COURT FILE NO.: CV-18-00601208
DATE: 20200211
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
HAZELTON HOMES CORPORATION
Plaintiff
– and –
RAKESH MEHTA
Defendant
J. Zibarras and C. Edwards, for the Plaintiff
P. Smiley, for the Defendant
HEARD: January 21, 2020
S.M. O’BRIEN J.
REASONS FOR DECISION
Overview
[1] The issue on this motion is whether I should set aside an ex parte Mareva order on the basis that the Plaintiff failed to provide full and fair disclosure of all material facts known to it at the time. In particular, the question is whether the Plaintiff’s failure to disclose information about an alleged trust agreement, which it relied on to seek the Mareva order freezing the Defendant’s assets, constituted a material non-disclosure. The Defendant, who contests the validity of the alleged trust agreement, submits that in any event, the Plaintiff was required to disclose that the alleged trust agreement was, in the words of counsel for the Defendant, “secret,” in the sense that it had not been disclosed in any public dealings relating to the property in issue.
[2] The Plaintiff, Hazelton Homes Corporation (“Hazelton”), obtained an ex parte order on July 11, 2018, subsequently varied by order dated August 17, 2018 (the “ex parte Order”), enjoining the Defendant, Mr. Mehta from dealing with the proceeds of sale of the property in issue, 95 Bridge Street in Picton (“95 Bridge Street” or the “Property”).
[3] Mr. Mehta submits that the affidavit upon which Hazelton relied in seeking the ex parte Order did not provide full and fair disclosure with respect to both the so-called “secret” trust agreement and with respect to its undertaking as to damages, which Mr. Mehta describes as “hollow”. He therefore submits that the ex parte Order should be set aside for material non-disclosure.
[4] I agree with Mr. Mehta for the reasons that follow. The alleged trust agreement was the linchpin on which Hazelton relied to obtain the ex parte Order. Mr. Mehta’s position is that he never entered into a trust agreement with Hazelton, nor signed the document filed by Hazelton, which he says is a forgery. It is not my task to determine whether the trust agreement is legitimate. However, even on Hazelton’s version of events, the fact that Mr. Mehta was on title, and held a mortgage on the Property, and the fact that the alleged trust agreement was known only to the parties, were material facts that should have been disclosed to the motions judge. Hazelton either should have anticipated that Mr. Mehta would deny the legitimacy of the trust agreement or, at a minimum, Hazelton should have anticipated that the legitimacy of the trust agreement was open to examination, given that it purposely had been shielded from other entities with dealings related to the Property.
[5] I also conclude that Hazelton’s undertaking as to damages at the ex parte motion constituted a material non-disclosure. Master Jolley has awarded security for costs in this matter because of Hazelton’s lack of assets. When seeking the ex parte Order, Hazelton claimed to own one piece of property. However, its entitlement to that property is also via an alleged trust agreement that is currently the subject of litigation. None of this information was disclosed to the motions judge.
Issues
[6] The issues for me to determine are:
(a) Did Hazelton’s failure to disclose that the trust agreement was only known to the parties and had not been publicly disclosed constitute a material non-disclosure?
(b) Did Hazelton’s undertaking as to damages constitute a material non-disclosure?
(c) Should I otherwise exercise my discretion not to set aside the ex parte Order?
Did the failure to disclose that the alleged trust agreement was not public constitute a material non-disclosure?
[7] I conclude that even on Hazelton’s version of events, the failure to disclose that the alleged trust agreement was not publicly known constituted a material non-disclosure. It was material for the motions judge to know that only Mr. Mehta was named as the purchaser in the Agreement of Purchase of Sale, only Mr. Mehta was on title to the Property, and only Mr. Mehta was liable for the mortgage on the Property.
Facts relating to failure to disclose secrecy of alleged trust agreement
[8] The individuals at the heart of this dispute are Arash Missaghi, Troy Wilson, and Mr. Mehta.
[9] Hazelton’s sole shareholder is World Corporation. The sole officer and director of both Hazelton and World Corporation is Laila Alizadeh, Mr. Missaghi’s wife. The day-to-day operations of the corporations are overseen by Mr. Missaghi. Mr. Wilson also was involved in these companies, although his precise role is not clear. In his affidavit at the ex parte motion, Mr. Wilson’s role is described only as being “the authorized representative of the plaintiff in this proceeding.”
[10] Mr. Mehta is a real estate agent and mortgage agent of retirement age. He first became connected with Mr. Missaghi in or about October 2014, when he was retained by Mr. Missaghi to assist with real estate and administrative tasks.
[11] In 2015, the parties entered into dealings with respect to the Property. Mr. Missaghi and Mr. Wilson became aware of an opportunity to purchase the Claramount Inn located in Picton (the “Inn”). The Inn included a building with seven guest rooms at 97 Bridge Street, as well as a neighbouring bungalow, known as the “cottage.” The Property in issue was the neighbouring property with the cottage, 95 Bridge Street.
[12] Mr. Mehta, Mr. Missaghi, and Mr. Wilson entered into an agreement, the terms of which are in dispute, with respect to these properties and the operation of the Inn. The parties agree that Mr. Mehta and his wife were to relocate to Picton to manage the Inn. In addition, the parties agree that the 95 Bridge Street Property was purchased in the name of Mr. Mehta and the 97 Bridge Street property was purchased by 2457647 Ontario Inc. (“245”), a company controlled by Mr. Missaghi.
[13] It is further agreed that the purchase of 95 Bridge Street was funded by a mortgage to Home Trust in the amount of $390,000 and a down payment of $210,000. Canadian Land Corporation, another company controlled by Mr. Missaghi, lent Mr. Mehta the funds for the down payment.
[14] At this point, the parties’ versions of events diverge. Hazelton alleges that the parties had agreed that 95 Bridge Street would be purchased by Mr. Mehta, but that Mr. Mehta would hold it in trust for Hazelton. It claims the parties structured the deal in this manner in order to have access to residential mortgage rates for 95 Bridge Street. Mr. Mehta’s position is that no such trust agreement existed. According to him, the alleged trust agreement appended to Mr. Wilson’s affidavit at the ex parte motion was a “fraud and a forgery.” He claims that it is not his signature on the agreement and that his handwritten name below the signature is spelled incorrectly.
[15] Mr. Mehta claims that the funds from Canadian Land Corporation were provided pursuant to a written loan agreement. Under the terms of the alleged loan agreement, Mr. Mehta was entitled to set off against the principal sum and interest any liabilities that arose from the management and operation of the Inn. Hazelton denies the legitimacy of the loan agreement.
[16] The Inn was not financially successful. Hazelton alleges that Mr. Mehta was partly responsible due to poor management. Mr. Mehta alleges that Mr. Missaghi refused to finance the Inn as needed to maintain it and operate it. By June 2017, the CRA froze the Inn’s account.
[17] The failure of the Inn culminated in the appointment of a receiver over 245 and 97 Bridge Street. The receiver sold 97 Bridge Street in June 2018. The same month, Mr. Mehta entered into an Agreement of Purchase and Sale with respect to the Property. This triggered Hazelton to seek the ex parte Order to freeze the proceeds of the sale of the Property.
[18] The crux of Hazelton’s case on the ex parte motion was that Mr. Mehta was not entitled to sell the Property, as he held it in trust for Hazelton due to the alleged trust agreement.
Law regarding full and fair disclosure
[19] Rule 39.01(6) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 states that where a party brings a motion without notice, it is required to “make full and fair disclosure of all material facts.” Failure to do so is, in itself, a sufficient ground for setting aside any order obtained on the motion.
[20] As set out in Yang v. Mao (1995), 1995 CanLII 7052 (ON SC), 23 O.R. (3d) 466 (Gen. Div.), “[i]n the case of motions for injunctive relief and other extraordinary remedies, it is trite that the applicants must meet the highest standard of candour and disclosure to the court.” The moving party should give particulars of its own claim, but also fairly state the points against it by opposing parties. “The importance and necessity of making full and fair disclosure to the court of all material facts when seeking injunctive relief without notice to the party affected, cannot be over-emphasized”: Parallel Medical Services Ltd. v. Ward, [2002] O.J. No. 1498 (S.C.J.), at para. 18. While the moving party is not required to argue against its own case, it is obliged to fairly present the material facts that may favour the opponent: Boal v. International Capital Management Inc., 2018 ONSC 2275, at para. 87.
[21] Of course, a mistake or non-disclosure does not necessarily mean that an order obtained on the motion must be discharged. The non-disclosure must be material in the sense that it might have had an impact on the original order: Two-Tyme Recycling Inc. v. Woods, [2009] O.J. No. 4894 (S.C.J.), at para. 20.
Analysis
[22] I conclude that Hazelton’s failure to disclose to the motions judge that the alleged trust agreement did not appear in any public record, and that only Mr. Mehta was publicly known to be the owner of the Property, constituted material non-disclosure. The alleged trust agreement was central to Hazelton’s claim for the ex parte Order. The fact that the trust agreement was secret raises fundamental questions as to ownership of the Property and was material to the motions judge’s decision.
[23] Although it is now obvious that the terms of the arrangements between the parties are hotly contested, Hazelton submits that at the time of the ex parte motion, it could not have anticipated that Mr. Mehta would deny the existence of the trust agreement. Further, it submits that regardless of the physical document, the actual arrangements between the parties reflect that Mr. Mehta was holding the Property in trust for Hazelton. For example, Hazelton was running both 95 and 97 Bridge Street together as a business. It was entitled to any profits from the business and was responsible for all the expenses related to the Property, including the mortgage payments.
[24] I do not accept that Hazelton failed to realize at the time of the ex parte motion that the court required further information about the alleged trust agreement. In the motion material on the ex parte motion, Hazelton baldly relied on the trust agreement as the basis for its interest in the Property. It did not alert the motions judge to the following:
(a) Mr. Mehta is the only owner on title to the Property. Mr. Mehta and not Hazelton was named as the purchaser in the Agreement of Purchase and Sale. He also was named as the transferee in the land transfer tax certificate. The certificate specifically indicates that Mr. Mehta was a “transferee” in the conveyance and not a “trustee.”
(b) Further, at the time the parties were purchasing 95 and 97 Bridge Street, a dispute arose with the vendor. Both Mr. Wilson and Mr. Mehta swore affidavits in that litigation. Both affidavits indicated that Mr. Mehta was the purchaser of the 95 Bridge Street Property. There is no mention of a trust, nor of Hazelton having any entitlement to the Property.
(c) The mortgage provisions on the mortgage Mr. Mehta obtained to finance the purchase of the Property name Mr. Mehta as chargor. In addition, Mr. Mehta’s son was the guarantor on the mortgage. In other words, Mr. Mehta and his son stood to become personally liable on the mortgage.
[25] Hazelton did not bring any of this to the attention of the motions judge. I note that at a minimum, even on Hazelton’s version of events, the trust agreement was in place to perpetrate a fraud on the mortgagee, Home Trust, in order to obtain residential mortgage rates for a business. Therefore, on Hazelton’s version, Home Trust was purposely kept in the dark about the true owner of the Property.
[26] I conclude that for the motions judge to fairly consider whether to grant the injunctive relief being sought without notice to Mr. Mehta, and in order for Hazelton to meet its obligation of full and fair disclosure, it was incumbent on Hazelton to alert the motions judge to the fact that there had been no public disclosure, of any kind, of the alleged trust agreement. Hazelton should have ensured the motions judge was aware that Mr. Mehta was solely on title, solely named in the Agreement of Purchase and Sale, and the sole chargor of the mortgage on the Property.
[27] I do not accept Hazelton’s argument that there was no material non-disclosure about the nature of the trust agreement, as the parties were in any event, on the admitted facts, operating under the terms of a trust. As submitted by Mr. Mehta, to create an express trust, there must be certainty of intention, certainty of subject matter, and certainty of objects: Angus v. Port Hope (Municipality), 2017 ONCA 566, at para. 95. In other words, an express trust, which is what was alleged here at least for the purposes of the ex parte motion, cannot arise over time from the conduct of the parties.
[28] More importantly, Mr. Mehta has provided evidence that Hazelton was not, in fact, paying the expenses of the Property as they related to the business. Mr. Mehta has filed evidence showing that the bills of the Inn were not being paid. In particular, he has appended to his affidavit e-mails from him to Mr. Missaghi regarding outstanding debts and the urgency of receiving funds for them. These debts included funds owed to Mr. Mehta for his own pay and to reimburse him for payments he made personally to cover the Inn’s expenses. On one occasion in June 2017, there is evidence that Mr. Mehta was required to withdraw funds from his personal account in the amount of $14,000 to make a payroll payment. While for the purposes of this motion, I am not determining what occurred between the parties, Mr. Mehta’s version of events does not look like a trust arrangement. If Hazelton was relying on the manner in which things unfolded as support for its argument that there was a trust agreement, it should have known that its position was complicated by the fact that Mr. Mehta asserted repeatedly that the expenses of the business were not being covered.
[29] In asserting the validity of the trust agreement, Hazelton also points to the fact that in contemporaneous e-mails around the time of the Inn’s failure, Mr. Mehta never claimed he had ownership of the Property. For example, in June 2018, Mr. Wilson contacted Mr. Mehta stating he needed the keys to the properties to sell the assets of the Inn. Mr. Mehta did not respond to insist that 95 Bridge Street belonged to him and was not Hazelton’s to sell.
[30] However, I accept Mr. Mehta’s response that by this point he was afraid of Mr. Missaghi and wanted to extricate himself from the situation with minimal engagement. In 2018, Mr. Missaghi and Ms. Alizadeh were arrested on charges of financial fraud and, in the case of Mr. Missaghi, forgery and obstruction of justice. Mr. Wilson was also arrested but the charges were withdrawn. Mr. Missaghi and Ms. Alizadeh were released on bail. Further, Mr. Missaghi had started to send bullying e-mails to Mr. Mehta. In April 2018, he sent an e-mail to Mr. Mehta in relation to the sale of another property with which Mr. Mehta claims he did not wish to be involved. Mr. Missaghi’s e-mail includes statements such as the following:
So before I start to get furious and actually take the necessary steps to educate, do yourself and your broker a favour and make sure that the listing is showing as SOLD.
This is what I do Rakesh. I Shake the system and change it and evolve people so everyone and every lawyer across the nation follows the new pattern. You just take whatever one tells you and repeat it like a parrot as if it’s the bible gospel. Even when its not even worth 2 cents of opinion you still verbalize it.
Talk to your broker and tell knock [sic] some sense into his tiny mind….
[31] Mr. Mehta also has included in his material, e-mail and text messages sent subsequent to his sale of the Property. Although these came later, they give some sense as to why Mr. Mehta wished to minimize his dealings with Mr. Missaghi. One text message sent on June 29, 2018 reads:
If I don’t get the proveeds [sic] of our picton property that you guys stole I will sue each and every member of your family…. Stealing from a person like me is like stealing from Al Capone. I don’t allow it to happen. And when it happens I can’t allow for it to be taken. So think about it. You and your retard of a father sleep on it. By Tuesday we will let the Games begin…. I will have no mercy after Tuesday. You guys will not rebound from this.
[32] Another text message two days later reads:
You fucked and stole from the wrong guy. Keep ignoring keep hiding. When you you [sic] steal money and lie and mislead and deceive know that there will be no mercy and no holding back. You should have thought about this when you decided to steal from my family when we all trusted u and that piece of shit pak rat father of yours. Keep ignoring. Keep hiding. Pretty soon you will be running too.
[33] The vitriol in these messages explains not only why Mr. Mehta was reluctant to engage with Mr. Missaghi, but also gives a sense of the spirit in which Hazelton sought the ex parte Order less than two weeks later.
[34] I similarly reject Hazelton’s submission that Mr. Mehta’s version of events could not be correct because it would not be commercially reasonable for Hazelton to enter into an arrangement whereby it paid the mortgage and expenses on the Property, but Mr. Mehta retained ownership. However, on Mr. Mehta’s version of events, the arrangements did not need to be commercially reasonable because the intention was to leave Mr. Mehta personally liable. Mr. Mehta alleges that over time, Hazelton and any related companies were refusing to provide financing for the Inn and Mr. Mehta was being left personally liable for expenses.
[35] Finally, I do not accept Hazelton’s argument that Mr. Mehta’s statement on cross-examination, about having the “in-trust” in 95 Bridge Street, constitutes an admission. I do not interpret “in-trust” to mean he was the “trustee.” In fact, although the wording is not clear, “having” the “in-trust” sounds more like holding the beneficial interest. This is consistent with Mr. Mehta’s answers elsewhere on cross-examination, in which he indicated that the plan was for him to buy 95 Bridge Street, and that this would be his equity stake in the project.
[36] This motion is not intended to determine the merits of the matters in dispute between the parties. It is only to determine whether the ex parte Order should be set aside on the basis of Hazelton’s failure to make full and fair disclosure. I conclude that even on Hazelton’s version of events, it still had the obligation to alert the motions judge to the fact that the alleged trust agreement was a secret agreement, with Mr. Mehta publicly on record as the owner of the Property and the chargor on the mortgage.
Did Hazelton’s undertaking as to damages constitute a material non-disclosure?
[37] Mr. Mehta also contends that Hazelton’s undertaking as to damages constituted a material non-disclosure. Mr. Mehta submits that Hazelton’s undertaking as to damages was “hollow” because it did not have any assets. I agree that Hazelton’s undertaking as to damages also constituted a material non-disclosure.
[38] In the affidavit of Mr. Wilson, on which Hazelton relied to obtain the ex parte Order, Hazelton stated that it held property. It also referenced connections to its related companies as follows:
Hazelton Homes is a corporation that holds real property across the Province of Ontario. As of the date of this affidavit, Hazelton Homes owns one property in the Province of Ontario. Hazelton Homes is part of an affiliated group of companies that includes its parent company World Corporation (“World Corp.”), and its sibling corporation 2457647 Ontario Inc. (“245”).
[39] However, subsequently in these proceedings, Master Jolley made an order dated October 31, 2019 ordering that Hazelton pay security for costs. In her reasons, Master Jolley noted that Hazelton’s sole shareholder, Ms. Alizadeh, had sworn that Hazelton was a holding company, with no income, assets, or bank account. She also swore that “certain companies in the plaintiff group of companies” had no sources of income and no assets other than their claims to sale proceeds of properties caught up in various receiverships.
[40] In addition, the property that Mr. Wilson asserted in his affidavit was “owned” by Hazelton, is itself the subject of litigation. Although the Statement of Claim in that litigation is referenced in an affidavit that Hazelton claims is inadmissible on this motion (in that it was submitted after the completion of cross-examinations), I do not need to determine the admissibility of the affidavit for this point. The Statement of Claim in the other action is in the public court record, as is an endorsement I made in that action dated May 24, 2019 on a motion for security for costs (Hazelton Homes Corporation v. Katebian and Home Trust Company, Court file no: CV-19-629030). The Statement of Claim alleges that Hazelton has a beneficial ownership in the property in question pursuant to a trust agreement. In my May 24, 2019 endorsement, in that action, I concluded that Hazelton’s alleged ownership of the property at issue could not be relied upon as a factor weighing against ordering security for costs, as the validity of the trust agreement had not been determined.
[41] On the motion before her, Master Jolley ordered security for costs in this action because it appeared that Hazelton was a shell company without assets. However, at the same time, she was not satisfied on the evidence that Hazelton was impecunious. In the context of “complex financial circumstances” and the “web of numerous companies,” she had not been provided sufficient documentary evidence to satisfy her that Hazelton did not have access to assets and funds.
[42] In response to Mr. Mehta’s submission now that Hazelton’s undertaking as to damages was “hollow,” Hazelton points out that it has met its security for costs obligations pursuant to the order of Master Jolley. In addition, Hazelton relies on 642947 Ontario Ltd. v. Fleischer (2001), 2001 CanLII 8623 (ON CA), 56 O.R. (3d) 417 (C.A.) to submit that even if Hazelton itself were not able to satisfy the undertaking, shareholders can be personally liable for an undertaking as to damages.
[43] I conclude that Hazelton’s undertaking as to damages at the ex parte motion constituted a material non-disclosure. A party making an undertaking as to damages has an obligation to disclose to the court if its assets are inadequate to satisfy its undertaking: Fleischer, at para. 63. Here, Hazelton represented to the court that it “owned” one property in the province of Ontario. It did not disclose that it otherwise did not hold any assets. It also did not advise the court that it was not on title to that property, but instead held a beneficial ownership pursuant to a trust agreement that was in dispute and the subject of ongoing litigation.
[44] Further, I do not accept that because Hazelton has met its security for costs obligations to date in this proceeding, its undertaking as to damages was meaningful. Just because a court may decide to pierce the corporate veil in particular circumstances at the conclusion of a case does not mean that Hazelton’s undertaking at the outset was meaningful on the basis that its shareholder could conceivably be held liable at some point in the future. Indeed, given Ms. Alizadeh’s evidence before Master Jolley about related companies having no assets, it is not clear that Hazelton’s sole shareholder, World Corporation, would have assets to satisfy an undertaking at the conclusion of this case. The fact that Hazelton has paid security for costs in order to pursue this action does not mean that any funds or assets from other companies would be easily recoverable to satisfy its obligations at the conclusion.
[45] In my view, in providing its undertaking on the ex parte motion, Hazelton had an obligation to disclose that it did not hold assets other than the one piece of property. It also should have disclosed that the validity of Hazelton’s ownership interest in the property was the subject of litigation. I conclude that this information was material to the motions judge’s determination on the ex parte motion.
Should I exercise my discretion not to set aside the ex parte Order?
[46] Hazelton submits that I should exercise my discretion not to set aside the ex parte Order, given the allegations of fraud against Mr. Mehta (for example with respect to the alleged loan agreement) and the fact that there is a serious risk the proceeds from the sale of the Property will be dissipated.
[47] In all the circumstances of this case, in my view, it is equitable to set aside the ex parte Order. Hazelton failed to disclose material facts, within its knowledge, that were at the centre of its claim for the ex parte Order. Although Hazelton alleges Mr. Mehta forged the alleged loan agreement, this allegation is not sufficient in the circumstances of this case, given the seriousness of the non-disclosure, to justify maintaining the ex parte Order.
[48] Further, I do not accept that there is strong evidence of Mr. Mehta’s intention to dissipate assets. In response to the ex parte Order, Mr. Mehta filed a detailed affidavit providing specific evidence as to the location of the funds from the sale of the Property. Those funds were used in part to pay off the Home Trust mortgage and for legal fees on the transaction. The remainder was provided to his lawyer’s trust account. Various payments were made from that account for legal fees in this and other matters and to satisfy a debt. The affidavit indicates that the remaining sum of almost $650,000 remained in the law firm’s trust account. Hazelton obtained the ex parte Order almost two weeks after the closing of Mr. Mehta’s sale of the Property. Mr. Mehta swore the affidavit responding to the ex parte Order over a month after the sale of the Property. If he had intended to dissipate the proceeds, he had the opportunity to do so.
Disposition
[49] Accordingly, the ex parte Order is set aside.
Costs
[50] With respect to costs, if the parties are unable to reach agreement, Mr. Mehta may provide me with his submissions on costs, of not more than 4 pages, within 21 days of the release of this decision. Hazelton will then have 14 days to provide responding submissions. I ask that both parties attach a copy of their costs outlines, which I omitted to request at the conclusion of the hearing. The costs submissions may be sent to my judicial assistant, Anna Maria Tiberio at annamaria.tiberio@ontario.ca.
O’Brien, J.
Date Released: February 11, 2020
COURT FILE NO.: CV-18-00601208
DATE: 20200211
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
HAZELTON HOMES CORPORATION
Plaintiff
– and –
RAKESH MEHTA
Defendant
REASONS FOR DECISION
O’Brien J.
Released: February 11, 2020