CITATION: Thomas Farrell at al. v. John Kavanagh et al., 2020 ONSC 8154

Court File No. CV-13-10369-00CL and

CV-13-10369-00CLA1

DATE: 20201231

ONTARIO

SUPERIOR COURT OF JUSTICE

(Commercial List)

BETWEEN:

THOMAS PATRICK FARRELL and THE MIDAS INVESTMENT CORPORATION

Plaintiffs

– and –

JOHN KAVANAGH, COSA NOVA FASHIONS LTD., B & M HANDLEMAN INVESTMENTS LIMITED, COMFORT CAPITAL INC., 693651 ONTARIO LTD., E. MANSON INVESTMENTS LIMITED, NATME HOLDINGS LTD., FRANCIE STORM, BARSKY INVESTMENTS LTD., STEPHEN HANDLEMAN, ROSEWILL INVESTMENT CORPORATION, THOMAS BOCK, THE BANK OF NOVA SCOTIA TRUST COMPANY AND CANADA INVESTMENT CORPORATION, COLINA KING, C & K MORTGAGE SERVICES INC. O/A RESCOM CAPITAL, GARY GRUNEIR, BILL SHIMBASHI, 1888871 ONTARIO INC. and CARLO PARENTELA

Defendants

-and-

ROCCO COMMISSO, 1812340 ONTARIO INC., 2364788 ONTARIO LTD., 2364789 ONTARIO LTD., 1870561 ONTARIO INC., 2364789 ONTARIO INC., 2364798 ONTARIO LTD., PIETER WILLEM VROON, GRACE COMMISSO, MARGARET PASTORE, SOLID GENERAL CONTRACTORS INC. and 1864847 ONTARIO LTD. carrying on business as C.I.U.D.A.D. EQUPMENT SALES

Third Parties

Maurice Neirinck, Michael McQuade for the plaintiffs

Reeva M. Finkel and Brendan Jones for Cosa Nostra Fashions Ltd., B & M Handleman Investments Limited, Comfort Capital Inc., 693651 Ontario Ltd., E. Manson Investments Limited, Natme Holdings Ltd., Francie Storm, Barsky Investments Ltd., Stephen Handleman, Rosewill Investment Corporation, Thomas Bock, The Bank of Nova Scotia Trust Company and Canada Investment Corporation.

R. Leigh Youd and Peter Smiley for Colina King

Mauro Marchioni for the Third Parties, Rocco Commisso and Maria (Grace) Commisso

Alfred Schorr for the Third Party, Margaret Pastore.

HEARD: February 10, 11, 12, 13, 14, 17, 18, 19, 20, 21, 24, 25, 26, 27, June 11, 2020

koehnen j.

I. Overview

[1] This action concerns the validity of two mortgages, each of which was registered against two properties in the city of Toronto: 205 Yonge Street and 90 Eastern Avenue.

[2] The first mortgage in the amount of $800,000 was registered on February 6, 2013. The second mortgage was registered on March 4, 2013 in the amount of $5,000,000. Its proceeds were used, among other things, to pay out the first mortgage.

[3] The plaintiffs allege that the mortgages were registered by the defendant John Kavanagh without authorization and that the remaining defendants had actual knowledge of the lack of authorization by virtue of discrepancies in documents that they received which discrepancies they should have noticed. Had the defendants noticed the discrepancies and made further inquiries, the plaintiffs say Mr. Kavanagh’s deception would have come to light and fraud would have been prevented. I am unable to agree and dismiss the plaintiffs’ claim.

[4] The corporation’s bylaws gave Mr. Kavanagh actual authority to bind the corporation acting on his own. That alone should dispose of the action.

[5] Mr. Farrell trusted Mr. Kavanagh and gave him considerable discretion in the management of Mr. Farrell’s affairs. Giving him the power to bind Midas was consistent with that practice.

[6] Mr. Farrell was in considerable financial difficulty in both Canada and Ireland. One way out of those difficulties was to mortgage the two properties and use the proceeds to pay off debts. That is exactly what was done. In the course of doing so, Mr. Farrell, Mr. Kavanagh and Renato Fellin developed a plan whereby they would try to insulate Mr. Farrell’s Canadian assets from his Irish creditors by removing him from the record books of Midas. Mr. Farrell was fully aware of the steps taken to mortgage the properties and benefited from the mortgages. Mr. Farrell’s conduct after discovering the alleged fraud is inconsistent with what one would expect from someone who had been defrauded.

[7] Even if I am incorrect in my assessment of Mr. Farrell’s knowledge of the mortgages, the fact that Mr. Kavanagh had the ability to bind the corporation and the fact that a good portion of the mortgage proceeds were clearly to the benefit of the plaintiffs is sufficient to dismiss the plaintiffs’ claim.

[8] In the event I am incorrect on the question of authority and Mr. Farrell’s knowledge of the mortgage, I have also addressed the plaintiffs’ claims against Colina King and the mortgagees.

[9] Ms. King was the lawyer that Mr. Kavanagh retained to register the mortgages. I find that her conduct did not breach the standard of a prudent solicitor in the circumstances of this case. In the alternative, if her conduct did breach the standard of a prudent solicitor, her application of the appropriate standard would not have prevented the registration of the mortgages.

[10] The plaintiffs’ claim against the mortgagees fails because the mortgagees were entitled to rely on Mr. Kavanagh’s authority under the indoor management rule. In addition, the mortgagees had no actual knowledge of any wrongdoing in connection with the mortgage. At best the plaintiffs’ claim is that the mortgagees were put on notice and should have made additional inquiries. That is not, however, legally sufficient to prevent the mortgagees from enforcing their mortgage. Finally, the plaintiffs claim that the mortgages were conditional on satisfactory appraisals and leases being produced for the Yonge Street property. The appraisals and leases contained irregularities which the plaintiffs claim should have led the mortgagees to make further inquiries. The law is clear that conditions of this sort are for the sole benefit of the mortgagee. The mortgagee is free to waive those benefits at will. Conditions of that sort do not impose any duty on a mortgagee to conduct a forensic analysis of the documents provided in order to protect the mortgagor.

a. The Parties

[11] The plaintiff, Thomas Farrell is a 71-year-old Irish businessperson who lives in Ireland. He testified that he went to school until age 10, does not read or write English, worked at various odd jobs after leaving school including as a farmhand, contractor, roofer and ultimately as a mechanic. He then developed his own business initially acquiring a gas station. He parlayed that into a group of nine gas stations with convenience stores, three car dealerships and approximately 70 Properties in Ireland that he rents out for income. He says he has his staff or family members, particularly his daughter Jackie, read documents to him. In a similar vein, he dictates documents to them to write on his behalf. When, in these reasons, I refer to emails from Mr. Farrell, they were prepared in this manner.

[12] The plaintiff Midas Investment Corporation is the owner of the two properties at issue in this action. It was incorporated to purchase the 205 Yonge St. property and later acquired the Eastern Avenue property.

[13] The defendant John Kavanagh is an Irish accountant. Before beginning to work for Mr. Farrell, he worked at Coopers Lybrand in Ireland. By the time Midas acquired the Yonge Street property, Mr. Kavanagh had been working for Mr. Farrell as his in-house accountant for approximately 16 years. They appear to have had a close and trusting relationship.

[14] Mr. Kavanagh was responsible for placing the mortgage on the Yonge Street and Eastern Avenue properties. Mr. Farrell takes the position that he did so without his knowledge or authorization.

[15] The defendant Colina King is the lawyer that Mr. Kavanagh retained to mortgage the two properties.

[16] The defendant Bill Shimbashi is a real estate valuator who prepared an appraisal for the Yonge Street property. The action has been settled against him.

[17] The defendants 1888871 Ontario Inc. and Carlo Parentela were sometime potential tenants of the Yonge Street property. The action has been settled against them.

[18] The defendant C & K Mortgage Services Inc. operating as Rescom Capital is a mortgage broker that was involved in funding and registering the two mortgages. The defendant Gary Gruneir is the principal of Rescom. The action has been settled against both Rescom and Mr.Gruneir.

[19] The remaining defendants are all mortgagees under the impugned mortgages.

b. Credibility and Reliability Issues

[20] My decision in this case turns largely on my assessment of the Mr. Farrell’s credibility and reliability. Mr. Farrell’s explanations frequently contradicted themselves, contradicted the contents of contemporaneous documents or seemed logically improbable.

[21] Mr. Farrell had a tendency to deny signing documents when it no longer appeared convenient to have his signature on the documents, denied that his legal or accounting advisors brought something to his attention or denied that those he trusted to read documents and report to him actually did so when the denial seemed highly improbable.

[22] He also evidenced an unfortunate pattern of assuming debt, reneging on the debt and then using aggressive delaying tactics to persuade the creditor to accept less than the amount owing.

[23] Whether these tendencies result from a lack of credibility because Mr. Farrell is willing to tailor his evidence to whatever he believes is convenient at a particular moment, or whether they are the result of a lack of reliability because Mr. Farrell’s inability to read deprives him of the visual cues that assist memory, does not matter. Whatever the source of the evidentiary frailty, where Mr. Farrell’s evidence conflicts with that of other witnesses who testified at trial, I prefer the evidence of the other witnesses.

[24] While I have sympathy for the challenges that an inability to read causes, that inability cannot excuse Mr. Farrell from responsibility for obligations that he and/or Midas have assumed. Mr. Farrell is a man of considerable means. He testified that his net worth had been estimated at approximately €100,000,000. An individual with even a fraction of that wealth has the means to ensure that he is made aware of issues that face him. If he is genuinely not made aware of those issues because a string of lawyers, accountants, business advisors and family members truly did not read documents to him, then that is unfortunate but it does not mean that he should be excused from his obligations nor does it mean that others, like the mortgagees in this case, should bear those obligations for him.

II. Authority of John Kavanagh to Register the Mortgages

a. Mr. Kavanagh as Trusted Advisor

[25] The principal issue in this proceeding is whether John Kavanagh had actual or ostensible authority to register two mortgages against the Yonge Street and Eastern Avenue properties.

[26] Mr. Farrell takes the position that the mortgages were unauthorized, that he played no role in them and that they were the result of fraudulent actions by Mr. Kavanagh.

[27] For me the case resolves itself on the question of actual authority. For the reasons set out below, I find as a fact that Mr. Kavanagh had actual authority to register the mortgages.

[28] When Midas purchased the Yonge Street property, Mr. Kavanagh had been working for Mr. Farrell for approximately 16 years. Despite Mr. Farrell’s sometimes contradictory evidence, I find that he trusted Mr. Kavanagh and gave Mr. Kavanagh considerable discretionary scope to run Mr. Farrell’s affairs. At one point Mr. Farrell agreed that Mr. Kavanagh had become a trusted employee. Mr. Kavanagh took care of the accounting, financial statements and tax returns of all of Mr. Farrell’s five businesses. Mr. Farrell had come to rely on Mr. Kavanagh.

[29] In September 2006, Mr. Farrell was in Toronto on a promotional trip arranged by the Suzuki Motor Company, one of whose automobile dealerships Mr. Farrell owned in Ireland. Mr. Farrell asked Mr. Kavanagh to accompany him to Canada for companionship and in case any documents needed to be read. He chose Mr. Kavanagh to accompany him above his wife or children who also helped with the business. During the course of that trip Mr. Farrell saw the Yonge Street property and decided to purchase it.

[30] At trial, Mr. Farrell tried to downplay Mr. Kavanagh’s role with the Yonge Street property. Mr. Farrell essentially tried to describe Mr. Kavanagh as a caretaker who was responsible for attending to basic maintenance work on the property. Contemporaneous documentation gives Mr. Kavanagh a significantly more material role.

[31] The agreement of purchase and sale was entered into by “John Kavanagh in trust”. The purchase was ultimately made in the name of Midas.

[32] Mr. Kavanagh accompanied Mr. Farrell when he opened the bank account for Midas at TD Bank and was given signing authority over the account. In addition, Mr. Farrell gave Mr. Kavanagh blank signed checks on Midas company bank accounts and allowed Mr. Kavanagh to fill them in.

b. Mr. Kavanagh’s Authority Under the Articles and By-Laws

[33] The law firm of Loopstra Nixon was retained for the purchase and to incorporate Midas.

[34] Midas’ share capital consisted of 100 common shares at a subscription price of one dollar each. Mr. Farrell and Mr. Kavanagh held 50 shares each. Mr. Kavanagh was also appointed as Secretary and Treasurer and was recorded as such on the corporation’s Form 1 which constitutes the formal public record of the corporation’s directors and officers.

[35] Loopstra Nixon addressed its reporting letter to both Mr. Kavanagh and Mr. Farrell. The reporting letter set out that each of Mr. Farrell and Mr. Kavanagh held 50 shares for consideration of $50. It listed the officers of the Corporation as follows:

President – Thomas Farrell

Secretary – John Kavanagh

Treasurer – John Kavanagh

[36] The reporting letter directed the reader to section 11 of By-Law Number one for guidance on signing authority. Section 11.01 of By-Law Number one reads in part:

Deeds, transfers, assignments, contracts, and obligations of the Corporation may be signed by the president or a vice-president or a director or the secretary or treasurer or an assistant secretary or assistant treasurer.

[37] In other words, Mr. Kavanagh as the Secretary or Treasurer could sign any such documents on behalf of Midas. It is especially noteworthy that the provision originally required that such documents be signed by the “president or a vice-president or a director together with the secretary or treasurer”. The words “together with” were struck out and replaced by the word or. In other words, the standard form by-law used by Loopstra Nixon would not have allowed Mr. Kavanagh to sign documents alone. Striking out the words “together with” and replacing them with “or” allowed Mr. Kavanagh to sign documents alone.

[38] Although Mr. Farrell took the position that he never had anyone read the reporting letter to him, he admitted that the lawyer at Loopstra Nixon who handled the purchase and incorporation knew that Mr. Farrell could not read and ran through the documents with him.

[39] At trial, Mr. Farrell took the position that By-Law Number one was invalid because the signatures above the entries where his typewritten name appeared at the end of the By-Law were not actually his. During his examination for discovery he had acknowledged that the signatures were his.

[40] In addition, the plaintiffs took the position at trial that By-Law Number one was not validly enacted because it was not signed by the second director at the time, John D’Agostino. I do not find this argument persuasive. Just beneath the signature line for Mr. D’Agostino is a paragraph indicating that, in lieu of confirmation at a general meeting of shareholders, the undersigned, being all of the shareholders, confirm the by-law. The signatures of Messrs. Farrell and Kavanagh follow. Section 116 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”) requires shareholder approval for by-laws. Moreover, Mr. D’Agostino’s missing signature on By-Law Number one did not prevent the plaintiffs from affirming in the Agreed Statement of Facts prepared for this trial that Midas had passed the by-law.

[41] By-Law Number two is the Midas borrowing by-law. Among other things, it authorizes the board to borrow money and to delegate any of its powers under By-Law Number two to any officer of the Corporation. Mr. Farrell has no memory of it being passed and denies the presence of his signature on the by-law. It does not surprise me that Mr. Farrell does not recall the by-law being passed. It is dated December 15, 2006. The trial occurred in February 2020. It would not be at all unusual that someone would no longer have a specific recollection of having signed a document 14 years earlier. Mr. Farrell takes the position, however, that the absence of a signature that he acknowledges to be his on the borrowing by-law renders the by-law invalid. I disagree.

[42] I came to the conclusion during the course of the trial that Mr. Farrell tended to assert that his signature had been forged on a document when the document was not convenient for him to have signed but agreed to his signature when it was convenient. When Mr. Farrell denied his signature, he never once identified anything in the allegedly falsified signature that led him to conclude that it was a forgery. Nor has Mr. Farrell introduced evidence from any handwriting expert to distinguish true signatures from false ones.

[43] I find as a fact that Mr. Farrell signed and approved both By-Laws one and two.

[44] Moreover, the concern about By-Law Number two is a bit of a red herring because it is unnecessary. Under s. 15 of the OBCA, a corporation has all of the powers of a natural person including the power to borrow money. Section 17(1) of the OBCA provides that it is not necessary for a by-law to be passed to confer any particular power on the corporation or its directors. By-Law Number one, which at discovery Mr. Farrell acknowledged he had signed, already allows Mr. Kavanagh to sign a variety of documents on behalf of the corporation, including lending documents.

[45] In 2008, Midas purchased the Eastern Avenue property. The Loopstra Nixon reporting letter for the Eastern Avenue purchase indicates that all contacts between the firm and Midas occurred through Mr. Kavanagh. Mr. Farrell’s name does not appear in the detailed account entries. Mr. Farrell had no explanation for that at trial and asserted that Mr. Kavanagh was having these interactions on his own initiative. I do not find that evidence credible. Mr. Farrell knew that the Eastern Avenue property was being purchased. He had negotiated the business deal with the vendor himself. He knew he would require a lawyer to complete the purchase. While suggesting that Mr. Kavanagh had no authority from Mr. Farrell to deal with Loopstra Nixon is consistent with Mr. Farrell’s narrative to characterize Mr. Kavanagh as a caretaker, it is simply not believable. I infer from the circumstances that Mr. Farrell explicitly or implicitly authorized Mr. Kavanagh to deal with Loopstra Nixon.

[46] To this point in the narrative, Mr. Kavanagh is a trusted confidant of Mr. Farrell’s who was authorized to deal with lawyers and banks on behalf of Midas and whom the by-laws of Midas empowered to bind the corporation.

c. The Development of Financial Difficulties

[47] Although the Eastern Avenue property was rented out, the Yonge Street property never had a tenant. It did, however, incur operating costs of approximately $300,000 per year without a regular stream of income to pay them.

[48] Shortly after purchasing the Yonge Street property, Midas began falling into arrears on property taxes.

[49] As Mr. Farrell described it, in 2011 he left it to his Canadian accountant, Mr. Rudensky to solve the issue and send cheques to the city to pay the tax bill. Mr. Farrell had given Mr. Rudensky six cheques of $19,000 for a total of $114,000 based on his unilateral calculation of the taxes owing. At that point, tax arrears stood at approximately $380,000. The only way that the six cheques would solve the tax issue was if the city accepted the manner in which Mr. Farrell had unilaterally calculated certain rebates to which he felt he was entitled. The city had consistently refused to accept that calculation.

[50] Mr. Farrell claims he was unaware of any further tax arrears after 2011. The issue is important because of the $800,000 advanced on the first mortgage, over $600,000 was used to pay off tax arrears. That portion of the mortgage was therefore clearly to the plaintiffs’ benefit.

[51] Although Mr. Farrell states that he was not aware of any subsequent tax arrears, a witness was called from the City of Toronto tax department who testified to the effect and produced documents demonstrating that the city had sent over 40 tax arrears notices to Mr. Farrell at his home in Ireland. As time went on, the notices became more forceful and culminated in steps to sell the property for tax arrears. Mr. Farrell claims he was never told about any of the 40 tax notices. In addition, tax arrears notices were also sent to Mr. Farrell’s accountant, Mr. Rudensky. Mr. Farrell claims that Mr. Rudensky never informed him of any of those notices. However, Mr. Farrell’s daughter Jackie, the family member who helped him most with his businesses, did forward an overdue tax notice to Mr. Rudensky that showed tax arrears of $471,000 in August 2011. This clearly demonstrates that the tax notices reached Mr. Farrell’s home. Although Jackie forwarded at least one tax notice to Mr. Rudensky, Mr. Farrell claimed that Jackie never brought any tax notices to his attention.

[52] Although Mr. Farrell testified that his daughter Jackie never brought any of the 40 tax notices to his attention, and although Jackie continues to work for him, she did not testify at trial. According to Mr. Farrell she could not do so because her teenage daughter has a serious eating disorder and requires her mother’s presence to encourage her to eat. No request was made to allow Jackie to testify by videoconference at trial or by pre-recorded video at a time more convenient to her.

[53] At the same time as tax arrears were growing, Mr. Farrell claimed that the rebates owing in his favour would eliminate the outstanding taxes. The evidence does not support that. The annual tax bill remained considerably larger than even what Mr. Farrell claims he was entitled to by way of rebates.

[54] Mr. Farrell dismissed the tax issues by saying that he would have expected Mr. Rudensky to obtain a tax clearance certificate because Mr. Farrell had told Mr. Rudensky to have the taxes paid. It is difficult to understand how that could be possible without sufficient funds.

[55] The City’s tax records also disclose numerous instances of Mr. Kavanagh communicating with the City either in person or by telephone about the tax arrears. Those records contain similar communications with Mr. Rudensky.

[56] Mr. Farrell maintained that, had he known of the tax arrears of $600,000, he would simply have paid them off. I do not accept that evidence. Even when tax arrears stood at only $380,000, Mr. Farrell was not prepared to provide enough money to pay them off.

[57] In addition to tax arrears, by September 2012, construction liens had also been placed on the Yonge Street property. In September 2012, Mr. Kavanagh appeared in court on behalf of Midas to adjourn the lien claimants’ efforts to force a sale of the property. Mr. Kavanagh asked for time to find financing to pay off the liens. Mr. Farrell claims not to have been aware of that.

[58] Mr. Farrell also had creditors in Ireland who were becoming ever more forceful. The Allied Irish Bank (“AIB”) had obtained a judgment against him for approximately €4,500,000. The judgment related to a mortgage on three properties in Ireland in respect of which Mr. Farrell had never made any payments. The bank had begun taking steps to enforce its judgment. In addition, Esso Oil demanded payment of €580,000 from Mr. Farrell.

d. Renato Fellin and the Plan to “Remove” Mr. Farrell from Midas

[59] In 2011, Mr. Kavanagh had encountered difficulties with construction contractors on the Yonge Street property. His search for a solution to those problems led him, through a mutual acquaintance, to Renato Fellin.

[60] This ultimately led to a meeting between Mr. Fellin, Mr. Kavanagh and Mr. Farrell sometime in 2011. During the course of that discussion, Mr. Fellin became aware of Mr. Farrell’s problems with AIB and Esso in Ireland. Mr. Farrell asked for his help with those issues and asked him to help Mr. Kavanagh with the Yonge Street property.

[61] Mr. Fellin’s understanding was that Mr. Kavanagh was doing the best he could with a limited budget. Mr. Fellin advised Mr. Kavanagh to clear up the tax arrears and mortgage the property to do so.

[62] By mid-2012 it is agreed that Mr. Kavanagh began looking for mortgage financing on the property. Mr. Fellin also made extensive efforts to find financing.

[63] According to Mr. Fellin, he retained Bill Shimbashi, a real estate valuator to prepare an appraisal. Mr. Fellin produced invoices from Mr. Shimbashi to corroborate his evidence.

[64] Mr. Fellin says he met Mr. Farrell on numerous occasions at various restaurants and bars throughout Toronto to discuss his problems with his Irish creditors.

[65] Mr. Fellin says he discussed changes to the board and shareholdings of Midas with Messrs. Farrell and Kavanagh on several occasions. Mr. Fellin says he advised Mr. Farrell to remove himself as a director and shareholder of Midas in order to protect Mr. Farrell’s Canadian assets from Irish creditors. If Mr. Farrell was facing bankruptcy or execution issues in Ireland and wanted to protect his Canadian assets, he needed to move himself out of those assets and put someone else in in in his place. I understood the concept to be that someone else would hold Mr. Farrell’s assets in a secret, informal trust to hide them from creditors, although Mr. Fellin did not use that specific language.

[66] Mr. Fellin understood that Mr. Kavanagh was putting this plan into place.

[67] The plaintiffs dispute Mr. Fellin’s testimony and ask me to prefer the testimony of Mr. Farrell. Mr. Fellin was called as a witness by the mortgagees. During cross-examination, counsel for the plaintiffs pursued a direct attack on his credibility.

[68] Mr. Fellin was disbarred as a lawyer. The decision disbarring him described Mr. Fellin as having engaged in trickery, outright dishonesty and as being ungovernable. After being disbarred, Mr. Fellin became a mortgage broker. His mortgage broker’s license was later revoked after he provided false information to his regulator. Mr. Fellin no longer operates under his real name but operates under the pseudonym of Walter Rossi.

[69] Despite this admittedly challenged ethical history, I nevertheless prefer Mr. Fellin’s evidence over that of Mr. Farrell.

[70] Mr. Farrell tried to downplay his relationship with Mr. Fellin and his involvement with Mr. Farrell’s creditors. Mr. Farrell dismissed Mr. Fellin as one of a number of people who had purported to offer help and dismissed his efforts as “pie-in-the-sky” but if something came of it, Mr. Farrell was content to go along with it. Contemporaneous documents tell a very different story. A string of email correspondence which will be examined later in these reasons shows Mr. Farrell was deeply involved in Mr. Fellin’s efforts and shows Mr. Farrell pressing Mr. Fellin with a level of urgency and frequency that is completely inconsistent with Mr. Farrell’s attempts to downplay Mr. Fellin’s role.

[71] In addition, Mr. Fellin’s explanation about why Mr. Farrell should remove himself as an officer, director and shareholder of Midas was consistent with Mr. Farrell’s own concerns.

[72] Mr. Farrell testified that in Ireland it is possible to conduct a global search to determine whether an individual is a director of any corporations by entering the individual’s name into a particular database. The search result then lists all of the corporations of which that individual is a director. Mr. Farrell thought that this was the case in Canada as well. If it were the case in Canada, it would have allowed any creditor to enter Mr. Farrell’s name into the Canadian equivalent of the Irish database and discover that Mr. Farrell was a director of Midas. That could lead his Irish creditors to the Yonge Street and Eastern Avenue properties.

[73] I will provide additional reasons for preferring the evidence of Mr. Fellin in paragraphs 114 to 125 below when the evidentiary groundwork for those reasons has been developed.

[74] Given that contemporaneous documents referred to Mr. Rossi rather than to Mr. Fellin and given that all witnesses knew him as Mr. Rossi, I will refer to Mr. Fellin by his pseudonym of Mr. Rossi in the remainder of these reasons.

e. Events of October 2012 – March 2013

[75] Mr. Rossi had been active in finding financing for Midas throughout 2012. By October, 2012 Mr. Kavanagh had retained Colina King to act as Midas’ counsel on the registration of the mortgages. Ms. King began corresponding with Mr. Kavanagh and Mr. Rossi about documentation necessary for the mortgage.

[76] On November 14, 2012 a new Form 1 Notice of Change was filed in respect of Midas. It removed Mr. Farrell and the Canadian resident director Mr. Papastamos as directors of Midas and replaced them with Mr. Kavanagh alone. In addition, it removed Mr. Farrell as President and left Mr. Kavanagh as the only officer. Ms. King knew Mr. Kavanagh as the sole shareholder of Midas, consistent with Mr. Rossi’s proposal.

[77] In the fall of 2012, Mr. Rossi introduced Midas to the mortgagee defendants. The initial contact was between Mr. Rossi and Arthur Kraus, a mortgage broker who worked in the office of Gary Gruneir through whose company mortgage financing was ultimately provided. By mid-December Mr. Rossi was providing documents to Mr. Gruneir, attended a site visit with Mr. Gruneir and gave Mr. Gruneir access to the Yonge Street property. Mr. Gruneir believed Mr. Rossi was an employee of Midas because Mr. Rossi was involved in the details of the loan to an extent that the borrower would usually be. Mr. Rossi would, for example, deliver things personally to Mr. Gruneir and would follow up on the status of the mortgage and the timing of advances.

[78] By December 2012, Mr. Farrell’s Irish creditors were becoming more aggressive. Although Esso had reached a settlement with Mr. Farrell pursuant to which it would accept €350,000 in satisfaction of its €580,000 claim, the Agreed Statement of Facts filed for this trial indicates that the €350,000 had to be paid by the close of business on December 21, 2012. Mr. Farrell denied this at trial, claimed he had 12 months to pay the Esso settlement and asserted that the Agreed Statement of Facts was wrong.

[79] By December 18, 2012 Mr. Rossi was having conversations with the lawyers for AIB to purchase the debt Mr. Farrell owed to the bank. Mr. Farrell admits that he told Mr. Rossi to contact the lawyers for the bank to purchase the debt. The overall plan was that Mr. Farrell was trying to get into a better position with the bank by having someone purchase the debt but that he would still need to negotiate terms with the purchaser.

[80] By January, 2013 Mr. Rossi was contacting the lawyers for Esso to make inquiries about purchasing the already reduced €350,000 debt that Mr. Farrell owed Esso at a further discount.

[81] Mr. Farrell claims not to know where Mr. Fellin would get the money to purchase either the AIB or the Esso debt.

[82] The overall plan seems to have been for Mr. Rossi to pose as a member of an investment fund that purchased distressed debt at a discount. Mr. Rossi admits that this was a fiction and that he was not involved with any such fund.

[83] On February 5, 2013 Mr. Rossi wrote to Ms. King sending her a Form 1 that was filed on January 23, 2013. In doing so, Mr. Rossi explained that the January 23 filing was required because the earlier filing showed only John Kavanagh as a director and that Mr. Kavanagh had received a notice from the ministry to the effect that they were “going to kill the company because of the lack of Canadian director” as a result of which Mr. Papastamos was put back on the board as a resident Canadian director. This is consistent with Mr. Rossi helping implement the plan to remove Mr. Farrell from his Canadian assets.

[84] The first mortgage of $800,000 was registered on February 6, 2013. Of that amount, just over $660,000 was paid to the city of Toronto for outstanding taxes and just shy of $115,000 was paid to Ms. King in trust. Of the amount paid to Ms. King, just over $96,000 was to be paid to construction lien claimants. In other words, approximately 760,000 of the $800,000 mortgage was used for legitimate purposes of Midas and protected the assets of Midas from seizure by creditors. It was in Mr. Farrell’s interest that the properties be protected from seizure.

[85] Mr. Farrell was in Canada between February 11 and February 19, 2013. On February 14 he met with Mr. Rossi. He followed up the next day by email asking for a copy of correspondence between Mr. Rossi and AIB.

[86] On February 25, 2013 Mr. Farrell wrote to Mr. Rossi in connection with his negotiations with AIB stating:

I cannot stress to you enough the urgency of this matter, it must end this week with AIB and by this week I mean up to noon on Thursday 28th of February 2013.

I await hearing from you.”

[87] By March 1, 2013 Mr. Farrell was writing Mr. Rossi stating:

I cannot stress to you enough how important it is to secure a final settlement with AIB. Please could you keep me posted on any emails/letters that you sent to AIB and received from AIB.

I would like to thank you for your input to date, I do realize that I am pressuring you a slight bit but I just want to get this matter resolved.

[88] The parties prepared several agreements in pursuit of discussions with AIB including confidentiality agreements, business agreements, directions and releases. Mr. Farrell shared correspondence between himself and his own lawyer with Mr. Rossi.

[89] The $5,000,000 mortgage was registered on March 4, 2013. The funds were dispersed as follows:

(i) $3,043,674.92 was paid to Midas of which, $1,500,000 was paid to Peter Vroon, a Dutch business person from whom Mr. Farrell had borrowed money. Mr. Farrell acknowledged at trial that the repayment of this amounts to Mr. Vroon was of benefit to him and had to be taken into account somehow in the disposition of the action.

(ii) $804,095.30 was paid to discharge the first mortgage of $800,000.

(iii) $250,000 representing six months of prepaid interest on the $5,000,000 was paid to the mortgagee.

(iv) $49,500 representing six months of property taxes was paid to the mortgagee to ensure taxes would be paid.

(v) $100,868.18 was paid to discharge a writ of seizure and sale

(vi) $68,808 was paid to Ms. King.

A further $300,000 advance was delivered to Ms. King in May which she in turn passed on to Midas minus a small deduction for an insurance payment.

[90] As a result, it is undisputed that $2,704,463.18 went to pay obligations that were of direct benefit to Midas because the payment preserved Midas’s assets. The balance of those funds was paid into a Midas bank account. That too, presumably, was to the benefit of Midas. The funds paid to Midas were disbursed to various third parties (including Mr. Rossi) and unidentified bank accounts. If funds were dispersed improperly from the Midas bank account by Mr. Kavanagh or others, the fraud or lack of authorization lies not in the mortgage but in the misuse of funds generated by the mortgage. That is not something for which the defendants, other than potentially Mr. Kavanagh, are responsible.

f. The Vroon Loan

[91] As noted approximately $1,500,000 of the $5,000,000 mortgage was used to pay a debt of €1,000,000 owing to Peter Vroon. I take a moment to digress from the chronological narrative to discuss the Vroon loan because it provides additional reason for doubting Mr. Farrell’s reliability as a witness.

[92] Mr. Farrell’s evidence on the Vroon loan is full of contradictions. During his examination for discovery Mr. Farrell testified that Mr. Vroon had in fact advanced the funds to Mr. Farrell so that Mr. Farrell could invest them on behalf of Mr. Vroon. During the same discovery Mr. Farrell stated that he had authorized Mr. Kavanagh to enter into the arrangement with Mr. Vroon. At trial Mr. Farrell denied this and said that the answer about Mr. Kavanagh being authorized to enter into arrangements with Mr. Vroon was not correct.

[93] At trial Mr. Farrell tried to describe the loan as being for the benefit of Mr. Kavanagh because the loan proceeds were to be the funds that Mr. Kavanagh was using to “buy into Midas”. However at the same time he admitted that €$650,000 of the Vroon funds were used to pay the legal fees of AIB. The remaining €350,000 went to Mr. Farrell personally. None of the money went to Mr. Kavanagh or to Midas. Later in his evidence, Mr. Farrell described the Vroon loan as an investment in Mr. Farrell’s Irish properties or as “an investment in Thomas Farrell”.

[94] The terms of the loan are embodied in a loan agreement dated March 16, 2009. It appears to bear signatures of Mr. Kavanagh and Mr. Farrell. Despite the fact that Mr. Farrell described the loan as an investment in himself, he denies that it is his signature on the document. He claims never to have seen the loan agreement. I do not accept this. Mr. Vroon sent the loan agreement to Mr. Farrell’s Irish lawyer, Mr. Breheny, to be signed by Mr. Breheny’s clients. Mr. Vroon delivered the loan proceeds to Mr. Breheny’s trust account. In addition, paragraph nine of the loan agreement refers to a letter dated March 13, 2009 from Mr. Breheny to Mr. Vroon. According to paragraph nine of the loan agreement, the letter provides:

Dear Mr.Vroon,

In consideration of the transfer to my client account of an amount of € 1,000,000 I have been directed by my clients and its directors to confirm that I hold to your order certain title documents to the Company’s property 205, Yonge St. in Toronto. The title documents I hold are specifically a transfer of that property into the name of my client. I confirm and undertake that I will hold the Deed of Transfer in trust for you and to your order, and I will deal with it only as directed by you. If you have any further queries in this regard please do not hesitate to contact me.

Yours sincerely,

Neil J. Breheny

[95] In his evidence, Mr. Farrell took the position that Mr. Breheny had sent a forged loan agreement to Mr. Vroon and was taking instructions from Mr. Kavanagh in this regard.

[96] While it is possible for a lawyer to be involved with forged documents and to send documents with a client’s forged signature against his client’s wishes, I do not accept Mr. Farrell’s evidence in this regard. Mr. Farrell has never complained about Mr. Breheny’s conduct to the Irish legal regulator, has never brought any lawsuit against Mr. Breheny and does not even appear to have complained to Mr. Breheny personally.

[97] On March 10, 2010, Mr. Vroon wrote to Mr. Breheny to confirm that he was still holding title documents to the Yonge Street property because the borrowers had not repaid the loan. Mr. Farrell claims that Mr. Breheny never brought this to his attention.

[57] Mr. Vroon testified that he believed Mr. Kavanagh was authorized to deal on behalf of Midas. No one ever brought to Mr. Vroon’s attention any limitations on Mr. Kavanagh’s ability to act for Midas. Although $1,500,000 was transferred from the Midas account to Mr. Vroon on March 10, 2013 to pay the principal owing on the loan, Mr. Vroon testified that no interest was ever paid despite Mr. Vroon sending regular invoices for interest.

g. Events after Registration of the Second Mortgage

[98] I now resume the chronological narrative.

[99] On March 6, 2013 Mr. Rossi advised Mr. Farrell that AIB’s lawyers would not engage with Mr. Rossi.

[100] On March 8, 2013 Mr. Farrell replied telling Mr. Rossi to ask AIB what the full amount of the debt was but then tell AIB that if the full debt were paid, Mr. Rossi did not think he would be able to get a release from Mr. Farrell in favour of the bank. Mr. Farrell’s next instruction was telling:

We will have to then wait and see the reaction of AIB but just in case Peter that they call our bluff can you confirm to me that the said funds are available to then be paid over to AIB. Perhaps yourself and John Kavanagh could put your heads together and make sure that this can happen but Peter I cannot stress to you enough that AIB has the strongest hand at the minute and it is getting stronger by the day and by the week and indeed the month (emphasis added).

Mr. Farrell concluded the email by asking Mr. Rossi to call Mr. Breheny.

[101] On March 5, 2013 Mr. Rossi wrote to the lawyers for AIB threatening them with a complaint to the Law Society of Ireland and to the Financial Services Ombudsman if they did not respond to him. He followed up again on March 14, 2013 when no response had been received. Mr. Rossi sent copies of both emails to Mr. Farrell who responded to Mr. Rossi on March 14 noting:

… If this does not put a move on them Peter[^1] you will have to make the next email to them harsher letting them know you mean business.

Peter, I just need the matter out of the way.

[102] Mr. Farrell followed up with a further email to Mr. Rossi on March 26, 2013 stating, among other things:

Could you now please speak with John Kavanagh and revert back to me as soon as possible as seriously Peter, time is of the essence.

[103] Mr. Farrell was in Toronto between April 5, 2013 and June 14, 2013.

[104] In early April 2013, Esso was taking steps to have Mr. Farrell assigned into bankruptcy. On April 7, 2013 Jackie Farrell, on Mr. Farrell’s instructions, sent Mr. Kavanagh payment details for Esso’s lawyers in Ireland. On April 12, 2013 Mr. Kavanagh arranged for a transfer of funds to pay off the Esso debt. Mr. Farrell says he has no idea where the funds came from. At the same time, however, Mr. Farrell asserts that he had plenty of money to pay Esso and AIB. Mr. Farrell’s evidence in this regard is inconsistent with his contemporaneous emails to Mr. Rossi urging him to resolve the situation with AIB and put his head together with Mr. Kavanagh to make that happen.

[105] The only evidence before me of any funds to pay the Esso judgment were the proceeds from the $5 million mortgage on the Yonge Street and Eastern Avenue properties.

[106] By June 20, 2013, Mr. Farrell says he became aware of the $5,000,000 mortgage and had Mr. Breheny write to the lawyer for the mortgagees, Kimberly Gabriel to investigate.

[107] On June 24, Mr. Breheny wrote to Colina King advising her of the alleged fraud. In Mr. Breheny’s letter he specifically refers to Mr. Farrell being the 50% shareholder, President and a Director of Midas. Ms. King replied on July 16, 2013 referring to a Form 1which demonstrated that Mr. Farrell was not the president or a director of Midas.

[108] I contrast this correspondence with Mr. Farrell’s evidence. He testified that at one point he visited Ms. King in her office on Warden Avenue. According to Mr. Farrell, after he introduced himself Ms. King responded “goodness goodness you are supposed to be dead.” Ms. King denies ever making such a statement and says that “goodness goodness” is not an expression she would use. I prefer Ms. King’s evidence over Mr. Farrell’s.

[109] It is unclear from Mr. Farrell’s evidence whether Ms. King’s alleged statement about Mr. Farrell being dead arose before or after Mr. Breheny’s letter of June 24. In either scenario, the statement makes little sense in light of contemporaneous documents.

[110] If I assume that Mr. Farrell visited Ms. King after she received Mr. Breheny’s letter of June 24, it is unlikely that Ms. King would have been taken by surprise and said words to the effect of “Goodness, goodness you are supposed to be dead” because she would already have learned of Mr. Farrell’s existence from Mr. Breheny’s letter. Had Ms. King in fact believed that Mr. Farrell was dead, one might expect her to have explained this in her reply to Mr. Breheny of July 13, 2013.

[111] If I assume Mr. Farrell’s visit to Ms. King occurred before Mr. Breheny’s letter of June 24, it is odd that Mr. Breheny would not have referred to that meeting in the letter. One would expect Mr. Farrell to have told his lawyer about the statement because it would only strengthen the allegation that there had been a fraudulent transaction. That would be relevant for Mr. Breheny to know and would be a relevant factor for him to include in his letter to Ms. King.

[112] When Mr. Farrell says he learned of the mortgage, he made no effort to contact Mr. Kavanagh. The mortgage was fraudulent as Mr. Farrell claims, one might have thought that Mr. Kavanagh would be the first person Mr. Farrell would contact to, at the very least, ask questions. Mr. Farrell says he contacted Mr. Kavanagh at some later point by telephone but could not recall the details of the conversation. Later in his evidence Mr. Farrell asserted that Mr. Kavanagh said during the conversation that things were not as they seemed and that he did not do what Mr. Farrell thought he had done.

[113] Although Mr. Farrell maintains that Mr. Kavanagh has defrauded him, he has raised no complaint against Mr. Kavanagh in Ireland and has not, for example, even made a complaint against him to Irish accounting authorities.

h. Farrell and Rossi Dealings After “Discovering the Fraud”

[114] After Mr. Farrell says he discovered the “fraudulent” mortgage, he continued to deal with Mr. Rossi in connection with the AIB debt.

[115] By September 2013 AIB was taking steps to enforce its security by selling the properties at issue. At that point, Mr. Rossi, at Mr. Farrell’s direction, began pretending that he was interested in purchasing the property. Mr. Farrell sent Mr. Rossi details of the property listing and, at Mr. Rossi’s request sent him contact information for a lawyer that Mr. Rossi could use who was in no way connected with Mr. Farrell.

[116] Even though Mr. Farrell continued to deal with Mr. Rossi after “discovering” the alleged fraud, Mr. Farrell says he did not speak with Mr. Rossi about the allegedly fraudulent mortgage

[117] That is striking.

[118] The email traffic between Mr. Farrell and Mr. Rossi makes it clear that Mr. Farrell was looking to Mr. Rossi for help and advice with problems. The emails also make it clear that Mr. Farrell had been encouraging Mr. Rossi to work with Mr. Kavanagh. It staggers belief that, if Mr. Farrell had been defrauded of $5,000,000 by the person he had told Mr. Rossi to deal with, he would not even tell Mr. Rossi to stop dealing with Mr. Kavanagh.

[119] Mr. Farrell has no explanation for the absence of such communications.

[120] Stranger still is that Mr. Farrell had no conversations with Mr. Rossi about Mr. Kavanagh even though Mr. Farrell came to learn that Mr. Rossi’s credit card had been used to pay for the Form 1 that was part of the allegedly fraudulent scheme. One might have expected a question as simple as: “Why were you paying for this?” or “What did you think you are paying for?”

[121] Even more strange is that Mr. Rossi received over $400,000 from the allegedly fraudulent mortgage proceeds yet Mr. Farrell has made no effort to recover that money from Mr. Rossi even though Mr. Farrell sued the mortgagees, the lawyer acting for Midas, the property valuator and the potential tenant associated with the Yonge Street property.

[122] The final component of strangeness concerns Mr. Rossi’s efforts on Mr. Farrell’s behalf with AIB and Esso. As noted earlier, the plan was to have Mr. Rossi purchase the debt at a discount. Mr. Rossi was pretending to be a representative of a fund that engaged in those sorts of purchases. There is no evidence anywhere of Mr. Rossi’s actual ability to pay AIB or Esso. Mr. Farrell agreed that he would have to come to an understanding with whoever bought the debt about how much Mr. Farrell would have to repay the purchaser and on what terms. Even though Mr. Farrell was pressing Mr. Rossi to wrap things up quickly to the point of threatening AIB with complaints to the Law Society and the Financial Services Ombudsman, there is no evidence that Mr. Farrell ever discussed terms of repayment with Mr. Rossi, let alone came to an agreement about the terms of repayment.

[123] The only inference I can arrive at is that Mr. Farrell never discussed terms with Mr. Rossi because Mr. Rossi was never going to pay for the debt with his own funds. Had the plan succeeded, Mr. Farrell would have used funds from the mortgages or other funds that Mr. Farrell had to pay AIB, just as he had apparently used mortgage funds to repay Esso.

[124] The only conclusion I can come to from these circumstances is that Mr. Farrell was aware of and consented to the plan to remove him as a shareholder and director of Midas to protect his Canadian assets from his creditors; that he was aware of the mortgages as they were being registered, that Mr. Kavanagh had authority to bind Midas to the Mortgage; that there was no fraud on Midas; and that the mortgage is valid. Mr. Farrell’s allegations that the mortgages are fraudulent certainly fits the pattern of Mr. Farrell accepting credit but then taking aggressive steps to avoid payment on the debt with a view at some point of negotiating a heavy discount on it.

[125] Even if my inferences and conclusions about the degree of Mr. Farrell’s knowledge are incorrect, the evidence demonstrates on a balance of probabilities that Mr. Kavanagh had authority to conclude the mortgages and that the plaintiffs received substantial benefit from the mortgages.

III. The Rule in Browne v. Dunn

[126] The plaintiffs submit that the defendants cannot challenge Mr. Farrell’s narrative about the mortgages because they did not put a contrary version of events to him during cross-examination nor did they put to him that he knew about and was involved in the mortgages.

[127] The defendants were, however, under no obligation to do so.

[128] The principle underlying what has become known as the Rule in Browne v. Dunn is trial fairness. The point is to ensure that a witness is somehow aware that their story is being challenged. The Court of Appeal described the principle as follows in R. v. Quansah, 2015 ONCA 237:

[81] Compliance with the rule in Browne v. Dunn does not require that every scrap of evidence on which a party desires to contradict the witness for the opposite party be put to that witness in cross-examination. The cross-examination should confront the witness with matters of substance on which the party seeks to impeach the witness’s credibility and on which the witness has not had an opportunity of giving an explanation because there has been no suggestion whatever that the witness’s story is not accepted.

[82] In some cases, it may be apparent from the tenor of counsel’s cross-examination of a witness that the cross-examining party does not accept the witness’s version of events. Where the confrontation is general, known to the witness and the witness’s view on the contradictory matter is apparent, there is no need for confrontation and no unfairness to the witness in any failure to do so.

[86] The confrontation principle is not violated where it is clear, in all the circumstances, that the cross-examiner intends to impeach the witness’s story. … (Citations omitted, emphasis added)

[129] Paragraph 81 of Quansah makes clear that the witness must be confronted only on those issues on which the party seeks to impeach the witness’s credibility and which the witness has not had a chance to explain because there has been no suggestion that the witness’s story is not accepted.

[130] The statements of defence made clear that the defendants alleged that the plaintiffs received the benefit of the mortgages and were seeking to set aside the mortgage Mr. Farrell placed on the property as a fraudulent conveyance.

[131] The defendants’ written opening statements, which were exchanged five days before the trial began, could leave no doubt that Mr. Farrell’s credibility was in issue. By way of example, Ms. King’s opening statement says the following with respect to Mr. Farrell’s claim that he had no notice of Mr. Kavanagh’s dealings with the properties and that the plaintiffs received no benefit from those dealings:

King submits that Farrell’s narrative, unlikely on its face, is rendered untenable by the productions of the defendants… (p. 1)

However, [the plaintiffs] have produced nothing to substantiate this beyond the word of Mr. Farrell, whose version of events contains a series of irreconcilable contradictions (p. 4)

… Farrell’s own version of events is fantastical. Even if Farrell’s narrative were credible on its face, it is fatally undermined by the evidence uncovered by the defendants (none of which was volunteered by the Plaintiffs). (p. 5)

These denials are, like so much of Farrell’s testimony, incredible. (p. 7)

[132] This should have made it abundantly clear that Mr. Farrell’s narrative was being challenged.

[133] Moreover, it is not necessary to confront a witness in a hostile manner to challenge credibility. It is sufficient to put to the witness facts that are inconsistent with his own narrative. In the case of Mr. Farrell it was up to his lawyer to decide whether he wanted to try to have Mr. Farrell explain those juxtaposed facts in re-examination.

IV. The Claim Against Mr. Kavanagh

[134] Mr. Farrell seeks an order vesting Mr. Kavanagh’s shares in Mr. Farrell. The mortgagees oppose that relief. They obtained a guarantee from Mr. Kavanagh. The only material asset of Mr. Kavanagh’s that the mortgagees know of is his interest in Midas.

[135] The plaintiffs base their claim to Mr. Kavanagh’s shares on two core submissions. First, that Mr. Kavanagh did not pay the subscription price for his shares and second, that the issuance of shares to Mr. Kavanagh was subject to conditions that Mr. Kavanagh did not meet. Neither of these grounds, in my view, constitutes a basis for vesting Mr. Kavanagh’s shares in Mr. Farrell.

a. Alleged Failure to Pay for the Shares

[136] Midas’ share capital consists of 100 common shares at a subscription price of one dollar each. Each of Mr. Farrell and Mr. Kavanagh were issued 50 shares. Mr. Farrell submits that Mr. Kavanagh never paid the $50 for his shares. Mr. Farrell submits that the effect of Mr. Kavanagh’s failure to pay is that his shares are somehow a nullity or should be transferred to Mr. Farrell. He relies on section 23 (3) of the OBCA in support of this submission.

[137] Section 23 (3) of the OBCA provides:

“a share shall not be issued until the consideration for the share is fully paid in money or in property or past service that is not less in value than the fair equivalent of the money that the corporation would have received if the share had been issued for money.”

[138] The Plaintiffs rely on Dunham v. Apollo Tours Ltd. (1978) 1978 CanLII 1442 (ON SC), 20 O.R. (2d) 9 at paras. 20-24 which held that a shareholder who did not pay for shares in similar circumstances could be deprived of the shares.

[139] The only evidence before me that Mr. Kavanagh did not pay the $50 is the assertion of Mr. Farrell. As noted earlier, I find Mr. Farrell to be an entirely unreliable witness. The mortgagees took a guarantee from Mr. Kavanagh based on the understanding that he held shares in Midas. I am not prepared to deprive the mortgagees of the benefit of the guarantee based on a bald assertion by Mr. Farrell to the effect that Mr. Kavanagh did not pay $50 fourteen years ago as he should have.

[140] The approach I am taking here is also consistent with that of the Supreme Court of Canada in Mennillo v. Intramodal Inc., 2016 SCC 51, at paragraph 22, where the shareholders’ failure to pay for their shares contrary to s. 25(3) CBCA[^2] did not affect their status as shareholders.

[141] It would seem additionally unfair to vest Mr. Kavanagh’s shares in Mr. Farrell given that the minute book for the company went missing after Loopstra Nixon send it to Mr. Rudensky. The plaintiffs have not called Mr. Rudensky as a witness to explain what happened with the minute book. The minute book may well shed light on whether and how Mr. Kavanagh paid for his shares.

[142] If I am wrong in my analysis, I note that in Dunham, the shareholder who had not paid for his shares was given a certain period of time to do so. If I am wrong in my analysis of the evidence and Mr. Kavanagh’s share should be paid for, I would grant leave to the mortgagees to pay $50 to Midas in full payment of Mr. Kavanagh’s shares.

b. Alleged Conditions Relating to Mr. Kavanagh’s Shares

[143] In addition to the allegation that Mr. Kavanagh did not pay the $50 subscription price for his shares, Mr. Farrell alleges that there were other conditions associated with the share issuance to Mr. Kavanagh which were never fulfilled.

[144] Mr. Farrell’s evidence in this regard is contradictory. At times, Mr. Farrell spoke of a requirement by Mr. Kavanagh to contribute 50% of the value of the properties in cash.

[145] At other times Mr. Farrell spoke of the deal being that Mr. Kavanagh would have his contribution valued based on work he did for Midas over and above the usual week’s work for which he was paid.

[146] Neither arrangement is anywhere in writing. There is no formal agreement, no email, not even a handwritten note. The method by which Mr. Kavanagh’s work above his “usual work week” was to be calculated was never determined nor was the time by which Mr. Kavanagh was required to contribute cash or services for his 50%. Nor was the total value of the amount that Mr. Kavanagh would have to “work off” ever determined. In those circumstances, the agreement Mr. Farrell describes is too vague to be enforceable.

[147] In support of his argument, Mr. Farrell further relies on to Kavanagh’s deemed admissions to paragraphs 20, 21, 24, 36, 38, 54 and 55 of the statement of claim which set out his arrangement with Mr. Kavanagh. These paragraphs do not constitute an enforceable agreement.

[148] The allegations about the obligation to make a cash investment are found in paragraph 20 of the statement of claim. It speaks of “a later financial investment from Kavanagh in an amount to be subsequently agreed upon.” That is nothing but an agreement to agree which is not enforceable.

[149] The gist of the remaining paragraphs is that it was a condition of the share issuance that Mr. Farrell would “devote whatever time was needed to fully and properly manage, oversee and look after the affairs of [Midas] in accordance with Farrell’s directions and instructions.”

[150] There is no evidence that any such condition was noted on the share certificates, in the minute book of the Corporation or was otherwise brought to the attention of others who may rely on the fact that shares were issued to Mr. Kavanagh. I note that Midas’s tax returns from early on show both Mr. Farrell and Mr. Kavanagh as 50% shareholders without further qualification. The first time that appears to have been changed is in the 2017 tax return.

[151] Finally, although section 23 (3) of the OBCA contemplates past services as amounting to consideration for the issuance of shares, it does not contemplate future services as amounting to consideration for the issuance of shares. Indeed, on the very wording of section 23 (3) it would appear that future services are precluded as consideration for share issuances because, by definition, they could not be fully paid for before the shares are issued.

[152] For all of these reasons, I do not accept Mr. Farrell’s evidence of any agreement that imposes any sort of condition on the shares of Mr. Kavanagh. I therefore dismiss the plaintiffs’ claim for a declaration that Mr. Kavanagh is not entitled to any shares in Midas.

c. Damages Claim against Mr. Kavanagh

[153] The plaintiffs claim damages from Mr. Kavanagh in the event that the $5,000,000 mortgage is declared enforceable. They claim damages of $3,892,947.47 plus interest. They say that this is the difference between the $4.8 million advanced on the mortgage and a sum of $907,052.53 which has been repaid. Midas also seeks recovery from Mr. Kavanagh of all costs and legal fees in the proceedings with the mortgagee defendants.

[154] I decline to award any judgment in the plaintiffs’ favour.

[155] The fact that a defendant has been noted in default does not entitle a plaintiff to judgment. Rule 19.02 (1) (a) provides that a defendant who has been noted in default:

is deemed to admit the truth of all allegations of fact made in the statement of claim.

[156] The statement of claim does not make any allegations of fact on which to base the monetary judgment the plaintiffs seek. The claims against Mr. Kavanagh are set out in paragraphs 50 – 58 of the statement of claim. Those paragraphs do not contain allegations of fact. Instead they make broad legal allegations about Mr. Kavanagh’s conduct. These include allegations to the effect that he “fraudulently and unlawfully” arranged for the mortgages, that he “misappropriated and stole” the proceeds of the mortgage, that he “fraudulently and unlawfully” caused Mr. Farrell to be removed as a director.

[157] To the extent there are factual allegations in those paragraphs, they relate to the registration of a mortgage, spending the proceeds of the mortgage and removing Mr. Farrell as a director. Those facts alone do not support a monetary judgment. The overlay on those facts that might support a judgment are the allegations of fraud, misappropriation and theft. As pleaded, those are legal characterizations, not facts. As noted earlier in these reasons I have not accepted the legal characterizations of fraud, misappropriation or theft.

[158] Moreover, the judgment the plaintiffs seek would be based on deemed admissions to the allegations in the statement of claim based on Mr. Kavanagh’s failure to defend. The effect of any such judgment would be to diminish the force of any judgment that the mortgagees would have against Mr. Kavanagh based on the guarantee.

[159] Although Mr. Kavanagh has been noted in default and is therefore deemed to admit the facts alleged against him in the statement of claim, those admissions do not bind other defendants: Correia v. Canac Kitchens, 2008 ONCA 506 at para 110. Using deemed admissions against Mr. Kavanagh to diminish the value of the mortgagees’ judgment on Mr. Kavanagh’s guarantee would not be appropriate given my earlier findings about the mortgages, the circumstances in which they were entered into and the use of their proceeds.

[160] To my mind, granting a default judgment against Mr. Kavanagh would be granting a judgment based on deemed admissions which judgment and deemed admissions go directly contrary to the evidence I heard and the findings of fact I have made. That would not be in the interest of justice.

[161] The mortgagees have advanced a cross-claim against Mr. Kavanagh on his guarantee. The cross-claim asserts the fact of the guarantee, the fact that the mortgage it guarantees is in default and that the default triggers the guarantee. Those facts were established at trial and entitle the mortgagees to judgment. To the extent that the mortgagees recover on the property itself, there can of course be no double recovery against Mr. Kavanagh.

V. The Claim Against Colina King

[162] The plaintiffs submit that Colina King, the lawyer Mr. Kavanagh retained on the mortgage transactions fell short of the standard of care required of a reasonably prudent lawyer in a real estate transaction. The plaintiffs argue that had Ms. King met the standard of care, irregularities would have been noticed and the nature of the fraud exposed.

[163] As noted above, I have found that there was no fraud. Strictly speaking it is therefore not necessary to address the negligence allegations against Ms. King. I will nevertheless do so briefly in the event I am wrong on the issue of fraud.

[164] The negligence allegations against Ms. King have to be viewed in proper context. She was retained in October for mortgages that were not registered until December and March. There was therefore no particular urgency in the registration of the mortgages. Urgency is a red flag for fraud. She was also retained by a long-standing officer of the corporation. That too is a source of some level of comfort. Finally, all of the funds on the mortgages appear to have been directed to legitimate payees. They were used to pay off tax arrears, construction liens, prepaid interest, prepaid taxes with the balance being paid to Midas. A further common red flag for fraud is payment to parties with no legitimate relationship to the mortgagor. That is not present here.

[165] The plaintiffs argue that Ms. King was negligent in accepting By-Law Number two, the borrowing by-law. The alleged negligence lies in the fact that the by-law is signed by Mr. Farrell as President and by Mr. Kavanagh as Secretary beneath a line that indicates that the by-law was enacted by the board. Mr. Kavanagh was not a board member at the time. In addition, the by-law is one of Midas and is dated December 15, 2006. As of that date the Corporation’s name was 2122161 Ontario Limited. While there was a corporate resolution changing the name to Midas, it was dated the same day as the company was incorporated.

[166] The plaintiffs’ expert, Robert Aaron, was of the view that this amounted to negligence. Ms. King’s expert, Hartley Nathan was of the opinion that this did not amount to negligence and that the irregularities were such that a reasonable solicitor may not have noticed or may have chosen to ignore them. Mr. Aaron admitted that the irregularities in By-Law Number two did not rise to the level of a red flag but were evidence of sloppiness. On re-examination Mr. Aaron expressed the view that the irregularities in By-Law Number two were red flags.

[167] In the context of the by-law as a whole, the irregularities do not constitute red flags that ought to have put Ms. King on notice of any wrongdoing. As noted earlier, the by-law was not even necessary because the corporation already had the power to borrow. Moreover, the by-law was expressly affirmed by Mr. Farrell and Mr. Kavanagh signing as shareholders thereby assuaging any concerns that the by-law may not have been properly passed.

[168] Although Ms. King purports to have seen a copy of the corporate minute book, she made no copy of it and has no correspondence to demonstrate its chain of possession. The corporate minute book has now disappeared. While it would have been helpful for Ms. King to make a copy of the minute book or to prepare cover letters that showed a chain of possession, no one articulated any theory about how her failure to do so caused the mortgages to be registered. Had she kept a copy of the minute book or had covering letters the mortgages would still have been registered. The defendants try to avoid the causation argument by suggesting that Ms. King never actually saw the minute book. She says she did, that it was her practice to view minute books and that she would not have proceeded with the transaction without having seen the minute book. I have no reason to disbelieve her. I have even less reason to disbelieve her given that the last trail of possession for the minute book was its transfer from Loopstra .Nixon to Mr. Farrell’s accountant, Mr. Rudensky, whom Mr. Farrell did not call as a witness.

[169] The plaintiffs also allege that Ms. King was negligent in respect of the certificate of incumbency that she delivered to the mortgagees. The certificate confirmed that Mr. Kavanagh and Mr. Papastamos were directors. The plaintiffs argue that Ms. King cannot demonstrate she met the standard of care in identifying the directors because she cannot produce the minute book that would contain resolutions appointing them. This goes back to the issue of the minute book which I have already addressed above.

[170] The plaintiffs further allege that Ms. King did not keep adequate records of her meeting with Mr. Papastamos. They allege she never met with him. Ms. King says she met an elderly Greek man who identified himself as Alex Papastamos, took copies of his identification, and reviewed the Certificate of Incumbency with him.

[171] Mr. Papastamos died before trial. He had, however, been examined under rule 39 . The transcript of that examination was admitted into evidence at trial. During that examination he denied having met Ms. King. He was asked whether the signature on the certificate of incumbency was his. He responded:

No, it is not my signature. It’s close enough… copied.

[172] Mr. Papastamos denied having signed the document but said that he had given Mr. Kavanagh a copy of his passport and driver’s license because Mr. Kavanagh needed a Canadian resident director for an unidentified business on Yonge Street. That sounds like it could relate to the Yonge Street property. He also testified to the effect that his relationship with Mr. Kavanagh was very good, he was not aware that he had been removed as a director of Midas, he was a director of Midas solely because it needed a resident Canadian director and that he was not involved in the business of Midas.

[173] The evidence of Mr. Papastamos is troubling. However even if I prefer his evidence over that of Ms. King, there are significant causation issues in respect of which the plaintiffs have not satisfied me.

[174] The plaintiffs’ theory is that Ms. King never met Mr. Papastamos but merely accepted photocopied ID that she received from Mr. Kavanagh. If I accept that as true, I must still determine whether that act of negligence caused the mortgages to be registered.

[175] The British Columbia Court of Appeal’s decision in BSA Investors Ltd v. Mosly, 2007 BCCA 94 is apposite in this regard. In that case, an agent of the plaintiff fraudulently registered a mortgage and took the proceeds for himself. The trial judge found the lawyer of the corporate plaintiff to have been negligent because he did not notice that its articles of incorporation required two signatures for debt instruments. The Court of Appeal overruled the trial judge on the basis that his causation analysis was faulty:

48. The question might therefore be asked: was it really a part of the plaintiffs' burden of proof to show that had Mr. Lester asked for the second signature it would have put a stop to Mr. Mosly's fraud. In my view, on these facts, the answer is yes. Obviously, the plaintiffs were not required to lead evidence negating every possible hypothetical situation. But here there was a sizeable body of evidence going to Mr. Mosly's dishonesty, which was accepted by the trial judge and summarized at paras. 57 to 72 of his reasons. Consequently, the plaintiffs' burden as to causation included the requirement to show, on a balance of probabilities, that had Mr. Lester performed his duty Mr. Mosly would have been stopped.

[176] Had Ms. King insisted on meeting Mr. Papastamos in person, one of two things would likely have occurred. Mr. Kavanagh could have made arrangements for Mr. Papastamos to attend Ms. King’s office and sign the certificate of incumbency in person. Mr. Papastamos was not aware that he had ever been removed as a director so it would have come as no surprise to him to be required to sign a document indicating that he was a director. Mr. Papastamos also described his relationship with Mr. Kavanagh as being very good. In that context he would probably have attended in person had it been made convenient for him. Alternatively, Mr. Kavanagh could have found someone else to act as the resident director. Given the sophisticated and detailed nature of the fraud that the plaintiffs allege against Mr. Kavanagh, it is unlikely that he would have been stopped by the mere requirement to have someone attend at Ms. King’s office in person in the capacity of a resident Canadian director.

[177] The plaintiffs also allege that Ms. King was negligent in having improper and ineffective resolutions signed approving the mortgages. The resolutions were prepared by Ms. Gabriel and sent to Ms. King for signature. The defect in the resolutions is that all of their dispositive paragraphs begin with the words “and whereas;” wording typically associated with recitals. While the error may lead to inelegant drafting, it does not affect the dispositive effect of the paragraphs in question. The actual language of those paragraphs remains dispositive in nature despite the two opening words. For example, the third paragraph reads:

AND WHEREAS the terms of the above-mentioned Letter are hereby ratified and confirmed and the Corporation is authorized to comply in full with its terms, and to provide all security documentation is required, to be executed as shown thereon.

[178] While it is no doubt preferable that the dispositive language of this paragraph be found under a heading of something like “be it resolved that” or in a paragraph that begins with those words as opposed to beginning with the words “and whereas”, the imperfect wording does not change the dispositive force of the paragraph.

[179] Regardless of its first two words, the language clearly evidences the ratification of the terms of the Letter referred to and affirms the corporation’s authorization to comply with the Letter and provide security documentation as required. The language of the fourth and fifth paragraphs of the resolutions is to similar effect.

[180] This issue also raises causation questions. Had Ms. King noticed the error, she would presumably have phoned Ms. Gabriel who would have provided more carefully drafted resolutions. It would not have prevented the mortgages from being registered.

[181] Finally, Ms. King received a new Form 1. The original Form 1 had Mr. Farrell and Mr. Papastamos as directors. It was replaced by a Form 1 that listed only Mr. Kavanagh as a director. Shortly before the first mortgage was registered, Ms. King received a revised Form 1 which reinstated Mr. Papastamos as a director in addition to Mr. Kavanagh. This was the Form 1 in respect of which Mr. Rossi had written Ms. King advising that Mr. Kavanagh had received a notice from the ministry to the effect that they were “going to kill the company because of the lack of Canadian director.”

[182] That was a reasonable explanation. The reinstatement of Mr. Papastamos was consistent with the requirements to have a Canadian resident director. It was reinstating an earlier, long-standing director and would not raise any particular concerns.

[183] For these reasons I find that a claim of negligence against Ms. King has not been made out.

VI. The Claim Against the Mortgagees

[184] The plaintiffs claim that the mortgagees had sufficient knowledge of the alleged fraud that prevents them from relying on the mortgage. I disagree. The plaintiffs claim against the mortgagees runs into three significant legal hurdles.

[185] The first legal hurdle is the indoor management rule embodied in ss. 19 (a) (b) and (d) of the OBCA which provides:

19. A corporation or a guarantor of an obligation of a corporation may not assert against a person dealing with the corporation or with any person who has acquired rights from the corporation that,

(a) the articles, by-laws or any unanimous shareholder agreement have not been complied with;

(b) the persons named in the most recent notice filed under the Corporations Information Act, or named in the articles, whichever is more current, are not the directors of the corporation;

(d) a person held out by a corporation as a director, an officer or an agent of the corporation has not been duly appointed or does not have authority to exercise the powers and perform the duties that are customary in the business of the corporation or usual for such director, officer or agent;

except where the person has or ought to have, by virtue of the person’s position with or relationship to the corporation, knowledge to that effect.

[186] The effect of the plaintiff’s claim against the mortgagees is to argue that Mr. Kavanagh, an individual named as an officer and a director in a Form 1 (the notice filed under the Corporations Information Act) and a person held out by Midas as an officer with the authority to bind the corporation (by virtue of By-Law Number one ) did not in fact have that authority.

[187] The only way the plaintiffs can take that position successfully is to demonstrate that the mortgagees knew or ought to have known that Mr. Kavanagh had no such power by virtue of the mortgagees relationship with Midas. They have not done so.

[188] The second legal hurdle is the Land Titles Act, R.S.O. 1990, c.L5. The basic scheme of that act is to say that registered instruments are valid, end of story. That principle is embodied in s. 78 (4) of the Act which provides:

Effect of registration

(4) When registered, an instrument shall be deemed to be embodied in the register and to be effective according to its nature and intent, and to create, transfer, charge or discharge, as the case requires, the land or estate or interest therein mentioned in the register.

[189] There are two limited exceptions to this principle. One is statutory, the other is based in case law. The statutory exception relates to certain types of fraud. The thrust of that exception is to capture instances where a party fraudulently impersonates the titleholder of property and, by doing so, fraudulently conveys an interest in property to themselves. The Land Titles Act contains limited exceptions to guard against that mischief. The plaintiffs agree that they do not fall into that exception because there was no fraudulent impersonation here. Mr. Kavanagh at all times purported to be who he actually was and was exercising the authority he had by virtue of the corporate by-laws.

[190] The exception rooted in case law holds that the protection of section 78 (4) only applies to bona fide registrants for value, that is to say registrants who do not have notice of an interest in land that differs from that shown in the register.

[191] The Ontario Court of Appeal set out what this means in Stanbarr Services Limited v. Metropolis Properties Inc. 2018 ONCA 244. In doing so the court made clear that in order to prevent someone from relying on a registered interest, one must demonstrate that the party had actual knowledge of an interest in land that differs from what is shown in the register. The Court of Appeal made this clear in paragraph 26 and 28:

[26] Because notice has been considered to be one of a limited number of exceptions to the mirror principle, it has been strictly construed. Our courts insist on actual notice of a defect. Actual knowledge means just that; the party must actually know about the defect. It is not sufficient that it has become aware of facts that may suggest it should make inquiries: Rose v. Peterkin (1885), 1885 CanLII 16 (SCC), 13 S.C.R. 677, at pp. 694-695. Constructive knowledge is insufficient. Thus, the factual analysis in considering a notice argument is limited to a consideration of what the party knew, not what it could have known had it made inquiries.

[28] … it is unnecessary and unhelpful to consider whether they received sufficient information to put them on inquiry. That is because receipt of such information does not amount to actual knowledge: Rose, at pp. 694-695. Therefore, whether the party received such information and what steps it took to investigate the situation is wholly irrelevant to the actual knowledge analysis.

[192] The plaintiffs have not demonstrated any actual knowledge on the part of the mortgagees. The best the plaintiffs can argue is that the mortgagees were aware of anomalies in by-laws, property appraisals or leases that should have led them to make further inquiries. This is clearly not enough and does not prevent the mortgagees from relying on their registration.

[193] The third legal hurdle concerns the legal duties of mortgagees to mortgagors or, more precisely put, the absence of such legal duties. In Isaacs v. Royal Bank of Canada, 2010 ONSC 3527 at paras. 38-44, aff’d at 2011 ONCA 88 the court affirmed that the relationship between a mortgagee and a mortgagor is one of debtor and creditor. The mortgagee owes the mortgagor no duties to adhere to its own internal lending procedures. Any steps a mortgagee takes are to protect its own interests. It is free to do or not do as it wishes. As a result, any condition in the lending agreement with respect to things such as satisfactory leases or satisfactory appraisals exist solely for the protection of the mortgagee. The mortgagee can wave them at will and has no duty to fulfil those conditions to protect the mortgagor.

[194] That is precisely the plaintiffs’ claim against the mortgagees. The lending commitment was conditional on satisfactory appraisals and leases. The plaintiffs complain that there were anomalies in the appraisal and lease which should have led the mortgagees to make further inquiries and that such further inquiries would have disclosed the alleged fraud. Isaacs makes clear however that there is no duty on the mortgagee to enforce those conditions.

[195] The mortgagees’ principal witness was Gary Gruneir. He is the directing mind of the defendant C & K Mortgage Services Inc. operating as Rescom Capital. Mr. Gruneir struck me as an honest, candid, direct and reliable witness. He described his business as being that of an asset lender. That is to say he advances funds on his own assessment of the value of the asset, not on the basis of appraisals or income streams. What is critical for him is what he can generate from the property on a forced sale. This makes good sense given that his business tends to focus on lending that is more challenging than the sort of lending large banks might engage in.

[196] At the time these mortgages were extended, he had completed approximately 1000 mortgages and had been in business for approximately 30 years. As a result of that experience he had a good base on which to value properties quickly. In addition, he acted as a mortgage broker for a wide range of sophisticated clients. They also had extensive experience in real estate investment and were a further source of information about property values.

[197] The anomalies on which the plaintiffs rely are as follows:

(a) Mr. Gruneir was sent an appraisal of the Yonge Street property only 12 pages of which dealt with the Yonge Street property while the remaining 26 pages dealt with a different property in a different neighbourhood. The plaintiffs argue that Mr. Gruneir should have noticed the discrepancy, called the appraiser and that, had he done so, the alleged fraud would have come to light.

(b) Mr. Gruneir knew there was supposed to be a tenant going into the Yonge Street property and allegedly made no effort to contact the tenant and did not notice anomalies in the purported lease that would have led him to contact the purported tenant and would have disclosed the false nature of the lease.

(c) Mr. received an estimate from Bautech Developments Limited for landlord work required on the Yonge Street property which the plaintiffs allege was forged. Mr. Gruneir did not follow up with Bautech. Had he done so, he would have learned of the forgery and the allegedly fraudulent mortgage would come to light.

[198] Mr. Gruneir testified that he probably viewed the appraisal on a computer. He knew of the property valuator in question and described him as a “no-fly zone appraiser” because his appraisals were unrealistically high and sloppily prepared. In this case the appraisal was based on a tenant generating $845,000 a year in income. Mr. Gruneir indicated that while a tenant might be icing on the cake, rental income does not figure prominently in his asset valuations. For his business, the distressed sale value was the critical driver. For the same reasons, Mr. Gruneir paid little attention to the lease.

[199] The plaintiffs also criticized Mr. Gruneir for not following up on the Bautech estimate for the installation of heating and air conditioning. The plaintiffs called Mr. Buttner, Bautech’s directing mind, as a witness. He said the estimate was a forgery and was not generated by his company. The plaintiff’s theory was that Mr. Gruneir should have followed up with Bautech to satisfy himself about the legitimacy and accuracy of the estimate. According to Mr. Gruneir, he had no basis for believing that the Bautech estimate was a forgery. I agree. There is nothing on the face of the document that would suggest that it was anything other than what it appeared to be.

[200] Moreover, tab 542 of Exhibit 1 is an email from Mr. Buttner to John Kavanagh attaching an estimate. This suggests that Mr. Buttner may have been mistaken when he concluded that the document he was shown during his examination in chief was a forgery. Even if the document Mr. Buttner was shown during his examination in chief contained irregularities visible to him, he had nevertheless provided Mr. Kavanagh with a legitimate estimate.

[201] The plaintiffs also allege that the mortgagees’ lawyer, Kim Gabriel acted negligently because she failed to notice a number of discrepancies and anomalies in the documents she was given by Ms. King and that had she done so and made further inquiries, the alleged fraud would have been uncovered.

[202] According to the plaintiffs’ expert, Mr. Robert Aaron, Ms. Gabriel, fell short of the standard of care in that she:

(a) Accepted without question Ms. King’s solicitors opinion with respect to the borrower having taken all necessary steps to authorize the mortgage when the borrowing by-laws was apparently invalid.

(b) Failed to notice a number of red flags including:

i. The proximity between the dates of corporate changes and the mortgages.

ii. The urgency for completion of both mortgages, the documents.

iii. The absence of any covering letter accompanying the documents that Ms. Gabriel received from Ms. King including the absence of a list of documents or an envelope indicating that the documentation came from Ms. King.

iv. Failing to notice the irregularities with the borrowing by-law.

v. Failing to notice the incomplete and inaccurate appraisal for the Yonge Street property.

vi. The absence of any lawyer contact for the alleged tenant of the Yonge Street property. Ms. Gabriel merely accepted the lease on the Yonge Street property without verifying that it had been signed by an officer of the corporate tenant. The corporate tenant was incorporated only nine days after the purported lease was supposedly signed.

[203] Although Ms. Gabriel is not a defendant in the action, the plaintiff’s theory is that if she knew or ought to have known of a fraud, then her knowledge is imputed to the defendant mortgagees.

[204] Ms. Gabriel filed an expert report prepared by Craig Carter. Mr. Carter has practiced since 1979. His practice focuses on mortgage remedies, mortgage law and standards of practice. In his view, Ms. Gabriel met the requisite standard of practice. Mr. Carter focuses on the fact that Ms. Gabriel acted for the mortgagee. The mortgagee’s lawyer is typically entitled to rely on the documentation and opinions received from the mortgagor’s lawyer. In his view it would be unduly expensive to require a mortgagee’s lawyer to reproduce what the mortgagor’s lawyer has already done. He warns against applying the standard of a litigation lawyer who is dissecting the transaction afterwards with a view to establishing fraud as the appropriate standard for the prudent solicitor registering a mortgage.

[205] According to Mr. Carter anomalies in the two by-laws would not constitute a red flag indicative of fraud. In his view, the purpose of a lawyer’s review of the by-laws is to ensure that the person executing the security documents has the appropriate delegated authority from the corporation to sign and bind the corporation. The standard of practice does not require the lender’s lawyer to review the by-laws of corporate or were looking for inconsistencies or flaws.

[206] According to Mr. Craig, Ms. Gabriel was not required to notice the dissonance between the corporate name and the date of the two by-laws because a lender’s solicitor is entitled to rely on the enforceability opinion provided by borrower’s counsel. Moreover, it is not unusual for a corporation to be incorporated as a numbered company and then to have its name changed immediately to the name preferred by the client. It is not unusual for that to occur on the date of incorporation.

[207] According to Mr. Craig, many of the issues that Mr. Aaron points to as being red flags are merely indicative of careless errors in corporate organization that occur all the time. In Mr. Craig’s view, a change in corporate directors proximate to the lending date is not a red flag here. Corporations change directors all the time. It was several months between the change of directors and registration of the mortgages or advance on the mortgages. To the extent there was urgency in registering the mortgage, that is understandable. There were tax arrears and construction liens on the property. Both security holders were moving to enforce. While covering letters may be ideal, the absence of a covering letter is not a red flag of fraud. The alleged anomalies in the borrowing by-law are not evidence of fraud given that the borrowing by-law is not even necessary for the corporation to borrow. Nor is an anomaly in the appraisal a red flag with respect to Ms. Gabriel. Any requirement for an appraisal would come from the lender. The lender may demand or waive that requirement. It is not for the lender’s lawyer to determine whether the appraisal is satisfactory. That is a business decision for the lender.

[208] I accept Mr. Carter’s evidence and find that Ms. Gabriel did not fall short of the standard of care.

[209] In concluding on the issue of the mortgagees’ liability, I return to the three legal hurdles I set out at the start of this section. The plaintiffs have not overcome any of those hurdles.

[210] The plaintiffs have not demonstrated anything in the relationship between the mortgagees and Midas that would prevent the mortgagees from relying on the indoor management rule.

[211] The plaintiffs have not demonstrated actual knowledge of any issue concerning the mortgage that would deprive them of the ability to rely on its registration.

[212] Even if I accept the plaintiffs’ complaints at full face value (which I do not) they do not amount to actual knowledge of any sort of a fraud. At best they amount to circumstances that might have led to further inquiry. The Court of Appeal has made it clear, however, in Stanbarr that sufficient information to put someone on inquiry is not enough. Actual knowledge is required.

[213] Finally, the plaintiffs have introduced no evidence to overcome the principles articulated in Isaacs to the effect that conditions that a mortgagee may impose on a lending commitment such as appraisals or satisfactory leases are conditions imposed for the benefit of the mortgagee alone. The mortgagees are not required to perform a forensic analysis of such documents to protect Mr. Farrell from the consequences of having allowed Mr. Kavanagh to bind Midas.

VII. The Farrell Mortgage

[214] After Mr. Farrell discovered the mortgage registered on the Yonge Street property, he registered a mortgage of $9,000,000 in his own favour. His stated reason was to prevent other fraudulent mortgages from being registered against the property. Mr. Farrell admits there were no advances made under the mortgage. The mortgagees ask me to declare Mr. Farrell’s mortgage to be invalid as a fraudulent conveyance and to discharge it.

[215] While Mr. Farrell is entitled to place security against his property, on the evidence before me, that security should not take priority over any judgment the mortgagees obtain as a result of this proceeding. As a result, any orders arising out of this proceeding will take priority over Mr. Farrell’s mortgage.

VIII. Disposition

[216] As a result of the foregoing, I make the following dispositive orders:

(i) The plaintiffs’ action is dismissed with costs.

(ii) I declare that the mortgagee’s mortgage on the Yonge Street and Eastern Avenue properties are valid.

(iii) All monies paid into court to the credit of this action shall be paid to the mortgagees forthwith.

(iv) The mortgagees shall have judgment against Mr. Kavanagh pursuant to his guarantee in the amount of $8,518,279.40 as of February 3, 2020.

(v) The plaintiffs’ claim that Mr. Kavanagh is not a 50% shareholder of Midas is dismissed.

(vi) The third party claims are dismissed

[217] Any party claiming costs as a result of these reasons may do so by January 18, 2021. Responding submissions should be delivered by February 1, 2021 with any reply delivered by February 8, 2021.

Koehnen J.

Released: December 31, 2020

Thomas Farrell at al. v. John Kavanagh et al., 2020 ONSC 8154

Court File No. CV-13-10369-00CL and

CV-13-10369-00CLA1

DATE: 20201231

ONTARIO

SUPERIOR COURT OF JUSTICE

(Commercial List)

BETWEEN:

THOMAS PATRICK FARRELL and THE MIDAS INVESTMENT CORPORATION

Plaintiffs

– and –

JOHN KAVANAGH et al.

Defendants

-and-

ROCCO COMMISSO et al.

Third Parties

REASONS FOR JUDGMENT

Koehnen J.

Released: December 31, 2020

[^1]: It was explained at trial that Mr. Farrell referred to Mr. Rossi as Peter because Mr. Farrell did not like the name Walter.

[^2]: The equivalent of s. 23(3) of the OBCA.