Building Solutions International Inc. v. Benazzi, 2014 ONSC 4715

Building Solutions International Inc. and Bowmore Investments Limited v. William Benazzi, WB Capital Management Inc. and WB Mortgage Investment Corporation

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

Building Solutions International Inc. and Bowmore Investments Limited

Plaintiffs

• and -

William Benazzi, WB Capital Management Inc. and WB Mortgage Investment Corporation

Defendants

Douglas Christie,

for the Plaintiffs

Jordan D. Sobel,

for the Defendants

HEARD: September 8, 2014

F.L. myers J.

REASONS FOR decision

Introduction

1On this motion for summary judgment, the plaintiffs seek damages in the sum of $1,074,716 for breach of contract and breach of fiduciary duty.

2The plaintiffs did not seriously press a cause of action against the defendant WB Mortgage Investment Corporation. It had no involvement in the issues. Accordingly, the plaintiffs’ action against WB Mortgage Investment Corporation is dismissed.

3The defendant, WB Capital Management Inc. (“CapitalCo”), concedes that it owes the sum of $25,000 to the plaintiff, Building Solutions International Inc. (“Building Solutions”). Judgment will go in favour of that plaintiff against the remaining corporate defendant.

4The bulk of the case turns upon whether the sum of approximately $1,050,000 invested by the plaintiff, Bowmore Investments Limited (“Bowmore”) is due and owing to it CapitalCo and whether the personal defendant, William Benazzi, is personally liable for the sums claimed by both plaintiffs against CapitalCo.

The Facts

5Bowmore is owned by Roberto Persichilli (“Benny”). The plaintiff, Building Solutions, is owned by Benny’s daughter, Benedetta Persichilli (“Bena”). It is common ground that the father, Benny, is a successful business man in Jamaica and is the source of all of the funds held in a number of companies that make up his corporate structure, including the plaintiffs.

6The defendant, William Benazzi, is a Certified General Accountant and the sole officer and director of CapitalCo. He has known Bena for over 25 years. They dated for over two years during and after university. After they had stopped seeing each other, Bena approached Mr. Benazzi to provide accounting and consulting services to the family business. Thereafter, for over 20 years, Mr. Benazzi has provided substantial ongoing professional services to Benny, his family, and their businesses.

7The relationships among the various parties have not always been easy. Benny has a business partner who is apparently quite difficult. Prior to the breakdown of the relationship leading to this action, Mr. Benazzi has twice before decided to terminate his relationship with Benny and his businesses. Each time, he gave into entreaties by Bena and agreed to continue to serve. Under cross-examination, he confirmed that he did so in order to continue the relationship and to help Benny.

8Over the years, Mr. Benazzi provided professional accounting services to Benny and Bena personally. He prepares and files their personal income tax returns, for example. In 2002, he was very involved in assisting Benny to create a tax efficient corporate structure in order to purchase property in Italy. The plaintiff, Bowmore, was one of the companies incorporated on the advice of Mr. Benazzi at that time. Since then, while Mr. Benazzi was not Bowmore’s principal accountant, he was Benny’s principal accountant and a close advisor. At times they traveled abroad together on business. Mr. Benazzi ate meals with the family. He spoke to Bena on a daily basis.

9The Persichilli's were demanding clients. They were demanding of Mr. Benazzi’s time on short notice and they did not always act in accordance with the tax structures Mr. Benazzi had set up for them.. At times, for example, Benny provided funds to his children in Canada directly. On one such instance, Mr. Benazzi became quite upset and required that the transaction be reversed so that the money could be flowed through Bowmore, a BVI corporation, in order to increase flexibility and avoid inefficient Canadian tax liability in respect of a transfer directly from father to child. Mr. Benazzi knew that Bowmore is a vehicle for Benny and the family for tax purposes. It was of Mr. Benazzi’s creation. He oversaw the movement of funds into and out of Canada though Bowmore. He was clearly a trusted advisor for two decades.

10Commencing in August, 2007, Mr. Benazzi decided to go into the mortgage lending business. He formed the two corporate defendants for that purpose. He sought to raise a pool of $25 million under the terms of an Offering Memorandum to capitalize the proposed vehicle. That effort failed. Nevertheless, having determined that some of his clients, including Benny and Bena, had funds to invest, Mr. Benazzi determined to use CapitalCo as a vehicle to run an investment business. Over the course of the next two years, CapitalCo executed investment agreements with the plaintiffs and Bena, personally, in which the funds which are the subject matter of this action were advanced to CapitalCo to be invested at its sole and unfettered discretion.

11The investment agreements provided for a fixed interest rate of return and provided that the investors could redeem their investments on 61 months’ notice. (I note that the initial investment agreement entered into by Bena had a shorter redemption period. That investment has been redeemed previously and does not form part of this action.)

12Although Mr. Benazzi was contemplating investing in mortgages, nothing in the investment agreements executed by CapitalCo limited the discretion of CapitalCo to that form of investment. Each of the agreements contains the following clauses:

The Client hereby appoints [CapitalCo] as the Investment Manager of the Account to manage the assets of the Account in its sole discretion.

1. THE AUTHORIZATION OF DUTIES OF THE INVESTMENT MANAGER

[CapitalCo] is specifically authorized and agrees to carry out the following duties as Investment Manager of the Account:

(i) Deal with matters affecting the Account that come to [CapitalCo’s] attention, such as maturities, redemptions, subscriptions or conversion privileges, mergers and corporate reorganizations, changes in corporate capitalization, rights issues, or any other issues affecting any assets of the Account in [CapitalCo’s] absolute discretion;

(ii) Do all acts and things necessary and to execute and deliver all documents, including instruments of transfer and conveyance, necessary or advisable in carrying out its role as Investment Manager. In carrying out its duties and responsibilities under this Agreement, [CapitalCo] acknowledges that it will exercise such diligence, competence and skill as may be reasonably expected of a reputable, experienced and competent professional Investment Manager. Notwithstanding anything else to the contrary contained herein, the Client understands and agrees that [CapitalCo] shall at all times act in accordance with its best judgment, consistent with the Client’s investment objectives contained in the Account Opening Form. In exercising its discretion hereunder, [CapitalCo] acknowledges that the Investment objectives of the Client are as defined in the Account Opening Form governing the asset mix and investment selection for the Client. The Client may from time to time amend the objectives shown therein by giving [CapitalCo] notice in writing of the amendment required in receiving acknowledgment of such advise [sic] from [CapitalCo]. [CapitalCo] shall not be in any way responsible for decisions made in the absence of such written advice. The Client agrees to advise [CapitalCo] of any restrictions that may be applicable to investments for the Client’s Account.

(vii) Ensure that all property held in the Account, including all cash, shall be kept separate and distinct from [CapitalCo’s] own assets and shall keep a separate record for each Account.

13No account opening forms were obtained from the plaintiffs. Moreover, all funds invested with CapitalCo were directed by Mr. Benazzi to be sent to a lawyer, Derek Sorrenti, to be held in trust pending investment.

14In cross-examination, Mr. Benazzi said that Mr. Sorrenti was not part of CapitalCo. CapitalCo had no bank account. Rather, it used its lawyer’s trust account to give clients confidence that funds would be held by a lawyer and because lawyers are not required to register as mortgage brokers under the provisions of the Mortgage Brokerages, Lenders and Administrators Act, 2006, S.O. 2006, c.29. CapitalCo was Mr. Sorrenti’s client.

15Mr. Benazzi confirmed in cross-examination that he did not instruct Mr. Sorrenti to segregate all funds received by each of CapitalCo’s investors individually. Rather, all were co-mingled and mortgages were obtained by lending from the co-mingled pool. CapitalCo did not allocate loans among its investors. Mr. Benazzi viewed all of his investors’ funds as having been pooled to decrease the risk to any one investor. CapitalCo kept no separate records concerning the loans being made out of Mr. Sorrenti’s trust account and it has no records of the mortgages held by CapitalCo. Mr. Benazzi thought that Mr. Sorrenti was performing this function so CapitalCo did not do so. It also did not get copies of relevant documents from its lawyer.

16Ultimately, the relationship between Mr. Benazzi and Mr. Sorrenti broke down. Mr. Benazzi says that he cannot obtain an accounting from Mr. Sorrenti. He does not know how much money is being held by Mr. Sorrenti, how much was invested in mortgages, or how much may just be gone. The defendants have advanced a third party claim against Mr. Sorrenti. Although Mr. Sorrenti has delivered a Statement of Defence to the plaintiffs’ claim under the provisions of the Rules, counsel for Mr. Sorrenti confirmed that he was taking no position in respect of this motion.

Fiduciary Duties

17Mr. Benazzi practised accounting through a corporation. Section 22 of the Certified General Accountants Act, 2010, S.O. 2010, c 6, Sch A, prevents the corporate veil from shielding Mr. Benazzi from his professional obligations. As one would expect, a CGA’s professional obligations include independence, competency and the avoidance of conflict of interest.

18The relationship between accountant and client is likely a fiduciary relationship per se. (See: Hodgkinson v. Simms et al., (1994) 1994 70 (SCC), 3 SCR 377, 415). If it is not a per se fiduciary relationship, then the court will look to the indica of a fiduciary relationship including: vulnerability, trust, confidence reliance, and, most important, the degree of discretion exercised by the advisor. It is apparent that the plaintiffs and Benny are not at the vulnerable end of the sophistication spectrum. However, in relation to their dealings with Mr. Benazzi in whom they placed trust, confidence and friendship and had a personal relationship for over 20 years, they were vulnerable. They sought out Mr. Benazzi even after he had tried to end the relationship previously. In light of the relationship of trust that the parties had developed, Bena and Benny were willing to grant CapitalCo absolute discretion over $1 million. The money was Benny’s money being invested through his vehicle Bowmore as was known to all throughout (and $25,000 through Bena’s company Building Solutions). Benny and Bena were willing to grant CapitalCo absolute discretion over their funds because they knew that it was their accountant and close advisor Mr. Benazzi that who would be the human actor exercising the discretion over the investments. In the circumstances, I have little difficulty finding Mr. Benazzi to have been a fiduciary to Benny, Bena and the businesses under their control including the plaintiffs - see Zavidinovich v. Mehta et al, (1999) 2112 (ONCA) and Hunt et al. v. TD Securities Inc., (2003) 2003 3649 (ON CA), OJ No. 3245 (ONCA).

19Moreover, it seems to me that having agreed to exercise absolute discretion over the investment of Benny’s funds, Mr. Benazzi was undertaking implicitly the duty of loyalty as set out in Hodgkinson, supra, and Galambos v. Perez, 2009 SCC 48, at pp. 66, 71, 77-78. The fact that he did not bother obtaining “know-your-client” account opening forms to assess the plaintiffs’ risk tolerance bolsters the degree of responsibility that Mr. Benazzi undertook.

20The plaintiffs allege that the defendants owed them a fiduciary duty to require them to seek independent legal advice. Mr. Benazzi told Bena that if she had any questions concerning the draft investment agreements, she could speak to Mr. Sorrenti, who was their author on behalf of CapitalCo. This was plainly unsatisfactory. As a fiduciary, Mr. Benazzi owed a duty of loyalty to act solely in the best interests of the beneficiaries; a duty forsaking self-interest. What can be said of a professional accountant who advises a foreign businessman to invest money with the accountant’s own company which is carrying on business in breach of the Securities Act, R.S.O. 1990, c. S.5? CapitalCo is not registered as a dealer in securities or as a securities advisor under section 25 of the statute. CapitalCo relies upon subsection 35(4) which exempts from registration as a dealer, anyone trading in mortgages who is exempt from the requirement to be licensed under the Mortgage Brokers, Lenders and Administrators Act, 2006. Mr. Sorrenti, a lawyer, is exempt under that statute as noted above. However, CapitalCo is not a lawyer. Its discretion was not limited to mortgages. Moreover, even if CapitalCo was exempt from registration as an investment dealer under subsection 35(4) of the Securities Act, it has no exemption from the registration requirement of subsection 25(3) as an investment advisor. Mr. Benazzi as an officer, director and employee of CapitalCo is not a registered under the statute. The upshot of CapitalCo not being registered under the Securities Act is that it followed none of the requirements applicable to a securities industry participant. That is, as noted above, it did not follow expected “know-your-client” rules. It did not have safeguards in place to protect its clients’ funds. It did not keep track of its clients’ money or the investments into which they were placed. It did not fulfill the standards of education, competency and integrity required of securities market participants in Ontario. The fact that CapitalCo has not been able to induce Mr. Sorrenti to account for funds that he is allegedly holding on CapitalCo’s behalf for more than the past two years, bespeaks the inappropriateness of the investment methodology undertaken by Mr. Benazzi and CapitalCo.

21The failure of Mr. Benazzi to clearly advise Benny, as his accountant, that CapitalCo was not a proper securities advisor in Ontario and an investment with it would lack the protections of Ontario’s securities regulatory laws was a conflict of interest and a breach of his duty of loyalty. Moreover, having attempted to raise a mortgage fund under an Offering Memorandum appropriately, it is apparent that Mr. Benazzi was aware of the applicable securities regulatory regime and chose to ignore it in creating his own pooled fund in CapitalCo subsequently.

22One may question whether referring the clients for independent legal advice would have had any effect. The clients would have been told that under the investment agreements, they were giving absolute discretion to their close and trusted advisor. The investment agreements failed to disclose that what was truly contemplated was that the clients’ money was to be placed in a pool with the money of others to be invested in mortgages. Even if not all lawyers would necessarily have picked up on the need for Securities Act compliance in a discretionary investment advisor scenario, just stating the concept of pooling funds immediately begs questions as to safeguards, accounting issues, competency to run such an endeavor – all the issues that subsequently have been exposed as lacking in Mr. Benazzi and CapitalCo. Mr. Benazzi failed to advise his clients of the lack of safety, and the illegality, of the investment mechanism that he proposed. He was replicating his mortgage pool idea but without complying with the Securities Act and without the multiplicity of safeguards that permission to participate in the capital markets in Ontario provides. The clients should have been told by a competent advisor that one should not invest money in Ontario in an unregistered pool and that the structure itself was illegal. By not giving his clients fair and full advice as to whether to participate in the investments at all due to his conflict of interest and, alternatively, by not recognizing his conflict and sending the clients for independent advice on full, frank and complete documentation, the appropriateness of restitutionary damages, by way of a full refund, becomes clear.

23CapitalCo. is jointly liable as it participated fully and knowingly in Mr. Benazzi’s breaches of fiduciary duty.

Defenses

24The defenses offered by CapitalCo and Mr. Benazzi are both technical and inapt. First, the defendants’ counsel argues that the case is not fit for summary judgment because Mr. Sorrenti’s evidence is not before the court. He says that absent Mr. Sorrenti’s accounting records and internal documentation, there is a lack of clarity as to what the defendant instructed Mr. Sorrenti to do and what Mr. Sorrenti actually did with the funds received. For example, the defendants submit that if they asked Mr. Sorrenti to segregate each of the clients’ investments, then the defendants would have fulfilled their duties to the plaintiffs. This is not so. CapitalCo owed a duty to each plaintiff. If CapitalCo instructed its lawyer to segregate funds, for example, and he did not do so, CapitalCo would remain in breach of contract vis-à-vis the plaintiffs. Moreover, Mr. Benazzi was clear in cross-examination that while he does not know if the funds of CapitalCo were intermingled by Mr. Sorrenti with funds of his other clients, his instructions to Mr. Sorrenti were to treat the funds of all of his clients as a pool. Accordingly, it is the defendants’ own evidence that CapitalCo was engaged in an inappropriate securities business and failed to meet its obligations to its investors. How Sorrenti actually treated funds that he received is not relevant at all to the issues of breach of duties by the defendants. The defendants’ counsel concedes that there is no further evidence available or required in order to resolve the issues as presented.

25The defendants also assert that the Bowmore was dissolved in its home jurisdiction during the time at which its investments were made. It therefore lacked capacity to enter into the investment agreements at the time they were entered into. Moreover, the funds invested in the name of Bowmore were provided by other corporate vehicles owned or controlled Benny. Therefore, the defendants argue that all that occurred is that Benny’s other companies gave money to Mr. Sorrenti and those companies should be looking to Mr. Sorrenti for the return of their funds.

26It defies common sense and the entire evidentiary record to suggest that Benny’s other companies were doing business directly with Mr. Sorrenti in advancing funds to him. The funds were being advanced by Benny, through his various companies, to fund Bowmore’s and Business Solution’s investments in CapitalCo under the investment agreements. There was no misunderstanding by any of the parties. Bowmore and Business Solutions were legally the investors under the investment agreements and they are properly the parties seeking recovery. If they have obligations to account to Benny or other companies in his group, that is between them and is no business of the defendants. The use of Bowmore to fund Benny’s Canadian endeavours had been endorsed by Mr. Benazzi who had taken tax positions for Benny and Bena based on the appropriateness of doing so. At all times Mr. Benazzi knew that he was dealing with Benny as the ultimate beneficial owner of the funds, his client, and the ultimate decision-maker.

27In any event, Bowmore was revived prior to the commencement of this litigation. Absent proof to the contrary, foreign law will be deemed to be the same as the law of Ontario. Under subsection 241(5) of the Business Corporations Act, R.S.O. 1990, c. B.16, a dissolved corporation, once revived, is deemed for all purposes to have never been dissolved. There is no evidence of any intervening third party rights that would limit this outcome.

28The defendants did not obtain the evidence of Mr. Sorrenti for the purposes of this motion under rule 39. It cannot now rely upon its own failure to do so if it thought that Mr. Sorrenti’s evidence would have provided it with a defence. However, I do not see a basis upon which Mr. Sorrenti’s evidence would be relevant to the issues between the plaintiffs and the defendants.

29Mr. Christie, for the plaintiffs, confirmed that if the plaintiffs are entitled to judgment against the defendants, William Benazzi and CapitalCo, in the amounts of their investments, they would waive any further claim for general and punitive damages for breach of fiduciary duty.

30Accordingly, this is an appropriate case in which to grant summary judgment in the agreed upon liquidated quantums set out below.

Breach of Contract by CapitalCo

31CapitalCo says that it is not contractually bound to allow Bowmore to redeem its investments until 61 months has run from its request(s). The time has not yet expired. The plaintiffs argue that the investment agreements were void due to the failure of CapitalCo to obtain investor information forms from them. I have reviewed the case law upon which the plaintiffs rely in support of this argument (Triathlon Leasing Inc. v. Bryan Easton Logging Ltd. et al., 2000 22759 (ONSC) and am unable to conclude that the investment agreements were mere agreements to agree.

32The plaintiffs are entitled to relief from the agreements as they were illegal per se at the outset. (See Beer et al. v. Townsgate I Limited et al., 1997 976 (ON CA), [1997] OJ No 4276) There was no sense in which the agreements were intended to transition to lawfulness by the parties. Moreover, the failure to segregate was a material breach of the agreements which entitled the plaintiffs to terminate them. In light of the holding of breach of fiduciary duties above, the only practical difference that the contract issue might raise is one as to the timing and rate of interest. However, in my view, in light of the restitutionary basis for the award, the investments should be treated as refunded from the date made. Therefore, interest should flow on each advance under the Courts of Justice Act from the date of each advance respectively

Disposition

33Accordingly, the plaintiff, Building Solutions International Inc., is entitled to judgment against William Benazzi and CapitalCo in the amount of $25,000 plus interest, as set out above. The plaintiff, Bowmore, is entitled to judgment against William Benazzi and CapitalCo, in the amount of $1,049,716 plus interest, in the amount set out above. Both judgments against the defendants are on a joint and several basis.

34The fixing of costs is a discretionary decision under section 131 of the Courts of Justice Act, RSO 1990, c. C.43. The discretion is generally to be exercised in accordance with the factors listed in rule 57.01 of the Rules of Civil Procedure. These include the principle of indemnity for the successful party, the expectations of the unsuccessful party, the amounts claimed and recovered, and the complexity of the issues. The court must consider as well the application of the principle of proportionality. Overall, the court is required to consider what is fair and reasonable in fixing costs in light of, among other things, the goal of fostering access to justice. Boucher v. Public Accountants Council (Ontario) 2004 14579 (ONCA)

35In this case, the defendants embarked upon an illegal course of conduct and abused their fiduciary relationship with long-standing clients. It is consistent with the authorities that costs in such cases be awarded on a substantial indemnity basis. The factual underpinnings of the motion spanned a lengthy period of time and were quite complex. The hourly rates claimed by the plaintiffs’ counsel are appropriate. The amount of time delineated in the plaintiffs’ costs outline is quite reasonable bearing in mind the number of steps required, the examinations undertaken, and the inability of a fiduciary to account for its beneficiaries’ funds. In all, it seems fair, just and reasonable to fix costs, inclusive of fees, disbursements and HST, payable by the defendants, William Benazzi and CapitalCo, jointly and severally in favour of the plaintiffs in the amount of $130,000 as claimed.

36The defendants asked for costs in relation to the proceeding dismissed against WB Mortgage Investment Corporation. I do not believe that the naming of the additional corporate defendant caused any extra costs of any significance to be incurred. Moreover, the defendants’ counsel did not bring a costs outline to the motion. I agree with the decision of Kiteley J. in Fran Elgin Mills 90 Inc. v. Romandale Farms Limited et al., 2014 ONSC 4715 and would have denied the successful defendant of a significant portion of any costs to which it might otherwise have been entitled in view of its breach of Rule 57.01 (6).

37There is no need for counsel to appear before the Court next Monday as discussed at the hearing. Whether the third party claim proceeds is between the defendants and Mr. Sorrenti and is not a part of this motion.

F.L. Myers J.