SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: 13-CV-486240
Heard: May 21 and July 23, 2015

RE: Zamani Homes Ltd. v. 11025982 Ontario Ltd.

BEFORE: Master Joan Haberman

COUNSEL:
Sacks, J. for the moving party

Murray, W. for responding party

REASONS

Master Haberman:

[1] Zamani Homes moves to add Joan Poon as a defendant to its Amended Statement of Claim. They also seek to add a claim for declaratory relief and damages for unjust enrichment. The only changes to the pleading to reflect involve two additions, found at proposed paragraphs 1(d) and 14, which read as follows:

The plaintiff claims a declaration that the transfer of the proceeds from 1105982 Ontario Inc. to the other Defendants is void, and damages for unjust enrichment;

Further, approximately 70% of the proceeds from the sale of the Property were transferred (sic) to Patrick Ng and his wife, Joan Poon. The Plaintiff states that 1105982 Ontario Inc. made preferential payments to Joan Poon, and the Plaintiff pleads and relied upon the Assignment and Preferences Act. Further, the Plaintiff states that this transfer of funds was fraudulent, and pleads and relies upon the Fraudulent Conveyance Act.

[2] For the reasons that follow, the motion was dismissed on July 23, 2015 at the conclusion of the hearing.

THE CLAIM

[3] The action was started by statement of claim, issued on August 2, 2013. At that time, only 1105982 Ontario Ltd. was named as a defendant and the only relief claimed was damages of $1 million. It was not entirely clear from the pleading what that figure represented.

[4] Zamani asserts that on March 31, 2011, they entered into an agreement to purchase a property in Richmond Hill from 1105 for $8,475,000. The transaction was scheduled to close on October 28, 2011 but moved to an unspecified date in January 2012. While the pleading does not assert that the transaction closed or when it did, much of what follows appears to rely on the fact that this is what occurred.

[5] Zamani claims that they received representations that the property’s net rental income totalled $360,000, presumably per annum though this is not specified, and their due diligence confirmed this figure. However, they assert that two months prior to closing, they learned that two major tenants left the building between completion of their due diligence and closing.

[6] The nub of the claim is found in the original paragraph 7, where Zamani alleged that the defendant’s principal, Patrick Ng advised both these tenants to vacate the property. It is not alleged why this was done or what benefit 1105 or Ng would have derived from having taken this step, nor is there any indication as to why the two tenants would have complied. There is no suggestion of coercion, manipulation, inducements or extortion and the two tenants, neither of whom has been named in the pleading, have not been sued.

[7] Zamani asserts that as a result of the departure of these tenants, the rental income from the building was greatly reduced. They claim that this placed them in a higher risk category when borrowing funds for this acquisition, as a result of which they incurred in excess of $500,000 of additional interest costs. They also claim they lost rental income, as the departing tenants failed to comply with the six-month notice period under the lease. Zamani holds 1105 responsible for this loss as they claim that they failed to enforce this clause.

[8] The statement of claim was amended by court order dated June 3, 2014, to add 4 defendants, all of whom are described to as the principals, officers and directors, and the “controlling mind” of 1105982 Ontario Inc.

[9] What began as a fairly straightforward, but not artfully drafted claim was converted to a more complex action by these amendments. In paragraph 12, Zamani explains why these parties have been added:

Subsequent to serving the within claim on 1105982 Ontario Inc., on or about August 2013 the Plaintiff was approached by Patrick Ng and was advised by Ng that the action commenced against 1105982 Ontario Inc. was futile as the Officers and Directors had already stripped the assets out of the company, including any proceeds from the sale. Essentially, Ng stated that 1105982 Ontario Inc. was now a shell company.

[10] On the basis of that conversation, Zamani now asserts that the officers and directors made preferential payments to themselves as Zamani’s expense, contrary to the Fraudulent Conveyance Act.

[11] The plaintiff also asserts that the officers and directors owed a fiduciary duty to 1105 which they breached; that they acted in bad faith and that they conspired to defeat their creditors, by removing the assets from 1105 to defeat or hinder Zamani’s ability to enforce a judgment, preferring their own interests over those of 1105.

[12] Zamani states that the officers and directors are liable for conspiracy and intentional interference with economic and/or contractual relations as they instructed and caused the tenants to unlawfully terminate the leases.

[13] For the first time, the amended pleading contains the theory of Zamani’s case. They claim that 1105 received a better offer to purchase the property between the date of the agreement of purchase and sale and the closing date, so they came up with a plan to ensure that this transaction would not close. Getting the tenants to vacate would reduce the rental income from the property to the point where 1105 believed Zamani would no longer be able to get financing. One can only speculate as to how long this alleged “better offer” would be available in view of the now greatly reduced rental income. This is not explained. That, the fact that the alleged motivation was only disclosed in an amended claim and the lack of particulars suggest this is nothing more than speculation.

[14] It is questionable if Zamani can rely on what they allege is a breach of fiduciary duty between the defendant, 1105, and the other defendants, and though some very particular torts have been asserted (breach of fiduciary duty; conspiracy; interference with economic relations), the factual underpinning necessary to plead these torts is, for the most part, absent.

[15] There are also inconsistencies within the claim. In paragraph 8, it is alleged that it was Patrick Ng who told the tenants to vacate. In paragraph 9, the allegation is more general – 1105 is accused of having undertaken this task and in paragraph 10, Zamani asserts that this amounted to 1105’s breach of the agreement of purchase and sale. 1105’s alleged breach is referred to again in paragraph 11. Finally, in paragraph 15, it is alleged that it was the officers and directors who actually caused the tenants to unlawfully terminate the leases. None of this is pleaded in the alternative.

[16] While a corporation can only act through its officers and directors, it is unclear if Zamani is saying that it was Patrick Ng acting on his own who allegedly chased the tenants off, or if it was the officers and directors who did this, acting together in some form of alleged conspiracy. Conspiracy has been alleged in the amended claim, but the old paragraph 7 (now paragraph 8) remains in the pleading. There can be no conspiracy, however, if Patrick Ng acted on his own.

THE PROPOSED PLEADING

[17] The pleading, as it currently stands, is far from clear and is also deficient in many respects, yet there was no opposition when the claim was amended last year. These issues are now being raised only because a further amendment is sought.

[18] As noted above, Zamani proposes to change only two aspects of the current claim to reflect the addition of Joan Poon as a defendant. He seeks to add a claim for a declaration that the transfer of the proceeds of sale from 1105 to the other defendants is void, and as a result, for damages for unjust enrichment. No quantum is specified. They also want to assert that a portion of the proceeds of sale of the property were transferred to Patrick Ng and his wife, Joan, and that this transfer was fraudulent.

[19] Zamani proposes to plead that Joan Poon was one of the perpetrators of this alleged fraud, as she allegedly received some of the funds disbursed by 1105, yet the factual underpinning to explain the basis of her alleged fraud is missing. Zamani also wants to claim damages from Poon for unjust enrichment, but they set out no quantum and no theory to support this claim for relief. Further, as there is no proposal to amend paragraph 1(a) of the claim, Poon, on the face of the pleading, would become one of the defendants from whom Zamani also claims damages of $1 million.

[20] There is no direct evidence from Poon but in his affidavit, her counsel, Samual Eng, states that she advised him that she was a shareholder in 1105, but neither an officer nor a director. That is confirmed in the corporate profile and there is nothing from Zamani to suggest otherwise.

[21] Poon also advised her counsel and he deposed that she had nothing to do with the day to day operations of the company, which was purely a holding company that owned property. This is consistent with Patrick’s discovery evidence. He stated that the company has no other function except holding the real estate, holding the property. After we sold it, the money going to go back to whoever they are (the investors). …Of course the money is gone because it’s a holding company. There’s no other business.

[22] Eng added that Poon was not aware of any particulars of what the tenants were told, such as who was told to vacate, how they were told, or any other surrounding circumstances of these allegations. He concludes that Poon would be prejudiced by the passage of time if she were to be brought into the action now, as her ability to fully investigate vague assertions would be hampered.

[23] Zamani has not replied to this evidence. They also filed no evidence of their own in their initial motion record, though this was motion to add a party after the expiry of the presumptive limitation period. Instead, their supplementary motion record was filed after receipt of Poon’s materials, and it contains a brief affidavit from Bob Zamani, an officer and director of the plaintiff’s corporation. He does not address the issue of prejudice.

[24] Zamani’s affidavit is directed at the issue of discoverability. He states that it was not until Patrick Ng was examined for discovery in late October 2014 that he learned that any of the proceeds of sale were transferred to Joan Poon. Zamani adds that the other defendants, joined to the action in the summer of 2014, have all been noted in default. According to Patrick’s discovery evidence, they all reside off shore.

[25] This likely leaves Patrick exposed to pay the entire loss if liability is found, along with Joan if she is now added to the claim.

THE LAW, ANALYSIS and CONCLUSION

Adding a party after expiry of presumptive limitation period

[26] Rule 5.03(4) empowers the court to add parties to an existing proceeding where their presence is necessary to enable the court to adjudicate effectively and completely on issues in the proceeding.

[27] This rule is subject to the provisions of the Limitations Act, 2004, which requires that the motion to add must be brought within two years of the cause of action having arisen. While the “special circumstances” doctrine has long been put to rest, it is still open to argue that a limitation period has not started to run until after all the essential elements of a claim against a party have been discovered, but only if a plaintiff can demonstrate that he used reasonable diligence in approaching this task. The “discoverability” principle therefore remains as a path for a plaintiff to pursue where appropriate.

[28] Although it is not specifically pleaded, the inference from the pleading is that the tenants were told to vacate between June and October 2011, and the transaction closed in January 2012. To the extent that Zamani claims there was a conspiracy and breach of the agreement of purchase and sale, such breach would, therefore, have occurred between June and October 2011. To the extent that Zamani asserts the company was stripped of its assets, this would have occurred within a few months of the closing date, based on Ng’s discovery evidence. In both cases, the presumptive two-year limitation period appears to have elapsed.

[29] Despite that, this motion was filed with no evidence at all addressing discoverability. It was not until March 2015 that Zamani filed anything addressing this issue, saying only that he didn’t know earlier (that monies were transferred to Joan Poon), but saying nothing about steps taken to determine the identity of shareholders.

[30] Zamani claims that he was told by Ng in August 2013 that the company had been stripped of its assets. All that appears to have been done at that time was to order a corporate search to find the names of the officers and directors of 1105. They were then added to the pleading but the record is silent regarding the identity of shareholders.

[31] The record is also silent regarding the new form of relief which Zamani now seeks to add to the claim. Initially satisfied to claim damages, he now seeks to void the transfer of funds, which occurred more than three years ago.

[32] The expiry of the presumptive limitation period was not raised as an issue by the responding party so I will not deal with it further at this time as I can dispose of the motion on other grounds that were argued. It is, however, a troubling point.

Adding parties – the general rules of pleading

[33] Rule 26.01, dealing with the amendment of pleadings generally, speaks in mandatory terms. Thus, the court shall grant leave to amend where it is sought except in certain exceptional situations. Rule 5.03, however, deals with a particular class of amendment – one that involves the addition of a party. There, the Rules leave the issue to the court as a matter of discretion.

[34] In either case, the amendment sought should not be permitted if it creates prejudice that cannot be compensated for by costs. An amendment should also be refused where what a party proposes to plead is untenable at law. In the latter instance, the court presumes that what is pleaded is true, and assesses whether those facts could establish a recognized cause of action if proven. If not, what is proposed is considered to be untenable at law and subject to being struck, so therefore, the amendment should be refused.

[35] While the pleading, in its current form, has already been issued, in that I am being asked to add yet another party (as well as a further form of relief) to the action, the discretion accorded to me under Rule 5.03 requires that I consider whether it is appropriate to add another party to this pleading as it currently stands, in addition to the merits of adding Poon and declaratory relief to the action.

[36] The addition of Poon, in particular, requires that any pleading she is added to and to which she must defend is one she can understand. The pleading, along with the proposed amendments, must conform to the rules of pleadings, or adding her to it will simply compound what is already a problem.

[37] The general rules of pleading are found in Rule 25.06. Subrule 25.06(1) provides that pleadings must contain a concise statement of the material facts but not the evidence. Subrule 25.06(3) allows a party to raise any point of law in a pleading, but only if material facts have been pleaded to support these points. Subrule 25.06(4) prohibits inconsistent pleadings by one party.

[38] The pleading, as it stands, fails to articulate essential facts. Defendants should not have to infer that this transaction did, in fact, close or guess at when it closed. While this is information Patrick Ng may well have, there is no reason to assume Joan Poon, or the other officers and directors do, as well.

[39] It is also unclear why Zamani went through with the deal if, in their view, it was no longer financially viable for them to do so. There is no reference to why they did not walk away before closing, thereby mitigating their damages. This raises the further question: having gone through with the transaction, though aware of the drop in rental income, can Zamani now ask that the sale be reviewed?

[40] There are also no particulars regarding the tenants that vacated or the circumstances within which they did so – the tenants are not even named as defendants to the action, though Zamani claims they failed to provide 6-months’ notice, as required by the lease, prior to their departure.

[41] There are also inconsistencies surrounding the dealings with these tenants – this is a critical point. Was it Patrick, on his own, or the officers and directors, as a group, who spoke with the tenants? Both are alleged simultaneously, and not as alternative positions. A conspiracy can only be pleaded where more than one perpetrator is involved so this is an important distinction.

[42] While evidence is best left to documentary and oral disclosure, this pleading provides the barest of bones as to what the issues are and to the extent that particulars have been pleaded, they are, in some cases, inconsistent with other assertions made. This is not a concise pleading of material facts.

[43] The policy reasons behind these rules is well summarized by Perell J. in EnerWorks Inc. v. Glenbarra Energy Solutions Inc., 2012 ONSC 414, [2012] OJ No 2272:

It is a fundamental principle of procedural justice that a litigant should have notice of the case against him or her. The Rules of Civil Procedure employ a system of fact pleading to give notice. The primary function of a system of fact pleading is to compel the parties to disclose the facts they are relying on to support their claim or defence. The heart of the system of fact pleading is that the parties plead the material facts that constitute their claim or defence.

The most important rule of pleading is Rule 25.06(1) that “every pleading shall contain a concise statement of material facts on which the party relies for the claim or defence, but not the evidence by which those facts are to be proved.” This rule directs the disclosure of the material facts, which include the facts that establish the constituent elements of the claim or defence: Philco Products Ltd. v. Thermionics Ltd., 1940 43 (SCC), [1940] SCR 501.

The causes of action must be clearly identifiable from the facts pleaded and must be supported by facts that are material….

[44] Subrule 26.05(8) has particular application to this claim;

Where fraud, misrepresentation, breach of trust, malice or intent is alleged, the pleading must contain full particulars, but knowledge may be alleged as a fact without pleading the circumstances from which it is to be inferred.

[45] This rule was interpreted in EnerWorks (supra) to suggest that

…the full particulars required by (the rule) must be set out precisely each allegation of wrongful conducts and the who, were, when, what and how of that alleged conduct (Balanyk v. University of Toronto, {1999 14918 (ON SC), 1999] OJ No. 2162).

[46] Zamani seeks to plead that funds were transferred to Joan Poon fraudulently, but nothing more is said about her role in this alleged fraud in the proposed pleading. She was a shareholder, so may well have benefited from monies paid out, but it is not a given that her conduct was fraudulent simply because she received funds. More is required in the way of pleading to set up this allegation. As she is married to Patrick Ng, the company president, it is conceivable that these monies were paid into a joint account and that she knew nothing about any of this.

[47] Although Zamani learned Poon was a shareholder when Patrick was being examined for discovery, it seems that was where they left the inquiry. They did not appear to have asked the extent to which she participated in the business or even in her own family finances. There is very little in this proposed pleading that can support a plea of fraud against this non-party, certainly not at the level of disclosure required by this subrule.

[48] Further, Zamani has elected to leave paragraph 1(a) in the pleading as is, such that the damage claim of $1 million currently stands as against all defendants. Poon, if added, would also be subject to it. As the three offshore defendants have not pleaded to the action, Patrick and Joan would be left to pay the claim if it succeeds, yet there is no real cause of action alleged against Joan Poon to support this damage claim. For the most part, it seems Zamani wants to add her so that she is bound by the court’s findings regarding this new claim for a declaration that the transaction is void but they have done so in a very sloppy and ineffective way.

[49] Presumably, the proposal to add this declaration is in addition to the $1 million damage claim, which remains in the new form of pleading that has been proposed. What is the damage claim about? Again, it is presumed to include the additional interest paid to fund the transition and the fact that the tenants allegedly left without notice, but none of that is clear.

[50] Zamani has pleading that Patrick, on his own, or the officers and directors worked to get rid of the tenants in hopes that Zamani would walk away and they could then deal with a better purchase offer. Getting two large tenants to leave was allegedly their plan for getting Zamani to walk away from the property. It is very difficult to accept that this is a realistic scenario as a reduction in rental income would likely affect any other offers made for the property in a partially unoccupied state. None of this is explained. There is no air of reality to it.

[51] There are other serious deficiencies in the pleading. Both conspiracy and interference with economic relations are special torts that must be advanced in a particular way. As Perell J. stated in EnerWorks (supra):

….it will be plain and obvious that a claim discloses no cause of action when the allegations in the statement of claim do not plead all the elements necessary for a recognized cause of action.

[52] There are very specific ways for pleading each of these special torts. They cannot simply be tossed into the mix with the putting forward supporting factual allegations in the pleading. Fraud, conspiracy and interference with economic relations have all been included in the claim in that way. Zamani now seeks to add a claim for unjust enrichment in a similar manner – without a factual foundation in the pleading.

ADDING A NEW FORM OF RELIEF

[53] I also have grave doubts as to whether the proposed claim for a declaration that the transfer of funds is void is tenable at law. Zamani has pleaded that he learned of the tenants’ departure before the transaction closed. They also assert that either Patrick or the officers and directors orchestrated this event as a means of getting them to walk away, so that 1105 would be at liberty to sell to a higher bidder.

[54] Zamani was therefore in possession of the material facts before the transaction closed. They knew that there would be a loss of rental income generally, as well as a specific loss due to the alleged failure by the tenants to give 6 months’ notice prior to vacating.

[55] Despite having knowledge of these facts, Zamani was prepared to and allegedly did incur higher borrowing costs to close the transaction, and allegedly reserved his rights to sue after the fact. There is no suggestion in the pleading that efforts were made to renegotiate purchase price at that point, or that there was a specific reasons why Zamani needed to purchase this particular property at this particular point in time.

[56] There is also no plea to the effect that the company was bound to retain funds to pay a potential claim by Zamani in the event that they chose to pursue one down the road and that they were successful. How far down that road would this be required?

[57] The proceeds of sale went into a holding company and were then disbursed to the vendor’s shareholders. There is nothing unusual about this and nothing in the pleading indicates how this transaction is different from what often occurs. Holding companies are common place. Transferring assets to shareholdings is not necessarily “stripping assets.” Something more had to have been pleaded to suggest otherwise. Simply pleading a conclusion is not sufficient. Zamani had to explain how they reached the conclusion that moving this money out was somehow wrong. This they failed to do.

[58] A further inconsistency in the pleading is the reliance on the Fraudulent Conveyance Act. A plead of fraudulent conveyance must include several elements, including an assertion that the debtor conveyed his or her property to another person with the intent to defeat, hinder, delay or prejudice creditors.

[59] In this case, the funds were transferred by 1105 to the defendants and to Poon. It is therefore 1105, the alleged debtor, who had to have had the intent to hinder or defeat creditors. But that is not what Zamani has pleaded. Instead, at paragraph 15, they allege that it was the directors that induced 1105 to transfer its assets to them. If 1105 was induced, how can they have had the intent to defeat creditors? I am hard pressed to understand how this fact scenario fits within the legislation relied on.

ORDER

[60] In short, the pleading as it currently stands, is replete with problems. For that reason, alone, I could dismiss this motion. Matters are only made worse by the manner in which Zamani seeks to add Joan Poon and a claim for a declaration to what a claim that is already far from clear, inconsistent and deficient.

[61] I was not asked to dismiss without prejudice, such that the plaintiff could try its hand at this again, so I make no such order.

[62] The motion is therefore dismissed.

[63] If the parties are unable to agree as to costs, I can be spoken to within 30 days of the release of these reasons.

Master Joan M. Haberman

Released: August _____ , 2015