COURT FILE NO.: CV-15-537425 DATE: 20170418 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
1414391 ONTARIO LTD and 2272822 ONTARIO LTD. Applicants – and – GEORGE GRAFF, STANLEY GORDON JOHN CLAPP and NANAKSAR THATH ISHAR DARBAR Respondents
Counsel: Mark A. Klaiman, for the Applicants Stephen Schwartz, for the Respondent George Graff No one appearing for the Respondents Stanley Gordon John Clapp and Nanksar Thath Ishar Darbar
HEARD: April 13, 2016
M. D. Faieta j.
Reasons for Decision
Introduction
[1] The context to this motion involves the long, convoluted and disputed history of millions of dollars in loans provided by the Respondent George Graff (“Graff”) secured by mortgages given by the Applicants, 1414391 Ontario Ltd. (“141”) and 2272822 Ontario Ltd. (“227”) which are corporations owned and controlled by Navtej Kang (“Kang”). To further complicate matters, some of these loans were used to refinance a construction mortgage held by the Respondent Nanaksar Thtath Ishar Darbar (“Nanaksar”) that had run into financial difficulty following its construction of a temple.
[2] Nanaksar is a not-for-profit Ontario corporation. Its primary objective is maintaining and conducting a temple for the Sikh religion.
[3] The Applicants originally sought an accounting of all monies received from Graff and repaid to him. Following the exchange of motion materials, the Applicants now accept Graff’s accounting.
[4] The only issue that remains outstanding on this motion is whether one of the mortgages, namely a mortgage of $650,000 (the “Castlemore Mortgage”) against 4415 Castlemore Road, Brampton (the “Castlemore Property”) registered June 13, 2013, is a collateral mortgage to the $700,000 mortgage (the “Wilson Mortgage”) registered against 1031 Wilson Avenue, Toronto (the “Wilson Property”) on January 12, 2011. Accordingly, default of the Wilson Mortgage constituted default of the Castlemore Mortgage. Similarly, if the Wilson Mortgage was entitled to be discharged, then the Castlemore Mortgage was to be discharged.
[5] On November 26, 2015, 141 paid $3,428,901.28 to Graff’s solicitors to obtain a discharge of all of the mortgages registered in favour of Graff against title to the Wilson Property. Graff’s solicitors are holding the sum of $351,615.46 in trust as the Applicants dispute that such amount is owed to Graff.
[6] For reasons given below, I have found that the mortgage on the Castlemore property is not collateral security for the mortgage on the Wilson property given the amendment registered in April 2015 that deleted this provision as reflected by the Notice that was signed by the bare trustee for the Castlemore property and registered on title sometime in May 2015.
Background
[7] Graff is about 80 years old. He sold his car wash business on Eglinton Avenue in Toronto to Gurdeep Grewal (“Gurdeep”) in 1986. Gurdeep introduced Graff to his brother Hardeep Singh (“Hardeep”) and his brother-in-law, Kang. Over time, Graff provided loans to Gurdeep, Hardeep and Kang for their purchase of car wash businesses and gas stations. He also provided financing to Gurdeep and Kang for the purchase of their homes.
[8] Gurdeep states:
Nanaksar is a worldwide religious organization that currently has approximately 100,000 followers. Nanaksar has congregations in about 35 countries. The spiritual and religious leader of Nanaksar is known as the Baba Ji. Baba Ji has held office for approximately 50 years. He resides in India.
[9] The evidence shows that Kang, Gurdeep, Hardeep, Satpal Ahluwalia, Surinder Singh Deol and Piara Singh Peuwal are directors of Nanaksar.
[10] In late December 2004, Nanaksar acquired a property municipally known as 9954 The Gore Road, Brampton, Ontario (“9954 Property”).
[11] In 2009 Nanaksar hired a general contractor to build a temple on the 9954 Property.
[12] In August 2010 Nanaksar secured construction financing for this project from the Royal Bank of Canada (“RBC”). One condition of this financing was that Nanaksar post a $500,000 bond as a guarantee for construction cost overruns. To this end, in September 2010 Nanaksar asked Graff for a loan of $700,000.00. Another condition of the RBC mortgage did not permit Nanaksar to further mortgage the Nanaksar property. Nevertheless, Graff lent these funds in November 2010. Kang, on behalf of, 141 agreed to provide a collateral mortgage on the Wilson Property to secure this loan. Although there is no documentary evidence to support this assertion, Kang states that the Respondent Stanley Clapp (“Clapp”), counsel for Graff, told him that: (1) 141 would not be responsible for repayment of the loan unless and until Nanaksar defaulted; (2) this collateral mortgage would be discharged from the Wilson Property after it was secured, sometime in the future, against the 9954 Property. Such assertions are denied by Clapp.
[13] In March, 2012, Graff advanced a further $150,000.00. This loan was secured by a second collateral mortgage on the Wilson Property that was registered on March 28, 2012. Once again, there is no documentary evidence to support Kang’s assertion that Clapp told him that 141 would only be responsible for this second collateral mortgage in the event that Nanaksar defaulted.
[14] In July 2012, RBC refused to advance any additional amounts to Nanaksar and demanded payment of its mortgage. Several contractors registered liens against the 9954 Property. As a consequence of Nanaksar’s failure to discharge the RBC mortgage, RBC obtained a court order that appointed a receiver. The receiver advised Nanaksar that it would sell the 9954 Property.
[15] Nanaksar negotiated a forbearance agreement with the receiver whereby the sale of the 9954 Property was postponed on condition that Nanaksar pay the sum of $250,000.00 to the receiver. Nanaksar paid this amount to the receiver on January 31, 2013.
[16] Nanaksar was unable to arrange conventional financing to discharge the RBC mortgage.
[17] Graff states that he received a call from Kang on or about April 28, 2013. Graff’s affidavit, sworn October 8, 2015, states:
He advised me that the Temple was in receivership. The Temple needed approximately $2.0 million to $2.5 million to deal with its financial problems. Kang indicated that he had sought loans from other sources without success. … He requested that I loan him the money. I replied that I would meet with Kang and Gurdeep at Gurdeep’s house. We met the next day.
On or about April 29, 2013, a meeting took place at Gurdeep’s home between myself, Kang and Gurdeep. Gurdeep and Kang requested that I loan the money to them for use at the Temple. Because of my relationship with Gurdeep and Kang, I was prepared to provide a loan to them. I emphasized that the loan would be made to them personally and not to the Temple. They agreed.
Gurdeep was not in a position to be a borrower. In 2009, I provided him with a $400,000 loan which was used to complete the construction of the Temple. As at April 2013, that loan was still outstanding. Gurdeep did not have any security to provide me for an additional loan. Accordingly, the borrower under the proposed loan was to be Kang.
In May 2013, I had funds on deposit overseas. The funds were in different currencies. The arrangement I made with Kang was that I would provide a loan in the approximate amount of $2 million by way of different currency amounts which would be sent to a Sikh temple in West Midland, United Kingdom and then converted to Canadian dollars. The funds would then be sent to the law offices of Paul Mand, the Temple lawyer. Kang and I agreed that I would be repaid the same amounts in the same currencies. Interest would accrue at the rate of 12% per annum. There was no term of the Loan. Rather, it was a demand loan. …
[18] In his affidavit sworn March 31, 2016, Kang states:
He [Graff] advised us that his money was abroad and that he wanted to transfer the money to Nanaksar Temple in the U.K.. He specifically did not want the money coming directly from abroad (or wherever it was) to Nanaksar in Canada and wanted the money transferred to Nanksar in the U.K. who in turn would transfer the funds to us. He was concerned that the CRA would question where we got the money from if it came directly from Graff. It was for this reason that the money was transferred by Graff to Nanaksar U.K. who in turn transferred the money to Canada. We had agreed that the interest was 12%. …
On the day that the money arrived from Nanaksar U.K., Amar Singh (Baba Ji) called a meeting of the then four directors of Nanaksar. I recall a meeting at Nanaksar office at 5:30 p.m. At that meeting, Amar Singh said that all of the money that I had arranged for Nanaksar was not going to be repaid to either myself or Graff as it was “black money”. He was trying to take advantage of the fact that he believed that Graff was improperly laundering money to avoid repayment of the obligations. I was shocked and protested his statements. I pointed out to him that I had mortgaged my properties to secure these loans for the benefit of Nanaksar. He was not moved. … [Emphasis added]
[19] Kang and Graff entered the following “Loan Agreement” dated May 27, 2013. Nanaksar is not a party to this agreement. The Loan Agreement states:
WHEREAS the borrower is desirous of borrowing $2,000,000.00 from the lender in order to provide new financing for a temple located at 9954 The Gore Rd, Brampton, Ontario which is currently owned by Nanaksar Thath Isher Darbar.
AND WHEREAS the lender has advanced $2,000,000.00 to the Trustees of the NTID Charitable Trust located in West Midland, United Kingdom upon the borrower’s direction.
AND WHEREAS the lender is desirous of obtaining security from the borrower in relation to the advancement of these funds.
AND WHEREAS the borrower is the president of 1414391 Ontario Ltd. which is the owner of 1031 Wilson Avenue …
AND WHEREAS the borrower is also the president of 2272822 Ontario Ltd. which is the owner of 2370 Finch Avenue West, Toronto …
NOW THEREFORE WITNESSTH that the parties agree as follows:
The borrower, in consideration of the advancement of $2,000,000.00 by the lender to the Trustees of the NTID Charitable Trust, agrees to provide a mortgage of $2,000,000.00 on both 1301 Wilson Avenue and 2370 Finch Avenue West, in favour of the lender to secure the payment of this advancement of funds.
The borrower also agrees to cause to be registered a first mortgage in favour of the lender to be placed on the property municipally known as 9954 The Gore Road, Brampton, Ontario for the same amount as the added security for the loan provided by the lender to the borrower.
All of these mortgages are collateral to each other and secure the sum of $2,000,000.00 lent by the lender to the borrower on the borrower’s instructions.
The borrower acknowledges that the $2,000,000.00 has been advanced by the lender in accordance with the borrower’s instructions.
The borrower and lender acknowledge the collateral mortgage is to be registered on 9954 The Gore Rd, Brampton, Ontario and will be done as soon as possible once this mortgage can be registered as a first mortgage whether by way of an assignment by the existing first mortgage (Royal Bank of Canada) or by other means.
The borrower acknowledges and represents that he has the power to cause such a mortgage to be executed on 9954 The Gore Rd, Brampton, Ontario.
The $2,000,000.00 is an approximation as on May 2, 2013, 400,000 British pound sterling with a conversion rate of 156.47 (Canadian) was transferred to the Trustees above mentioned, on May 9th, 2013, 830,000 U.S. dollars with a conversion rate of 1.0027 (Canadian) was transferred to the Trustees and on May 10th, 2013, 400,000.00 Euros with a conversion rate of 1.3115 (Canadian) was transferred to the Trustees. Therefore, the actual amount borrowed may be less than $2,000,000.00 Canadian but the mortgages will be adjusted accordingly at a later date. [Emphasis added.]
[20] In May 2013 Nanaksar arranged a second forbearance agreement with the receiver which required the payment of a further $500,000 and evidence of their ability to discharge the RBC mortgage. In respect of the latter requirement, Nanaksar agreed to borrow from Graff the funds required to discharge the RBC mortgage.
[21] Kang states that Graff advanced $300,000 directly to Nanaksar for purposes of the second forbearance agreement. On May 27, 2013, as security for the repayment of these funds, Kang, on behalf of 141, granted a third collateral mortgage on the Wilson Property to Graff in the amount of $300,000; and (2) a fourth collateral mortgage over the Wilson Property to Graff for $2 million. On the same date, Kang, on behalf of 227, also granted a collateral mortgage over the Finch Property, to Graff in the amount of $2 million.
[22] Kang, in an affidavit sworn September 30, 2015, states:
Over the next few months, Mr. Graff transferred several payments directly into Nanaksar’s account totaling approximately $2 million dollars … [Emphasis added.]
[23] Graff denies that he lent $2 million to Nanaksar. Graff, in his affidavit sworn October 8, 2015, states:
In May 2013 I loan approximately $2 million to Kang personally. Contrary to the allegations in his September 30, 2015 affidavit the Loan was not made to [Nanaksar]; …
Contrary to the allegations in the Kang Affidavit, at no time have I ever made a loan to Nanaksar. It is my information that Nanaksar is a Sikh Temple. I understand that Kang is a member of the Temple and is a follower of the Sikh religion. I am not. I have no interest in loaning money to the Temple for a variety of reasons. They include the fact that I am not a member of their community, I do not speak their language and I had no assurance that any loans made to the Temple would be repaid. I simply had no comfort in lending money directly to the Temple and would not do so.
I am aware that my loans made to Kang were primarily for the purpose of Kang using those funds on behalf of the Temple. That was none of my concern. As the borrower of the loans, Kang was free to direct the money as he saw fit. In my history of dealing with Kang, I always insisted and received from Kang security in the form of mortgages registered against title to various properties owned by him. Without the receipt of security in the form of real property mortgages, I never would have agreed to make any loans to him. This risk was lessened by my insistence and his agreement that I receive mortgages registered against title to a number of properties. …
Kang’s assertions that Clapp told him that 141 would only be responsible for my loans in the event that Nanaksar defaulted is nonsense, contrary to the documentation and to my knowledge, never occurred.
[24] On November 14, 2013, a fifth collateral mortgage for $100,000 over the Wilson Property in favour of Graff.
[25] On November 21, 2013 the receivership order and the RBC mortgage were discharged and the mortgage of the 9954 Property, by Nanaksar to Graff, was registered.
[26] Kang states, in his affidavit sworn March 31, 2016:
On the day that the money arrived from Nanaksar UK, Amar Singh (Baba Ji) called a meeting of the then four directors of Nanaksar. I recall a meeting at Nanaksar office at 5:30 p.,.. At that meeting, Amar Singh said that all of the money that I had arranged for Nanaksar was not going to be repaid to either myself or Graff as it was “black money”. He was trying to take advantage of the fact that he believed that Graff was improperly laundering his money to avoid repayment of the obligations. I was shocked and protested his statements. I pointed out to him that I had mortgaged my properties to secure these loans for the benefit of Nanaksar. He was not moved. …
[27] To summarize, Kang states that the following mortgages were given to Graff against the following five properties as security for these loans: (1) Finch Property; (2) 1031 Wilson Avenue, Toronto (“Wilson Property”); (3) 9946 The Gore Road, Brampton (“9946 Property”); (4) 9954 The Gore Road, Brampton (“9954 Property”); and (5) 4415 Castlemore Road, Brampton (“Castlemore Property”):
| Property | Chargor | Registration Date | Principal Amount |
|---|---|---|---|
| Finch Property | 227 | August 10, 2011 | $400,000 |
| Wilson Property | 141 | January 12, 2012 | $700,000 |
| Wilson Property | 141 | March 28, 2012 | $150,000 |
| Wilson Property | 141 | May 27, 2013 | $300,000 |
| Wilson Property | 141 | May 27, 2013 | $2,000,000 |
| Finch Property | 227 | May 27, 2013 | $2,000,000 |
| 9946 Property | Satinder Kaur Grewal | June 6, 2013 | $400,000 |
| Castlemore Property | Inderjeet Sidhu as bare trustee for Nanaksar | June 11, 2013 | $650,000 |
| Wilson Property | 141 | November 14, 2013 | $100,000 |
| 9954 Property | Nanaksar | November 22, 2013 | $3,019,251 |
| TOTAL | $9,719,251 |
[28] Kang states that he received the following sums of money from Graff by way of cheque, however Kang has not provided a cheque in support of the payment of $2 million received by Graff on May 25, 2013:
| Date | Amount | Payee |
|---|---|---|
| February 23, 2010 | $200,000 | Nanaksar |
| July 30, 2010 | $350,000 | Kang |
| July 30, 2010 | $150,000 | Kang |
| March 28, 2012 | $150,000 | Nanaksar |
| June 26, 2013 | $50,000 | Stanley Clapp in Trust |
| June 26, 2013 | $150,000 | Stanley Clapp in Trust |
| June 26, 2013 | $80,000 | Stanley Clapp in Trust |
| August 28, 2013 | $10,000 | Paul Mand Lawyers in Trust |
| October 3, 2013 | $26,000 | Stanley Clapp in Trust |
| October 18, 2013 | $20,000 | Stanley Clapp in Trust |
| November 12, 2013 | $44,000 | Stanley Clapp in Trust |
| November 19, 2013 | $10,000 | Stanley Clapp in Trust |
| July 18, 2009 | $100,000 | Kang |
| August 10, 2011 | $120,000 | 1208445 Ontario Inc. |
| August 10, 2011 | $85,000 | 1208445 Ontario Inc. |
| August 10, 2011 | $20,000 | 1208445 Ontario Inc. |
| October 5, 2011 | $50,000 | 141 |
| November 22, 2011 | $45,000 | 141 |
| November 5, 2011 | $50,000 | Kang |
| December 10, 2010 | $20,000 | Kang |
| July 13, 2010 | $50,000 | Kang |
| May 29, 2012 | $100,000 | Kang |
| November 22, 2011 | $45,000 | 141 |
| May 25, 2013 | $2,000,000 | Unknown |
| TOTAL | $3,925,000 |
[29] Kang also states that Graff gave him the following amounts in cash:
| Date | Amount of Cash |
|---|---|
| December 1, 2010 | $50,000 |
| December 10, 2010 | $5,000 |
| May 8, 2011 | $25,000 |
| October 5, 2011 | $15,000 |
| December 31, 2011 | $50,000 |
| August 31, 2012 | $35,000 |
| January 6, 2013 | $3,000 |
| December 17, 2013 | $50,000 |
| March 25, 2014 | $50,000 |
| July 20, 2015 | $50,000 |
| Total | $333,000 |
[30] Kang states that Graff was repaid the following amounts:
| Date | Payee | Amount of Cheque | Amount of Principal |
|---|---|---|---|
| June 26, 2013 | Stanley G. Clapp in Trust | $401,117.43 | $400,000 |
| November 2, 2015 | Chaitons LLP in Trust | $512,717.55 | $500,000 |
| November 26, 2015 | Chaitons LLP in Trust | $3,428,901.44 comprised of three cheques of $1,428,470.12, $2,000,000 and $431.32 | $3,250,000 |
| TOTAL | $4,342,736.43 | $4,150,000 |
Analysis
[31] As noted earlier, the only issue that remains outstanding on this motion is whether Castlemore Mortgage, registered June 13, 2013, is a collateral mortgage to the Wilson Mortgage registered on January 12, 2011.
[32] Graff’s position is two-fold: (1) that the Castlemore Mortgage, despite its express language to the contrary, was never intended to be a collateral mortgage to the Wilson Mortgage; and, (2) in any event, the Castlemore Mortgage was amended by deleting the reference to collateral security on April 30, 2015.
Issue #1: Was the collateral security provision mistakenly included in the Castlemore mortgage?
[33] Inderjeet Kaur Sidhu has been part of the Nanaksar congregation since 2005. She follows the spiritual guidelines and directions of Baba Ji. Baba Ji lives in India. Sidhu states that, at Baba Ji’s request, Sidhu agreed in November 2012 to be the registered owner of the Castlemore Property in trust for Nanksar. The trust agreement, dated November 20, 2012, was also signed by Sidhu at Baba Ji’s direction. It states:
… That [Nanaksar] … are the beneficial owners as to 100% of the said land and always will be as from January 30, 2009;
That I, [Sidhu], as trustee obtained registered title to the undivided interest in the said property on January 30, 2009 …
That I, [Sidhu], the trustee, was and will be a bare trustee and had and will have active duties to perform in respect of the said property …
That all obligations, including any mortgage obligations, responsibilities, acts or omissions pertaining to the land during the period of time it was vested in myself .. were or will be performed or omitted to be performed by the beneficial owner [Nanaksar] …
[34] In June 2013, Sidhu states that he met with Baba Ji in Toronto. At Baba Ji’s direction, Sidhu attended Stanley Clapp’s office to sign documents in connection with a loan that Nanaksar was receiving from Graff. Sidhu states:
I did not notice at that time that the mortgage had a provision that related to it being a collateral mortgage to a $700,000 mortgage on [the Wilson Property]. That information was not provided to me by Baba Ji. I understand that the [Castlemore Mortgage] was additional security for George Graff.
[35] About two years later, in April 2015, Sidhu was directed by Baba Ji to attend Mr. Clapp’s office to sign further documents regarding the Castlemore Mortgage. Sidhu states:
I again attended with Gurdeep Grewal at Mr. Clapp’s office and signed the documents requested by Baba Ji. The document I signed at that time amended the [Castlemore Mortgage] by deleting the reference to the collateral mortgage on the Wilson Property.
I have reviewed the allegations of Navtej Kang in his February 18, 2016 affidavit concerning the Board of Directors of [Nanaksar]. It is true that I did not speak with the Board of Directors concerning the amendment to the 2013 Mortgage I signed in April 2015. I do not recognize the Board of Directors as having the authority over these matters. I recognize the authority of Baba Ji. I was instructed by him to grant the 2013 Mortgage and to subsequently amend the 2013 Mortgage and I did so. Moreover, Gurdeep Grewal was a member of the Board of Directors in 2013 and in 2015 and he was aware of the request by Baba Ji for me to sign papers to amend the 2013 Mortgage. Gurdeep Grewal confirmed that this amendment was proper and correct.
[36] The Notice registered on title in respect of the Castlemore Mortgage states:
Applicant: Sidhu, Inderjeet …
Party To: Graff, George …
This notice is pursuant to section 71 of the Land Titles Act. …
Schedule: The applicant hereby applies to have the registered Charge No. PR2381976 registered on 2013/06/11 amended to reflect the following changes:
The following second paragraph of additional provisions dealing reference of collateral security is hereby deleted:
The Mortgagor agrees that the within Charge/Mortgage of Land is given as collateral security to a Charge/Mortgage registered as Instrument No. AT2918197 on June 12, 2012 in the Office of Land Titles of Toronto, securing the principal sum of $700,000, against a property … municipally known as 1031 Wilson Avenue, Toronto, Ontario … . Provided that all payments given under the aforesaid Charge/Mortgage of Land shall be the same as if given under this Charge/Mortgage of Land, and all defaults under this Charge/Mortgage of Land shall be the same as if defaulted under the aforesaid Charge/Mortgage of Land, and a discharge of Instrument No. AT2918197 shall be the same as a Discharge of this Charge/Mortgage of Land and a discharge of this Charge/Mortgage of Land shall be the same as a discharge of Instrument No. AT2918197.
All other terms of the Charge shall remain same.
[37] Graff submits that the collateral security provision in the Castlemore Mortgage was mistakenly included for the following reasons:
- At the time that she signed the Castlemore Mortgage, Sidhu’s evidence is that she did not notice that it had a provision which stated that it was collateral mortgage to the Wilson Mortgage;
- Graff’s evidence that the reference to collateral security in the Castlemore Mortgage was a mistake and that he did not notice that mistake until July 2014;
- Kang has not explained why the Castlemore Mortgage would be collateral to the Wilson Mortgage;
- The Wilson Mortgage was registered 17 months before the Castlemore Mortgage was registered;
- The principal amounts of the two mortgages are different – Wilson ($650,000); Castlemore ($700,000);
- The Castlemore Mortgage was registered on the same day as the Gore Road Mortgage which does not have a collateral security provision; and
- There is no business reason for the Castlemore Mortgage to be collateral to the Wilson Mortgage.
[38] Graff has not moved for an order for rectification of the mortgage to remove the collateral security provision in the Castlemore Mortgage nor has he provided any legal analysis to demonstrate that rectification is appropriate in these circumstances.
[39] The murky history of financings between Kang and Graff provides no help in trying to ascertain the business efficacy for including, or not including, the collateral security provision in the Castlemore Mortgage. I am not satisfied that the evidence before me justifies the rectification of the Castlemore Mortgage to remove the collateral security provision. Rectification is an equitable remedy. The applicable principles are described in Heim v. Heim, 2011 ONSC 129, paras. 18-20. The onus rests with Graff to provide “convincing proof” that rectification is warranted. Mr. Clapp drafted the Castlemore Mortgage at Graff’s direction. I am not prepared to exercise such equitable discretion in the absence of any evidence from Mr. Clapp regarding the drafting of the Castlemore Mortgage and particularly, the absence of evidence that he included the collateral security provision in the Castlemore Mortgage without such direction from Graff. If that had been the case, then I expect that such evidence would have been adduced.
Issue #2: Is Graff entitled to rely upon the Notice?
[40] Graff submits that:
- Sidhu, as registered owner of the property, was entitled to deal with the Castlemore Property, including granting mortgages;
- The amendment to the Castlemore Mortgage is not invalidated if Sidhu, as trustee, acted outside the scope of her authority in amending the Castlemore Mortgage because, as its registered owner, she had the statutory authority under s. 93(1) of the Land Titles Act to do so: Di Michele v. Di Michele, 2014 ONCA 261; Trang v. Nguyen, 2012 ONCA 885;
- he had no actual or constructive knowledge of any lack of authority on the part of Sidhu to sign the amendment to the Castlemore Mortgage’ the principle of the indoor management rule is a common law principle that has been codified under the Ontario Business Corporations.
[41] The Applicants submit that Graff had actual or constructive knowledge of Sidhu’s lack of authority to sign the amendment to the Castlemore Mortgage because: (1) Kang states that Graff and Clapp were aware of internal friction within Nanaksar; (2) Sidhu was not an officer or director of Nanaksar; (3) Graff ought to have known that Nanaksar was governed by a Board of Directors; (4) Graff contacted Gurdeep Grewal, a director of Nanaksar to arrange for the amendment to the Castlemore Mortgage when he knew that there were five other directors who were not in favour of amending the Castlemore Mortgage.
[42] J. Anthony VanDuzer, The Law of Partnerships & Corporations, Third Edition, Irwin Law Inc., 2009, the “indoor management rule” describes, at pages 214-215, as follows:
A person dealing with a corporation has no obligation to ensure that a corporation has go through any procedures required by its articles, by-laws, resolutions, contracts, or policies to authorize a transaction or to give authority to a person purporting to act on behalf of the corporation. Compliance with such procedures is a matter of internal or “indoor” management with which outsiders do not have to concern themselves. … This rule does not, however, relieve the third party from having to establish actual or apparent authority in order to enforce its claim against the corporation.
[43] Given that Sidhu was the registered owner of the Castlemore Property, she had the statutory authority to deal with the Castlemore Property, including granting a mortgage: Land Titles Act, R.S.O. 1990, chap. L.5, s. 93(1).
[44] There is much evidence regarding a power struggle within Nanaksar wherein it is alleged that Kang sought to have Nanaksar’s board of directors replaced with persons who supported him. The minutes of a meeting of Nanaksar’s board of directors on June 17, 2013 shows that an eleven member board was replaced with a seven member board. There is evidence of a strained relationship between some of the members of the board elected in 2013.
[45] Despite Kang’s bald assertion that Graff and Clapp were aware that there was “some internal friction” within Nanaksar, I am not satisfied that either Graff or his solicitor had actual or constructive knowledge of the fact that Sidhu lacked the authority of Nanaksar’s Board of Directors to sign the amendment to the Castlemore Mortgages in April 2015. It appears that the same steps were taken in obtaining the execution of the amendment of the Castlemore Mortgage as were taken in obtaining execution of the Castlemore Mortgage in that the same member of Nanaksar board of directors attended at Clapp’s office with Sidhu.
[46] Accordingly, I find that Graff is entitled to rely on the amendment to the Castlemore Mortgage executed by Sidhu.
Conclusions
[47] The Applicant’s motion is dismissed.
[48] I encourage the parties to resolve the issue of costs failing which the Respondents shall deliver written submissions within 7 days and the Applicants shall deliver written submissions within 14 days. Submissions are to be no longer than 3 pages exclusive of an outline of costs.
Mr. Justice M. D. Faieta
Released: April 18, 2017