COURT FILE NO.: 13-59219
DATE: 20191017
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
BRAVEHEART INVESTMENTS INC.
Plaintiff
– and –
PATRICK LECLAIR and JOANNE LECLAIR
Defendants
Carolyn Dunlop, for the Plaintiff
Keith A. MacLaren, for the Defendants
HEARD: October 8-10, 2019
REASONS FOR DECISION
Phillips j.
[1] This three-day, two witness trial is about whether the parties once entered into a contract which should now be enforced.
[2] All agree that a “promissory note” was signed by the Defendants on July 29, 2008 and that they received $335,000 thereafter. The dispute lies in what that note, and associated transfer of funds, actually involved. Secondarily, there is disagreement about the degree to which the Defendants paid down any amount owing through their contributions to the Plaintiff over the ensuing years.
The Positions of the Parties
[3] The Plaintiff argues that the “promissory note” speaks for itself, making clear that the parties had a meeting of minds to the effect that it was lending the Defendants the sum of $335,000. The loan was to be paid back in at least monthly installments over 10 years with the Defendants’ home as collateral security. The Plaintiffs say that while 54 acceptable payments were made through a method agreed upon by the parties, the payments stopped in August 2013 leaving an unpaid balance of $191, 387.02.
[4] The Defendants argue that the “loan” was really no such thing. They say the “promissory note” was actually a taxation scam cooked up by the Plaintiff which they went along with out of friendship. By characterizing the money transfer as a loan Mr. Brown could count it as part of his receivables which would assist him with some taxation issues. In actual fact, say the Defendants, the $335,000 was really an advance on earnings the Defendants were expected to become entitled to as a result of future contributions to the Plaintiff’s business. Moreover, the Defendants argue that various oral agreements made in conjunction with the July 29, 2008 arrangement mean that the Defendants’ have by now paid off the $335,000 through contributions to the Plaintiff’s business and no monies are currently owed.
Background Facts
[5] The Plaintiff is a holding company set up, owned and run by Mr. Steven Brown. Mr. Brown uses Braveheart Investments Inc. (“Braveheart”) as a vehicle through which to carry out parts of his principal business, a large multi-office physiotherapy enterprise known as Family Physiotherapy Centre (“FPC”).
[6] Mr. Brown and the Defendant, Patrick Leclair, met in 2002. Mr. Leclair was involved in the real estate business and Mr. Brown was an interested investor. As of April 2007, it was agreed that Mr. Leclair and his wife, Joanne Leclair, would provide business consulting services to Mr. Brown.
[7] I would describe both Patrick and Joanne Leclair as very sophisticated and capable business people. Mr. Leclair has an impressive work history in real estate investing and the arrangements related to financing large transactions. Ms. Leclair is a former mortgage broker. I was able to discern, at the very least through the large volume of email correspondence filed, that both Mr. and Ms. Leclair are highly assertive, extraordinary negotiators and communicators with strong opinions and knowledge about the conduct of commercial affairs.
[8] Leaving aside for the moment the question of whether it was bone fide, the “promissory note” in question has clear and unambiguous terms. The evidence establishes that both Mr. and Ms. Leclair signed it after having an opportunity to review it at their leisure. The document sets out that:
We, the undersigned Patrick and Joanne Leclair (hereinafter “Borrowers”) do hereby jointly and severally promise to pay Braveheart Investments Inc. (hereinafter “Lender”) the amount of $335,000.00 with interest on such amount accruing at the rate of ten percent (10%) per annum. Payment will first be applied to interest, and then to principal, accordingly.
Failure to make a payment when due shall be a default on the loan. Should a default exist for more than thirty (30) days, the total amount outstanding will be currently due, and the borrower agrees to pay the holder of this note reasonable costs of collection including Legal fees. The Lender’s remedies will be governed by the Laws of Ontario.
COLLATERAL – As collateral security for the payment of this Note, Borrowers agree to:
Provide an uncontested interest equal to the total amount of the outstanding Loan on 1930 Claudette Drive, Rockland, Ontario K4K 1K7
[9] As mentioned, the Defendants did indeed receive the sum of $335,000 by bank draft. In a twist I find unimportant for present purposes, the draft was issued to the Leclairs by Steven Brown personally.
[10] I say the above fact is unimportant because it is clear on the evidence that all parties were content to use various intermediary entities to interact with each other. For instance, an arrangement was agreed to whereby the Leclairs would bill Braveheart monthly for their consulting services using Patrick Leclair’s numbered company. The evidence establishes that all were in agreement that the amount billed would then have deducted from it the amount owed that month on the promissory note. The balance would then be paid to the numbered company. I find the agreement to use these alternate identities and this particular payment method to be inconsequential in terms of the issues on trial.
[11] In fact, the evidence establishes that other oral agreements were arrived at that slightly modified the alleged contract. These changes, however, were confined to the edges of the matter and are not integral to the core issues. For instance, while the “promissory note” directed that payments were to be made “via Electronic Funds Transfer or in person or by mail”, the financial records show that parties settled on another money transfer method, as outlined above. In addition, the long history of invoices submitted shows that it was decided after only a few payments that the applicable interest rate would drop from 10% to 7%.
Issues
[12] As the matter has unfolded, I must decide the following issues:
(i) Has the Plaintiff proved that the “promissory note” signed July 29, 2008 is bone fide? In other words, is that document a record of a valid contract to be read as meaning what it plainly says?
(ii) If the promissory note is indeed legitimate, has the Plaintiff proved that the Defendants did not fulfill their obligations under it such that its default terms should now be enforced?
Analysis
Issue 1 - Has the Plaintiff proved that the “promissory note” signed July 29, 2008 is bone fide?
[13] I decide this issue in favour of the Plaintiff. To be more specific, I reject the Defendants’ evidence that the document signed on July 29, 2008 was an effort at tax fraud by Steven Brown and not a loan to them. I simply do not believe Patrick Leclair on this point. I arrive to that conclusion by considering a combination of common sense and the totality of the evidence. I shall elaborate on my thought process below:
• Mr. Leclair testified that Mr. Brown proposed that the $335,000 be transferred to the Leclairs as an advance on earnings. The idea was that by putting it in the form of a loan, Mr. Brown would render the funds “receivables” and thus enjoy a tax advantage.
In July of 2008, Brown and Leclair’s business consultancy arrangement had been up-and-running for about 15 months. While there is some fluctuation, the Leclair invoices show that the pair were charging Brown about $12,500 per month.
I find the proposition that Mr. Brown would advance an amount roughly commensurate to two years of the Leclair’s fees to avoid paying the taxes on that amount to be impossible to believe. The risk to Mr. Brown so far outweighs the reward to him that there is no likelihood of it having occurred that way.
While hindsight tells us that things actually worked out quite well in respect of FPC’s growth and profitability, I find it highly unlikely that Mr. Brown would have believed that outcome to be so certain that he would pay his business consultants in advance.
• I find the 10% interest rate applied at the beginning to be inconsistent with the tax scam notion. As explained, that fraud idea is that Mr. Brown was endeavoring to make $335,000 become receivable on his books to enjoy taxation advantage. I note, however, that he would still have to pay tax on the interest income. It would be in his interests, therefore, when constructing his fraud, to choose a low interest rate and not a high one. The tax authorities would require only a rate in line with the market. As the parties’ own conduct makes clear the 10% rate was high. Indeed, after about only 6 months, they negotiated it down to 7%. In my view, the selection by Mr. Brown of the original 10% rate takes away from Mr. Leclair’s position that Mr. Brown was engaged in tax evasion by crafting a phony loan. To accept Mr. Leclair’s position, I have to accept that Mr. Brown chose an inordinately high rate that would have run contrary to his interests, lowering the reward on the already low risk reward ratio.
• In my view, when the interest component is fully considered, the position that the “promissory note” was actually a taxation scam does not accord with even the Defendants’ interests.
There is no dispute that a sum was being deducted each month as a portion of the monthly invoices tendered by the Leclairs. Importantly, there is no suggestion anywhere that the Defendants were topping up or otherwise inflating their invoices. I take the fees they billed for as in accordance with services actually rendered. In other words, the Defendants say they were chipping away at the “earning advance” they had received by a dollar for a dollar of service they were providing.
The problem for the Defendant’s position is if the $335,000 was an “earnings advance”, the element of interest makes it so they would end up working a substantial amount for free. The interest consequence as the loan was initially structured, or for that matter even at the lower 7% rate later agreed to, adds up to anywhere from $55,643.38 to more than $100,000 (depending on which amortization schedule is used - the Defendants’ at Tab 5 of Exhibit 21 or the Plaintiff’s at Tab 24 of Exhibit 2).
Even on their own construction, the Defendants, having actually received $335,000, would be obliged to provide more than $395,000 worth of services to work off the “advance”. It is hard to see how anyone anticipating a successful consultancy run would want an “earnings advance” that comes with a 10% interest consequence (the amount on the table when the papers were signed). Indeed, it is hard to see why someone in that position would want an earnings advance that carries any interest levy at all. The fact that the Leclairs say they did so for nothing in return is difficult to accept.
• I am struck by the fact that on the Defendants’ version, they put their home at risk, getting no compensation of any kind for doing so. I cannot believe that a couple sophisticated in the ways of business and finance would put their home on the line in order to help someone conduct a fraud, especially for absolutely nothing in return. I fail to see how that particular collateral (or any collateral for that matter) would have been required to deceive the CRA. Why would the Leclairs agree to such significant and unnecessary risk for no reward?
[14] In my judgment, the Defendants’ position that the July 29, 2008 document was in fact something other than a loan is so highly unlikely as to be unbelievable. In every respect, I prefer the evidence of Mr. Steven Brown. Indeed, I consider the proposition that the promissory note was a taxation scam and that the $335,000 was an advance on earnings to be a fabrication by Patrick Leclair which is detrimental to his credibility generally.
[15] The overall preponderance of evidence points to the fact that this was a valid contract, a meeting of minds in respect of a $335,000 loan with interest. The terms of the contract are clear and unambiguous. I find for the Plaintiff on this question.
Issue 2 - Has the Plaintiff proved that the Defendants did not fulfill their obligations under the contract such that its default terms should now be enforced?
[16] This issue is complicated by the unusual way the parties agreed that the Defendants would make their payments on the loan. As has been mentioned, the Plaintiff would deduct the monthly payment from the amounts the Defendants were billing for services rendered.
[17] I have reviewed the invoices prepared by the Defendants for submission to the Plaintiff. Through those records, I am able to see the amounts that were deducted each month. I note that the amounts, $4389.63 when the interest rate was 10%, and $3793.09 when it dropped to 7%, line up precisely with the payments schedule submitted by the Plaintiff.
[18] I find the email from Joanne Leclair on June 13, 2012 to be confirmatory of the state of affairs as now reported by the Plaintiff. In particular, I find she confirms what Mr. Brown says was his general reluctance in respect of paying bonuses. That email, contained at Tab 15 of Exhibit 2, reveals the temperature of the negotiations between Patrick Leclair and Steven Brown toward formalizing things into a written contract. It is clear, in reviewing the communications and the exchange of drafts of proposed contractual terms, that the payment of any bonus was a very contentious subject. I accept the evidence from Steven Brown on this issue to the effect that, in his view, bonuses were only to be contemplated at year-end and not in advance.
[19] This is important because it drives me to specifically reject the Defendants’ position that they should be credited in respect of multiple $50,000 bonuses. Mr. Leclair testified that the understanding from the outset was that such bonuses were part of the “earnings advance” and would become payable in the future. I note that there is no mention of pre-arranged bonuses in any of the copious amount of emails and other documents that discuss that very subject at length as things began to unravel in 2012.
[20] I reject the accuracy and authenticity of the “Advance Amortization Schedule” prepared by Patrick Leclair, in evidence at Tab 5 of Exhibit 21. I recognize that Mr. Leclair affixed Mr. Brown’s electronic signature to it. I decline to take that electronic signature as indicative of any meeting of minds on the issue. I find it curious, to say the least, that Mr. Leclair put Mr. Brown’s electronic signature on the document when he would be seeing him later that same day. Surely the nature of the “Advance Amortization Schedule”, a document modifying a document with real signatures on it (ie the all-important one signed July 29, 2008), would call for a non-electronic signature in the circumstances.
[21] In sum, I do not put much stock in the evidence of Patrick Leclair. As a result of an adverse credibility inference I draw from his fabrication of the taxation fraud issue discussed above, as well as the dearth of communications consistent with the “Advance Amortization Schedule” when the subject of bonuses was being directly discussed, I cannot accept that the multiple bonuses now claimed by the Leclairs were ever agreed to.
[22] I find the payment schedule at Tab 24 of Exhibit 2 to be true and accurate. It corresponds with the totality of the evidence, especially the history of payments recorded by the invoices submitted. Also, it accords with the evidence of Steven Brown, whose evidence I prefer in every respect where it differs from Patrick Leclair’s. Accordingly, I find that the Defendants did indeed make 54 full and proper payments, in a manner and at an interest rate agreed to. I also accept that they made one partial payment in July 2013. I further accept that the Defendants were credited in respect of one $50,000 bonus, an event that occurred in the spring of 2012. I reiterate that I find the Ms. Leclair email of June 13, 2012 to corroborate that event as both having happened and being an anomaly.
[23] This means that the Defendants have paid $257, 056.52. I find the Defendants in default with respect to the outstanding amount of $191, 387.02.
Conclusion
[24] A valid, enforceable contract was signed on July 29, 2008 memorializing a meeting of minds about a loan from the Plaintiff to the Defendants of $335,000, which loan was to be repaid with interest in monthly installments over the course of 120 months (pre-payment and early payout could be done without penalty).
[25] The parties arrived at some oral agreements in respect of collateral matters, like the practicalities of how funds would be transferred along with a reduction in the interest rate. In addition, one $50,000 bonus was awarded in 2012 for extraordinary services rendered which was applied to the loan as an early payment. I find, however, that no other agreements were arrived at which altered the terms of the loan in any meaningful way or that now entitle the Defendants to point to bonuses that further offset the amount owed.
[26] It is ordered that:
• The Defendants shall pay to the Plaintiff the sum of $191, 387.02, plus pre-judgment and post-judgment interest in accordance with the Courts of Justice Act, R.S.O. 1990, c. C.43;
• In the alternative, the Plaintiff shall have a security interest in the amount set out above in the property listed in the loan agreement: 1930 Claudette Drive, Rockland, Ontario K4K 1K7.
[27] The parties may make written submissions as to costs within 30 days.
Mr. Justice Kevin B. Phillips
Released: October 17, 2019
COURT FILE NO.: 13-59219
DATE: 20191017
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
BRAVEHEART INVESTMENTS INC.
-and-
PATRICK LECLAIR and JOANNE LECLAIR
REASONS FOR DECISION
Phillips J.
Released: October 17, 2019