SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Melvyn D. Eisen, In Trust v. Altus Group Limited and Jason White
BEFORE: Master Graham
HEARD: April 5, 2016
COUNSEL:
M. Winterstein for the plaintiff
E. Bowker for the defendants (moving parties)
REASONS FOR DECISION
(Defendants’ motion to examine beneficiaries of plaintiff trust and to amend pleadings)
1The plaintiff Melvyn Eisen, a lawyer qualified to practice in Ontario, is the trustee for a group of 13 investors who together provided mortgage financing to 2172742 Ontario Inc. (“217”), the owner of a property located in Goodwood, Ontario (“the Property”). The defendant Altus Group Limited (“Altus”) carries on business as a real estate appraiser. The defendant Jason White is a consultant to Altus who prepared an appraisal report dated February 21, 2011 assessing the market value of the Property at $6.1 million.
2On February 15, 2012, Eisen as trustee for the investors accepted a mortgage on the Property to secure a loan for $2.75 million. The owner and mortgagor 217 defaulted on the mortgage on September 14, 2012. Eisen now alleges that the defendants were negligent in their appraisal of the Property and valued the Property at an amount more than twice its actual value, to the investors’ detriment.
3The defendants have conducted their examination for discovery of the plaintiff Eisen as trustee for the investors. They now move for an order requiring the individual investors, who are the beneficiaries of the trust, to be examined for discovery and for leave to amend their statement of defence and to add a counterclaim against Eisen personally.
Motion to examine the beneficiaries of the trust
4The motion to examine the investors who are the beneficiaries of the trust, in addition to the trustee Eisen, is brought pursuant to rule 31.03(8) of the Rules of Civil Procedure; rule 31.03(9) is also relevant:
31.03(8) Where an action is brought or defended for the immediate benefit of a person who is not a party, the person may be examined in addition to the party bringing or defending the action.
(9) Where a party is entitled to examine for discovery,
(a) more than one person under this rule; or
(b) multiple parties who are in the same interest,
but the court is satisfied that multiple examinations would be oppressive, vexatious or unnecessary, the court may impose such limits on the right of discovery as are just.
5The beneficiaries of the trust of which Eisen is trustee are the investors who actually sustained the loss on the mortgage. The defendants submit that the action is brought by Eisen “for the immediate benefit” of the investors and accordingly, those investors may be examined in addition to Eisen.
6The fact that rule 31.03(8) states that the person or persons for whose benefit the action is brought may be examined means that the court has a discretion as to whether or not to order examination of any such persons, in this case the individual investors. This discretion is to be exercised in conjunction with the discretion in rule 31.03(9) applicable to the imposition of any limitations on any examinations ordered.
7In order to determine whether or not to order examinations of the individual investors, it is necessary to consider the nature of the claims advanced by Eisen as their trustee. The basis of the claim is essentially negligent misrepresentation and the allegations in the statement of claim include the following:
“12. The defendants confirmed in writing that the Appraisal Report could be relied upon by the Trustee and its investors. . . .
In accordance with the express authority of the defendants as reflected in their letter of January 13, 2012 to the Trustee, the Trustee and its investors relied upon the Appraisal Report for the purpose of determining whether, in what amount and upon what terms they ought reasonably to provide mortgage financing for the subject property. . . .
Had the Trustee not been misinformed of the actual value of the Property, neither he nor the investors would have agreed to provide a mortgage as there would not have been sufficient security in the land to do so on the terms sought and agreed upon between the parties. . . .
The defendants knew or ought to have known and it was entirely foreseeable and intended at the time that the Trustee would rely upon the expression of value contained in the Appraisal Report. The defendants are accordingly liable for any and all additional losses sustained by the Trustee and its investors in reliance upon the expression of value which the defendants provided.” [emphasis added]
8The statement of defence includes the following pleadings:
“43. The Altus Defendants deny that any Investor or Eisen relied on any information in the Report or in the Report Excerpt.
In the alternative, the Altus Defendants state that if any Investor or Eisen relied on any information in the Report or in the Report Excerpt, which is not admitted but is denied, then such reliance was unreasonable and/or unauthorized. . . .
Following the actual or implied recommendation by Eisen and/or based on their own assessment of the risk, the Investors agreed to the Investment and Eisen proceeded to register the mortgage charge on the title of the Property.” [emphasis added]
9Essentially, the plaintiff alleges that the defendants represented that their appraisal with respect to the value of the property could be relied on. In reliance on the appraisal, the trustee “and its investors” decided to provide mortgage financing, which they would not have done had they not been misinformed as to the value of the property. As a result of their reliance on the appraisal, the trustee and the investors sustained losses for which the defendants are responsible. The defendants deny the investors’ alleged reliance on the report, allege that any reliance on the part of any investor was unreasonable and plead that the investors’ decision to invest was based at least in part on their own assessment of the risk.
10The evidence on the motion includes a letter dated January 6, 2012 from Eisen “To All Investors” with which he provided excerpts from the defendants’ appraisal of the property, set out the proposed principal amount of the mortgage, interest rate and other terms and enquired whether the “investors” were interested in participating in the proposed mortgage.
11The evidence also includes documents titled “Investment Authority” from each of the investors to “Melvyn D. Eisen, in trust”. These documents state that the investor is satisfied that the approximate value of the property is $6.1 million and include the following warning: “You are cautioned that the responsibility for assessing the financial merits of the mortgage investment rests with the investor or investors at all times.”
12At his examination for discovery held October 15, 2014, Eisen gave the following evidence (question 91 of the transcript):
- Q. In terms of how it all works, do they rely on you to do the due diligence about whether this is a reasonable investment or do you expect them to go and do their own research?
A. I provide them the letter [referring to the January 6, 2012 letter]. I set out everything I know about the transaction and it’s up to them to assess whether or not they wish to participate or not. [emphasis added]
13The losses in relation to the mortgage were sustained by the individual investors. The claims in respect of those losses are simply being advanced by Eisen on behalf of the investors. The pleadings raise an issue as to what decisions the individual investors made in relation to their decision to invest in the property. Eisen himself has testified that the decision as to whether or not to participate in the investment was left to the individual investors and he is unable to answer questions about the extent to which any of the investors relied on the appraisal in making their decisions.
14Evidence of the extent of the individual investors’ reliance on the appraisal is directly relevant to the plaintiff’s claim for negligent misrepresentation. The defendants should therefore be able to obtain any such evidence directly from those investors, for whose immediate benefit the action is brought, and test that evidence at examinations for discovery. Subject to the application of rule 31.03(9) I accept that the defendants may examine the individual investors in addition to their trustee Eisen.
15The issue under rule 31.03(9) is whether, accepting that rule 31.03(8) entitles the defendants to examine more than one person, the court is satisfied that multiple examinations would be oppressive, vexatious or unnecessary such that the court should “impose such limits on the right of discovery as are just”.
16The plaintiff submits that in exercising its discretion under rule 31.03(9), the court must consider the principle of proportionality in rule 29.2.03:
29.2.03 (1) In making a determination as to whether a party or other person must answer a question or produce a document, the court shall consider whether,
(a) the time required for the party or other person to answer the question or produce the document would be unreasonable;
(b) the expense associated with answering the question or producing the document would be unjustified;
(c) requiring the party or other person to answer the question or produce the document would cause him or her undue prejudice;
(d) requiring the party or other person to answer the question or produce the document would unduly interfere with the orderly progress of the action; and
(e) the information or the document is readily available to the party requesting it from another source.
17The plaintiff submits that requiring all 13 investors to be examined would increase the parties’ costs to an amount disproportionate to the amount in issue in the action. In addition, the examinations will be time consuming and will delay the progress of the action. Further, the information sought from the investors can be obtained from the trustee Eisen who has now undertaken to ask various questions of each of the investors. Essentially, the plaintiff’s argument under rule 31.03(9) is that examination of the individual investors would be oppressive and unnecessary.
18Discovery questions for the investors will relate to the basis for their individual decisions to invest in the mortgage and specifically whether those decisions were influenced in any way by the defendants’ appraisal. Each investor would have made his or her own decision to invest for his or her own reasons. Questions relating to these issues are relevant to the claim in negligent misrepresentation and would therefore not be vexatious.
19With respect to the issue of proportionality, which I accept can influence the court’s decision in applying rule 31.03(9), it is necessary to consider the quantum of the claim. The claim for relief is for $5 million plus interest and costs. The funds advanced under the mortgage total $2.75 million, consisting of $500,000.00 from each of two investors, $300,000.00 from each of two investors, $200,000.00 from each of three investors, $100,000.00 from each of five investors and $50,000.00 from one investor. These individual investments are all sufficiently large to warrant examinations of the individual investors.
20Although examining all 13 investors would be somewhat time consuming, the scope of questioning of each individual investor would be relatively narrow and each individual examination should not be lengthy. The court can honour the proportionality requirement by imposing a time limit on each examination such that requiring individual examinations would not be unduly onerous.
21Plaintiff’s counsel argued that the individual examinations could increase costs in the action because the investors may require their own counsel owing to the allegations in the amended statement of defence and counterclaim that Eisen was negligent in his dealings with the investors. If the investors were to require their own counsel for their examinations, then presumably they will require their own counsel at trial, regardless of whether they are examined individually. The cost of having counsel attend at examinations for discovery will be relatively insignificant in the context of the same counsel being involved at trial. The possible need for the investors to retain counsel for the examinations is not sufficient reason to refuse to order that they be examined individually.
22With respect to rule 29.02.03(1)(e), which requires the court in addressing the issue of proportionality to consider whether the information sought by the examining party would be available from another source, the trustee Eisen has no evidence as to what influenced each individual investor to invest and accordingly that information is not available from him.
23Plaintiff’s counsel argued in his factum that the defendants should be precluded from examining the individual investors because they never attempted to do so by way of an updated discovery plan under rule 29.1.03. Given the plaintiff’s refusal to agree to individual examinations of the investors as sought by the defendants on this motion, any request by the defendants to modify or update the original discovery plan would have been fruitless. The motion was therefore necessary and this objection has no merit.
24The issue was raised on the motion as to whether the examinations of the investors could be conducted in writing. Although each investor will likely be asked identical or at least similar questions, examinations in writing will not allow the defendants’ counsel to test their evidence by cross-examination on their answers. The examinations will be more effective and more likely to assist in the settlement of the action if the investors are examined orally.
25For these reasons, I conclude that allowing the defendants to conduct examinations for discovery of all of the investors would be neither oppressive, nor vexatious, nor unnecessary. The individual investors shall each attend for oral examination for discovery.
26As indicated above, I accept that the oral examinations of the individual investors should be subject to time limits. As the scope of questioning of the investors is limited, relating primarily to what information they relied on when making their decisions to invest, each examination shall be limited to one hour. This should allow the parties to complete the examinations of the 13 investors in two days.
27Before the hearing of this motion, the parties had agreed that plaintiff’s counsel would have Mr. Eisen make certain enquiries of each of the investors. As these enquiries will presumably now be made directly of the investors at their examinations for discovery, any order in this regard is hereby stayed.
Motion to amend the statement of defence and counterclaim
28The plaintiff only opposes the proposed amendments contained in paragraphs 65 and 97–99 of the draft fresh as amended statement of defence and counterclaim. The defendants have revised those paragraphs from the version contained in the proposed amended pleading in the motion record such that they now read as follows:
Further, to the extent that the Investors have suffered a loss, such loss was caused or contributed by their failure to conduct their own due diligence regarding Melvyn D. Eisen’s mortgage practices.
Eisen failed to:
(a) ensure his client investors, including the Investors, obtained independent legal advice in making investments in relation to mortgages;
(b) to disclose and explain the nature of the conflicting interest or potential conflicting interest to his clients, including the Investors; and
(c) to recommend his investor clients, including the Investors, obtain independent legal representation and require they receive independent legal advice.
Eisen’s practice with respect to mortgages fell below the standards expected of a solicitor practising in the Province of Ontario.
Eisen failed to warn the Investors that his practice fell below the standard of care.
29The defendants rely on rule 26.01:
26.01 On motion at any stage of an action the court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.
30Although the language of rule 26.01 is mandatory, it does not mean that all proposed amendments are automatically granted. In Marks v. Ottawa (City), 2011 ONCA 248, the Court of Appeal stated (at paragraph 19):
19 Although the general rule is that amendments are presumptively approved, there is no absolute right to amend pleadings. The court has a residual right to deny amendments where appropriate: Daniele v. Johnson (1999), 1999 CanLII 19921 (ON SCDC), 45 O.R. (3d) 498 (Div. Ct.) at paras. 11-15.2 Further, I would agree that the proper factors to be considered are those first set out in Simrod v. Cooper, [1952] O.W.N. 720 (H.C.J. Master) at p. 721, aff'd at p. 723 (H.C.J.), and quoted with approval in Vaiman v. Yates (1987), 1987 CanLII 4345 (ON SC), 60 O.R. (2d) 696 (H.C.J.) at p. 698, which can be summarized as follows:
An amendment should be allowed unless it would cause an injustice not compensable in costs.
The proposed amendment must be shown to be an issue worthy of trial and prima facie meritorious.
No amendment should be allowed which, if originally pleaded, would have been struck.
The proposed amendment must contain sufficient particulars.
31In opposing the amendments, the plaintiff relies on the last two of these factors. The plaintiff submits, and I agree, that any of the proposed amendments that would not survive a motion to strike should not be permitted. In this regard, the plaintiff relies on Canadian National Railway v. Brant, 2009 CanLII 32911 (ON SC), [2009] O.J. No. 2661 (S.C.J.) and in particular paragraphs 27 – 29:
27 A pleading must contain a "concise statement of the material facts on which the party relies for the claim or defence, but not the evidence by which those facts are to be proved": rule 25.06; Davis v. Canada (Attorney General) 2004 NLSCTD 153, 240 Nfld. & P.E.I.R. 21, [2004] N.J. No. 274. Unnecessary paragraphs should be struck so as to refine and focus the pleading. A pleading or a portion of a pleading may be struck if it is scandalous, frivolous or vexatious, may prejudice or delay the fair trial of the action, or is an abuse of the process of the court: rule 25.11 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. No pleaded fact that is relevant can be scandalous: Duryea v. Kaufman (1910), 21 O.L.R. 161 (H.C.J.) at 168:
Anything which can have any effect at all in determining the rights of the parties can be proved, and consequently can be pleaded - but the Court will not allow any fact to be alleged which is wholly immaterial and can have no effect on the result ...
28 A pleading of fact will be struck if it cannot be the basis of a claim or a defence in the action and is designed solely for the purpose of atmosphere: Wilson v. Wilson, [1948] O.J. No. 62 (H.C.J.). If the only purpose of the pleading is to cast the opposing party in a bad light, it will be struck. Pleadings of historical facts, whether those facts are true or not, that have no relevance to the proceeding, will also be struck: see, for example, Davis v. Canada (Attorney-General), above; Desjarlais v. Canada (2002), 2002 FCT 973, 224 F.T.R. 37, [2002] F.C.J. No. 1272.
29 One of the reasons for this rule is that the pleadings define the issues in the action. If a party is required to respond to irrelevant facts, inquire into those facts on discovery, and respond to evidence of those facts at trial, the litigation and trial will be diverted by inquiries into facts that have no connection to the real issue before the court. [emphasis added]
32With respect to the proposed paragraph 65, the plaintiff submits that it should not be permitted because the reference to the plaintiff Eisen’s “mortgage practices” is so broad as to open the door to irrelevant enquiries into aspects of his real estate practice that have nothing to do with his dealings with the investors in this case. Further, it contains no particulars of what “due diligence” might have been required on the part of the investors in the trust.
33As stated in Duryea v. Kaufman, cited at paragraph 27 of Canadian National Railway v. Brant, supra, “the Court will not allow any fact to be alleged which is wholly immaterial and can have no effect on the result”. The manner in which the plaintiff Eisen operates his law practice in relation to mortgages generally is of no relevance to the issues in the action, which are whether he provided sufficient information to the investors to enable them to make informed decisions regarding whether or not to invest in the Property and whether he breached the applicable standard of care by failing to recommend that the investors seek independent legal advice. The allegation in paragraph 65 is therefore frivolous and vexatious and that paragraph is not permitted as part of the amended pleading. Apart from the irrelevance of the allegation, which is in itself reason to refuse the amendment, I also accept that the proposed paragraph contains no particulars of the alleged required due diligence.
34With respect to paragraphs 97–99, the defendants acknowledge that sub-paragraphs 97 (a), (b) and (c) should be pleaded as particulars of paragraph 98. If these paragraphs are re-drafted in this way, the plaintiff takes issue only with sub-paragraph (b) which alleges a failure to disclose a conflicting interest to “his clients, including the Investors”. Counsel for the defendants acknowledges that there is no pleading in the proposed fresh as amended statement of defence and counterclaim alleging or particularizing any such “conflicting interest”. The allegation in sub-paragraph (b) is therefore not relevant to any issue raised by the defendants; accordingly it is frivolous and vexatious and is not permitted. The proposed paragraph 99 is permissible provided that it is clear that the alleged breaches by Eisen of the standard of care are as set out in the previous paragraph.
35In summary, the disputed amendments are permitted in the following form:
- Eisen’s practice with respect to mortgages fell below the standards expected of a solicitor practising in the Province of Ontario in that he failed:
(a) to ensure his client investors, including the Investors, obtained independent legal advice in making investments in relation to mortgages; and
(b) to recommend his investor clients, including the Investors, obtain independent legal representation and require they receive independent legal advice.
- Eisen failed to warn the Investors that his practice fell below the standard of care as described in paragraph 97.
Costs
36Following the hearing of the motion, counsel provided costs outlines. As it was possible that there be divided success on the motion, I informed counsel that I would request written submissions on costs following the release of my decision. If counsel cannot agree on costs, the defendants may make written submissions within 20 days and the plaintiff may respond within 20 days thereafter. Submissions shall not exceed three pages not including the costs outlines.
MASTER GRAHAM
DATE: May 17, 2016