not assess whether the work was actually performed. As a result, in the Inspector's view, the BTY reports do not assist the Inspector's analysis of what work Rose & Thistle performed on each property and what payment it is entitled to for that work.

[77] Based upon my review of the reports prepared by the BTY Group, I accept the inspector's conclusion that the reports do not contribute anything meaningful to the analysis of whether the books and records of Rose & Thistle are accurate nor do they contribute anything meaningful to the inquiry into the accuracy, validity or reasonableness of the invoices rendered by Rose & Thistle to the Schedule B companies. As was the case with the IQS reports, the BTY Group reports did not fill in the evidentiary gap noted by the inspector. That rendered the BTY Group reports of little probative value to the issues in dispute.

A.5 Issues raised in cost consultant reports on specific Schedule B properties

[78] The frailty and unreliability of the invoices rendered by Rose & Thistle were illustrated by the analysis of the invoices rendered for three specific Schedule B properties.

Bannockburn (1185 Eglinton)

[79] Bannockburn acquired the property at 1185 Eglinton Avenue East on December 17, 2010. The Bannockburn development was intended to consist of two residential condominium towers with a block of townhouses. Demolition of the previous property on the site was performed, but no other work took place. [page484]

[80] BTY Group reviewed the Rose & Thistle accounting ledger for hard construction costs on the project. The inspector reported that on December 31, 2010, Rose & Thistle issued an invoice to Bannockburn in the amount of $467,719.60 for services provided between December 7 and 31, 2010 -- i.e., the invoice included the ten-day period prior to the acquisition of the property. The Rose & Thistle invoice included items for demolition disposal, development approval expenses and project management fees. In the supplement to its fifth report, the inspector stated:

The amount of this invoice matched exactly the amount transferred to Rose & Thistle from Bannockburn. Moreover, Bannockburn did not purchase 1185 Eglinton Avenue until December 17, 2010, ten days after the invoice shows that work commenced. In her email commenting on the Fifth Report, Ms. Walton explained that Rose & Thistle engaged consultants and began work on a property before the purchase of that property closed.

The amounts listed on the December 31, 2010 invoice from Rose & Thistle to Bannockburn cannot be reconciled to the transaction list appended to the [BTY Group] Bannockburn Report. In particular, there are no demolition costs and less than $25,000 in development costs recorded on the ledger provided to BTY for the period prior to December 31, 2010.

30 Fraser Avenue; 7-15 Fraser Avenue

[81] Fraser Properties Corp. owned land located at 30 Fraser Avenue in Toronto; Fraser Lands Ltd. owned the adjacent property at 7-15 Fraser Avenue. Dr. Bernstein made an equity contribution of $16,024,960 to Fraser Properties. As early as its first report, the inspector had reported: "Fraser Properties transferred $10,281,050 to Rose & Thistle and received transfers of $1,215,100 from Rose & Thistle. Rose & Thistle retained $9,065,950 paid by Fraser Properties."

[82] In its report, the BTY Group stated that the Fraser Avenue properties housed existing one- and two-story buildings, with the plan being to renovate the existing buildings and construct two new commercial buildings. The BTY Group reviewed and reported on the accounting ledgers of Rose & Thistle. In the supplement to its fifth report, the inspector stated:

Rose & Thistle provided the Inspector with invoices to Fraser Lands Ltd. totaling $300,896 and invoices to Fraser Properties Ltd. totaling $1,598,580[.]

It appears that the ledger provided by Rose & Thistle to BTY does not support the amounts invoiced to Fraser[.]

Rose & Thistle received transfers of $9,080,850 from the Companies that own the Fraser Property, issued invoices totaling $1,899,477 with respect to alleged work performed on the Fraser Property and provided BTY with records showing that it had actually incurred expenses totaling $395,532 in respect of the Fraser property. [page485]

1485 Dupont

[83] In its report on the property at 1485 Dupont (Dupont Developments), the BTY Group stated that the accounting ledgers provided by Rose & Thistle showed hard construction cost bill payments to contractors of $805,036.20 and soft construction costs payments to contractors of $113,383.91. As was the case in all of its reports, the BTY Group stated that it had not undertaken a review of invoices or cancelled cheques to substantiate the payments noted in the ledger as paid. In the supplement to its fifth report, the inspector stated:

The Inspector also notes that Ms. Walton's construction cost figure does not appear to account for amounts that are owed to contractors but not paid. For example, the Respondents delivered an affidavit of Yvonne Liu stating that Rose & Thistle completed various construction work on the property at 1485 Dupont Avenue ("the DuPont Property"). Construction liens in the aggregate amount of $821,297 have been registered against the DuPont Property. The Inspector has not evaluated the validity of these lien claims. However, the existence of substantial lien claims in respect of DuPont undermines the assertion that funds transferred to Rose & Thistle from the [Schedule B] Companies were used to pay for construction at DuPont.

A.6 Ms. Walton's comments on the cost consultant reports

[84] In her June 21, 2014 affidavit, Ms. Walton commented on each of the reports prepared by the cost consultants and she gave general descriptions of the work performed on each property. Notwithstanding that Ms. Walton spent extensive time in her affidavit dealing with each property, she did not append to her affidavit the backup documentation to support the amounts charged by Rose & Thistle to each project which the inspector had been requesting since last October.

A.7 Conclusion on the Rose & Thistle invoices

[85] Ms. Walton deposed that "as confirmed by the third party cost consulting reports, the value of all work completed by Rose and Thistle has been confirmed". In her factum, she pointed to the cost consultant reports as establishing that Rose & Thistle had spent specific amounts on construction costs. The IQS and BTY Group cost consultant reports do not allow any such conclusion to be drawn -- they dealt only with the amounts which were recorded in the books and records provided by Rose & Thistle to the cost consultants without providing any independent audit or verification of the accuracy or validity of those amounts.

[86] In para. 10 of the October 25, 2013 order of Newbould J., the respondents were required to "provide forthwith a full [page486] accounting of all monies received, disbursed, owed to and owed from the Schedule B Corporations and The Rose & Thistle Group Ltd. since September, 2010 to the present". That order required the respondents to account for all moneys owed by Schedule B companies pursuant to invoices rendered by Rose & Thistle. The Waltons have failed to do so. The Waltons have left unanswered the repeated demands of the inspector for documentation to backup and support those invoices, and Ms. Walton has filed cost consultant reports which assumed the accuracy of those invoices, instead of providing an independent audit of their accuracy.

[87] Rose & Thistle no doubt provided some construction and maintenance work for the Schedule B companies, but the Waltons bore the burden of establishing the validity and accuracy of the invoices which Rose & Thistle rendered for those services. Not only have they failed to do so, but one can only conclude from the refusal of the Waltons over the past nine months to provide backup for the Rose & Thistle invoices -- both to the inspector and to their own cost consultants -- that backup for the full amounts of those invoices simply does not exist.

[88] I therefore accept the view of the inspector expressed in its fifth report, and I find that the respondents have not produced the documentation needed to perform a detailed reconciliation of the alleged construction and maintenance expenses to the cash transfers to determine whether those transfers related to construction and maintenance work that Rose & Thistle actually performed for Schedule B companies.

[89] I make a similar finding in respect of the management fees charged by Rose & Thistle. Those fees were charged as a percentage of the construction costs incurred. Without an accounting of the accuracy of the construction costs actually incurred, an assessment of the reasonableness of the management fees is not possible. However, I will accept the reconciliation of management fees in the amount of $1 million reached by the inspector with the respondents for revenue-producing properties as reported in the inspector's third report.

[90] Taken together, those two findings mean that of the $30.6 million in invoices rendered by Rose & Thistle to the Schedule B companies, the respondents have established the validity and reasonableness of only $1 million of them -- i.e., the reconciliation relating to management fees for revenue-producing properties. The respondents have failed to prove, on the balance of probabilities, that the remaining invoices covered work or services actually performed by Rose & Thistle for [page487] Schedule B companies, notwithstanding that the information needed to do so remained in the possession and control of the respondents.

B. Placing two mortgages on the Don Mills Road Schedule B properties without the applicants' consent

[91] On July 31 and August 1, 2013, two mortgages of $3 million each were registered against the Schedule B properties at 1450 Don Mills Road and 1500 Don Mills Road. Notwithstanding that the agreements between the parties for these properties required that any decisions concerning the refinancing of the properties required the approval of Dr. Bernstein, Norma Walton did not tell Dr. Bernstein that the mortgages were placed on the properties. In his November 5 reasons appointing a receiver, Newbould J. dealt with those mortgages [at paras. 10-13 and 46]:

This was a matter raised at the outset and was one of the basis for my finding of oppression leading to the appointment of the Inspector. Mr. Reitan learned as a result of a title search on all properties obtained by him that mortgages of $3 million each were placed on 1450 Don Mills Road and 1500 Don Mills Road on July 31, 2013 and August 1, 2013. Dr. Bernstein had no knowledge of them and did not approve them as required by the agreements for those properties. At a meeting on September 27, 2013, Ms. Walton informed Mr. Reitan and Mr. Schonfeld that the Waltons were in control of the $6 million of mortgage proceeds (rather than the money being in the control of the owner companies), but refused to provide evidence of the existence of the $6 million. Ms. Walton stated that she would only provide further information regarding the two mortgages in a without prejudice mediation process. That statement alone indicates that Ms. Walton knew there was something untoward about these mortgages.

In his first interim report, Mr. Schonfeld reported that the proceeds of the Don Mills mortgages were deposited into the Rose & Thistle account. Rose & Thistle transferred $3,330,000 to 28 of the 31 companies. The balance of the proceeds of the Don Mills mortgages totalling $2,161,172, were used for other purposes including the following:

1. $98,900 was paid to the Receiver General in respect of payroll tax;

2. $460,000 was deposited into Ms. Walton's personal account;

3. $353,000 was apparently used to repay a loan owed by Rose & Thistle in relation to Richmond Row Holdings Ltd.; and,

4. $154,600 was transferred electronically to an entity named Plexor Plastics Corp. and $181,950 transferred electronically to Rose and Thistle Properties Ltd. Ms. Walton advised the Inspector that she owns these entities with her husband.

In her affidavit of October 31, 2013, Ms. Walton admits that $2.1 million was "diverted" and used outside the 31 projects. She admits it should not have been done without Dr. Bernstein's consent. She offers excuses that do not justify what she did. What happened here, not to put too fine a point [page488] on it, was theft. It is little wonder that when first confronted with this situation, Ms. Walton said she would only talk about it in a without prejudice mediation.

In her affidavit of October 4, 2013, Ms. Walton said she had made arrangements to discharge the $3 million mortgage on 1500 Don Mills Rd on October 21, 2013 and to wire money obtained from the mortgage on 1450 Don Mills Road into the Global Mills account (one of the 31 companies) by the same date. Why the money would not be put into the 1450 Don Mills account was not explained. In any event, no repayment of any of the diverted funds has occurred.

I do not see the picture as now being less clear. To the contrary, it seems much clearer. I have referred to the concerns above in some detail. They include the following:

1. $2.1 million was improperly taken from the proceeds of the $6 million mortgages that never had Dr. Bernstein's approval, $400,000 of which was taken by Ms. Walton into her personal bank account. Ms. Walton was well aware that this was wrong. She is a lawyer and the agreements were drawn in her office. Her initial reaction when confronted about the mortgages by Mr. Reitan, who at the time did not know what had happened to the mortgage proceeds, that she would only discuss it in a without prejudice mediation is a clear indication she knew what she did was wrong and contrary to Dr. Bernstein's interests.

[92] The respondents appealed the November 5 order to the Court of Appeal; Norma Walton represented herself on the appeal. She submitted to the Court of Appeal that Newbould J. had erred in describing her involvement in the two unauthorized Don Mills mortgages as "theft". In rejecting that argument, the Court of Appeal stated [at para. 12]:

We also do not accept that the application judge's use of the word "theft" is necessarily a mischaracterization of some of the conduct of Ms. Walton. However, even if the word "theft" is considered inappropriate given its criminal connotation, Ms. Walton's own affidavit acknowledges a knowing misappropriation of funds in respect of at least one property. Whatever one might choose to call that conduct, it provided powerful evidence that Dr. Bernstein's interests in the property were being unfairly prejudiced by the conduct of the Waltons. The application judge's use of the word "theft" does not, in our view, taint his factual findings or the manner in which he exercised his discretion.[^20]

[93] In her factum on these motions, Ms. Walton stated that "there is no question that the borrowing of $6 million from the Don Mills properties was contrary to the contracts between Walton and Bernstein". However, she filed an affidavit in which she sought to correct "a fundamental misconception that has [page489] pervaded this litigation from the beginning concerning my knowledge of the payment of funds from the $6 million of mortgages". Ms. Walton deposed:

What I want to make clear, though, is that I never knew the sum of $2,161,172 had been ultimately paid out to me and my companies from that $6 million until after the Inspector completed his work. That complete lack of knowledge or intention was not made clear in the October 31 affidavit I filed and as such I am correcting that now[.]

In her affidavit, Ms. Walton blamed the inadequacy of the respondents' accounting software at the time, and she contended that at the time of the Don Mills Road mortgages she made "the assumption that the Bernstein-Walton properties were funding the Bernstein-Walton properties and the non-Bernstein properties were funding the non-Bernstein properties".

[94] For several reasons, I do not accept Ms. Walton's explanation.

[95] First, Ms. Walton offered no new evidence on the point that was not before Newbould J. or the Court of Appeal, apart from her denial that she knew about the payments out.

[96] Second, Ms. Walton's contention that she had assumed the Bernstein properties were only funding Bernstein properties flies in the face of the overwhelming evidence presented by the inspector that when most funds were advanced into the Schedule B companies by the applicants, the respondents immediately transferred them out to Rose & Thistle and, in many cases, to Schedule C companies. Throughout these proceedings, Norma Walton has presented herself to the court, through her affidavits and through her submissions, as the person who was in charge of the entire enterprise, whether it be the operation of Schedule B companies, Rose & Thistle or the Schedule C companies. In para. 38 of her June 21, 2014 affidavit, Ms. Walton clearly acknowledged that she was the one who had managed the jointly owned portfolio of Schedule B properties. On her cross-examination, Ms. Walton admitted that she had authorized the transfer of moneys out of the Schedule B companies to Rose & Thistle, including by getting on the computer and making electronic transfers herself.[^21]

[97] Her husband, Ronauld Walton, did not file an affidavit in these proceedings, nor did the chief financial officer of the Rose & Thistle group of companies, Mario Bucci.[^22] Their failure to file [page490] evidence is most significant, and I infer from that failure that neither Ronauld Walton nor Mario Bucci could offer evidence which would assist the respondents in establishing a defence to the applicants' allegations. Nor have they stepped forward to contend that the improper transfers of moneys out of the Schedule B companies were the result of directions or orders given by someone other than Norma Walton.

[98] Third, on her July 8, 2014 cross-examination, Ms. Walton admitted that she was the one who had provided the Devry Smith Frank law firm with instructions on the two Don Mills Road mortgage transactions,[^23] including directing that the proceeds from the Don Mills mortgages be paid into the Rose & Thistle bank account.[^24] Those admissions support a finding, which I make, that Ms. Walton knowingly directed the proceeds from the two Don Mills mortgages to be paid into the Rose & Thistle bank account and that she did so knowing that such payments would be in breach of the obligations of the Waltons to Dr. Bernstein.

[99] Fourth, Ms. Walton failed to appreciate that in her efforts to remove the moniker of "theft" from her conduct in respect of the two $3 million mortgages, she only compounded the difficulty of her legal position vis-à-vis the applicants. In her affidavit, Ms. Walton deposed that "every single day transfers between our companies were occurring and there was no visibility with our accounting software as to each company's position vis-à-vis the transfers of funds". Yet, over the course of three years from September 24, 2010 until June 27, 2013, Ron and Norma Walton entered into a series of agreements with the applicants which contained provisions representing that (i) monthly reports would be made -- which implied that the accounting systems used by the Schedule B companies would be adequate to provide accurate, detailed monthly accountings of the funds advanced to the Schedule B companies; and (ii) that the Schedule B company would only be used to purchase, renovate, lease and refinance the specified property. Also, on an ongoing basis, Norma Walton was representing to Dr. Bernstein that she was able to calculate his financial position in Schedule B property projects. For example, her April 15, 2012 e-mail to Dr. Bernstein represented that "Spadina will net you $6.66 million plus accrued interest to [page491] repay your mortgages; plus $1.12 million to repay your capital; plus $754,000 to pay your profits, for a total of $8.534 million."

[100] If, as Ms. Walton now deposed, the respondents' accounting system was inadequate to ascertain the position of each Schedule B company vis-à-vis the transfers of funds, then by entering into a series of agreements with the applicants containing those representations, and by making such specific representations about financial returns in her periodic updates to Dr. Bernstein, Norma Walton would have engaged in a pattern of deceitful misrepresentation leading the applicants to believe that the respondents knew what was happening with the moneys advanced, when they did not because of the lack of visibility within their accounting system. In trying to concoct an implausible excuse for her conduct concerning the two Don Mills mortgages, Norma Walton ended up damning her own position.

[101] Fifth, as part of the Don Mills Road mortgage transaction documents Ms. Walton falsely certified that only she and her husband were the shareholders of Global Mills Inc. In fact, Dr. Bernstein's company, DBDC Global Mills Ltd., was a 50 per cent shareholder. Ms. Walton testified that Dr. Bernstein had instructed her not to disclose his shareholding interest in Schedule B companies.[^25] Ms. Walton produced no documents to support that allegation,[^26] and I reject it.

[102] Sixth, in para. 101 of her factum, Ms. Walton submitted, in respect of the two $3 million Don Mills mortgages, that "there was no attempt to hide this and everything was completely transparent on the books and records of our companies. The Inspector found it easy to trace exactly what had happened to this money given that transparency." That was a breathtaking statement by Ms. Walton, and it demonstrated her continued willingness to distort the truth. In fact, Ms. Walton had given no prior notice to Dr. Bernstein about her intention to place the two mortgages on the Don Mills properties. She hid that transaction from Dr. Bernstein. There was no transparency. The transaction only came to light as a result of Mr. Reitan's searches of title as part of a larger concern by the applicants over the respondents' lack of transparency about what they were doing with the applicants' funds. Even then, [page492] the true facts about the two mortgage transactions did not emerge until Ms. Walton was compelled to disclose them in the early stages of this proceeding. For Ms. Walton to now attempt to spin those facts in her favour shows her complete lack of understanding about what it means to tell the truth. There really is no other way to put the matter.

[103] Her distortion of the facts in respect of the Don Mills Road mortgages echoed her conduct which I described in a June 20, 2014 decision [2014 ONSC 3732 (S.C.J.)] regarding the dispute between two mortgagees on 875 and 887 Queen Street East. I found that Norma Walton had materially misrepresented the true state of affairs to one of the mortgagees, RioCan:

Norma Walton's representation that the lender had deposited the certified cheque -- a representation which was re-transmitted to RioCan with the intention that RioCan rely upon it -- was misleading in a very material respect. Why? Because the lender, Woodgreen, which had deposited the cheque, had immediately returned the funds to Red Door Lands, ostensibly taking the position that its deposit of the cheque had not constituted an acceptance of payment against principal of the mortgage. That sequence of events can be gleaned from the communications which had flowed back and forth between Walton and Kesten about which RioCan knew nothing.[^27]

[104] In sum, I do not accept Ms. Walton's continued protestations that she had a complete lack of knowledge that funds from the two $3 million mortgages on the Don Mills Road properties had been misappropriated to the use of Walton and her companies. The voluminous evidence placed before me on this motion leads me to have absolutely no doubt that Norma Walton not only knew, in detail, what was taking place with the transfer of funds from those two mortgages, but that those transfers took place at the direction of, and under the control of, Norma Walton. Norma Walton knowingly put in place the two Don Mills Road mortgages of $3 million each without the required approval of Dr. Bernstein and she knowingly misappropriated some of the proceeds of those mortgages to her own personal use and the use of companies which she owned, but in which Dr. Bernstein had no ownership interest.

[105] Unfortunately, Ms. Walton's continued efforts to repair her reputation in respect of the Don Mills Road mortgage transactions by distorting the truth makes it clear to me that it will never be possible to secure from her a true accounting of what happened to the funds advanced by the applicants. [page493]

VII. Issues Concerning the Waltons using the Applicants' Funds for Schedule C Properties

[106] The applicants seek relief against what are called the Schedule C properties -- i.e., properties owned by, or controlled by, Ron and Norma Walton, usually through a company in which Dr. Bernstein had no ownership interest. At the hearing, the respondents disputed including some of the properties in the applicants' list of Schedule C properties, contending that they did not own them. I will address that issue in section XI.B of these reasons. Suffice it to say, at this point of time, that the reason the applicants included a property in the list of Schedule C properties against which they sought relief was because the Rose & Thistle website represented that the property was owned by the Waltons or Rose & Thistle.

[107] In its fourth report, the inspector identified seven properties owned by Walton Schedule C companies for which it could ascertain that funds transferred from a Schedule B company to Rose & Thistle were transferred, in turn, to the Schedule C company to acquire the property. Froese addressed the inspector's findings in his report. Froese's high level comment was:

We reviewed the tracing performed by the Inspector and agree that some funds from the applicants can be traced through the Rose & Thistle clearing account to Schedule C Companies and that these funds were used for the purchase of properties. However, the tracing performed by the Inspector does not address other funds received by the Schedule C Companies and transferred to Rose & Thistle or transferred through Rose & Thistle to Schedule B Companies.

The net result is that, in relation to the seven properties, approximately $2 million of funds flowed from Dr. Bernstein through the Rose & Thistle clearing account to the Schedule C Company account, where the funds were available at the time the properties were purchased. It should be noted that no funds trace to the purchase of the properties owned by Academy Lands and Front Church, and that less funds trace to the College Lane property than are determined by the Inspector as a result of co-mingling of funds.

I shall consider Froese's comments on the analysis performed by the inspector for specific properties below.

[108] Mr. Reitan, in his affidavit sworn June 26, 2014, deposed that the following amounts of the applicants' funds were used to purchase or refinance some of the Schedule C properties:

(i) $330,750 for the purchase of 14 College Street and $987,165 for the refinancing of 14 College Street; [page494]

(ii) $1.032 million for the purchase of 3270 American Drive;

(iii) $1.6 million for the purchase of 2454 Bayview Avenue;

(iv) $937,000 for the purchase of 346E Jarvis Street[^28] and the repayment of Dr. Bernstein's mortgage on 346F Jarvis Street;

(v) $2.337 million for the purchase of 44 Park Lane Circle, the personal mansion of Norma and Ronauld Walton;

(vi) $221,000 for the purchase of 2 Kelvin Street and $115,950 for the purchase of 0 Luttrell Avenue; and

(vii) $371,200 for the purchase of 26 Gerrard Street East.

A. 14 College Street

Inspector

[109] College Lane Ltd. was a Walton Schedule C company. On July 5, 2011, College Lane purchased 14 College Street, Toronto for $5.6 million, financed largely by a mortgage in the amount of $5.5 million. The inspector conducted two tracing analyses on this property: the first focused on the acquisition of the property in July 2011, and the second dealt with the discharge of a mortgage on July 4, 2012.

[110] In its fourth report, the inspector reported that on June 30, 2011, five days prior to the acquisition of 14 College Street, the opening balance in the Rose & Thistle account was $18,266. The inspector reported that the applicants made equity or mortgage advances to several Schedule B companies shortly before that date which were quickly followed by transfers from the Schedule B companies' accounts to the Rose & Thistle account: (i) $220,650 on June 30 from Bannockburn; (ii) $223,150 on June 30 from Twin Dragons; (iii) $91,350 from Riverdale; and (iv) $56,550 from Wynford Professional Center Limited. The inspector also noted that on June 30, 2011, $216,250 was transferred from two Walton companies to Rose & Thistle, and on June 30, 2011, several transfers out occurred to various Schedule B companies and Walton companies from Rose & Thistle. The inspector reported that it had traced $330,750 of the applicants funds into the purchase of the College Lane property on July 5, 2011. [page495]

[111] In its April 25 supplement to the fourth report, the inspector reported on its further analysis for this property which led it to conclude that approximately $983,475, primarily sourced from funds paid to Schedule B companies by the applicants (Donalda Developments Ltd. and Fraser Properties Corp.), were transferred to Rose & Thistle and then forwarded to College Lane which, in turn, used the funds to discharge a mortgage which had been granted to Windsor Bancorp on July 4, 2012.

Froese

[112] In respect of inspector's report that it had traced $330,750 of the applicants' funds into the purchase of the College Lane property, Froese stated:

The co-mingling of Schedule C Company funds and Schedule B Company funds does not permit a direct tracing of the $330,750 to College Lane, although a portion is traceable, depending on the assumptions applied to the tracing.

(Emphasis added)

I accept the inspector's analysis on this issue. Although there was comingling in Rose & Thistle at the time of funds from Schedule B and C companies, the vast majority of the funds had originated with Schedule B companies which the inspector could trace to specific advances of the applicants' funds.

[113] Froese stated, in respect of the inspector's report that $983,475 of applicants' funds had been transferred to College Lane, that a third-party financing of $715,650 partially offset that amount and that further post-acquisition (July 5, 2011) transfers between College Lane and Rose & Thistle resulted in a net balance of $1,070,536 owing from College Lane to Rose & Thistle as at December 31, 2013:

In our view the $1,070,536 net amount is the appropriate amount owing to Rose & Thistle from Academy Lands (sic). This includes funds co-mingled in the Rose & Thistle clearing account, some of which were funds deposited from Dr. Bernstein to Schedule B Companies.

As I will discuss below, I do not accept giving precedence to the post-acquisition net transfer state of accounts advocated by Froese.

B. 3270 American Drive (United Empire Lands)

Inspector

[114] On March 11, 2013, United Empire Lands, a Walton Schedule C company, purchased 3270 American Drive, Toronto, [page496] for $6.7 million, with mortgages totalling $5.67 million registered against title.

[115] The inspector reported that funds totalling approximately $1.032 million, primarily sourced from funds advanced by the applicants to a Schedule B company -- West Mall Holdings Ltd. -- were transferred to the Rose & Thistle account on March 8, 2013 and, that same day, transferred to United Empire Lands. Those funds could be tied to a $1.649 million March 7 applicants' equity investment in West Mall which was transferred in three installments on March 7 and 8 to the Rose & Thistle account. One of those installments was the $1.032 million transferred on March 8 from Rose & Thistle to United Empire Lands.

Froese

[116] In his report, Froese stated:

The Inspector identified a March 8, 2013 transfer of $1,032,000 from West Mall Holdings Ltd. to Rose & Thistle that he concluded was sourced from the Applicants funds. On the same day, a transfer of $1,032,000 of funds from Rose & Thistle to United Empire Lands Ltd. provided the funds to United Empire to close the purchase of the 3270 American Drive property on March 11, 2013.

We do not disagree with this analysis. However, it does not take into account funds received from Christine DeJong Medical Professional Corporation for an investment in United Empire that were used in part to fund Schedule B Companies and which were being repaid to United Empire through the $1,032,000 transfer.

(Emphasis added)

Christine DeJong brought her own cross-motion and filed an affidavit. She deposed that she thought the payments she was making to United Empire Lands would be used to acquire the American Drive property.

[117] Froese also stated in his report:

Based on the above information, United Empire funds of $706,850 were transferred to Rose & Thistle and used in part to fund Schedule B Companies. Schedule B funds of $1,046,000 were transferred through Rose & Thistle to United Empire, in part as repayment of the $706,850.

C. 2454 Bayview Drive (Academy Lands Ltd.)

Inspector

[118] Academy Lands Ltd., a Walton Schedule C company, purchased property at 2454 Bayview Avenue, Toronto on December 21, 2011 for $8 million, with a charge in the amount of $6.2 million registered in favour of Business Development Bank [page497] of Canada. Accordingly, $1.8 million had to be otherwise financed in order to acquire the Bayview property.

[119] The inspector reported that on December 12, 2011, the amount of $1.6 million was transferred from the Rose & Thistle account to Academy Lands.

[120] A week earlier, on December 6, 2011, the closing balance in the Rose & Thistle account had been only $97,880. The inspector reported that on December 5, 2011, the applicants paid into the account of Royal Agincourt Company, a Schedule B company, an equity investment in the amount of $1.782 million. Between December 5 and December 13, 2011, the amount of $1.73 million was transferred out of that account into the Rose & Thistle bank account. On December 8, 2011, the applicants made a mortgage advance of $706,050 to Tisdale Mews Inc., another Schedule B company, which, on the same day, was transferred from that bank account to the Rose & Thistle bank account.

[121] The inspector expressed the view that the transfers from the Royal Agincourt account and the mortgage advance from the Tisdale Mews account to Rose & Thistle were the primary sources of the funds for the transfer of $1.6 million to Academy Lands on December 12 which, in turn, funded the acquisition of 2454 Bayview on December 21, 2011.

Froese

[122] Froese made several comments about the inspector's analysis. First, Froese stated:

We agree that $1.6 million and $110,350 traced to Academy Lands. However, these funds were fully returned to Rose & Thistle during the period of the Inspector's analysis in the following two days. This is an example of a "snapshot" tracing being accurate in and of itself but not reflecting relevant transactions within several days of the period selected by the Inspector.

(Emphasis added)

Froese concluded: "Accordingly Academy Lands did not retain any funds from Dr. Bernstein in December 2011 when it purchased 2454 Bayview."

[123] I am not prepared to accept that statement. Gaps in the evidence do not permit the making of such a forceful assertion. Let me explain why.

[124] A review of the Academy Lands bank account statement for the month of December 2011 certainly shows that the December 12 "transfer in" of $1.6 million from Rose & Thistle was the main source of the $1.986 million balance which existed on December 20, the day before the acquisition of the Bayview [page498] property. The $1.986 million was withdrawn by way of a certified cheque on December 20. The next day -- the day of closing -- an identical amount was deposited "at the counter" back into the Academy Lands account. The identity of amounts of the December 20 withdrawal and December 21 deposit back-in would support an inference, which I draw, that the same money withdrawn on December 20 was re-deposited the following day into the Academy Lands account.

[125] On December 21 -- the day of closing -- there was a transfer of $322,800 from the Academy Lands account to the Rose & Thistle account. Unfortunately, neither the inspector's report nor the Froese report investigated the specific use of those funds. The Froese report did attach the Rose & Thistle bank statement which showed that the $322,800 deposit was the source for over a dozen payments of various amounts over the course of that day which reduced the account's balance to just slightly more than $30,000. I was not pointed to evidence which would explain those various transfers out of the Rose & Thistle account, specifically whether they had anything to do with payments made on the closing of the purchase of the Bayview property.

[126] Froese also stated that they had been informed that the vendor of the Bayview property, Dibri Inc., had provided $1.75 million of financing to Academy Lands in an unregistered vendor take-back mortgage that was not registered until 2014: "As a result, little or no funds were required to close the purchase of the property." On this point, I have reviewed Exhibit 2 to the Froese report. It does not contain a statement of adjustments for the closing of the acquisition of Academy Lands and the copy of the charge is obviously a mere draft. The other closing documents contained in Exhibit 2 did not refer to a vendor take-back mortgage.

D. 346 Jarvis, Unit E (1780355 Ontario Inc.)

Inspector

[127] The tracing analysis performed by the inspector in its fourth report traced parts of two April 15, 2013 advances by the applicants -- $1.286 million into Dewhurst and $1.452 million into Eddystone -- into the bank account of Rose & Thistle ($641,500 and $866,700 respectively). The inspector reported that transfers to Schedule C companies and Ms. Walton from Rose & Thistle around that time amounted to $1.194 million consisting of $937,000 to 1780355 Ontario, $111,550 to Plexor Plastics (a Walton company) and $110,000 to Norma Walton. [page499]

[128] The inspector reported that shortly after the transfers totalling $937,000, Norma and Ron Walton purchased a property at 346E Jarvis, Toronto using 1780355 Ontario Inc.

Froese

[129] Froese stated that he agreed with the inspector that $937,000 traced through the Rose & Thistle clearing account to 1780355 Ontario. Froese stated that as of December 31, 2013, the net amount owing to Rose & Thistle by 1780355 Ontario was $496,897. That led Froese to state:

In summary, we agree with the Inspector's tracing of $937,000 of Dr. Bernstein's funds through Schedule B Company accounts to the Rose & Thistle clearing account and to 178 Inc. In our view, however, the $496,897 net amount owing from 178 Inc. to Rose & Thistle is the appropriate amount to consider owing to Rose & Thistle from 178 Inc.

(Emphasis added)

E. 44 Park Lane Circle

Inspector

[130] The Waltons own a large mansion in the Bridle Path area of Toronto on 44 Park Lane Circle, which they acquired on June 26, 2012 for $10.5 million. Two mortgages totalling $8 million were registered against title that day.

[131] On June 25, 2012, Rose & Thistle transferred $2,584,850 into Ms. Walton's personal account and that day she transferred $2.5 million to acquire 44 Park Lane Circle. The $2,584,850 transfer was largely sourced from (i) a June 15 equity investment by the applicants of $2,320,963 into Red Door Developments (875 Queen St. East) which was transferred that same day to Rose & Thistle; and (ii) a June 25 $675,000 equity investment made by the applicants in respect of 1450 Don Mills which was deposited directly into the Rose & Thistle account.[^29]

Froese

[132] Froese did not dispute the inspector's analysis concerning the use of the applicants' advance to Red Door Developments; Froese did not address the advance to 1450 Don Mills. [page500]

Evidence of Ms. Walton about the acquisition of the property

[133] In her June 21, 2014 affidavit, Ms. Walton explained how she and her husband came to own the property at 44 Park Lane Circle. She deposed:

We purchased the 6.2 acre property at 44 Park Lane Circle in June 2012 for $10.5 million with the intention of making money on the property, similar to our last house we bought at 92 Truman[^30] and similar to the commercial properties we purchase on a regular basis. It was never our intention to remain in the residence long-term, and we lived there with our four children through major renovations to save living costs and expenses.

Looking at the marketing brochure prepared by a realtor retained by the respondents for a potential sale of 44 Park Lane Circle -- Exhibit SS to Ms. Walton's June 21, 2014 affidavit -- it is difficult to be moved by Ms. Walton's protestations of the hardship of living through renovations. The pictures of the house show a palatial mansion finished to the highest standards with only the best of luxury amenities.

[134] Ms. Walton candidly admitted that she and her husband had used some of the money provided by Dr. Bernstein for the 875 Queen Street East property to acquire their residence at 44 Park Lane Circle:

We used the proceeds of sale provided by Dr. Bernstein to us when he bought into our 875 Queen Street property. We had a cost base of $6.65 million and he bought in at a price of $9.5 million. The $2.215 million he invested to purchase 50% of the shares in 875 Queen Street East was used by us to fund the purchase of 44 Park Lane Circle, as this money was due to us, such money representing the equity we had created in the property and disclosed to Dr. Bernstein prior to his purchase. This money was not to be used to complete the Queen Street project as it was part of the purchase price for Dr. Bernstein to buy in.

As Ms. Walton clarified in her July 3, 2014 affidavit, they had invited Dr. Bernstein to buy into that project "many months after we had contracted to buy" the property, not after they had actually bought the property. In fact, as her June 8, 2012 e-mail to Dr. Bernstein disclosed, Ms. Walton only had the property under "conditional contract" at the time she solicited an investment from him.

[135] In its third report dated January 15, 2014, the inspector set out the explanation it had received from Walton for the 875/887 Queen Street East transaction: [page501]

From June 15 to 25, 2012, Rose & Thistle transferred the $2.3 million paid by Dr. Bernstein to itself and established an inter-company receivable due from Rose & Thistle to Red Door in that amount. Ms. Walton subsequently delivered an invoice dated June 30, 2012 . . . that purported to charge fees to Red Door in the amount of approximately $2.1 million effectively offsetting the inter-company debt. Ms. Walton subsequently advised the Inspector that the purpose of the transaction was to adjust her equity to draw and the agreed-upon increase in value between the time she purchased the company and Dr. Bernstein's buy-in. An adjustment to Ms. Walton's equity account on the books of the company has been recommended by the company's external accountant. The Inspector questioned the propriety of Rose & Thistle delivering an invoice purportedly charging fees as a mechanism to reflect a distribution of equity to a shareholder. Upon being challenged by the Inspector, Ms. Walton reversed the invoice and reinstated the receivable due from Rose & Thistle. In addition, an increase was recorded to Ms. Walton's equity on the balance sheet adding approximately $2.2 million as a fair market value adjustment. The Inspector notes that paragraph 13 of the agreement between the parties provides that equity is to be distributed to the shareholders only after the property is developed and sold. The receivable due from Rose & Thistle remains outstanding and Ms. Walton has yet to explain the basis upon which Rose & Thistle removed cash from this company to create the receivable in the first place.

[136] I do not accept Ms. Walton's contention that they were entitled to use Dr. Bernstein's equity contribution to 875 Queen Street East to fund the acquisition of their Park Lane Circle residence. Her explanation does not accord with the representations which were made in the June 25, 2012 agreement between Norma Walton and Ron Walton, on the one part, and Dr. Bernstein, on the other, for the Queen Street East properties. Attached to that June 25, 2012 agreement was a table setting out the capital required for the project. The table recorded total capital required of $11.64 million. Included in that required capital was $2.215 million for "development monies invested to date". The chart represented that three sources of funds would be used to satisfy the required capital: (i) a $7 million mortgage; (ii) $2.32 million from Dr. Bernstein; and (iii) $2.32 million from Ron and Norma Walton.

[137] In her evidence, Ms. Walton seemed to suggest that the reference to the required capital of $2.215 million for "development monies invested to date" somehow signalled to Dr. Bernstein that when he signed the agreement he knew, or should have known, that the Waltons would extract some "earned equity" from the project. Ms. Walton canvassed this point with Dr. Bernstein on her cross-examination of him which led to the following exchange:

Q. 1811. Ms. Walton: I'm going to suggest to you that this email, coupled with this statement, shows that your buy-in to the Queen Street property was at a price that was higher than the cost base because of the work that [page502] the Walton Group had done on the property in the two years prior that they had it under contract?

R. Dr. Bernstein: My agreement to purchase in was at the cost of purchasing the properties and the cost out-of-pocket of monies spent or to be spent to get to the closing. That is what it was for.

S. 1812: Dr. Bernstein, I know you're saying that now, but did you ever say, "Norma, I like the project, but I want to be in at the purchase price and I don't want to pay any development monies of 2.215 million?"

A: No, because I took this to say that you spent $2.215 million in bringing the property to where it was.

Q. 1813: Did you do any due diligence on that 2.215 million?

A: I trusted you and your comments and your documentation that you spent that money.

Q. 1814: Okay, but you . . .

A: Did I ask you to verify it? No. Did I trust you? Yes, I did.

Q. 1815: So you bought into the property understanding that there was already $2.215 million of value inherent in the purchase price?

R. Absolutely not. I bought into the property because it says here you spent $2.215 million to that point or that will have been spent with the closing, along with legal fees and land transfer tax, municipal and Ontario land transfer tax and other fees and disbursements of $65,000. That's what I bought into.

Q. 1817: Let me rephrase. Are you unhappy that you agreed to buy in at nine and a half million dollars?

A: If the circumstances are all in place . . . Are you asking me about today?

Q. 1818: Yes

A: From my understanding today, you didn't spend $2.215 million. From my understanding today, you did not secure Red Door to do anything and move value. From my understanding today, what you told me here is not true.

[138] Dr. Bernstein testified that when he invested in the Queen Street East project, he was not aware that he was not buying in at the original cost base of the property, as contended by Ms. Walton.[^31]

[139] Section 4 of the Queen Street East agreement provided that Dr. Bernstein wished to own 50 per cent of the shares in the companies, Red Door Developments Inc. and Red Door Lands Ltd., in exchange for providing 50 per cent of "the equity [page503] required to complete the project". Section 4 stipulated that "the company will issue sufficient shares such that Bernstein has 2,320,963 and Walton has 2,320,963 voting shares of the same class." Section 4 stipulated that Dr. Bernstein would receive shares issued from the company's treasury, not acquire shares from the Waltons which were already issued and outstanding. Both Ron and Norma Walton are lawyers; I have no doubt that they understand the basics of corporate law.

[140] Section 7 of the agreement dealt with the equity contributions -- Dr. Bernstein was required to provide his by June 20, 2012, and the Waltons were required to provide theirs "in a timely manner as required as the project is completed".

[141] Section 15 of the agreement specifically dealt with the use of funds advanced to the Red Door companies:

The Company will only be used to purchase, renovate and refinance the property at 875 and 887 Queen Street East, Toronto, Ontario or such other matters solely relating to the Project and the Property.

[142] As to the ability of the parties to extract their capital from the Queen Street East project, s. 13 stated:

Once the Project is substantially completed to the point that all of the Property has been sold, both parties will be paid out their capital plus profits and Walton will retain the company for potential future use.

[143] Norma Walton deposed, in para. 51 of her June 21, 2014 affidavit, that the money she and her husband had extracted out of the Red Door companies following Dr. Bernstein's advance of equity was money which "was due to us, such money representing the equity we had created in the property and disclosed to Dr. Bernstein prior to his purchase". In her July 3, 2004 affidavit, she contended that "the increase in value from the time we contracted to purchase to the time we invited Dr. Bernstein to partner with us was ours alone as we were the sole owners of the company at that time". Those assertions are flatly contradicted by the plain language of the agreement with Dr. Bernstein to which Ron and Norma Walton put their signatures. Also, the plain language of the agreement flatly contradicted her statement that Dr. Bernstein's "money was not to be used to complete the Queen Street project as it was part of the purchase price for Dr. Bernstein to buy in".

[144] Moreover, in her June 8, 2012 e-mail to Dr. Bernstein soliciting his investment in the property, Norma Walton made no mention of her intention to use his investment to fund the Waltons' "extraction of equity" so that they could buy a home on Park Lane Circle. [page504]

[145] Based upon Norma Walton's June 21, 2014 evidence, I can only conclude that when Norma and Ron Walton signed the June 25, 2012 agreement with Dr. Bernstein for the 875/887 Queen Street East project, they fully intended to use the funds advanced by Dr. Bernstein to fund, in part, their own acquisition that day of their 44 Park Lane Circle personal residence. They did not disclose to Dr. Bernstein their intended use of his funds. To the contrary, in the agreement they signed with him on June 25, 2012, they led Dr. Bernstein to believe that the funds he advanced would be used solely for the project at 875/887 Queen Street East and that neither he nor his co-venturers, Norma and Ron Walton, would be able to withdraw their capital from that project until it had been sold. By signing the agreement with Dr. Bernstein on June 25, 2012, and then proceeding immediately to appropriate the funds he advanced to their own use later that day to acquire their mansion at 44 Park Lane Circle, Norma and Ron Walton deceived Dr. Bernstein and unlawfully misappropriated Dr. Bernstein's funds to their own personal use. In short, the Waltons defrauded Dr. Bernstein.

Evidence of Norma Walton about the ownership interests of others in 44 Park Lane Circle

[146] Ms. Walton deposed that she and her husband currently were in the process of severing the 44 Park Lane Circle property into two separate parcels. In her December 17, 2013 affidavit, Ms. Walton deposed that the property was owned by her husband and herself and that no shareholders owned an interest in the property. However, on the net worth statement attached as Exhibit "MM" to her June 26, 2014 affidavit, Ms. Walton had divided the property into two parts -- 44a and 44b -- and listed $5.77 million in preferred shares invested in "44b" Park Lane Circle. On December 18, 2013, Newbould J. ordered that the respondents could not deal with 44 Park Lane Circle without further order of the court.

[147] Mr. Reitan deposed that Ms. Walton must have sworn false evidence on December 17, 2013, or the Waltons were in breach of Justice Newbould's order of December 18, 2013 [ 2013 ONSC 6833 (S.C.J.)] or Exhibit MM to Ms. Walton's June 26, 2014 affidavit was false.

[148] Based upon a review of the entire record, I think the answer lies in a fourth explanation. In her evidence and at the hearing, Ms. Walton went to considerable pains to state that she intended to take care of all of her creditors -- except Dr. Bernstein -- because she had promised to make good on their [page505] investments as preferred shareholders in various Schedule C companies which no longer possessed any equity to pay their shareholders. Many of the affidavits and statements filed by the preferred shareholders stated that they had agreed with Ms. Walton that she could pay them from the proceeds of sale from other Walton properties, even though the Schedule C corporations in which they had invested lacked any equity to pay them out as preferred shareholders. I conclude that Ms. Walton's reference in her net worth statement to $5.77 million of preferred shareholders in "44b" Park Lane Circle was her way of saying to the preferred shareholders that she would protect them out of the proceeds of the severed "44b" portion of the Park Lane Circle property once it was sold. That evidence demonstrates that if Ms. Walton thinks it fit to pay a creditor, she will work to do so; if she does not, she won't. In Ms. Walton's worldview, her discretion is absolute, and her creditors must abide by the exercise of her discretion and the preferences she accords certain creditors.

Renovations to 44 Park Lane Circle

[149] The evidence also disclosed that funds originating in a Schedule B company, Tisdale Mews, were used to fund $268,104.57 in renovations to the Waltons' 44 Park Lane Circle home. Ms. Walton justified the use of those funds by stating that [at para. 16] "Rose & Thistle funded 100% of the $268,104.57 purchases before any cheques were sent out of the Tisdale Mews account" and, overall, Rose & Thistle transferred more money to Tisdale Mews than it had received from that Schedule B company. In his November 5 reasons, Newbould J. considered that evidence from Ms. Walton and concluded [at para. 46] that "no reasonable explanation has been provided" for the use of the Tisdale Mews funds.

F. 2 Kelvin Street and 0 Luttrell Avenue

Inspector

[150] 6195 Cedar Street Ltd., a Walton Schedule C company, purchased 2 Kelvin Street, Toronto on April 17, 2012, for $1.8 million, with a mortgage in the amount of $1.44 million registered against title.

[151] The inspector reported that funds totalling approximately $221,000, primarily sourced from funds paid by the applicants to a Schedule B company, were transferred to the Rose & Thistle account on April 17, 2012 and, in turn, transferred that day to Cedar. The opening balance in the Rose & Thistle account on [page506] April 17 was $10,285. A $700,000 equity investment made by the applicants to Fraser Lands Ltd. that day was transferred out of that Schedule B company's account to the Rose & Thistle account.

Froese

[152] Froese stated: "We agree with the Inspector that $221,000 traces through the Rose & Thistle clearing account to 6195 Cedar, with a limited amount of co-mingling in the clearing account in or around April 17, 2012."

Applicants' evidence

[153] Mr. Reitan deposed that the property at 0 Luttrell was adjacent to the one at 2 Kelvin Street. A Walton company, Bible Hill Holdings Ltd., purchased the Luttrell property on November 15, 2012. Norma Walton did not disclose the respondents' ownership interest in that property in her affidavit sworn December 17, 2013; she only later admitted that ownership interest as a result of inquiries from applicants' counsel. Mr. Reitan also deposed, in para. 164 of his June 26, 2014 affidavit, that up to $152,950 of a $318,392 November 13, 2012 contribution by Dr. Bernstein to Salmon River Properties Ltd. in respect of 0 Trent Avenue was transferred through the Rose & Thistle account to Bible Hill Holdings Ltd. to finance the acquisition of 0 Luttrell. Having reviewed the supporting documents filed by Reitan to reach that conclusion, I accept his analysis.

G. 26 Gerrard Street (Gerrard House Inc.)

Inspector

[154] Gerrard House Inc., a Schedule C company, purchased 26 Gerrard Street, Toronto on December 20, 2011, for $5.5 million, at which time two charges were registered totalling $4.95 million.

[155] The inspector reported that it appeared that funds totalling approximately $371,200, primarily sourced from funds paid by the applicants to the Schedule B companies, were transferred to the Rose & Thistle account on December 20, 2011 and, that same day, were transferred to Gerrard House.

[156] The opening balance in the Rose & Thistle account on December 20 was $40,369. Most of three mortgage advances made by the applicants that day to three Schedule B companies were transferred to the Rose & Thistle account: $278,200 from Liberty Village Properties Ltd.; $39,900 from Riverdale; and $120,400 from Wynford. [page507]

Froese

[157] Froese agreed with the inspector that "$371,200 traces through the Rose & Thistle clearing account to Gerrard House, with a very limited amount of co-mingling in the clearing account on December 19 and 20, 2011."

H. The Froese critique of the inspector's "snapshot" approach

[158] In its report, Froese criticized the inspector's tracing analysis because it was a "snapshot" tracing which, while accurate in and of itself, did not reflect the history of other transfers into and out of Rose & Thistle and a Schedule C company. Froese expressed the view that the determination of the amount owing to or from Rose & Thistle to a Schedule C company should be based upon the net amount owing as at December 31, 2013.

[159] The inspector responded to this criticism in its fifth report emphasizing that "the tracing charts at Appendix F are intended to provide a snapshot of activity at a particular point of time. Funds transferred to or from the relevant company outside of the time period are not captured".

[160] Let me comment on two principles which guided Froese's analysis -- one implied, the other stated. First, Froese made no comment on the propriety of the respondents' pooling funds advanced by the applicants with other Schedule B company funds, Rose & Thistle funds, Schedule C company funds, and amounts advanced by third-party investors in respect of Schedule C companies. Second, Froese was of the view that the appropriate way to approach the issue of who owed whom what involved looking at the state of the various net balance accounts amongst the Schedule B companies, Rose & Thistle and Schedule C companies at a particular point of time. In his report, Froese frequently used December 31, 2013 as that point of time.

[161] While I understand the technical reasons why Froese followed those principles when conducting his analysis, the principles did not take into account the critical feature of the context surrounding all of those inter-company transfers of the applicants' funds -- they should never have happened. The contracts between the applicants and the respondents contained provisions designed to ensure that funds advanced by the applicants to a Schedule B company did not leak out from that company's account and that third-party investment funds did not leak into [page508] the Schedule B companies. The Waltons utterly ignored those contractual obligations, with several consequences:

(i) funds advanced by the applicants to Schedule B companies in fact ended up going to Walton-owned Schedule C companies, a fact acknowledged by Froese;

(ii) the pooling of the applicants' funds with others by the respondents has caused significant difficulties in ascertaining precisely what happened with all of the funds advanced by the applicants. That difficulty was caused by the respondents systematically ignoring their contractual obligations. The respondents had complete control over all of the funds. The co-mingling of the applicants' funds with others was a problem solely of the Waltons' making; and

(iii) to contend that one should look at the net balances owed between Rose & Thistle and a Schedule C company at a more recent point of time, rather than focusing on transfers which made available applicants' funds for Schedule C companies to acquire properties, ignored the fact that the transfer of Schedule B company funds to Schedule C companies at times when a Schedule C property was acquired should never have happened in the first place and that "but for" the transfer of applicants' funds to Schedule C companies, the latter would not have been able to acquire the Schedule C property.

In my view, for the respondents to use an expert's report to argue that the inspector's analysis of the tracing of applicants' funds into Schedule C companies lacked absolute precision does not help the respondents' case at all. It amounted to nothing more than chipping away at the edges of inter-company transfers which the Waltons should never have made. It also reinforced the utter failure of the Waltons to discharge the onus on them of explaining precisely what had happened with the applicants' funds. For the Waltons to be able to rely on net inter-company balances at, say December 31, 2013, in opposition to the applicants' claims for relief against Schedule C companies, they would have to demonstrate that all of the applicants' funds which were transferred at an earlier point of time into a Schedule C company to fund its acquisition of a property ultimately found their way back into the Schedule B company from which they originated and were used only by that Schedule B company. That, the respondents have not done, or even tried to do. As a result, I do not accept the opinion proffered by Froese [page509] that the better way of assessing transfers to Schedule C companies is to ascertain the net balance owing by or to a Schedule C company at some point of time long after the applicants' funds had been made available to the Schedule C company to acquire a property -- a benefit to the Waltons and a detriment to Dr. Bernstein.

I. The "trending up" of transfers to the Schedule C companies

[162] The inspector performed an overall analysis of the net amounts transferred from Schedule B companies to Rose & Thistle and from Rose & Thistle to Schedule C companies during the period October 2010 to December 2013. The net amount transferred from Schedule B companies to Rose & Thistle was $23.68 million and the net amount transferred from Rose & Thistle to Schedule C companies was $25.37 million. The inspector stated, in its fifth report:

The Inspector's analysis shows a consistently increasing net transfer from the [Schedule B] Companies to Rose & Thistle. In other words, even if some amounts were transferred to the Companies by Rose & Thistle, these returns did not keep pace with the steady flow of funds from the Companies to Rose & Thistle and from Rose & Thistle to the Walton Companies.

[163] In its fifth report, the inspector included a chart and graph which compared the net amount of transfers from the Schedule B companies to Rose & Thistle with the net amount of transfers from Rose & Thistle to Walton companies for each month from October 2010, when the applicants made their first investment, to December 2013. The inspector reported:

The graph depicts the net amount transferred as at the end of each month. The graph indicates a steady trend upwards. That is, the net amount transferred from [Schedule B] Companies increased, on a month over month basis for most months. The transfers from Rose & Thistle to Walton Companies increased in most months in a similar ratio[.]

The timing and quantum of the transfers described above is not consistent with the Respondents' contention that the transfers to Rose & Thistle represent payment for, among other things, more than $20 million worth of construction work performed by or on behalf of Rose & Thistle for the benefit of the Companies.

If the transfers had been related to construction work, a substantial portion of the funds taken from the Companies would have to have been used to pay construction costs, including contractors (if the work was subcontracted) or suppliers and labor (if the work was performed by Rose & Thistle). Only the profit earned by Rose & Thistle on the construction would have been available for transfer to the Walton Companies. However, throughout the period examined, the amount transferred to the Walton Companies and the amount transferred from the Companies increased at approximately the same pace. In every month examined, the amounts transferred to the Walton Companies represented a significant percentage [page510] of the amount transferred from the Companies. There is no evidence that the Respondents had sufficient resources to fund both the transfers to the Walton Companies and the work shown on the invoices that they have proffered to justify those transfers.

J. Preferred shareholders of some Schedule C companies

[164] What evidence was filed on these motions to explain the sources of funding available to the Schedule C companies other than the funds of the applicants which were transferred by the Waltons out of the Schedule B companies? Ms. Walton deposed that there was $14,107,876 of 42 "innocent third party investors' money" in the Schedule C companies consisting of preferred shareholders, common shareholders and debtors. A chart summarizing those investments -- Exhibit MM to her June 21, 2014 affidavit -- only recorded $7.7 million in investments and it did not provide any backup documentation to verify the investments.

[165] Ms. Walton also filed affidavits or statements from 30 preferred shareholders in five Schedule C companies: Front Church Properties, Academy Lands, the Rose & Thistle Group, Cecil Lighthouse and 1793530 Ontario. Each shareholder deposed to the "value" of his or her preferred shares (or in some cases loans) in Schedule C companies. The particulars are set out in Appendix "B" to these reasons.

[166] I am not prepared to accept that the "value" each shareholder attributed to his or her shares reflected that actual amount invested by the shareholder. Some of the affidavits strongly suggested that shareholders were including capital appreciation and accrued dividends or distributions in the "value" of their investments. For example, Christine DeJong deposed that she had advanced $716,906 to United Empire, a Schedule C company, in January 2013, and stated that the value of her shares, according to the respondents, was now $992,750. However, taking that "value" evidence from preferred shareholders at its highest, it disclosed a "value" of $8,780,817 attributed by those shareholders to their investments in the five Schedule C companies.

K. Summary of findings on transfers of funds to Schedule C companies

[167] I accept, in large part, the tracing analysis performed by the inspector on the Schedule C companies described above. I find that in the instances identified by the inspector, in a brief period of time the Waltons directed the transfer of funds advanced by the applicants from a Schedule B company to a Walton-owned Schedule C company, through Rose & Thistle, and [page511] the Schedule C company used those funds to purchase a property. In the result, I find that the following amounts of the applicants' funds were used to purchase or discharge encumbrances on Schedule C properties:

(i) 14 College Street: $1,314,225 ($330,750 + $983,475);

(ii) 3270 American Drive: $1.032 million;

(iii) 2454 Bayview: $1.6 million;

(iv) 346E Jarvis St.: $937,000;

(v) 44 Park Lane Circle: $2.5 million;

(vi) 2 Kelvin Street: $221,000;

(vii) 0 Trent: $152,900; and

(viii) 26 Gerrard Street: $371,200.

[168] I also accept the following conclusion of the inspector:

[T]he Inspector has concluded that the Respondents used new equity invested in, and mortgage amounts advanced to, the [Schedule B] Companies by the Applicants to fund the ongoing operations of other Companies and the Walton Companies. Almost every time the Applicants advanced funds to one of the Companies, a significant portion of those funds was transferred to Rose & Thistle. In some instances, funds could be traced directly into a Walton Company. In other instances, funds could not be traced directly because the Applicants' funds were co-mingled with other funds in the Rose & Thistle account. However, the Inspector has concluded that the Applicants' investment in the Companies was a major source of funds for the Walton Companies.

L. Other issues concerning Schedule C properties

L.1 Galloway Road

[169] Highland Creek Townes Inc., a Walton company, owned the property at 232 Galloway Road, Toronto. On May 18, 2011, Dr. Bernstein, through his company 368230 Ontario Limited, advanced a mortgage loan to Highland Creek. The principal amount of the mortgage was $4.05 million, advanced in two tranches. The mortgage matured on June 30, 2012. It was guaranteed by Norma and Ron Walton.

[170] Mr. Reitan deposed that his review of the title for the property disclosed that Ms. Walton had caused the discharge of Dr. Bernstein's mortgage in August 2012 notwithstanding that the full amount of the principal had not been repaid. There was no dispute that the discharge was done without Dr. Bernstein's knowledge, consent or approval. When this discharge was discovered, Dr. Bernstein pressed Ms. Walton to pay out his [page512] mortgage on Galloway. Dr. Bernstein e-mailed Ms. Walton on October 1, 2013, asking what she had done with the $6 million in mortgages on the Don Mills Road properties and he continued:

You promised to pay out the Galloway mortgage by September 30. I do require, and I did expect the funds. When can this be paid out?

[171] Ms. Walton's e-mail response of the same date ignored that question and, instead, pressed Dr. Bernstein to stop his public litigation and move their dispute into "a private setting immediately". That prompted the following response from Dr. Bernstein:

Dear Norma;

And the $6M is located ____ ?? ____

And the Galloway mortgage is being paid out on ____ ?? _____

I cannot get answers asking you directly -- what other options do I have?

[172] On his July 9, 2014 cross-examination, Dr. Bernstein testified that he still had not been paid out on the Galloway mortgage.[^32]

[173] Ms. Walton's unilateral discharge of Dr. Bernstein's mortgage on the Galloway property without the payment in full of the amount due under the mortgage provided another example of Ms. Walton's pattern of breaching her contracts with Dr. Bernstein, as well as a pattern of oppressive conduct by Norma and Ronauld Walton, as directors and officers of corporations, against the interests of Dr. Bernstein as a corporate creditor.

L.2 30/30A Hazelton

[174] The respondents seek court approval to sell 30 Hazelton, a Schedule C property, to 1659770 Ontario Inc., the corporate profile for which lists Jennifer Coppin as the director and officer. George Crossman, a lawyer at Beard Winter LLP, deposed that in 2009 he had been involved in a real estate transaction in which Jennifer Coppin offered to purchase his client's condominium unit through 1659770 Ontario Inc. Ms. Coppin was charged criminally in respect of that transaction, it being alleged that she had altered the agreement of purchase and sale to inflate the purchase price to secure higher financing. Mr. Crossman deposed that he understood it was [page513] a term of Ms. Coppin's probation that she not engage in any further real estate dealings.

VIII. Explanations Proffered by Ms. Walton for the Use of the Applicants' Funds

[175] Ms. Walton proffered several explanations for the respondents' use of the applicants' funds, some of which I have already considered. Nonetheless, this section will summarize and consider each proffered justification.

A. Dr. Bernstein was a silent partner and did not insist on the strict observance of the agreements

[176] A major theme of Ms. Walton's affidavits was that Dr. Bernstein wanted to be a silent partner with the result that over the years he did not insist upon strict compliance with the agreements' reporting obligations. That led Ms. Walton to contend in her factum: "Bernstein acquiesced to Walton managing the portfolio in Walton's sole discretion".

[177] The evidence did disclose that during the initial two years of the parties' business relationship, Dr. Bernstein appeared to be content with receiving only periodic reports from Ms. Walton or answers to specific questions which his accountants posed. As Dr. Bernstein stated on his cross-examination, "I just assumed you were following protocols for our agreements . . . ."[^33]

[178] By September 2012, Dr. Bernstein and his accountants were beginning to ask more pointed questions, including requesting financial statements for the Schedule B companies. By March 2013, Dr. Bernstein was requiring the respondents to secure his approval for payments over $50,000 from Schedule B companies as stipulated by the agreements. In June 2013, Mr. Reitan requested detailed information about Dr. Bernstein's investments and raised specific concerns with Ms. Walton. Although this course of conduct would prevent Dr. Bernstein from relying on the respondents' failure to provide monthly reports in the early part of their relationship as an event of default under the agreements, Dr. Bernstein most certainly did not waive his entitlement to receive any reports under the agreements. When Dr. Bernstein began to request them, he was entitled to receive them. [page514]

[179] The evidence also disclosed that even in September 2013, as the relationship between the parties was breaking down and Dr. Bernstein was becoming quite vocal in his demand for a proper accounting of his money, Norma Walton was not prepared to adhere to the terms of her agreements with Dr. Bernstein. Those agreements stipulated that no refinancing of a property would take place without his approval. On September 20, 2013, Ms. Walton e-mailed Dr. Bernstein advising that the $3.27 million mortgage on 140/150 Queen's Plate Drive was coming due at the end of the month and that she had arranged a new mortgage for $3.35 million which would close in early October. Ms. Walton had signed the term sheet for the replacement mortgage on September 18, 2013, without first securing Dr. Bernstein's approval. Dr. Bernstein e-mailed her on September 23, insisting that she comply with the terms of their agreement and obtain his approval for any decisions regarding refinancing before they were made. Ms. Walton's response was telling because it revealed her complete unwillingness to follow the contractual terms which bound her:

We are up against a deadline such that if we do not refinance, Carevest will call our loan. I have been working hard to arrange refinancing and initially we tried to get BDC on board but they won't provide funds without site plan approval. Hence I arranged for Stephen to provide the mortgage. I would assume that is agreeable given the alternative is calling the loan, no?

Even when Dr. Bernstein subsequently agreed to refinance on the basis of a new $3.27 million mortgage, Ms. Walton proceeded to put in place a mortgage for an increased amount, $3.35 million.[^34]

[180] From this, I conclude that Ms. Walton was prepared to ignore not only the contractual language which bound her, but also the express instructions of her co-investor. Instead, Ms. Walton simply did as she saw fit irrespective of her legal obligations.

B. The pooling of funds was permissible or at least not wrongful

[181] Ms. Walton deposed that when she was managing the jointly owned portfolio of companies, she used Rose & Thistle "as a clearinghouse account to smooth cash flow across the portfolio". In its first report, the inspector recorded the explanation Ms. Walton had provided for the pooling of funds: [page515]

Ms. Walton confirmed to the Inspector that equity contributions to, and income received by, the [Schedule B] Companies were centralized and co-mingled in the Rose & Thistle account, which Ms. Walton described as a "clearing house". Ms. Walton provided the following explanations for this practice:

(a) Since the Properties are at various stages of development, some are cash flow positive and others cash flow negative. The transfers to and from the Rose & Thistle account "smooth out" the cash flow of the companies; and,

(b) Rose & Thistle does not bill for services that it provides on a regular basis and some transfers were in the nature of payments for services that have been provided but not yet invoiced.

[182] In its fifth report (July 1, 2014), the inspector reported:

The Respondents provided the Applicants with a pro forma setting out the anticipated cost of completing planned development and/or construction on each project. The Applicants invested 50% of the budget shown on the pro forma but these funds were dispersed among the [Schedule B] Companies and Walton Companies. Accordingly, the funds invested by the Applicants in a Company did not remain available to that Company.

Since the Companies did not retain the amounts that the Applicants invested, almost every Company required outside funding in order to complete the work shown on the relevant pro forma. These funds appear to have been drawn in some cases (including those illustrated in Appendix F to the Fourth Report) from new equity investments and mortgage advances by the Applicants. In other words, new advances to one Company appear to have been used to fund the existing obligations of other Companies or Walton Companies.

[183] On his cross-examination, Froese stated that the companies managed by the respondents did not have any controls in place designed to prevent the comingling of funds or the movement of funds from Schedule B companies to Rose & Thistle and on to Schedule C companies. Froese stated that depending on the arrangement between the parties and the companies, you would expect controls to be in place if the arrangements called for that.[^35]

[184] In its fifth report, the inspector discussed the consequences of the pooling or comingling of funds advanced to the Schedule B companies by the applicants:

The Inspector notes that the Respondents' position that they are owed funds by the [Schedule B] Companies is premised on the assumption that every Company is responsible for every other Company's debts to Rose & Thistle. The Respondents assert that if Company A owed Rose & Thistle $1 million and Company B had $1 million in its bank account, they were entitled to take payment from Company B for the debt owed by Company A. This is [page516] significant since the contract governing investment into each Company provided that the Respondents were to provide equity funding once the Applicants' equity investment was exhausted. The co-mingling of funds therefore had two important consequences: (i) the Applicants' equity investments were exhausted much more quickly because they were used to fund alleged obligations across the portfolio and not only to fund one Company; (ii) the Respondents were able to delay their own equity contributions by transferring funds from other Companies instead of injecting new equity into the relevant Company.

(Emphasis added)

[185] Notwithstanding the voluminous e-mail correspondence from Ms. Walton to Dr. Bernstein reporting on the progress of projects, it was not until June 13, 2013 that she told him that the funds he was advancing to the Schedule B companies were being pooled amongst those companies, transferred to Rose & Thistle and also transferred to Schedule C companies, when she responded to Mr. Reitan's June 7, 2013 complaint letter.

[186] The pooling or comingling of funds was a critical breach of the obligations which Norma and Ron Walton owed to Dr. Bernstein under their agreements. In her factum, Ms. Walton submitted: "It never occurred to Walton that Bernstein would object to the pooling of funds." I completely reject that submission; it is not in the least credible. One would have thought that the "specific-purpose" clauses contained in each of the agreements for the Schedule B companies which the Waltons -- both lawyers -- had signed over the course of three years would have provided Ms. Walton with good reason to think that Dr. Bernstein would object to the pooling of funds since such pooling contravened those agreements. Ms. Walton's protestation of innocent, but mistaken, belief on this issue simply was not credible.

[187] In addition, based on the evidence adduced I find that

(i) The Applicants were not aware that the Respondents were withdrawing funds from the Schedule B Companies' bank accounts for any purpose other than the costs of the associated property;

(ii) The Applicants did not know that funds from Schedule B Companies were transferred or diverted to the Rose & Thistle "clearing house" bank account because the Respondents, in particular Ms. Walton, deliberately hid those transfers from the Applicants; and,

(iii) The Waltons deliberately did not tell the Applicants that they were using funds advanced by the Applicants to Schedule B Companies for their own personal purposes and benefit and for the benefit of the Schedule C Companies which they owned or controlled. [page517]

C. Production of the general ledgers of the Schedule B companies

[188] As an exhibit to her June 21, 2014 affidavit, Ms. Walton produced the detailed general ledgers for each of the Schedule B companies. She viewed the production of the general ledgers as amounting to a full accounting of the applicants' funds as previously ordered by this court. It was not. Those general ledgers had been produced to the inspector last October. They did not enable an analysis of the applicants' funds transferred from the Schedule B companies to Rose & Thistle, and then to the Schedule C companies, so they did not satisfy the respondents' obligation to provide a full accounting of how the respondents had used the applicants' funds.

D. The respondents previously had provided a full accounting

[189] Ms. Walton submitted that the respondents had provided a full accounting of the use of the applicants' funds and sought a declaration to that effect. This was an argument which Ms. Walton had made on several other occasions, as summarized in my reasons of May 20, 2014:

To date the respondents have failed to comply with orders of this Court requiring them to provide an accounting of monies received from the applicants. The trail starts with the October 25, 2013 order of Newbould J. where, at paragraph 10, he ordered "that the Respondents shall provide forthwith a full accounting of all monies received, disbursed, owed to and owed from the Schedule "B" Corporations and The Rose & Thistle Group Ltd. since September, 2010 to the present".

In her affidavit sworn December 17, 2013, Walton deposed, in response to the applicants' allegation that she had failed to provide a full accounting, that "I have provided all information/documentation to the Receiver/Manager", and she proceeded to give some details, concluding: "The Receiver/ Manager is in possession and control of all financial documents held by the Walton Group in relation to the Schedule B Companies, and all documents related to the Rose and Thistle Group have been provided to him." In his endorsement made January 20, 2014, Newbould J. rejected Walton's contention that the respondents had provided a full accounting. He concluded they had not, and he ordered:

Ms. Walton is to provide the accounting ordered in paragraph 10 of the order of October 25, 2013 no later than January 31, 2014. Delivering records to the Manager is not an accounting.

Notwithstanding that clear finding and further order by Newbould J., in her notice of motion dated March 31, 2014, Walton sought an order that the applicants "clarify what is meant by the term 'a full accounting of all monies received, disbursed, owed to and owed from Schedule 'B' Corporations and The Rose and Thistle Group Ltd. since September 2010 to the present' as found in the October 25, 2013 Order." In her affidavit of that date Walton deposed: [page518]

I have heard the Applicants complain a number of times to the Court that I have not provided an accounting as ordered on October 25, 2013. I have sworn an affidavit wherein I explain what I provided by October 28, 2013 to fulfill this requirement.

As noted, back on January 31 Newbould J. held that the respondents had not delivered the ordered accounting and directed them to do so. They have not done so. Moreover, it is not for the applicants to explain the meaning of an order of this Court; that job falls to the judges of this Court. When Walton raised this point at a recent hearing before me, I informed her that a full accounting would involve explaining what had happened to every penny of the money invested by Dr. Bernstein with the respondents. That has not occurred, and that most serious failure by the respondents weighs heavily in considering what part, if any, of the net proceeds of the sale from the Gerrard Street Property should be made available to them for their personal use or benefit.[^36]

[Emphasis in original]

As I have found above, and will discuss further below, the respondents still have not provided the ordered accounting.

[190] Finally, on this point, in his order dated November 1, 2013 [reasons reported November 5, 2013], Newbould J. directed the respondents to pay the inspector's fees. They failed to do so. In a March 21, 2014 order, Newbould J. directed the inspector to examine the respondents about their non-payment of fees. The inspector commenced his examination of Norma Walton on April 11, 2014. Prior to the examination, Ms. Walton had not produced documentation relating to her financial situation; at the examination Ms. Walton gave numerous undertakings to produce such documentation. As of the date of the inspector's fifth report (July 1, 2014), Ms. Walton had fulfilled or partially fulfilled eight of the 39 undertakings given at her examination. According to the inspector, the remaining 31 undertakings remained entirely unsatisfied, including the important undertaking to provide copies of bank statements relating to the Walton Schedule C companies. In its fifth report, the inspector stated that Ms. Walton had advised she would answer the balance of her undertakings once she had filed her evidence for the July 16 hearing. At the hearing, I inquired whether Ms. Walton had delivered those outstanding undertaking answers. She had not.

E. The charts attached to the June 21, 2014 Norma Walton affidavit

[191] In paras. 10 through to 14 of her June 21, 2014 affidavit, Norma Walton attempted to account for the $23.68 million in net [page519] transfers from Schedule B companies to the Rose & Thistle Group and, in para. 49(l) of her factum, Ms. Walton argued that "everything that was transferred from the jointly owned properties to Rose and Thistle had been accounted for as monies used by Rose and Thistle to purchase, renovate or manage the joint portfolio".

E.1 Construction work billed by Rose & Thistle

[192] The chart contained in paras. 11 and 13 of her affidavit, as well as Tab A to her factum (which I will call the "reconciliation chart"), recorded that $8.5 million of construction work had been performed by Rose & Thistle for Schedule B companies between January 2011 and February 2012, specifically for the Spadina, Eglinton, Wynford and Atlantic properties. Ms. Walton stated that she had prepared the reconciliation chart with the assistance of Mr. Bucci, the CFO of Rose & Thistle; she did not explain why Mr. Bucci had failed to provide any evidence in this proceeding, especially evidence which would provide an accounting of the applicants' funds.

[193] Ms. Walton deposed that she was unable to complete the analysis for the construction work performed on projects after February 2012 because she was still awaiting the reports prepared by her cost consultants. That explanation made no sense and I do not accept it. As described above, the cost consultants simply relied upon accounting summaries provided to them by Rose & Thistle. Put another way, the cost consultants merely used information already in the possession of Rose & Thistle to prepare their reports. It therefore makes no sense that Rose & Thistle would be unable to use information already in its possession to explain the total amount of construction costs which it contended it had incurred on behalf of the Schedule B companies.

[194] In her factum, Ms. Walton argued that Rose & Thistle was entitled to up to an additional $17.070 million for construction costs based on the cost consulting reports.[^37] I give no credence whatsoever to that argument. On the contrary, I found earlier in these reasons that the respondents had failed to account for and to justify the amount of the construction costs invoiced by Rose & Thistle to the Schedule B companies. [page520]

E.2 Management fees

[195] Ms. Walton explained that $1.183 million of the net transfer could be explained by management fees which Rose & Thistle had billed to the Schedule B companies. Earlier in these reasons, I accepted the reconciliation between the inspector and the respondents of $1 million in management fees.

E.3 Property maintenance costs

[196] Ms. Walton's reconciliation chart also recorded $2.58 million in property maintenance costs performed by Rose & Thistle. In the supplement to its fifth report, the inspector stated:

Ms. Walton's chart includes property maintenance fees charged to the Properties. The Inspector understands that these costs represent costs incurred by Rose & Thistle on behalf of the [Schedule B] Companies with respect to maintenance of the various Properties. The Inspector has not been provided with back-up documentation in respect of these fees.

I find that the respondents have not established, on a balance of probabilities, that they incurred such maintenance costs on behalf of Schedule B companies.

E.4 Deposits paid by Rose & Thistle for Schedule B properties

[197] The reconciliation chart also recorded $6.657 million in deposits paid by Rose & Thistle for the purchase of Schedule B properties. The inspector, in the supplement to its fifth report, stated:

The Inspector understands that in some cases Dr. Bernstein funded the deposits by payments directly into the Rose & Thistle account. Accordingly, Ms. Walton appears to state that the Waltons funded their share of deposits on some properties by drawing funds out of other [Schedule B] Companies. These transfers do not appear to represent payment for services rendered by R&T because all such services appeared to be shown elsewhere on Ms. Walton's chart.

Put simply, Ms. Walton's chart, if correct, appears to indicate that Dr. Bernstein funded his share of the listed deposits directly and the Walton's share of those deposits indirectly (since the Waltons used funds that Dr. Bernstein had previously contributed to another company).[^38]

[198] Let me express my profound displeasure and frustration at the way the Waltons' "evidence" on this point was [page521] developed. Last year, the Waltons were ordered to provide a full accounting of the funds advanced by Dr. Bernstein. They failed to do so, as was found by both Newbould J. and myself in earlier reasons. Yet, in her June 26, 2014 affidavit and her factum filed July 15, 2014, Ms. Walton, for the first time, argued, through her reconciliation chart, that Rose & Thistle had paid for $6.657 million in deposits for Schedule B properties for which accounting recognition previously had not been given. That spawned a flurry of responding submissions from other parties on the point, both before and after the hearing, ultimately culminating with Ms. Walton massaging a reply chart put in by the applicants (Mr. Reitan's Schedule "E") to contend that the Waltons in fact had injected $8.933 million in equity into the Schedule B companies, an assertion for which the Waltons had adduced no concrete, forensically verifiable evidence!

[199] That is no way in which to perform an accounting.

[200] Since last October, the Waltons have been subject to an order of this court requiring them to account. For eight months, they ignored that order. Frankly, what appears on Ms. Walton's reconciliation chart should have been put before the inspector last October so that proper consideration could have been given to the arguments set out in it. I am thoroughly unimpressed by Ms. Walton's last-minute effort to "jam through" an accounting. Her breach of the previous accounting order, together with the last-minute nature of her accounting attempt, combine to justify a high degree of skepticism towards the arguments embedded in the reconciliation chart.

[201] Returning to the property purchase deposits, I would observe that the "backup" Ms. Walton provided for these deposits at Exhibit B to her June 26, 2014 affidavit in large part consisted of Rose & Thistle bank account statements, certain entries on which bore handwritten asterisks, unaccompanied by any other explanation. I infer that the asterisked entries corresponded with the deposits recorded on Schedule A to her factum. Her Exhibit B also contained copies of a number of Rose & Thistle cheques, only some of which seemed to have anything to do with deposits for purchases of land. However, Ms. Walton failed to show how those payments made by Rose & Thistle were recorded on the books and records of Rose & Thistle and the relevant Schedule B company, a most material omission in her argument.

[202] In any event, I do not accept Ms. Walton's argument on this point. In Appendix E to its fourth report, the inspector reported that for the period under review it had identified [page522] $78.42 million in transfers from Schedule B companies to Rose & Thistle and $54.739 million in transfers from Rose & Thistle to Schedule B companies, for a net transfer of $23.68 million from Schedule B companies to Rose & Thistle. Ms. Walton contended, in her July 15, 2014 factum, that the $23.68 million in net transfers from Schedule B companies should be reduced by, or could be partially accounted for by, $6.657 million in deposits made by Rose & Thistle in respect of Schedule B properties. According to her reconciliation chart, those deposits spanned the period from September 2010 (Eglinton) to April 2013 (620 Richmond). Had Rose & Thistle transferred to Schedule B companies funds for deposits on Schedule B properties -- whether Bernstein funds or non-Bernstein funds -- one reasonably would expect that those deposits would have been taken into account in the transfers from Rose & Thistle to Schedule B previously reported by the inspector because the books and records of Rose & Thistle would have recorded such inter-company transfers. To take them into account again, as Ms. Walton seemed to argue, would amount to double-counting or, as put by the inspector in the supplement to his fifth report, it would mean that "Dr. Bernstein funded his share of the listed deposits directly and the Walton's share of those deposits indirectly (since the Waltons used funds that Dr. Bernstein had previously contributed to another company)". In sum, I do not accept Ms. Walton's submission that deposits of $6.657 million should be recognized to reduce the net transfer amount due from Rose & Thistle to the Schedule B companies as found by the inspector.

E.5 Equity withdrawals

[203] The reconciliation chart also recorded $3.615 million representing a December 2011 and June 2012 "Dr. Bernstein purchase from Walton in the schedule B" (Tisdale and 875 Queen Street East) of $1.4 million and $2.215 million respectively. Ms. Walton deposed that those amounts related to Dr. Bernstein "buying into a company after we had already owned the company for a period of time". That "earned equity", according to Ms. Walton, further reduced the net transfers from Schedule B companies to Rose & Thistle. I do not accept Ms. Walton's submission on that point. I will turn now to the respondents' "earned equity" argument in which two properties figured prominently -- the property at 875/887 Queen Street East held by Red Door Developments Inc. and Red Door Lands Inc. (which I discussed earlier in the context of [page523] 44 Park Lane Circle), as well as the Tisdale Mews property at 78 Tisdale Avenue.

875/887 Queen Street East

[204] In section VI.E of these reasons, I rejected Ms. Walton's argument that she had been entitled to withdraw $2.32 million in "earned equity" from funds advanced by Dr. Bernstein for 875/887 Queen Street East and, instead, found that the Waltons had misappropriated to their own personal use on June 25, 2012 funds advanced by Dr. Bernstein to acquire their personal residence at 44 Park Lane Circle and, by so doing, Norma and Ron Walton had deceived Dr. Bernstein and engaged in fraud.

78 Tisdale Avenue

[205] In his third report dated January 15, 2014, the inspector set out the explanation it received from Ms. Walton for the Tisdale transaction:

In the case of Tisdale, Ms. Walton purchased the property for approximately $1.4 million. Rose & Thistle performed development work on the property before Dr. Bernstein invested in it. In the relevant agreement between the parties dated January 11, 2012 . . . Dr. Bernstein bought 50% of the shares of Tisdale based on an agreed-upon value of approximately $6.7 million. Ms. Walton therefore had one half of that amount, approximately $3.35 million in equity in Tisdale immediately after Dr. Bernstein's investment. Rose & Thistle delivered an invoice to Tisdale dated January 1, 2012 . . . that purported to charge fees to Tisdale in the amount of approximately $4.4 million. Ms. Walton subsequently advised the Inspector that the purpose of the transaction was to effectively adjust her equity to draw out the increase in value between the time she purchased the company and Dr. Bernstein's buy-in. An adjustment to Ms. Walton's equity account on the books of the company has been recommended by the company's external accountant. The Inspector questioned the propriety of Rose & Thistle delivering an invoice purportedly charging fees as a mechanism to reflect a distribution of equity to a shareholder. Upon being challenged by the Inspector, Ms. Walton reversed the invoice and an increase was recorded to Ms. Walton's equity on the balance sheet adding approximately $4.4 million as a fair market value adjustment. The Inspector understands that Ms. Walton relies upon this increase in her equity account as a basis to explain several expenses that she caused Tisdale to pay. The Inspector notes the paragraph 13 of the agreement between the parties provides that equity is to be distributed to the shareholders only after the property is developed and sold.

[206] I do not accept Ms. Walton's explanation that she was entitled to treat funds advanced by Dr. Bernstein for Tisdale as a return of equity to her. Again, the agreement the Waltons signed with Dr. Bernstein did not permit such conduct. Section 7(a) stated that Dr. Bernstein would provide $1.48 million of his [page524] 50 per cent share of the joint $3.342 million equity investment upon signing, while s. 7(b) stated that "Walton has already provided the bulk of their equity and they will provide another $191,000 in a timely manner as required as the Project is completed". Section 13 did not permit the payment out of capital until the project was "substantially completed". Consequently, the Waltons' extraction of some of the funds advanced by Dr. Bernstein on the basis that they were entitled to a return of capital or payment out of their equity was in breach of their clear contractual obligations to Dr. Bernstein. They had no right to do so.

[207] Further, as in the case of 875/887 Queen Street East, the Waltons did not inform Dr. Bernstein that they intended to treat some of his equity injection as a return of capital to them.[^39] By failing to so inform Dr. Bernstein, at a time when they represented to Dr. Bernstein that no capital would be withdrawn until the substantial completion of the project, the Waltons deceived and defrauded Dr. Bernstein.

Comments by Froese on equity contributions

[208] In its report, Froese stated:

Based on information attached to each Agreement, over the period from 2010 to 2013, expected funding available at the date of purchase of the Bernstein properties exceeded the funds required to purchase the properties by approximately $55.5 million. That is, the pro forma information showed that there was significant excess funding available to commence work on the projects. As well, Walton was to initially advance approximately $14.5 million as compared to the $75.2 million to be advanced by Dr. Bernstein as an equity investment (plus mortgage financing for certain properties).

The co-mingling of funds through the Rose & Thistle clearing account resulted in a portion of the $55.5 million of excess funding at the date of purchase to carry the properties without further funding requests of the shareholders, and also without the immediate need for Walton contributions.

As previously noted, the agreements between Dr. Bernstein and the Waltons contained clauses which provided that the Schedule B company would "only be used to purchase, renovate and construct, and sell" the specified property or "such other matters solely relating to the Project and the Property". While Froese's comments about the comingling of funds reflected a theoretical view about how funds could be used, they ignored the specific [page525] provisions in each of the agreements between Bernstein and the Waltons about how the funds had to be used.

[209] Froese also stated:

This analysis supports the position of Norma Walton that Dr. Bernstein expected, or reasonably should have expected, there to be a significant disparity in the initial investment in the Bernstein properties, with Walton to fund future costs required to complete each project.

With respect, such an assertion fell outside the proper scope of the opinions which Froese was in a position to express, especially because there was no evidence to support such an assertion.

E.6 Conclusion

[210] In conclusion, I find that the reconciliation chart filed by Ms. Walton did not assist her in accounting for the net transfers from the Schedule B companies to Rose & Thistle. At the end of the day, the respondents have only justified an adjustment of $1 million to the inspector's net transfer figure based upon the reconciliation of management fees reached with the inspector.

F. It was the receivership which caused the applicants financial harm

[211] On several occasions during this proceeding, Ms. Walton has contended that it was the applicants' decision to seek the appointment of receiver which caused them financial harm. She argued that had the applicants allowed the Waltons to deal with the portfolio, everyone would have been financially happy. In her June 21, 2014 affidavit, Ms. Walton again stated that a valuation of the portfolio of Schedule B properties the respondents had commissioned from Colliers right after the receivership order was made showed an appraised value of the portfolio of $328.34 million. That appraisal was not placed before me in evidence; I am unable to comment upon it.

[212] Moreover, Ms. Walton's submission on this point ignored the simple fact that it was the conduct of the respondents in breaching the agreements by comingling funds and applying some of the applicants' funds for unintended purposes, including self-dealing in favour of the respondents' personal interests, that lies at the root of the current situation. The receivership order was designed to mitigate the harm caused by the respondents' wrongful conduct. [page526]

IX. Analysis: Overview

[213] I intend to proceed with the analysis of the parties' claims by considering the groups or packages of relief sought by them. The relief sought by the applicants has evolved since the service of their initial February notice of motion. Much of the relief requested by the applicants at the July hearing originated in their consolidated notice of cross-motion/notice of motion dated February 14, 2014, which was originally returnable on March 5, 2014. For a variety of reasons, that hearing was adjourned until this past July. In their June 13, 2014 fresh as amended consolidated notice of motion, notice of cross-motion and notice of return of application, the applicants expanded the scope of the relief to include some not requested by the applicants in their initial February notice of motion.

[214] At the hearing, the applicants amended and expanded the relief sought in two further respects. First, the applicants advised that they had reached an understanding with the mortgagees of some of the Schedule C properties, as a result of which they were amending the relief requested in respect of those properties. Second, the applicants submitted a form of draft order which went through three iterations during the course of the hearing and which further expanded the relief they sought. Ms. Walton took issue with what she described as the "creeping" amendments the applicants sought to make to their claims.

X. Motion to amend the notice of application

[215] The applicants sought an order granting them leave to issue and serve the fresh as amended notice of application attached to their June 13, 2014 consolidated notice of motion. Ms. Walton submitted that it was inappropriate for Dr. Bernstein to continually seek to amend his application to claim ever-expanding relief. She submitted that apart from any "ancillary matters" flowing from the orders last year appointing the inspector and the manager, Dr. Bernstein should not be entitled to assert additional claims. Ms. Walton submitted:

This is Bernstein's seventh proposed amendment to the application. He is not entitled to continue to amend the application every time he decides he wants something further from Walton. The proper route for him now is to come back through the receivership for anything he wants within the receivership, and to launch a statement of claim if he intends to sue for damages after the Schedule B accounting is completed. It is improper form to claim damages through the seventh amendment to an application when the relief originally sought has been finally determined. [page527]

[216] I do not accept Ms. Walton's submission. The respondents have ignored the October 2013 order to account. As a result, the inspector had to expand the scope of its work, and only through the inspector's investigations did a clearer -- albeit still incomplete -- picture emerge about how the respondents had dealt with the applicants' funds.

[217] As I read the applicants' proposed fresh as amended notice of application, they are making the amendments in light of the evidence which has emerged through the inspector's reports. That is a proper basis upon which to amend, and I therefore grant the applicants leave to issue and serve their proposed fresh as amended notice of application.

XI. Analysis: Relief Involving Schedule B Companies/ Properties and the Individual Respondents

A. The relief sought

The applicants

[218] Both the applicants and Ms. Walton sought relief in respect of the Schedule B companies and properties. On their part, the applicants sought the following relief in their notice of motion in respect of the Schedule B companies and against the individual respondents:

(i) an order that the issued and outstanding shares in the Schedule "B" companies held by the Waltons be cancelled where shareholder equity had not been contributed by them;

(ii) an order for restitution and repayment to the applicants by the respondents in the amount of $78,420,418 for breach of contract, unlawful misappropriation and unjust enrichment;

(iii) an order for restitution and repayment by the respondents to the applicants and/or the Schedule B companies, as appropriate, in respect of the fees of Schonfeld Inc., in its capacity as inspector and manager in this proceeding, and of its counsel Goodmans LLP;

(iv) an interim order directing the respondents to disclose any agreements not heretofore disclosed to cross-collateralize any obligations of the Schedule B companies, the Schedule C properties or 44 Park Lane Circle, Toronto, Ontario; and

(v) an order that Schonfeld Inc. be appointed as receiver over the respondents Norma Walton and Ronauld Walton for the [page528] purpose of ensuring payment in accordance with any judgment of the court in this proceeding.

[219] In the third iteration of the draft judgment and order filed by the applicants at the July hearing, they sought orders granting the following additional relief:

(i) the continuation of the orders of Newbould J. dated October 4, 2013, October 25, 2013, November 5, 2013, December 18, 2013 and March 21, 2014, except as modified by any order made by these reasons;

(ii) holding the respondents jointly and severally liable for restitution payable to the applicants in the amount of $78,420,418 for all funds diverted from the Schedule B companies and payment to the applicants of the balance of those funds not otherwise recovered by the applicants from the sale of the Schedule B properties;

(iii) indemnification by the respondents of the Schedule B companies and applicants for all principal amounts, plus interest, costs and penalties incurred by or on behalf of the Schedule B companies, in respect of unauthorized mortgages registered on the properties, with that amount to be fixed;

(iv) indemnification by the respondents of the Schedule B companies and applicants for all amounts due and owing to creditors and lien claimants of the Schedule B properties and companies, including costs, penalties and interest of the Schedule B companies, with that amount to be fixed;

(v) declaring that the applicants had priority over any unauthorized interests in the Schedule B companies; and

(vi) allowing the applicants to elect to treat funds advanced by them to the Schedule B companies, or any of them, as shareholder loans for the purposes of enforcement of their remedies.

Ms. Walton

[220] On her part, Ms. Walton requested orders containing the following relief:

(i) a declaration that the respondents had provided a full accounting of Dr. Bernstein's invested funds in the Schedule B companies in full satisfaction of the October 25, 2013 order; [page529]

(ii) removal of the Rose & Thistle Group Ltd. from the operation of paras. 3(b) and (c) of the October 25, 2013 order; and

(iii) a determination by the court, by way of the trial of an issue, of the amount of money due from the Schedule B companies to the Rose & Thistle Group Ltd. for work done and not yet paid and an order that the amount due be paid from sale proceeds of the Schedule B properties.

B. Analysis

B.1 Accounting

[221] I have found above that the respondents have not provided the accounting mandated by this court's October 25, 2013 order.

[222] Ms. Walton sought to remove from the ambit of the October 25 order the respondent, the Rose & Thistle Group Ltd., on the basis that the company was owned jointly by her husband and herself and "no longer has any banking relationship with the Bernstein-Walton portfolio of properties". Since the respondents have failed to provide the court-ordered accounting, and since Rose & Thistle was the conduit through which funds of the applicants were directed by the Waltons from the Schedule B companies to Schedule C companies, there is no basis to remove Rose & Thistle from the operation of paras. 3(b) and (c) of the October 25, 2013 order. On the contrary, it is necessary that Rose & Thistle remain subject to that order so that tracing efforts can continue.

[223] Accordingly, I dismiss those portions of Ms. Walton's motion.

[224] The applicants' request for an order that the respondents disclose any cross-collateralization agreements not already disclosed is necessary for the proper performance of the accounting order, and I grant it.

B.2 Transfers between Rose & Thistle and Schedule B companies

[225] I have found that of the $23.6 million in net transfers from Schedule B companies to Rose & Thistle identified by the inspector, the respondents had only justified a reduction of $1 million in that number by reason of management fees billed. It follows that I dismiss Ms. Walton's audacious -- but forensically unsupported -- request for a trial of an issue of the amount of money the Schedule B companies owed to Rose & Thistle. While in sports the best defence sometimes might be a [page530] good offence, this strategy does not work when parties who are subject to a court accounting order fail to comply with it. Ms. Walton seems to fail to appreciate the gravity of the situation in which she and her husband find themselves.

B.3 Restitution and damages

[226] The applicants sought an order for restitution and repayment to them by the respondents in the amount of $78,420,418 for breach of contract, unlawful misappropriation and unjust enrichment, which they translated in their draft order into a request for an order that the respondents were jointly and severally liable for restitution payable to the applicants in the amount of $78,420,418 for all funds diverted from the Schedule B companies and that they pay to the applicants the balance of those funds not otherwise recovered by the applicants from the sale of the Schedule B properties

[227] I am not prepared to grant such an order at this time because I am not satisfied that adequate argument was placed before the court on this issue. Applying the different measures of damages for breach of contract, unlawful misappropriation and unjust enrichment could result in quite different damage awards on the facts of this case. I think the court requires more assistance on this point than was provided by the parties at this hearing, and I therefore defer to a later date consideration of this part of the applicants' claim. For the same reason, I am not prepared to grant, at this time, the applicants' related request for an order that the respondents indemnify the Schedule B companies and the applicants for all amounts due and owing to creditors and lien claimants of the Schedule B properties and companies, with that amount to be fixed.

[228] However, I think the evidence justifies granting two forms of relief which relate to the entitlement as between the parties to sale proceeds.

[229] First, the applicants sought an order that the issued and outstanding shares in the Schedule B companies held by the respondents be cancelled where they had not contributed shareholder equity. Ms. Walton submitted that the respondents had paid $100 for their shares in the Schedule B companies,[^40] as a result of which she contended that the Waltons were entitled to an accounting of moneys from the joint portfolio in the same way [page531] that Dr. Bernstein was.[^41] Ms. Walton further submitted that Dr. Bernstein's claim to cancel the shares owned by the Waltons in Schedule B companies was premature because the inspector had not yet provided confirmation of the equity invested in the Schedule B companies by Ms. Walton. Accordingly, Ms. Walton submitted that there was no basis for the cancellation of the shares.

[230] I reject Ms. Walton's argument. The various agreements Dr. Bernstein entered into with the Waltons stipulated that shares in a Schedule B company would be issued on the basis of one share for each dollar of equity invested. For example, the October 4, 2012 agreement concerning Fraser Properties Corp. and Fraser Lands Ltd. (7-15 and 30 Fraser Avenue) provided that 16,572,063 shares would be issued to each of Dr. Bernstein and the Waltons, with s. 7 stating that the $33,144,124 of equity would be paid at stipulated times, with the Waltons' $14,107,062 payable "to the Company in a timely manner as required as the Project is completed". The payment of $100 by the Waltons to the Fraser companies would not support the issuance to them of 16,572,063 shares in those companies, but only the issuance of 100 shares. I therefore order that the Waltons' shareholder interests in each of the Schedule B companies be calculated by reference to the equity contribution provisions contained in each Schedule B company agreement and that the shares issued to the Waltons be limited to those for which they have actually paid; any other shares should be cancelled. From the evidence filed to date, that will result in de minimis shareholdings of the Waltons in most Schedule B companies and therefore limit -- quite properly -- their ability to participate in any distributions from those companies once all creditors have been paid.

[231] Second, I grant the applicants' request for an order appointing Schonfeld Inc. as receiver over the respondents Norma Walton and Ronauld Walton, but with a somewhat different scope than that requested. The net worth statement filed by Ms. Walton on these motions represented that the only source of net worth available to the Waltons consisted of their equity in Schedule B and C properties and companies. Ms. Walton made it quite clear in her evidence that she wished to dispose of the [page532] Schedule C properties in order to prefer her non-Bernstein creditors. In section XII.D below, I find that the applicants have demonstrated a strong prima facie claim of unjust enrichment against the Waltons in respect of certain Schedule C properties up to a possible claim of $22.6 million. Until proper consideration can be given to those claims and the respective interests of all creditors of the Waltons, it is necessary to ensure that the Waltons cannot dispose of their Schedule C property. A receiver is required for that purpose.

[232] The Waltons have not complied with this court's accounting order and, as I noted earlier in these reasons, Ms. Walton failed to answer key undertakings about her personal finances, including failing to provide copies of her bank account statements. It is necessary to appoint a receiver over the books and records of the Waltons, both to preserve information about their financial affairs and to make such information available to their creditors for tracing purposes who are faced with sorting out the mess created by the Waltons.

[233] Consequently, I appoint Schonfeld Inc. as receiver of all the property of the Waltons, of whatever kind, as well as of their books and records. However, the appointment of Schonfeld shall be on an interim basis only. In my view, a court officer, such as a receiver, should only be allowed to wear so many hats; otherwise, unworkable conflicts of interest inevitably arise. Dr. Bernstein is not the only creditor of the Waltons. Accordingly, I order that Schonfeld Inc. be replaced as receiver of the Waltons within 120 days of the date of this order but, until then, Schonfeld Inc. can exercise the full powers of such a receiver.

B.4 Unauthorized mortgages indemnification request

[234] In respect of the applicants' request for orders requiring the respondents to indemnify them and the Schedule B companies in respect of "unauthorized mortgages", insufficient specific evidence and argument was provided on this point to enable its consideration.

B.5 Priority of claims/shareholder loans

[235] I am not prepared to grant, at this point of time, the applicants' request for an order that they have priority over "any unauthorized interests in the Schedule B Companies". The request was too vague, and the evidence and argument on this point was not adequately developed. As well, it was not clear whether any person who might be claiming such an "unauthorized interest" had been given notice of the motion. [page533]

[236] The applicants sought an order that they be permitted to elect to treat funds advanced by them to the Schedule B companies as shareholder loans for the purposes of enforcement of their remedies. Again, this point was not adequately developed. There were references in the evidence to the applicants already having converted their equity advances into shareholder loans. If that in fact occurred, the need for a court order is not apparent. In any event, the relief sought might affect the priority of claims by creditors of Schedule B companies, and that issue is better left to the claims process administered by the manager.

B.6 Inspector's fees

[237] Previous orders of this court required the Waltons to pay for the costs of the inspector. Save for a partial payment from the proceeds of the recent sale of one Schedule C property, the Waltons have failed to do so. The applicants have been left to fund the activities of the inspector, a position they should not have been put in. Accordingly, I grant an order for restitution and repayment by the respondents to the applicants and/or the Schedule B companies, as appropriate, in respect of the fees of Schonfeld Inc., in its capacity as inspector in this proceeding, and of its counsel Goodmans LLP.

[238] As to the applicants' request for a similar order in respect of the fees of the manager and its counsel, I see no need to vary the terms of the appointment order at this time. The applicants may renew their request, if the need arises, as the realization process conducted by the manager comes closer to completion.

B.7 Continuation of prior orders of this court

[239] Finally, for the sake of clarity, the orders of Newbould J. dated October 4, 2013, October 25, 2013, November 5, 2013, December 18, 2013 and March 21, 2014 shall continue in full force and effect, except as otherwise modified by the specific orders made in these reasons.

XII. Analysis: Relief Involving Schedule C Companies and Properties

A. The relief sought

Applicants

[240] In their notice of motion, the applicants sought the

following relief in respect of Schedule C properties: [page534]

(i) an order that the orders of this court dated December 18, 2013 and March 21, 2014 be amended to add all the properties listed in Schedule C of the notice of motion;

(ii) an interim certificate of pending litigation and a blanket charge respecting the property municipally known as 44 Park Lane Circle, Toronto, Ontario and the Schedule C properties in which the respondents have an interest;

(iii) a declaration that the property at 44 Park Lane Circle, Toronto, Ontario and the Schedule C properties in which the respondents have an interest and/or the proceeds from the sale of 44 Park Lane Circle, Toronto, Ontario and/or the Schedule C properties in which the respondents have an interest are subject to a constructive and/or resulting trust from the date of purchase in favour of the applicants;

(iv) an order tracing the funds from the applicants to and through the accounts of the Schedule B companies, the accounts of Rose & Thistle, the personal accounts of Norma and Ronauld Walton, the trust account of Walton Advocates, the trust account of Devry Smith Frank LLP, former real estate counsel for the Waltons, and otherwise into 44 Park Lane Circle, Toronto, Ontario and the Schedule C properties;

(v) an order declaring 44 Park Lane Circle, Toronto, Ontario and the Schedule C properties in which the respondents have an interest as the proceeds of the funds from the applicants;

(vi) an order that the applicants may seize and sell 44 Park Lane Circle, Toronto, Ontario and the Schedule C properties in which the respondents have an interest, subject to the enforceable rights of prior registered charges and liens on the properties;

(vii) an order that Schonfeld Inc. be appointed as manager of the Schedule C properties in which the respondents have an interest for the purposes of the relief sought; and

(viii) an order that the respondents are jointly and severally liable for restitution in the amount of $1,518,750, plus interest at the rate set out in the relevant mortgage documents and costs on a full indemnity basis as set out in the relevant mortgage documents, in respect of the mortgage discharge from title of the property at 232 Galloway Road and payment of that amount to the applicants. [page535]

[241] In the third iteration of the draft judgment and order submitted by the applicants at the July hearing, the applicants requested the following additional relief:

(i) the amendment of the orders of this court dated December 18, 2013 and March 21, 2014 nunc pro tunc to include 26 specified Schedule C properties, save and except those properties that have been sold pursuant to an order of this court;

(ii) a declaration that the respondents had not transferred the following Schedule C properties to arm's-length third parties, but had retained an interest in 346C and D Jarvis Street, 14/17 Montcrest, 19 Tennis Crescent and 646 Broadview Avenue;

(iii) an order specifying that in respect of any Schedule C property for which leave is granted to issue a certificate of pending litigation, a charge would be registered on title to those properties in favour of the applicants, in subsequent priority to any security interests, trusts, liens, charges and encumbrances, statutory or otherwise, in favour of any person validly registered on title as of the date of the order;

(iv) an order that the certificates of pending litigation and charges sought did not apply to ten Schedule C properties in respect of which the applicants had reached an understanding with the mortgagees of those properties;

(v) the imposition of a constructive trust on the following Schedule C properties in favour of the applicants as at the date of purchase of the properties for the proportionate share of the purchase price that the following amounts represented and for any proportionate share of the increase in value to the date of realization:

(a) 2454 Bayview Avenue: $1.6 million;

(b) 346E Jarvis Street: $937,000;

(c) 14 College Street: $1,314,225;

(d) 26 Gerrard Street: $371,200;

(e) 2 Kelvin Avenue: $221,000;

(f) 3270 American Drive: $1,032,000; and

(g) 44 Park Lane Circle: $2,337,850, [page536]

save and except those properties which had been sold pursuant to court order, and that the constructive trust so ordered in favour of the applicants was subordinate only to bona fide secured creditors with valid registered security interests on title of the property;

(vi) the respondents and the Schedule C companies/properties in which the respondents had any interest as at July 16, 2014, the date of the hearing, were jointly and severally liable for all losses suffered by the applicants in respect of funds advanced by the applicants to the Schedule B companies;

(vii) the respondents and the Schedule C companies/properties in which the respondents currently have an interest are jointly and severally liable in the amount of $23,680,852 for net proceeds diverted from the Schedule B companies and received by the Schedule C companies/properties and shall pay to the applicants the balance of those funds not otherwise recovered by the applicants from the sale of the Schedule B properties.

[242] As mentioned, at the July hearing, the applicants advised they were amending the relief sought in respect of certain Schedule C properties based upon an understanding they had reached with the mortgagees of those properties: 19 Tennis Crescent; 1 William Morgan Drive; 44 Park Lane Circle; 346 Jarvis Street, Unit 2; 346E Jarvis Street; 777 St. Clarens Avenue; 260 Emerson Avenue; 3270 American Drive; 2454 Bayview Avenue; and 30 and 30A Hazelton Avenue. Under the agreement, the applicants would not pursue against those properties their requests for (i) certificates of pending litigation; (ii) the power to seize and sell those properties; and (iii) the appointment of Schonfeld Inc. as manager of those properties. In return, the draft provisions stipulated that the mortgagees would provide written notice to the applicants forthwith upon receiving from the owner of the property a letter of intent, agreement of purchase and sale or a request to deliver a discharge statement of any applicable mortgages. The proceeds of the sale of any property sold by the owner and approved by the court first would be paid to the mortgagee in such amounts necessary to satisfy all claims that the mortgagee might have on the property pursuant to the terms of the mortgage, with the balance to be paid to the manager to be held in trust pending further order of the court. Where a mortgagee sold the property, the proceeds would be paid out to satisfy any encumbrances, usual costs and [page537] expenses of the sale and all claims of the mortgagee, with the balance of the net proceeds of sale to be paid to the manager.

Respondents

[243] Norma Walton sought orders containing the following relief in respect of the Schedule C properties:

(i) the vacating of the second order of March 21, 2014, in its entirety, and the order of December 18, 2013, as they related to any restrictions being placed on the respondents' ability to sell their Schedule C properties;

(ii) in the alternative, an order approving the sales of the following Schedule C properties in accordance with the agreements of purchase and sale attached to Ms. Walton's motion record: 2 Kelvin Avenue; 24 Cecil Street; 66 Gerrard Street East; 2454 Bayview Avenue; 3270 American Drive; 30 Hazelton Avenue; and 30A Hazelton Avenue;

(iii) payment of the net proceeds from sale of those Schedule C properties to the shareholders of the respondents and the creditors of the respondents, as the respondents may direct, until those shareholders and creditors are paid in full;

(iv) if the court considered it to be helpful, an order that Froese Forensic Partners Ltd. be appointed as monitor to review the Schedule C properties and to provide oversight of the sales process on behalf of the court, with its costs to be paid by the respondents from sale proceeds; and

(v) an order amending Schedule "C" in this proceeding nunc pro tunc to remove from Schedule "C" the following properties: 620 Richmond Street West; 875 Queen Street East; 3775 St. Clair Ave. E.; 14/17 Montcrest; 185 Davenport Road; 1246 Yonge Street; 17 Yorkville; 19 Tennis Crescent; 646 Broadview Avenue; 3 Post Road; and 2 Park Lane.

B. Which properties fall into the category of "Schedule C properties"?

[244] The applicants sought relief against properties in which they alleged the Waltons had an interest based on the respondents' representation that those properties were Rose & Thistle projects on the website of that company. Disputes arose as to whether the Waltons had interests in certain properties. Before proceeding with the analysis of the requests for substantive relief in respect of Schedule C properties, an identification of [page538] the properties against which relief should be granted must first be made.

B.1 Properties in respect of which there is no dispute

[245] In their initial February notice of motion, the applicants sought relief against 25 Schedule C properties. Three of those properties were sold pursuant to court order: 65 Front Street East; 26 Gerrard Street East; and 14 College Street. The Waltons were permitted by court order to refinance 66 Gerrard Street East.

[246] There was no dispute that the respondents possessed an interest in the following unsold Schedule C properties: 3270 American Drive, Mississauga; 2 Kelvin Avenue; 346 Jarvis Street, Suites A, B and E; 1 William Morgan Drive; 324 Prince Edward Drive; 24 Cecil Street; 30 and 30A Hazelton Avenue; 777 St. Clarens Avenue; 252 Carlton Street and 478 Parliament Street; 66 Gerrard Street East; 2454 Bayview Avenue; 319-321 Carlaw; 0 Luttrell Ave.; 260 Emerson Avenue; and 44 Park Lane Circle.

B.2 Removal of 16 Montcrest Blvd. and 346D Jarvis Street from the applicants' request

[247] By letter dated July 25, 2014, counsel advised that the applicants would not be pursuing relief against 16 Montcrest Blvd. and 346D Jarvis Street: the applicants had agreed to discharge the certificates of pending litigation registered against those properties pursuant to my interim order.

B.3 No evidence of Walton interest in property

[248] At the hearing, the applicants advised that to date they had not discovered any interest held by the Waltons in the following properties which had been identified by them as Schedule C properties: 3775 St. Clair Avenue East; 185 Davenport Road; 1246 Yonge Street; 17 Yorkville; 3 Post Road; and 2 Park Lane Circle Road.

B.4 Disputed properties

[249] The applicants sought relief against the following three Schedule C properties in respect of which disputes existed as to whether the Waltons continued to possess an interest in them: 346 Jarvis Street, Unit C; 646 Broadview Avenue; and 19 Tennis Crescent. [page539]

19 Tennis Crescent

[250] The title register for 19 Tennis Crescent listed 1673883 Ontario Inc. as the owner, as a result of a May 22, 2009 transfer of title from the Waltons and Carreiros. The corporate profile for 1673883 Ontario Inc. showed Ron Walton as a director and officer. Although it appears that he was the first director at the time of incorporation in September 2005, Ron Walton has continued as a director and officer notwithstanding the subsequent appointment of other directors in 2011.

[251] Ms. Walton deposed that in 2011, they sold the holding company which owned that property and "if the purchasers have not changed the corporate records to remove my husband as a Director, that is news to me. Neither of us has had any ownership or management of that property since it was sold." That assertion is very difficult to reconcile with the inclusion of the 19 Tennis Crescent property on the December 2013 list of "Our Investment Portfolio" shown on the Rose & Thistle website.

646 Broadview Inc.

[252] 646 Broadview Inc. is shown as the registered owner of 646 Broadview Avenue as a result of an April 29, 2014 transfer from 1636483 Ontario Inc. I accept the evidence of Mr. Reitan that the Waltons enjoyed functional control over 1636483 Ontario,[^42] but I have no evidence that they continued to possess an interest in the property following the April 2014 sale.

346 Jarvis Street, Unit C

[253] The parcel register for 346 Jarvis Street, Unit C, lists Carlos and Colette Carreiro as owners. Carlos Carreiro worked for Rose & Thistle for a period of time and was a co-director with Ms. Walton in a few companies -- Urban Amish Interiors Inc., Loft Raum Inc. and Carcol. Mr. Carreiro filed an affidavit in support of the respondents on these motions in which he listed his place of residence as 18 Sword Street, Toronto.

[254] In his affidavit, Mr. Carreiro did not address the issue of the ownership of 346 Jarvis Street, Unit C. The parcel registers showed that the Carreiros acquired the unit on November 5, 2010 from the Waltons' company, 1780355 Ontario Inc., for the consideration of $666,514. A charge was then registered against title that same day in favour of the Equitable Trust Company in [page540] the amount of $559,872. On her cross-examination, Ms. Walton undertook to produce any document showing the consideration paid for 346C Jarvis.[^43] She did not fulfill that undertaking, merely stating that "I have produced all documentation regarding that purchase evidencing the monies paid."

Order regarding disputed properties

[255] The evidence concerning these three properties disclosed that the Waltons at one point owned or controlled the properties and it was unclear whether the properties subsequently were transferred to bona fide arm's-length purchasers for value. I therefore intend to include the three properties within the ambit of the orders I make below concerning "Schedule C properties", but I direct the manager to give notice of this order to the registered owners of those three properties within 15 days of the date of this order. If, within 60 days of the date of this order, the registered owner of a property provides the manager with evidence that it acquired the properties from the Waltons for fair market value and that the Waltons no longer have any kind of interest in the property, then the property shall be released from the operation of this order.

B.5 Conclusion

[256] For the balance of these reasons, any reference to "Schedule C properties" means those properties which are listed on Appendix "A" to these reasons. As set out below, I will grant relief against those Schedule C properties. As well, I vary the orders of this court made December 18, 2013 and March 21, 2014 to include all such Schedule C properties.

C. Specific constructive trust claims

C.1 Governing legal principles

[257] Unjust enrichment claims have three elements: (i) an enrichment of the defendant; (ii) a corresponding deprivation of the plaintiff; and (iii) the absence of a juristic reason for the enrichment. Enrichment involves the conferral of a tangible benefit -- a payment or an avoidance of an expense -- on the defendant. In Garland v. Consumer Gas Co., the Supreme Court of Canada set down a two-part approach to considering the element of want of juristic reason. First, the plaintiff must show that no juristic reason from an established category exists [page541] to deny recovery. The established categories which can constitute juristic reasons include a contract, a disposition of law, a donative intent and other valid common law, equitable or statutory obligations. If there is no juristic reason from an established category, then the plaintiff has made out a prima facie case under the juristic reason component of the analysis. The prima facie case is rebuttable, however, where the defendant can show that there is another reason to deny recovery. Here, the court can look to all of the circumstances of the transaction in order to determine whether there is another reason to deny recovery. Courts generally have regard to two factors: the reasonable expectations of the parties and public policy considerations.[^44]

[258] The constructive trust is a remedial device available where an unjust enrichment has occurred and also as a remedy for oppressive conduct.[^45] The remedial constructive trust is a broad and flexible equitable tool used to determine beneficial entitlement to property. In nature it is a proprietary remedy: where a claimant can demonstrate a link or causal connection between his or her contributions and the acquisition, preservation, maintenance or improvement of the disputed property, a share of the property proportionate to the unjust enrichment can be impressed with a constructive trust in his or her favour. The claimant must demonstrate a "sufficiently substantial and direct" link, a "causal connection", or a "nexus" between the plaintiff's contributions and the property which is the subject matter of the trust. The primary focus is on whether the contributions have a "clear proprietary relationship". The plaintiff must also establish that a monetary award would be insufficient in the circumstances, and in this regard the court may take into account the probability of recovery, as well as whether there is a reason to grant the plaintiff the additional rights that flow from the recognition of property rights. The extent of the constructive trust interest should be proportionate to the claimant's contributions.[^46]

[259] Tracing is an identification process which can assist in ascertaining property over which a constructive trust may be imposed or property which represents the proceeds of other [page542] property subject to a constructive trust. Tracing is the process by which the plaintiff traces what has happened to his property, identifies the persons who have handled or received it, and justifies his claim that the money which they handled or received can properly be regarded as representing his property.[^47] Accordingly, a claimant must demonstrate that the assets being sought in the hands of the recipient are either the very assets in which the claimant asserts a proprietary right or a substitute for them.[^48] If there is confusion in the tracing, the onus is on the fiduciary to identify his own funds.[^49]

[260] Finally, a remedial constructive trust is a discretionary remedy. Two consequences flow from that. First, a constructive trust will not be imposed where an alternative, simpler remedy is available and effective. Second, a constructive trust will not be imposed without taking into account the interests of others who may be affected by the granting of the remedy. On this point, it is well established that the beneficiary of a constructive trust cannot assert its proprietary interest against a person who came into possession of the property bona fide and for value.[^50]

C.2 Application to the facts

[261] The applicants rested their claim for the imposition of constructive trusts on two main grounds. First, the applicants submitted that the respondents had received benefits from the diversion of the applicants' equity contributions by acquiring value in 44 Park Lane Circle and the Schedule C properties without contributing their own funds. According to the applicants, the respondents' benefits corresponded directly with the applicants' deprivation and no juristic reason existed for the respondents' retention of the benefits conferred by the applicants.

[262] Second, the applicants submitted that the Waltons were directors of each of the Schedule B companies, managed those companies' day-to-day affairs and exercised complete control [page543] over the funds invested by the applicants in the Schedule B companies. Under such circumstances, according to the applicants, the Waltons owed fiduciary duties to the Schedule B corporations to use the funds invested by the applicants in the best interests of the corporations. Since those were closely held, specific-purpose corporations, their best interests were shaped, in large part, by the terms of the agreements between the applicants and respondents. According to the applicants, the diversion of funds out of the Schedule B company by the Waltons for their own purposes was a breach of their fiduciary duties and constituted conduct which was oppressive to the applicants' interests as shareholders.

[263] Ms. Walton opposed this part of the applicants' claim on several grounds. First, Ms. Walton submitted that before the applicants could seek such relief against the Schedule C properties, including 44 Park Lane Circle, they should name as parties the companies which owned those properties and serve the companies' shareholders, mortgagees and lien holders. I disagree. The Waltons own or control the companies which own the Schedule C properties, save perhaps for three properties for which I have made special provision in section X1.B.4. So, the companies are on notice. The applicants do not seek to prime existing interests registered against title to the Schedule C properties. As to the preferred shareholders, many obviously have had notice of these motions since they filed affidavits and statements in support of the Waltons and the DeJongs made submissions opposing the relief sought by the applicants. More importantly, I regard the issue of the priority of claims against a specific Schedule C property as an issue for determination in the receivership which I intend to order over those properties.

[264] I accept the arguments made by the applicants. The Waltons breached their contractual obligations to Dr. Bernstein and their fiduciary duties to the Schedule B companies by pooling the funds advanced by the applicants to the Schedule B companies with Rose & Thistle and Schedule C company funds. I have accepted, in large part, the tracing analysis performed by the inspector and I have found that in the instances identified by the inspector, in a brief period of time the Waltons directed the transfer of funds advanced by the applicants from a Schedule B company to a Walton-owned Schedule C company, through Rose & Thistle, and the Schedule C company used those funds in respect of a Schedule C property. I specifically found that the following amounts of the [page544] applicants' funds were used to purchase or discharge encumbrances on Schedule C properties:

(i) 14 College Street: $1,314,225;

(ii) 3270 American Drive: $1.032 million;

(iii) 2454 Bayview: $1.6 million;

(iv) 346E Jarvis St.: $937,000;

(v) 44 Park Lane Circle: $2.5 million;

(vi) 2 Kelvin Street: $221,000;

(vii) 0 Trent: $152,900; and

(viii) 26 Gerrard Street: $371,200.

The use by the Waltons of those funds of the applicants to acquire those Schedule C properties or to discharge registered encumbrances resulted in the unjust enrichment of the Waltons. There was absolutely no juristic reason for that use of the applicants' funds. On the contrary, such use of the funds breached the Waltons' contractual obligations to the applicants; in some cases, I have found it amounted to fraud.

[265] The DeJongs argued that Dr. Bernstein did not suffer any detriment in respect of his funds used to acquire 3270 American Drive because in return for advancing those funds to a Schedule B company -- West Mall Holdings -- Dr. Bernstein got what he had bargained for -- issued shares of West Mall Holdings with its property encumbered as represented in the capital requirements terms of his agreement with the Waltons. I do not accept that submission. Dr. Bernstein did not get what he bargained for, which was the obligation of the Waltons only to use those funds for the development of the West Mall Holdings property. Instead of so doing, the Waltons stripped the funds out of West Mall Holdings to acquire 3270 American Drive, an unauthorized use of the funds which benefitted them.

[266] The DeJongs also opposed the granting of a constructive trust over 3270 American Drive on the basis that they were bona fide purchasers without notice of Dr. Bernstein's claim. I do not accept that submission. In January 2013, the DeJongs advanced funds to United Empire Lands to purchase commons shares in the company. The Waltons transferred the applicants' funds to United Empire Lands after the DeJongs had acquired their shares in United Empire Lands and just three days before that company acquired 3270 American Drive, with the result that the applicants' constructive trust interest in the property [page545] arose after, not before, the DeJongs purchased their shares in United Empire Lands.

[267] Consequently, I grant constructive trusts in favour of the applicants in respect of each of the Schedule C properties listed above for the proportionate share of the purchase price that those amounts represented as at the date of purchase of the properties and for any proportionate share of the increase in value to the date of realization, except that no such trust shall attach to a property already sold and where no proceeds of sale remain in the hands of the manager. I do not consider any other remedy to afford an effective alternative in the circumstances; the evidence disclosed that the potentially exigible assets of the Waltons were limited to their interests in the Schedule C companies and related properties.

D. Claims for a receivership order and certificates of pending litigation

[268] The state of the evidence at this point of time does not permit the making of constructive trust orders for fixed amounts in respect of other Schedule C properties. The inspector's tracing analysis was limited to the properties above. However, two aspects of the evidence support making a finding, which I do, that the applicants have demonstrated a strong prima facie case of unjust enrichment of up to a possible claim of $22.6 million against the Waltons in respect of the other Schedule C properties.

[269] The first aspect of the evidence consists of the inspector's findings, which I accepted, that during the period from October 2010 to October 2013, the Waltons directed the transfer of $23.6 million (net) from the Schedule B company accounts to a bank account belonging to Rose & Thistle and transfers of $25.4 million (net) from the Rose & Thistle account to companies that they owned without the applicants -- the companies which owned the Schedule C properties. The second aspect is the inspector's conclusion, which I accepted, that the Waltons used new equity invested in, and mortgage amounts advanced to, the Schedule B companies by the applicants to fund the ongoing operations of Rose & Thistle and the Schedule C companies, and that the applicants' investment in the Schedule B companies was a major source of funds for the Walton Schedule C properties/companies.

[270] That evidence is sufficient to support an order, which I make, granting leave to the applicants to issue certificates of pending litigation against all Schedule C properties. Under s. 103 of the Courts of Justice Act, R.S.O. 1990, c. C.43, a certificate of [page546] pending litigation may be issued by the court where a proceeding is commenced in which an interest in land is in question. A court must exercise its discretion by looking at all of the relevant matters between the parties in determining whether or not to issue the certificate. If reasonable claims are put forward in an action for a constructive trust 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