SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-12-2971-00
DATE: 2015 08 21

RE: 1698496 ONTARIO LIMITED and SEEMA KHAN

-and-

KASHIF ZOBERI and 1647287 ONTARIO LIMITED

BEFORE: LEMAY J.

COUNSEL: E. Rogers, Counsel for the Plaintiffs

No one for the Defendants, motion heard ex-parte

E N D O R S E M E N T

LeMay J.

[1] The Plaintiffs, Seema Khan and 1698496 Ontario Ltd. entered into a business relationship with the Defendants, Kashif Zoberi and 1647297 Ontario Ltd. with the intention of running a property management company. Ms. Khan was the principal of 1698496 Ontario Ltd, and Mr. Zoberi was the principal of 1647287 Ontario Ltd.

[2] The business arrangements were structured in such a way that an individual had to go on title for each of the properties that Ms. Khan and Mr. Zoberi purchased in order for the parties to be able to obtain financing. It was agreed that Mr. Zoberi would be the one who would go on title.

[3] The parties also agreed that they would seek out investors who would provide a down payment for the purchase of the property. Once the properties were acquired, Ms. Khan’s company was to act as the property manager, and was to contract the tasks out to Mr. Zoberi’s company, which would be responsible for providing the rental documentation and payments to Ms. Khan’s company. Ms. Khan’s company would then pay all of the expenses associated with the property to the investors and/or third party service providers.

[4] Under this arrangement, the investors would make money because they would be given an income stream for a period of five years. At the end of the five years, they would then receive their principal back, along with a predetermined additional return.

[5] The two parties would make money because Ms. Khan’s company would receive 90% of the remaining revenue from the properties, and Mr. Zoberi’s company would receive 10% of the remaining revenue.

[6] The agreement went wrong in part because Mr. Zoberi’s finances deteriorated quite badly. As a result, Ms. Khan and her company commenced litigation against Mr. Zoberi and his company. Neither Mr. Zoberi nor his company defended the action, and were noted in default. Ms. Khan and her company now seek partial default judgment. They are not seeking full default judgment at this point, because they do not have all of the documents to support all of their prayers for relief.

[7] I granted partial default judgment on July 27th, 2015. Two issues remained to be considered:

a) Did Ms. Khan or her company have either a constructive or resulting trust over the properties that Mr. Zoberi and/or his company held?

b) Given Mr. Zoberi’s conduct, is this an appropriate case for punitive damages?

[8] I gave counsel for the Plaintiffs, Mr. Rodgers, an opportunity to provide written submissions and case law on these two issues. I will address both of them once I set out some additional context below.

The Additional Context

[9] The parties purchased a number of properties over the course of a number of years. For five of these properties, the Plaintiffs are making a claim that a trust of some description exists in favour of the Plaintiffs.

[10] With respect to the properties where the Plaintiffs are making trust claims, there are some facts that are relevant. First, for three of these properties, being 27 Merton, 24 Ashford Court, and 42 Ashford Court, the Plaintiffs provided the Defendants with money for the purchase of these properties directly. For the other two properties, being 43 Ashurst Crescent and 30 Axelrod Avenue, monies were provided by an investor, Mr. Buttigeig. In these two cases, Mr. Buttigeig had an agreement with the Corporate Plaintiff that he could have sued on if he did not receive the monies owing to him under the arrangements. No litigation was commenced that I am aware of. The Plaintiffs paid the monies owing to Mr. Buttigeig under the claim, and now seek those monies from the Defendants.

[11] In addition to a failure to pay monies owing under various agreements, the Defendants have engaged in the following conduct:

a) Asking Ms. Khan to temporarily discharge a mortgage she held on one of the properties, and then registering another mortgage on this property, causing Ms. Khan to lose her priority.

b) Registering other mortgages on the properties that Mr. Zoberi held as part of the agreement. The funds from these properties were used for Mr. Zoberi’s benefit.

c) Failing to pay monies that were owed to the investors, requiring Ms. Khan and the Corporate Plaintiff to honour these agreements.

d) Listing one or more of the properties for sale without advising Ms. Khan.

e) Paying out monies from the proceeds of sale from the properties to satisfy Mr. Zoberi’s other debts.

f) Various acts of negligence in the administration of the properties.

[12] As a result of all of this conduct, a Statement of Claim was issued in September of 2012. I am advised that there were discussions with Mr. Zoberi before he was noted in default, but that these discussions did not bear fruit. A requisition to note the Defendants in default was filed on April 11th, 2013. The Statement of Claim includes the following claims:

a) A declaration that the Defendant Zoberi holds title in trust to the five properties listed above.

b) Damages of $100,000.00 on account of punitive and/or aggravated damages.

[13] Given that the Plaintiffs are seeking a partial default judgment in this case, they are entitled to the benefits of Rule 19.02 of the Rules of Civil Procedure. One of those benefits is that the Defendants are deemed to accept the truth of the pleadings in the Statement of Claim. My analysis has taken that fact into account.

[14] Indeed, at the hearing of this motion on July 27th, 2015, I was prepared to make an Order under section 178 of the Bankruptcy and Insolvency Act solely because of this provision of the Rules. I reaffirm that Order.

Does a Constructive or Resulting Trust Arise?

[15] Ms. Khan and/or her company directly advanced funds to purchase three of the properties. Mr. Rogers has referred to Rascal Trucking Ltd. v. Nishi (2013 SCC 33, [2013] 2 S.C.R. 438) for a description of the circumstances where a Court will find that a purchase money resulting trust exists. In that case, the Court stated:

A purchase money resulting trust arises when a person advances to funds to contribute to the price of property, but does not take legal title to that property. Where the person advancing the funds is unrelated to the person taking title, the law presumes that the parties intended for the person who advanced the funds to hold a beneficial interest in the property in proportion to that person’s contribution. This is called the presumption of resulting trust.

[16] In this case, the evidence filed on the motion before me discloses that, with respect to 27 Merton, 24 Ashford Court, and 42 Ashford Court the Plaintiffs provided money to fund the purchase of the property, and did not take legal title to the property. There is a presumption of a resulting trust that arises with respect to these properties.

[17] There is no evidence before me that would support, in any way, an argument that the presumption of resulting trust was rebutted in this case. As a result, I find that the Plaintiff has established a purchase money resulting trust for the properties at 27 Merton, 24 Ashford Court, and 42 Ashford Court.

[18] The existence of a purchase money interest trust is not available with respect to the other two properties on the facts before me. This brings me to the issue of a constructive trust. Mr. Rogers referred me to Soulos v. Korkontzilas (1997 346 (SCC), [1997] 2 S.C.R. 217), where the Court explained the concept of constructive trust as follows:

Canadian courts have never abandoned the principles of constructive trust developed in England. They have, however, modified them. Most notably, Canadian courts in recent decades have developed the constructive trust as a remedy for unjust enrichment. It is now established that a constructive trust may be imposed in the absence of wrongful conduct like breach of fiduciary duty, where three elements are present: (1) the enrichment of the defendant (2) the corresponding deprivation of the plaintiff; and (3) the absence of a juristic reason for the enrichment: Becker v. Petkus, supra.

[19] In this case, I find that the three requirements for a constructive trust are met with respect to the 43 Ashurst Crescent and 30 Axelrod Avenue properties. The Defendants were enriched as they did not have to honour the obligations to Mr. Buttigeig out of the proceeds from the sale of the property, even though their agreement with the Plaintiff required them to do so. The Plaintiffs were deprived because the met the obligations to Mr. Buttigeig out of their own assets, even though they were not required to do so. Finally, there is no juristic reason for the enrichment of the Defendants.

[20] Accordingly, I find that a constructive trust exists with respect to the properties at 43 Ashurst Crescent and 30 Axelrod Avenue.

[21] In terms of these trust declarations, nothing in this decision should be taken as a finding that any innocent third party has any additional obligations.

Is This an Appropriate Case for Punitive Damages?

[22] In advancing this argument, Mr. Rogers pointed to only one case that supported his position. Specifically, he referenced me to Hunt v. Molson (2014 ONSC 3155). In that decision, Corbett J. was faced with a case where a client, Ms. Himel, had entered into a mortgage transaction, with the assistance of Mr. David Molson, who acted as her solicitor on the mortgage. Ms. Himel lost approximately $75,000.00 on the transaction as a result of the fraud of one of the other investors (a Dr. Toth), and her lawyer Mr. Molson. Corbett J. found that punitive and exemplary damages should be payable in these circumstances, and fixed them at $30,000.00. The basis for Corbett J’s decision was the fraud, coupled with the fact that, as Ms. Himel’s lawyer, Mr. Molson owed her a duty of trust and fidelity.

[23] As noted in Whiten v. Pilot Insurance (2002 SCC 18, [2002] 1 S.C.R. 595 at paragraph 36), punitive damages are awarded in exceptional cases for “malicious, high handed” conduct that offends the court’s sense of decency. In order to trigger an award of punitive damages, the conduct must represent a marked departure from ordinary standards of decent behaviour.

[24] In these circumstances, I am not persuaded that punitive damages are appropriate. The Hunt v. Molson, supra, decision is distinguishable because of the duties of trust and fidelity that Mr. Molson owed Ms. Himel in that case. Those duties are not present in this case to the same extent, as Mr. Zoberi was not providing professional advice to Ms. Khan, and did not have the duty of fidelity that a lawyer would have had. The parties entered into this arrangement for their own mutual profit.

[25] While the Plaintiffs have claimed a breach of fiduciary duty in this case, that is their legal claim. They are obligated to point to some factual basis to support the existence of a fiduciary duty. As I have stated, this is a commercial transaction between independent parties.

[26] The fact that Mr. Zoberi misled Ms. Khan, and engaged in inappropriate business conduct is quite clear. Indeed, it appears to me that Mr. Zoberi has engaged in fraudulent misrepresentations. However, the conduct supported by the evidence in this case does not, in my view, rise to the level of “malicious and high handed” conduct. Even on the Plaintiff’s pleadings, Mr. Zoberi’s conduct was motivated by his own financial exigency. He is, on the evidence I have, unable to pay any of these debts, which is why he pursued this course of conduct.

[27] Given the foregoing, I decline to award punitive damages in this case.

Conclusion

[28] I confirm that I am prepared to find that Mr. Zoberi held the properties in a constructive or resulting trust for Ms. Khan and/or 1698496 Ontario Ltd. As a result,

[29] I am not prepared to order punitive and/or aggravated damages in this case.

[30] As a result, Mr. Rogers filed a draft Order with the Court on July 27th, 2015. A copy of that draft Order is attached to these reasons. It may now be issued with the following changes:

a) In terms of the constructive trust/resulting trust issue, paragraph 1 is to be modified to show that a purchase money resulting trust exists with respect to the properties at 27 Merton, 24 Ashford Court, and 42 Ashford Court , and that a constructive trust exists with respect to the properties at 43 Ashurst Crescent and 30 Axelrod Avenue.

b) In terms of the remainder of the Orders, with respect to paragraph 2, those are to be modified to show that there has been a breach of trust. If Mr. Rogers wishes to make submissions on the existence of a fiduciary duty, he may do so.

c) With respect to paragraphs 3 through 11, 13 and 14 of the draft Order, those can be issued without modifications.

d) Paragraph 12 of the Draft Order is to be removed from the Order as issued by the Court office.

[31] Finally, I note that the Plaintiffs may wish to bring further default judgment proceedings in this case, and they are free to do so. They have asked that the costs of this partial default judgment motion be reserved to the Judge hearing the final motion, and I so Order.

[32] Should there be any issues with respect to the Order that Mr. Rogers is seeking, I may be contacted through the Trial Office.

LeMay, J.

DATE: August 21, 2015