ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: CV-18-000178-00
DATE: 2019/01/18
BETWEEN:
1324789 ONTARIO INC.
Plaintiff
– and –
GAVIN MARSHALL, SUSAN MARSHALL, MAGENTA WATERFRONT DEVELOPMENT CORPORATION, HELIOTROPE INVESTMENT CORPORATION, MAGENTA CAPITAL CORPORATION, MAGENTA INVESTMENT CORPORATION, MAGENTA II MORTGAGE INVESTMENT CORPORATION, MAGENTA III MORTGAGE INVESTMENT CORPORATION
Defendants
Christopher J. Edwards and Kevin M. Cooke, for the Plaintiff
Denise Sayer and Adam Stikuts, for the Defendants
HEARD in Kingston: December 5, 6 & 10, 2018
HURLEY, J.
REASONS FOR DECISION
Nature of the motions
[1] These motions concern four residential land development projects. The plaintiff 1324789 Ontario Inc. is seeking the appointment of a receiver- manager. It is an unusual request in that the plaintiff is not a creditor nor are the projects insolvent. Rather, there has been a falling out between the two principals, Gary Beach and Gavin Marshall; the former is the manager of the projects and the latter their financier.
[2] The intended effect of this appointment would be to complete the projects with Mr. Beach continuing as the manager of them and to prohibit Mr. Marshall from taking any legal steps to either remove Mr. Beach as the manager or compel the payment of the secured and unsecured debt owed to his companies. In the alternative, the plaintiff is seeking an interlocutory injunction which would accomplish the same objective except there would be no receiver- manager.
[3] The defendants have brought a cross-motion for a variety of relief, including a ruling that Mr. Beach has been lawfully terminated as the manager and that the defendant Magenta Waterfront Development Corporation (”MWDC”) can take all the necessary steps to complete the projects. They are also seeking an order that the plaintiff remove the notice registered under section 71 of the Land Titles Act against the property known as “Cranberry Cove” and the dismissal of the action against all the defendants with the exception of MWDC and Mr. Marshall.
Background
[4] The four developments are located on three lakes, Loughborough, Dog and Cranberry, that are a short distance north of Kingston. Mr. Beach first met Mr. Marshall when he approached him in January, 2013 to secure mortgage financing in the amount of $1,650,000. Mr. Marshall is the principal of Magenta Capital Corporation, which is a successful mortgage lender based in Perth.
[5] Mr. Beach had been developing waterfront lots on Loughborough Lake known as “Applewood Lane” and “Johnson Point” with another individual, Jeff McEwen, but after a dispute had arisen between them, Mr. McEwen had commenced power of sale proceedings to enforce mortgages that he held against the two properties. This was the principal reason for Mr. Beach contacting Mr. Marshall about the loan.
[6] After further discussions, Mr. Marshall decided that, rather than simply being a lender, he would invest in Applewood Lane and Johnson Point. The parties each retained lawyers and, in February 2014, MWDC and the plaintiff entered into a written agreement entitled “Joint Venture Agreement” with respect to the two properties. Under this agreement, MWDC received a 57% interest in the joint venture with the balance owned by the plaintiff.[^1]
[7] Under section 3 of this agreement (which I will refer to as “JVA1” from this point forward), Mr. Beach was retained as project manager at an annual remuneration of $72,000, payable in monthly instalments of $6,000. His remuneration after February 1, 2015, was, according to subsection 3(5), “to be mutually determined and agreed upon by the “Joint Venturers” based upon, among other things, the scope and nature of work to be completed after February 1, 2015, notwithstanding Beach’s best efforts towards completion prior to February 1, 2015 and the scope and nature of Beach’s direct involvement in the marketing and sale of the residential building lots”.
[8] Section 3(6) set out MWDC’s right to terminate his services:
JV1 [MWDC is referred to as JV1 and the plaintiff as JV2 in the agreement], in its sole and unfettered discretion, may relieve Beach of his responsibility for Project management, subject to the following:
(i) issuance of notice of termination may occur no earlier than six (6) months from and after the date of this agreement.
(ii) a payment in the amount of $12,000 will be required to be paid to Beach concurrent with issuance of notice of termination relieving Beach of his project management responsibilities, in addition to the pro-rated amount of the management fee earned since the last monthly payment date. For example, termination mid-month would result in termination payments in the amount of $15,000, whereas termination on the first business day of the month would trigger a $12,000 payment in addition to the $6,000 payment remitted with respect to services provided over the preceding month; and upon receipt of payment as aforesaid Beach relinquishes his entitlement to any additional payments for management services.
(iii) Beach shall not be subject to termination as the Project manager if, during the Term of this agreement, it meets or exceeds the milestones set forth on Schedule “C” for the Project (both as to time deadlines and as to completeness and effectiveness of services) in a manner materially consistent with the plans and budgets provided by Fotenn Planning and Urban Design on July 23, 2013 and updated on October 29, 2013 and by JV2 on July 29, 2013 and November 30, 2013, it being understood by both parties that in the course of providing Project management services there will be matters that are beyond the reasonable control of Beach notwithstanding his best efforts.
[9] Mr. Beach could cease acting as the project manager on account of “death, disability or some other circumstance”.
[10] The milestones in schedule “C” were the steps still required to complete the developments. The most important were approval of the draft plans and the registration of the final plans. For Applewood Lane, the date for the draft plan approval was June 30, 2014 and the registration of the final plan August 31, 2014. For Johnson Point, the dates were, respectively, September 1 and December 1, 2014.
[11] Unfortunately, the development process took much longer than anticipated. There was substantial opposition to the developments by neighbouring landowners and multiple hearings before the Ontario Municipal Board. There were some regulatory issues that took longer than expected to resolve. The final plan for Applewood Lane was not registered until May 2016. A final plan has still not been registered for Johnson Point.
[12] The costs also greatly exceeded the budgeted amounts. The estimated amount was $422,300. The costs incurred to date are $3,094,502.
[13] JVA1 contemplated both parties contributing to the costs in proportion to their respective ownership interests but, if the plaintiff was unable to do so, MWDC would make the contribution. If it did, the plaintiff could choose either a corresponding dilution in its ownership interest or to borrow the money from MWDC up to a stipulated amount.
[14] The key provisions in JVA1 with respect to financing are subsections 4(2), (4), (5), (6) and (8). They read:
“(2) JV1 shall on a reasonable efforts basis endeavour to obtain third party financing for the Joint Venture for the Project, in an amount sufficient to fund the planning and servicing related work required to obtain registration and approval of the Project as a vacant land condominium as per budgets prepared by JV2 and Fotenn Planning and Urban Design, including interim, bridge and permanent financing, consistent with sound business judgment and with the loan rate, terms and conditions prevailing. Any financing shall minimize to the extent possible direct contributions by the Joint Venturers. JV2 shall do everything necessary to facilitate the advancement of third-party financing as prescribed above, including the provision of personal guarantees by Gary Beach and Martha Beach if required by a third party lender.
(4) When any portion of the funds required to meet the obligations of the Joint Venture cannot be obtained from a third party in a manner satisfactory to JV1, each Joint Venturer shall advance its Proportionate Share of the funds required by the Joint Venture so that obligations may be paid as they fall due. Any advance shall be without interest. In such event JV1 agrees to advance a maximum of $205,000 to assist JV2 in financing its Proportionate Share of the funds then required by the Joint Venture, exclusive of funds required to service third party debt, and additional funds, to a maximum of $35,000, to assist JV2 in funding its Proportionate Share of third party debt repayment. The Loan advanced to JV2 hereunder will be incremental to the amount of Pre-Existing Loans
(5) Any Loan as advanced, from time to time, will be secured by a charge over JV2’s undivided interest in the Lands and will be subject to an interest rate equivalent to the TD Prime Rate plus 5.00%. Any Loan may be advanced, in instalments, as required.
(6) Notwithstanding the above, in the event that JV2 fails to contribute its Proportionate Share of the funds required by the Joint Venture, including to fund a demand for payment or equity infusion by a third party lender, JV1 will contribute all of the required funds; provided, in such event, JV1’s Proportionate Share will increase in the manner calculated as follows:
Total Joint Venture Costs Contributed by JV1
Total Joint Venture Costs
where Total Joint Venture Costs include an initial acquisition cost of the Lands of $3,200,000.00. (For greater certainty, a sample calculation of JV1’s Proportionate Share in such circumstances is attached as Schedule B.)
(8) Nothing in this agreement shall serve to limit in any way the ability of JV1 or parties related to JV1 to enforce repayment of the Pre-Existing Loans and Loan by employing any and all of the remedies available to mortgagees as provided by law.[^2]
[15] In addition to the responsibility for financing the project, MWDC was granted the authority to complete the development in the event Mr. Beach was terminated as project manager and also had the final decision-making power. Subsections 3 (10) and (11) provided:
(10) Subject to the balance of the provisions of this agreement, which shall govern where they conflict with this section, in the event the Joint Venturers are unable to reach agreement in respect of any decision or action to be undertaken relative to the Project, then JV1 shall have the full and unrestricted authority to undertake any and all actions in connection therewith, consistent with the general principles specified above. With respect to any such decisions of JV1, JV2 hereby irrevocably nominates, constitutes and appoints JV1 as its true and lawful attorney-in- fact to execute and deliver in the name of JV2 any and all such documents necessary in respect of any such decision or action to be undertaken. The appointment and power of attorney, being coupled with an interest, shall not be revoked by the dissolution, winding up, bankruptcy or insolvency of JV2. JV2 hereby ratifies and confirms, and agrees to ratify and confirm, all that JV1 may lawfully do by virtue of the appointment in power of attorney.
(11) The following decisions shall require unanimous approval by the Joint Venturers:
(i) any change in the purpose of the Joint Venture as set forth in this agreement;
(ii) any change or amendment to any matter agreed upon in this joint venture agreement;
(iii) bringing in additional joint venturers.”
[16] In July 2014, the parties entered into another written agreement with respect to a third property known as “Pine Point” (which I will refer to as “JVA2”). This agreement was essentially in the same terms as the first one. Mr. Beach’s remuneration stayed the same. The division of ownership was 50/50 but MWDC paid the acquisition costs and has to date paid all of the development costs. The budgeted development costs were $447,000 but have increased to $730,000. There were deadlines included in the agreement with respect to the sale of the lots that have not been met.[^3] Although Mr. Beach initially deposed that there was only a draft written agreement, he now concedes that there is one which bears the signatures of both he and his wife.
[17] MWDC has provided detailed evidence of its efforts to secure financing from institutional lenders and a commercial mortgage broker. According to it, none were prepared to loan any money because of the location of the lands and the status of the developments. The plaintiff has taken issue with the adequacy and extent of MWDC’s efforts but has not adduced any evidence that funding was available from any third party.
[18] The plaintiff, as was its right, chose to borrow money from MWDC and related entities to make its contribution to the three development projects. In addition, the Beaches borrowed money to pay personal expenses not related to the joint venture totaling about $930,000. All of the loan advances were secured by mortgages or the execution of promissory notes. The interest rates for the loans vary from 7.99% to 14.99%. MWDC loaned more money than it was required to do under the Joint Venture Agreements. The mortgages are in default and the promissory notes are payable on demand.[^4]
[19] There is no written agreement for the property known as “Cranberry Cove”. MWDC paid $579,707.93 for it in August 2016. It has also paid all the development costs in relation to it. The plaintiff is claiming a constructive trust interest in the property due to Mr. Beach’s role in introducing the vendor, his services in relation to the development of it and his avowal that the parties intended to enter into another joint venture agreement in respect of it. MWDC denies that any of this is true. The plaintiff has registered a notice against the property under section 71 of the Land Titles Act.
The events giving rise to the litigation
[20] The relationship between Mr. Beach and Mr. Marshall began to seriously deteriorate in 2017 when Mr. Beach sought changes to the Joint Venture Agreements and Mr. Marshall’s financial help in restructuring his personal debt. There are conflicting versions of their negotiations but much of the important communication was documented in emails and letters they exchanged in 2017 and 2018.
[21] Mr. Beach believes that Mr. Marshall did not treat him fairly and that his response to his proposals was unreasonable. Mr. Marshall takes the opposite view. For the purposes of these motions, it is not necessary to resolve this particular quarrel except to note that, when the negotiations stalled, it was Mr. Beach who threatened litigation first and then followed through with this warning by retaining a lawyer who repeated his demand for a renegotiation of the Joint Venture Agreements and stated that a lawsuit would be commenced if this did not occur.
[22] In a letter dated March 28, 2018 which Mr. Beach hand delivered to Mr. Marshall’s office, he wrote, in part:
The Joint Venture Agreement does not provide a mechanism for us to resolve these issues or disputes. The only manner in which these can be resolved is by way of an Application before the Superior Court. That is not where these disputes should be addressed. I am stating the obvious when I note that if we cannot resolve our differences an Application will have a devastating impact for both of us. Public disputes on development property can only lead to the risk of losing potential sales and they can also impact the goodwill of the entire development, which we’ve seen with the fallout of the AAB debacle with 2 unfinished homes.
[23] Mr. Marshall replied to this letter on April 8, 2018 with a ten page email that set out his proposal which included loaning Mr. Beach additional funds to be secured by mortgages on property that he owned. This was not acceptable to Mr. Beach who replied to it through his lawyer, Christopher Edwards, on April 27, 2018. In that letter, Mr. Edwards reiterated his client’s earlier admonition that a legal proceeding would have a devastating impact on the developments.
[24] The following month, the parties commenced legal proceedings against each other.
[25] MWDC says that the total debt owed by the plaintiff, a related company 1073650 Ontario Inc. and the Beaches personally, is $6,242,346. Mr. Beach’s wife, Martha, is the sole owner, officer and director of the two companies but it is undisputed that Mr. Beach is their controlling mind. Mr. Beach acknowledges that there is a “large amount” of money owed to the defendants but deposed that he cannot determine the exact amount because he does not have the necessary information.
[26] It is difficult to determine how close the developments are to completion and how much more money is needed to accomplish this. Mr. Beach claims that lots have been sold which will generate in excess of $2 million in revenue and proposes that these funds be used to finance the remaining costs. Mr. Marshall, who deposed that he has “no idea” when they will be completed or what the final cost will be, takes the position that the sale proceeds should be applied to repay the funds that have been advanced by MWDC, in accordance with the Joint Venture Agreements.
[27] Following the commencement of the litigation, all issues concerning the development projects have been handled through the lawyers. By letter dated September 27, 2018, MWDC terminated Mr. Beach as project manager and made the termination payment due to him under the Joint Venture Agreements.
The positions of the parties
[28] The plaintiff’s main complaints are that MWDC did not obtain third party financing at lower interest rates and that, despite the expanded scope of the development projects, it refused to increase Mr. Beach’s remuneration. It asserts that MWDC owed a fiduciary duty in addition to the rights and obligations set out in the Joint Venture Agreements. It also complains that MWDC has wrongfully deprived it of an ownership interest in the Cranberry Cove development, that there have been some accounting irregularities and inadequate disclosure of financial information. Unless a receiver- manager is appointed or injunctive relief granted, Mr. Beach will no longer be able to participate in completing the development projects and this will cause him irreparable harm. He and his wife are facing financial ruin. Their debt, given the high interest rates, has the potential of extinguishing their equity interest in the development projects and the enforcement of the mortgages and demand loans will result in MWDC securing full ownership of them.
[29] MWDC relies on the Joint Venture Agreements. They were negotiated at arm’s length with the assistance of independent legal counsel and any legal claim must be based on a breach of them, not an alleged extraneous fiduciary duty. Under both Agreements, MWDC was obliged only to make reasonable efforts to obtain third party financing which it did. Neither Agreement compelled it to increase Mr. Beach’s remuneration. There have been no accounting irregularities because MWDC has complied with the Agreements and will continue to do so with respect to any payments received or disbursed. The plaintiff has received all financial disclosure requested by it. The plaintiff and the Beaches freely entered into the mortgages and signed the promissory notes and there is no lawful justification for nonpayment of the debt. Most importantly, all of the plaintiff’s claims, including the alleged constructive trust interest in Cranberry Cove, can be quantified in monetary damages and, as a result, there is no basis for the granting of the exceptional interlocutory relief being sought by it. Any financial consequences that the plaintiff or the Beaches might suffer are due to their own actions and not because of MWDC’s exercise of its lawful rights under the Joint Venture Agreements and the debt instruments.
Should a receiver-manager be appointed?
[30] The applicable legal principles were summarized by Strathy, J. (as he then was) in Anderson v. Hunking, 2010 ONSC 4008 at para. 15:
Section 101 of the Courts of Justice Act provides that the court may appoint a receiver by interlocutory order “where it appears to a judge of the court to be just or convenient to do so.” The following principles govern motions of this kind:
(a) the appointment of a receiver to preserve assets for the purposes of execution is extraordinary relief, which prejudges the conduct of a litigant, and should be granted sparingly: Fisher Investments Ltd. v. Nusbaum (1988), 31 C.P.C. (2d) 158, 71 C.B.R. (N.S.) 185(Ont. H.C.);
(b) the appointment of a receiver for this purpose is effectively execution before judgment and to justify the appointment there must be strong evidence that the plaintiff’s right to recovery is in serious jeopardy: Ryder Truck Rental Canada Ltd. v. 568907 Ontario Ltd. (Trustee of) (1987), 16 C.P.C. (2d) 130, [1987] O.J. No. 2315 (H.C.);
(c) the appointment of a receiver is very intrusive and should only be used sparingly, with due consideration for the effect on the parties as well as consideration of the conduct of the parties: 1468121 Ontario Limited v. 663789 Ontario Ltd., [2008] O.J. No. 5090, 2008 66137 (ON SC), 2008 66137 (S.C.J.), referring to Royal Bank v. Chongsim Investments Ltd. (1997), 1997 12112 (ON SC), 32 O.R. (3d) 565, [1997] O.J. No. 1391 (Gen. Div.);
(d) in deciding whether to appoint a receiver, the court must have regard to all the circumstances, but in particular the nature of the property and the rights and interests of all parties in relation thereto: Bank of Nova Scotia v. Freure Village of Clair Creek (1996), 40 C.B.R. (3d) 274, 1996 8258 (ON SC), 1996 8258 (Ont. S.C.J.);
(e) the test for the appointment of an interlocutory receiver is comparable to the test for interlocutory injunctive relief, as set out in RJR-MacDonald Inc. v. Canada (Attorney General), 1994 117 (SCC), [1994] 1 S.C.R. 311 at paras. 47-48, 62-64, 111 D.L.R. (4th) 385;
(i) a preliminary assessment must be made of the merits of the case to ensure that there is a serious issue to be tried;
(ii) it must be determined that the moving party would suffer “irreparable harm” if the motion is refused, and “irreparable” refers to the nature of the harm suffered rather than its magnitude – evidence of irreparable harm must be clear and not speculative: Syntex Inc. v. Novopharm Ltd. (1991), 1991 14290 (FCA), 36 C.P.R. (3d) 129, [1991] F.C.J. No. 424 (C.A.);
(iii) an assessment must be made to determine which of the parties would suffer greater harm from the granting or refusal of the remedy pending a decision on the merits – that is, the “balance of convenience”: See 1754765 Ontario Inc. v. 2069380 Ontario Inc. (2008), 2008 67403 (ON SC), 49 C.B.R. (5th) 214 at paras. 7 and 11, [2008] O.J. No. 5172 (S.C.);
(f) where the plaintiff’s claim is based in fraud, a strong case of fraud, coupled with evidence that the plaintiff’s right of recovery is in serious jeopardy, will support the appointment of a receiver of the defendants’ assets: Loblaw Brands Ltd. v. Thornton (2009), 78 C.P.C. (6th) 189, [2009] O.J. No. 1228 (S.C.J.).
[31] The plaintiff proposes that Stanley Loiselle, who is a partner with the firm Raymond Chabot Grant Thornton, act as the receiver- manager. There is no affidavit from him. Mr. Beach deposed that he has consented to this appointment and “advised that he has the experience and qualifications to facilitate the completion of the Joint Venture projects”. He attached a copy of Mr. Loiselle’s curriculum vitae as an exhibit to his affidavit which refers to some of his experience in bankruptcy and insolvency proceedings. There is no mention of real estate developments.
[32] As I stated at the outset, the plaintiff is not a creditor nor is it alleging that the development projects are insolvent or at risk of insolvency.[^5] The plaintiff did not provide me with any caselaw in which a receiver was appointed to manage a commercial enterprise solely because the principals had had a falling out and could no longer work together. Rather, the cases involved allegations of fraud in which the moving parties sought the appointment of a receiver to preserve their investment. Although the plaintiff has cited some accounting irregularities, it is not alleging any fraudulent conduct on the part of MWDC.
[33] The plaintiff’s claim arising from MWDC’s failure to obtain third party financing at lower interest rates, on the basis of the record before me, is weak. The Joint Venture Agreements required reasonable efforts by MWDC to obtain this funding and it has provided detailed evidence of the efforts made by it. The plaintiff did not submit any countervailing evidence that such funding was available but maintains that this is a “triable issue”. It complains that Mr. Marshall did not offer his personal guarantee in order to secure a loan when he said that he would do so. At its highest, this was a pre-contractual representation which is not likely legally enforceable. The Joint Venture Agreements specifically imposed this obligation on Mr. Beach and his wife, not Mr. Marshall. Finally, when the plaintiff and the Beaches borrowed the money, it was at their request and they signed documents which clearly identified the interest rates. The argument that they had no choice but to borrow the money is without merit.
[34] Although it is disputed by MWDC, I am prepared to find, for the purposes of this motion, that the work performed by Mr. Beach as project manager was more extensive than originally contemplated by the parties. However, the Joint Venture Agreements did not impose an obligation on MWDC to increase his remuneration. Therefore, it did not breach the Agreements by declining to do so.
[35] The plaintiff will have an uphill battle in establishing that MWDC owed it a fiduciary duty that superseded, or was in addition to, the terms of the Joint Venture Agreements. In Visagie v. TVX Gold Inc., 2000 5749 (ON CA), Charron, J.A. stated at para. 25:
In my view, the trial judge erred in concluding that there was a fiduciary relationship between the parties. The duties owed by each party to the other during the currency of the agreement and after its termination, as described by the trial judge, arose from the terms of the agreement itself rather than from any fiduciary obligation imposed by law. The Supreme Court of Canada in Cadbury Schweppes, supra, makes it clear that fiduciary obligations are seldom present in a commercial context between parties acting at arm's length. Binnie J., in writing for the court, quoted at pp. 163-64 the following from Frame v. Smith, 1987 74 (SCC), [1987] 2 S.C.R. 99, 42 D.L.R. (4th) 81:
Because of the requirement of vulnerability of the beneficiary at the hands of the fiduciary, fiduciary obligations are seldom present in the dealings of experienced businessmen of similar bargaining strength acting at arm's length: see, for example, Jirna Ltd. v. Mister Donut of Canada Ltd. (1971), 1971 42 (ON CA), 22 D.L.R. (3d) 639 (Ont. C.A.), aff'd 1973 31 (SCC), [1975] 1 S.C.R. 2. The law takes the position that such individuals are perfectly capable of agreeing as to the scope of the discretion or power to be exercised, i.e., any "vulnerability" could have been prevented through the more prudent exercise of their bargaining power and the remedies for the wrongful exercise or abuse of that discretion or power, namely damages, are adequate in such a case.
[36] Even if the plaintiff is able to establish a fiduciary duty, I have difficulty in ascertaining what that fiduciary duty is and how it was breached by MWDC. In the statement of claim, the plaintiff alleges that MWDC’s failure to obtain the third party financing was a breach of fiduciary duty but this cannot be because its obligation was specifically set out in the Joint Venture Agreements. The other alleged breach was MWDC’s refusal to renegotiate Mr. Beach’s remuneration. The plaintiff pleads, in the alternative, that this was a breach of “the reciprocal obligations of good faith and loyalty”. Again, the parties’ rights and obligations in this regard are covered by the Agreements.
[37] I conclude that there are serious issues to be tried because I cannot say the claims are frivolous or vexatious but I would not find that the plaintiff has made out a strong prima facie case.[^6]
[38] The plaintiff alleges that it will suffer irreparable harm because the damages cannot be quantified. While there could be some difficulties in assessing the damages, it would be far from an impossible task. If the plaintiff proved that MWDC breached the Joint Venture Agreements by not securing the financing, the damages would be the difference between what financing was available and the interest rates charged by MWDC. Mr. Beach is not currently a plaintiff but if he was (or becomes one) and proves that his remuneration should have been adjusted, a trial judge could fix this amount. There is nothing exceptional about the constructive trust claim in relation to Cranberry Cove – those types of claims are routinely decided by trial judges, especially when it comes to an interest in real property.
[39] The other irreparable harm is the damage to Mr. Beach’s professional reputation in the land development field if he is no longer involved in these specific development projects. Even assuming that the plaintiff, a numbered corporation, can assert such a claim, it does not constitute irreparable harm. Whenever there is litigation, it can have a negative impact on personal reputations. In any event, it is difficult to see how the alleged harm would be any different if he remained involved in development projects being managed by a court-appointed receiver.
[40] Financial harm, even bankruptcy, does not constitute irreparable harm: 2169205 Ontario Inc. v. Ontario (Liquor Control Board) 2010 ONSC 5382; Burkes v. Canada Revenue Agency 2010 ONSC 3485.
[41] I find that the plaintiff will not suffer irreparable harm if a receiver-manager is not appointed.
[42] This leaves the balance of convenience. Which of the parties would suffer greater harm from the granting or refusal of the appointment of a receiver-manager pending a decision on the merits?
[43] The proposed order of the plaintiff would require the receiver-manager to maintain Mr. Beach as the project manager and compel the parties to complete the four development projects. This, of course, would benefit Mr. Beach because he would continue to be paid and exercise the same authority he had before he started the lawsuit. It would deprive MWDC of the control it bargained for and, in effect, rewrite important provisions of the Joint Venture Agreements concerning payment of sale proceeds to MWDC.
[44] Both Mr. Beach and his lawyer adverted to the “devastating” impact of litigation in this case and I agree with their assessment. The appointment of a receiver-manager would have an adverse impact on the marketability of the four development projects and likely imperil their successful completion. Prospective purchasers would know of the receivership and that would affect not just the price of the lots but also whether offers would even be made. Although I have not seen the agreements of purchase and sale that currently exist, I expect that those purchasers would rethink closing the transactions or potentially renegotiate the agreements because of the receivership. Tradespeople will demand payment upfront. Although the receiver-manager will have the authority to borrow money to fund the development projects, finding a lender will be very difficult and, even if he does, the interest rates will be extremely high and subordinated security probably unacceptable. The party most at risk and who will suffer the greater harm is clearly MWDC because, unlike the plaintiff, it has put a substantial sum of money into the development of the properties; the plaintiff has only accrued debt.
[45] I find that the balance of convenience favours MWDC.
[46] To conclude, the appointment of a receiver- manager is extraordinary relief and the plaintiff has not established that it should be granted such an exceptional remedy in this case. The plaintiff will be able to obtain an appropriate remedy – an award of damages – if it is successful in the lawsuit. It has the added protection of the Joint Venture Agreements which spell out the parties’ respective rights and obligations. Finally, the documentary disclosure mandated by the Rules of Civil Procedure will ensure that it receives ongoing production of financial records and an accounting of monies received and disbursed.
Should an interlocutory injunction be granted?
[47] The plaintiff is essentially seeking an injunction that would accomplish the same result except that, instead of a receiver-manager overseeing the development projects, two people who do not trust each other and will not be able to harmoniously work together, will be compelled to try and do so for an indefinite period of time. The defendants would also be prohibited from enforcing debt agreements freely entered into by the plaintiff and the Beaches until the plaintiff’s lawsuit is resolved.
[48] As my decision with respect to the appointment of a receiver-manager included a consideration of the three-part test applied in motions for interlocutory injunctions, I will not repeat those findings here. But there is one difference in respect of the balance of convenience criterion that I will address.
[49] An interlocutory injunction would not have the same public impact as a receivership. However, I still find that the balance of convenience favours the defendants.
[50] The mutual trust and confidence which would be necessary to bring the development projects to a successful and timely completion is irretrievably gone. This is proven not only by the allegations that Mr. Beach and Mr. Marshall have made against each other but also the difficulties that have been encountered in the administration of the projects since the commencement of litigation. The conflict would likely only escalate.
[51] Given the size of its capital contribution, MWDC has a very strong interest in completing the development projects as soon as possible. It has to comply with the Joint Venture Agreements in doing so and, if it does not, the plaintiff can take legal action against it which could include a request for interim relief.
[52] As Mr. Beach is not a party to the lawsuit nor is he a shareholder, officer or director of the plaintiff, his termination as project manager and consequent loss of income is arguably not a legally relevant factor.[^7] The debt enforcement proceedings may be financially calamitous for the plaintiff and the Beaches but that is not a valid reason to preemptively prohibit a creditor from seeking legal redress for nonpayment of a debt.
[53] I might have reached a different conclusion if the plaintiff’s assertion that Mr. Marshall surreptitiously orchestrated the situation in order to seize control (and possibly ownership) of the development projects when they were close to fruition was true. A close review of the record shows that this is an unsupportable grievance. Mr. Beach chose to borrow money at high interest rates and clearly benefited from the loans when they were made. He now wants to rewrite the bargain he made. If he and his wife face financial ruination, it is due to decisions they made, not any wrongful conduct on the part of Mr. Marshall. Mr. Beach emphasized a comment of Mr. Marshall in one of his emails in October 2017 that another lender would have “cut you off at the knees”, suggesting that this was either Mr. Marshall’s plan all along or he has seized the opportunity to do so on the cusp of the successful completion of the joint venture. If anything, this observation by Mr. Marshall supports his position that he treated Mr. Beach better than many other lenders would have. Mr Marshall’s forbearance, both in deferring repayment of the loans and his retention of Mr. Beach as project manager despite the failure to meet the milestones contained in the Joint Venture Agreements is, I find, evidence of his good faith and demonstrated a genuine desire to complete the development projects with Mr. Beach. This is not now possible because of Mr. Beach’s decision to litigate their differences unless Mr. Marshall restructured the deal on terms more favourable to him.
[54] At the hearing of the motion I raised the issue of a possible stay of the legal enforcement of the mortgages and promissory notes based on the recent decision of the Court of Appeal in 1652620 Ontario Inc. v. Cornerstone Builders Ltd., 2018 ONCA 973. The claims made in the three lawsuits are interrelated and arise out of a relationship between the same parties. However, I have concluded that the jurisdiction to make such an order arises from rule 20.08 and it would not be appropriate to grant such an order in the absence of a motion for summary judgment. This does not mean that I would find that such an order should be made; rather, it is one that can only be considered in the context of a summary judgment motion involving all the interested parties.
Ancillary relief
[55] The plaintiff has also sought orders with respect to the payment into court of sale proceeds and the production of documents. The Joint Venture Agreements include terms about the treatment of such payments and there is no reason to depart from them. There is no written agreement for Cranberry Cove but given the nature of the constructive trust claim, it is sufficient protection of the plaintiff’s interests that MWDC’s obligation be limited to the production of relevant documents, including those with respect to any sales. The request for disclosure of documents should be resolved through the agreement of counsel and, if not, I am prepared to make an order for production based on written submissions from the parties.
The defendants’ motion
[56] Although the defendants sought a variety of relief in their notice of motion, counsel provided me with a proposed draft order requesting the following:
(i) pending the resolution of the parties dispute or trial, the defendant MWDC can exercise its sole and unfettered discretion to take all steps necessary to complete the joint venture projects known as Applewood Lane/Johnson’s Point and Pine Point Road including, but not limited to, terminating Mr. Gary Beach as project manager
(ii) that the plaintiff remove the notice registered under section 71 of the Land Titles Act against the property known as Cranberry Cove
(iii) that the claims against Susan Marshall, Heliotrope Investment Corporation, Magenta Capital Corporation, Magenta Mortgage Investment Corporation, Magenta II Mortgage Investment Corporation and Magenta III Mortgage Investment Corporation be dismissed
[57] The defendants have not delivered a statement of defence and counterclaim. As a result, I do not have the jurisdiction to make an order against a person who is not a party to the litigation nor can I, in effect, issue a declaration without that specific request being made in a pleading.
[58] In any event, I would not make an order about MWDC exercising a right that it has under the Joint Venture Agreements because I consider this unnecessary. I am also concerned about making an order in the terms proposed by the defendants because it could give rise to an estoppel argument with respect to any future claim by Mr. Beach for damages based on the alleged wrongful termination of his services as project manager. This issue could only be decided if he is a named party and there is a proper evidentiary record.
[59] I agree with the defendants’ argument that, because of section 62 of the Land Titles Act, a notice of constructive trust should not have been registered under section 71 of the statute. Section 160 uses the term “apply” which usually refers to an application rather than a notice of motion. It would be an inefficient use of court resources and an unnecessary cost to require the defendants to commence an application just for this purpose. That said, the plaintiff or Mr. Beach could bring a motion for a certificate of pending litigation that would have the same effect as the notice registered under section 71. A certificate may or may not be granted. In the circumstances, I have decided that the plaintiff or Mr. Beach should be granted 30 days in which to bring a motion for a certificate of pending litigation, failing which the notice is discharged and the register is to be rectified to reflect the removal of the notice.
[60] It would be premature to dismiss the action against the defendant corporations under rule 21 because the statement of claim, read generously, could support a cause of action against the corporations. The claim as against the defendant Susan Marshall will be struck; the mere fact that funds for a loan came from her RRSP does not give rise to a cause of action against her.
Disposition
[61] The plaintiff’s motion is dismissed subject to any order I might have to make if the parties cannot agree on the production of documents. The defendants’ motion is allowed in part and the section 71 notice is discharged on the terms set out in these reasons and the action as against the defendant Susan Marshall is dismissed.
[62] If the parties cannot agree on costs, the defendants shall deliver written submissions not to exceed five pages in length exclusive of their cost outline, dockets and caselaw within 30 days of the release of this decision. The plaintiff’s submissions are to be the same length and delivered within 15 days of receipt of the defendants’ submissions.
Hurley, J.
Released: January 18, 2019
1324789 Ontario Inc. v. Marshall, 2019 ONSC 517
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
1324789 ONTARIO INC.
Plaintiff
– and –
GAVIN MARSHALL, SUSAN MARSHALL, MAGENTA WATERFRONT DEVELOPMENT CORPORATION, HELIOTROPE INVESTMENT CORPORATION, MAGENTA CAPITAL CORPORATION, MAGENTA INVESTMENT CORPORATION, MAGENTA II MORTGAGE INVESTMENT CORPORATION, MAGENTA III MORTGAGE INVESTMENT CORPORATION
Defendants
REASONS FOR decision
Hurley, J.
Released: January 18, 2019
[^1]: Although these are the ownership interests stated in the written agreement, both sides agreed at the hearing of the motion that the actual division was 58.5% and 41.5%. The agreement identifies "pre-existing loans" of $1,387,616 which was the amount loaned by MWDC to buy out Mr. McEwen's interest in the properties and also to pay some other debts of the Beaches and companies owned by them.
[^2]: “Loan” is defined in subsection 1(4) to mean “monies loaned to or for the benefit of JV2 by JV1 or parties related to JV1 pursuant to paragraph 4 (5) of this agreement.”
[^3]: Some of the lots were to be ready for sale by November 30, 2014 with the balance by November 30, 2015.
[^4]: An action with respect to a mortgage granted to Canadian Western Trust Company (which is funded by RRSPs held by Gavin Marshall and his wife Susan) by the plaintiff, 1073650 Ontario Inc. and the Beaches was commenced June 22, 2018. A second action, this one in relation to the promissory notes, was commenced by the defendant Heliotrope Investment Corporation against the plaintiff and the Beaches on May 11, 2018.
[^5]: Although it seems clear that MWDC has the financial capability to complete all of the development projects, both Joint Venture Agreements provide that the appointment of a receiver – manager without the consent of one of the parties constitutes an event of bankruptcy. This does not mean an assignment into bankruptcy would automatically occur but it does underline how consequential such an appointment could be.
[^6]: The “serious issue” threshold still applies to a receivership but, in view of the Supreme Court of Canada’s decision in R v. Canadian Broadcasting Corp., 2018 SCC 5, the “strong prima facie case” standard would likely apply in relation to the plaintiff’s request that MWDC be enjoined from terminating Mr. Beach as project manager. To paraphrase Justice Brown in R v. Canadian Broadcasting Corp., the overall effect of such an order would be to require MWDC to do something (retain Mr. Beach as project manager until the completion of the development projects) rather than refrain from doing something.
[^7]: Further, the Joint Venture Agreements include a buy/sell provision. As a result, even if MWDC was restrained from terminating Mr. Beach as project manager, MWDC would still have the right to sell the lands to a third party purchaser who would not be bound to retain his services.