Brown v. Caplan, 2017 ONSC 731
CITATION: Brown v. Caplan, 2017 ONSC 731
BARRIE COURT FILE NO.: CV-12-01079
DATE: 20170201
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Leo Brown
Plaintiff
– and –
Frederick Caplan, Alain Senecal, 1501233 Ontario Limited, Al Lalani and 2017841 Ontario Inc. carrying on business as Lansen Homes, Melotone International Inc. and 2226201 Ontario Corp.
Defendants
COUNSEL:
R. Colautti and S. Pickard, for the Plaintiff
J. Evans and A. Del Bel Belluz, for the Defendant, Frederick Caplan
M. Drudi, for the Defendants, Alain Senecal, 1501233 Ontario Limited and 2017841 Ontario Inc.
A. O’Brien, for the Defendants, Al Lalani, Melotone International Inc. and 2226201 Ontario Corp.
E. Bisceglia, for a Judgment Creditor
HEARD: December 5, 2016
RULING
MULLINS J.:
Nature of Proceeding
[1] The plaintiff, Leo Brown, moves for summary judgment against the defendants Fred Caplan, Alain Senecal, 1501233 Ontario Ltd., and 2017841 Ontario Inc., pursuant to r. 20 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. He alleges that the defendant Caplan breached the fiduciary duty owed to him. He also claims that he was induced to invest by the responding parties’ misrepresentations. He is seeking rescission of contract alleged to govern his investment of $500,000, damages for the loss of the use of funds, and costs on a substantial indemnity basis.
Background
[2] The issues in this action arise from a failed building development at 355-362 Essa Road, Barrie, Ontario (the Essa property). The relevant actors all relate to the Essa property in some way:
(a) the defendant 1501233 Ontario Ltd. (“150 Ontario”) is the registered owner of the Essa property;
(b) the defendant 2017841 Ontario Inc., operated as Lansen Homes (“Lansen”), was the builder of the Essa property;
(c) the defendant Alain Senecal (“Senecal”) is the officer and director of 150 Ontario, and the sole officer, director, and shareholder of Lansen (collectively, the “Senecal Defendants”);
(d) the defendant 2226201 Ontario Corp. holds a first mortgage on the Essa property;
(e) the defendant Melotone International Inc. (“Melotone”) holds the second mortgage on the Essa property.
(f) the defendant Al Lalani is the director of Melotone;
(g) Patrick Murphy (“Murphy”) is an accountant that helped develop a plan to sell portions of the Essa property to investors;
(h) the defendant Frederick Caplan (“Caplan”) is a lawyer who worked with Murphy to develop the Essa property investment project;
(i) the plaintiff, Leo Brown (“Brown”), is an investor in the Essa property;
(j) Daniel Russell (“Russell”) is a former investor in the Essa property.
[3] In or around 2005, 150 Ontario decided to develop the Essa property into a condominium. To finance the development, 150 Ontario mortgaged the property to Melotone. Another mortgage was given in December 2007. The second mortgage was eventually granted priority over the Melotone mortgage and transferred to 2226201 Ontario Corp.
[4] Despite this mortgage financing, sufficient funds were lacking to complete the construction and register the condominium. In 2007, Senecal reached out to Murphy and Caplan for help in securing additional investment.
[5] Brown was Murphy’s business associate and he had also dealt with Caplan on occasions. Caplan and Murphy approached Brown about the opportunity to invest in the Essa property. In order to take full advantage of the investment’s tax benefit against a large capital gain he had recently incurred, Brown had to invest before the end of 2007.
[6] On December 18, 2007, Caplan outlined the Essa property investment opportunity in a letter to potential investors, including Brown. According to the letter, the investment’s characteristics included the following:
(a) investors could purchase up to 75% of the Essa property;
(b) the mortgages on the properties totalled approximately $5.4 million;
(c) approximately $50,000 was required to complete minor construction work on the project;
(d) Caplan’s legal fees would total $70,000, plus GST;
(e) 150 Ontario would hold the property in trust for the purchasers until the condominium registration was completed; and
(f) the condominium registration could be completed by the end of February 2008.
[7] Caplan drafted a Sale and Trust Agreement (STA) between 150 Ontario and Brown. The STA provided that Brown would be entitled to a 25% interest in the Essa property in exchange for a payment of $250,000 and his assumption of 25% of the property’s mortgages. The STA was executed in December 2007.
[8] In January 2008, Brown purchased an additional 25% interest along the same terms as the original STA.
[9] Brown expected that Caplan, Murphy, and Russell would pool their funds and purchase a 25% share, leaving 150 Ontario with 25%. Russell contributed $125,000 for a 12.5% share in the summer of 2008, but neither Caplan nor Murphy personally injected funds.
[10] The investment of Brown and Russell, totalling $625,000, was paid into Caplan’s trust account.
[11] Even after Brown and Russell had invested, the project had significant financial difficulties. No investor could be found to purchase the final 12.5% share. The sum demanded under the mortgage was greater than the estimated $5.4 million. The final construction, which Brown managed and completed cost $180,000, far exceeding the $50,000 estimate.
[12] At some point, Melotone took control of the Essa property. The property remains in Melotone’s possession and control to this day.
[13] In October 2011, the Essa property was finally registered as a condominium.
Key Issues
Is Brown entitled to rescission and the recovery of the $500,000 he invested?
Are the plaintiff’s claims statute-barred by the Limitations Act, 2002, S.O. 2002, c. 24, Sched. B?
Is this a proper case for summary judgment under r. 20 of the Rules of Civil Procedure?
Key Positions of the Parties
[14] Brown argues that a solicitor-client relationship existed between him and Caplan. Caplan had previously acted on behalf of two companies of which Brown was a primary shareholder. Caplan never warned that he was not acting for Brown in any legal capacity, or advised him to obtain independent legal advice. Further, Brown’s investment was deposited into Caplan’s trust account under a ledger entitled “Frederick Caplan, Barrister and Solicitor, Client Ledger 387: Leo Brown purchase from Senecal Re: Essa Road”. Thus, Caplan stood as Brown’s lawyer and owed him the duties of a fiduciary.
[15] He argues that Caplan breached his fiduciary duty in a number of ways. For example, he made numerous withdrawals from the trust account without Brown’s authorization. He also preferred his own pecuniary interests over those of Brown when he declined to inject new funds into the project.
[16] Caplan denies he owed Brown a fiduciary duty. He was the lawyer for the investment project, not Brown. He contends that Brown is a sophisticated investor who was fully aware that a lawyer cannot act for both sides of a transaction. There was no retainer agreement, no reporting letter from Caplan to Brown, and no account from Caplan to Brown. Brown only became entitled to Caplan’s advice when he invested in the project.
[17] For their part, the Senecal Defendants suggest that Caplan acted as the lawyer for Brown and for them.
1. Are the responding parties liable for misrepresentations made to the plaintiff?
[18] Brown submits that the responding parties made a number of misrepresentations that they knew or ought to have known were false, including that
(a) the cost to complete construction was $50,000,
(b) there would be two more independent purchasers on the project,
(c) the condominium registration would occur by the end of February 2008, and
(d) the balance owing on the mortgages was no more than $5.4 million.
[19] Brown was induced to invest in the project because of these and other misrepresentations, and lost his $500,000 investment as a result. Thus, the responding parties are liable for his losses.
[20] The December 18, 2007 letter to investors accurately reflected his understanding of the investment project at the time Caplan deposes. The estimates contained in the letter were based on the figures given to him by Murphy and Senecal. When taken globally, the estimates were not remarkably more or less than predicted.
[21] The Senecal Defendants contend that they cannot be held responsible for any alleged misrepresentations made to Brown. The investment project was the “brainchild” of Murphy and Caplan, not them. In structuring the investment, Murphy and Caplan were given unlimited access to 150 Ontario’s financial information.
[22] The Senecal Defendants also argue that Brown cannot now claim rescission of the contract because he affirmed the agreement by continuing with the transaction for years after he discovered the misrepresentations. Brown contributed to the increased costs by spending approximately $180,000 on the completion. They contend that the project’s failure was largely due to the subprime mortgage market collapse of 2008, which scuppered refinancing, not false representations.
2. Are the plaintiff’s claims statute-barred by the Limitations Act, 2002?
[23] Caplan and the Senecal Defendants contend that Brown discovered the alleged misrepresentations in 2008. Thus, the action he issued in August 2011 was brought beyond the two-year limitation period set by s. 4 of the Limitations Act, 2002. Brown retained a lawyer in relation to the Essa property in June, 2009. At that point, he must have known that Caplan was not acting for Brown personally.
[24] Brown insists that he did not discover his claims until April 13, 2010. On that day, Senecal forwarded him a copy of an April 9, 2010 letter that Caplan had written to Senecal. In that letter, Caplan states that no investors had signed Sale and Trust Agreements for the Essa property investment project. As Brown had signed two such agreements, seeing Caplan’s letter left him “shocked and confused”. According to Brown, the incident made it clear that Caplan was in breach of his fiduciary obligations and that litigation would likely be required if he were to recover his investment. Brown acknowledges that he consulted with lawyer James Wickett regarding the Essa property transaction in November 2009, but only for a second opinion.
[25] Up until April 13, 2010, Brown believed that Senecal was truly attempting to reduce the balance owing on the Melotone mortgage. However, since commencing the litigation, Brown has realized the extent of Senecal’s and Caplan’s misrepresentations.
3. Is the plaintiff entitled to damages? If so, what amount is appropriate?
[26] Brown claims that he is entitled to the return of his $500,000 investment plus a reasonable rate of return. Caplan and the Senecal Defendants submit that any damages calculation should take into account the significant tax benefits that Brown received from investing in the Essa property.
4. Is this a proper case for summary judgment under r. 20 of the Rules of Civil Procedure?
[27] Brown argues that there is no trial required of the issues of liability, or the amount of the investment lost. Thus, summary judgment should be granted in his favour.The Senecal Defendants contend that the issues on this motion are interwoven with the issues set to be determined at trial. As such, they should be determined at trial. Caplan suggests that the only appropriate summary judgment order that could be made is a dismissal of the claims against him.
[28] Under Rule 20 the court is obliged to grant summary judgment if satisfied there is no genuine issue requiring a trial, or the parties agree to have all or part of the claim so decided and court is satisfied that it is appropriate to grant summary judgment. In making the determination of whether there are genuine issues requiring a trial, the court must consider the evidence and is entitled to weigh the evidence, evaluate the credibility of a deponent and draw reasonable inferences.
[29] There is no issue but that Mr. Brown invested $500,000, probably in haste to achieve a substantial tax deduction, in the Essa project. As to whether Mr. Caplan stood in a fiduciary relationship to him, what the scope of the duty may have been, and, more importantly, whether and how it was breached, raises genuine issues which are not conducive to determination at this stage. The state of Mr. Caplan’s knowledge at the material times is in issue and the evidence about that is not adequately assessable on the hearing of this motion. The materials do not reveal why, or whether the remedy of rescission is appropriate, or why the plaintiff might be entitled to an award for opportunity loss, rather than interest on any money judgment. As well, there is an issue of whether the tax benefits Mr. Brown received are to be taken into account and if so, how much these were. The facts surrounding the limitation issue are contested. The evidence around this issue is simply not definitive enough, especially given the potential effect of a determination of this issue. There are disputes between the parties as to whether Senegal is responsible for information given to Brown. The role that the mortgage financing played in the project’s failure is a quagmire which, in fairness to all parties deserves full exposure. There are in short, a number of genuine issues requiring trial. The motion is dismissed. If the parties cannot agree on costs, they may make brief written submissions. The plaintiff shall have 15 days to do so and the defendants 25.
Madam Justice A.M. Mullins
Released: February 1, 2017
CITATION: Brown v. Caplan, 2017 ONSC 731
BETWEEN:
Leo Brown
Plaintiff
– and –
Frederick Caplan, Alain Senecal, 1501233 Ontario Limited, Al Lalani and 2017841 Ontario Inc. carrying on business as Lansen Homes, Melotone International Inc. and 2226201 Ontario Corp.
Defendants
RULING
Madam Justice A.M. Mullins
Released: February 1, 2017