Court File and Parties

COURT FILE NOs.: C-705-17 and C-728-15 DATE: 2019-04-10 ONTARIO SUPERIOR COURT OF JUSTICE

COURT FILE NO.: C-705-17 BETWEEN:

ALEXANDER MICHEL Plaintiff – and – SPIRIT FINANCIAL INC., FRANZ KRAMER and GUNTHER KRAMER Defendants

Counsel: Jeffrey A.L. Kriwetz, Counsel for the Plaintiff David M. Steele and Daniel W. Veinot, Counsel for the Defendants

COURT FILE NO.: C-728-15 BETWEEN:

FRANZ KRAMER, CHRISTA SCHMIDT and GUNTHER KRAMER Plaintiffs

• and - ALEXANDER MICHEL Defendant

Counsel: David M. Steele and Daniel W. Veinot, Counsel for the Plaintiffs Jeffrey A.L. Kriwetz, Counsel for the Defendant

THE HONOURABLE MR. JUSTICE P.J. FLYNN

REASONS FOR DECISION

[1] This trial dealt with two different actions:

(i) C-705-17 (the debt action) involves a claim by Alexander Michel (Michel) against Franz Kramer (Kramer) and his son Gunther (Gunther) and the related corporation Spirit Financial Inc. (Spirit) for a debt or damages worth just over $2 million Cdn.; That action was originally commenced in Toronto in 2011 and was transferred to Kitchener in 2017; and

(ii) C-728-15 (the slander action) for a claim by Kramer and Gunther and Christa Schmidt (Christa) for general damages of $850,000 and aggravated and punitive damages in the amount of $500,000 each, for email threats, trespass threats, a Russian death threat, slander and defamation.

[2] And to think that Kramer and Michel once were friends. How often are friendships destroyed by money? That’s clearly the case here.

[3] For about 7 years, Kramer and Michel trained and worked together as airline pilots in Germany until 2003. Kramer moved to Kitchener, Ontario where he remains today and Michel moved on with other airlines into different countries, so that today he lives in Brunei.

[4] The two pilots saw each other often and often flew together. They talked, and one thing lead to another.

[5] And then they did business together. And it didn’t work out well for Mr. Michel. As co-pilots, the two of them had to trust each other to stay aloft. Together in business, trust was required too. But the trust was lost after Michel poured hundreds of thousands of dollars (deutschmarks, euros and Swiss francs) into Kramer’s hands and couldn’t get the great bulk of it back. So their friendship crashed and burned and Michel became Kramer’s enemy.

[6] Between 2000 and 2010, Michel advanced significant sums to Kramer: 949,504 Euros (EUR) and 100,119 Swiss Francs (CHF).

[7] Whether those monies were advanced as loans or “invested” by Michel in the mortgage pool created by Kramer/Spirit for lending on residential properties remains disputed. But the transaction(s) clearly started as a loan, as shown by the two Promissory Notes dated May 12, 2000: the first from Spirit to Michel for 140,000 D.M. at 7% interest, and the second on the same date from Kramer to Michel for the same amount at 6% interest. Both were due on or before June 1, 2001.

[8] Why two on the same day? I find that they were most likely made in the above order in respect of the same funds for the reasons given by Michel: he didn’t know Spirit and only wanted to deal with Kramer, whom he obviously trusted. And Kramer accepted that. There were no further Promissory Notes. So the 2nd Promissory Note was meant to replace the first and commenced the two pilots’ business relationship.

[9] Spirit was incorporated in 1995 as Spirit Construction Limited but changed to its present name in 1999. At all material times Kramer was a director and President of Spirit and from 2000 until 2014 Gunther was Spirit’s Secretary-Treasurer. On the evidence available to me he was more likely than not a director of Spirit for that period.

[10] In or about 2000 Kramer decided to embark on a new venture: mortgage lending through the instrumentality of Spirit. Neither he, nor Gunther, nor Christa, nor anyone associated with Spirit had any experience or licence to do that, as is required by Ontario legislation governing mortgage brokers and lenders.

[11] Kramer initiated a pool of funds in Spirit which he would make available to individual borrowers for 2nd and 3rd mortgages.

[12] It turns out that Michel’s witting or unwitting contributions to the Kramer/Spirit lending pool (about $1.6 million Cdn.), when compared with the contributions of all other investors (about $1.3 million Cdn.) represented more than half of the pot.

[13] Apparently, things went on amicably for about 9 years, with Michel forking over vast sums of his own money to Kramer, the last amounts in Swiss Francs in 2008 and 2009. Michel’s funds came from his employment income and the proceeds of the sales of his German properties. They switched from Euros to Francs because Michel’s employer and mode of payment had changed. The amicability ended in 2009 when Michel began demanding the return of his money.

[14] Until the end of the trial, Kramer insisted that none of Michel’s advances represented a loan. Rather, he said, they were investments in Spirit’s lending pool. And that Michel’s loss represented the cost of doing this kind of business.

[15] But the only documents contemporaneous with the beginning of the business relationship were those Promissory Notes – and only the note between Michel and Kramer personally makes any sense in all the circumstances. There are no other written instruments throughout all of their dealings.

[16] In a strange twist, on the last day of evidence in the trial, Kramer conceded that Michel’s Swiss franc advances were still available (and not sent back to the pool as asserted in his pleadings) and belong to Michel. He agreed to pay those funds to Michel in accordance with a signed direction. And so, I endorsed the Trial Record accordingly.

[17] And while the evidence clearly shows that Michel’s portion of the “pool” was more than half, it was never made clear whether Kramer had any significant funds of his own at risk in the pool. Kramer testified that he had less than 20 other investors, including a number of his close relatives.

[18] There are many differences on the facts and their meanings between the evidence of Michel and the evidence of Kramer. Where they differ on any substantial matter, I prefer the evidence of Michel over that of Kramer.

[19] In some places in his testimony, Kramer turns into a fantastic storyteller and his story simply doesn’t make sense. And in other cases, in cross-examination, he is like a Llama in the headlights frantically searching for an answer that makes sense and stunned by the realization that he cannot knit it together seamlessly to make the story work. For example, when he is confronted by a cross-examiner who is determined to get to the bottom of the question of where all the money went or who got paid out, he seemed to be making it up as he went. And by his demeanour he seems like a man too arrogant to be required to answer such petty concerns.

[20] Sometimes there were unnecessarily long pauses between the end of the cross-examiner’s question and his answer. I found him neither credible nor reliable.

[21] On the other hand, Michel came across as an angry, jilted friend and lender…and understandably so. But his version of the facts of the transaction(s) and the relationship is the one that makes better sense.

[22] Except for the 2013 statements delivered after Michel’s action had commenced, none of the statements received by Michel showed any losses. Rather they showed Michel earning interest and his balance increasing. Michel testified that he raised concerns with Kramer when some of the statements showed interest at less than the stipulated rate of 6% and Kramer tried to assure him that when the money was paid back, Michel would receive 6% interest. This was consistent with Michel’s initial concept. Michel continued to make advances because of Kramer’s representations.

[23] In 2009, Michel demanded repayment, but Kramer resisted and at first falsely represented to Michel that his money was in long term investments and unavailable and that it was tied up until 2015. In fact he guaranteed in writing that everything would be paid back by 2015. Kramer continued to represent to Michel that his investment was safe and the risk of the mortgage loans from the pool was low.

[24] Except for four payments made in 2009, Michel’s advances have not been repaid. And 2015 has long ago come and gone.

[25] Those 4 payments were: April 20, 2009 7,273 CHF June 23, 2009 59,890 EUR September 9, 2009 29,960 EUR October 21, 2009 59,920 EUR or approximately $232,500 Cdn.

[26] I am satisfied that, without interest calculations, Michel has paid over to Kramer 799,734 EUR and 92,846 CHF which has not been repaid.

[27] I have concluded that the relationship between Kramer and Michel was that of debtor/creditor and while there was only one Promissory Note between them, all of Michel’s subsequent advances must be considered similar demand loans at 6% simple interest.

[28] No experts were called by either side.

[29] Kramer was an arrogant fraudster who believed he could control all the variables in his unlicensed lending scheme. After all, it was mostly others’ money at risk. He made all of his investment or lending decisions on his own. Apparently, he found mortgage borrowers from throughout the Province of Ontario. He never consulted Michel (nor any of his other investors) and he seemed to favour repaying those others, including family members, over his most substantial source of funds. He even used the pool money to salvage an old hotel project…nothing to do with residential real estate loans.

[30] Michel had no vote – no say. He was naïve to say the least, and he became a dupe.

[31] Kramer’s representations to Michel about the state of his capital advances and accumulated interest were false and I find that they were fraudulently made. It’s clear that they worked on Michel who long continued to make advances to his ultimate detriment. It is also clear that Kramer has totally failed to account for Michel’s money. Kramer also lied about losses Michel is said to have suffered.

[32] A reasonable inference can be drawn that Michel was wrongfully apportioned a disproportionate share of so-called losses to the pool while Kramer and his relatives were recouping their money.

[33] More than two years after Michel sued Kramer on his loans, Michel received a Spirit statement showing that for the calendar year 2013 the Cdn. Dollar value of Michel’s account dropped by $835,000 (even) from $1,788,656.67 because of an “accumulated loss” which was never explained to Michel, nor indeed to this Court in spite of Kramer’s fumbling attempt to concoct an explanation.

[34] Prior to these proceedings, no accurate and proper accounting was provided by Kramer to Michel. Once the action commenced the defendants produced a plethora of records, showing sums that seem to be made up by defendants who seem to say “here, you figure it out”. Well, Michel couldn’t figure them out – nor can I. I say balderdash to them.

[35] During Kramer’s examinations in 2015 he gave an undertaking to explain the calculation of Michel’s losses, but there still is no satisfactory explanation.

[36] At Exhibit A2, Tab 117, Kramer produced a Summary to explain the losses, but it doesn’t resolve anything. It misses Michel’s advances for 2000 – 2003. It contradicts other parts of Kramer’s evidence. And even though individual annual statements didn’t show this, the Summary shows that from 2011 to 2012 Michel bore more losses that the entire pool.

[37] And it goes on. The Summary shows that from 2011 to 2014 the value of the pool dropped from $2,717,721 to $599,618. And Michel’s account dropped in value from $1,792,950 to zero with absolutely no explanation. This Summary is nonsensical when it comes to showing Michel’s proportionate share of the pool.

[38] The Summary’s picture attributing loan losses to Michel is incomprehensible. There are significant and unexplained discrepancies with those shown on Spirit’s income statements.

[39] These summaries go a long way to completely eroding any credibility that Kramer might have had.

[40] The only reasonable inference to draw from all of the unexplained discrepancies and inconsistencies and double dipping is that there was a deliberate attempt by Kramer to assign a disproportionate share of the so-called losses to Michel: to justify to Michel why his money had vanished.

[41] Another example of Kramer’s arrogant deceit was his insistence at trial that he was required to withhold and remit non-residents’ tax for 2008 and onward, even though he had acknowledged in answers to undertakings that that requirement no longer existed.

[42] The aforementioned Summary also includes an “unrecoverable (loss) from affiliated company” in the amount of $350,660. That company was Spirit Holdings, also controlled by Kramer. It seems from the documentary evidence that Spirit had loaned funds to Spirit Holdings and incurred loss when the loan wasn’t repaid. No security was given for the loan. And so Spirit Holdings’ loss became Spirit’s loss which somehow became Michel’s. The loss was occasioned from a project that was unlike any of the other residential loans that Kramer had represented to Michel for which his funds were to be used.

[43] As the controlling will and mind of both Spirit and Spirit Holdings, Kramer was simply transferring all of the money in each between his own pockets.

[44] Another example of Kramer’s self-dealing at Michel’s expense is depicted at Ex. 7, Tab B, pp. 54-63: this property was sold under power of sale to 2161004 Ontario Ltd., another corporation controlled by Kramer. 2161004 Ontario Ltd. then transferred that property to Kramer’s spouse, Christa.

[45] As further demonstration of Kramer’s skullduggery, during his cross-examination, he admitted that he and his family received payments on account of their investments in Spirit. One can only conclude that in addition to unfairly and disproportionately attributing losses to Michel so as to reduce his balance to zero, Kramer (and Gunther, because he was a director and officer throughout) were stripping Spirit of all of its cash. That included significant jumps in salaries paid to Kramer and clan.

[46] In addition, the Spirit bank statements show significant and unexplained withdrawals from and transfers in and out of Spirit’s bank accounts, to and from other accounts that most likely are related to Kramer – a shell game hiding money from Michel.

[47] The net effect of all of those movements of money in and out of Spirit’s bank account is a net cash withdrawal of $311,873 from Spirit’s bank account at a time when Michel was demanding the return of his money.

[48] As to the Swiss francs of which I made an endorsement at trial and of which Kramer testified that they were set aside and available to be paid and belong to Michel and that he would comply with a Direction to pay, Kramer engaged in some kind of Mexican stand off for about 9 years (since March of 2010) refusing to deliver those funds to Michel because of a phony requirement for Michel to sign statements and provide proof of citizenship.

[49] Kramer’s Limitation Defence cannot succeed. The partial payments made after Michel’s demand had the effect of extending the limitation period.

Conclusion

[50] In sum, the evidence establishes on a balance of probabilities that a debtor/creditor relationship existed between Kramer personally and Michel.

[51] All of Michel’s advances to Kramer (or Spirit) were personal loans with interest at 6% per annum.

[52] Kramer breached the obligation to repay, making only 4 partials in 2009.

[53] Kramer argues that Michel invested in Kramer’s mortgage lending venture. He says while not actually in writing, their arrangement was eventually reduced to writing as is evidenced by Michel’s letter to the German tax authority.

[54] I reject this explanation entirely. While there are certainly questions and allegations by Kramer against Michel’s credibility, for some of which the mud sticks, Kramer’s own credibility and reliability problems far outweigh Michel’s. And rather than simply throwing up my hands and crying “a pox on both of your houses”, I have chosen to weigh the credibility concerns. And as I have indicated elsewhere, I prefer to believe and accept the evidence of Kramer much less than I believe and accept the evidence of Michel.

[55] Kramer argues that the recognition of the risk of loss shows that Michel was investing, not lending. But while the evidence demonstrates that there was quite a back and forth between Michel and Kramer about what interest rate Michel’s advances would attract, it is clear to me that the parties always came back to 6% per annum throughout, just as they had begun with the Promissory Note from Kramer to Michel.

[56] And as much as Kramer would attach significance to the letter to the German tax authorities for the proposition that the parties’ agreement meant that Michel’s advances would remain on deposit until 2015, I find that each of the advances was a form of demand loan.

[57] Kramer admits the amounts and timing of the Michel advances. So using those amounts and that timing, at 6% per annum, the parties should easily be able to agree on the math and come to the final amount of the judgment. And I order them to do just that.

[58] In fact, Kramer and Gunther, in concluding their submissions to me not only asked that Michel’s (debt) action against them be dismissed but throw Spirit under the bus and ask that Spirit be ordered to pay to Michel on account of Euros advanced $953,656 (Cdn.), together with sufficient Canadian currency to purchase 74,022 CHF, and all together with pre-judgment interest from January 15, 2015 at 3% per annum.

[59] Spirit is/was just a plaything of Kraemer’s. It was his to do with what he wanted. And even though Michel was the biggest contributor of the funds held by or passing through Spirit, Michel had neither a vote nor any influence over Spirit or any of its activities. And from the beginning it was clear that he wanted nothing to do with Spirit.

[60] Because Spirit was used by Kramer to pay out others in preference to Michel, it must be considered an accomplice to Kramer’s fraudulent activities.

[61] Accordingly, I would also grant judgment against it in the same amount as that against Kramer, as would be calculated using my direction in paragraph 57 above.

[62] The evidence shows that Gunther is no longer a director or officer of Spirit and probably didn’t have much say in his father’s business while he was director and officer. So the debt action must be dismissed as against him.

[63] The second action (C-728-15) alleges that Michel harassed the Kramer family during and after the debt action proceedings. That harassment is said to include threats, including death threats and threats of rape. Apparently, Kramer took their complaints to the WRPS, OPP and RCMP – all to no avail. So they sued instead.

[64] The police investigations no doubt went nowhere for the same basic reason that I must dismiss this case: there is simply no credible evidence that ties Michel to any of the complaints – no evidence that he threw the window-breaking rock, no evidence that Michel had any connection to the Russian email and no evidence that any of the posters of which the Kramers complain were made or posted by Michel. Nor do I believe that the Kramers suffered any damages.

[65] In my view, this slander action was just another shield or device used by the Kramers in trying to thwart Michel’s legitimate debt claim.

[66] As to the videotaped episode where Michel encounters Gunther at his place of business, there is no evidence of any physical harm or threat and even Gunther conceded he wasn’t physically threatened. Gunther asked Michel to leave and he left.

[67] And though he might have expressed to or in front of others that the Kramers were “scammers”, I write this off as mere vitriol and probably true. Michel had every right to be frustrated and angry. He was getting the proverbial run around from his former friend over the status of a huge amount of his money. That included three no-shows by Kramer for court ordered examinations.

[68] But there simply is no evidence that Michel engaged in any of the conduct of which the Kramers’ complain. So the second action must be dismissed.

[69] As I earlier indicated, I expect the parties to agree on the amount owing by Kramer to Michel, by computing the product of each of Michel’s advances from the date of the advance until November 30, 2018, multiplied by 6% per annum. This they can transpose to a chart attached to their draft judgment which will accompany their costs submissions.

Costs

[70] Unless I see something that persuades me otherwise in their costs submissions, it would seem obvious that Michel is entitled to his costs in both actions. Those costs will be fixed by me after I received and review the parties’ costs submissions in accordance with the following directions:

(a) on or before May 6, 2019 Michel shall prepare, serve and deliver to my Kitchener Chambers:

(i) his 57-B Costs Outline, augmented by no more than 4 double-spaced pages;

(ii) his Bill of Costs; and

(iii) any relevant Offer to Settle; and

(b) on or before May 31, 2019 Kramer, Spirit, Christa and Gunther shall prepare, serve and deliver to my Kitchener Chambers:

(i) their 57-B Costs Outline augmented by no more than 4 double-spaced pages;

(ii) their Bill of Costs; and

(iii) any relevant Offers to Settle.

P.J. Flynn J.

Released : April 10, 2019