COURT FILE NO .: CV-16-55095400A1 DATE: 20160707 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Nadi Inc., Plaintiff and Saeed Yahyavi, Defendant

BEFORE: F.L. Myers J.

COUNSEL: Kevin Sherkin and Ryan Wozniak , for Saeed Yahyavi Barbara Green and Ellad Gersh , for Nadi Inc.

HEARD: June 28, 2016

ENDORSEMENT

The Motion

[1] On June 28, 2016, I heard an emergency motion brought by Saeed Yahyavi to restrain a sale of his home by Nadi Inc. under power of sale. The sale was scheduled to close the next day - June 29, 2016. After the hearing, I released a short endorsement restraining the sale with reasons to follow. These are my reasons.

The Facts

[2] By judgment dated May 28, 2015, Dunphy J. adjudged Mr. Yahyavi and others liable to Nadi for over $1 million for fraud. Among other relief granted, Dunphy J. ordered that a mortgage granted by Mr. Yahyavi against his house stand as partial security for the bulk of the amount due under the judgment.

[3] Mr. Yahyavi was one of three principals behind a numbered company which I refer to as 217. Dunphy J. adjudged all three principals and 217 liable to Nadi. Mr. Yahyavi claims that he has since then been excluded from the management and affairs of 217 by his two former colleagues.

[4] After obtaining the judgment, Nadi discovered that 217 had fraudulently conveyed a piece of property to third parties. It commenced a new action against 217 and its purchaser for an order setting aside the transaction under the Fraudulent Conveyances Act and for $200,000 in punitive damages. It is perfectly clear in the new statement of claim that the new proceeding was brought to enforce Justice Dunphy’s judgment. Para. 15 of the statement of claim provides:

15. The Fraudulent Conveyance was conducted with the intention to defeat Nadi and Nadi International of their ability to enforce the Fraud Judgment and specifically to defeat, inter alia , 217, Tehranchi, Yahyavi and Safari’s creditors.

[5] By February 3, 2016, it appears that Nadi made common cause with 217, represented by the two shareholders other than Mr. Yahyavi, and the third parties behind the entity that bought 217’s fraudulently conveyed property. The plaintiff and the third parties entered into a settlement agreement dated as of February 3, 2016 that is in the record before me. Under the settlement agreement, the third parties agreed to pay Nadi $250,000 through its counsel Robins Appleby in trust. The third parties also agreed to cause the discharge of a mortgage registered against Unit 917 which was part of the fraudulently conveyed property. Thereupon, Nadi agreed to dismiss its fraudulent conveyance action. That is, for a payment of $250,000, Nadi agreed to let the purchaser keep the property that Nadi claimed ought to have been available to it to satisfy Justice Dunphy’s judgment against 217 and all of the judgment debtors.

[6] Paragraph 6 of the settlement agreement provides:

6. Nadi and [the third party purchasers] agree that except as provided herein, nothing in this settlement will prevent Nadi in any way from enforcing the Fraud Judgment attached as Schedule “A”. For clarification, this settlement is only in respect of the alleged fraudulent conveyance that is the subject matter of the herein action as between Nadi and [the third parties], and this settlement does not preclude Nadi from taking any and all future enforcement steps to recover for the full amount owing to it under the Fraud Judgment.

[7] By Notice of Sale dated April 19, 2016, Nadi gave notice to Mr. Yahyavi that it was enforcing the mortgage on his home as provided for in Justice Dunphy’s judgment. The notice of sale calculated the amount due under the mortgage without making any disclosure or providing any credit for the $250,000 recovered from the fraudulent conveyance action. Much back-and-forth ensued among counsel. On June 7, 2016, Mr. Taub at Robin Appleby advised that his firm had commenced acting for the Mr. Safari (one of the other two shareholders of 217) but not for either 217 or the third shareholder. At that time, Mr. Yahyavi was attempting to raise funds to pay out the mortgage and kept asking for a discharge calculation. On June 7, 2016, Mr. Taub advised Mr. Yahyavi’s counsel that Nadi’s mortgage exceeded $1.05 million.

The June 10, 2016 Hearing

[8] Things came to a head on June 10, 2016. Mr. Yahyavi brought an urgent motion before me seeking a stay of the sale of his house under Nadi’s power of sale to allow him more time to pay out the mortgage. In his amended notice of motion, Mr. Yahyavi also sought: (a) an assignment of the mortgage on paying into court the full amount due, (b) an order extinguishing Nadi’s writ of seizure and sale upon Mr. Yahyavi paying into court all additional money outstanding under Justice Dunphy’s judgment, (c) an order assigning Justice Dunphy’s judgment to Mr. Yahyavi, and (d) an order requiring a determination of the entitlement to the funds to be paid into court.

[9] As the matter was brought on minimal notice, I determined to hear only the request for a stay which, as properly characterized, was probably a motion for an interim injunction to prohibit Nadi from selling the house under the power of sale. Mr. Yahyavi’s evidence raised some smoke about a potential conflict of interest at Robins Appleby, but at its core was a plea for more time to complete a refinancing of his house to allow him to pay out Nadi’s mortgage. Mr. Yahyavi produced an inadequate refinancing proposal for the hearing. Mr. Taub appeared for Nadi and advised, on an unsworn basis, that Nadi had entered into an agreement of purchase and sale on the prior day. Under the applicable case law, a mortgagor loses its right to redeem when the mortgagee enters into an agreement to sell the mortgaged property under a lawful power of sale.

[10] In my endorsement dated June 10, 2016, I indicated that I had heard only Mr. Yahyavi’s request for a “stay” that day. Applying the well-known three-part test for an interlocutory injunction, that also applies to interim stay applications, I found that Mr. Yahyavi had not established irreparable harm. If Nadi prevented a proper redemption, then Mr. Yahyavi could be compensated in damages. But if Nadi lost a value-maximizing sale, Mr. Yahyavi’s ability to compensate Nadi was very much in issue. Moreover, if Mr. Yahyavi maintained a right of redemption, he had to pay Nadi in cash rather than by proposing a conditional commitment letter. No fraud was established against the mortgagee. Absent extreme circumstances tantamount to fraud, a mortgagor is not entitled to enjoin a sale under a proper power of sale proceeding except by actually paying the mortgage debt in full. Arnold v. Bronstein et al.. As alluded to above, even the right to prevent a sale by payment in cash terminates once the mortgagee enters into a binding agreement to sell the mortgaged property in lawful power of sale proceedings. Logozzo v. Toronto-Dominion Bank. I therefore dismissed the motion for a stay and invited the parties to agree on a schedule for the remaining issues. I offered to hold a Case Conference to assist with scheduling under Rule 50.13 if necessary.

New Facts Emerge

[11] Mr. Yahyavi testifies that after he was unsuccessful in court, he went about looking for a firmer refinancing commitment. In doing so, he approached one of the third parties who (unbeknownst to him), was one of the buyers of the fraudulently conveyed property from 217. On June 17, 2016, the third party told Mr. Yahyavi that he had paid $250,000 to Nadi to resolve the fraudulent conveyance action. He told Mr. Yahyavi that he had done a deal with Mr. Yahyavi’s partners in 217 who had excluded him (one of whom at least is now represented by Nadi’s lawyer Mr. Taub).

[12] After the first motion before me was dealt with, Mr. Yahyavi also had an opportunity to review the agreement of purchase and sale that Mr. Taub had produced at the hearing. The sale is to the son of the real estate agent shown as acting for the Nadi in the agreement. It also sets the closing for June 29, 2016 but the closing can be deferred up to 60 days if there is an issue with the vendor’s power of sale. Thereafter, if Nadi cannot convey good title by power of sale, Nadi can walk away from the agreement upon returning the buyer’s deposit. Mr. Yahyavi is at least suspicious that the sale is not a bona fide conveyance but was a last-minute pretense to make it appear that his right of redemption was foreclosed before the first hearing before me.

[13] By letter dated June 22, 2106, Mr. Yahyavi’s counsel wrote to Mr. Taub expressing concern that the $250,000 payment received by Nadi had not been disclosed. He asserted that Nadi’s notice of sale was void for misstating the amount due under the mortgage and that the agreement of purchase for Mr. Yahyavi’s home was void for failing to disclose the relationship between the vendor’s real estate agent and the buyer. He enclosed relevant case law on both points.

[14] As mentioned in para. 5 above, as part of the settlement of the fraudulent conveyance action, Nadi had the third parties discharge a mortgage against the fraudulently conveyed Unit 917. One might rightly wonder why Nadi required this since under the very next paragraph of the settlement agreement, Nadi agreed to dismiss its claim to set aside the fraudulent conveyance and thereby leave Unit 917 with the third parties. Why would Nadi care if the third parties kept the property with or without a mortgage on it? Well, it turns out that the third parties transferred Unit 917, mortgage free, to a “friend” of the principal of Nadi. Unit 917 had been caught by Nadi’s writ of seizure and sale. The third parties paid $250,000 to Nadi to keep the site and then they gave Unit 917 to Nadi’s friend after discharging a $386,000 mortgage.

[15] Mr. Yahyavi says that it is obvious that Nadi obtained more than $250,000 on that property. It also got Unit 917 for the “friend” free of a $386,000 encumbrance and that value too should be counted as realization by Nadi under Justice Dunphy’s judgment.

[16] Amir Anthony Nadiloey is the principal of Nadi. His evidence is that his friend bought Unit 917 from 217 in 2009 and had been driven suicidal trying to get the transfer closed. He was just helping his friend get what was rightly his. That altruism however does not begin to explain why a $386,000 mortgage was taken off title by the third parties as part of the settlement with Nadi.

[17] Mr. Yahyavi brought his motion back on before me urgently to prohibit the sale of his house under the power of sale that was scheduled to close on June 29, 2016. His notice of motion refers to Rule 59.06 to try to re-open the part of the motion that I dismissed previously based on the new information that he obtained. Nadi made no effort at the hearing to claim that Mr. Yahyavi was too late to rely on new evidence. Nor could it have rightly done so in that the information was deliberately kept from Mr. Yahyavi.

[18] It is obvious that the other two shareholders of 217, the third parties, and Nadi have made common cause and are seeking to continue enforcement against Mr. Yahyavi. Absent tortious misconduct, there is nothing necessarily wrong with that provided that all that is being enforced against Mr. Yahyavi is Mr. Yahyavi’s just debt. Mr. Yahyavi has whatever indemnity, contribution, or marshaling rights against his co-judgment debtors as he may have once he has paid his debts as due.

[19] In his responding affidavit for Nadi sworn June 24, 2016, Mr. Nadiloey discloses the settlement agreement with the third parties. He swears in para. 18 of his affidavit that:

18. Pursuant to paragraph 12 of the Minutes of Settlement, the Settlement provided for payment by the [the third parties] to Nadi in the amount of $250,000, (the “ Settlement Proceeds ”) and other terms. The Settlement Proceeds were paid in respect of the Nadi’s claim in the [fraudulent conveyance action] for punitive damages of $200,000 and its costs incurred, on a full indemnity basis, and were not payment in respect of either the Judgment or the Mortgage. Neither Yahyavi, 217 or any of its officers or directors contributed to the payment of the Settlement Proceeds. [Emphasis by underlining added.]

[20] There is no mention in the settlement agreement of the settlement payment being made on account of punitive damages.

[21] I understand that payments on behalf of an insolvent person can at times be routed through a third party to try to avoid characterization of the payment as an unjust preference. But the payment still needs to be recognized when received. Structure is one thing; pretending is another. I assess the arguments that the payment in Nadi’s hands can be labelled as proceeds of punitive damages and costs rather than payment toward Justice Dunphy’s judgment from general to specific as follows:

[22] First, at a high level, the settlement of the fraudulent conveyance action was a compromise of a claim premised on the third parties having assisted the judgment debtor 217 move an asset out from under Nadi’s ability to realize on it. Money flowing to Nadi was compensating it for the loss of realization on Justice Dunphy’s judgment. Even if the third party was just paying punitive damages for its reprehensible conduct, the funds in Nadi’s hands are damages consequent upon its claim to recover assets to satisfy Justice Dunphy’s judgment. The costs recovered were costs incurred enforcing the judgment debt. Where is it written that a creditor can avoid recognizing money received in realization of a claim by agreeing to characterize it differently? Were that permissible, every creditor would arrange every debt repayment to flow through a false structure and never have to recognize repayments – at least as among multiple debtors. Nadi’s counsel provided no law to suggest that characterizing a payment as something else prevents it from being recognized in substance for what it is in the creditor’s hands.

[23] Second, what arm’s length third party settles civil litigation by agreeing to pay punitive damages and costs first? I was not given any examples of case law involving bona fide compromise payments being made to punitive damages and costs. Parties recoil at the thought of admitting reprehensible conduct. Moreover, lawyers understand that proof of punitive damages is exceptionally difficult. It is the first claim waived in bona fide settlement negotiations. To test the bona fide’s of the allocation of the settlement proceeds sworn to by Mr. Nadiloey, Mr. Yahyavi’s counsel asked Robins Appleby to produce for the hearing their file of the settlement negotiations that led to the purported allocation of the settlement funds to punitive damages. Ms. Green of Robins Appleby responded:

I do not understand your request. I am not a witness to the proceedings, and I am in the middle of preparing and about to meet with the real estate lawyer in my office. In any event, I would not have the time to gather that information, and it is not readily available to me.

I have no obligation to comply with your request, and will not. Nor do I have any instructions to consent to an adjournment to accommodate any such requests. I will not be available to respond any further, so you will, if necessary, have to raise this with the judge.

I note your request is being made with less than an hour of the time I need to leave the office.

[24] Perhaps Ms. Green’s unfortunate tone can be attributed to her being hurried. The matter was moving in real time and time was short. However, it was also not the first time that Mr. Yahyavi’s counsel had sought this type of backup. While I declined to order a witness from Robins Appleby to give evidence and produce documents at the hearing of the motion, I would expect Nadi and especially its law firm to be fully transparent with non-privileged correspondence relevant to the unusual nature of the claim being made by Nadi.

[25] Finally, moving from the more general to the specific, case law provides that damages do not lie as a remedy under the Fraudulent Conveyances Act. Taylor et al. v. Cummings et al. (1897), 27 S.C.R. 589 (“That statute avoids the deed, nothing more” per Sedgewick J.); Waxman v. Philip Environmental Inc., 1994 CarswellOnt 4666 (Ont. Ct. Gen. Div.). While some courts have mused over the possibility of ordering punitive damages since Whiten was decided, Nadi was not able to point to any cases in which punitive damages have been awarded as a remedy under the Fraudulent Conveyances Act. In my view, classifying the payment made to Nadi as punitive damages under the Fraudulent Conveyances Act and therefore not realization on Justice Dunphy’s judgment was sophistry. Even if Nadi incurred some costs of enforcement which were then paid, the costs incurred and received should have been shown on both sides of the ledger and not excluded altogether. Mr. Taub’s representation to Mr. Yahyavi’s counsel of the amount of the mortgage debt on June 7, 2016, without disclosing or providing credit for the funds received by his firm in trust for Nadi was knowingly incorrect.

The Notice of Sale is Void

[26] Under the case law, a notice of sale issued as part of a power of sale proceeding must be correct. However the days of technical flaws thwarting mortgagee enforcement efforts have long since passed. Inconsequential errors will not nullify a notice of sale. The purpose of a notice of sale is to notify the debtor/mortgagor of the amount that he or she has to pay, by a specific time, in a specific place, to avoid a sale of the mortgaged collateral. Where the mortgagee has a reasonable basis to claim an amount that can be disputed and sorted out in an accounting, the notice of sale will not be nullified. Grenville Goodwin Ltd. v. MacDonald, [1988] O.J. No. 1437 (C.A.) at para. 7. But where, as here, parties adverse in interest have entered into confidential agreements to turn on the mortgagor; they have structured their affairs with a lack of apparent arm’s length to hide or to artificially reduce the amount apparently received on the mortgage debt; and as a result, the amount outstanding on the mortgage debt has been misstated in the notice of sale, in my view the notice of sale cannot stand.

[27] I understand that some of the funds from the settlement of the fraudulent conveyance action might have been allocated to the part of Justice Dunphy’s judgment that was not secured by Mr. Yahyavi’s mortgage. Nadi’s position with respect to punitive damages however led it to refrain from recognizing any of the settlement against any part of the judgment. Even if Nadi were now to recognize the settlement proceeds that it received as payment of the judgment and then allowed to allocate as between the part of Justice Dunphy’s judgment that is secured by the mortgage and the rest the judgment, the notice of sale would still substantially overstate the amount properly due by Mr. Yahyavi. Moreover, if more value is found to have been bestowed upon or for the benefit of Nadi as a result of the discharge of the mortgage on Unit 917 under the settlement agreement and/or the transfer of that unit, the amount of the overstatement will increase dollar for dollar.

[28] I therefore endorsed the record as follows on June 28, 2016:

In view of the urgency (it is 5:30 p.m. and the proposed closing is tomorrow) I will give a decision now with brief reasons to follow. I am satisfied that Nadi received and failed to account for $250,000 on account of Justice Dunphy’s judgment dated May 28 2015. As such, the notice of sale dated April 19, 2016 is void. Grenville Goodwin Ltd. v. MacDonald (1988), 65 O.R. (2d) 381. Nadi is therefore enjoined from completing the sale tomorrow pursuant to the agreement between Nadi and Mr. Farhanian dated June 9, 2016.

The parties disagree as to the amount outstanding under the mortgage, including, among other things, whether Nadi received value in relation to the conveyance of unit 917. Accordingly, upon Mr. Yahyavi paying into court $1,100,000 (one-million-one-hundred-thousand dollars) based on Nadi’s best case of $1,001,817.04 plus an allowance for interest and costs, before July 8, 2016, Nadi shall assign the mortgage and judgment to Mr. Yahyavi or his designate. Thereupon, all issues concerning the proper amount to which Nadi is entitled from the funds paid into court to the credit of this action are referred to the Master in Toronto. The Master will take such accounts and determine such issues as she or he deems fit to determine the amounts due to Nadi or Mr Yahyavi under Justice Dunphy’s judgment. If payment is not made by July 8, 2016. Mr. Yahyavi’s right to enjoin a future exercise of Nadi’s power of sale is lost.

Costs to Mr. Yahyavi of $10,000 on a partial indemnity basis payable forthwith but may not be deducted from the $1.1 million to be paid into court by Mr. Yahyavi.

F.L. Myers J. Date: July 7, 2016