Court File and Parties

COURT FILE NO.: CV-18-590996-00CL DATE: 20200416 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

1839392 Ontario Limited Applicant – and – 1839314 Ontario Inc. and Pace Developments Inc. Respondents

Counsel: John Adair, for the Applicant Patrick Martin, for the Pace Developments Inc. M. Kestenberg appearing for the non-party Brattys LLP D. Bourassa appearing for the non-party MarshallZehr G. Phoenix counsel to the Inspector, Fuller Landau LLP

HEARD: April 2, 2020

C. Gilmore, J.

reasons on motion

Overview

[1] Due to circumstances related to COVID-19 restrictions, this matter was heard by way of a virtual hearing on “Zoom.” All counsel and the court appointed Inspector, Mr. Erlich, were present. Counsel for the Applicant, Mr. Adair, was the “host” of the hearing and recorded it at my request. Mr. Adair has undertaken to send me the recording on a USB stick which in turn will be placed in the file in order to satisfy the “open court” principle. While not an ideal solution, it is the best possible one in these difficult times.

[2] There are two motions before the court. The Applicant’s motion for an interim order for a Mareva injunction prohibiting the Respondents from transferring, pledging, dissipating or dealing with their assets in any way to the extent of $3.2M. In addition to the Respondents in this proceeding, the Applicant seeks to have the injunction enforced against seven other individuals and corporations who are not parties to this Application including Dino Sciavilla, Yvonne Sciavilla, Pace Group Investments Inc., Great Eldin Investments Ltd., 206261 Ontario Inc., 2462357 Ontario Inc. and 824503 Ontario Inc. (collectively “the Mareva Respondents). The Applicant also seeks costs of this application and all motions to date.

[3] Relief is sought against the Mareva Respondents because of their alleged connection to the impugned transactions in this matter. Specifically, Mr. Dino Sciavilla is the principal of Pace Developments Inc. (“PDI”). Mrs. Yvonne Sciavilla is Mr. Dino Sciavilla’s wife. Great Eldin Investments Ltd. has the same corporate address as PDI. Mr. Sciavilla is the President of 206261 Ontario Inc. and 2462357 Ontario Inc. which have the same corporate address as PDI and Great Eldin. Mrs. Sciavilla is a Director of 824503 Ontario Inc. The corporate address for 824503 is the same as the Sciavilla home address.

[4] The Respondents’ motion seeks an order requiring Brattys LLP to pay occupancy fees it has collected in the amount of $140,704.38 to PDI. Should the Applicant not be successful in its claim for an injunction, it has no response to the request for payment of the occupancy fees.

[5] The Applicant 1839392 Ontario Limited (“183”) is in the business of developing and building real estate projects. The Respondent PDI is also engaged in the business of developing and building real estate projects. Mr. Dino Sciavilla (“Mr. Sciavilla”) is the principal of PDI. 183 and PDI were two of three joint venturers in a real estate project known as The Mark. The Mark consists of a 48-unit townhome phase that was completed in 2014 and a 220 unit 16-storey high-rise condominium phase which is essentially complete and generated revenue in excess of $60M. The Mark project is located in Markham, Ontario.

[6] The third joint venturer is Fortress Wismer 3-2011 Ltd. (“Fortress”). Fortress is in the business of real estate development and financing. Fortress is not a party to this proceeding. It was given notice of the Application but has chosen not to participate.

[7] The Respondent 1839314 Ontario Inc. (referred to as “The Mark”) is a corporation incorporated by the three joint venturers as a bare trustee for The Mark project. 183 is a 30% shareholder in The Mark. PDI and Fortress each have a 35% interest in The Mark. Brattys LLP is the real estate solicitor for The Mark in relation to the project.

[8] PDI managed the project through its principal, Mr. Sciavilla, and oversaw day to day operations. Fortress’ main role in the joint venture was to arrange financing. 183 provided $2.2M in equity financing in exchange for receiving 30% of the shares of The Mark.

The Parties’ Positions on the Facts

The Co-Owners Agreement and Alleged Breaches

[9] 183, PDI and Fortress executed a Co-Owners Agreement dated February 15, 2011 (“the Agreement”). The Agreement appoints PDI as the Property Manager responsible for the day-to-day operations of the project?. The Agreement also required that the parties enter into a written Property Management Agreement with PDI. This was never done, and the parties bear equal responsibility for this.

[10] The Agreement requires that a Management Committee consisting of two members each from PDI, 183 and Fortress meet regularly to oversee PDI’s work as Property Manager. Any major decisions relating to the project were to be made by way of unanimous vote of all three parties. Section 2.02 of the Agreement sets out a lengthy list of items which qualify as major decisions including the payment of funds from the revenue of the project or entering into contracts with non arms-length parties.

[11] The Agreement required that the co-owners keep proper books of account for the project at the office of the Property Manager which were to be available for inspection by the co-owners at any time. The Agreement also required the Management Committee to approve the selection of an accountant for the project, required the accountant to prepare annual financial statements on a review engagement basis, and required the accountant to prepare annual statements of cash surplus.

[12] Where operating revenues were not sufficient to fund the project, the Agreement required that co-owners contribute their proportionate share of required funds to meet operating deficits. A failure to contribute when required is considered an Act of Default (section 5.01) and other co-owners were entitled to contribute the proportionate share of the defaulting co-owner which would be treated as a demand loan owing by the defaulting co-owner with interest at 1% above prime and payable 30 days after any demand. During any period of default, a defaulting co-owner was not permitted to participate in Management Committee meetings.

[13] While PDI did institute a Management Committee, the Committee failed and has not met regularly since 2013. PDI says that this is because of a breakdown in the relationship between 183 and Fortress. 183 could have called a Management Committee meeting anytime but never did. 183 says this was because of a breakdown in the relationship of all of the co-owners.

[14] 183 had no experience acting as an equity investor nor any experience in managing projects. It relied on Mr. Sciavella and PDI to provide the management, operational and financial reporting expertise necessary for such a large project.

[15] 183 alleges that PDI has breached the Agreement by its failure to abide by the financial reporting requirements. Specifically, 183 alleges that PDI has failed to provide financial statements to a review engagement standard since 2011. 183 submits it has been left in the dark as to profits from the townhouse portion of the project and never received an annual statement of cash surplus as required by the Agreement.

[16] It is for this reason that 183 has not answered cash calls, taking the position that it will not pay more into the project without a better understanding of the financial landscape. 183 also alleges that when it pressed PDI for information in 2015 it was met with an aggressive response by Mr. Sciavilla who threatened to withhold further information and “keep 183 in the dark” if it did not answer cash calls.

[17] By early 2018, 183 had significant concerns related to PDI’s conduct and the finances of the project and specifically what had been done with the profit generated from the sale of the townhomes in 2013 and 2014. In addition, 183 had concerns about General Ledgers (“GLs”) with overlapping time periods (some of which related to other projects), and payment being made to related parties. Since PDI would not respond to its concerns, 183 commenced this litigation in January 2018.

[18] PDI has a different view of the facts related to the Agreement. According to PDI it had financial statements prepared for the project, but not to a review engagement standard. At 183’s request it hired HS & Partners to prepare the financial statements. However, neither the cost consultant hired by the first mortgagee nor Fortress approved the cost for HS & Partners, so the statements were not finalized.

[19] Subsequently, Valente Pacitti LLP was hired to prepare the financial statements to a review engagement standard. However, the cost was not approved by the cost consultant. That is, the lender did not approve the cost of the accountant coming out of lender advances. PDI submits that it offered to pay its share of the accountant’s fees (35%) but 183 refused, so again the financial statement preparation was stalled.

[20] PDI points out that that the two principal lenders on the project, the first mortgagee Firm Capital, and the second mortgagee MarshallZehr (“the lenders”) supervised the project funding through their cost consultant CB Ross Partners (“CB Ross”). Whenever a payment was required to be made, CB Ross had to make a recommendation for a distribution of funds which then had to be authorized by the project guarantor, Westmount Guarantee. In this way, every payment made by PDI was supervised by the lenders.

[21] PDI’s position is that financial statements were prepared and forwarded to 183 each year (albeit not to a review engagement standard) and the CB Ross monthly reports were also forwarded to 183. The relationship between the parties broke down during the high-rise phase of the project when it became clear the project was underfunded and that capital was needed from the co-owners. Counsel for PDI took the court through CB Ross reports between April 2016 and November 2017 where those reports make it clear that more equity was requested in each of those eight months in order to make the budget.

[22] PDI submits it made cash calls totalling $1.66M by April 2016 but neither Fortress nor 183 met the calls. As such, PDI and the Mareva Respondents met the cash calls to keep the project afloat. As well, PDI and the Mareva Respondents are guarantors of the entire amount of the first and second place mortgages. By injecting cash into the project, they are simply trying to minimize their losses. The first mortgage has now been paid out but over $13M remains owing to the second mortgagee, MarshallZehr, and another $6.6M is owed to subsequent mortgagees. About eight commercial units remain for sale but there is a concern given the current economic climate as to when those sales may occur and what losses may be suffered.

[23] PDI’s position is that since 183 failed to meet cash calls as required, it is a Defaulting Shareholder as defined by the Agreement and not entitled to participate further in the co-ownership. As such, it delivered to 183 a Notice of Default on January 22, 2018. 183’s position is that it is not a defaulting co-owner as PDI has breached the Agreement by failing to provide proper financial reporting.

The Distribution Order

[24] After 183 commenced this Application in January 2018, 183 and PDI negotiated and consented to the “Distribution Order” made by Justice Wilton-Seigel on May 28, 2018. That interim order required PDI to provide the financial reporting required under the Agreement and not to distribute any project funds except for agreed-upon purposes and with five days’ notice to 183 and PDI. The intent of the Order was to address 183’s concerns about the project’s ongoing finances and financial reporting requirements. Specifically, the Distribution Order provided that:

i. Pace (PDI) and 183 were to jointly instruct Brattys not to distribute any “revenue or other amounts” received in connection with the project other than for certain specified purposes (the “Permitted Distributions”), which included payments for project related expenses as approved and recommended by the cost consultant, payments to registered mortgage holders as required to deliver clear title to arm’s length third-party purchasers of condo units, payment of HST directly to CRA, and payment of Brattys’ own legal fees; ii. Brattys could not make any Permitted Distributions without first giving 183 five days’ written notice; and iii. An independent accountant would be appointed to prepare review engagement financial statements for the project for the years 2011 to 2017.

[25] 183 alleges that PDI breached the Distribution Order when Mr. Sciavilla directed Brattys to release at least $3M to PDI between July and December 2018. 183 alleges that such a distribution was made on instructions from PDI and in breach of the Distribution Order. 183 does not allege any improper conduct on the part of Brattys LLP.

[26] In November 2018, 183 was aware that revenue in excess of $60M would be received for the condominium units and followed up with Brattys. In December 2018 counsel for Brattys, Mr. Kestenberg, wrote to 183 advising that there may have been instances of non-compliance with the Distribution Order by Brattys and that $7M had mistakenly been released to The Mark without notice to 183. Mr. Martin, counsel for PDI, disagreed and advised counsel for 183 that in fact only $3M had been released to the Mark and that all of the expenses were proper and complied with the Distribution Order.

[27] 183’s position is that PDI failed to provide documentation to support its position that the payments complied with Distribution Order (i.e. that the cost consultant had approved the use of the funds).

[28] PDI’s position is that the funds were not requested from Brattys by either PDI or The Mark. The requests, in fact, came from CB Ross (the cost consultant) employed by the first mortgagee and approved by the project surety Westmount Guarantee. It was Westmount that contacted Brattys and requested the funds to pay anticipated construction costs including trades. PDI had no knowledge of any alleged breach until it was brought to its attention by 183.

[29] PDI denies that 183 received no documentation regarding the impugned payments. 183’s own material contains copies of the authorizations from Westmount Guarantee for each of the payments which in turn refers to those payments being authorized by CB Ross. 183 has received an open invitation to attend and review the lengthy cost consultant reports at PDI’s office.

[30] The dispute about the funds released by Brattys lead to 183 bringing a further motion to request a sample audit of 100 of the 342 distributions by PDI from July to December 2018. The consent order (“the Audit Order”) dated February 21, 2019 appointed MNP to conduct the audit. The report was delivered on May 29, 2019. MNP concluded that PDI made several payments that were not proper project expenses.

[31] 183 gave five examples of improperly paid project expenses identified by MNP:

a. Payment of $47,750 by The Mark to PDI in July 2018 as a portion of its equity contribution. b. Payment of $2,000 by The Mark in October 2018 to 2309918 Ontario Inc. (a company related to PDI) to cover a bank overdraft. c. Payment of $19,000 by The Mark in October 2018 to 2309918 Ontario Inc. for which no invoice was provided. MNP was advised orally that these funds were for “repayment of a loan.” d. Payment of $100,000 by The Mark in October 2018 to Mapleview Developments Ltd. apparently for bridge financing for another PDI project. e. Payment of $85,000 by The Mark in October 2018 to 2309918 Ontario Inc. to pay down an intercompany loan balance.

[32] 183 submits that all of the above payments were made in clear breach of the Distribution Order.

[33] PDI disagrees. PDI’s position is that while the Distribution Order prohibits Brattys from making distributions other than as set out in the Order, it does not bind PDI. As set out above, all of the payments made by Brattys were made in accordance with the Distribution Order in accordance with the recommendations of CB Ross, the cost consultant hired by the first mortgagee. PDI’s submission was that the Mareva Respondents advanced $18M of their funds into the project to keep it afloat and there was no restriction on how that money was to be repaid.

Appointment of the Inspector

[34] Given the disputes about the alleged breach of the Distribution Order and the improperly paid project expenses identified by MNP, 183 brought a motion in June 2019 for the appointment of an Inspector pursuant to s.161 of the Ontario Business Corporations Act. Specifically, 183 alleged that in breaching the Distribution Order, PDI had misappropriated project funds. In support of its motion, 183 provided an affidavit from Mr. Bruno Lucente of MNP who deposed that PDI had obstructed MNP’s efforts and failed to provide requested information.

[35] PDI does not agree that MNP’s efforts were frustrated in any way. Mr. Sciavilla swore in his affidavit of January 7, 2019 that PDI “has answered all questions and given all requested documentation as quickly as possible and will continue to do so until MNP has completed its review engagement.”

[36] PDI consented to the appointment of an Inspector. The order appointing Fuller Landau LLP was made on July 16, 2019. Part of the Inspector’s mandate was to investigate and report on related-party payments. The Inspector’s First Report was delivered on November 1, 2019. 183 highlighted several of the Inspector’s findings in that report as follows:

a. The Mark made several equity repayments to PDI and Fortress. b. The Mark made 262 separate payments to PDI-related entities and provided documentation for only 85 of those payments. The total value of the 262 payments was $13.5M. The Inspector conceded that PDI also transferred $9.4M into The Mark leaving a shortfall of $4.1M. Enquiries with respect to related-party payments largely went unanswered. c. PDI conducted project accounting through three separate general ledgers (“GLs”) including PDI’s own GL instead of using The Mark’s GL. d. PDI was unable to provide the Inspector with bank statements for two of the four bank accounts maintained by The Mark. e. The Mark made 45 payments to PDI during the first phase of the project but only one of those payments was recorded in PDI’s GL. f. PDI’s GL showed 209 transactions for which the Inspector requested documentation. He received nothing.

[37] 183’s position is that many of the payments highlighted in the First Report were in breach of either the Agreement or the Distribution Order or both. PDI was simply using The Mark as a bank account without following court orders or required procedures.

[38] In anticipation of the originally scheduled date for this motion (February 11, 2020), PDI delivered an affidavit setting out that it had provided additional information to the Inspector. The motion was adjourned to allow the Inspector to review the additional material.

[39] The Inspector delivered a second report on March 16, 2020. The Inspector was not completely satisfied with the additional information provided by PDI noting that it had not provided explanations for hundreds of related-party payments. The Inspector concluded as follows in his second report:

21. Based on the Inspector’s investigation to date, including its review of the Post-First Report Information, the deficiencies identified in paragraph 49 of the First Report continue to exist. Accordingly, the outstanding information continues to impair the Inspector’s ability to complete its mandate, beyond what it has been able to review, analyze and report on in the First Report and this Second Report.

[40] PDI responds with the following:

a. Two of the GL accounts noted were opened in error and never used and no bank accounts opened for them; b. All banking documents requested by the Inspector were provided other than cancelled cheques for one CIBC account which the bank was unable to provide, however, bank statements were provided. c. The Inspector simply referred to “Selected Parties” who received payments. The Inspector attempted to exclude arm’s length transactions from his analysis but it is clear that not all of the Selected Parties are related parties. The First Report refers to the Selected Parties having made $9.1M in cash deposits as recorded in PDI’s GL for the First Project. The Inspector also refers to $9.4M in cash deposits for the Second Project as recorded in the GL. PDI’s position is therefore that the Mareva Respondents deposited $18.5M into the project and withdrew $21.5M as per Appendices J, K and L to the First Report. That leaves a deficit of $3M. d. PDI points out that the Inspector’s First Report simply refers to payments to Selected Parties. One of those parties was Empire Communities (“Empire”), the construction manager for the high rise. 183 concedes that Empire is not a related party. PDI provided invoices showing payments to Empire of $3,762,613. If those payments are removed from the payments made to Selected Parties as set out in the First Report, the Mareva Respondents paid $764,002.33 more into the project than they were paid from it. PDI goes further and argues that if one considers only the payments made to the Mareva Respondents, they deposited $9,492,915.92 more than was paid to them.

[41] PDI relies on an email dated March 24, 2020 from the Inspector (Mr. Erlich) to Mr. Frank Presta, CFO of The Mark. Mr. Erlich agreed that if Empire was removed from the calculation of transactions with Selected Parties, PDI’s calculations would be correct. However, he goes on to say that he was not asked to analyze the net cash position of each Selected Party nor did he know whether The Mark received funds from Empire. This was not part of the Inspector’s mandate. Thus, although the numbers on their face appear correct, a full analysis was not done.

[42] The Inspector and his counsel were present at the motion. Counsel for the Inspector submitted that the Inspector was not taking a position on this motion other than to raise two points:

a. The reports should not be taken to have drawn any conclusions about the Selected Parties. The Mareva Respondents are only a portion of those parties. b. Some confusion arises with respect to the affidavit of Mr. Presta who deposed that two of the operating accounts mentioned in the reports did not exist. In fact, according to the Inspector the GLs show hundreds of transactions bearing those account numbers. PDI advised they could not produce those records given the age of the accounts. As well, there may be further confusion because there were accounts with similar account numbers that were only used as clearing accounts.

Allegations Related to Mr. Sciavilla

[43] 183 submits that Mr. Sciavilla’s credibility is in issue because he has lied in sworn evidence about his financial dealings with the project. In his affidavit sworn May 3, 2018, Mr. Sciavilla deposed that PDI was not getting compensated for its work on the condo phase of the project and that the only fee that PDI had ever charged was $10,000 per unit for the townhomes.

[44] 183 submits this is untrue because the First Inspector’s Report outlines payment of over $1.3M to PDI. (one of the Mareva Respondents) which included $316,000 in management fees, loan repayments, salary recoveries and development consulting fees.

[45] PDI denies any wrongdoing. It submits that since the Mareva Respondents paid over $18.5M into the project, there was nothing wrong with them repaying some of those advances. Further, PDI has done Tarion deficiency work since occupation of the condo units began on June 27, 2018. PDI pays the employees doing that work and the project refunds the salary to PDI. There is nothing improper in any of this.

Occupancy Fees

[46] The 220 units of the high-rise condominium were scheduled to close on August 27, 2019. However, the units had all been occupied prior to closing. The purchasers provided 12 post-dated cheques for occupancy, but the closing date was more than 12 months after occupancy. Brattys decided to handle the adjustment as a deficit on closing rather than trying to collect more cheques from all of the purchasers.

[47] Prior to closing, the property manager, First Service Residential, had not been paid and was owed $211,668.16. As such, they refused to provide the required Clearance Certificate for closing. PDI paid First Service’s bill to ensure that closing could occur. Brattys collected $140,704.38 in occupancy fees as adjustments on closing. The order of Penny, J. dated August 23, 2019 required that Brattys hold back this amount and that a joint direction was required to release the funds. 183 has refused to allow release of the funds. PDI seeks release of the funds to reimburse part of the cost to pay First Service.

The Affidavit of Cecil Hayes

[48] Mr. Cecil Hayes, the COO of MarshallZehr Group Inc. (“MarshallZehr”) provided an affidavit sworn March 31, 2020. MarshallZehr is one of the project’s primary lenders. Their mortgage is now in first place after Firm Capital was paid out.

[49] Counsel for 183 asks this court not to rely on the MarshallZehr affidavit. It was provided the day before this motion was heard, leaving no time to cross-examine. MarshallZehr’s counsel was present on February 11, 2020 when this matter was adjourned and has had plenty of time to provide their position. Providing an affidavit less than 48 hours before the motion is unacceptable in the circumstances.

[50] Mr. Bourassa as counsel for MarshallZehr submitted that there is no reason for the affidavit not to be considered. His client never received materials for this matter until 10 days prior to the motion. As for the February 11, 2020 appearance, the intent of the adjournment was to allow the Inspector to review the additional documentation from PDI and to produce a second report. MarshallZehr did not receive motion material until very recently.

[51] MarshallZehr is the last standing secured party in this project and may suffer a deficiency of between $6M to $7M. It will likely have to look to the guarantees provided by the Mareva Respondents to make good on the deficiency.

[52] Mr. Hayes takes the position that MarshallZehr shares 183’s concerns about the financial management of the project but differs as to the appropriate remedy. 183 is suing to protect its equity investment but there are no profits to distribute. Further, any order for damages granted to 183 would be subordinate to MarshallZehr as a secured lender. Granting an injunction in favour of 183 would create a risk for this project and others with which MarshallZehr is involved.

The Test for a Mareva Injunction

[53] Counsel do not dispute that the test for a Mareva injunction is clearly set out in Rana v. Malik, 2014 ONSC 701 at para 63 citing Chitel v. Rothbart (1982), 39 O.R. (2d) (Ont. C.A.) at 513 as follows:

A Mareva injunction may be granted if the following criteria are met:

i) The plaintiff must establish it has a strong prima facie case on the merits by making full and frank disclosure of all material facts within his knowledge including providing particulars of the claim against the defendant, the grounds of his claim and the amount and fairly stating the points made against him by the defendant. ii) The plaintiff should give some grounds for believing the defendant has assets here. As much precision as possible regarding those assets is required so that the injunction can be directed towards a specific asset. iii) The plaintiff should give some grounds for believing that there is a risk of the assets being removed before the judgment or award is satisfied. The material must persuade the court that the defendant is removing or there is a real risk that he is about to remove his assets from the jurisdiction to avoid a judgment or that the defendant is otherwise disposing of his assets, out of the ordinary course of business, so as to render a future tracing impossible or remote. iv) The plaintiff must satisfy the court that it will suffer irreparable harm if the relief is not granted. v) The plaintiff must show in all circumstances that the balance of convenience favours the granting of the injunction pending trial of the issues between the parties. vi) The plaintiff must give an undertaking as to damages.

Full and Frank Disclosure

[54] PDI complains that 183 has not made full and frank disclosure or fairly stated the case against it in that it:

a. Failed to make cash calls when required; b. Failed to disclose that the Mareva Respondents have deposited more money into the project than have been refunded. c. Falsely stated that Mr. Sciavilla swore a false affidavit and that PDI breached the Distribution Order.

[55] I agree with 183 that the full and frank disclosure requirement does not apply in the same manner to a Mareva motion on notice. The Respondents have had ample time to file material and make their case. The issues to focus on in this motion are whether 183 has a strong prima facie case, whether there is a real risk of dissipation of assets by the Respondents and whether 183 will suffer irreparable harm if the motion is not granted.

Does 183 have a Strong Prima Facie Case?

[56] To summarize 183’s position, it relies on the following in support of its position that it has proven a strong prima facie case:

a. PDI has failed to provide proper financial reporting as required by the Agreement including proper financial statements and cash surplus statements. The failure to provide proper reporting was deliberate as evidenced by the obfuscation created when PDI used three separate GLs including its own; b. PDI failed to provide documentary disclosure when requested by both MNP and Fuller Landau. Disclosure remains outstanding; c. PDI breached the Distribution Order which prohibited any related-party distributions. PDI’s submissions that the distributions between July and December 2018 were only technical breaches because the payments were for proper project expenses, should be disregarded. Payments were made to The Mark and 2309918 were in clear defiance of the Distribution Order. d. The Inspector’s Report highlights related-party payments and missing documentation which led the Inspector to conclude that PDI provided either contradictory or no explanations for hundreds of related-party transactions. e. Mr. Sciavilla lied in his May 3, 2018 affidavit when he stated that PDI was not receiving compensation for its work on the condo phase of the project and only $10,000 per unit for the townhomes. The First Inspector’s Report sets out payments totaling over $1.3M to PDI (a related party) for management fees, loan repayments, salary recovery and development consulting fees. f. The Mareva Respondents have received over $100,000 of project funds and provided no adequate explanation for those distributions. They have misappropriated and converted funds, conspired and unjustly enriched themselves.

[57] PDI takes a very different view and submits that 183 has failed to demonstrate that it has a strong prima facie case. I agree with PDI that 183 has failed to meet this required threshold.

[58] On the issue of breaches of the Agreement, it is clear that no party enforced the requirement of a Management Agreement thus leaving Mr. Sciavella’s role and responsibilities somewhat fluid, to say the least. I accept that PDI did attempt to obtain financial statements at a review engagement standard but was blocked by the cost consultant’s failure to approve the cost and then Fortress and 183 refusing to pay their share.

[59] It is also clear that there were significant disagreements about the project’s financial management. The lender, MarshallZehr, confirms that this is the case. However, this cannot all be laid at the feet of PDI when both Fortress and 183 had remedies under the Agreement which they could have pursued, such as calling Management meetings or insisting on a Management Agreement.

[60] With respect to the Distribution Order, this order was made at a time when Firm Equity was still the first-place lender. Both a cost consultant and a guarantor were in place to approve each distribution. I accept that PDI had little to do with this and even if they had asked Brattys to make a payment, no payment could have been made without the required approvals. The court can only draw the conclusion that if payments were approved by CB Ross and the guarantor (and therefore the lender) that they were appropriate project costs. As well, I accept Mr. Martin’s submission that there was no evidence of outstanding claims by trades or suppliers. It appears they were properly paid from those funds.

[61] The most serious allegation made by 183 is the misappropriation of funds by the Mareva Respondents from The Mark. There is evidence that, in order to minimize their own financial losses, the Mareva Respondents paid money into the project to keep it afloat. I accept that the 2018 cost consultant’s reports requested large capital payments from the joint venturers. Those requests were ignored by both Fortress and 183. There is no dispute that 183 has not made any further investment into the project beyond their initial one. There is also no dispute that the Mareva Respondents have given guarantees to MarshallZehr which MarshallZehr intends to act upon given the deficit status of the project. It makes sense that the Mareva Respondents would want to minimize their exposure by paying money into the project. In short, why would the Respondents attempt to convert or steal money which they will be obliged to repay in any event?

[62] Based on these facts, all of the parties bear some responsibility for what are likely to be future losses all around. They did not insist on a Management Agreement in order to clarify and crystallize PDI’s responsibilities as Project Manager. Fortress and 183 would not contribute to the cost of an accountant to prepare financial statement to a review engagement standard. The parties stopped attending Management Committee meetings or even holding them. Fortress and 183 did not respond to cash calls in the cost consultant’s reports. While it is clear that funds were paid to related parties, there is evidence that at least some of those payments were repayments of funds advanced by the Mareva Respondents.

Risk of Dissipation of Assets

[63] 183 argues that the millions of dollars in payments to related parties by The Mark (as caused by PDI) is evidence of an intention to dissipate assets and that the injunction is required to ensure this does not continue.

[64] I do not agree. This is not a case in which there is a concern that the Respondents will remove assets out of the jurisdiction. The Mareva Respondents are property developers whose assets are real property. In Sibley & Associates LP v. Ross, 2011 ONSC 2951, 2011 CarswellOnt 4671, the court determined that there was a risk of dissipation of assets where the assets in question were liquid and easily transferrable. That is not the case here. The assets owned by the Mareva Respondents are not liquid. They are transferrable but encumbered by secured lenders.

[65] I do not find that these Respondents are attempting to hide their assets or disposing of them outside of the normal course of business. They simply want to finish the project and repay their debts. It is likely that the losses on this project will mean that the Mareva Respondents will become personally liable for some of those losses. In short, MarshallZehr and the Respondents stand to lose far more than 183 as a result of this Joint Venture.

Irreparable Harm

[66] 183 has not really clarified what irreparable harm it would suffer other than an alleged dissipation of assets as described above. 183, like its joint venture partners, stands to potentially lose money on this project. That is, it appears possible that 183 will not receive a return on its capital investment. It is therefore in no different position than the other investors and lenders on this project.

Undertaking as to Damages

[67] The Respondents raised a number of issues with respect to what it alleges is a meaningless undertaking which lacks substance. 183 has admitted that it has no assets other than the investment in this project. By way of undertaking as to damages, it has provided an undertaking from PANJ Holdings Inc., a non-party with assets totalling $500,000. 183 submits it is a beneficial owner of PANJ’s real estate holdings.

[68] The Respondents take the position that this alone is sufficient to deny 183’s motion since the undertaking as to damages is critical and must be an undertaking with value.

[69] I agree. The undertaking as to damages is disproportionate to the serious and extensive allegations made by 183. In these circumstances, an undertaking backed by cash or a bond would be more appropriate.

Balance of Convenience

[70] 183 must also show that the harm it will suffer if the injunction is not granted exceeds the harm that would be suffered by the Respondents if it is.

[71] The difficulty in this case is that there is evidence that with or without an injunction, 183 is unlikely to recoup its investment. With the project in a deficit and MarshallZehr as the secured first place lender, any revenue coming out of the project must be paid to MarshallZehr first. Both 183 and Fortress stand to lose their equity investment. As such, the balance of convenience does not favour the granting of an injunction.

The Mareva Respondents’ Motion

[72] Given that the motion for an injunction has failed, the Mareva Respondents should have the requested funds released from Brattys LLP to reimburse them, at least in part, for funds paid to obtain the required Clearance Certificate on closing. 183 has made no response to this motion.

Orders and Costs

[73] The Applicant’s motion for an interim Mareva injunction is dismissed.

[74] PDI and The Mark’s motion for release of $140,704.38 from Brattys LLP is allowed.

[75] The parties may make written submissions on costs to be submitted to me electronically starting with the Respondents. Submissions are due on a seven-day turnaround commencing seven days from the date of release of these Reasons. Submissions are to be no longer than two pages, double-spaced, exclusive of any Bill of Costs, Offers to Settle or case law.

[76] I am not clear as to whether MarshallZehr is seeking costs. If so, their costs submissions are due on the same schedule as those of the Respondent.

[77] If no costs submissions are received within 35 days of the date of these Reasons, costs will be deemed to be settled.

C. Gilmore, J.

Released: April 16, 2020