Court File and Parties

COURT FILE NO.: 799/15 DATE: 20190502 SUPERIOR COURT OF JUSTICE

BETWEEN:

Nancy Jean Philip Plaintiff – and – Rawlings Building Group Limited, Rawlings Constructors Limited, Robert Paul Rawlings and Darlene Ann Rawlings Defendants

Counsel: Benjamin Blay, for the plaintiff Kyle MacLean, for the defendants

HEARD: March 25, 2019

leitch j.

Summary Judgment

Summary Judgment

1The plaintiff seeks an order granting summary judgment in her favour against the defendants, Robert Paul Rawlings and Darlene Ann Rawlings (“the Rawlings”) and a declaration that such judgment survives their bankruptcy.

2The plaintiff entered into contracts with Rawlings Constructors Limited (“Rawlings Constructors”) for the purchase of a new custom home and paid deposits pursuant to her agreements. She did not receive her new home and Rawlings Constructors is bankrupt. The plaintiff now seeks to recover her deposits and other damages from the Rawlings, who were the directors and officers of Rawlings Constructors.

3There is no issue that summary judgment is appropriate in these circumstances. As noted, the plaintiff seeks summary judgment. The defendants resist the plaintiff’s motion for summary judgment and in addition seek an order dismissing the plaintiff’s claim. Therefore, the position of all parties is that the issues between them should be resolved on this motion.

4There is also no issue that the plaintiff has unfortunately suffered a significant loss as a result of her dealings with the defendants. However, her motion raises the complex legal issue whether her claim against the Rawlings is one described in s. 178 of the Bankruptcy and Insolvency Act, R.S.C. 1985 c. B-3 (the “BIA”).

5Section 178(1)(d) of the BIA describes certain debts or liabilities which a bankrupt is not released from by an order of discharge. The plaintiff alleges that the debt or liability owed to her is one of such liabilities. She submits that her claim fits within the statutory provisions of s. 178(1)(d) or (e) which provide as follows:

d) Any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity…

e) Any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or a liability that arises from an equity claim.

Background Facts

Background Facts

6The plaintiff signed a reservation agreement with Rawlings Constructors.

7The reservation agreement stated that the deposit paid pursuant to the reservation agreement would be held in trust pending execution of an agreement of purchase and sale and upon the execution of that agreement, the deposit paid under the reservation agreement would be held together with additional sums on deposit.

8On April 26, 2012, the plaintiff and Rawlings Constructors entered into an agreement of purchase and sale pursuant to which Rawlings Constructors were to construct a new custom home for the plaintiff.

9As required by the agreement of purchase and sale, the plaintiff paid an additional deposit on execution of the agreement of purchase and sale and a final deposit upon completion of the concrete foundation wall. The deposits paid pursuant to the agreement of purchase and sale were to be credited on account of the purchase price on closing.

10After discussing the design of the new home, details were finalized in early July 2012. Around the same time, the plaintiff provided funds to Rawlings Constructors to cover the building permit application fee and development charges owed to the City of London

11Construction on the plaintiff’s home began in August 2012 and continued through to April 2013. During that time, there were communications between the plaintiff and Rawlings Constructors in relation to design changes and finishing details.

12The operations of Rawlings Constructors “collapsed” in April 2013.

13The plaintiff did not receive the new home she had counted on Rawlings Constructors to build for her.

14The plaintiff made an application to Tarion for recovery of her deposits. She included in her claim the monies paid in relation to the building permit fee and development charges. The plaintiff received the maximum recovery possible from Tarion in the amount of $40,000. There is no issue that she has appropriately mitigated her damages by pursuing this recovery.

15The Rawlings, who are the principals and the operating mind of Rawlings Constructors, made assignments in bankruptcy on June 13, 2014. Rawlings Constructors was assigned into bankruptcy on June 16, 2014.

16The Rawlings were granted absolute discharges from bankruptcy on May 27, 2015.

17In their responding materials, the Rawlings made clear that all of the corporate defendants have no assets and, as noted, Rawlings Constructors is bankrupt. Therefore, only the Rawlings have responded to the plaintiff’s motion and the plaintiff’s motion materials focused only on the liability of the Rawlings.

The Plaintiff's Claim

The Plaintiff's Claim

18The plaintiff seeks to recover the sum of $122,430.44 comprised of the following amounts:

i. her initial deposit under the reservation agreement of $10,000; plus ii. her further deposit on execution of the agreement of purchase and sale of $40,000; plus iii. her final deposit paid on completion of the concrete foundation wall of $35,000; plus iv. the monies paid to cover the building permit fee and development charges, $25,450; plus v. punitive and aggregate damages in the amount of $51,980.44 (representing the plaintiff’s out-of-pocket expenses for rental accommodations, storage charges, upgrade materials that were not utilized, the cost of an appraisal of the partially constructed home, and legal fees incurred in relation to the bankruptcy proceedings); less vi. her recovery of $40,000 from Tarion.

The Position of the Plaintiff

The Position of the Plaintiff

19The plaintiff’s position is that Rawlings Constructors acted in a fiduciary capacity in their dealings with her. She submits that their relationship fits within the type of relationship described in LAC Minerals Ltd. v. International Corona Resources Ltd., 1989 SCC 34, 1989 CarswellOnt 126 at para. 130 as follows:

a) the fiduciary has scope for the exercise of some discretion or power; b) the fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interest; and c) the beneficiary is particularly vulnerable to, or at the mercy of, the fiduciary holding the discretion or power.

20The plaintiff submits that she was “completely at the Rawlings’ mercy” with respect to how the monies she paid them were applied or transferred and she contends they were obliged to hold the monies in trust (relying on Casa Blanca Homes Ltd. v. R., 2013 TCC 338, 2013 T.C.C. 338 at para. 24 for the proposition that a deposit “by its very nature, is money held by a vendor for the benefit of a purchaser”).

21The plaintiff also contends, as set out in para. 61 of her factum, that “in failing to account for the monies paid by Nancy to the Rawlings, the Rawlings have brought the subject indebtedness squarely within s. 178(1)(d) of the BIA.

22With respect to the applicability of s. 178(1)(e) of the BIA, the plaintiff’s position is that Paul Rawlings made a fraudulent misrepresentation to her which she relied on in entering into the agreement of purchase and sale and in making the payments required pursuant to that agreement.

23The plaintiff notes that Paul Rawlings provided her with a book titled “Building a Quality Custom Home”, before she entered into the agreement of purchase and sale and informed her that he was the author of this book. Her affidavit also references the fact that this book was “promoted” on the website for Rawlings Constructors with the words, “We Wrote the Book on Custom Home Building” and “Paul Rawlings has compiled his knowledge into a new book”.

24There is no issue that the defendants had 30 years of experience in the building industry and that Paul Rawlings had more than 22 years’ experience running his own company as represented on the website.

25The motion materials make clear that the book was sold to Rawlings Constructors by the publisher for a fee. Rawlings Constructors was entitled to edit and tailor the book to include its name and photographs of homes it had built. The plaintiff compared the publisher’s version of the book with the version Paul Rawlings provided to her and found that Paul Rawlings might have “co-authored” approximately eight of the 109 pages in the book.

26The plaintiff submits that the elements of fraudulent misrepresentation are satisfied in these circumstances (the defendants made a representation, knowing the representation was false, with the intention of deceiving the plaintiff and the false representation materially induced the plaintiff to act, resulting in damage). See Machias v. Mr. Submarine Ltd., 2002 ONSC 1176 at para. 138.

27As a result, the plaintiff’s position is that the debt owed to her by the Rawlings also survives their bankruptcy pursuant to s. 178(1)(e) of the BIA.

28The third argument of the plaintiff is that these are circumstances where the corporate veil ought to be pierced on the basis that the Rawlings, as the only directors and officers of the corporate defendants, directed a wrongful thing to be done, they showed a striking lack of concern for the plaintiff, they failed to act in a commercially reasonable fashion and rendered Rawlings Constructors judgment proof (see 642947 Ontario Ltd. v. Fleischer, 2001 ONCA 8623, 2001 CarswellOnt 4296, Parkland Plumbing and Heating Ltd. v. Minaki Lodge Resort 2002 Inc., 2009 ONSC 1522, and 1005633 Ontario Inc. v. Winchester Arms Ltd., 2000 ONSC 22774).

29The plaintiff set out at para. 6 of her factum, and her counsel argued during his submissions, that these are circumstances where liability should be imposed upon the Rawlings personally because the defendants:

a) failed to account for the funds advanced by the plaintiff; b) failed to disclose the dire financial status of Rawlings Constructors to the plaintiff; c) permitted and encouraged the plaintiff to pay monies when they knew that the defendants were not solvent; d) allowed the financial distress of the defendants to progress to the point where an “as is” sale to the plaintiff became impossible; e) took dividends out of Rawlings Constructors when they knew, or ought to have known that this entity was insolvent (which the plaintiff also submits violated the provisions of s. 38(3) of the Ontario Business Corporations Act); and f) misrepresented that Paul Rawlings had written the book on home building.

30Lastly, the plaintiff’s position is that these circumstances are such that punitive damages are justified in that the defendants’ actions represented a marked departure from ordinary standards of decent behaviour and good faith. The plaintiff further submits (as set out in para. 82 of her factum) that punitive damages attaching to a judgment for fraud will also fall under s. 178(1)(d) and ought to survive the bankruptcy of the Rawlings.

The Position of the Responding Parties

The Position of the Responding Parties

31The responding parties assert that the plaintiff’s claim is not properly a claim against the Rawlings.

32Furthermore, they submit that the plaintiff’s is not a claim described in either ss. 178(1)(d) or (e) of the BIA. In particular, the responding parties note that the agreement with the plaintiff did not require that her deposits be held in trust, the Rawlings did not owe her a fiduciary duty, and - in any event - there has been no misappropriation of funds by any party. Therefore, they contend that the plaintiff’s claim does not meet the requirements of s. 178(1)(d) of the BIA.

33In addition, the responding parties deny there was any fraudulent misrepresentation made by Paul Rawlings. They note that his name and the name of the co-author are clearly and equally noted on the front cover of the book. They further note that the plaintiff does not take issue with the accuracy of the representations in the book respecting Paul Rawlings’ experiences as a home builder. Their position is that the book is not misleading as to its authorship and it clearly states that the book is a general guide only in relation to home building. They also submit that there is no evidence that the plaintiff relied on the alleged misrepresentation in entering into the agreement and making the payments contemplated by such an agreement.

34The responding parties emphasize that construction of the plaintiff’s home began as contemplated under the agreement. The foundation was completed. The home was framed. Roofing work began in October 2012 and interior work continued through to April 2013. Throughout that time there were communications with the plaintiff in relation to design and finishes.

35They emphasize, as they deposed in their affidavits filed in response to this motion, that at all material times they acted to ensure the continued operation of Rawlings Constructors as a going concern. They point out also that they did so at what they describe as significant personal cost selling their own home to invest the net proceeds into Rawlings Constructors and also investing an advance from an inheritance.

36Further, the position of the responding parties is that the monies paid for the building permit fee and the development charges would not under any circumstances be considered amounts to be held in trust or subject to any type of fiduciary responsibility. Therefore, the only potential recovery on the basis of a trust is $45,000 (the $85,000 in deposits paid by the plaintiff less the $40,000 recovered from Tarion). The responding parties also point out that their affidavits detail the use of close to $49,132 and considering that evidence and the Tarion recovery there is no outstanding trust claim.

37Finally, the responding parties resist any award of aggravated or punitive damages and deny any personal responsibility for such amounts in any event. They also question the appropriateness of recovering legal expenses in relation to a bankruptcy proceeding within this head of damages.

Disposition

Disposition

38The plaintiff’s circumstances are sympathetic however I am satisfied that her claim is not a claim that the Rawlings are personally responsible for post-bankruptcy.

39Firstly, her deposits were paid to Rawlings Constructors and it is this entity that she contracted with. In other words, the plaintiff’s claim is for reimbursement from that corporation and the Rawlings, even though directors and officers of this closely held corporation, are not personally liable for such debt. Rawlings Contractors was clearly the contracting party. It was an operating entity in the business of building new homes. The Rawlings personally invested in Rawlings Contractors. These are not circumstances where individuals surreptitiously hid behind an asset less holding company to avoid personal liability. These also are not circumstances where a recipient of deposits absconded with the deposits making no effort to fulfil the contract. In other words, these circumstances do not rise to the extraordinary circumstances where directors and officers should be held personally liable for the debts of their corporation.

40Further, even if I were satisfied that the Rawlings should be personally liable to the plaintiff, I cannot find that the plaintiff’s claim is one described in s. 178(1)(d) or (e) of the BIA.

41I agree with the responding parties that a trust obligation could only potentially be found in relation to the deposits paid pursuant to the agreement of purchase and sale and not the monies paid for the building permit and development charges.

42However, I am satisfied that, in these circumstances, I cannot conclude that the debt to the plaintiff arose from a fraud, embezzlement, misappropriation or defalcation committed while acting in a fiduciary capacity.

43In Simone v. Daley, 1999 ONCA 3208, [1999] O.J. No. 571 the Court of Appeal made clear that the exceptions to release of liability on bankruptcy should be narrowly construed and require some element of wrongdoing or improper conduct by the party owing the fiduciary duty.

44Furthermore, in Simone, the court questioned the appropriateness of the finding of a fiduciary duty by the trial judge where the parties had made an oral agreement to buy and sell property. The court observed that the relationship of vendor and purchaser does not in and of itself give rise to fiduciary duties and specifically stated at para. 14 that “the normal contractual relationship between a vendor and purchaser is not characterized by the reposing of a trust or confidence by one person in another and a consequent dependence resulting therefrom, which the authorities indicate give rise to a fiduciary duty”.

45The plaintiff relied on the decision in Casa Blanca for the proposition that a deposit is held by a vendor for the benefit of the purchaser and thus the vendor holds the deposit in trust. However, that case was an appeal from a reassessment made under Part IX of the Excise Tax Act and dealt with liability for GST on the deposits recovered by a proposed purchaser (in addition to the receipt of other monies) on an assignment of rights under agreements of purchase and sale to third parties. The case stands for the proposition that the assignment of the deposit was a transfer of ownership of a financial instrument and thus a GST-exempt supply of a financial service.

46I cannot find, as the plaintiff asserts, that Rawlings Constructors owed a fiduciary obligation to the plaintiff. Only the reservation agreement stated that the deposit pursuant to that agreement would be held “in trust” and notably that trust arrangement was only “pending the execution of the agreement of purchase and sale”. The agreement of purchase and sale clearly stated that the deposits paid pursuant to the agreement (which were defined to also include the deposit paid under the reservation agreement) would be “credited on account of the purchase price on closing”. No trust was imposed in relation to those deposits. Significantly, in contrast, the agreement of purchase and sale imposed trust obligations on Rawlings Constructors in relation to insurance policies and the proceeds thereof which Rawlings Constructors was obliged to hold in trust for the parties as their respective interests may appear. There is no ambiguity or uncertainty in the agreement in relation to the deposits paid by the plaintiff. They were not entrusted to a fiduciary.

47I conclude that the debt owed to the plaintiff is not included in the category of exceptions described in s. 178(1)(d) of the BIA. The plaintiff’s debt does not arise out of a fraud or other wrongdoing committed by a party acting in a fiduciary capacity.

48The remaining issue is whether the exception described in s. 178(1)(e) of the BIA is applicable. In other words, did the plaintiff’s debt arise from a fraudulent misrepresentation as the plaintiff asserts?

49In relation to this issue, I note that in para. 9 of her affidavit sworn October 23, 2017 the plaintiff deposed that “based on the content and presentation by the Rawlings defendants as to their experience in the building industry and having in mind the representations made to me by these defendants including the content of the Book”, she decided to enter into the contract.

50On her cross examination, the plaintiff conceded she did not read the book before entering into the agreement with Rawlings Constructors and thus there could not have been any reliance on the content of the book. The plaintiff also admitted on cross examination that there was no misrepresentation as to Mr. Rawlings’ experience as a custom home builder.

51In paragraph 35 of her second affidavit sworn April 24, 2019 the plaintiff deposed that “it was not the content, but the fact that Paul proclaimed he wrote the book that gave him credibility in my eyes. This is why clients, like myself, trusted him. For someone new to London area and unfamiliar with any builder, this was a key influencer to me”.

52I cannot conclude that there was a false misrepresentation which resulted in the plaintiff entering into the contact and making her deposits. I agree with the defendants that the cover of the book noted a co-author and its contents reveal Paul Rawlings was only one of the contributors. I do not find that there was any intention to deceive the plaintiff. Further, I agree with the defendants that in the face of the acknowledged experience of the defendants, it is difficult to accept that the representation relating to the book materially induced the plaintiff to enter into the agreement and pay the deposits.

53I conclude that s. 178(1)(e) of the BIA is not applicable.

54For these reasons the plaintiff’s claim must be dismissed. I urge counsel to resolve the issue of costs, failing which brief written submissions may be made within 45 days from the date of release of these reasons.