Court File and Parties

COURT FILE NO.: CV-16-551346 DATE: 20190404 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

SCHWARTZ LEVITSKY FELDMAN INC. in its Capacity as Receiver and Manager of THE DEVINE ENTERTAIMENT FILM LIBRARY LIMITED PARTNERSHIP Plaintiff – and – DAVID WOOLFORD, ISMAIL PEER, DAVID KARAS, INDAR SONI, ALISON BELL, LORNE ALLEN, THE ESTATE OF GABRIEL MOZER, COLIN WEBSTER and NICK PAIVA Defendants

Counsel: Michael Hochberg, for the Plaintiff Jeffrey Larry, for the Defendants David Woolford, David Karas, Alison Bell, Lorne Allen, the Estate of Gabriel Mozer, Colin Webster and Nick Paiva

HEARD: January 18, 2019

LEDERER J.

Endorsement

[1] This is a motion for summary judgment. The parties agree that this is a matter suitable to resolution by this means. They agree there is no genuine issue requiring a trial.

[2] This action arises from a commercial transaction. It was described by the moving party, the receiver and manager of a limited partnership, The Devine Entertainment Film Library Limited Partnership (hereinafter the “Limited Partnership”) as a “tax saving scheme” and on behalf of the moving parties, 7 of the 9 defendants, as “part of a tax-incentivized offering”.

[3] Be that as it may.

[4] The Limited Partnership agreed to purchase 13 films from a related company, Devine Entertainment Corporation (hereinafter “Devine Corp.”). The purchase price was $7,000,000. The purchase agreement was labelled as the Asset Acquisition Agreement and is dated December 31, 2005. The defendants are all subscribers of the Limited Partnership. The Limited Partnership did not pay the full purchase price for the 13 films. Rather it executed a $7,000,000 promissory note in favour of Devine Corp. The promissory note was due December 31, 2015. The Limited Partnership paid $750,000 towards the purchase leaving an outstanding debt of $6,250,000 evidenced by promissory note.

[5] The subscribers each signed a “Subscription Agreement”, paid a subscription amount ($25,000 per unit) and signed an Assumption of the Loan and Debt Agreement as the balance of the consideration for the purchase of units in the Limited Partnership. Under these assumption agreements, each subscriber agreed to pay his or her pro rata share of the amounts due under the promissory note. The moving party, the plaintiff, makes much of the fact that these agreements also refer to the obligation of the subscriber “to pay the other debts of [the Limited Partnership] from time to time”. I shall return to this later in these reasons. Both the promissory note and the Assumption of the Loan and Debt Agreement were attached, as exhibits, to the Subscription Agreement. While it may not be pertinent to the decision I am to make, I note that the Assumption of Loan and Debt Agreements signed by the subscribers refer to the “Loan” as evidenced by the “Note” (the promissory note) as being in the principal amount of $7,000,000 but also indicate the loan, in the aggregate, being:

• for 6 of 9 agreements $7,880,360,
• for 2 of the 9 agreements $5,849,518, and
• for 1 of 9 agreements not an aggregate amount but the debt assumed being $191,147.90.

It was not said but presumably these values reflect, on one hand, the amounts paid directly by the subscribers and on the other the interest the Limited Partnership (the borrower) was to pay Devine Corp. (the lender).

[6] I pause to summarize the legal relationships and obligations these various agreements demonstrate:

• The Asset Acquisition Agreement was effective as of December 31, 2005. It is a contract by which the Limited Partnership agreed to purchase the 13 films from Devine Corp.
• The Amended and Restated Promissory Note is also dated December 31, 2005. It was executed on behalf of the Limited Partnership by the President & CEO of the General Partner. It requires the payment of the $7,000,000 plus interest on the tenth anniversary date of the “Note” (December 31, 2015).
• The Subscription Agreements are contracts between the Limited Partnership (the Issuer), a further corporation identified as Devine Entertainment Film Library GP Inc. (the General Partner) and each of the individual subscribers (the Purchasers). The Purchasers agreed to buy units from the Limited Partnership and as part of the agreement acknowledged that the General Partner may also rely on the representation made by the purchasers in entering the agreement. The Subscription Agreements were executed at various times, but all late in the years of 2006, 2007 and 2008 (November and December).
• The Assumption of Loan and Debt Agreements are referred to and attached as Schedule B to the Subscription Agreements. The execution of them is part of the consideration for the purchase of units by the subscribers. By these agreements those who have purchased units “…assume the legal obligation to make all payments of principal and interest in respect of the Assumed Loan and Debt Amount in accordance with the terms and conditions set forth in the Note and agree to make all such payments to Devine [Corp.] from and after the date hereof” being the dates of each of these agreements. In other words, the subscribers assumed the debt of the Limited Partnership that arises from the promissory note. They are each to pay their share on the prescribed date, December 31, 2015.

[7] For the moment I observe only that there is no contractual relationship which creates any obligation of the subscribers to pay the Limited Partnership anything beyond the initial subscription amount ($25,000 per unit). This is significant. It is the Receiver and Manager of the Limited Partnership that is the plaintiff in this action and the subscribers who are the defendants.

[8] It stands to reason that for the arrangement to work to the benefit it was designed to create, the Limited Partnership would have to sell enough units such that the subscription fees paid for their purchase would reduce the outstanding debt (in effect a deferred payment) remaining to be paid under the promissory note when it matured on December 31, 2015. The Asset Acquisition Agreement foresaw the problem. At clause 3.3(B) it identified certain “Events of Default”. Among them this one:

(B) If one or more of the following events (herein each an “Event of Default”) shall happen:

(f) if the Purchaser [the Limited Partnership] does not complete its planned financing in 2006 of at least 200 of its limited partnership units for minimum aggregate proceeds of $5,000,000…

[9] This requirement was not met. The Limited Partnership did not complete the financing of at least 200 units by 2006. It had only sold 80 units. In 2007 and 2008, it sold an additional 87 units, for a total of 167 units at $25,000 per unit for a total financing of $4,175,000.

[10] In the Factum, filed on behalf of the defendants, it is said that there was a further and earlier default. It is said that the Limited Partnership defaulted on the promissory note “in 2005” by failing to pay interest when it was due. There is an unsupported statement to this effect in the affidavit sworn by the defendant, Richard Mozer. [1] It is not clear to me how this could be. The promissory note was executed on December 31, 2005. This suggests no interest would have been owed during 2005 and no default, on that account possible. There were no offerings and, thus, no Assumption of Loan and Debt Agreements until 2006. The earliest of these agreements appears to have been executed by the defendant, David Woolford on December 29, 2006. [2] This suggests that the Limited Partnership was directly responsible for any interest owing up to that date and whatever share remained owing after the payments made by the subscribers who were obliged to pay only their “proportionate share” of the “Assumed Loan Amount” and the accompanying interest. Richard Mozer, the representative of the defendant, The Estate of Gabriel Mozer, was cross-examined. The transcript is unclear as to how, from where and, accordingly, if, interest was paid by the defendants, by the Limited Partnership from the subscription payments it had received or if interest was paid at all.

[11] It is unclear as to whether there was a default in the payment of interest. It does not matter. It is established that units were not sold as was required by the Asset Acquisition Agreement. Under its terms this was a default.

[12] Clause 3.3 (B) goes on from the quotation above to review the recourse available if there is a default:

…then the Vendor, in addition to its rights at law or otherwise with respect to the Charged Assets, may without limiting or restricting other rights or remedies under contract, at law or in equity, by ten (10) Business Days’ notice to the Purchaser whether with or without prior demand therefore so long as such default has not been remedied at the expiry of such ten (10) Business Days’ notice:

(i) declare all indebtedness under the Promissory Note to be payable forthwith;

(ii) demand payment on the Promissory Note;

(iii) declare that the Charged Assets here in created are forthwith specifically charged to the extent that such assets are not already specifically charged;

(iv) take possession of the Charge Assets, carry on the business of the Purchaser and collect and retain for the Vendor’s own account any revenues or income generated in respect of the Charge Assets;

(v) appoint in writing a receiver or receivers, which shall include a receiver/manager or receivers/managers, of the Charge Assets to carry on the business of the Purchaser and to exercise all powers of the Purchaser;

(vi) remove the General Partner as the general partner of the Purchaser and replace the General Partner with a general partner determined by Vendor [ sic ];

(vii) sell or otherwise dispose of the Charged Assets or institute proceedings in any court of competent jurisdiction for sale or foreclosure of the Charge Assets; and/or

(viii) pursue any other remedies or proceedings authorized or permitted under the Personal Property Security Act (Ontario) or otherwise by law or equity;

all at such times and in such manner as that Vendor in its sole discretion deems expedient and all without the necessity for any additional notice, presentation, demand, advertising, or entering into possession of any properties or assets of the purchaser.

[13] The submissions of the parties, generally, reflect on the right of the vendor (Devine Corp.) to, upon default, look to immediate payment of the debt outstanding under the promissory note. I note all the remedies to underscore that none of this inures to the benefit of the purchaser (the Limited Partnership). To the contrary, it is its failure that is the catalyst for reliance on the recourse set out. It is Devine Corp. that holds the rights to look to the subscribers for payment under the Assumption of Loan and Debt Agreements, not the Limited Partnership. I repeat that it is the Receiver and Manager of the Limited Partnership that is the plaintiff in this action.

[14] How can this be? How is it that the Limited Partnership can assert any claim against the individual subscribers for a debt it owes to Devine Corp.?

[15] Devine Corp. is no longer carrying on business. It has been delisted as a public company. Forvest Trust S.A. is a Swiss company based in Geneva. It is in the investment business. Forvest Trust was a secured lender to Devine Corp. Forvest Trust purports to hold all rights and benefits of Devine Corp. in respect of the debt owed by the Limited Partnership to Devine Corp. On November 5, 2009, Forvest Trust made a demand for payment of the debt to the Limited Partnership and the general partner (Devine Entertainment Film Library GP Inc.). On the same day, it provided the Limited Partnership, the general partner and Devine Corp. with notice of intention to enforce security pursuant to the Bankruptcy and Insolvency Act [3]. A demand having been made the entirety of the debt became immediately payable to Fovest Trust as the assignee of Devine Corp. The Limited Partnership and the general partner did not respond to the demand that had been made. They did not pay the debt.

[16] On November 4, 2011, Forvest Trust commenced an action against the Limited Partnership, the general partner and Devine Corp. Thereafter, it brought a motion seeking to add the subscribers as defendants in that action. The motion was refused. It was the Assumption of Loan and Debt Agreements which created the ability of Devine Corp. to look to the subscribers for payment of the funds owed under promissory note. There was no privity of contract between Forvest Trust and the individual subscribers under those agreements. Forvest Trust was not a party to them. In the absence of privity there would have to be, and there was no expressed intention of those who were parties, to extend the benefit of those agreements (the assumption of the debt) to a third party, in this case Forvest Trust. [4] The Master (now Mr. Justice Glustein) analogized this to a situation where A agrees to pay the mortgage of B. The agreement would almost certainly refer to the amounts owing, the date of maturity and the rate of interest. Nonetheless, this “incorporation by reference” of the mortgage debt into the contract between A and B would not allow the mortgagee to enforce the contract between A and B. For that ability to be in place, the mortgagee would require an assignment of that agreement or seek a direct guarantee from A (the party agreeing to pay, in this case the subscribers). It is by those means that the mortgagee, as a secured lender, may be able to obtain the benefit of the agreement between A and B. As it is Forvest Trust was only assigned Devine Corp.’s security in the Limited Partnership’s rights to the 13 films and its rights against the Limited Partnership under the promissory note. [5]

[17] As a result, the individual subscribers were not added as parties to the action commenced by Forvest Trust. As it is, the Limited Partnership and the general partner failed to defend the action and judgment was obtained against them on April 23, 2014 in the principal amount of $10,883,356.16.

[18] It will be readily apparent that the amount of the judgment exceeds the amount of the promissory note. This is because that is not the only amount that is the subject of this claim. Quite apart and separate from the promissory note, Forvest Trust took an assignment of in excess of $3,000,000 of debt that Devine Corp. owed to the Royal Bank. Forvest was also assigned the security agreements held by the Royal Bank. That amount became enforceable on November 9, 2009. It is at this point that I return to the reliance placed by the plaintiffs on the phrase found in the Assumption of Loan and Debt Agreements that each subscriber undertakes to pay the amounts due, not only under the promissory note, but also “the other debts of Devine LP from time to time.” As it is included in the judgment against the Limited Partnership, the plaintiffs submit it is now a debt of the Limited Partnership and payable by it under the Assumption of Loan and Debt Agreements. The absence of privity would impact this part of the claim as it does the debt owed as a result of the default under the Asset Acquisition Agreement and demand made under the promissory note.

[19] The decision of the Master was made on June 6, 2013. This was followed by the default judgment on April 23, 2014. The Limited Partnership (in the person of the Receiver and Manager) did not make a demand on the individual subscribers until January 4, 2016. On April 21, 2016, the Receiver and Manager, in furtherance of its responsibility to realize on the assets of the Limited Partnership, commenced this action against the individual subscribers. The action is founded on the idea that the Assumption of Loan and Debt Agreements are assets of the Limited Partnership. [6]

[20] The catalyst for this may have been the decision of the Master when, in refusing to add the subscribers to the action commenced by Forvest Trust, he made the following observation:

Forvest’s claim on the Promissory Note as assignee is against Devine LP. Devine LP may have an “asset” in the form of ALDAs from the Limited Partner Subscribers, and if Forvest obtains default judgment against Devine LP or Devine GP (both noted in default), Forvest can then seek to enforce the judgment, either through the sheriff seizing assets and collecting money for distribution to execution creditors pursuant to the Creditors’ Relief Act, 2010, S.O. 2010, c. 16, Schedule 4, or through bankruptcy and insolvency proceedings either by the trustee acting on behalf of the bankrupt Devine LP or Devine GP, or the creditor bringing action on notice to other creditors under section 38 of the BIA if the trustee refuses to do so. [7]

[Emphasis added]

[21] For their part the defendants wonder how it is possible that money representative of a debt, that pursuant to the promissory note, the Limited Partnership owed to Devine Corp. can now be attachable as an asset by its Receiver and Manager to be utilized by it to rearrange the affairs of the Limited Partnership or pay off any and other of its creditors. Under the Assumption of Debt and Loan Agreements, each defendant agreed to pay its portion of the debt to Devine Corp., not to the Limited Partnership. The defendants agreed to “assume legal responsibility to make all payments of principal and interest in respect of the Assumed Loan and Debt Amount in accordance with the terms and conditions of the Note and agree[d] to so make all such payments to Devine [Corp.] from and after the date hereof”. [8] As the defendants see it, the Assumption of Loan and Debt Agreements do not provide any right or ability allowing the Limited Partnership to demand that the amounts owed by it be paid to it. Put differently, it may be that the Assumption of Loan and Debt Agreements were an asset to the Limited Partnership but only in circumstances where it fulfilled its obligations under the Asset Acquisition Agreement. Had it done so those agreements would have required the subscribers (the defendants) to pay the debt represented by the promissory note. The value of the asset was lost when the Limited Partnership breached the Asset Acquisition Agreement and failed to sell the number of units required to provide what the parties to it had agreed was the minimum acceptable level of financing. With the default, the debt was owed once the demand was made. Any delay in making the demand does not overcome the breach or its impact. It simply delays the running of the applicable limitation period. Here the Limited Partnership continued to sell units and subscribers continued to purchase them. Perhaps if the 200 units had been sold, albeit after the time limit set by the Asset Acquisition Agreement, with the certainty that the necessary financing was available, no one would have complained and no demand would have been made. Perhaps, in those circumstances, there would have been no damage or maybe there would be an argument that the parties, by their conduct, had amended the Asset Acquisition Agreement such that the time for the sale of the 200 units had been extended. As it is, it does not matter. The sale of units never reached the 200 required. There was a breach; a demand was made. The debt was owed and had to be paid by the Limited Partnership without the assistance of the subscribers.

[22] It is difficult to see how this understanding could be wrong. Nonetheless, the plaintiff (the Receiver and Manager of the Limited Partnership) says it is. It is submitted that the Assumption of Loan and Debt Agreements are, in fact, guarantees which can be enforced by the Limited Partnership on its own. This does not help. For the moment suppose the agreements are guarantees. (Interestingly, the defendants agree that they are.) The problem is in the assertion that, as such, they can be enforced by the Limited Partnership. It must be true that the plaintiff, who is the debtor, can have no right to claim against the defendants, as guarantors, for the plaintiff’s own failure to pay the loan (the debt under the promissory note), regardless of when the demand was made. In a guarantee, the debtor (the Limited Partnership) has an obligation to pay the creditor (Devine Corp.). Each of the guarantors (the subscribers) has a subsidiary obligation to pay the creditor, but not the debtor. So far as I am aware, there is no legal authority to suggest that a debtor has a right to compel a guarantor to pay the debtor to cover the debtor’s own obligation. That right belongs to the creditor for whose benefit the guarantee is drawn. There is no loan document, in this case, that refers to the Limited Partnership as having any right to pursue the defendants for repayment of a loan, particularly one it did not pay as it was required to do as a result of its own default.

[23] This, of course, assumes that the Assumption of Loan and Debt Agreements are guarantees. They are not. A guarantee is a secondary obligation. It arises when the debtor fails to act on its obligation (the primary obligation) to pay. It is only, then, that the surety (the guarantor) is called on to pay. That is not what is happening here. In this case the Assumption of Loan and Debt Agreements are not stand-alone undertakings by the subscribers. They are obligations taken on by the subscribers as part of the payment (consideration) for the units being purchased. On the understanding that, among other things, the requisite number of units will be sold within the time prescribed, the subscribers will become the primary debtor. Their obligation was to come, not from the failure of the Limited Partnership to pay, but from the success of the overall transaction.

[24] In the Reply Factum filed on behalf of the plaintiff, it takes a different tack. It proposes three alternative approaches, each of which assumes that the Assumption of Loan and Debt Agreements are guarantees and each of which would allow the Limited Partnership to bring this action to enforce the guarantee the agreements are said to provide:

• First, it is proposed that the Assumption of Loan and Debt Agreements are guarantees that stand apart from the Asset Acquisition Agreement and the Promissory Note. Since they are “addressed to” both the Limited Partnership and Devine Corp., they both have privity of contract with the subscribers and should both have the ability to enforce the agreements. [9]
• Second, in the event that this privity is found not to exist as between the subscribers and the Limited Partnership, it should, nonetheless, be entitled to enforce the guarantee the Assumption of Loan and Debt Agreements provide as a “principled exception to the privity doctrine.” This relies on the proposition that what is being sought is no more than what is contemplated within, what the Reply Factum refers to as, “the express scope” of these agreements. [10]
• And third, still working from the understanding that the Assumption of Loan and Debt Agreements are guarantees, the plaintiff (the Receiver and Manager) submits that the Limited Partnership ought to be entitled to enforce the guarantee as trustee of the rights of the creditor (Devine Corp.) under the Assumption of Loan and Debt Agreements. [11]

[25] There is no privity between the subscribers and the Limited Partnership that arises from, or is present in, the Assumption of Loan and Debt Agreements. The fact that the agreements are directed to the Limited Partnership and its general partner do not demonstrate an exchange of consideration between them. [12] That exchange is in the Asset Acquisition Agreement where the execution of the Assumption of Loan and Debt Agreements is part of the consideration (in company with the payment of $25,000 per unit) provided in return for the units purchased. It is hardly surprising that the Assumption of Loan and Debt Agreements include this direction. It advises the seller (Devine Corp.) and the purchaser (the Limited Partnership) under the Asset Acquisition Agreement that the consideration the agreements represent has or will be provided.

[26] The second submission (the first alternative submission) acknowledges that there need be no privity. “In general, there is no requirement for privity between the surety and the principal - the person whose performance is being guaranteed.” [13] To my mind, the problem with this is self-evident. The performance of the Limited Partnership is not being guaranteed. It is being substituted for by the undertaking of the subscribers to do so when they know that the units they are purchasing will have a viable value, that is to say when 200 are sold within the time limit set.

[27] The Reply Factum relies on Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd. [14] It is said that in that case the Supreme Court of Canada held that there were sound policy reasons for relaxing the privity of contract doctrine in the case before it. As I see it that case was different from this one. There, Fraser River Pile & Dredge Ltd. (the appellant) owned a barge. It was chartered by Can-Dive Services Ltd. (the respondent). The barge sank. Fraser River collected on its loss from its insurer. The insurer and Fraser River agreed that the latter would sue Can-Dive Services as a subrogated claim of the insurer. The insurance contract covered “charterers”. The insurance contract contained a policy indicating that the insurer waived any right of subrogation against the “charterer.” In the absence of privity between the insurer and the charterer the court upheld the clause in the contract:

When sophisticated commercial parties enter into a contract of insurance which expressly extends the benefit of a waiver of subrogation clause to an ascertainable class of third-party beneficiary, any conditions purporting to limit the extent of the benefit or the terms under which the benefit is to be available must be clearly expressed. The rationale for this requirement is that the obligation to contract for exceptional terms most logically rests with those parties whose intentions do not accord with what I assume to be standard commercial practice. [15]

[28] The situation in the case that I am asked to decide is precisely the opposite of what occurred in Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd. There the Court held that there should be no payment. The insurance contract covered the third party loss and waived any rights of subrogation. In that case the intention of the contract that it be extended to protect “charterers” was stated and recognized. In this case the plaintiff relies on Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd. to seek payment where there is no contractual provision that allows the Limited Partnership to benefit from its own failure to pay or its failure to sell the requisite units within the time provided by the Asset Acquisition Agreement. It is worthwhile remembering that the supposed creditor (Devine Corp.) is no longer in business. It may not be the only creditor of the Limited Partnership. There is no certainty as to where the money will go if the subscribers are now required to pay. It will go to the Receiver and Manager to be dispersed as the law dictates and permits. If it all goes to Devine Corp. or rather its assignee Forvest Trust, that will only be because Devine Corp. is the only creditor, a happenstance of the particular circumstances and not because of any immediate right of its own and not because, as in Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., the contract provides for that result. To invoke the principle referred to by the Master in his decision refusing to add the subscribers as defendants in the action commenced by Forvest Trust and noted by him as enunciated in Brown v. Belleville (City) [16], in the absence of privity, there was no expressed intention to extend the benefit of the Assumption of Loan and Debt Agreements to the Limited Partnership as a third party. [17] It is not commercially sensible to suggest there could be such an intention. How could such a benefit be advanced? It would allow the Limited Partnership to profit from its own default of the Asset Acquisition Agreement. If there had been no default, to suggest that nonetheless somehow the Limited Partnership could have a claim, would have had the effect of denying Devine Corp. the benefit of the sale it had made to the Limited Partnership.

[29] I turn now to the third submission (the second alternative submission) made on behalf of the plaintiff (the Receiver and Manager). It is submitted that the Limited Partnership ought to be permitted to enforce the Assumption of the Loan and Debt Agreements as the trustee of the rights of Devine Corp. and its assignee, Forvest Trust. Reliance is placed on the case of V. K. Mason Construction Ltd. v. Canadian General Insurance Group Ltd. [18] In that case the plaintiff (Mason) was a general contractor for a renovation project at the Commerce Court building in the City of Toronto. The plaintiff’s contract was with the CIBC Development Corporation. The contract provided that in the event of a default by a subcontractor, the CIBC Development Corporation would indemnify the plaintiff. As the contract required, the subcontractor who was to undertake the mechanical work, provided the plaintiff with a performance bond naming itself as the “principal”, the plaintiff as the “obligee” and the Canadian General Insurance Group Limited as the surety. CIBC Development Corporation was not a named party to the bond. The subcontractor defaulted. The plaintiff sued, claiming damages from the surety. It was conceded that the plaintiff had been paid its costs pursuant to the indemnification provided by the CIBC Development Corporation. The surety (Canadian General Insurance Group Limited) sought summary judgement on the basis that the plaintiff had suffered no loss. The motion was dismissed. The plaintiff had the right to sue as trustee on behalf of CIBC Development Corporation. That case has no application in this one. In that case the judge noted:

In my view, the contractual relationship between CIBC and Mason, including the undisputed facts concerning industry practice and the specific understanding those parties reached concerning the bond, constituted Mason as trustee for CIBC with regard to Mason’s rights under the bond. I reject the submission that this conclusion is precluded by the fact that the CIBC - Mason contract does not expressly constitute Mason as trustee and includes an “entire contract” clause. It is not [at] all clear to me that it is open to Canadian General to rely on that term where the parties to the contract themselves agree that there is a trust obligation. In any event, even if Canadian General can rely on the entire contract clause, the obligation of Mason “to preserve and protect the rights” of CIBC with respect to the subtrades is explicit as is the obligation “to require them to perform their work in accordance with and subject to the terms and conditions of the Contract”. It was CIBC that insisted on the bond, and given the cost-plus nature of the contract, it was apparent that the bond was for the benefit of CIBC. The obligations of the Mason, read in the light of the entire contractual setting, readily lead to the implication [of] a trust obligation with respect to recovery under the bond.

It is a well-established principle of law that where the benefit of a guarantee is clearly intended for a third party not privy to the guarantee, the obligee is entitled to enforce the guarantee in its capacity as trustee… [19]

[Emphasis added]

[30] As with Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd. the circumstances in this case are different from those in V. K. Mason Construction Ltd. v. Canadian General Insurance Group Ltd. There is no implication that can be drawn from reading “the entire contractual setting” that there is a trust obligation arising from the terms of the Assumption of Loan and Debt Agreements. They are not a guarantee. They are a primary obligation to the pay a pro rata share of the promissory note when it matures assuming the terms of the Asset Acquisition Agreement are complied with. They were not. There was a default.

[31] Finally, there was a suggestion that, as an alternative to being guarantees, the Assumption of Loan and Debt Agreements represent an obligation by the defendants to indemnify the Limited Partnership. On their face these agreements are not that. Simply, an indemnity is the act of holding another harmless. An indemnity is an undertaking by one person to make good losses suffered by another. This is consistent with the understanding that an indemnity is a primary obligation owed directly to a beneficiary irrespective of whether the beneficiary was entitled to sue the person responsible for causing the loss. This is distinct from a guarantee which is a secondary obligation to pay should the primary debtor fail to do so. In this case, the Limited Partnership did not suffer any loss. It did not pay off the promissory note. The Assumption of Loan and Debt Agreements do not provide any right to Limited Partnership to be indemnified for anything much less payments it never made.

[32] The Assumption of Loan and Debt Agreements are neither guarantees nor indemnities. They do not stand alone and independent of the overall arrangement they are part of. They do not operate independently from the Asset Acquisition Agreement or the promissory note. They are part of the consideration provided by the defendants to the Limited Partnership to pay, not to indemnify the Limited Partnership or guarantee the payment it would otherwise be required to make. Instead they demonstrated that the subscribers were to take responsibility to pay the creditor if the terms of the Asset Acquisition Agreement were met. The fact is they were not. The Asset Acquisition Agreement was breached; there was a default. The agreement failed and the obligations under it ended.

[33] Even if I am wrong in all I have said, it does not matter. The action, as commenced by the Receiver and Manager was out of time. This action was commenced on April 21, 2016. The Promissory Note was to mature on December 31, 2015. With the breach of the Asset Acquisition Agreement, that is the failure to sell 200 units “in 2006”, the debt evidenced by the promissory note became payable, in its entirety, on demand. Forvest Trust made the demand on November 5, 2009. It initiated its action (the one that was before the Master) as against the Limited Partnership and its general partner on November 4, 2011, which is to say the last day before the two year limitation period set by section 4 of the Limitations Act, 2002 expired. [20] To the extent that the Limited Partnership believed that it had a claim allowing it to be indemnified by the subscribers, it had a further two years from the date it was served with the Statement of Claim issued on behalf of Forvest Trust to commence the appropriate proceeding. This arises from section 18 of the Limitations Act which states:

(1) For the purposes of subsection 5(2) and section 15, in the case of a claim by one alleged wrongdoer against another for contribution and indemnity, the day on which the first alleged wrongdoer was served with the claim in respect of which contribution and indemnity is sought shall be deemed to be the day the act or omission on which that alleged wrongdoer’s claim is based took place.

(2) Subsection (1) applies whether the right to contribution and indemnity arises in respect of a tort or otherwise.

[34] This being so, in compliance with section 4 of the Limitations Act, 2002, the Limited Partnership would have been required to launch this action no later than two years after the date it was served with the claim brought by Forvest Trust. The date of service on the Limited Partnership is not referred to in the record and was not referenced in the submissions of counsel. Rather the submissions made on behalf of the Limited Partnership argue that it did not “discover” its claim until the day that judgment was obtained against it by Forvest Trust being April 24, 2014. [21] The law is plain, the presumed date is the date of service. That date is rebuttable by application of the discoverability principle:

…Properly interpreted, s. 18 works with other provisions of the Limitations Act, 2002 to create a presumed start date for the running of the limitation period. That presumed limitation period start date will result in a claim for contribution or indemnity being statute-barred two years after the party seeking contribution or indemnity is served with a claim in the proceeding in which contribution or indemnity is sought, unless that party proves that the claim for contribution or indemnity was not discovered and was not capable of being discovered through the exercise of due diligence until some later date. [22]

[35] The factors governing discoverability are found in section 5 of the Limitations Act, 2002:

(1) A claim is discovered on the earlier of,

(a) the day on which the person with the claim first knew,

(i) that the injury, loss or damage had occurred,

(ii) that the injury, loss or damage was caused by or contributed to by an act or omission,

(iii) that the act or omission was that of the person against whom the claim is made, and

(iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it; and

(b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a).

[Emphasis added]

[36] The submissions made on behalf of the defendants (the subscribers) point out that the purpose behind section 18 of the Limitations Act, 2002 is to promote consolidation of related claims. This suggests that claims for contribution and indemnity should be brought within the main action and not after judgment:

The effect of the new provision is that the period for bringing the claim for contribution and indemnity now coincides much more closely with the basic limitation for bringing all actions, and procedurally, it is contemplated that all claims arising out of the incident that caused the injury will be tried and disposed of together. Therefore, to the extent that a claim for contribution and indemnity may be brought beyond the limitation period that applied to the plaintiff's potential claim against a particular tortfeasor, the extension is minimized by the operation of s. 18 and any negative consequences to the tortfeasor by being brought into an action after he or she could have been sued by the plaintiff are minimized as well. [23]

[37] It is in this context that I find that “the reasonable person with the abilities in the circumstances of the person with the claim” (in this case those connected with the Limited Partnership) would have recognized that “a proceeding would be an appropriate means to seek to remedy” no later than June 6, 2013, the date that the Master refused to add the subscribers as defendants in that action. At that point, if not sooner, it would have been clear that the Limited Partnership faced liability and that given the order of the Master it was left to launch any claim it had for contribution and indemnity if the subscribers were responsible for or required to share in any of that liability. June 6, 2013 is more than two years before April 21, 2016.

[38] The action as against these defendants is out of time.

[39] For the reason reviewed herein, the action is dismissed.

[40] As discussed with the parties at the time of the hearing of the motion, costs to the defendants, to be paid by the plaintiffs, in the amount of $18,000.

Lederer J. Released: April 4, 2019

Reasons for Judgment

COURT FILE NO.: CV-16-551346 DATE: 20190404 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

SCHWARTZ LEVITSKY FELDMAN INC. in its Capacity as Receiver and Manager of THE DEVINE ENTERTAIMENT FILM LIBRARY LIMITED PARTNERSHIP Plaintiff – and – DAVID WOOLFORD, ISMAIL PEER, DAVID KARAS, INDAR SONI, ALISON BELL, LORNE ALLEN, THE ESTATE OF GABRIEL MOZER, COLIN WEBSTER and NICK PAIVA Defendants

REASONS FOR JUDGMENT Lederer J. Released: April 4, 2019

Footnotes

[1] Affidavit of Richard Mozer sworn June 28, 2018 at para.18. Richard Mozer identifies himself as a defendant in his capacity as the representative of the Estate of Gabriel Mozer, a named defendant.

[2] I say “appears” because there is a cheque evidencing the purchase of units by David Karas dated December 1, 2006 and a subscription agreement similarly signed on November 29, 2006 but no accompanying Assumption of Loan and Debt Agreement.

[3] R.S.C. 1985 c. B-3

[4] Forvest Trust S. A. v. The Devine Entertainment Film Library Limited Partnership 2013 ONSC 3347 at paras. 26-29 referring to Brown v. Belleville (City) 2013 ONCA 148, [2013] O.J. No. 1071 (C.A.) at 75 and 99-100

[5] Ibid (Forvest) at paras. 40-43

[6] Motion Factum of the Moving Party/Plaintiff at paras. 20 (“In accordance with the terms of the ALDAs, the assets of Devine LP include, but are not limited to, each Subscribers’ obligation to pay his or her pro rata share of the amounts due under the promissory note, as well as each Subscriber’s obligation to pay his or her pro rata share of the Judgement as the judgement is a debt of Devine L.P.”) and para. 21

[7] Ibid at para. 69

[8] Affidavit of Mark Russell, sworn March 20, 2018 Exhibit K (he Assumption of Loan and Debt Agreements, see the Motion Record pp. 173, 179, 186, 208, 221, 244, 256, 278 and 295.

[9] Reply Factum at paras. 23 and 34

[10] Ibid at paras. 24 and 35

[11] Ibid at paras. 31 and 36

[12] At the outset, immediately below the title, each of the Assumption of Loan and Debts Agreements say:

TO: DEVINE ENTERTAINMENT CORPORATION ("Devine") AND TO: THE DEVINE ENTERTAINMENT FILM LIBRARY LIMITED PARTNERSHIP ("DEFLLP") and its General Partner, DEVINE ENTERTAINMENT FILM LIBRARY GP INC. (“the “GP”)

The presence of this direction is not consideration.

[13] Reply Factum at para. 26

[14] , [1999] 3 S.C.R. 108

[15] Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., supra (fn. 15) at para. 42

[16] Supra, (fn. 5) and referred to at Reply Factum at para. 28 in turn further referencing London Drugs v. Kuehne & Nagel International Ltd. (3 S.C.R. 299 at pp. 418-426

[17] See para. [16] and fn. 5 herein

[18] [1998] O.J. No. 3476 (Ont. Gen. Div.)

[19] Ibid at paras 14 and 15

[20] S.O. 2002, c. 24 Sched. B. Section 4 states:

Unless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.

[21] See fn. 21 above where section 4 of the Limitations Act is quoted and sets the two year limitation as running from the date the claim was discovered

[22] Mega International Commercial Bank (Canada) v. Yung 2018 ONCA 429 at para. 54

[23] Waterloo Region District School Board v. CRD Construction Ltd. 2010 ONCA 838 at para. 29