COURT FILE NO.: CV-14-00002006-00ES CV-14-00002009-00ES CV-13-00005075-00ES CV-10-00014569-00ES
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
LISA GELB, in her personal capacity
Applicant/Moving Party
– and –
RICHARD GELB, in his personal capacity and in his capacity as Estate Trustee of the Estate of Martin Gelb
Respondent/Responding Party
Raymond M. Slattery, for the Applicant/Moving Party
Ewa Krajewska and Michael Rosen, for the Respondent/Responding Party
HEARD: November 27, 2019
REASONS FOR DECISION
DIETRICH J.
Overview
1Lisa Gelb and Richard Gelb are the only children of the late Martin Gelb and the late Harriet Gelb. Martin died in 1995 and Harriet died in 2010.
2Martin and Harriet had amassed a considerable fortune. Martin founded Tectrol Inc. ("Tectrol"), a successful electronic design and manufacturing company. He also invested, directly and indirectly, in commercial and residential real estate.
3On Martin's death, Richard managed Tectrol and other family-owned companies and, as Estate Trustee, he administered Martin's estate. Martin's will directed that his estate be held in a spousal trust for Harriet's benefit during her lifetime.
4In general terms, Martin and Harriet's succession plan provided, through their respective wills, that Richard would receive the shares and debt of Tectrol, and the residue of their respective estates would be divided equally between Lisa and Richard.
5Lisa challenged Richard's management of the companies forming part of Martin's estate and the administration of Martin's estate. She sued him personally and as Estate Trustee of Martin's estate, making claims valued at between $21 and $28 million.
6Through mediation, Lisa and Richard settled their dispute. They agreed that Lisa would receive a share in the residue of their late parents' estate greater than one-half. Pursuant to Minutes of Settlement made as of May 28, 2017, in addition to her one-half share, Lisa is entitled to receive certain estate assets in respect of which there is no dispute. She is also entitled to a "Preference Payment" of $4,951,377.75 payable, in cash or in kind, out of Richard's share of the residue of their late parents' estates.
7There are insufficient liquid assets in the estates to fund the entire Preference Payment. Therefore, in accordance with the Minutes of Settlement, the balance of the Preference Payment must be satisfied out of assets forming part of Richard's share of the residue of Martin's estate. These assets include interests in certain joint ventures in real estate (the "Joint Venture Properties") and shares of 454675 Ontario Limited ("454"), whose sole asset is a rental property.
8The Minutes of Settlement also provide that because Richard wished to own all of the shares of 454, he is required to purchase from Martin's estate Lisa's 50 percent interest in the shares of 454 to which she is entitled as a residual beneficiary. To fund the Preference Payment, Richard will also need to purchase a number of shares of 454 from his share of the residue of Martin's estate.
9Lisa objects to Richard obtaining updated valuations of the Joint Venture Properties. As such, the parties have not been able to complete the administration of their late parents' estates. The parties disagree on what the Minutes of Settlement mean regarding a valuation of the assets that form part of the residue of Martin's estate.
10Lisa brings this motion seeking an order enforcing the Minutes of Settlement. She seeks a declaration that the assets forming part of the residue of Martin's estate, including the Joint Venture Properties and the shares of 454, be valued as at the date of Harriet's death in 2010 for the purposes of satisfying the Preference Payment. However, for the purposes of Richard's purchase of shares of 454 from Martin's estate in accordance with the Minutes of Settlement, she seeks a declaration that these shares be valued based on a current valuation.
11For the reasons that follow, for the purposes of enforcing the Minutes of Settlement, I find that the appropriate valuation of the assets forming part of the residue of Martin's estate is the value of the assets on a valuation date proximate to the date of distribution of those assets from Martin's estate.
Background
12Following Harriet's death, Altus Group Limited ("Altus") prepared valuation reports in 2011 regarding a number of real estate properties. The valuations were done to determine the capital gains tax that would be owing as a consequence of the deemed realization of the capital assets in Martin's estate and Harriet's estate on Harriet's death in 2010. Hubbard Appraisals Services Ltd. ("Hubbard") valued one of the properties forming part of the Joint Venture Properties. MNP LLP ("MNP") applied a minority discount to the values of the Joint Venture Properties based on the percentage interest held by Martin's estate in these assets, which ranged from 5 percent to 50 percent. According to the valuation work done by the Altus, MNP and Hubbard, the aggregate value of the Joint Venture Properties was $888,141.40 as of May 30, 2010.
13Richard tabled the 2010 valuations of the estate assets at the mediation.
14At the time of the mediation on October 27, 2016, 454 was valued at approximately $5 million, and the total value of the estate assets likely exceeded $50,000,000.
15During the mediation, Lisa and Richard entered into Terms of Settlement, and the Minutes of Settlement followed some months later. The Minutes of Settlement provided that the shares of Tectrol would be transferred to Richard at an agreed value as stated in the Minutes of Settlement.
16When the Minutes of Settlement were negotiated, Lisa and Richard anticipated that Richard's share of the cash and the Joint Venture Properties that formed part of the residue of their late parents' estates would fund the Preference Payment. They also knew that these assets alone would not wholly satisfy the Preference Payment. Richard would need to fund the balance of the amount owing to Lisa by purchasing shares of 454 from his share of the residue of Martin's estate.
17The Minutes of Settlement specifically provide that Richard will receive all of the shares of 454, subject to the conditions that Lisa and Richard share the residue of their parents' estates equally and that Lisa receive all payments owing to her under the Minutes of Settlement, including the Preference Payment. The Minutes of Settlement further provide that if the assets of their parents' estates are insufficient to cover the Preference Payment, then Richard must purchase Lisa's one-half of the shares of 454 from Martin's estate, plus that number of shares of 454 from Richard's one-half of Martin's estate required to make up any deficiency in the Preference Payment.
18In contemplation of the purchase of shares of 454 by Richard, the Minutes of Settlement specifically direct that Martin's estate shall retain Altus and MNP to determine the value of Martin's estate interest in 454. The Minutes of Settlement do not provide a valuation date.
19Following the execution of the Minutes of Settlement, Altus and MNP prepared valuation reports for 454 and the effective date for the valuation was June 30, 2018. In its report dated as at June 30, 2018, MNP stated the fair market value of the shares of 454 to be $8,337,000.
20On October 17, 2018, Lisa requested that the Joint Venture Properties be transferred to her in kind in partial satisfaction of the Preference Payment. Richard's lawyer responded by stating that without updated valuations it would be impossible to determine the insufficiency in the estates to pay the full amount owing to Lisa. Lisa's lawyer then advised that the 2010 valuations, which were known to the parties at the mediation, provided the relevant values and that there was no need for updated valuations. Lisa's lawyer nevertheless asked Richard for information about the current value of the underlying real estate forming the Joint Venture Properties.
21Richard obtained opinions of value from a real estate broker and reported that the aggregate value of Martin's estate's interest in these real properties was $3,068,847, without taking into account any discount for a minority interest. If the same combined minority and marketability discount rates were applied to this valuation as were applied by MNP in its 2010 report, Richard concluded that the Joint Venture Properties would have a 2019 value of $2,548,828.
Position of the Parties
22Lisa submits that the value of the Joint Venture Properties and the shares of 454 for the purposes of making the Preference Payment in accordance of the Minutes of Settlement should be based on the 2010 valuations tabled by Richard at the mediation. She asserts that she relied on those valuations in her negotiations and in coming to the settlement, and in determining the quantum of the Preference Payment.
23Lisa further submits that the value of the shares of 454 for the purposes of Richard's purchase of those shares from Martin's estate should be based on a current valuation of those shares and that an updated valuation should be obtained for this purpose.
24Richard submits that the proper valuation of the Joint Venture Properties and the shares of 454 is the valuation as at the time of distribution of the assets from Martin's estate. He asserts that his approach is consistent with the general rule for valuing distributions of residue to beneficiaries.
25Richard asserts that if the Joint Venture Properties and the shares of 454 are valued using 2010 values, Lisa would effectively receive not only the Preference Payment of $4,951,377.75, but also the increase in value of the real property underlying the Joint Venture Properties between 2010 and the date of distribution. Lisa would also receive a cash payment from Richard on the sale of the shares of 454 she would have inherited from Martin's estate but for her agreement that he could purchase them from the estate, equal to the increase in the share value between 2010 and the date of sale. The result would be approximately $2 million of additional value in Lisa's hands above the agreed upon Preference Payment of $4,951,377.75. Richard further submits that Lisa had no specific entitlement under the Minutes of Settlement to the Joint Venture Properties or to the benefit of them based on 2010 values. Her entitlement is, simply, to a payment of $4,951,377.75 in cash or in kind.
26Richard further asserts that the settlement documents should be interpreted by presuming that the parties intended the legal consequences of their words. He submits that it would be unfair and inequitable for Lisa to receive from him the current market value of the Joint Venture Properties in kind and the current market value of the shares of 454 to which she is entitled, while attributing an earlier lesser value to those assets for the purpose of satisfying her Preference Payment. In doing so, she would be attempting to claim for herself the increase in value of these assets over the nearly 10 years since Harriet's death.
Legal Principles
27Minutes of Settlement are a type of contract. The Supreme Court of Canada has provided guidance where there is an ambiguity or a question of interpretation regarding a contract. In BG Checo International Ltd. v. British Columbia Hydro and Power Authority, 1993 CanLII 145 (SCC), [1993] 1 S.C.R. 12, at para. 9, the Supreme Court stated:
It is a cardinal rule of the construction of contracts that the various parts of the contract are to be interpreted in the context of the intentions of the parties as evident from the contract as a whole.
28The primary goal of contractual interpretation is to ascertain the objective intent of the parties as expressed in the written agreement. The interpretation must be grounded in the text. A judge should interpret a plainly worded document by presuming that the parties intended the legal consequences of their words: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 47, 55, 57.
29In Sattva, at para. 47, the Supreme Court held that when interpreting a contract, the courts should have regard to the surrounding circumstances of the contract – the factual matrix, while "giving the words used in the contract their ordinary and grammatical meaning, consistent with the circumstances known to the parties at the formation of the contract."
30The factual matrix of a contract includes objective evidence of the background facts at the time of the execution of the contract. The scope of the factual matrix evidence is limited to objective facts and does not include the subjective intention of the parties: Sattva, at para. 58.
31In Union Carbide Canada Inc. v. Bombardier Inc., 2014 SCC 35, [2014] 1 S.C.R. 800, the Supreme Court held that the common law exception of confidentiality in mediation proceedings is displaced to enable the parties to produce evidence of communications made in the mediation process in order to prove the terms of settlement.
32Evidence of post-contractual conduct is admissible to assist in contractual interpretation, but "only if the contract remains ambiguous after considering its text and its factual matrix:" Shewchuk v. Blackmont Capital Inc., 2016 ONCA 912, 404 D.L.R. (4th) 512, at para. 46.
Analysis
33A review of the Terms of Settlement and the Minutes of Settlement is necessary to determine what the parties intended on the issue of valuation. The Minutes of Settlement provide that if there is a conflict between the Terms of Settlement and the Minutes of Settlement, the Minutes of Settlement will govern.
34Lisa argues that the factual matrix at the time the Minutes of Settlement were entered into includes the fact that the parties were engaged in protracted litigation relating to Richard's activities in administering the estate assets since Martin's death, some 21 years prior to the mediation. The only asset valuations available and used at the mediation were those effective as of the date of Harriet's death in 2010. Lisa asserts that the settlement and calculation of the Preference Payment were reached on that basis.
35Lisa further argues that objective evidence includes evidence which may have affected how a reasonable person would understand the document. The relevant facts are those that are known or those which reasonably ought to have been known to both parties at or before the date of contracting, eliminating any concern of unreliability: Sattva at para. 60. Lisa asserts that the Minutes of Settlement are a contract that should be interpreted in accordance with these directions.
36Lisa further asserts that Richard could have obtained later valuations and tabled them at the mediation, but he did not, and, therefore, he should not be able to resile from the contract and rewrite the Minutes of Settlement using 2018 valuations.
37I do not find Lisa's argument in support of her reliance on the 2010 valuations to be persuasive. The mediation took place in 2017, some seven years following Harriet's death. The 2010 valuations were prepared for tax purposes, to determine the taxes that were owing at the time of Harriet's death as a consequence of the deemed disposition rules under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp). The valuations were not current at the time of the mediation and were not prepared for the mediation. While Lisa is critical of Richard for not providing up to date valuations, there is no evidence to suggest that she requested them. Based on the record, it was known to all the parties that the underlying asset of the Joint Venture Properties and 454 was real estate. As set out in Sattva, the relevant facts are those which reasonably ought to have been known to both parties at or before the date of contracting. In my view, it ought to have been foreseeable to any of the parties that the real estate would likely have increased in value between Harriet's death in 2010 and the mediation in 2017, especially given that some of it is located in the Greater Toronto Area.
38The Minutes of Settlement plainly state that Lisa is entitled to a specific payment of $4,951,377.75. This is the amount that was in the contemplation of the parties when they entered into the Terms of Settlement and the Minutes of Settlement. The parties did not contemplate any appreciation in that number at the time of distribution even if the payment were funded with appreciable assets as opposed to cash. Neither the Terms of Settlement nor the Minutes of Settlement required the transfer of the Joint Venture Properties or any other appreciable asset to Lisa. Had the residue of her parents' estates been comprised exclusively of other assets, such as cash and near cash, the Preference Payment of $4,951,377.75 would have been paid to her in cash and she would have been entitled to nothing further.
39Lisa also argues that the transfer of assets to her was to be tax-paid so that she would receive estate assets, if necessary, on a roll-over basis permitting her to receive the assets at the cost base to the estate from which the assets were distributed. In order to fund the Preference Payment, Lisa has asked to receive the Joint Venture Properties in kind. Based on the record, Richard, as Estate Trustee of Martin's estate, proposes to transfer the Joint Venture Properties to Lisa on a tax-paid basis, irrespective of the valuation used. The distribution would be made so that she would not be responsible for any capital gains tax attributable to capital appreciation in the assets between Harriet's death and the date of distribution. The result would be tax-paid assets in her hands.
40Applying the principles in Sattva, the court must interpret the Minutes of Settlement objectively and may consider the subsequent conduct of the parties. I am satisfied that on an objective interpretation of the Minutes of Settlement, the parties did not intend for the 2010 valuations to apply on a distribution of assets from the estates. The Minutes of Settlement clearly fix the amount of the Preference Payment to be made to Lisa without any comment on the valuation of assets that may be used to fund the payment.
41The court may also consider the subsequent conduct of the parties. In considering this conduct, I am further persuaded that the parties did not intend for the 2010 valuations to apply at the time of distribution of the estate assets. The Terms of Settlement did not contemplate that there would be a shortfall regarding the Preference Payment to Lisa, but the Minutes of Settlement, entered into months after the Terms of Settlement, did. Neither the Terms of Settlement nor the Minutes of Settlement set a date for the valuation of properties that fell into the residue of the estates, which include both the Joint Venture Properties and the shares of 454 that fell into the residue of Martin's estate. The parties agreed that shares of 454 would be valued by Altus and MNP for the purpose of a valuation report, though the Minutes of Settlement are silent as to the effective date to be used for the valuation. The Minutes of Settlement are clear that the Preference Payment is a payment from Richard's interest in the estates of Martin and Harriet. Lisa and Richard agreed to have the shares of 454 valued at the date of June 2018, which was thought to be close to the distribution date for the residue of the estates. If the parties had intended to set the valuation date for the Joint Venture Properties at Harriet's date of death, or any other date, they could have done so, but they did not. Alternatively, they could have fixed a value for the Joint Venture Properties or the shares of 454, as they did for the shares of Tectrol, when they were negotiating the Minutes of Settlement, but they did not.
42The Minutes of Settlement do not contemplate a specific date for the valuation of the shares of 454. However, it is apparent that a valuation would be needed as the parties had agreed that, subject to certain conditions, Richard would inherit all of those shares and Lisa would receive an amount equal to the value of at least one-half of those shares, and possibly more in the event that there were insufficient other estate assets to make the Preference Payment in full. If the parties had intended a 2010 valuation of the shares of 454 to apply, they could have included that term in the Minutes of Settlement. Instead, the Minutes of Settlement specifically direct a valuation of the shares of 454.
43When Altus and MNP prepared their valuation of the 454 in accordance with the Minutes of Settlement, Lisa did not object to the use of June 30, 2018 for the valuation date and she did not suggest that a 2010 valuation date should be used. Lisa does not dispute the 2018 valuation of the shares of 454.
44Lisa argues that Richard's obligation under the Minutes of Settlement was to allocate a number of shares of 454 to Lisa from Richard's share of the residue of Martin's estate based on the 2010 valuation in order to fund the Preference Payment. Then, once that allocation was made, she would sell the shares to Richard at their fair market value. I find that there is no principled basis to assert that the assets for which Lisa would receive consideration, being the shares of 454, should be valued at a 2018 value while the same assets, which Richard may use to make the Preference Payment, would be valued as of 2010. This approach would result in a significant windfall to Lisa and aggrandize the Preference Payment in a way that was not in the contemplation of the parties when they entered into the Minutes of Settlement. Otherwise, the Preference Payment would not have been fixed, but would have been described as a payment in kind comprised of particular assets.
45The Minutes of Settlement specifically contemplate a valuation of the shares of 454 other than the valuation that was available at the mediation. While the valuation date for the shares of 454 was not specifically stated in the Minutes of Settlement, I find that the conduct of the parties following the execution of the Minutes of Settlement reinforces their intention that the valuation date would be a date following the execution of the Minutes of Settlement and that Richard would purchase the shares from Martin's estate at their fair market value at the time of purchase. It would be incongruous to find that the parties intended that Richard would allocate shares of 454 to Lisa for the purposes of satisfying the Preference Payment valued at a 2010 valuation and then be required to purchase those same shares at their fair market value at the time of distribution. This approach too would result in an unintended windfall to Lisa that was not within the contemplation of the parties when they settled their dispute.
46The Joint Venture Properties fell into the residue of Martin's estate. The Minutes of Settlement do not change that result. Accordingly, their value can only be ascertained on the distribution of the properties to the beneficiaries.
47Further, this approach is consistent with the general rule that residual estate assets are valued as at the date of distribution: Widdifield on Executors and Trustees, 6th Edition (Toronto: Thomson Reuters, 2020), at 5.1.3 and Rudderham, Re, 1971 CanLII 1100 (NS CA), [1971] 21 D.L.R. (3d) 457, at para. 24 (N.S.C.A.), as approved by the Court of Appeal for Ontario in Fray v. Evans, 2013 ONCA 776, where it was held, at para. 33, that:
The general rule of administration of estates requires valuation of assets to be distributed among beneficiaries to be made as of the date of distribution and not as of the date of the testator's death.
48I accept Lisa's submission that a proper current valuation of the Joint Venture Properties has not been done. The opinions of value from a real estate broker do not provide a proper valuation for the purposes of the Minutes of Settlement and for distribution of the residue. The application of minority and marketability discount rates, if appropriate, must be undertaken by a professional valuator, considering all relevant factors including the fact that there are no joint venture agreements between Martin's estate and other participants in the joint ventures and there is no mechanism to compel an exit from the joint ventures.
49I do not accept Lisa's submission that a current valuation of the shares of 454 is necessary or appropriate. The Minutes of Settlement direct that a valuation of these shares be undertaken and that has been done. Lisa did not object to the use of June 30, 2018 as the valuation date and she does not dispute the 2018 valuation. The delay in the administration of the estates appears to have been caused by Lisa's unwillingness to agree to an updated valuation of the Joint Venture Properties.
Disposition
50For the foregoing reasons, it is ordered that, on the joint instruction of Lisa Gelb and Richard Gelb, the Estate Trustee of the Estate of Martin Gelb shall retain MNP, Altus and Hubbard to provide updated appraisals of the interest of the estate of Martin Gelb in the Joint Venture Properties as of the date of these reasons. The appraisals shall take into account any relevant marketability and minority discount and such other factors as the said appraisers consider appropriate. The appraised values shall then be used to calculate the value of the residue of the estate of Martin Gelb and, in turn, to calculate the payment to Lisa Gelb contemplated in the Minutes of Settlement at subparagraphs 5(h) and 5(j). The parties shall apply the methodology set out in the Respondent's factum at subparagraph II H but using the updated appraisal values for the Joint Venture Properties and using the June 30, 2018 valuation of $8,337,000 as the value of the shares of 454.
Costs
51The parties are strongly encouraged to agree on the matter of costs. Should they be unable to do so, the Respondent shall serve and file written submissions not exceeding three pages in length (excluding any costs outline, bill of costs and offers to settle), within 14 days hereof and the Applicant shall serve and file written submissions not exceeding three pages in length (excluding any costs outline, bill of costs and offers to settle) 14 days thereafter.
Dietrich J.
Released: February 12, 2020
COURT FILE NO.: CV-14-00002006-00ES CV-14-00002009-00ES CV-13-00005075-00ES CV-10-00014569-00ES
DATE: 20200212
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
LISA GELB, in her personal capacity
Applicant/Moving Party
– and –
RICHARD GELB, in his personal capacity and in his capacity as Estate Trustee of the Estate of Martin Gelb
Respondent/Responding Party
REASONS FOR DECISION
Dietrich J.
Released: February 12, 2020