COURT FILE NO.: CV-17-131614
DATE: 20201019
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
RAKI HOLDINGS INC.
Applicant
– and –
LIONHEART ENTERPRISES INC. and 583753 ONTARIO INC.
Respondents
N. Wilson, for the Applicant
J. Wortzman and K. Dhirani, for the Respondents
HEARD: September 29, 2020
RULING
MULLIGAN J.:
[1] The parties returned to this court for a virtual hearing to seek a determination as to which party is entitled to funds remaining in trust after a prior judicial hearing concerning contractual issues between them. Raki Holdings Inc. (Raki) is a land development company that purchased two large parcels from the Respondents, Lionheart Enterprises Inc. and 583753 Ontario Inc. (Lionheart). The contractual issue between the parties was the subject of a motion determined in favour of Raki (see: Raki Holdings Inc. v. Lionheart Enterprises Inc, 2018 ONSC 6421, affirmed 2019 ONCA 786).
[2] It is not necessary to repeat the details as set out in my previous Ruling, but a brief overview will assist in the discussion that follows.
April 2, 2012
[3] The parties entered into two agreements of purchase and sale, whereby Raki agreed to purchase a parcel known as Raki North for $41,930,000. It acquired a second parcel known as Raki South for $20,741,000. These transactions closed on April 2, 2012. The purchase price was calculated at $700,000 per acre of net developmental acreage (NDA); however, the developmental acreage was subject to determination at a later date, based on subdivision approval developments and surveyor’s measurements. More importantly, it depended on the interpretation of the NDA clause with respect to certain acreage within these lands known as Storm Water Management (SWM) ponds. The parties could not agree on whether the SWM ponds were included or excluded. This determination was the subject of the previous Ruling. It was resolved in Raki’s favour.
[4] As part of the original closing of the transaction on April 2, 2012, Raki entered into a mortgage-back on both properties with the Respondents for 75% of the purchase price. The term of each mortgage was for five years. The first two years were interest free and the final three years bore interest at 5.5% per annum. Both mortgages came due on April 2, 2017.
April 2, 2017
[5] The mortgages came due on April 2, 2017, but there was no tender of the mortgage amount, instead the parties entered into discussions and negotiations to try to finalize the number of acres falling into the NDA category. They were unable to agree.
[6] Then, between April 11, 2017 and November 6, 2017, the parties entered into negotiations which led to discharges of the mortgages on terms, by way of a settlement, after Raki indicated it would bring a motion to discharge the mortgages. There were two possible later outcomes negotiated, depending on the ultimate determination of the NDA clause interpretation. Discharges were obtained based on the Respondents’ interpretation of the NDA while the clause remained in dispute.
August 8, 2017
[7] Raki obtained a discharge of the Raki South mortgage by paying an undisputed amount and a disputed amount together with interest and security for costs on August 8, 2017. It was agreed that these disputed amounts would be held by the Respondents’ solicitor, in trust. The mortgage on this property having come due on April 2, 2017, notional interest continued to run until August 8, 2017 because Raki made no monthly payments. The notional amount was part of the additional payment by Raki and is part of the subject matter of this dispute.
November 6, 2017
[8] Raki obtained a discharge of the Raki North mortgage on November 6, 2017. It paid the undisputed amount together with a disputed amount, once again to the Respondents’ solicitor, in trust. The mortgage on this property also matured on April 2, 2017, but once again, no monthly payments were made by Raki. Instead the notional interest to November 6, 2017 formed part of the amount paid into trust to the Respondents’ solicitor and is also part of the subject matter of the dispute between the parties now.
[9] In total, Raki paid an additional $5,854,205 as disputed funds and interest to secure the two discharges. This sum included calculations for the SWM ponds, acreage and interest.
Litigation History
[10] The NDA issue was resolved by Judgment dated October 26, 2018, and thereafter affirmed on appeal on October 2, 2019. This enabled the parties to attempt to resolve the issue of the disputed funds, which totalled $5,854,205. The issue of the acreage for which the $700,000 per acre figure could be applied was substantially known to the parties.
November 28, 2019
[11] Based on the judicial determination of the NDA as affirmed by the Court of Appeal, it was clear the Raki had overpaid with respect to the holdback in trust. The entire additional payment was $5,854,205. On November 28, 2019, the Respondents released $4,364,735 to Raki and retained the balance.
May 11, 2020
[12] Raki commenced a Notice of Motion seeking a return of the funds in trust held by the Respondents’ solicitor on May 11, 2020.
July 6, 2020
[13] The Respondents released a further $500,000 to Raki on July 6, 2020, retaining in trust approximately $1,192,613, which was placed in a GIC.
The Disputed Funds in Trust
[14] Upon first receiving the disputed funds in August and November 2017, the vendors’ solicitor placed the amount into an interest bearing GIC. As of September 17, 2020, the GIC has earned interest of approximately $203,143.25 and continues to earn interest. Reflecting the low interest rates in today’s economy, the current GIC is earning interest at 0.55%.
The Position of the Parties
[15] Raki filed a Factum, together with the Affidavit of Michael Pozzebon, an authorized signing officer for Raki. Raki seeks an order that it is entitled to interest on the disputed funds paid into trust at the rate of 5.5%, matching the rate stipulated in the mortgage between the parties. Alternatively, it seeks a lower rate of interest, reflecting its own costs of borrowing. The undisputed amounts were not paid out to the Respondents until several months after maturity date. Raki seeks an order that the Respondents are not entitled to interest on the undisputed amounts between the maturity date and the payment several months later. Alternatively, Raki seeks an order that the Respondents are only entitled to interest to June 9, 2017, the date of its settlement offer, and thereafter the Respondents are only entitled to interest at the Courts of Justice Act, R.S.O. 1990, c. C.43 (CJA) rate.
[16] The Respondents filed a Factum and join issue with the submission of Raki as to how these funds should be distributed. The Respondents filed Affidavits from Maria Theresa Cezareo, solicitor for the Respondents’ law firm, together with the Affidavit of Victor Shields, a representative of the Respondents. The Respondents seek an order that they are entitled to interest at the rate of 5.5% on the undisputed amounts from the maturity date, April 2, 2017, until the actual payment dates several months later, together with compound interest on this amount. The Respondents concede that Raki is entitled to interest earned on the GICs from the date of the original payments to the Respondents’ solicitors.
[17] The parties submit that once these two overarching questions are answered, they are confident they can resolve the fine-line details with respect to the calculations and disbursement of the balance of these funds, subject to a further hearing, if necessary.
[18] The amount of funds still in dispute exceeds $1,000,000, but I remind myself that this is in the context of a transaction involving two Agreements of Purchase and Sale for over $60,000,000. The agreements contained a price adjustment clause requiring a calculation of the NDA. The parties disagreed on the interpretation of that clause. This issue was answered by judgment on October 28, 2018, but the release of funds was further delayed by almost a year until the Court of Appeal decision on October 2, 2019. Raki’s motion to determine the interpretation of that clause was successful, it is clear that they had to overpay disputed amounts to obtain the discharge of mortgages. The total overpayment was $5,854,205. Over two years later, on November 28, 2019, Raki received a return of $4,364,735. On July 6, 2020, it received further release of $500,000. The amount remaining in trust, approximately $1,192,000 plus interest, represents, in large part, a payment in trust of the interest on the undisputed amounts from the maturity date until the date of actual payment, together with a further deposit in trust of anticipated interest on these amounts for twelve months thereafter. It is clear that both parties seek judicial assistance as to the allocation of the funds remaining in trust.
Discussion
[19] The parties filed a joint book of authorities. In addition, Raki relies on ss. 128, 129 and 130 of the CJA. Section 130 of the CJA provides as follows:
30 (1) The court may, where it considers it just to do so, in respect of the whole or any part of the amount on which interest is payable under section 128 or 129,
(a) disallow interest under either section;
(b) allow interest at a rate higher or lower than that provided in either section;
(c) allow interest for a period other than that provided in either section.
(2) For the purpose of subsection (1), the court shall take into account,
(a) changes in market interest rates;
(b) the circumstances of the case;
(c) the fact that an advance payment was made;
(d) the circumstances of medical disclosure by the plaintiff;
(e) the amount claimed and the amount recovered in the proceeding;
(f) the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding; and
(g) any other relevant consideration. R.S.O. 1990, c. C.43, s. 130.
[20] Raki suggests that the provisions of the CJA and the discussions about various factors in the cases set out in the joint book of authorities can assist the court in making a just determination of the distribution of these funds. The Respondents suggest that ss. 128 and 129 of the CJA have no application because there was no monetary judgment and Raki did not bargain for interest with respect to the monies paid into trust. Both parties made reference to Bank of America Canada v. Mutual Trust Co., 2002 SCC 43, [2002] 2 S.C.R. 601 - perhaps the preeminent Supreme Court of Canada decision on pre and post judgment interest. In speaking for the court, Major J. considered the time value of money. As noted at paragraph 21:
The value of money decreases with the passage of time. A dollar today is worth more than the same dollar tomorrow. Three factors account for the depreciation of the value of money: (i) opportunity cost (ii) risk, and (iii) inflation.
[21] Major J. considered ss. 128 to 130 of the CJA and stated at para. 39:
Sections 128 and 129 CJA, therefore, contain interest rates and methods of calculation to serve for pre-judgment and post-judgment interest, respectively, in those cases for which there is no evidence of a more appropriate interest rate and/or method of calculation.
[22] In Zucchetti Rubinetteria S.P.A. v. Natphil Inc., 2011 ONSC 3845, Perell J. considered prejudgment interest and an appropriate rate. He noted at paragraph 6,
The relationship between the parties in the case at bar was a commercial relationship involving international trade and, in my opinion, a 7% interest rate of simple (not compound) interest is fair and just because it better reflects the commercial expectations of the parties. Regardless of the determination of the exchange rate, this interest rate is appropriate for the circumstances of the case at bar.
[23] In MDS Inc. v. Factory Mutual Insurance Company, 2020 ONSC 1924, J. Wilson J. considered the comments of Major J. in Bank of America Canada and noted at paragraph 692, “This case involves two successful business entities, with excellent counsel battling out the issues every inch of the way with the significant US$25,000,000.00 policy at stake.”
[24] Her Honour also considered Major J.’s comments in Bank of America Canada with respect to the time value of money. The case before her took ten years from the date of loss until the date of judgment. On the facts before her, she concluded at paragraph 739, “To award prejudgment interest in accordance with the actual cost of borrowing, including compounding of any interest paid is not punishment, but simply fair, just compensation based upon the facts of this case.”
[25] In Lee v. He, 2018 ONSC 5932, Boswell J. considered the issue of interest on a mortgage after maturity. In the case before him, he found at para. 73:
I am prepared to find that a duty of fairness and reasonableness exists, however, based on the following three factors:
(c) … the Supreme Court has recognized a general organizing principle of good faith in contracts law. Contracting parties must generally conduct themselves honestly and reasonably and not capriciously or arbitrarily. See Bhasin v. Hrynew, 2014 SCC 71.
[26] In Cheung v. Moskowitz Capital Mortgage, 2018 ONSC 1322, Morgan J. dealt with a case involving mortgage interest after maturity. As he stated at paragraph 24:
I therefore conclude that the fairest solution is for the interest owing on the Mortgage from January 1, 2018 until the payout date to be payable at the Courts of Justice Act rate for the relevant period. In that way, the Mortgagors will pay something toward the time value of the money they have held on to, while the Mortgagee will not reap a profit from its delay in providing for a proper discharge statement.
[27] However, before coming to that conclusion, Morgan J. noted at paragraph 23, “Continuing to charge the 8% rate [after due date] would make the Mortgagee’s wrongful conduct into a well calculated business decision.”
The Affidavit of Michael Pozzebon
[28] Mr. Pozzebon is the signing officer for Raki and provided some insight into the cost that Raki incurred for its own borrowing. As he stated at paragraph 31:
Furthermore, during the course of the development, Raki borrowed money in order to fund development costs. During the period the disputed amounts were being held by the Respondents, the interest rate Raki paid on borrowed funds was the CIBC prime rate plus 1%, which ranges from 3.95% to 4.95%, compounded on a daily basis. If the disputed funds had not been held by the Respondents, Raki would have been able to apply the funds towards development costs, which would have reduced its borrowing in an amount equivalent to the disputed amounts.
[29] That paragraph assists Raki with respect to the position it founds itself in, having to have the disputed amounts tied up for over two years. But in my view, it also assists the Respondents because Raki did not pay interest on the mortgages after the April 2, 2017 maturity date. The notional interest amounts were paid in trust. According to Mr. Pozzebon, Raki only began incurring actual interest when it paid out these disputed amounts, first of all in August, then in November of 2017. Raki submits that the Respondents should not obtain interest on these disputed amounts after its June 9, 2017 settlement offer. If paid then, it would have stopped the clock on interest between Raki and the Respondents. But it is logical to assume that it would have started the clock for interest between Raki and its’ lender. Mr. Pozzebon provided a range of interest rates Raki was incurring: 3.95% to 4.95% compounded on a daily basis. There is no specific evidence as to the rate that Raki would have incurred had it paid the mortgages out on the due date of April 2, 2017.
[30] I pause to note that the reason for the payment of disputed funds was the Respondent’s interpretation of the price adjustment clause, an interpretation that was ultimately unsuccessful. Although I do not find that the Respondents were acting unreasonably in questioning the interpretation of the impugned paragraph, in my view, there ought to be some consequences for its wrong interpretation.
Interest on the Undisputed Amounts
[31] I also remind myself that the parties are sophisticated commercial entities who had the benefit of counsel throughout each step of the Agreement of Purchase and Sale, and subsequent litigation. There is no David and Goliath here. I am satisfied that, on balance, an interest rate of 4%, not compounded, payable to the Respondents from the maturity date, April 2, 2017, until payment of the undisputed amounts in August and November 2017, is fair and reasonable under the circumstances. I will address the GIC interest during this period later in these Reasons.
Interest on the Disputed Amounts
[32] Raki submits that it ought to receive interest at the rate of 5.5% on the disputed amounts until payment or judgment. Raki submits it is entitled to interest on these funds at the rate of 5.5%, compounded yearly, matching the rate of interest on the mortgages between the parties, or alternatively at the rate of 3.95% to 4.95% compounded daily, reflecting its own costs of borrowing. The Respondents deny Raki’s entitlement to the amounts sought as these amounts were never bargained for when the disputed monies were paid into trust. They do concede that Raki is entitled to the interest earned on the GICs over the years from the date of payment.
[33] It is true that the parties did not negotiate a rate of interest on the dispute of funds paid into trust. The Respondents received these funds and put the funds into GICs and renewed them from time to time. But according to the Affidavit of Maria Theresa Cesareo, the GIC is currently earning interest at 0.55% - a far cry below the 5.5% negotiated between these sophisticated parties in 2012 and far below the average cost of borrowing that Raki incurred, according to the Affidavit of Mr. Pozzebon.
[34] I remind myself that the original Agreements of Purchase and Sale between these two sophisticated parties represented a purchase price of over $60,000,000. There was a disagreement over the meaning and interpretation of the price adjustment clause. Ultimately, Raki was successful, its interpretation was accepted by the court and affirmed a year later by the Court of Appeal. In the result, and with the benefit of hindsight, Raki overpaid to obtain the discharges by paying a disputed amount that favoured the Respondents’ interpretation into trust. Those payments occurred in August and November 2017. It did not receive any partial return of funds for over two years. After the Court of Appeal decision, Raki received over $4,364,735 on November 28, 2019 and a further $500,000 on July 6, 2020.
[35] In my view, there ought to be consequences for the Respondents’ overreaching in its calculation of the NDA.
[36] In my view, providing Raki with only the GIC interest earned on the remaining disputed funds tied up for over two years does not do justice to the case and acts as a penalty to Raki. I am satisfied that an interest rate of 4% per annum, not compounded, is fair and reasonable under the circumstances.
[37] The Respondents prudently invested the disputed funds into GICs, even prior to Raki’s request to do so. I am therefore satisfied that this earned interest can assist the Respondents in mitigating this calculation and can be retained by the Respondents.
Conclusion
[38] Raki requests that the court determine entitlements for funds remaining in trust. The Respondents join issue and make submissions as to how these funds are to be allocated. Both parties are sophisticated commercial entities and had the benefit of legal counsel in drafting the Agreement and the litigation that followed. Although there was no wrongdoing by the Respondents, their interpretation of the NDA clause turned out to be incorrect. I therefore conclude that interest should be calculated as follows:
a. The Respondents are entitled to simple interest on the mortgages at the rate of 4% per annum from the date of mortgage maturity (April 2, 2017) until it received payment on the undisputed principle amounts of August 8, 2017 and November 6, 2017. Once this figure had been determined, I turn to the funds remaining;
b. Raki is entitled to simple interest at the rate of 4% per annum on the remaining disputed amounts from the date of payment (August 8, 2017 and November 6, 2017) until payment or judgment.
c. The Respondents are entitled to retain all interest earned in the GICs from the date of investment
[39] The parties are encouraged to reach agreement on the calculations based on this Ruling. If not resolved by agreement within 45 days, the parties may make further submissions in writing, such submissions not to exceed 10 pages.
Costs
[40] The parties are encouraged to reach agreement on costs with respect to this virtual hearing. If no agreement is reached, Raki may make submissions not exceeding 5 pages together with a Bill of Costs within 20 days of the release of this Ruling. The Respondents shall have a further 10 days to make submissions not exceeding 5 pages, together with a Bill of Costs. Submissions may be sent to my judicial assistant in Barrie.
Justice G. Mulligan
Dated: October 19, 2020