CITATION: Martino v. Fortress Real Capital Inc., 2017 ONSC 4790

COURT FILE NO.:CV-16-561293CP

DATE: 20170810

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

DAVID MARTINO

Plaintiff

– and –

FORTRESS REAL CAPITAL INC., FORTRESS REAL DEVELOPMENTS INC., JAWAD RATHORE, VINCENZO PETROZZA, ADI DEVELOPMENTS (LINK) INC., ADI DEVELOPMENTS INC., BUILDING & DEVELOPMENT MORTGAGES CANADA INC., ILDINA GALATI, FFM CAPITAL INC., ROSALIA SPADAFORA, KRISH KOCHHAR, TONY MAZZOLI, SAUL PERLOV, DEREK SORRENTI, SORRENTI LAW PROFESSIONAL CORPORATION, OLYMPIA TRUST COMPANY and HER MAJESTY THE QUEEN IN RIGHT OF ONTARIO

Defendants

Mitchell Wine for the Plaintiff

Lisa Parliament and Lauren Ray for the Defendants Adi Developments (Link) Inc. and Adi Development Group Inc.

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 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.

[5] 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.

[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 various actions, there were other pleadings motions, but these motions have been settled and withdrawn. 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 they agreed to discontinue claims against several Defendants.

[9] These Reasons for Decision respond to Adi Developments’ motion.

[10] The Reasons for Decision in the other motions are being simultaneously released. See: McDowell v. Fortress Real Capital Inc., 2017 ONSC 4789; McDowell and Aversa v. Fortress Real Capital Inc., 2017 ONSC 4791; and, Madryga v. Fortress Real Capital Inc., 2017 ONSC 4792.

[11] 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 Development 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.

[12] 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

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

[14] The Defendant Adi Developments (Link) Inc. (formerly Adi Developments Sutton Inc.) and Adi Development Group Inc. are related Ontario corporations with offices in Burlington, Ontario.

[15] Adi Development Group Inc. was misnamed as Adi Developments Inc., and, on consent, I order that the Statement of Claim be amended to correct the misnomer.

[16] Adi Developments (Link) Inc. was incorporated to develop a mixed-use project in Burlington, Ontario (“the Sutton Project”) comprised of four buildings with approximately 300 residential condominium units with some commercial units in two of the buildings.

[17] In August 2012, the Fortress Defendants began to market investments in the Sutton Project. The Fortress Defendants made presentations and the investments were marketed through mortgage brokers, including the Defendant Building & Development Mortgages Canada Inc., whose principal broker is the Defendant Ildina Galati.

[18] On September 4, 2012, Adi Developments (Link) Inc. signed loan agreements with: (1) Fortress Real Developments; and (2) Derek Sorrenti, in trust, as lender. Under the loan agreements, Adi Developments (Link) Inc. agreed to borrow an amount not to exceed $11.6 million from the lenders.

[19] Adi Development Group signed the loan agreements as guarantor.

[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. It 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 the Adi Development Defendants’ 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 the Defendant 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 the Adi Development Defendants.

[22] The principals of 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 Sutton Project. Among other things, he and his firm, the Defendant Sorrenti Law Professional Corporation, provided legal advice to investors in the syndicated mortgage for that Project.

[24] Under the loan agreements, Adi Developments (Link) agreed to pay interest at 8%, payable quarterly. It agreed to pay a variety of other fees and charges and to share profits. The loan was to mature on October 4, 2015 (i.e., a three-year term) with a right to extend the maturity date for six months. Under the loan agreements, Adi Developments (Link) agreed to provide security for the loan including a mortgage to Mr. Sorrenti. Under the loan agreement, the lender agreed to subordinate its security to construction financing up to $49.5 million.

[25] Under the loan agreement, the lender 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); …

[26] The Plaintiff Mr. Martino is a licensed mortgage agent who was an employee of the Defendant FFM Capital Inc. In October 2012, Mr. Martino became aware of the Sutton Project. He was already familiar with the Fortress Defendants because in 2011, he had attended a dinner organized by them to promote investments in another project.

[27] Mr. Martino received promotional material about the Sutton Project, including an opinion as to value. He decided to invest $50,000 from an RESP account he had for his children’s education.

[28] Before completing his investment, Mr. Martino received and in some instances completed or signed, among other documents: (1) Investor/Lender Disclosure Statement for Brokered Transactions; (2) Investment Authority – Form 9D; (3) Memorandum of Understanding; (4) Mortgage Investment Direction and Indemnity Agreement; (5) Lender Acknowledgement and Consent Agreement; (6) Declaration of Bare Trust; (7) Borrower Acknowledgment and Consent Agreement; and (7) Solicitor’s Certificate of Disclosure & Undertaking Regarding Arms-Length Mortgages.

[29] In the Investment Authority – Form 9D, which was signed by Mr. Martino, he 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 [$49.5 million] ….

[30] In the Memorandum of Understanding, which was signed by Mr. Martino, he confirmed that Fortress Real Capital products are syndicated mortgages evidenced by charges on real property. He agreed to subordinate his interest in the syndicated mortgage to construction financing up to an amount of $49.5 million.

[31] In the Mortgage Investment Direction and Indemnity Agreement, which was signed by Mr. Martino, he confirmed, among other things, that he was fully aware of the nature of the mortgage and its terms and conditions.

[32] In the Lender Acknowledgement and Consent Agreement, which was signed by Mr. Martino, he acknowledged, among other things, that: (a) he was aware that under the loan agreement, the syndicated mortgage would be postponed to construction financing to a maximum of $49.5 million; (b) he understood the effect of the terms of the loan agreement; (c) he agreed that the syndicated mortgage shall be postponed and that it would standstill to prior mortgages to a maximum of $49.5 million; and (d) he had received independent legal advice with respect to the investment and the documentation associated with it.

[33] In the Declaration of Bare Trust, which was signed by Mr. Martino, he recited that he had agreed to lend $50,000 to participate in a syndicated mortgage loan registered in the name of the Bare Trustee (Mr. Sorrenti).

[34] Under the Declaration of Bare Trust, Mr. Martino 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. ….

[35] In the Borrower Acknowledgement and Consent Agreement, Mr. Martino agreed to subordinate his interest in the syndicated mortgage to construction financing up to $49.5 million.

[36] Before completing his investment, Mr. Martino had a phone conversation with Mr. Sorrenti, or a lawyer in his office, for the purpose of receiving independent legal advice. Mr. Martino and Mr. Sorrenti signed the Solicitor’s Certificate of Disclosure & Undertaking Regarding Arms-Length Mortgages.

[37] On November 8, 2012, Adi Developments (Link) Inc. became the registered owner of 5210, 5218, and 5226 Dundas Street and 2500 Burloak Drive in Burlington, which properties it had purchased for $1.9 million.

[38] On November 8, 2012, the syndicated mortgage was registered against the title of the property. The mortgagee was Mr. Sorrenti. The mortgagor was Adi Developments (Link). The guarantor is Adi Development Group. The syndicated mortgage is registered as Instrument No. HR1062915. It was a term of the syndicated mortgage that it could be postponed to construction financing not to exceed $49.5 million.

[39] 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.

[40] 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:

A. Priority

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.

[41] Mr. Martino alleges that the priority, standstill, forbearance, and postponement provision in the syndicated mortgage was not a term included in the loan agreement and was added to the syndicated mortgage with consideration from Adi Developments (Link) Inc. and with no disclosure to the investors.

[42] On June 14, 2013, Adi Developments (Link) became the registered owner of 5236 Dundas Street, which it had purchased for $733,076. This made the total purchase price for the lands of the Sutton Project $2,633,076.

[43] In July 2014, Adi Developments (Link) began to sell units in the to be constructed Project.

[44] In June 2015, construction began on the Sutton Project.

[45] By letter dated July 1, 2015 Adi Developments (Link) Inc. extended the loan to April 4, 2016.

[46] On October 14, 2015, Adi Developments (Link) Inc. gave a mortgage in the amount of $16 million to Aviva Insurance Company of Canada, and on the same day, Mr. Sorrenti and Olympia Trust subordinated the syndicated mortgage to the new mortgage from Aviva Insurance.

[47] In April of 2016, the investors were advised that the Project had entered an “ongoing standstill, subordinate and postponement” arrangement with a period of “interest accrual”.

[48] On April 5, 2016, Adi Developments (Link) Inc. borrowed $75 million from Meridian Credit Union to finance the construction of the Project on the security of a first mortgage of the property. The construction mortgage was registered on title to the Sutton Project lands and on the same day, a postponement of the syndicated mortgage to the construction mortgage was registered as Instrument No. HR1347635.

[49] Mr. Martino’s position is that the syndicated mortgage went into default in April 2016. Mr. Sorrenti, however, has not taken any steps to enforce the syndicated mortgage.

[50] In May 2016, the investors were advised that it was necessary to increase the postponement to greater construction financing from $45.9 million to $121 million, and the investors were requested to authorize the postponement. Mr. Martino refused to sign the consent.

[51] On September 27, 2016, Mr. Martino, as an investor in the syndicated mortgage, commenced a proposed class action on behalf of all persons in Canada (other than in Québec) who were investors in the syndicated mortgage. He claims, among other things: (a) certification of the action as a class action; (b) rescission of all agreements with respect to his investment in the Sutton 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 Sutton Project lands and payment of the mortgage debt.

[52] Mr. Martino pleads that there was no agreement for the accrual of interest under the loan agreements and that syndicated mortgage has been in default since April 4, 2016. He 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 or operative; (c) the standstill provisions were not adequately disclosed or disclosed at all to Mr. Martino; (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.

C. Discussion and Analysis

[53] At the outset, I note that the Adi Development Defendants’ argument is identical to the argument made be Empire Pace in McDowell v. Fortress Real Capital Inc., 2017 ONSC 4789. Thus, the Adi Development Defendants submit that Mr. Martino’s action as against them be dismissed because Mr. Martino is not a party to the syndicated mortgage and pursuant to the sealed contract rule, he cannot sue to enforce the mortgage. Alternatively, they submit that 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.

[54] Mr. Martino’s response is the same as was Ms. McDowell’s response in McDowell v. Fortress Real Capital Inc., supra. He responds that the sealed contract rule does not apply because: (1) either he was a disclosed principal and the sealed contract rule applies only to undisclosed principals; or (2) he can rely on the trustee/beneficiary exception to the sealed contract rule. Further, he 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.

[55] For the reasons set out in McDowell v. Fortress Real Capital Inc., 2017 ONSC 4789, which I incorporate by reference, mutatis mutandis, I agree with the Adi Development Defendants’ argument and I disagree with Mr. Martino’s counterargument.

[56] The result is that the claims against the Adi Development Defendants by Mr. Martino should be dismissed. This outcome, however, does not mean that the syndicated mortgage cannot be enforced against the Adi Development Defendants. It means, rather, that the syndicated mortgage cannot be enforced by Mr. Martino in his personal capacity or in his capacity as a proposed representative plaintiff.

[57] The result is that Mr. Martino’s Statement of Claim against the Adi Development Defendants should be struck out and the action against them dismissed.

D. Conclusion

[58] For the above reasons, the Statement of Claim against the Adi Development Defendants is struck out without leave to amend. The action against the Adi Development Defendants should be dismissed.

[59] If the parties cannot agree about the matter of costs, they may make submissions in writing beginning with the Adi Development Defendants’ submissions within 20 days of the release of these Reasons for Decision followed by Mr. Martino’s submissions within a further 20 days.

Perell, J.

Released: August 10, 2017

CITATION: Martino v. Fortress Real Capital Inc., 2017 ONSC 4790

COURT FILE NO.:CV-16-561293CP

DATE: 20170810

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

DAVID MARTINO

Plaintiff

– and –

FORTRESS REAL CAPITAL INC., FORTRESS REAL DEVELOPMENTS INC., JAWAD RATHORE, VINCENZO PETROZZA, ADI DEVELOPMENTS (LINK) INC., ADI DEVELOPMENTS INC., BUILDING & DEVELOPMENT MORTGAGES CANADA INC., ILDINA GALATI, FFM CAPITAL INC., ROSALIA SPADAFORA, KRISH KOCHHAR, TONY MAZZOLI, SAUL PERLOV, DEREK SORRENTI, SORRENTI LAW PROFESSIONAL CORPORATION, OLYMPIA TRUST COMPANY and HER MAJESTY THE QUEEN IN RIGHT OF ONTARIO

Defendants

REASONS FOR DECISION

PERELL J.

Released: August 10, 2017