ESTATE FILE NO.: 31-2303814
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST)
IN BANKRUPTCY AND INSOLVENCY
IN THE MATTER OF THE PROPOSAL OF 1482241 ONTARIO LIMITED, OF THE CITY OF TORONTO, IN THE PROVINCE OF ONTARIO
BETWEEN:
JAMSHID HUSSAINI AND NEELOFAR AHMADI
Appellants
– and –
CROWE SOBERMAN INC., TRUSTEE ACTING IN THE PROPOSAL OF 1482241 ONTARIO LIMITED (“148”)
Respondent
Craig A. Mills & Ivan Merrow, counsel for the Appellants Jamshid Hussaini, Neelofar Ahmadi
Mervyn D. Abramowitz, David T. Ullmann, & Alexandra Teodorescu, counsel for the Respondent 1482241 Ontario Limited
Steven L. Graff & Miranda Spence, counsel for the Respondent Crowe Soberman Inc. in its capacity as the Proposal Trustee for 1482241 Ontario Limited
HEARD: December 4 and 5, 2018, January 9, 2019
V.R. CHIAPPETTA j.
Overview
1The appellants, Jamshid Hussaini (“Hussaini”) and Neelofar Ahmadi (“Ahmadi”) (collectively “the Claimants”), appeal the disallowance of their claims in the bankruptcy proposal proceeding of 1482241 Ontario Limited (“148” or the “Debtor”). The Claimants are both real estate agents in the Toronto area. They are the principals of Homelife Dreams Reality Inc., which is a corporation incorporated pursuant to the laws of Ontario (“Homelife”).
2In 2012, the Claimants wanted to purchase a commercial property located at 240 Duncan Mill Road in Toronto, Ontario (the “Property”). The registered legal owner of the Property was 148, an Ontario corporation wholly owned by Alain Checroune (“Checroune”) that carried on business buying, selling and managing commercial properties. 148 held the Property as trustee for Checroune.
3The Claimants attempted to purchase the Property from 148, but were unsuccessful because of issues with financing and title. In a second attempt to ultimately acquire the Property, the Claimants entered into an agreement with Checroune to buy 100% of 148’s shares.
4By way of Share Purchase Agreement signed on June 22, 2012, the Claimants and Checroune agreed that Checroune would transfer 20% of the shares of 148 to the Claimants immediately, and that the balance of the shares would be transferred upon payment in full, with an October 1, 2015 closing date (the ”June 22 Agreement”). By way of Amended Trust Declaration signed on the same day, the Claimants and Checroune agreed that Checroune would transfer and assign 20% of his beneficial interest in the Property to the Claimants (the “Amended Trust”).
5The sale of the balance of the shares did not close.
6On June 13, 2014, the Claimants commenced an action against 148 and Checroune, seeking in part a declaration that they are beneficial owners of a 20% interest in the Property. A Fresh as Amended Claim was issued in November 14, 2016. Homelife was added as a party. The Claimants sought in part a declaration that Checroune’s conduct as alleged therein was oppressive. This action was stayed when on October 13, 2017, 148 filed a Notice of Intention to Make a Proposal (the “Proposal Proceedings”) pursuant to s. 67 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”).
7Crowe Soberman Inc. was appointed as the Proposal Trustee (the “Proposal Trustee”). The Proposal Trustee sold the Property to an arms-length purchaser at the end of February 2018. This agreement was approved by the Court on March 16, 2018. 148 submitted a proposal to its creditors on April 13, 2018. A requisite majority of creditors voted in favour of the proposal at a meeting held on May 4, 2018. The proposal was also approved by Court on June 12, 2018.
8The Claimants advanced two claims in the Proposal Proceedings: two property proofs of claim (collectively the “Property Claim”) collectively claiming a 20% beneficial interest in the Property (or the proceeds from sale) based on the Amended Trust and an unsecured proof of claim (the “Litigation Claim") seeking damages for lost opportunity and lost profit based on 148’s alleged oppressive conduct, along with legal fees incurred related to the 2014 litigation.
9The Proposal Trustee disallowed the Property Claim by way of Notice of Disallowance dated May 17, 2018.
10Although the Proposal Trustee has not disallowed the Litigation Claim, Justice Dunphy ordered that the Litigation Claim may be treated as disallowed for the purposes of this hearing.
11The Claimants appeal the disallowances, seeking a declaration that both the Property Claim and the Litigation Claim are valid and enforceable claims in the Proposal Proceedings. For reasons set out below, I have concluded that the Claimants have failed to establish a proprietary interest in the Property either by way of express trust or constructive trust, such that the Property Claim is neither valid nor enforceable. Further, the Claimants have failed to prove that 148 acted in a manner that was oppressive to their interests such that the Litigation claim is neither valid nor enforceable.
Factual Background
Negotiation of the June 22 Agreement
12By Trust Declaration dated September 21, 2005, 148 held legal title to the Property in trust as a bare trustee for Checroune as the beneficiary (the “2005 Trust Declaration”). Pursuant to the 2005 Trust Declaration, 148 agreed to remit to Checroune all revenue owing from the Property and Checroune agreed to indemnify 148 for all liabilities relating to the Property.
13On February 8, 2012, the Claimants submitted an Agreement of Purchase and Sale to purchase the Property for $15 million (the “APS”). The Claimants intended to purchase the Property themselves, without partners. The Claimants were unable to purchase the property as contemplated by the APS. The Claimants encountered issues with assuming the first mortgage without a penalty considering a maturity date of October 2015, with a Certificate of Pending Litigation that was registered against the property and with financing the purchase.
14In consultation with their lawyer at the time, the Claimants developed a different way to achieve their end goal of owning the Property: they would purchase 100% of the shares of 148, the owner of the property, for $15 million.
15On June 6, 2012, the Claimants and Checroune entered into a written agreement whereby the Claimants would purchase Checroune’s shares in 148 (the “June 6 Agreement”). 148 was not a party to the June 6 Agreement. The June 6 Agreement reads in relevant part:
(a) 148 is the registered owner of the Property and the Property is subject to a mortgage in the amount of $9 million.
(b) Checroune will sell the Claimants 36.67% of the issued shares of 148 with the further 63.33% to be made available by Checroune to the Claimants and to be transferred after all payments are made.
(c) The price payable for the purchased shares will be based on the sum of $6 million as the value of 148 subject to adjustments.
(d) The Claimants shall pay a deposit of $200,000 and a further sum of $2 million upon closing.
(e) Closing means 10 days after the Claimants sign the offer. If for any reason the transaction does not close, the offer becomes null and void and the deposit will be returned to the Claimants.
(f) The Claimants shall have the rights of a 36.67% shareholder following closing and will be entitled to vote on the election of the board of directors, the appointment of officers of the corporation and to share in the distribution of the profits of 148 to the extent of their shareholding.
(g) The Claimants have the right to manage the Property, collect rents and enter into leases with Checroune’s written consent.
(h) Until the Claimants buy the full 100% of the shares in 148 as contemplated in the Agreement, they will not be permitted or entitled to manage the business of 148, retain profits, sell or re-mortgage the Property.
(i) Upon payment in full, Checroune will transfer the balance of the shares to the Claimants.
(j) Any liabilities arising out of matters occurring on or before the closing date or from existing litigation shall remain the responsibility of Checroune.
(k) The Claimants agree to accept title to the shares subject to the litigation brought by 214688 Ontario Ltd., provided that Checroune pay all costs related to this litigation and any damages resulting from this litigation.
16On June 22, the parties amended the June 6 Agreement to reflect the following:
(a) The Closing Date means Thursday June 21, 2012.
(b) The Claimants agree to purchase only 20% of the issued shares of 148 from Checroune for a total of $1.2 million upon closing, $200,000 of which has already been paid. Upon payment of this sum, Checroune shall transfer to the Claimants 20% of the shares of 148.
(c) The Claimants shall have the rights of a 20% shareholder following closing.
(d) The Claimants can thereafter purchase the remaining 80% of the shares of 148 from Checroune. The purchase price for the remainder of the shares shall be $4.8 million (the remaining $13.8 million price adjusted by the $9 million existing mortgage). The closing date for the transfer of the balance of the shares shall be October 1, 2015, however, if the property can be refinanced without penalty then the closing date shall be October 1, 2014.
(e) Until the Claimants purchase 100% of Checroune’s shares, they will not be entitled to manage the business of the corporation, retain profits, sell or re-mortgage the property owned by the business.
(f) The litigation shall be finally resolved by the date of the transfer of the balance of shares.
17On June 21, 2012, the Claimants paid Checroune $1 million, in addition to the $200,000 deposit previously paid on June 6, 2012.
18On June 21 and 22, 2012 a number of documents were exchanged between the parties including:
(a) A director’s resolution, signed by Checroune as sole director of 148, transferring 20% of his shares in 148 to the Claimants,
(b) Share Certificates in respect of 20% of the shares of 148,
(c) An Undertaking signed by Checroune to sell the remaining 80% of the shares to the Claimants, and
(d) The Amended Trust Declaration.
19The Amended Trust Declaration amends the 2005 Trust Declaration wherein 148 as legal title-holder to the Property granted Checroune a 100% beneficial interest in the property. The Amended Trust assigns 20% of Checroune’s beneficial interest in the Property to the Claimants. The Amended Trust Declaration was not registered on title and not referenced in the June 22 Agreement.
Subsequent Disputes between the Claimants and Checroune
20Subsequent to the June 22 Agreement, the Claimants began to lease the 6th floor of the Property from 148 as office space for Homelife. In or about June 2014, the Claimants came to believe that Checroune intended to sell the Property to another purchaser. This prompted them to commence the 2014 Litigation. The Claimants state that in August 2014, Checroune began a campaign of intimidation and harassment so that they would no longer wish to purchase the balance of the shares. They allege that Checroune turned off the lights, elevators and heating during business hours and canceled valid access cards and parking passes. Checroune denies that he engaged in such conduct. There is no third-party evidence before the Court.
21In October 2014, 148 terminated Homelife’s tenancy, alleging that it breached the terms of its lease with 148 by not obtaining Checroune’s consent prior to entering into sublease agreements. The Claimants deny this.
22On October 27, 2014, Justice Whitaker granted an injunction order restraining 148 and Checroune from disrupting Homelife’s business as well as from selling, mortgaging, encumbering or dealing with the Property or shares in 148 without the Claimants’ consent. Checroune nonetheless obtained a second mortgage on the Property, which was registered on title on September 21, 2016, without the Claimants’ knowledge.
23On October 1, 2015, Checroune tendered to the Claimants in an effort to close the transfer of the remaining 80% of the shares. The Claimants refused to close. Their position is that they did not close on the purchase of the remaining 80% of the shares because Checroune failed to discharge the Certificate of Pending Litigation from title to the Property, as required by the June 22 Agreement. The Claimants did not attempt to extend the closing date and did not waive that condition of closing.
24In July 2016, Homelife left the Property and was no longer a tenant of 148.
148’s Bankruptcy
25On October 13, 2017, 148 commenced restructuring proceedings by filing a Notice of Intention to Make a Proposal. Crowe Soberman Inc. was appointed as trustee with respect to the proposal.
26On November 3, 2017, the Court authorized the Proposal Trustee to sell the Property in accordance with a court-approved sale process. The Court expressly stated that its authorization did not determine the validity or enforceability of the agreements to which the Claimants were a party with Checroune.
27At the end of February 2018, the Proposal Trustee entered into an Agreement of Purchase and Sale with respect to the Property with an arms-length purchaser. This agreement was approved by the Court on March 16, 2018. The approval order provided that the sale proceeds should be held by the Proposal Trustee in trust.
28On April 13, 2018, 148 submitted a Proposal to its creditors.
29On April 25, 2018, the Claimants advanced the following claim in the Proposal Proceedings, which is subject to this appeal:
Two property proofs of claim collectively claiming a 20% beneficial interest (15% for Hussaini and 5% for Ahmadi) in what are now proceeds from the sale of the Property based on the language of the Amended Trust Declaration (the Property Claim).
30On May 3, 2018, the Claimants advanced the following claim in the Proposal Proceedings, which is also subject to this appeal:
Two unsecured proofs of claim seeking damages in the amount if approximately $42 million (the Litigation Claim).
31On May 4, 2018, a requisite majority of creditors voted in favour of the Proposal. The Claimants did not vote as their claims were treated as contingent claims.
32On June 12, 2018, the Proposal was approved by the Court. The Claimants did not oppose the approval of the Proposal or appeal the order approving it.
33For the purposes of this appeal, the Claimants have reduced their Litigation Claim from 42 million to 4 million, being the difference between the price they offered for the Property under the June 22 Agreement ($15 million) and the price the Proposal Trustee secured for the Property in the sale concluded in the Proposal ($19 million).
Issues
34The parties agree that this appeal presents to the Court the following issues:
(1) Do the Claimants each have a trust claim against 148 pursuant to s.67 of the BIA in respect of the Sale Proceeds of the Property currently held by the Proposal Trustee in trust?
(2) Should the Court find that a constructive trust arose benefitting the Claimants in respect of the Sale Proceeds of the Property currently held by the Proposal Trustee in trust or in respect of the $1.2 million paid by them to Checroune?
(3) If the Claimants each have trust claims with respect to the Sale Proceeds, what priority, if any, should be afforded to those trust claims?
(4) Do the Claimants have an unsecured claim for damages against 148 with respect to the breaches alleged in the Litigation Claim?
Analysis
1. Do the Claimants each have a trust claim against 148 pursuant to s.67 of the BIA in respect of the Sale Proceeds of the Property currently held by the Proposal Trustee in trust?
35I have concluded that the Claimants do not have a trust claim against 148 pursuant to s.67 of the BIA in respect of the proceeds of the Property currently held by the Proposal Trustee in trust.
36The Claimants assert that the language of the Amended Trust created an express trust. The Amended Trust states that Checroune transfers and assigns 20% of his 100% beneficial interest in the Property to the Claimants. Despite this language however, it cannot be said that there was sufficient certainty of intention to create a trust with respect to the Property. The language of the 2012 Amended Trust Declaration must be interpreted contextually, considering the whole of the circumstances, including the factual matrix within which it was made and the conduct of the parties thereafter: Antle v. Canada, 2010 FCA 280, 413 N.R. 128, leave to appeal refused, [2010] S.C.C.A. No. 462 at paras. 11-14.
Law of Express Trust
37Certainty of intention is one of the three certainties necessary to create a trust. In order for a trust to have certainty of intention, the language used must show that the settlor intended that the recipient must hold the property on trust for the benefit of the beneficiary: Donovan W.M. Waters, Waters’ Law of Trusts in Canada, 4th ed (Toronto: Carswell, 2012) at 140. However, there is no magic in the word “trust”. Intention is a matter of substance over form, and language alone cannot create a trust: Willis (Litigation Guardian of) v. Willis Estate (2006), 23 E.T.R (3d) 292 (Ont. S.C.J.), affirmed, 2007 ONCA 552, 33 E.T.R. (3d) 187. It is important to interpret the words of a document purporting to create a trust in context. As stated by the Federal Court of Appeal in Antle at para. 12: “A test that requires one to look at all of the circumstances, and not just the words of the trust deed, is an approach that appears to have been adopted by Canadian courts generally.”
38The other two certainties are certainty of object and certainty of subject-matter. Certainty of object is the requirement that the beneficiary of the trust must be ascertainable. Certainty of subject-matter is the requirement that the property to be held on trust must be clearly identifiable at the time the trust comes into existence. The beneficial interest which each beneficiary should have in that property must also be clearly identifiable. These certainties are required so that trustees, courts, and settlors can be sure that a trust is being properly administrated according to its terms.
Application
39148 submits that the Claimants have failed to satisfy their onus in proving certainty of subject matter. It notes that the Amended Trust refers to the Property including Assets such as chattels, fixtures, equipment, and leases and rental agreements. This, it argues, is not only ambiguous in and of itself but is also inconsistent with the property the Claimants set out to acquire, namely 100% of the shares of 148. I disagree. The Amended Trust agreement adopts the definition of the Property in the 2005 Trust Agreement and provides further certainty of subject-matter in terms of what a proprietary interest in the Property would include. It is not inconsistent with the Claimants’ intended ownership of 100% of the shares of 148, as 148 holds legal title to the Property and its assets.
40148 further submits that the Claimants have not demonstrated certainty of intention to create a trust with respect to the Property. The Claimants’ position is that they have discharged this burden. They submit that the explicit language of the Amended Trust is the best evidence in determining certainty of intention. Certainty of intention is satisfied, it is argued, by the unambiguous language of the Amended Trust, which clearly assigns 20% of Checroune’s beneficial interest in the Property to the Claimants. I disagree.
41Certainty of intention relates to a clear intention that the trustee should hold property for the benefit of someone else. No particular form of words is required or determinative: Willis (Litigation Guardian of) v. Willis Estate, 2007 ONCA 552, 33 E.T.R. (3d) 187 at para. 2. In this case, it is important to consider the language of the 2012 Amended Trust Declaration contextually with the parties’ stated and consistent intention for executing the Amended Trust and their conduct thereafter.
42The Claimants’ intent was always to own the Property outright. They had no intention to be joint owners of the Property with Checroune. Checroune’s intent was always to sell the Property outright. He had no intention to sell only part of the Property.
43It was only when the Claimants were unable to purchase the Property that they turned their efforts to owning 100% of the shares of 148. The Claimants had no intention to be minority shareholders of the business of 148. They did not want any partners. They wanted to own 148 outright so they could ultimately own the Property. Checroune’s intent was always to sell 100% of his shares of 148. He had no intent to work with a minority shareholder. If he could not sell the Property outright, he wanted to sell all of the shares of 148.
44Ahmadi testified that the Claimants’ lawyer put together the strategy to purchase 100% of Checroune’s shares in 148 because the Claimants wanted to own the Property but were unable to purchase it outright. The parties intended that the Claimants would acquire 100% of the shares of 148 for $15 million. The share transaction was subsequently structured so the Claimants initially acquired 36.67% of the shares (later amended to 20% of the shares) and were obligated to purchase the balance at a later date, to be transferred upon further payment. On cross examination, Ahmadi admitted that the parties made this arrangement because the Claimants could not obtain financing to purchase 100% of the shares outright, considering the Certificate of Pending Litigation registered on the Property. The share purchase was therefore structured in two tranches, but it was always the parties’ shared intention that Checroune would sell 100% of his shares in 148 to the Claimants.
45It was in this context, upon the purchase of the first 20% of the shares and prior to the full completion of the intended share purchase, that the Amended Trust was executed.
46Ahmadi testified that the Claimants did not understand the details of the documents and did not understand the specifics relating to the Amended Trust, including the differences between beneficial and legal interests. Her evidence is that the Claimants understood that the purpose of the Amended Trust was “to protect our interest and to become the owners.” It provided a measure of security to ensure that Checroune did not sell the Property without the Claimants’ knowledge, pending the completion of the sale of the remaining shares pursuant to the June 22 Agreement. It therefore further served as an incentive to Checroune to comply with his obligations as defined in the June 22 Agreement in facilitating the sale of the remaining shares.
47Ahmadi described the Amended Trust as “extra security” to protect the Claimants’ interests in ultimately acquiring 100% of the shares of 148 and, as a result, 100% of the Property. There is no evidence to suggest that at the time of the Amended Trust, the Claimants intended to receive a 20% proprietary or beneficial interest in the Property. Rather, the evidence is that the Claimants intended the Amended Trust to serve as security towards the close of the sale of the remaining 80% of the shares, and nothing more.
48Similarly, Checroune’s evidence is that the Amended Trust was intended to act as “security” or to provide “additional security” pending the intended transfer of the remaining 80% of the shares. He states that he never intended to convey any part of the Property until the Claimants paid in full for 100% of the shares as contemplated by the June 22 Agreement.
49The parties’ stated shared intention in creating the Amended Trust is demonstrated by their conduct subsequent its execution. At no time did the parties act in a manner consistent with the Claimants’ enjoying a beneficial interest in the Property. For over three years, the Claimants did not contribute to the ongoing expenses related to the Property, including maintenance and any payments toward the existing $9 million mortgage, despite the obligation of the beneficial owner pursuant to the 2005 Trust Declaration to indemnify 148 for all liabilities relating to the Property. Similarly, at no time did the Claimants receive a share of profits derived from the Property, despite 148’s obligation pursuant to the 2005 Trust Declaration to remit all revenue owing from the Property to the beneficial owner. Significantly, this conduct is also consistent with the parties’ intention as reflected in the June 22 Agreement that until the Claimants purchased 100% of Checroune’s shares, the Claimants would not be entitled to retain profits.
50The parties’ demonstrated conduct fails to indicate the Amended Trust was intended to transfer a partial proprietary interest. Rather, it underscores their stated intention that the Amended Trust was intended to protect the Claimants’ contractual agreement with Checroune to complete the purchase of the remaining shares.
51For these reasons, I have concluded the Amended Trust does not constitute an express trust as the Claimants have not demonstrated that there was certainty of intention.
The Amended Trust post-October 2015
52The transfer of the remaining shares as intended by the parties and contracted by the June 22 Agreement did not close on October 1, 2015. I agree with 148 that the Amended Trust, intended by the parties to secure the closing, is therefore rendered moot as of October 2015 as there is nothing more to secure.
53The Claimants paid Checroune $1.2 million for 20% of the shares of 148 in furtherance of their intention as set out in the June 22 Agreement to acquire 100% of the shares. Today, they own 20% of the shares of a bankrupt company. At no time did they wish to own only 20% of the shares. The Claimants may have legal recourse against Checroune in this regard as a party to the June 22 Agreement. They do not have a claim against 148, however, with respect to any rights arising from the Amended Trust.
2. Should the Court find that a constructive trust arose benefitting the Claimants in respect of the Sale Proceeds of the Property currently held by the Proposal Trustee in trust or in respect of the $1.2 million paid by them to Checroune?
54In the alternative, the Claimants submit that a constructive trust ought to be imposed over the sale proceeds in order to recognize their beneficial interest. It is their position that unless this remedy is applied, 148 and its creditors will be unjustly enriched at the Claimants’ expense.
Law of Constructive Trust
55A constructive trust arises by operation of law as a means for equity to combat behaviour that is contrary to good conscience. It is a remedy for unconscionable transactions: Soulos v. Korkontzilas, 1997 CanLII 346 (SCC), [1997] 2 S.C.R. 217 at paras. 18, 32, 45. Constructive trusts can arise in many circumstances, including to remedy an unjust enrichment; or to confiscate profits flowing from a wrong.
56The Claimants advance arguments based on both circumstances. They claim that 148 has been unjustly enriched, and that 148 has wrongfully breached an equitable duty to them and profited as a result.
57The elements of an unjust enrichment claim are: a benefit to one party, a corresponding deprivation to the other, and no juridical reason for the transfer of value: Kerr v. Baranow, 2011 SCC 10, [2011] 1 S.C.R. 249 at para. 32. The enrichment must correspond with a deprivation from the plaintiff. The purpose of the unjust enrichment doctrine is to reverse unjust transfers. Accordingly, it must first be determined whether wealth has moved from the plaintiff to the defendant: Professional Institute of the Public Service of Canada v. Canada, 2012 SCC 71, [2012] 3 S.C.R. 660 at paras. 151-152. In order for a constructive trust to arise to remedy the unjust enrichment, monetary damages must be inadequate to compensate the plaintiff, and there must be a link between the benefit alleged to have been provided and the property over which the constructive trust is claimed: Peter v. Beblow, 1993 CanLII 126 (SCC), [1993] 1 S.C.R. 980 at para. 31.
58The Supreme Court in Soulos at para. 45 outlined four conditions that should generally be satisfied in order for a constructive trust based on wrongful conduct to arise:
(1) The defendant must have been under an equitable obligation, that is, an obligation of the type that courts of equity have enforced, in relation to the activities giving rise to the assets in his hands;
(2) The assets in the hands of the defendant must be shown to have resulted from deemed or actual agency activities of the defendant in breach of his equitable obligation to the plaintiff;
(3) The plaintiff must show a legitimate reason for seeking a proprietary remedy, either personal or related to the need to ensure that others like the defendant remain faithful to their duties; and
(4) There must be no facts which would render the imposition of a constructive trust unjust in all the circumstances of the case.
Application
59The Claimants argue that 148 has been enriched by its breach of its duty as trustee to the Claimants. They argue that it has utilized the Property for its own benefit both prior to and after the filing of the Notice of Intention to Make a Proposal without regard to the Claimants’ beneficial interest in the Property. This position, however, presumes that the Claimants enjoy a beneficial interest in the Property. For the reasons outlined above, I have concluded that they do not. 148 does not owe an equitable duty as trustee to the Claimants. Therefore, the first condition outlined by the Supreme Court in Soulos is not met.
60The Claimants further argue that 148 has been unjustly enriched to the extent that Checroune used the $1.2 million he received from the Claimants to satisfy amounts purportedly owed by Homelife to 148. This submission confuses the various contractual relationships of the Claimants, Homelife, Checroune and 148. The payment by the Claimants of $1.2 million was made to Checroune pursuant to the June 22 Agreement. If there is an enrichment, it is to Checroune personally. Neither Homelife nor 148 were parties to the contract pursuant to which the Claimants paid Checroune the $1.2 million.
61The Claimants submit that they have been deprived of the funds they paid in good faith in furtherance of their intention to acquire 100% of the shares of 148, the security they relied upon in the form of the Amended Trust and any benefits agreed upon in the June 22 Agreement. Again, if there is a deprivation it is at the hands of Checroune personally and not 148. The Claimants’ alleged deprivation does not correspond to 148’s alleged enrichment.
62Finally, the Claimants argue that there is no justification at law for 148 to retain “these benefits”. For reasons noted above, however, it cannot be said that 148 was enriched as a non-party to the June 22 Agreement.
3. If the Claimants each have trust claims with respect to the Sale Proceeds, what priority, if any, should be afforded to those trust claims?
63I have concluded that the Claimants do not have trust claims with respect to the sale proceeds. I will nonetheless analyze the issue of priority, in case I am incorrect in this conclusion.
64The Claimants argue that if it is found that the Amended Trust grants them a proprietary interest, they are entitled to 20% of the sale proceeds, excluding all amounts paid under the Second Mortgage and any amounts paid to 148 and its counsel under the Proposal.
65148 argues that if it is found that the Claimants are beneficiaries in accordance with the Amended Trust, 148’s liabilities in respect of the Property are properly deducted from the sale proceeds before any residual benefit is paid to the Claimants or Checroune.
66I agree with 148. The 2005 Trust Declaration provides that 148 holds legal title to the Property as bare trustee for Checroune, who holds the entire beneficial interest in the Property. It further states that Checroune as beneficiary shall fully indemnify 148 as trustee from all liabilities, obligations, claims, charges, encumbrances and responsibilities, as well as all costs and expenses in connection with the Property including legal expenses. These terms were not altered in the Amended Trust. The terms of the trust itself are such that the Claimants do not have a right to the sale proceeds until 148’s obligations are otherwise satisfied.
67This is consistent with the nature of a beneficiary’s rights to the trust property. The beneficiary has no rights over the trust property, only rights over the trustee’s actions with regard to the trust property. The trustee is the legal owner of the trust property, and has the rights necessary to direct trust assets to pay trust creditors. A trustee further has a right to reimburse himself or herself out of trust assets. For that purpose, trustees have priority as against beneficiaries in the trust property: Lionel Smith, “Trust and Patrimony”, (2009) 28 ETPJ, 332.
68Where a trust directs that the trustee should make certain payments to a beneficiary, the beneficiary usually receives that benefit subject to deductions for the expenses of the trust property. This issue commonly arises in cases where there is a dispute between successive beneficiaries about from where trust expenses should be deducted. If a beneficiary is entitled to the income produced by trust capital for life, for example, they usually receive that income subject to deduction for ordinary, recurring expenses such as repairs or property taxes. Major occasional improvements or expenditures are usually paid out of the trust capital, which may be subject to the beneficial interest of a different beneficiary. In all cases, it is always open to the settlor to dictate how the trust expenses are to be paid: Waters’ Law of Trusts in Canada at 1028.
69If the Claimants are beneficiaries under the Amended Trust therefore, the nature of the Claimants’ rights are such that 148’s liabilities are deducted from the sale proceeds before any residual benefit is paid to the Claimants or Checroune. To do otherwise would be to ignore the express language of the Amended Trust and grant a priority contrary to that recognized in law.
4. Do the Claimants have an unsecured claim for damages against 148 with respect to the breaches alleged in the Litigation Claim?
70As shareholders of 148, the Claimants are permitted to apply for a court order under the oppression remedy provisions of the Business Corporations Act (Ontario), R.S.O. 1990, c. B. 16, s.248 (the “OBCA”). The oppression remedy provisions of the OBCA state that where a court is satisfied that the business or affairs of the corporation have been carried on or conducted in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of a shareholder, the court may make an order to rectify the matters complained of (s.248(2)).
71The Litigation Claim is based on the allegations as set out in the Fresh as Amended Statement of Claim dated November 14, 2016. In that Claim, the Claimants seek a declaration of oppressive conduct or damages for oppressive conduct as against Checroune personally, not 148. The Claimants plead therein that 148 was an agent for Checroune and that Checroune is personally liable for the actions of 148.
72The allegations of improper conduct before the Court are similarly restricted to allegations about Checroune’s actions. Ahmadi states (and Checroune denies) that Checroune turned off the lights and the elevators in the building at the Property and that he harassed subtenants.
73The onus is on the complainant pleading oppressive conduct to identify the expectation that he or she claims has been breached by the conduct in question and to establish that such expectations are reasonable: BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 S.C.R. 460 at para. 70.
74The Claimants have not provided any evidence in terms of their reasonable expectations. Ahmadi states that Checroune never involved the Claimants in the management of 148, never invited them to a shareholders’ meeting and kept them in the dark about 148’s operations and finances. She did not state that this amounted to a breach of a reasonable expectation.
75Practically speaking, there were only two shareholders of 148. It defies commercial reality that a shareholders’ meeting would be called, particularly as the Claimants did not request a meeting and the parties spoke daily about the business of 148. Contrary to Ahmadi’s evidence, Checroune testified that he provided the Claimants with financial information about 148 and access to information in general.
76The Claimants argue that the June 22 Agreement created reasonable expectations that they would gain the associated rights of a 20% shareholder. The Agreement clearly states, however, that until the Claimants became 100% shareholders of 148, they could not manage the business, retain profits from the business, or mortgage or sell the business.
77In my view, therefore, the Claimants have failed to demonstrate that 148 engaged in oppressive conduct or breached their reasonable expectations.
Damages
78For the purpose of damages, the Claimants argue that they reasonably expected that they would become the owners of the Property. It is appropriate, they submit, to therefore award them damages in the amount of $4 million, being the difference between the price that they proposed to pay under the June 22 Agreement and the price the Property ultimately sold for under the Proposal.
79The Claimants have failed to consistently state their reasonable expectations. They have failed to explain how this remedy is connected to their reasonable expectations pursuant to the June 22 Agreement or the alleged oppressive conduct of 148. The Claimants’ damages would only be based on the difference between the price in their agreement and the price the Property ultimately sold for if the agreement had been for the purchase of the Property. There is no evidence of this. In fact, the Claimants concluded an agreement to purchase 100% of Checroune’s shares in 148, not the Property. If oppressive conduct was found, which it was not, damages would appropriately flow from the failed June 22 Agreement, and would reflect the impact of the oppressive conduct on the price of 148’s shares.
Disposition
80It is for these reasons the appeal is dismissed.
81The parties are encouraged to agree on an appropriate costs award. If unable to do so, I will receive submissions of not more than three pages in writing. 148 shall submit their submissions within 30 days. The Claimants shall submit their submissions in response within 20 days thereafter. A Reply, if any, shall be submitted within 10 days thereafter.
V.R. Chiappetta J.
Released: January 24, 2019
COURT FILE NO.: 31-2303814
ESTATE FILE NO.: 31-2303814
DATE: 20190124
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
JAMSHID HUSSAINI AND NEELOFAR AHMADI
Appellants
– and –
CROWE SOBERMAN INC., TRUSTEE ACTING IN THE PROPOSAL OF 1482241 ONTARIO LIMITED (“148”)
Respondent
REASONS FOR JUDGMENT
V.R. Chiappetta J.