2303757 Ontario Inc. v. 2149589 Ontario Inc.
Court File and Parties
Court File No.: 18-1095 Date: 2018-09-28 Ontario Superior Court of Justice
Between: 2303757 ONTARIO INC. Applicant And: 2149589 ONTARIO INC., MAGUR CONSTRUCTION LTD., and BRATTY’S LLP Respondents
Counsel: Richard Macklin and Malini Vijaykumar for the Applicant Ian W. Thompson for 2149589 Ontario Ltd. No one appearing for Magur Construction Ltd. or Bratty’s LLP
Heard: September 20, 2018
Before: Boswell J.
Ruling on Forfeiture Application
[1] A solicitor holds $200,000 in trust; the deposit on a failed real estate transaction. Two innocent parties each claim entitlement to the funds. Only one can succeed. In this instance, it is the applicant.
Overview
[2] Magur Construction Ltd. agreed to purchase a ten acre parcel of land in the City of Barrie from the Applicant (“230”) for $6 million. The closing date was set for January 10, 2018. The Agreement of Purchase and Sale (“APS”) required an initial deposit of $50,000, with a further $150,000 to be paid within 3 days of the removal of a due diligence provision.
[3] The APS provided, in terms of the treatment of the deposit, as follows:
The Seller and Buyer hereby authorize the Listing Brokerage to place all deposits in a term deposit with all interest earned on such deposits to be paid to the Buyer upon completion or termination of this Agreement, except in the case of the default by the Buyer under this Agreement, in which event the Seller shall be intitled (sic) to be paid and to retain the deposits together with all interest thereon as liquidated damages under this Agreement or at law as a result of such default.
[4] Magur paid the initial $50,000 deposit by bank draft to the solicitors for 230, Bratty’s LLP, on March 13, 2017 when the APS was firmed up. On May 2, 2017, Magur’s solicitor, Leonard Susman, delivered a certified cheque from his trust account for $150,000 to Bratty’s to satisfy the balance of the deposit owing in accordance with the APS.
[5] The APS included a clause permitting Magur to assign its interest in the agreement to a third party. Magur did so. Just two days before the scheduled closing, Mr. Susman wrote to 230’s lawyer to advise that Magur had assigned its interest in the APS to the Respondent, “214” in trust for a company to be named later. A copy of the Assignment Agreement (“AA”) was attached.
[6] The AA was purportedly signed on April 8, 2017. It required that 214 pay a deposit of $200,000. The deposit was to be paid to a solicitor, Laman Meshadiyeva, in trust. On April 10, 2017, 214 provided a certified cheque for $200,000 to Ms. Meshadiyeva’s office.
[7] A handwritten amendment on the face of the AA indicates that $50,000 of the $200,000 deposit was to be immediately directed to Magur. The remaining $150,000 was to be paid to 230’s solicitors in trust. 214 asserts that the handwritten amendment was made without its knowledge or approval.
[8] There is no dispute that the $150,000 paid to Bratty’s by Mr. Susman on May 2, 2017 came from 214.
[9] For reasons not made clear to me, no one advised Bratty’s about the AA when the further deposit was paid, nor anytime thereafter, prior to January 8, 2018.
[10] 230 questioned the validity of the AA when first presented with it. Nevertheless, a principal of 230 reached out to 214 on January 9, 2018 to determine if they were prepared to complete the transaction. In response, one of the principals of 214 – Ramandeep Singh Khatra – emailed 230’s litigation counsel, Richard Macklin, and advised as follows:
We will be seeking damages from Magur Construction and both the real estate agents for misrepresentation, lies and intent to defraud. You should be dealing with Magur Construction as you have contract with them and that was your and everyone’s position.
[11] No mention was made of any claim that 214 had to the deposit funds held in trust by Bratty’s.
[12] Ultimately, neither Magur nor 214 was prepared to close the transaction on the closing date - January 10, 2018. In the result, 230 tendered on both Magur and 214. Neither completed the transaction.
[13] The following facts are not in dispute in this case:
(a) 230 did not have notice of the AA until January 8, 2018;
(b) 230 was not aware, when the deposits were paid, that the funds came from 214. By all appearances, they came from Magur;
(c) Mr. Khatra’s correspondence to Mr. Macklin on January 9, 2018 did not provide notice to 230 that there was any issue regarding entitlement to the deposit funds; and,
(d) 230 was ready, willing and able to complete the transaction on January 10, 2018.
[14] Recently, 214 has commenced an action against its solicitor (Yuvraj Singh Chhina), its realtor, Magur and others for breach of contract and breach of fiduciary duty (the “Chhina Action”).
The Parties’ Positions
[15] The position of 230 is straightforward. It relies on the provision of the APS that entitles it to the deposit should the Buyer fail to complete the transaction. It submits that it was a bona fide purchaser for value without notice of the claim of 214 to the deposit funds and as such, its position defeats any attempt by 214 to trace its funds into 230’s hands. It sees this as a straightforward failed real estate transaction with the usual deposit forfeiture. In its view, there is no genuine, live issue regarding the entitlement to the deposit.
[16] 214 considers this an atypical case; one that is much more complicated than 230 suggests.
[17] 214 initially sought an adjournment of the application. It has initiated a motion to convert this application to an action and to consolidate it with the Chhina Action. It sought to adjourn the hearing of this application at least until the close of pleadings in the Chhina Action, so that the court would have a better vantage point to assess the array of issues touching upon the deposit funds.
[18] I denied the adjournment request for two principal reasons:
(a) 230 has nothing to do with the issues between 214 and its solicitor, realtor and others. The only live issue between 230 and 214 is the entitlement to the deposit funds held in trust by Bratty’s. That issue can be fully disposed of in this application without the need to encumber it with additional parties and issues; and,
(b) I am prepared to assume, for the purposes of this application, that 214 has been defrauded in some manner and that it is, as such, an innocent party making a claim to recover the funds it unwittingly paid into Bratty’s trust account. In other words, I am prepared to consider 214’s case from what I believe to be its highest and best position.
[19] Having been denied an adjournment, 214 advanced the position that entitlement to the deposit funds is still a live issue because they have yet to be paid out to 230. Since they are still held in Bratty’s trust account, 230 is not yet a bona fide purchaser for value without notice.
[20] 214 contends that it was never a party to the APS. The deposit funds must, therefore, be impressed with a trust in its favour. Moreover, only a party in breach of the APS could lose its entitlement to the deposit funds. Since 214 was not in breach, it has never lost its entitlement to those funds.
Issues and Analysis
[21] The positions of the parties raise, in my view, three issues to be addressed. They are:
(a) What is the status of the deposit funds paid to Bratty’s LLP?
(b) Does 214 have an ability to trace its funds? The answer to this question depends on the answer to two further questions:
(i) Is 230 a bona fide purchaser for value without notice in relation to the deposit?
(ii) Are the deposit funds “in the hands” of 230?
[22] Each issue may be briefly addressed.
The Deposit Funds
[23] Generally speaking, when funds are paid to a trustee as a deposit on a real estate action, they cease to be the property of the payor in the absolute sense. They are subject to the terms of the trust, which are typically set out in the agreement of purchase and sale. See Re William Joseph Frechette, (1991) 3 O.R. (3d) 664 (Ont. Ct. Gen. Div.) and Re Greenstreet Management Inc., 2007 CarswellOnt 7514 (S.C.J.) at para. 27. In this case, in accordance with the terms of the APS, the deposit funds were to be held by Bratty’s until completion or other termination of the agreement.
[24] 214 argues that the deposit in this case remains its property in the absolute sense because it never authorized its funds to be paid into Bratty’s trust account. It essentially says that its funds should not be dealt with in accordance with the terms of the APS, since it was not a party to the APS and never intended its funds to be used as the deposit.
[25] While I am sympathetic to 214’s argument, in my view, the funds paid to Bratty’s by Mr. Susman effectively constituted the deposit to be dealt with according to the terms of the APS.
[26] There is no obligation on the part of a trustee, when receiving or holding deposit funds, to make inquiries as to the source of the funds and whether there is any possibility that they may have been misapplied in some manner: see Monico Investments Ltd. v. Rebelcorp Financial Group Ltd., [1994] O.J. No. 2353 (Ont. Ct. Gen. Div.) at para. 120. Imposing such an obligation would be entirely commercially unworkable.
[27] The APS required that Magur pay Bratty’s, in trust, the sum of $200,000 by way of deposit, to be dealt with in accordance with the terms of the APS. Magur’s solicitor forwarded $200,000 to Bratty’s in due course. Neither Bratty’s nor 230 were under any obligation to make inquiries of Mr. Susman as to the source of those funds.
Are the Deposit Funds Subject to Tracing by 214?
[28] Bratty’s is a party defendant to the Chhina Action. The specific claims against Bratty’s are for an injunction restraining Bratty’s from disposing of the $200,000 deposit and for a declaration that Bratty’s holds the funds in trust for 214 on the basis of a constructive trust.
[29] Obviously, to obtain the relief it seeks against Bratty’s, 214 must be able to trace its funds to the deposit being held by Bratty’s. Superficially, that would not appear to be a difficult task. There does not appear to be any dispute that at least $150,000 of 214’s money ended up being paid to Bratty’s.
[30] Having said that, there are generally two situations that will terminate an exercise of tracing. The first is where the existence of the identified trust fund is not established. In other words, where the money is gone. That is not the case here. The funds physically remain in Bratty’s trust account.
[31] The second situation arises where the trust fund has found its way into the hands of a third party purchaser for value without notice: see McTaggart v. Boffo et al., [1975] O.J. No. 2539 (Ont. H.C.) at para. 81. See also Law Society of Upper Canada v. Mazzucco, 2009 CarswellOnt 3437 (S.C.J.) at para. 23. This is exactly the situation 230 says occurred here and what entitles it payment of the deposit funds.
[32] Two issues immediately arise. First, is 230 a bona fide purchaser for value without notice? Second, have the trust funds found their way “into the hands of” 230?
230 is a purchaser for value without notice
[33] The term “purchaser for value” is broadly defined in equity. It means “a person who acquires any interest in property”: see iTrade Finance Inc. v. Bank of Montreal, 2011 SCC 26, at para. 64.
[34] In accordance with the terms of the APS, 230 acquired an interest in the deposit funds when the agreement was terminated by virtue of the breach of the Buyer. I find that 230, at that point, became a bona fide purchaser for value.
[35] Moreover, at the time 230 became entitled to the deposit funds, it had no notice that 214 claimed an interest in the funds on the basis of fraud, conversion or for any other reason.
[36] To be clear, notice can be established in more than one way. 214 could establish, for instance, that 230 had actual notice of its claim against the deposit funds. Or it could establish that the facts were such that 230 ought to have made inquiries about the source of the funds but failed to do so because it did not want to know the truth about them. In other words, that 230 was wilfully blind.
[37] In this case, there is no evidence of actual notice. The closest 214 came to actual notice was Mr. Khatra’s email to Mr. Macklin on January 9, 2018. While Mr. Khatra raised issues of misrepresentation, lies and fraud, he did not connect those issues to the funds on deposit with Bratty’s. His email is not, in my view, sufficient to put 230 on actual notice of its claim.
[38] I further find that there is no basis to conclude that 230 ought to have been alert to the need to make inquiries. The deposit money had all come from Mr. Susman. 230 had not even heard of the AA or the existence of 214 until January 8, 2018. On January 9, 2018, 214 took the position that 230 should continue to deal with Magur – the party whom 230 understood to have provided the deposit funds in the first place. Again, Mr. Khatra did not alert 230 to its claim to an interest in the deposit funds.
The Deposit Funds are “In the Hands” of 230
[39] The main thrust of 214’s argument on the application is that the trust funds are not actually “in the hands” of 230. As a result, it argues, it has not lost its ability to trace the funds.
[40] I acknowledge that in McTaggart v. Boffo, as above, Lieff J. described the bar to continued tracing arising when the trust funds found their way “into the hands” of the third party purchaser for value. But I do not think that phrase should be read literally, so as to require that the third party purchaser actually have physical possession of the trust funds.
[41] As Brown J., as he then was, noted in Mazzucco, as above, at para. 23, Professor Waters has written that, “tracing ends when the property is acquired by a bona fide purchaser of a legal interest for value.” (Emphasis mine).
[42] In this instance, I find that 230 acquired an absolute interest in the deposit funds when the Buyer failed to complete the purchase transaction on January 10, 2018. It was entitled, at that time, to call for delivery of the funds to it. It acquired a legal and beneficial interest in the funds. Bratty’s had no basis in law to retain the funds after that time.
[43] In my view, it makes no difference at this stage whether the funds remain in Bratty’s trust account. What matters is that 230 acquired its unfettered interest in the funds on January 10, 2018 without notice – actual or constructive – of any claim of 214 to those funds.
[44] In the result, the application is granted.
Costs
[45] If the parties are unable to agree on the issue of costs, they may make written submissions to me on a fourteen day turnaround. The applicant’s submissions shall be served and filed by October 12, 2018. The respondent’s by October 26, 2018. Submissions shall be limited to two pages, not including costs outlines. They are to be filed with my assistant, Diane Massey, by email to diane.massey@ontario.ca.