COURT FILE NO.: CV-17-575558

DATE: 20180607

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

BRETT ROBERT CALDWELL Plaintiff

– and –

AURELIO BAGLIONE, WINCHESTER FINANCIAL CORPORATION, RALEIGH MANAGEMENT AND LEASING CORPORATION, PARRY SOUND MALL INVESTMENT CORPORATION, KIRKLAND LAKE MALL INVESTMENT CORPORATION, 1855 LASALLE BOULEVARD INC., PARRY SOUND MALL INC., KIRKLAND LAKE MALL INC., LASALLE PLAZA INC., BO-KA INVESTMENTS LIMITED, and THE WINCHESTER REAL ESTATE INVESTMENT TRUST LTD. Respondents

Counsel:

Greg Temelini, for the Plaintiff

C. Saleh, for the Respondents

HEARD: May 18, 2018

REASONS FOR JUDGMENT

L. A. PATTILLO J.:

[1] The Applicant, Greg Robert Caldwell (“Caldwell”), brings this Application pursuant to section 248 of the Ontario Business Corporations Act (“OBCA”) and rules 14.05(2) and 14.05(3) (d), (g) and (h) of the Rules of Civil Procedure for an order that he is entitled to be paid fair market value in respect of the Respondents’ divestiture of investments he made with them.

[2] There is no dispute with respect to the central facts.

[3] In December 2007, Caldwell invested in three commercial properties with the Respondents (collectively the “Winchester Financial Group”). Specifically the properties were: LaSalle Boulevard Plaza in Sudbury, Ontario (“LaSalle Plaza”); Kirkland Lake Mall in Kirkland Lake, Ontario (“KL Mall”) and Parry Sound Mall in Parry Sound, Ontario (“PS Mall”) (collectively the “Property Investments”).

[4] Each of the Property Investments had an Offering Memorandum describing the investment, its structure and the risks.

[5] Caldwell viewed the Property Investments as a good way to save for his retirement. They provided him with the potential to earn income and to benefit from capital appreciation while at the same time providing available deductions under the provisions of the Income Tax Act.

[6] Each of the Property Investments was structured as a trust arrangement. An investor acquired “Units”, each Unit representing a 1/100^th beneficial ownership interest in the specific property. Legal title to each of the three properties was held by separate corporations, each acting as a bare trustee. The bare trustee held the property in trust for each of the Unitholders.

[7] As part of the purchase, the investor also acquired certain financial services provided by the Respondents Winchester Financial Corporation and Raleigh Management and Leasing Corporation which included guarantees with respect to the mortgage rate and minimum annual gross revenue of the properties and interest free cash flow loans made to the properties. Further, Winchester Financial Corporation provided financing to purchase the Units.

[8] At the time of his purchase of the Units, Caldwell received offering memoranda and term sheets for each of the three property investments and entered into many agreements for each of the three Property Investments, including a subscription agreement, trust agreement, rental revenue and guarantees agreement, financial services agreement, trust agreement, rental agreement, financial services agreement and co-owners’ agreement as well as financing agreements.

[9] In December 2007, Caldwell purchased 11 Units in the LaSalle Plaza at a purchase price of $29,500 per Unit for a total purchase price of $324,500. The purchase was financed by promissory notes to Winchester Financial of $10,000 and $138,500 respectively and the assumption of mortgage indebtedness in the principal amount of $176,000. Caldwell authorized a monthly payment from his chequing account of $1,451.07 in respect of the promissory notes which continued to November 2015. Over the course of the eight years, Caldwell paid the Winchester Financial Group a total of $209,630.00 in respect of his investment in the LaSalle Plaza.

[10] Also in December 2007, Caldwell purchased eight Units in the KL Mall at a purchase price of $45,000 per Unit for a total purchase price of $360,000. After a deposit of $10,000, the purchase was financed by a promissory note for $146,000 and assumption of mortgage indebtedness in the principal amount of $204,000. Beginning in December 2007, Caldwell paid $1,301.04 a month towards the promissory note. The monthly payments continued until in or around November 2015. In total Caldwell paid $151,903 to the Respondents in respect of his investment in the KL Mall.

[11] Again in December 2007, Caldwell purchased 10 Units in PS Mall at a price of $82,050 per Unit for a total purchase price of $820,500. After a deposit of $10,000, the purchase price was financed by a promissory note of $285,500 and the assumption of mortgage indebtedness in the principal amount of $525,000. From January 2008 to in or around November 2015, Caldwell made monthly payments on the promissory note of $3,024.45. Over the course of the eight years, Caldwell paid the Respondents a total of $256,710 on account of his investment in the PS Mall.

[12] The total amount paid by Caldwell to the Respondents in respect of his investment in the Investment Properties over the eight years was $618,243.

[13] Sometime in 2010, the Ontario Securities Commission (“OSC”) began investigating the Winchester Financial Group including the Property Investments, concerning possible violations of the Securities Act, R.S.O. 1990, c. S5 (the “Act”). On March 26, 2013, the OSC and the Winchester Financial Group entered into a settlement agreement (the “Settlement Agreement”) which was approved by order of the Commission dated March 28, 2013 (the “OSC Order”).

[14] In the Settlement Agreement, the Respondents admitted that they engaged in the business of trading in securities without being registered to do so and without ensuring that there was an exemption from the requirement to be registered under the Act. They also admitted to breaching the Act because no prospectus was filed or receipted by the Commission for the investment offerings including the Property Investments.

[15] The Respondents paid $50,000 on a joint and several bases to the OSC as part of the settlement. With respect to the Property Investments, the Settlement Agreement required the Respondents to cease their activities and to rectify deficiencies necessary to bring themselves on side with the provisions of the Act. In that regard, the Settlement Agreement set out a number of requirements in paragraph 31 including:

a) The Respondents needed to have their business conducted through an entity that was registered with the OSC;

b) Winchester Securities was to collect “know your client” information about each of the investors;

c) Utilizing third parties approved by the OSC, Winchester Securities was to conduct an Exemption Analysis to determine whether each investment for each unit-holder qualified under an exemption from the prospectus requirement in Ontario securities law and if so, it was required to undertake a Suitability Assessment for each unit-holder.

[16] Specifically, paragraph 31(g) provides as follows:

(g) Where an investment does not qualify for an exemption contained in Ontario securities law following the Exemption Analysis, or is not suitable for the investor following the Suitability Assessment, the Respondents shall, within 90 days of the completion of the Suitability Assessment and the Exemption Analysis, cause the relevant unit-holder to be divested of its interest in the Units or the Bonds by having Winchester Financial Group purchase or otherwise redeem the investment. The Respondents shall retain an independent third party acceptable to Staff to determine the purchase amount and/or redemption value owing to the unit-holders;

[17] The Suitability and Exemption Analysis required by the Settlement Agreement was completed by April 13, 2015. Caldwell’s investment in the three Property Investments was determined to be not consistent with securities requirements. By letter dated November 23, 2015, the Respondent Aurelio Baglione, President of the Winchester Financial Group wrote to Caldwell in respect of his investment in LaSalle Plaza and advised him of the results of the Exemption and Suitability Assessment. The letter stated that as a result of the determination “.., you are required to be divested of your units based on the principal that you be put back in the position that you would have been had you not invested.”

[18] The letter further stated that, as required by the OSC, the Winchester Financial Group retained Grant Thornton Limited (“Grant Thornton”) to determine the amounts to be paid on divestures and it had approved the following divestiture formula:

Net Redemption Amount

= (the deposit made on investment acquisition + loan payments on the note payable)

• (value of income tax deductions + cash flow distribution to the investor)

• reimbursement of tax obligations arising on the divestiture.

[19] The letter went on to state that the formula, as it applied to Caldwell’s investment in LaSalle Plaza, resulted in a divestiture amount of $32,958.86 payable on the Units reverting to the issuer.

[20] Anticipating, correctly, that the same formula would be used to divest his Units in the KL Mall and the PS Mall, Caldwell stopped the monthly payments for those investments in December 2015.

[21] In February 2016, Caldwell received a divestiture letter from Winchester Financial Group respecting his KL Mall Units which was similar to the LaSalle Plaza letter. The divestiture formula determined that Caldwell owed $275.31 to the Winchester Financial Group in respect of the divestiture of his Units in the KL Mall.

[22] While Caldwell has never received a divestiture letter in respect of his Units in the PS Mall, in their material filed in the Application, the Respondents state that, pursuant to the Grant Thornton formula, Caldwell owes the Winchester Financial Group the sum of $80,431.16 for the divestiture of his Units in the PS Mall.

[23] Caldwell submits that Winchester Financial Group’s actions in terminating the agreements he had with them in respect of the three Property Investments, unilaterally choosing the remedy of rescission and failing to pay him fair value for his investments are breaches of the agreements, entitling him to compensatory damages reflecting the actual losses flowing from the breaches.

[24] Caldwell also relies on the oppression remedy in section 248 of the OBCA and submits that the Winchester Financial Group has acted oppressively and in unfair disregard of his interests. Finally, Caldwell relies on breach of trust, and submits that the bare trustees breached their fiduciary duties to him by not acting in his best interests.

[25] In response, the Winchester Financial Group submits that they did not breach the agreements. Rather, they were frustrated by the OSC’s interference. They further submit that they did not oppress Caldwell because the remedy provided left Caldwell in the same, if not a greater financial position than he would have been in had he never purchased the Units at all. The Respondents further deny they owe Caldwell a fiduciary duty as he failed to fulfil his duties under the promissory notes. In the alternative, they submit they did not breach their fiduciary duty and at all material times they acted in Caldwell’s best interests. Finally, the Respondents submit that Caldwell is in the wrong venue. Rather than commence an application, he should have proceeded before the OSC pursuant to s. 144 of the Act to revoke or vary the OSC Order approving the Settlement Agreement.

[26] In my view, Caldwell is entitled to a remedy both based on breach of contract and under the oppression remedy. As a result, I do not intend to address breach of trust although I’m satisfied from the material that the Respondents’ actions in terminating the agreements and purporting to rescind his investments also constitute a breach of trust.

[27] I do not agree that Caldwell’s proper course for relief was to apply to the OSC to have the OSC Order revoked or varied. Caldwell seeks a remedy to receive fair value for the termination of his investments. The Respondents’ submission that the OSC is the proper venue is premised on the fact that the OSC Order approving the Settlement Agreement required them to divest Caldwell’s Units based on the principal that Caldwell was to be returned back into the position he would have been in had he never invested at all. But that is not what the Settlement Agreement provides. The only reference to the divesting of Units is paragraph 31(g) which as noted, provides, in part, that the Winchester Financial Group was to “purchase or otherwise redeem the investment.” Nor was counsel able to direct me to any other order or direction from the OSC to support the Respondents’ premise.

[28] The Winchester Financial Group submits that paragraph 31(g) of the Settlement Agreement required them to retain an independent third party acceptable to the OSC staff to determine the purchase amount and/or redemption value owing to Caldwell which they did in retaining Grant Thornton who came up with the divestiture formula. It is clear from the wording of that provision, however, that staff’s approval involves who was to be retained, not the basis upon which the purchase price was to be determined. The manner in which Caldwell’s Units in the Property Investments were to be valued was not part of the OSC Order. Rather, it was a matter between Caldwell and the Winchester Financial Group.

[29] Accordingly, the relief sought by Caldwell in the Application would not have been available from the OSC pursuant to s. 144 of the Act.

[30] In my view, the Respondents’ actions in unilaterally terminating the agreements between themselves and Caldwell and failing to pay Caldwell fair value for his investments are clear breaches of the agreements by the Respondents. The agreements in question either contained no termination clause or, if there was a termination clause, it was not operable and was not relied upon by the Winchester Financial Group in divesting Caldwell’s Units.

[31] Nor, in my view, does the doctrine of frustration apply. The doctrine comes into play when a supervening event, beyond the control of the parties and not contemplated by them, results in a significant change in the obligation: Capital Quality Homes Ltd. v. Colwyn Construction Ltd. (1997), 14 O.R. (2^nd) 617 (C.A.). The supervening event in this case is the OSC’s involvement and the subsequent settlement. But it was not something beyond the Respondents’ control. It was caused entirely by their failure to abide by Ontario securities law. Further, they knew or ought to have known that such failure could result in the intervention of the OSC.

[32] Given that the agreements between Caldwell and the Respondents were not in compliance with Ontario securities law, they were illegal. While the general rule is that a cause of action cannot be founded on an illegal act, there is an exception where the illegality arises by statute and the person asking for relief is within the class of persons for whose benefit the statute is intended to operate: Ontario (Securities Commission) v. British Canadian Commodity Options Ltd. (1979), 1979 2000 (ON SC), 22 O.R. (2d) 278 (Supreme Court) at paras. 15 to 18.

[33] The provisions in the Act concerning registration and the prospectus requirements are there to protect members of the investing public, such as Caldwell. Accordingly, he is a person for whose benefit the securities law is intended to operate and is therefore subject to the above noted exception and entitled to a remedy.

[34] I am also satisfied that Caldwell is entitled to relief pursuant to s. 248 of the Business Corporations Act, R.S.O. 1990, c. B. 16 (the “OBCA”), the oppression remedy.

[35] Section 248(1) provides that a “complainant” may apply to the court for an order under the section. Section 248(2) of the OBCA provides:

(2) Where, upon an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates,

(a) any act or omission of the corporation or any of its affiliates effects or threatens to effect a result;

(b) the business or affairs of the corporation or any of its affiliates are, have been or are threatened to be carried on or conducted in a manner; or

(c) the powers of the directors of the corporation or any of its affiliates are, have been or are threatened to be exercised in a manner,

that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation, the court may make an order to rectify the matters complained of.

[36] An oppression claim is to be brought by “complainant” (s. 248(1)) which is defined in s. 245 of the OBCA as meaning:

(a) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates,

(b) a director or an officer or a former director or officer of a corporation or of any of its affiliates,

(c) any other person who, in the discretion of the court, is a proper person to make an application under this Part.

[37] Section 248(3) of the OBCA gives the court broad remedial powers to remedy oppressive conduct. It sets out in a non-exhaustive list, a number of remedies available to the court if oppression is found, including the power to require a corporation to purchase the securities of a security holder.

[38] In BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 S.C.R. 560, the Supreme Court of Canada set out what is required to establish the oppression remedy in s. 241 of the Canada Business Corporations Act, R.S.C. 1985 c. C-44 (“CBCA”) the wording of which is identical to s. 248 of the OBCA. At para. 56, the court stated that in considering whether an oppression claim has been made out, it is necessary to determine whether the reasonable expectations of the claimant have been breached and, if so, whether the breach is oppressive, unfairly prejudicial or unfairly disregarded the interests of the claimant.

[39] As noted in Ernst & Young Inc. v. Essar Global Fund Limited, 2017 ONCA 1014 (Ont. C.A.) at para. 115, the court’s discretion to permit a person to be a complainant under s. 238 (d) of the CBCA, which is identical in wording to s. 245(c) of the OBCA, is broad. In my view, having regard to the circumstances of this case, Caldwell, as a Unit holder in the corporations, is a proper complainant entitling him to bring an oppression application.

[40] Further, I consider that the Respondents’ actions in terminating the agreements and purporting to redeem Caldwell’s investments on the basis that he was to be returned back into the position he would have been in had he not invested at all to be a breach of his reasonable expectations at the time he entered into the investments, and to be unfairly prejudicial to Caldwell and to have disregarded his rights.

[41] Caldwell made the investments with the expectation that they were long term and, if he abided by the agreements, they would enable him over time to both earn income and share in capital appreciation. At no point during the eight years from the time he entered into the agreements to the November 23, 2015 letter from Baglione was he in breach of his obligations under the agreements. The Respondents’ actions both in improperly terminating the agreements and in purporting to pay him as if he’d never invested in the Property Investments are clearly unfairly prejudicial to Caldwell. The formula used by the Winchester Financial Group not only denies Caldwell any capital appreciation, it also credits the Respondents with the tax savings Caldwell obtained as a result of his being able to deduct interest on the money he borrowed.

[42] The Respondents submit that they did not oppress Caldwell because the remedy given left him in the same, if not greater financial state than he would have been in as if he’d never purchased the Units at all. How they come to that conclusion escapes me. For eight years, Caldwell paid the Respondents $209,630 in respect of LaSalle Plaza. The Respondents say he is only entitled to $32,958.86 for his Units. For the KL Mall, Caldwell paid $151,903 to the Respondents over the eight years and the Respondents say he owes them $275.31 in respect of his Units. Finally for the PS Mall, Caldwell paid the Respondents $256,710 over the eight years and according to the Respondents, he owes a further $80,431.16 in respect of the divestiture of the PS Mall Units. The Respondents have not explained, based on those figures, how Caldwell ends up in a greater financial state than if he’d never purchased the Units at all.

[43] Accordingly, I am satisfied that Caldwell is entitled to a remedy, either for breach of contract or pursuant to s. 248 of the OBCA.

[44] Caldwell submits that the proper remedy is to require the Respondents to pay him the fair value for his Units in the Property Investments as at November 23, 2015, which is the date he stopped paying the Winchester Financial Group under the agreements. I agree. Accordingly, the Winchester Financial Group are jointly and severally liable to pay Caldwell the fair market value for his Units in each of the Property Investments as at November 23, 2015.

[45] Given the structure of the investments, the calculation of fair market value involves not only a determination of the fair market value of the three plazas as at the date of divestiture, it also requires a determination of the state of Caldwell’s interest in each of the three Property Investments at that time.

[46] Caldwell submits that the valuation approach set out by Newbould J. in Muscillo v. Bulk Transfer Systems Inc., 2009 38508 (ON SC), [2009] O.J. No. 3061 (S.C.J.) should be adopted. Muscillo involved a dispute between two brothers who were shareholders in various businesses. Newbould J. concluded that the appropriate remedy was for one of the brothers to buy the shares of the other at fair value. At para. 104 of the decision, the learned Judge set out at some length the terms which were to govern the valuation. I am satisfied that those terms, with some modifications given the nature of the investments in this case, should apply.

[47] Accordingly, the fair value of Caldwell’s Units in the three Property Investments is to be determined as follows:

a) Within two weeks from the release of these reasons, Caldwell and the Respondents are to attempt to agree on an independent valuator and to retain such valuator. If no such agreement is reached, the parties shall each retain an independent valuator within one further week.

b) If there is one valuator chosen by agreement, the costs of the valuation are to be paid by Caldwell and the Respondents equally, save and except that if appraisals of the three plazas are required, the Winchester Financial Group shall pay for those appraisals. Apart from the appraisals, the parties shall each pay one-half of whatever deposit, if any, is required by the valuator and thereafter shall each forthwith pay one-half of all accounts of the valuator as rendered.

c) If there are two valuators chosen, the parties shall each pay the costs of the valuator chosen by them. Each shall forthwith pay whatever deposit, if any, is required by the valuator and forthwith pay all accounts of the valuator as rendered. The Winchester Financial Group shall obtain and pay for the appraisals of the three plazas in the first instance and shall provide a copy of the appraisals to Caldwell’s valuator upon receipt. If Caldwell’s valuator is not prepared to accept the Winchester Financial Group’s appraisals, he or she shall obtain their own appraisals and Caldwell shall be responsible for the cost in the first instance.

d) All of the parties shall fully cooperate with the valuator(s) and respond on a timely basis to all requests by the valuator(s) for financial statements, documents and information considered relevant by the valuator(s) and shall, if requested by the valuator(s), meet with the valuator(s) or cause other employees to meet with the valuator(s) and answer any questions they may have.

e) The parties shall also provide their consent for the valuator(s) to discuss matters with the parties' accountants/appraiser if requested by the valuator(s), and if any fees are to be paid to such accountants/appraiser, they shall be paid equally by the parties if there is one valuator or by each of them for fees incurred for the valuator chosen by them.

f) The valuation is to be the fair market value of as at November 23, 2015 of Caldwell’s Units in each of the LaSalle Plaza, the KL Mall and the PS Mall.

g) The valuation(s) is/are to be completed within 60 days from the date of the retainer of the valuator(s).

h) An application is then to be made to the court within seven days to have the fair value fixed by the court. The closing shall take place within 30 days of the fixing of fair value.

i) If any issues arise regarding the valuation and closing of the purchase, a motion may be made to the court.

[48] Caldwell is successful on the Application and is entitled to his costs. In light of my order herein and the fact that the matter will be returning to the court for a determination of fair value, the determination of those costs is reserved to the judge hearing that Application.

L. A. Pattillo J.

Released: June 7, 2018