CITATION: McDowell v. Fortress Real Capital Inc., 2017 ONSC 4789

COURT FILE NO.: CV-16-560268CP

DATE: 20170810

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

ARLENE McDOWELL

Plaintiff

– and –

FORTRESS REAL CAPITAL INC., FORTRESS REAL DEVELOPMENTS INC., JAWAD RATHORE, VINCENZO PETROZZA, EMPIRE PACE (1088 PROGRESS) LTD., BUILDING & DEVELOPMENT MORTGAGES CANADA INC., ILDINA GALATI, DEREK SORRENTI, SORRENTI LAW PROFESSIONAL CORPORATION, OLYMPIA TRUST COMPANY and MICHAEL CANE

Defendants

Mitchell Wine for the Plaintiff

Martin Sclisizzi and Ziad Yehia for the Defendant Empire Pace (1088 Progress) Ltd.

Jeremy Devereux and Jennifer Teskey for the Defendants, Fortress Real Capital Inc., Fortress Real Developments Inc., Jawad Rathore, and Vincenzo Petrozza

Ryan Morris and Daniel. Styler for the Defendant Olympia Trust Company

Mario. Delgado the Defendants Building & Development Mortgages Canada Inc. and Ildina Galati

Proceeding under the Class Proceedings Act, 1992

HEARD: July 25 and 26, 2017

PERELL, J.

REASONS FOR DECISION

A. Introduction

[1] Before the court are four proposed class actions that concern investments in four land development projects. The camaraderie of the class actions is that they involve the same proposed Class Counsel, one overlapping plaintiff in two actions, some overlapping defendants, similar theories of the case, and a new genre of class action; i.e., a mass rescission of investments in a syndicated mortgage, combined with a mass mortgage enforcement action, combined with tort, contract, and breach of fiduciary duty claims.

[2] The proposed Representative Plaintiffs are: (1) Arlene McDowell for the Ten88 Project in Toronto, Ontario; (2) Arlene McDowell and Saverio Aversa for the Collier Centre Project in Brampton, Ontario; (3) David Martino for the Sutton Project in Burlington, Ontario; and (4) Bryan Madryga and Eileen Wallace for the Harmony Simcoe Project in Barrie, Ontario.

[3] The proposed Class Members, who are the investors in the syndicated mortgages for each of the four class actions, are to be represented by the same proposed Class Counsel, Levine Sherkin Boussidan PC.

[4] In the Ten88 Project Action, Empire Pace (1088 Progress) Ltd. brings a pleadings motion to strike various claims or paragraphs from the Statement of Claim and to have the action dismissed as against it.

[5] In the Sutton Project Action, Adi Developments (Link) Inc. and Adi Development Group Inc. bring a pleadings motion to strike various claims or paragraphs from the Statement of Claim and to have the action dismissed against them. (Adi Development Group Inc. was misnamed as Adi Developments Inc., and, in Martino v. Fortress Real Capital Inc., 2017 ONSC 4790, on consent, I ordered that the Statement of Claim be amended to correct the misnomer.)

[6] In all four actions, the Fortress Defendants; namely Fortress Real Capital Inc., Fortress Real Developments Inc., Jawad Rathore, and Vincenzo Petrozza bring a pleadings motion to strike various claims or paragraphs from the various Statements of Claim. Messrs. Rathore and Petrozza also seek to have the action dismissed as against them.

[7] In all four actions, Olympia Trust Company brings a pleadings motion to strike various claims or paragraphs from the various Statements of Claim.

[8] In the Sutton Project Action and in the Collier Centre Project Action, FFM Capital Inc. brings pleadings motions to strike various claims or paragraphs from the Statements of Claim. These motions, however, were settled and are being withdrawn.

[9] In the Sutton Project Action and in the Collier Centre Project Action, Rosalia Spadafora, Krish Kochhar, Tony Mazzoli, and Saul Perlov bring pleadings motions to strike various claims or paragraphs from the Statements of Claim. These motions, however, were settled and are being withdrawn.

[10] In the Harmony Simcoe Project Action, FMP Mortgage Investments Inc., Michael Daramola, Tonino Amendola, and Graham McWaters bring a pleadings motion to strike various claims or paragraphs from the Statement of Claim. This motion, however, was settled and is being withdrawn.

[11] In the Harmony Simcoe Project Action, FDS Broker Services Inc., Glenn May-Anderson, and Zafar Iqbal Khawaja bring a pleadings motion to strike various claims or paragraphs from the Statement of Claim. This motion, however, was settled and is being withdrawn.

[12] In response to the now withdrawn motions and in response to the motions now before the court, the Plaintiffs made concessions and withdrew certain claims and agreed to discontinue claims against several Defendants. They clarified the scope of other claims. As an aspect of the withdrawals, the Plaintiffs have agreed to discontinue their claims against Mr. Kochhar, Mr. Mazzoli, Mr. Amendola, Mr. McWaters, Mr. Khawaja, Mr. May-Anderson, and FDS Broker Services.

[13] These Reasons for Decision respond to Empire Pace’s motion in the Ten88 Project Action.

[14] The Reasons for Decision in the other motions are being simultaneously released. See: Martino v. Fortress Real Capital Inc., 2017 ONSC 4790; McDowell and Aversa v. Fortress Real Capital Inc., 2017 ONSC 4791; and Madryga v. Fortress Real Capital Inc., 2017 ONSC 4792.

[15] Taken together, the outcome of the various motions is as follows: (a) the claims against Messrs. Rathore and Petrozza are struck out without leave to amend; (b) the claims against Empire Pace are struck out without leave to amend; (c) the claims against the Adi Developments Defendants are struck out without leave to amend; (d) the claims against Kochhar, Mazzoli, Amendola, McWaters, Khawaja, May-Anderson, FDS Broker Services, Financial Services Commission of Ontario, and Her Majesty the Queen in Right of Ontario are discontinued; and (e) the Plaintiffs’ Statements of Claim in all the actions are struck out in their entirety against all remaining Defendants with leave to deliver Fresh as Amended Statements of Claim.

[16] A Fresh as Amended Statement of Claim means a pleading with an amended style of cause and without the amendments being underlined and without strikeouts and without the joinder of the Defendants against whom the Plaintiffs have delivered discontinuances or against whom the claims have been struck. The Plaintiffs shall have 40 days to deliver their Fresh as Amended Statements of Claim, failing which the actions shall be dismissed. The delivery of the Fresh as Amended Statements of Claim is without prejudice to the Defendants’ rights to challenge the pleadings as not disclosing a reasonable cause of action or as non-compliant with the Rules of Civil Procedure.

B. Factual Background

[17] For the purposes of this motion, I shall use the facts as set out in the proposed and not officially delivered Fresh as Amended Statement of Claim in Ms. McDowell’s action for the Ten88 Project along with the facts associated with the documents referred to in that pleading.

[18] The Defendant Empire Pace is an Ontario corporation with an office in Vaughan, Ontario. It was incorporated in 2012 to own and develop the Ten88 Project in Toronto, Ontario, which was initially planned to be a development comprising 104 condominium townhouses and 310 condominium units.

[19] On August 13, 2012, Empire Pace signed loan agreements with: (1) Fortress Real Developments with “Derek Sorrenti, in trust, as first lender”; and (2) “Olympia Trust, in trust, as second lender”. Under the loan agreements, Empire Pace agreed to borrow an amount not to exceed $20 million from the lenders.

[20] The Defendant Fortress Real Developments, which orchestrated the lending but which is not the lender, is an Ontario corporation with an office in Richmond Hill and is in the business of real estate development. The nature of Fortress Real Developments’ business; i.e., whether it was a land developer, a promoter, a lender, a broker, a fiduciary, or something else, will be a contentious issue in all four proposed class actions, but for the purposes of Empire Pace’s motion, nothing turns on how to categorize the business of Fortress Real Developments.

[21] The Defendant Fortress Real Capital, which is a Canadian corporation, is related to Fortress Real Developments. The nature of Fortress Real Capital’s business will be another contentious issue, but for present purposes, it is sufficient to say that it was involved with its sister company to syndicate mortgages to lend money to land developers like Empire Pace.

[22] The principals of the Fortress corporations are the Defendants Jawad Rathore of Markham, Ontario and Vincenzo Petrozza of Richmond Hill, Ontario.

[23] The Defendant Mr. Sorrenti is a lawyer who practices in Vaughan, Ontario. In addition to being a lender, Mr. Sorrenti played several other roles with respect to the Ten88 Project. Among other things, he and his firm, the Defendant Sorrenti Law Professional Corporation, provided legal advice to the investors in the syndicated mortgages.

[24] Olympia Trust is a trust company incorporated under the laws of the province of Alberta with its office in Calgary. It was a lender and a trustee with respect to the syndicated mortgages.

[25] Under the loan agreements, Empire Pace agreed to pay interest at 8%, payable quarterly. It agreed to pay a variety of other fees and charges and to share profits. Under the loan agreements, Empire Pace agreed to provide security for the loan including a mortgage to Mr. Sorrenti and Olympia Trust. The loan was to mature on August 10, 2015 (i.e., three-year term) with a right to extend the maturity date for six months.

[26] Under the loan agreements, the lenders agreed to subordinate their security to construction financing up to $110 million.

[27] Under the loan agreements, Mr. Sorrenti and Olympia Trust agreed to grant partial discharges, postponements, and to standstill in certain circumstances. The loan agreement stated:

16. Postponement and Subordination

Each of the First Lender and the Second Lender covenants and agrees as follows:

(a) to postpone and subordinate the Loan Documents in favour of First-Ranking Construction Loan Security and to enter into such standstill agreements as the holders may require:

(b) to postpone and subordinate the Loan Documents in favour of each non-financial encumbrance which is reasonable for a development such as the Project and which individually does not materially adversely affect the market value of the Property (including without limitation, encumbrances pertaining to condominium deposits, roads, sidewalks, easements, rights-of-way, subdivision agreements, site plan control agreements, development agreements, cost-sharing agreements, encroachment agreements, zoning/use laws, utility licences, utility easements, Crown patent reservations and restrictive use covenants); …

[28] Returning to the narrative, the day after it entered into the loan agreements; i.e., on August 14, 2012, Empire Pace became the registered owner of the land for the Ten88 Project. It paid $8.8 million for the property.

[29] On August 15, 2012, Empire Pace granted the syndicated second mortgage. This mortgage, which was to be syndicated by the Fortress Defendants, was registered as Instrument No. AT3101004 against the title of the property.

[30] The syndicated mortgage is a document under seal. By operation of s. 13 of the Land Registration Reform Act, R.S.O. 1990, c. L.4, a mortgage or charge not executed under seal has the same effect for all purposes as if executed under seal.

[31] The syndicated mortgage contained a priority, standstill, forbearance, and postponement provision, as follows:

13. Priority, Standstill, Forbearance and Postponement

The Chargee acknowledges that the Chargor will be arranging for additional financing to facilitate the development of the project on the Lands which shall include but not be limited to soft and hard cost financing, marketing financing, additional equity and surety bonding/financing to be secured by real estate charge(s) and personalty and any and all renewals and replacements thereof (the “Senior Security”). The current amount of the loans to be evidenced by the Senior Security are $…. (the “Total Senior Security”) which Total Senior Security shall increase from time to time as may be necessary to reflect any necessary adjustments to the project as to scope of the project or anticipated costs (the “Total Adjusted Senior Security”). The Chargee agrees with the Chargor as follows:

1. The Total Adjusted Senior Security, and all advances made thereunder from time to time in respect of the Lands and project contained thereon, shall constitute a prior charge and security interest against the Lands, and all other real and personal property assets of the Chargor …

2. The within Charge shall constitute a subsequent charge and security interest against the Lands and all other real and personal property assets of the Chargor relating or pertaining to the Lands subsequent to the Total Adjusted Senior Security.

3. Without limiting the generality of the foregoing the Chargee hereby postpones and subordinates the within Charge, and all of its rights, powers and interests thereunder, to and in favour of the Total Adjusted Senior Security, and to any and all loan advances made by or under the Total Adjusted Senior Security from time to time, together with all interest now or hereafter accrued and/or payable thereon … regardless of whether:

(a) any or all of the advances under the Total Adjusted Senior Security advances are made on or prior to, or subsequent to, the date of registration of the within Charge;

(c) there is any outstanding default by the Chargor (or any other party) under the within Charge before, at the time, or after any such loan advance(s) by under the Total Adjusted Senior Security;

(d) there is any outstanding default by the Chargor (or any other party) under the Total Adjusted Senior Security before, at the time, or after any such loan advances(s) by the Chargee before, at the time or after the indebtedness or obligations of the Chargor to the Chargee arises under the within Charge; …

4. From and after the date hereof, to and until the repayment in full of all monies owing to the holders of the Total Adjusted Senior Security, the Chargee shall not register (or cause to be registered) any documents or instruments on title to the Lands (or any portion thereof) which would limit, inhibit, prevent or delay any loan advances under the Total Adjusted Senior Security, nor will the Chargee initiate or pursue any claims, steps or proceedings which might (either directly or indirectly) negate, challenge or impugn the priority status of the Total Adjusted Senior Security over the within Charge as herein set out, and the concomitant postponement and subordination of the within Charge to any and all loan advances made the under the Total Adjusted Senior Security as hereinbefore provided or contemplated.

C. STANDSTILL/FORBEARANCE

1. The Chargee hereby covenants and agrees that from and after the date hereof, to and until the date of repayment of the outstanding indebtedness secured under the Total Adjusted Senior Security and the complete discharge thereof (which period of time is hereinafter referred to as the “Standstill Period”), the Chargee shall not take, direct, initiate, pursue or otherwise participate in (either directly or indirectly) any collection, realization or enforcement proceedings or remedies against (or otherwise affecting) the Chargor…, nor against the Lands (or any portion thereof), nor against any chattels, fixtures, rents, leases and/or other personal property situate upon, within, or affixed to, or otherwise relating to the Lands or the Condominium complex (or any portion thereof), as a result of any breach, default or non-compliance with any covenants, conditions, representations, warranties, terms and/or provisions of this Chargee (or any portion thereof) save and except any enforcement proceedings or remedies first approved of in writing by all of the holders of the Total Adjusted Senior Security, which approval may be unreasonably withheld.

D. GENERAL

The Chargor covenants and agrees to execute and provide any or all of the Chargees under the Total Adjusted Senior Security with whatever documents that, in the reasonable opinion of such Chargees or their solicitors, may be required from time to time to evidence and confirm the foregoing postponements, subordination, priorities and standstill provided for in Sections A, B and C above.

[32] In August 2012, the Fortress Defendants began to market interests in the syndicated mortgage granted by Empire Pace. The Fortress Defendants made presentations, and the investments in the syndicated mortgage were marketed through mortgage brokers, including the Defendant Building & Development Mortgages Canada Inc., whose principal broker is the Defendant Ildina Galati.

[33] In August 2012, Ms. McDowell received promotional material about the Ten88 Project from Marcel Greaux of the mortgage brokerage firm Mortgage Alliance of Canada.

[34] Ms. McDowell decided to invest $25,000 in the syndicated mortgage.

[35] On October 5, 2012, Ms. McDowell met with Mr. Greaux and a notary. The purpose of the meeting was to close her investment in the syndicated mortgage. During the meeting, Ms. McDowell had a phone conversation with Mr. Sorrenti. Ms. McDowell alleges that she was not properly advised by Mr. Sorrenti and that he did not provide her with genuine independent legal advice with respect to her investment in the Ten88 Project.

[36] At the meeting with Mr. Greaux and the notary, Ms. McDowell received, and in some instances completed or signed, the following documents: (1) a letter from Fortress Real Capital and Centro Mortgage Inc. (also known as Building & Development Mortgages Canada Inc.); (2) Investor/Lender Disclosure Statement for Brokered Transactions; (3) Attestation; (4) Investment Authority – Form 9D; (5) Mortgage Commitment; (6) Loan Agreement; (7) Memorandum of Understanding; (8) Lender Acknowledgement and Consent Agreement; (9) Mortgage Investment Direction and Indemnity Agreement; (10) Solicitor’s Certificate of Disclosure & Undertaking Regarding Arms-Length Mortgages; (11) Client Suitability Form; (12) Declaration of Bare Trust with Mr. Sorrenti; (13) Confirmation of Lender’s Interest with Empire Pace; and (14) an opinion of land value.

[37] In the Investment Authority – Form 9D, which was signed by Ms. McDowell, she gave instructions to Sorrenti Law Professional Corporation. The form stated, among other things, that:

I hereby confirm that I understand and agree that the second charge/mortgage in which I have invested shall be required to postpone and standstill to prior charges/mortgages to a maximum of [$110 million] ….

[38] In the Memorandum of Understanding, which was signed by Ms. McDowell, she confirmed that Fortress Real Capital products are syndicated mortgages evidenced by charges on real property. She agreed to subordinate her interest in the syndicated mortgage to construction financing up to an amount of $110 million.

[39] In the Mortgage Investment Direction and Indemnity Agreement, which was signed by Ms. McDowell, she confirmed, among other things, that she was fully aware of the nature of the mortgage and its terms and conditions.

[40] In the Lender Acknowledgement and Consent Agreement, which was signed by Ms. McDowell, she acknowledged, among other things, that: (a) she was aware that under the loan agreement, the syndicated mortgage would be postponed to construction financing to a maximum of $110 million; (b) she understood the effect of the terms of the loan agreement; (c) she agreed that the syndicated mortgage shall be postponed and would standstill to prior mortgages to a maximum of $110 million; and (d) she had received independent legal advice with respect to the investment and the documentation associated with it.

[41] In the Declaration of Bare Trust, which was signed by Ms. McDowell, she recited that she had agreed to lend $25,000 to participate in a syndicated mortgage loan registered in the name of the Bare Trustee (Mr. Sorrenti).

[42] Under the Declaration of Bare Trust, Ms. McDowell and Mr. Sorrenti agreed, among other things, as follows:

1. … the Bare Trustee shall be seized of the Syndicated Mortgage and any and all amendments thereto as Bare Trustee for the Beneficiary.

2. The Bare Trustee shall deal with the Syndicated Mortgage or any portion thereof as directed by the Beneficiary. ….

3. The Bare Trustee shall accept such alterations, revocations and amendments to its powers set out herein as the Beneficiary may determine at any time and from time to time. ….

[43] In the Confirmation of Lender’s Interest, which was signed by Ms. McDowell and by Mr. Sorrenti, Ms. McDowell agreed as follows:

(a) to postpone and subordinate the Loan in favour of one or more secured Mortgaged Property construction loans, in favour of arm’s-length lenders and enter into any and all required standstill agreements as such lenders may require, in an aggregate principal amount not to exceed [$110 million], ….

[44] In the Confirmation of Lender’s Interest, Mr. Sorrenti, agreed as follows:

1. … [the lender] confirms that it holds an undivided interest that represents 0.33% or $25,000 in the Loan, in trust for and on behalf of the Mortgage Investor;

2. … [the lender agrees] to enforce the Loan on behalf of the Mortgage Investor as would a prudent lender, have regard to the quantum of the Loan and nature of the development against which the Loan security is registered …

[45] In July 2013, construction of the Ten88 Project began.

[46] On July 29, 2014, Empire Pace borrowed $28 million from Meridian Credit Union to finance the construction of the Project. The security was a first mortgage on the property. The construction mortgage was registered on title as Instrument No. AT3645667. The same day, Mr. Sorrenti and Olympia Trust delivered a postponement which was registered on title as Instrument AT3646021.

[47] In August 2015, Empire Pace exercised its option to extend the maturity of the syndicated mortgage to February 10, 2016.

[48] On February 5, 2016, investors in the Ten88 Project were advised that the Project was 75% sold with occupancy to begin in the spring or summer of 2017 and that because of the standstill, subordination and postponement provisions the “loan will now enter a period of interest accrual for the remainder of the term allowed by the standstill, postpone and subordinate provisions.” Thus, the investors were advised that interest would accrue and be paid along with the principal upon completion of the project.

[49] Ms. McDowell’s position is that notwithstanding the advice that the loans were in a period of interest accrual, the loans were in default and principal and interest were due and payable.

[50] Mr. Sorrenti and Olympia Trust, however, have not taken any steps to enforce the syndicated mortgage.

[51] On September 9, 2016, Ms. McDowell commenced this proposed class action. She claims, among other things: (a) certification of the action as a class action; (b) rescission of all agreements with respect to her investment in the Ten88 Project; (c) the removal and replacement of Mr. Sorrenti and Olympia Trust as trustees; (d) general damages of $25 million; and (e) judicial sale of the Ten88 Project lands and payment of the mortgage debt.

[52] Ms. McDowell pleads that there was no agreement for the accrual of interest under the loan agreements and that the syndicated mortgage has been in default since February 10, 2016.

[53] Ms. McDowell pleads and submits that the standstill provision is not enforceable because: (a) the loan agreements do not include a standstill provision; (b) the standstill provisions in the loan agreements were not triggered and are not operative; (c) the standstill provisions were not adequately disclosed or disclosed at all to Ms. McDowell; (d) the standstill provisions are inconsistent with the default provisions of the loan agreement; and (e) only the construction lender may rely on the standstill provision.

[54] Ms. McDowell pleads that Empire Pace owed her a duty of care and misrepresented to her in the Lender Acknowledgement and Consent Agreement that: (a) the Ten88 Project lands were worth $16,560,000; (b) the investment in the syndicated mortgage was RRSP-eligible; and (c) Empire Pace had delivered a legal opinion to this effect.

C. Discussion and Analysis

1. Position of the Parties

[55] Empire Pace submits that Ms. McDowell’s action as against it be dismissed because she is not a party to the syndicated mortgage and pursuant to the sealed contract rule, she cannot sue to enforce the mortgage. Alternatively, it submits that the action should be dismissed because the terms of the syndicated mortgage are subject to a standstill provision that precludes enforcement without the approval of the construction lender, Meridian Credit Union, which approval has not been obtained.

[56] Ms. McDowell responds that the sealed contract rule does not apply because: (1) either she was a disclosed principal and the sealed contract rule applies only to undisclosed principals; or (2) she can rely on the trustee/beneficiary exception to the sealed contract rule. Further, she responds that the standstill provision is not enforceable for want of disclosure, for want of consideration, for ambiguity and inconsistency with the loan agreement, or for not being operational as a matter of contract interpretation.

2. Procedural Background

[57] Empire Pace’s motion is brought pursuant to Rule 21, which provides:

WHERE AVAILABLE

To any Party on Question of Law

21.01(1) A party may move before a judge,

(a) for the determination, before trial, of a question of law raised by a pleading in an action where the determination of the question may dispose of all or part of the action, substantially shorten the trial or result in a substantial saving of costs;

(b) to strike out a pleading on the ground that it discloses no reasonable cause of action or defence, and the judge may make an order or grant judgment accordingly.

(2) No evidence is admissible on a motion,

(a) under clause (1)(a), except with leave of a judge or on consent of the parties;

(b) under clause (1)(b).

To Defendant

(3) A defendant may move before a judge to have an action stayed or dismissed on the ground that,

Jurisdiction

(a) the court has no jurisdiction over the subject matter of the action;

Capacity

(b) the plaintiff is without legal capacity to commence or continue the action or the defendant does not have the legal capacity to be sued;

Another Proceeding Pending

(c) another proceeding is pending in Ontario or another jurisdiction between the same parties in respect of the same subject matter; or

Action Frivolous, Vexatious or Abuse of Process

(d) the action is frivolous or vexatious or is otherwise an abuse of the process of the court,

and the judge may make an order or grant judgment accordingly.

[58] On a Rule 21 motion, the court is entitled to consider any documents specifically referred to and relied on in a pleading: Martin v. Astrazeneca Pharmaceuticals PLC, 2012 ONSC 2744 at paras. 160-162, aff’d 2013 ONSC 1169 (Div. Ct.); Re*Collections Inc. v. Toronto-Dominion Bank, 2010 ONSC 6560; Web Offset Publications Ltd. v. Vickery (1999), 1999 CanLII 4462 (ON CA), 43 O.R. (3d) 802 (C.A.), leave to appeal dismissed, [1999] SCCA No. 460; Corktown Films Inc. v. Ontario, [1996] O.J. No. 3886 (Gen. Div.).

[59] A statement of claim is deemed to include any statement or documents incorporated in it by reference and which form an integral part of a plaintiff's claim: Montreal Trust Co. of Canada v. Toronto-Dominion Bank, [1992] O.J. No. 1274 (Gen. Div.); Weninger Farms Ltd. v. Canada (Minister of National Revenue), 2012 ONSC 4544 at paras. 11-12; McCreight v. Canada (Attorney General), 2013 ONCA 483 at para. 32.

[60] With respect to the statement of claim, under rule 21.01(1), the court accepts the pleaded allegations of fact as proven, unless they are patently ridiculous or incapable of proof: A-G. Canada v. Inuit Tapirisat of Canada, 1980 CanLII 21 (SCC), [1980] 2 S.C.R. 735; Canada v. Operation Dismantle Inc., 1985 CanLII 74 (SCC), [1985] 1 S.C.R. 441; Nash v. Ontario (1995), 1995 CanLII 2934 (ON CA), 27 O.R. (3d) 1 (C.A.); Folland v. Ontario (2003), 2003 CanLII 52139 (ON CA), 64 O.R. (3d) 89 (C.A.); Canadian Pacific International Freight Services Ltd. v. Starber International Inc. (1992), 1992 CanLII 15412 (ON SC), 44 C.P.R. (3d) 17 (Ont. Gen. Div.) at para. 9.

[61] With some adjustments when evidence is admitted, a rule 21.01(1)(a) motion uses the same test as under a motion under rule 21.01(1)(b), where the court may strike out a pleading on the ground that it discloses no reasonable cause of action: R.D. Belanger & Associates Ltd. v. Stadium Corp. of Ontario Ltd. (1991), 1991 CanLII 2731 (ON CA), 5 O.R. (3d) 778 (C.A.) at pp. 781-82; Toronto-Dominion Bank v. Deloitte Haskins & Sells (1991), 1991 CanLII 7366 (ON SC), 5 O.R. (3d) 417 (Gen. Div.); MacDonald v. Ontario Hydro (1994), 1994 CanLII 7294 (ON SC), 19 O.R. (3d) 529 (Gen. Div.), aff’d 1995 CanLII 10628 (ON SC), 26 O.R. (3d) 401 (C.A.).

[62] Where a defendant submits that the plaintiff’s pleading does not disclose a reasonable cause of action, to succeed in having the action dismissed, the defendant must show that it is plain, obvious, and beyond doubt that the plaintiff cannot succeed in the claim: Dawson v. Rexcraft Storage & Warehouse Inc. (1998), 1998 CanLII 4831 (ON CA), 164 D.L.R. (4th) 257 (Ont. C.A.); Hunt v. Carey Canada Inc. (1990), 1990 CanLII 90 (SCC), 74 D.L.R. (4th) 321 (S.C.C.).

[63] Matters of law that are not fully settled should not be disposed of on a motion to strike: Dawson v. Rexcraft Storage & Warehouse Inc., supra, and the court's power to strike a claim is exercised only in the clearest cases: Temelini v. Ontario Provincial Police (Commissioner) (1990), 1990 CanLII 7000 (ON CA), 73 O.R. (2d) 664 (C.A.).

[64] In R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42 at paras. 17-25, the Supreme Court of Canada noted that although the tool of a motion to strike for failure to disclose a reasonable cause of action must be used with considerable care, it is a valuable tool because it promotes judicial efficiency by removing claims that have no reasonable prospect of success and it promotes correct results by allowing judges to focus their attention on claims with a reasonable chance of success.

[65] Questions involving contractual issues, including enforceability and interpretation of a contractual provision, that require no extrinsic evidence may be properly determined pursuant to a motion under rule 21.01(1)(a): OHL Construction Canada v. Toronto Transit Commission, 2015 ONSC 2712 at paras. 23-25: Spina v. Shoppers Drug Mart Inc., 2012 ONSC 5563 at para. 117.

3. Analysis

[66] Put simply, I agree with Empire Pace’s argument with the result that the claims against it by Ms. McDowell should be dismissed. This outcome, however, does not mean that the syndicated mortgage cannot be enforced against Empire Pace. It means, rather, that the syndicated mortgage cannot be enforced by Ms. McDowell in her personal capacity or in her capacity as a proposed representative plaintiff.

[67] From a procedural perspective, the determination of whether Ms. McDowell has standing to enforce the syndicated mortgage and the merits of her argument that the standstill provision does not stand in the way of enforcing the mortgage are questions of law that can be determined under Rule 21. To answer these questions, the court accepts the truth of the allegations of fact contained in the Amended Amended Statement of Claim and in the legal documents incorporated by reference, which include the loan agreement, the syndicated mortgage, and the various other documents that are described above in the factual background.

[68] The syndicated mortgage is a contract under seal, and Ms. McDowell is not a signatory to the sealed contract. Pursuant to the sealed contract rule, Ms. McDowell does not have the legal standing to enforce the syndicated mortgage. Until replaced as the lender, only Mr. Sorrenti and Olympia Trust have the standing to enforce the syndicated mortgage.

[69] In Porter v. Pelton (1903), 1903 CanLII 74 (SCC), 33 S.C.R. 449 at para. 3, Justice Nesbitt made it clear that neither a principal in a principal-agent relationship or a cestui que trust in a trustee-beneficiary relationship can sue or be sued on a document under seal unless the principal or cestui que trust signs the sealed contract.

3. The cases for over a century establish the rule of law firmly that where partners contract under seal they are bound by the form of the instrument, and where parties so signing are merely acting as agents and are so described, only the parties signing can be bound. A principal or partner cannot be bound unless he has given authority for his signature under seal, and is designated as a party to the deed. A cestui que trust cannot either sue or be sued upon a covenant made by and in the name of a trustee on his behalf.

[70] Although the sealed contract rule has been harshly criticized by academic writers, a contract under seal is enforceable against the agent only: Friedman Equity Developments Inc. v. Final Note Ltd., 2000 SCC 34, [2000] 1 S.C.R. 842. Ms. McDowell is incorrect in asserting that the sealed contract rule applies only where the principal is an undisclosed principal, which was the case in the Friedman Equity Developments decision, but the sealed contract rule does not differentiate between undisclosed or disclosed principals; where a contract is under seal, for a principal to sue or be sued, he or she must disclose themselves and he or she must sign the deed.

[71] In C. Harvey, Agency Law Primer 3rd ed. (Toronto: Carswell, 2003) at p. 78 in chapter 3, which is about the rights and liabilities of principals and agents with third parties, under the heading, “disclosed principal,” Professor Harvey writes:

At common law, even if the agency empowerment is sealed, a principal cannot sue or be sued on a contract embodied in a deed made on behalf of the principal by an agent, unless the principal is described in the deed as a party to it and the agent executes the deed in the name of (as compared to on behalf of) the principal; this proposition governs where or not the contract has been sealed.

[72] It is true that there is a way in equity for a cestqui que trust to circumvent the sealed contract rule. Where the contract is under seal, and it is made for the benefit of the cestqui que trust, in equity, the cestqui que trust can join the trustee who signed the contract as a plaintiff or defendant and sue as if he or she was the trustee: Harmer v. Armstrong, [1934] Ch. 65; Friedman Equity Developments Inc. v. Final Note Ltd., supra at paras. 25-30.

[73] In Friedman Equity Developments Inc. v. Final Note Ltd., supra at para. 30, Justice Bastarache stated:

30. … it was essential to the reasoning in the Harmer decision that the contract was being enforced by the beneficiary in the name of the agent. The beneficiaries could not assert any rights that they had against the third parties to the contract directly. The equitable rule did not create any legal relationship between the beneficiary and the third party. Without such a legal relationship, the third party certainly cannot sue the beneficiary.

[74] However, this circumvention of the legal rule, not an exemption to the legal rule, but a separate equity rule, does not assist Ms. McDowell in the case at bar nor does it assist her and Mr. Aversa in their action against Adi Developments in Martino v. Fortress Real Capital Inc., 2017 ONSC 4790. In these cases, the equitable rule is not available to Ms. McDowell for one and perhaps two reasons.

[75] First, while it appears that the lenders had a trustee relationship to Ms. McDowell, she can only sue to enforce the lenders’ rights, but those rights are subject to the standstill provision. Thus, coming full circle, Ms. McDowell is unable to sue to enforce the syndicated mortgage.

[76] Second, it is unclear how Ms. McDowell, who has an undivided interest that represents just 0.33% of the loan to Empire Pace, can enforce 100% of the syndicated mortgage unless she joins as defendants the Class Members who might opt out. In other words, it is unclear as to how the rule from Harmer v. Armstrong can operate in the circumstances of a proposed class action about a syndicated mortgage.

[77] Ms. McDowell also does not have the standing to challenge the interpretation or the enforceability of the standstill provision in the syndicated mortgage. In her response to Empire Pace’s motion, Ms. McDowell argues that the standstill provision does not apply in accordance with its terms or that the standstill provision does not apply because it was not disclosed or adequately disclosed to her or because there was no consideration given by the mortgagor, Empire Pace, for the standstill provision. Ms. McDowell, however, has no standing to make these arguments that challenge a contract to which she is not a party.

[78] Assuming that the facts set out in the Statement of Claim are capable of proof, it is plain and obvious that in order for Mr. Sorrenti and Olympia Trust (the lender/mortgagee) to enforce the syndicated mortgage, they must have the approval of the construction mortgagee. Ms. McDowell, however, does not plead that Meridian Credit Union approves the enforcement of the syndicated mortgage. Taking the pleadings as they are, I can determine that as a question of law that may dispose of the action, the syndicated mortgage is not currently enforceable because of the standstill provision within it.

[79] Put somewhat differently, no purpose would be served by granting Ms. McDowell leave to amend her Statement of Claim to plead that Meridian Credit Union consents to the enforcement of the syndicated mortgage because was that the case, then the consent would already have been pleaded and, in any event, Ms. McDowell does not have standing to enforce the syndicated mortgage.

[80] Further, on their merits, Ms. McDowell’s arguments attacking the standstill provision, assuming she has the standing to make them, fail. As a matter of interpretation, the standstill provision does apply to the circumstances of the immediate case. There is no dispute about the factual matrix for the interpretation of the standstill provision. The meaning of the standstill provision is plain. There is no ambiguity. To enforce the mortgage, the lender must have Meridian Credit Union’s approval.

[81] Further still, it is clear from the documents incorporated into the Statement of Claim that the standstill provision was adequately disclosed to the parties to the loan agreement and, for that matter, as revealed by the factual background taken from the pleadings and the documents incorporated by reference, the standstill provision was adequately disclosed to Ms. McDowell. Moreover, no additional consideration from Empire Pace was necessary for the inclusion of the standstill provision. The standstill provision was a term of the original loan agreement, the consideration for which was, among other things, the syndicated mortgage and the advance of funds.

[82] The result is that Ms. McDowell’s claim against Empire Pace should be dismissed and it should be let out of the proposed class action.

[83] Finally, I note here for the first time that there is a peculiarity in Ms. McDowell suing to enforce the syndicated mortgage because she also seeks rescission of the syndicated mortgage; i.e., she seeks inconsistently to set aside the mortgage that she seeks to enforce. However, for the purposes of deciding Empire Pace’s Rule 21 motion, I have ignored this peculiarity and rather treated the rescission claim as a matter of a plaintiff eventually having to elect between rescinding or enforcing the syndicated mortgage and on the assumption that she would eventually elect to abandon the rescission claim.

D. Conclusion

[84] For the above reasons, the pleadings against Empire Pace are struck out without leave to amend. The action against Empire Pace should be dismissed.

[85] If the parties cannot agree about the matter of costs, they may make submissions in writing beginning with Empire Pace’s submissions within 20 days of the release of these Reasons for Decision followed by Ms. McDowell’s submissions within a further 20 days.

Perell, J.

Released: August 10, 2017

CITATION: McDowell v. Fortress Real Capital Inc., 2017 ONSC 4789

COURT FILE NO.: CV-16-560268CP

DATE: 20170810

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

ARLENE McDOWELL

Plaintiff

– and –

FORTRESS REAL CAPITAL INC., FORTRESS REAL DEVELOPMENTS INC., JAWAD RATHORE, VINCENZO PETROZZA, EMPIRE PACE (1088 PROGRESS) LTD., BUILDING & DEVELOPMENT MORTGAGES CANADA INC., ILDINA GALATI, DEREK SORRENTI, SORRENTI LAW PROFESSIONAL CORPORATION, OLYMPIA TRUST COMPANY and MICHAEL CANE

Defendants

REASONS FOR DECISION

PERELL J.

Released: August 10, 2017