SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-12-454013

DATE: 20140122

RE: Glenn Bridgmohan, Bridgmount Development & Construction Ltd. o/a BDC, Natasha Bridgmohan and Angela Ramsuchit, Plaintiffs

– AND –

2218667 Ontario Limited o/a Xtreme Construction, Khalid Mughal o/a Xtreme Construction, Khalid Mughal and Aleea Baccus, Defendants

BEFORE: Justice E.M. Morgan

COUNSEL: Jordan D. Sobel, for the Plaintiffs

HEARD: January 21, 2014

ENDORSEMENT

[1] This was a half-day undefended trial brought by the owners of two properties that hired a contractor to perform renovations on the properties.

I. The breach of contract claim

[2] The properties are located at 191 Edenbridge Drive, Toronto and 153 Willis Road, Woodbridge, respectively. The former was at all material times owned by the Plaintiff Glenn Bridgmohan in trust for his company, the Plaintiff BDC, and the latter was at the material time owned by the Plaintiff Angela Ramsuchit in trust for her daughter and son in law, the Plaintiffs Natasha Bridgmohan and Glenn Bridgmohan.

[3] The Plaintiffs contracted with an entity named Xtreme Construction (“Xtreme”). According to the Plaintiffs’ undefended pleading and the contractual documents and correspondence in the record, at times Xtreme was the operating name of the corporate Defendant 2218667 Ontario Limited, and at other times it was the business name used by the principals of that company, the Defendants Khalid Mughal and Aleea Baccus. The project manager for contractor these renovation projects was Khalid Mughal, while the accounts and financial person for the contractor was Aleea Baccus.

[4] Given that Xtreme appears to be an unincorporated entity or business name at times used by each of the other Defendants, all of the Defendants are jointly and severally liable on the two contracts at issue here.

[5] Xtreme provided an itemized quote to the Plaintiffs for work on the 191 Edenbridge Drive property (“Edenbridge”) that included supplying labour and materials for renovations to the existing building and a 4000 square foot addition. The contract price for Edenbridge was $495,917.50 plus HST for a total of $559,256.78.

[6] The Plaintiffs made an initial payment to Xtreme for the Edenbridge project in the amount of $167,777.03 on September 30, 2011. This payment was made in accordance with the contract between them, which called for 30% of the contract price to be paid upon signing the Edenbridge contract.

[7] Xtreme also provided an itemized quote to the Plaintiffs for the work on the 13 Willis Road property (“Willis”) that included supplying labour and materials for renovations to the existing building. The contract price for Willis was 418,095.00 plus HST for a total of $472,447.35.

[8] The Plaintiffs made two payments to Xtreme for the Willis project, one in the amount of $75,000.00 on October 14, 2011 and the other in the amount of $38,985.00 on January 27, 2012, for a total of $113,985.00. These installments were staged payments made toward the overall contract price for the Willis project.

[9] The pleading and uncontroverted evidence of the Plaintiffs is that the work on the Edenbridge and Willis properties was never completed by Xtreme. Indeed, only a fraction of the work was completed on the properties, and a minimal amount of materials were supplied. The Defendants testified that the workmanship done by Xtreme was so substandard and shoddy on both projects that it had to be demolished and rebuilt by new contractors. The materials supplied by Xtreme were also substandard and those that were used in the work it completed were wasted due to the poor quality of the work. According to the testimony of Natasha Bridgmohan, much of the work performed by Xtreme was structurally dangerous and contrary to building regulations.

[10] Ms. Bridgmohan testified that by March 2012 it became obvious to the Plaintiffs that Xtreme and its principals were “in over their heads” and were incapable of performing as required and completing the work on the two properties. The Plaintiffs fired Xtreme from both projects at the same time in early March 2012. At that time, Khalid Mughal apparently agreed on behalf of Xtreme to refund the monies already paid by the Plaintiffs, and indicated that the Defendants needed six weeks in order to raise the funds.

[11] The Defendants clearly breached their two contracts with the Plaintiffs. The Plaintiffs have never been reimbursed the money that they paid to Xtreme under either of those contracts.

[12] The Plaintiffs retained two other contractors who have produced inspection reports with respect to the Willis property. The first report, by Castellini Homes Inc., indicates that it would cost $17,600 to repair the damage done to the Willis property by Xtreme’s poor workmanship, while the second report, by VisaVi Consulting & Management Ltd., indicates that it would cost $18,000 to repair the damage done to the Willis property. Natasha Bridgmohan testified that, in fact, the Plaintiffs spent much more than this amount in completing the work at Willis, and that Xtreme had seriously underestimated the cost of the overall project, but she did not have specific figures beyond the $18,000 evidenced in the VisaVi report.

[13] As for the Edenbridge project, Ms. Bridgmohan testified that the way the project was designed by Xtreme was so faulty that it had to be scrapped and an entirely different structure was built on the property. She indicated that the overall amount that the Plaintiffs spent was well beyond the Xtreme estimate and contract, but she had no specifics and in any case was forthright in stating that the Edenbridge project was so substantially different than that envisioned in the Xtreme contract that it was not really a comparable project.

II. The breach of trust claim

[14] The Plaintiffs plead that the funds paid to the Defendants in respect of the construction contracts for the two properties were to be held in trust pursuant to the Construction Lien Act, RSO 1990, c C.30 (the “CLA”). They therefore seek in paragraph 1(e) of the Statement of Claim a declaration that the failure to repay these funds constitutes a breach of trust.

[15] Section 8 of the CLA provides:

(1) All amounts,

(a) owing to a contractor or subcontractor, whether or not due or payable; or

(b) received by a contractor or subcontractor,

on account of the contract or subcontract price of an improvement constitute a trust fund for the benefit of the subcontractors and other persons who have supplied services or materials to the improvement who are owed amounts by the contractor or subcontractor. [emphasis added]

(2) The contractor or subcontractor is the trustee of the trust fund created by subsection (1) and the contractor or subcontractor shall not appropriate or convert any part of the fund to the contractor’s or subcontractor’s own use or to any use inconsistent with the trust until all subcontractors and other persons who supply services or materials to the improvement are paid all amounts related to the improvement owed to them by the contractor or subcontractor. [emphasis added]

[16] The Defendants’ inability to repay the funds advanced to them for the two projects may indicate that they misappropriated the funds, or may indicate that through mismanagement the money was simply wasted and lost. In any case, section 8(2) of the CLA specifies that there is only a breach of trust where it can be established that an appropriation of funds by the contractor took place prior to all subcontractors and suppliers to the project being paid in full. There is no indication in the record as to whether the subcontractors and suppliers have been paid all amounts related to the projects, and so a breach of trust as described in section 8(2) has not been established.

[17] Moreover, while funds paid to a contractor in Xtreme’s position under these contracts are trust funds under the CLA, section 8(1) makes it clear that the beneficiaries of that trust are the subcontractors and suppliers and not the owners that contracted with the general contractor. It is for those subcontractors and suppliers, not the owners, to bring a claim of breach of trust if they are unpaid. As indicated in Part I above, the Defendants are liable to the Plaintiffs for breach of contract. However, the trust provisions of the CLA do not apply to this breach.

III. The Bankruptcy and Insolvency Act claim

[18] The Plaintiffs also seek in paragraph 1(g) of the Statement of Claim a declaration that section 69.3(1) of the Bankruptcy and Insolvency Act, RSC 1985, c B-3, as amended (the “BIA”), will not operate so as to stay the action. By extension, the Plaintiffs submit that now that the matter has been tried, bankruptcy should also not operate to stay or discharge the judgment debt.

[19] Ms. Bridgmohan testified that while the Defendants have not commenced any bankruptcy proceedings or taken any steps under the BIA, Mr. Mughal has intimated to her that they might eventually do so. In those circumstances, counsel for the Plaintiff contends that a declaration that the debt will survive bankruptcy is imperative.

[20] The Court of Appeal held in 166404 Canada Inc. v Coulter, [1998] OJ No 1450 that in order for a judgment to survive bankruptcy of a defendant, the defendant must be found to have committed fraud while acting in a fiduciary capacity. As Sutherland J. found in Re Brant (1984), 52 CBR (NS) 317 (SCJ), this means that the claim would have to allege, and the court would have to find, that there was a fraud, false pretenses, or fraudulent misrepresentation made directly to the victim, or that a fiduciary misappropriated to him or herself the property of the beneficiary.

[21] The Plaintiffs’ claim for a declaration that a stay does not operate under s. 69.3(1) of the BIA is akin to a claim for a declaration that a debt survives the discharge of a bankrupt under subsections 178 (1) and (2) of the BIA. In addition to fraud and fraudulent misrepresentation, several examples of other debts that might survive a discharge are provided in Houlden and Morawetz, Bankruptcy and Insolvency Law of Canada (3rd edn.), at ch. H §22(4)(b). These include client funds diverted by a solicitor to himself, an employer’s funds misappropriated by an employee, a company’s funds diverted by an officer or director to herself, and, potentially, a partner who similarly diverts partnership funds.

[22] Since, as discussed in Part II above, the Defendants are not trustees for the Plaintiffs under the CLA or otherwise, these relationships are not analogous to the one in the case at bar. Even if the relationships were seen as analogous, however, in the present case fraud has not been pleaded or proved and misappropriation has not been shown.

[23] Here, the Defendants were described by Ms. Bridgmohan as having contracted “over their heads”. The record shows that they did substandard work and that they breached their contract with the Plaintiffs by not being capable of completing the work. The ample evidence of the Defendants’ incompetent management of their business speaks to a loss of the funds paid by the Plaintiffs, but not necessarily to the funds’ diversion or to the Defendants’ fraudulent intent.

[24] Perhaps more importantly, I am of the view that a court ought not make a ruling regarding a claim or judgment surviving bankruptcy in advance of any actual bankruptcy. A prior judgment in fraud may well have consequences under the BIA, but it is for the prior court to adjudicate the civil claim in fraud and for the bankruptcy court to adjudicate the consequences of that fraud in light of the bankruptcy. See Re Kemper (1961), 2 CBR (NS) 130 (Ont SC).

[25] This civil action has not proceeded in bankruptcy court. The Defendants’ bankruptcy at this point is only a hypothetical possibility. The case therefore does not present an opportunity for a declaration about how the monetary portion of the judgment is to be treated under the BIA. For that reason alone, the declaration sought by the Plaintiffs with respect to the debt surviving the Defendants’ possible future bankruptcy is not a form of relief that can be granted here.

IV. Disposition

[26] The undefended pleading and Plaintiffs’ testimony demonstrate that the Defendants are all jointly and severally liable on the contracts for the Edenbridge and Willis properties. The Plaintiffs shall have judgment for reimbursement of the funds paid on those contracts in the amount of $167,777.03 plus $113,985.00, and, in addition, for $18,000.00 for repair of the Willis property.

[27] The Plaintiffs shall therefore have judgment against the Defendants, jointly and severally, for breach of contract, in the total amount of $299,762.03.

[28] Plaintiffs’ counsel has requested costs of this action in the amount of just under $5,800 up until trial, plus another $1,800 for the half-day hearing including preparation time. Those amounts are reasonable, considering the factual and legal issues that had to be sorted out with respect to the two properties and the difficulties in finding and serving the Defendants.

[29] The Defendants shall pay costs to the Plaintiffs of $7,600.00, inclusive of disbursements and HST.

Morgan J.

Date: January 22, 2014