ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: CV-14-500254
DATE: 20140924
B E T W E E N :
JULIO ALVAREZ CRUZ
Applicant
– and –
GARY W. LUHOWY, THOMAS ALOJZ BERKY and ANNA DAPHNE BERKY
Respondents
Guillermo Schible
for the Applicant
Gary Luhowy
as interpleader
Brett Moldaver
For the Respondents Thomas Alojz Berky and Anna Daphne Berky
HEARD: SEPTEMBER 18, 2014
CHAPNIK J.:
[1] This matter involves a real estate transaction that closed on August 1, 2013 in reliance upon undertakings given by the parties’ real estate lawyers pertaining to various holdbacks. It is these holdbacks that now form the subject of this litigation.
overview
[2] On March 13, 2013, the applicant Julio Alvarez Cruz (Cruz) as vendor, entered into an Agreement of Purchase and Sale (the Agreement) with the respondent Thomas Berky, as purchaser, for the property known as 90 St. Hubert St. in Toronto, Ontario. To facilitate the closing of the transaction, the parties agreed upon three important holdbacks of the purchase funds as follows:
The purchaser respondent was entitled to hold back 5% of the purchase price, or $55,000 for a period of 45 days after closing to be held in trust by his solicitor, the respondent Gary W. Luhowy (Luhowy), and to be paid to the vendor upon expiry of the 45 day period provided no construction liens were registered against the property. (The construction lien holdback).
The parties further agreed that the applicant vendor’s lawyers would hold back a sum of $25,000 for the purchasers and release it to them if Luhowy did not receive written confirmation from the City that the building permit was “closed” or a clear unconditional final inspection report by noon on August 30, 2013. (The building permit holdback).
The purchasers would also hold back through their solicitor, the sum of $10,000 to be released to the vendor upon completion of certain listed items. In the event of disagreement on the status of completion of the said items, such matters would be referred to the project’s architect for determination. (The construction work holdback).
[3] Accordingly, Luhowy as lawyer for the purchasers now holds in trust $65,000, comprising the funds referable to the construction lien holdback and the construction work holdback. He brings an Interpleader motion in this application under rule 43 of the Rules for an order directing the payment of those funds into Court or as the Court directs. He also seeks costs. I will deal with his motion at the conclusion of these reasons.
Issue no. 1 – The construction lien holdback
[4] On July 31, 2013, prior to the closing, the respondent Luhowy executed a written Undertaking and Direction on behalf of his law firm Green & Luhowy LLP, which reads:
IN CONSIDERATION of and notwithstanding the closing of the above transaction, we hereby undertake as follows:
To hold back the sum of $55,000 and, upon expiry of the 45 Day Construction Lien Period commencing on the day immediately following completion, to forthwith forward same to the Seller or as it directs, provided there are no construction liens registered against the property.
[5] At the same time, Ludowy’s clients, the purchasers, that is, both Thomas and Anna Berky, executed a direction in writing stating:
AND WE IRREVOCABLY DIRECT GREEN & LUHOWY LLP to comply with the above undertaking.
[6] No liens were ever registered against the property. As a result, on or about September 18, 2013, vendor’s counsel sent an email to Luhowy demanding delivery of the $55,000 construction lien holdback to Cruz in accordance with Luhowy’s Undertaking and Direction.
[7] Luhowy states that his clients, the purchasers, instructed him not to release the construction lien holdback of $55,000 to the vendor, as there is some construction work on the property that needs to be addressed. Indeed, the purchasers recently commenced an action against Cruz in that regard. They take the position that this matter should be determined in the context of the newly commenced civil action with the monies held in court or an interest-bearing account, pending a determination of all issues on the merits. Cruz argues that this is a discreet, single issue which is clear on its face and which should be determined on its merits now.
[8] I agree with the vendor on this issue. The matter of the construction lien holdback is clear and unambiguous. The parties agreed to close the transaction on August 1, 2013 subject to the 45 day holdback pending any lien claims registered against the property. Luhowy gave a written Undertaking and Direction signed by him on behalf of his law firm, to that effect. The purchasers gave an irrevocable direction to support the undertaking.
[9] The purchasers’ claim for work done or not done post-closing does not change the fact that these monies form part of the purchase price for the property, given that no liens have been registered against it. The vendor is entitled to those funds by contract.
[10] The Law Society of Upper Canada’s Rules of Professional Conduct, rules 4.01(7) and 6.03(10), provide specific commentary on this obligation as it would apply to Luhowy in the context of a real estate closing. They require lawyers to strictly and scrupulously carry out an undertaking given to the tribunal or to another legal practitioner in the course of litigation. Such an undertaking is described as “a personal promise and responsibility”, unless clearly qualified. Clearly, a solicitor is liable for an undertaking given to parties other than clients in the performance of his or her professional responsibilities. See for example, Pollon v. American Home Assurance Co. (1991), 1991 7117 (ON CA), 3 O.R. (3d) 59 (C.A.) at para. 17; Towne v. Miller (2001), 2001 28006 (ON SC), 56 O.R. (3d) 177 (Sup. Ct. J.) at para. 13; and Sauder v. Granapandithen (1995), 1995 7115 (ON SC), 25 O.R. (3d) 379 (Gen. Div.) at para. 34.
[11] In the circumstances before me, the vendor is entitled to the $55,000 held back pending any construction liens for 45 days after closing. The respondents cannot use their alleged dissatisfaction with the property and the vendor’s warranties to revoke their irrevocable undertaking made at the time of closing. An order shall issue that the respondent Luhowy release the $55,000 construction lien holdback to the applicant forthwith.
Issue No. 2 – THE BUILDING PERMIT HOLDBACK
[12] On the date of closing, the vendor’s then counsel, Rahul Kesarwani, undertook to hold $25,000 of the closing proceeds in trust, pending receipt by Luhowy’s office of written confirmation from the City “that the building permit has been closed or a clear unconditional Final Inspection Report” issued. If not received by noon, August 30, 2013, the monies were to be returned to the purchasers.
[13] There is a dispute between the parties as to whether the reports were “received” by Luhowy on or before the stipulated date. Though there appears to be a printout of an email sent to Luhowy on August 2, 2013, he denies receiving it. However, whether or not the building permit closure was received by the purchasers on or before the stipulated date, the applicant vendor seeks to be relieved of strict compliance in this regard.
[14] In the case of Pluzak v. Gerling Global Life Insurance Co. (2001), 2001 24096 (ON CA), 52 O.R. (3d) 520 (Sup. Ct. J.) at paras. 17, 21 and 27-29, the Court of Appeal affirmed the principle that empowers a court to grant relief from forfeiture in a case of breach of a covenant or condition where the primary object of the stipulation is to secure a stated result that can be attained, and where the forfeiture provision is added by way of security for the production of the result. For example, when security is seized for breach of a covenant to pay, a court may order its release upon payment of the arrears and costs.
[15] This principle is found in s. 98 of the Courts of Justice Act, R.S.O. 1990 c. C-43 (the Act) which provides that a court may grant relief against penalties and forfeitures on such terms as are considered just. It is also endorsed in the more general sections of the Act granting the court jurisdiction to stay a proceeding on such terms as are considered just (see for example, s.106 of the Act).
[16] Assuming then, that Luhowy did not receive notice of the Final Inspection Report by noon on August 30, 2013, should the $25,000 building permit holdback be released to the applicant?
[17] The respondents contend it would be unjust to allow the applicant equitable relief given that it is alleged in the civil proceedings, that he failed to honour his obligations under the Agreement; and that those funds should be either paid into court or another financial vehicle pending agreement or further court order.
[18] I disagree, in light of the following undisputed facts:
The applicant received a compliance email from the City on August 2, 2013, a day after closing, enclosing the Municipal confirmation of the building permit closure on all items.
The respondents’ solicitor made no attempt to ascertain the status of the permit closure prior to the stipulated date of August 30, 2013, despite the fact that the $25,000 holdback agreement was negotiated and signed by all parties.
No request was made by the respondents for the said document until September 4, 2013 when they wrote to the applicant demanding the monies as the deadline had passed 4 or 5 days previously.
The delay (assuming that the first time the respondents received the documents was on September 4, 2013) caused no prejudice to the purchasers, who conceded this lack of prejudice on cross-examination.
The holdback funds formed part of the purchase price for the property.
[19] Once again, the civil action the respondents have recently commenced in respect of alleged construction deficiencies does not affect their undertaking or responsibility to release those funds which were held back solely for the purpose of ensuring the building permit closure. Despite the 5 day hiatus, returning the $25,000 to the purchasers in these circumstances would provide them a windfall to the applicant’s detriment.
[20] This is a situation where, in my view, the applicant is entitled to equitable relief from the potential forfeiture of the funds to the respondents. The respondents have provided no basis to retain the said funds or for securing them further.
[21] The applicant is therefore granted a declaration of entitlement and an order that Rahul Kesarwani release the $25,000 building permit holdbacks to the applicant forthwith.
Issue no. 3 – the construction work holdback
[22] Pursuant to the aforementioned Undertaking and Direction provided by Luhowy as irrevocably directed by the respondents, the parties also agreed to hold back the sum of $10,000 pending completion of 8 items listed in the Agreement, provided that in the case of disagreement as to the status of completion of any of the said items, “the parties shall refer such question to the Architect for the project for his inspection and determination in writing as to completion of any item(s) in dispute”.
[23] In his Notice of Application, Cruz asked that such matters be referred to the project’s Architect for resolution. However, now that the respondents have issued a Statement of Claim in regard to such items, the applicant has agreed that these monies should be secured pending a final resolution of those matters. I agree and, in the circumstances, order that the said monies be paid into Court to the credit of the civil action within 10 days of the release of these reasons.
the interpleader motion
[24] As noted above, Luhowy, as the respondents’ real estate lawyer, was obliged to hold $65,000 ($55,000 and $10,000) in trust as stipulated in the closing documents. In his interpleader motion, Luhowy seeks an order directing that those monies be paid into court. He also seeks costs of the motion and application.
[25] According to Luhowy, on or about September 9, 2013, the respondent purchasers “counterdemanded their irrevocable direction to Luhowy to pay the $55,000 to Cruz”. Due to this and various other issues that had arisen between the parties, Luhowy determined that the proper course of action was for him to interplead.
[26] Pursuant to rule 43 of the Rules of Civil Procedure (the Rules), a person may interplead if he or she claims no beneficial interest in the property other than a claim for costs, fees or expenses, does not collude with any of the claimants and is willing to deposit the property with the court or dispose of it as the court directs.
[27] It is trite law that absent special circumstances, solicitors must honour their undertakings both on a professional level and as officers of the court. In this case, where a conflict arose, Luhowy did in effect, become a stakeholder and thus, as he contends, had only one course of action in respect of the monies held in trust and that was to interplead.
[28] The court has now directed that the $55,000 held by his law firm in trust be paid out to the applicant; and the $10,000 similarly held be paid into court pending a determination in the civil action. Luhowy seeks costs of $2,000 for his interplead motion.
[29] At first glance, it appeared that Luhowy might be entitled to some costs. He was subject to cross-examination and was in a conflict of interest due to his clients’ purported instructions.
[30] However, upon a closer review of the file and submissions made, I am satisfied that Luhowy is not entitled to any award of costs. This is not a case where a person acts as an independent stakeholder. Luhowy gave a personal Undertaking and Direction to the applicant. As the Divisional Court held in Bogoroch & Associates v. Sternberg (2007), 2007 41889 (ON SCDC), 229 OAC 284, “sanctioning the misconduct of the solicitor with an award of costs in his favour would not only clearly approve of a “practice likely to reflect adversely on the administration of justice”, but, would send a strong signal to the Profession that undertakings can be ignored” at para. 24.
[31] Moreover, in his materials, Luhowy advocates for the respondents, noting matters that are wholly irrelevant to the application before me. He was named a respondent to this application. There shall be no costs in respect of the Interpleader motion.
conclusion
[32] This application is allowed. The following orders shall issue:
that the respondent Luhowy or his law firm Green & Luhowy LLP release the $55,000 construction lien holdback to the applicant or to whom he shall direct, forthwith;
that there be a declaration that the applicant is entitled to the $25,000 building permit holdback; and an order that Rahul Kesarwani release the $25,000 he holds in respect of that issue forthwith to the applicant or to whom he may direct;
that the $10,000 construction work holdback be paid into court by Luhowy to the credit of the civil proceeding commenced by the respondents within 10 days of the release of these reasons.
[33] The applicant seeks costs of the motion and application in the all-inclusive sum of $11,500. In my view, this sum accords with the case law on costs and is within the reasonable contemplation of the parties given the plethora of materials filed, the factors set out in rule 57.01 and the assertion by the respondents’ counsel that the amount claimed is “fair”.
[34] Order to go for costs payable by the respondents Thomas Alojz Berky and Anna Daphne Berky to the applicant in the sum of $11,500 including disbursements and HST.
CHAPNIK J.
RELEASED: September 24, 2014
COURT FILE NO.: CV-14-500254
DATE: 20140924
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N :
JULIO ALVAREZ CRUZ
Applicant
– and –
GARY W. LUHOWY, THOMAS ALOJZ BERKY and ANNA DAPHNE BERKY
Respondents
REASONS FOR JUDGMENT
CHAPNIK J.
RELEASED: September 24, 2014