Court File and Parties

COURT FILE NO.: CV-19-00632160 DATE: 20210409 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

MARQUEST ASSET MANAGEMENT INC. Plaintiff/Defendant by Counterclaim – and – STONE INVESTMENT GROUP LTD. Defendant/Plaintiff by Counterclaim

Counsel: Kevin Richard, Trevor Fairlie, for the Plaintiff/Defendant by Counterclaim Sean D. McGarry, for the Defendant/Plaintiff by Counterclaim

HEARD: January 21, 2021

Papageorgiou J.

Endorsement

[1] Marquest Asset Management Inc. (“Marquest”) has sued Stone Investment Group Limited (“Stone”) for failing to pay amounts owed under a promissory note dated November 26, 2018 (the “Note”), entered into pursuant to a purchase agreement dated June 20, 2018 (the “Purchase Agreement”).

[2] Stone counterclaimed against Marquest for breach of the Purchase Agreement and claims set-off in respect of damages which it suffered as a result.

[3] Marquest has brought a motion for summary judgement on its claim as well as dismissal of Stone’s counterclaim.

[4] Stone says that this case is inappropriate for summary judgment. It says that it has raised genuine issues which require a trial in respect of its counterclaim and that Marquest should not obtain summary judgment on its Note as Stone may set-off any amounts owed by Marquest in respect of the alleged breach of the Purchase Agreement against any amounts owed by Stone in respect of the Note. However, Stone also requests summary judgment on its counterclaim in its final paragraph of its factum.

[5] For the reasons that follow, I am granting Stone summary judgment in respect of two issues raised in its counterclaim and dismissing a third issue which it raised. The amount awarded to Stone pursuant to its counterclaim is less than the outstanding amount owed to Marquest pursuant to the Note and accordingly, I am granting Marquest summary judgement in respect of amounts payable pursuant to the Note net of amounts payable to Stone on its counterclaim. I am directing that in accordance with this decision, the parties calculate the total damages owed to Stone with interest to the date of this decision and that such amount be paid to Stone out of moneys paid into court, with the balance payable to Marquest in respect of the net amount payable pursuant to the Note. If the parties cannot agree on these calculations, they may make submissions. Marquest may also make submissions on its interest claim in respect of outstanding amounts owed pursuant to the Note at that time.

What is the test on a summary judgment motion?

[6] In accordance with r. 20.04(2) of the Rules of Civil Procedure, the Court shall grant summary judgment if:

(a) the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence; or

(b) the parties agree to have all or part of the claim determined by summary judgment and the court is satisfied that it is appropriate to grant summary judgment.

[7] In determining whether there is a genuine issue requiring a trial, the court shall consider the evidence submitted by the parties. A judge may exercise any of the following powers under r. 20.04(2.1) of the Rules of Civil Procedure: (1) weighing the evidence; (2) evaluating the credibility of a deponent; and (3) drawing any reasonable inference from the evidence.

[8] The Supreme Court of Canada in Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, at para. 49 (“Hryniak”), succinctly explained when there will be no genuine issue for trial:

There will be no genuine issue requiring a trial when the judge is able to reach a fair and just determination on the merits on a motion for summary judgment. This will be the case when the process: (1) allows the judge to make the necessary findings of fact, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result.

[9] In order to defeat a motion for summary judgment, the responding party must put forward some evidence to show that there is a genuine issue requiring a trial. A responding party on a summary judgment motion cannot rest solely on allegations in a pleading. Each side must “put their best foot forward” with respect to the existence or non-existence of material issues to be tried: Mazza v. Ornge Corporate Services Inc., 2016 ONCA 753, at para. 9.

[10] Furthermore, “the motion judge is entitled to presume that the evidentiary record is complete and there will be nothing further if the issue were to go to trial”: Tim Ludwig Professional Corporation v. BDO Canada LLP, 2017 ONCA 292, 137 O.R. (3d) 570, at para. 54. Parties must present sufficiently precise evidence to show there is a genuine issue for trial: “A summary judgment motion cannot be defeated by vague references as to what may be adduced if the matter is allowed to proceed to trial”: Diao v. Zhao, 2017 ONSC 5511, at para. 18.

[11] Pursuant to r. 20.04(2.1) of the Rules of Civil Procedure in determining whether there is a genuine issue requiring a trial, the judge may weigh the evidence, evaluating the credibility of any deponents and draw reasonable inferences.

[12] In this case, the majority of the facts are uncontradicted. There are some conflicts in the evidence relating to conversations which took place and I have concluded that it is in the interests of justice that I use the above expanded powers to resolve these disputes. In my view, I can use these expanded powers without requiring viva voce evidence. I am satisfied that the record before me allows me to resolve such issues and in doing so, I have arrived at a just and fair determination, and that proceeding to trial in this case would not be proportionate, timely or cost-effective.

Overview

[13] Marquest and Stone both carry on the business as investment management companies.

[14] On June 20, 2018, Marquest and Stone entered into the Purchase Agreement, whereby Stone purchased the management agreements and corresponding authority for a group of mutual funds (the “Acquired Funds”) for a principal amount of $650,000.

[15] Pursuant to the Purchase Agreement, the parties executed the Note on November 26, 2018. The Note set out the terms by which Stone would pay Marquest for the Acquired Funds purchased under the Purchase Agreement.

[16] Stone made the required payments under the Note up to and including October 2019 but made no further payments thereafter.

[17] On October 31, 2019, Stone advised that it believed Marquest owed Stone at least $151,350 as a result of various breaches and/or negligence in respect of the Purchase Agreement and stated that it was going to pay money it owed pursuant to the Note into the trust account of its own lawyer, Miller Thomson LLP (“Miller Thomson”), in lieu of making payments to Marquest (the “Holdback Funds”).

[18] Marquest sues for breach of the Note which provides that upon a Major Default, the full principal including interest immediately becomes due and payable.

[19] It is clear that but for the issue of whether Marquest is liable on Stone’s counterclaim, Stone is liable for payments due pursuant to the Note.

[20] Stone claims set-off in respect of any obligations it has pursuant to the Note on the basis that Marquest breached the Purchase Agreement and/or was negligent in relation to three matters:

a. The Cooltech Debenture; b. Withholding Taxes; and c. TFSA filings.

[21] Since this proceeding commenced, Stone paid a total of $191,293.67 in respect of moneys owed pursuant to the Note into court which was the full amount of the outstanding principal Marquest says was owed as of November 19, 2019. Further, as a result of the resolution of some issues related to the Withholding Taxes, Stone has also consented to a payment of $54,862.36 of such moneys be paid out to Marquest, leaving a balance of $136,431.33 in court.

The Cooltech Debenture

[22] Stone asserts that there was an error in the underlying pricing for one of the assets purchased, a convertible debenture of Cooltech Corp., (the “Cooltech Debenture”) and that Marquest is thereby in breach of representations and warranties contained in the Purchase Agreement. In that regard, the disclosure documentation provided to Stone showed that the Cooltech Debenture was in the Acquired Funds and had a value of $115,812 CAD as of June 30, 2018 with a maturity date of December 31, 2019. However, as will be discussed, the Cooltech Debenture had been exchanged for shares and this was never disclosed to Marquest, nor were the shares actually delivered to Stone, or even Marquest.

[23] The Cooltech Debenture was a convertible debenture initially purchased by Marquest on June 13, 2016 for $115,000 USD with a maturity date of May 19, 2017. It was an unsecured fixed income investment product that could be exchanged for a different investment product under certain circumstances, usually in the same company that issued the debenture.

[24] On November 4, 2016, the promoter of Cooltech Corp. proposed that the Cooltech Debenture be forgiven in exchange for shares in a new company, Cooltech Holding Corp. (“Cooltech Holding”), which was going to go public. Mr. Mersch, the Marquest manager of the Acquired Fund, accepted this proposal. While Cooltech Holding was expected to go public in early 2017, the process took longer than expected.

[25] In late June and early July 2017, Mr. Mersch suggested that the value of 39,304 shares of Cooltech Holding issued be reduced by 30 percent. Marquest agreed. Up until early July 2017, the principal and interest earned on the Cooltech Debenture had equalled $125,744 USD. With a 30 percent reduction as of July 6, 2017, the new valuation was $88,041 USD. However, Marquest continued to list the Cooltech Debenture as an asset of the Acquired Fund even though it had been written down and was going to be exchanged for shares.

[26] On July 26, 2017, Cooltech Holding and Infosonics Corporation (“Infosonics”) publicly announced a merger whereby Cooltech Holding would be acquired by Infosonics. The exchange ratio was approximately 5.7 shares of Cooltech Holding for 1 share of Infosonics. At closing in March 2018, the Fund thus received 6,980 shares of Infosonics. Additionally, in August 2018, all former shareholders of Cooltech Holding received additional shares of Infosonics pursuant to an option agreement that was exercised. From this transaction, the Fund was supposed to receive an additional 2,297 shares of Infosonics. In these reasons I refer to these as the Cooltech/Infosonics Shares. I note that these shares are publicly traded so their value could fluctuate.

[27] Despite the above, prior to the closing of the Purchase Agreement, the disclosures received by Stone continued to list the Cooltech Debenture as a Fund asset and did not reference the Cooltech/Infosonics Shares or any of the above transactions set out above.

[28] A Stone associate portfolio manager, Rene Fantin, was reviewing the pricing of the Cooltech Debenture when he discovered correspondence that indicated that holders of the Cooltech Debenture “agreed to complete forgiveness in November/December (2016).”

[29] Mr. Fantin sent an email to Gerry Brockelsby, Chief Investment Officer of Marquest, for an explanation on December 17, 2018. The email reads:

…My name is Rene Fantin and I am an Associate PM at Stone looking after some of the funds we recently acquired. I was looking at Monthly Pay Fund and found that CoolTech Corp debentures are priced at 134.21 per unit, but I have received some correspondence between the custodian and the company that all holders of the securities “agreed to complete forgiveness back in November/December (2016)”

Do you have any further information on these securities or the correspondence agreeing to waive all further rights associated with the debentures from your side that you could provide?

[30] Mr. Fantin received no response.

[31] In his affidavit, Mr. Brockelsby stated that Stone failed to make any attempts to ask Marquest for assistance with this matter, but when cross-examined, acknowledged receiving the email; he says that he must not have seen it.

[32] On or about January 24, 2019, Stone’s auditors made inquiries into the Cooltech Debentures. In response, Stone’s principal, Richard Stone, says he called Mr. Brockelsby, to inquire into the Cooltech Debenture. Mr. Stone says that Mr. Brocklesby told him that he had no information with respect to Cooltech. Although Mr. Brockelsby has no recollection of this conversation, as I will discuss below, there is evidence supporting that such conversation occurred, including admissions from Mr. Brockelsby.

[33] Mr. Stone then discovered a note from Mike Dai of Aloe Finance, (the individual advising RBC, Marquest’s custodian and value agent) indicating that Cooltech Debenture Holders “had no further rights” and had “agreed to complete forgiveness. He wrote to Mr. Dai on January 5, 2019 and asked:

I require some information concerning the above mentioned security. I am the Chief Investment Officer of Stone ASSET management Limited. In December 2018, we acquired the management contract for a family of mutual funds from Marquest. The fund Marquest Monthly Pay, holds 115,000 units of the above mentioned security. Unfortunately, both RBC Dexia, the custodian for the fund and the last portfolio manager cannot provide me an[y] information.

On May 12, 2017 you wrote to Roger Rai and a number of people at RBC Dexia.

“All, these debentures were forgiven and cancelled in 2016. All holders agreed to complete forgivenss back in November/December. Holders should have no further rights pursuant to these debentures.

Our issue is that your email is not sufficient notice for the Funds auditors. Could you assist me by providing me the contact details for the law firm and lawyer who oversaw the corporate action you reference in your email. This will allow us to contact them and receive from them the necessary documents to satisfy the Fund’s auditors requests.

[34] In a telephone call Mr. Dai confirmed with Mr. Stone that the Cooltech Debentures were indeed worthless. Although Marquest refers to some contradictory evidence given during his cross-examination, Mr. Stone ultimately confirmed that Mr. Dai did not advise Mr. Stone that the Cooltech Debenture had been exchanged for the Cooltech/Infosonics Shares. Marquest makes an issue of this inconsistency, but it did not seek to call Mr. Dai as a witness. Frankly, it makes no commercial sense that Stone would take no steps to follow up on these shares had he been advised by Mr. Dai of their existence at this time. As soon as he did obtain Marquest’s explanation, Mr. Stone immediately tried to locate the Cooltech/Infosonics Shares.

[35] As of January 30, 2019, Mr. Stone had satisfied himself that the Cooltech Debentures were worthless and had been worthless since their forgiveness in 2016. This meant that there was an error in the net asset value (“NAV”) of the Acquired Funds. This triggered Stone’s obligations to compensate investors and reimburse the fund where the Acquired Funds were held for over-paying redemption proceeds at an inflated market value in accordance with the Investment Funds Institute of Canada Bulletin Number 22. Stone felt that each day the Acquired Funds were traded at an inflated market value had the potential to increase the amount of compensation due to the investors and/or the fund itself and thus Stone’s damages.

[36] To understand why this is important, the Acquired Funds are regulated by the Ontario Securities Commission (the “OSC”) which requires that assets and their values be listed for prospective investors. Investors rely on those valuations to be correct. If there is an asset in the mutual fund which has been overvalued, then investors have overpaid for their units in that mutual fund. Investors also rely on assets in a fund being held by a custodian for the fund so that the fund manager has complete discretion in selling the asset if necessary.

[37] Accordingly, on January 30, 2019, in order to comply with its regulatory obligations, Stone concluded that it had to inject funds into the mutual fund where the Cooltech Debenture was held as well as report both itself and Marquest to the OSC. It also wrote to investors advising them of the pricing error.

[38] It injected a total of $70,908. It also incurred $3,616 in fees from its auditors and $14,852.44 from its counsel related to this issue—a total of $18.198.44. The total amount claimed in its affidavit evidence is $89,376.44. I note that in its letters to Marquest written at the time, Stone quoted a lower amount for these professional fees incurred so that the total amount claimed overall was $87,637.25 instead of $89,376.44. Marquest did not raise any issues about this discrepancy. I am not troubled by it as it is small and it may be that Stone continued to incur more professional fees over time which were added in.

[39] On April 4, 2019, Stone advised Marquest that it was writing the Cooltech Debenture down to zero and reporting this matter to the OSC. It then wrote a letter enclosing an invoice for approximately $40,000 for providing Stone with information and assistance with Stone’s audit during the early part of 2019. Stone says this was retaliation and that there was not expectation that Marquest would be billing Stone for this work.

[40] By email dated May 29, 2019, Marquest provided its explanation to Stone regarding Cooltech which is set out above, e.g. that the Cooltech Debenture had been exchanged. I note that the Exhibit to Mr. Brockelsby’s affidavit which sets out this response appends almost 200 hundred pages of documents which it appears Mr. Brockelsby used to prepare his response. I infer that this was no small issue that Mr. Brockelsby could easily address.

[41] After receiving this explanation, Stone took steps to locate and obtain the Cooltech/Infosonics Shares. This process took five months and when cross-examined, Mr. Brockelsby conceded that locating and obtaining custody of the Cooltech/Infosonics Shares was a challenge. By the time the Cooltech/Infosonics Shares were obtained, in November 2019, they were largely illiquid and worth very little.

[42] Cooltech’s complaint is that Marquest made three errors:

a. It continued to represent the Cooltech Debenture as a fixed income asset, when in fact the Cooltech Debenture had been forgiven; b. It failed to ensure actual possession of the Cooltech/Infosonic Shares as required by National Instrument 81-102 Part 6 which requires “all portfolio assets of an investment fund must be held under the custodianship of one custodian”; and c. It misrepresented the maturity date on the Cooltech Debenture, moving it forward from May 19, 2017 to December 31, 2019 on publicly filed disclosure documentation without any basis.

[43] When cross-examined, Mr. Brockelsby acknowledged that there was a “failure to have the record keeping of those shares properly transmitted” and that “at least one party didn’t do their job” in coordinating the transfer. He also accepted that Marquest made an oversight by not ensuring that the transfer of the shares was made into its custodian account. He also gave the following answers:

Q. So…and I don’t see anywhere in here a conversation where someone says, “Let’s make sure that those shares are transferred to us”. A. That’s correct. Q. So, why not? And if it’s not Marquest’s responsibility to do so, you know, you tell me. But I would assume that there is some oversight responsibility to make sure that that happened. A. You are absolutely correct. Q. So, really, you know, in an ideal world, what should have happened is Marquest should have said, “Nine months have gone by, where are my shares? Show me some receipts here”, right? A. Yes. Q. And that didn’t happen? A. No, it did not. Q. And then in the years that passed in between, I guess a year and a half while the asset was…before the funds were sold to Stone, nobody followed up with the transfer agent or with RBC to say, “Still don’t have the shares. It’s now been one year, two years, what’s going on?” A. Correct. Q. Okay. And is there a reason that didn’t happen? A. Not that I can give you, no.

[44] Stone refers to the following representations and warranties in the Purchase Agreement whereby Marquest agreed that disclosure documents for each of the Acquired Funds complied with securities laws and did not contain any untrue statements of material facts:

1.1 (j) since the date of inception of each Acquired Fund, applicable Disclosure Documents for each fund, when such prospectus or marketing material has been effective, complied in all material respects with the requirements of applicable Securities Laws then in effect and such prospectus has not contained, at any time such prospectus was in use since the date of inception of an Acquired Fund, an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except in each case as would not reasonably be expected to have a Material Adverse Effect on the Acquired Fund; 1.1(k) the Disclosure Documents for each Acquired Fund contain full, true and plain disclosure of all material facts regarding the Securities of each Acquired Fund. 1.1 (s) the Securities of the Acquired Funds have been sold, in compliance in all material respects with Securities Laws, and in accordance with the Constating Documents and Disclosure Documents.

[45] I am satisfied that Marquest has breached section 1.1((j), (k) and (s) of the Purchase Agreement by listing the Cooltech Debenture as an asset when it was in fact exchanged for Cooltech/Infosonics Shares, and by having failed to list any information about the shares for which the Cooltech Debenture was exchanged. Clearly, it did not accurately disclose the details of the Acquired Assets. Pursuant to section 1.8 of the Purchase Agreement, Marquest agreed to indemnify Stone from:

..all liabilities, claims, losses, costs damages, charges and expenses whatsoever (the “Losses”), including without limitation, all reasonable legal fees and disbursements, in any way caused by, or arising directly or indirectly from, or as any consequence of:

(a) Any incorrectness in or breach of any representation or warranty contained in this Agreement of the Indemnifying Party; (b) Any non-fulfillment of any covenant or agreement contained in this Agreement by the Indemnifying Party; (c) Any breach by the Indemnifying Party of any provision of this Agreement; (d) Any act, deed, matter or thing whatsoever, made, done or permitted by the Indemnifying Party in or about the performance of its obligations hereunder; and (e) The non-compliance by the Indemnifying Party, any employee or representative thereof with any of the Securities Laws and/or any other laws governing the activities contemplated by this Agreement, including, without limiting the generality of the foregoing, advertising and copyright laws.

[46] In my view, even though it is Marquest seeking summary judgment, the record is clear that Marquest breached its obligations in respect of the Cooltech Debenture, and there is no genuine issue requiring a trial regarding this breach. I refer to Meridian Credit Union ltd. v. Baig, 2016 ONCA 150, 394 D.L.R. (4th) 601, where the Court of Appeal directed that where a party brings a motion for summary judgment, the court may grant summary judgment in favour of the responding party.

[47] With respect to whether Stone suffered any damages, Marquest makes a number of arguments. First, it argues that Stone has no claimable damages. Mr. Brockelsby conducted his analysis of the pricing error, if any, as a result of Cooltech Debenture issue for the period from July 6, 2017 to March 2019. His analysis shows that at no time was the price variance large enough to trigger a mandatory repricing by Marquest under Multilateral Instrument 31-103—Registration Requirements, Exemptions and Ongoing Registrant Obligations (“MI 31-103”). Under MI 31-103, a repricing of a fund need only occur if the price variance exceeds 50 basis points which he concluded it did not. He says that his analysis reveals that the pricing error was $13,652. He says that pursuant to the Purchase Agreement, Stone is not entitled to be indemnified for claims in connection with the Purchase Agreement that are less than $25,000.

[48] To be clear, Mr. Brockelsby’s analysis gives the Cooltech Debenture value and preserves that value until the Cooltech/Infosonics Shares are received.

[49] Stone argues that the Cooltech Debenture could not have value as it was forgiven. Further, if the Cooltech/Infosonics Shares were not in Marquest’s possession, they could not be considered a portfolio asset and, as such, they had to be valued at zero because only “assets” can be included in the NAV calculation for the purpose of determining pricing errors. Stone refers to National Instrument (“NI”) 81-102 which establishes the requirement for custodianship of all, and not less than all, portfolio assets of each Marquest mutual fund:

6.1 General (1) Except as provided in sections 6.8, 6.8.1 and 6.9, all portfolio assets of an investment fund must be held under the custodianship of one custodian that satisfies the requirements of section 6.2. (2) Except as provided in subsection 6.5(3) and sections 6.8, 6.8.1 and 6.9, portfolio assets of an investment fund must be held (a) in Canada by the custodian or a sub-custodian of the investment fund; or (b) outside Canada by the custodian or a sub-custodian of the investment fund, if appropriate to facilitate portfolio transactions of the investment fund outside Canada. [Emphasis added.]

[50] Stone also refers to the following provisions of NI 81-106 which specifies that at a minimum the manager must calculate the NAV at least once a week:

14.1 Application – This Part applies to an investment fund that is a reporting issuer. 14.2 Calculation, Frequency and Currency (1) The net asset value of an investment fund must be calculated using the fair value of the investment fund’s assets and liabilities. (1.2) For the purposes of subsection (1), fair value means (a) the market value based on reported prices and quotations in an active market, or (b) if the market value is not available, or the manager of the investment fund believes that it is unreliable, a value that is fair and reasonable in all the relevant circumstances. (emphasis added) (1.3) The manager of an investment fund must (a) establish and maintain appropriate written policies and procedures for determining the fair value of the investment fund’s assets and liabilities; and (b) consistently follow those policies and procedures. (1.4) The manager of an investment fund must maintain a record of the determination of fair value and the reasons supporting that determination. (3) An investment fund must calculate its net asset value at least as frequently as the following: (a) if the investment fund does not use specified derivatives or sell securities short, once a week; (b) if the investment fund uses specified derivatives or sells securities short, once every business day. 14.3 Portfolio Transactions – The net asset value of an investment fund must include each purchase or sale of a portfolio asset no later than in the next calculation of the net asset value after the date the purchase or sale becomes binding.

[51] I note that NI 81-106 directs the fund manager to value funds using the fair value which is usually the market value and if that is not available then a value that is reasonable in the circumstances. I ask the rhetorical question, how could Stone have possibly done a reasonable valuation of the Cooltech/Infosonics Shares when it did not even know about them?

[52] Mr. Brockelsby conceded that it is the investment manager’s obligation to ensure that all items are recorded at the fair market value, but insisted that it was appropriate to keep the Cooltech Debenture on the books, until the Cooltech/Infosonics Shares were received. When cross-examined, he agreed that the length of time it took for the Shares to be received was “extraordinary” and that he had never experienced anything like this before.

[53] Marquest says that it is not reasonable that someone with Mr. Stone’s experience would think that a debenture would be actively forgiven without obtaining anything in exchange. It asserts that Mr. Stone should have assumed that he did not have all of the relevant information, that he should have asked more questions and that he was negligent for having failed to do so. However, Marquest does not have any expert evidence on the standard of care at this time and accordingly, Marquest cannot succeed with this argument. On a summary judgment motion, it is required to put its best foot forward.

[54] Marquest also says that Stone failed to consult with Marquest before it made the decision to pay moneys into the Fund as a prudent manager should have done. Presumably, in making this argument Marquest is asserting that Stone failed to act reasonably in mitigating the loss it believed it had incurred. Marquest says that had Stone asked, Marquest would have been able to answer any questions and confirmed that there was no pricing issue.

[55] Marquest does not point to any provision of the Purchase Agreement which required Stone to make any such inquiries although in paragraph 5 of its Defence to Stone’s counterclaim it states that “Stone had an obligation to raise the issue with Marquest at the earliest moment in order to seek information and assistance from Marquest (which would be the industry norm, and had been the past practice between the parties.)”. Marquest provided no independent evidence on industry norms.

[56] In any event, as set out above, there is sufficient direct evidence before me, as well as evidence from which I can draw reasonable inferences, that Stone did seek to resolve this issue first with Marquest unsuccessfully.

a. Mr. Brockelsby admits he received the email from Mr. Fantin on December 18, 2018 requesting information about this issue, although he did not notice it. b. Although Mr. Brockelsby states in paragraph 39 of his affidavit that “not once did Stone ask Marquest about Cooltech”, in paragraph 40 of his affidavit he states that he “vaguely recall[s] discussing Cooltech with Stone” although he denied discussing the alleged pricing error. He says that he was personally involved with the Cooltech issue and does not know why he would have indicated he had no information on it. I note that despite his alleged familiarity with the issue, it took him almost two months to provide a response to Stone’s April 4, 2019 letter in respect of the Cooltech Debenture. As well, given that the only issue relating to Cooltech on the record before me is the pricing error, why would Stone have discussed Cooltech with Mr. Brockelsby at all if it had nothing to do with the issues in this proceeding? c. Mr. Brockelsby admitted during cross-examination that the conversation alleged by Mr. Stone during which he asked Mr. Brockelsby about Cooltech was possible. He stated: “I can’t recall whether he said that or he didn’t say that. I just can’t recall.” d. In letter dated April 10, 2019 to Marquest, Mr. Stone wrote: Today is April 10th and we want to advise you that Stone will be submitting to the Ontario Securities Commission Form 31-103F4 Net Asset Value Adjustment, mid-afternoon today. I would like to bring you clarity on one point. I did as Chief Investment Officer and UDP, reach out to Gerry Brockelsby asking for information about two private placements (COOLTECH and Cordillera) held in the portfolios we acquired. Gerry, as always, was pleasant and helpful. He immediately responded to my questions and sent by courier that day a copy of the information he had on file for Cordillera. Concerning COOLTECH he advised he had no information because the investment was managed by the fund’s previous portfolio manager. [Emphasis added] On the record before me, Stone’s letter above was written in response to Marquest’s written complaint that Stone failed to contact it about this issue. Marquest did not dispute Mr. Stone’s reference to this conversation with Mr. Brockelsby about Cooltech in any subsequent written contemporaneous communications prior to this action; I would have expected that had no such conversation occurred, Mr. Brockelsby or someone at Marquest would have immediately contradicted Mr. Stone in writing. I note that there were ongoing written communications between the parties after April 10, 2021. As well, I would have to conclude that Mr. Stone fabricated this conversation at this early stage to respond to a negligence and/or failure to mitigate claim by Marquest in an action that had not yet even begun. There is no basis in the record for me to do so. e. The only other piece of evidence relating to this issue is Mr. Brockelsby’s assertion in his affidavit that he found it odd that Stone had not contacted him about this “as Stone had asked us on numerous occasions to assist Stone with its audit in the first few months of 2019 as they carried out work in relation to the audit for all of the Acquired Funds. As noted above, Marquest sent Stone an invoice for $40,567 for this work demonstrating the extensive interactions the parties must have had during this period. In my view, all of this supports Stone’s assertion that it made inquiries of Marquest. Why would Stone have chosen this one issue to deal with on its own without information from Marquest when it was admittedly in regular contact with Marquest on other issues?

[57] Although no law was provided to me on mitigation, it is trite that the burden to prove a failure of mitigation is on the defaulting party, in this case Marquest.

[58] In my view, Marquest has not raised a genuine issue which requires a trial that Stone failed to mitigate given: i) all of the work Stone did to investigate the issue in the record before me; i) Stone’s clear recollection of speaking with Mr. Brockelsby about the Cooltech issue; ii) Mr. Brockelsby’s admission that he received the December 18, 2018 email; iii) Mr. Brockelsby’s admission that he recalls some discussion about Cooltech with Stone; and iv), Mr. Brockelsby’s admission that it is possible that Stone discussed Cooltech with him.

[59] Having made inquiries with Marquest about the Cooltech Debenture which did not yield any helpful information, Stone was not required to advise Marquest when it ultimately concluded there was a pricing error and made the decision that it had to write down the Cooltech Debenture to zero. The fact that Mr. Brockelsby works in the industry and would have done something different does not meet the burden of Marquest having to show that this constitutes a genuine issue for trial, particularly when in my view, the legislative scheme is a complete answer in this issue.

[60] This is a heavily regulated field. It is important that investment managers properly value assets in portfolios on an ongoing basis so that investors are not mislead or overpay for their investments, and so they can make informed decisions about these investments. Instrument NI 81-106 makes this clear. In my view, based upon information which it had, Stone took prudent measures to address what it saw as a problem with the valuation of the fund utilizing the only information it had. Marquest’s position that Stone should have waited months to address this valuation issue is fundamentally inconsistent with securities regulation and the public interest.

[61] Marquest also says that Stone has been inconsistent in its statement as to what it is owed by virtue of some of its communications that its claim in respect of this issue is much less than the amount which it claims in this proceeding.

[62] In that regard, on October 4, 2019 Stone wrote to Marquest grateful for the information provided and indicated that it believed that its “out-of-pocket costs” with respect to the alleged Cooltech valuation error was $31,000 and it was entitled to repayment of these pursuant to sections 1.8, 1.9 and 1.10 of the Purchase Agreement. The letter indicated that it wished to “negotiate a financial solution on the matter to avoid both parties spending the money and energy to go through an application for a claim.” Stone says that this letter was an offer to Marquest to resolve the Cooltech Debenture issue by way of payment to it of $31,000 for its “out-of-pocket costs”, not an expression of what its damages are. I accept this explanation which is consistent with the letter.

[63] Marquest also points out that on October 31, 2019, Stone wrote to it to provide a further update on the Cooltech issue and advised that it now believed the pricing error was $13,652 instead of the $70,908 it had previously alleged in the April 4, 2019 letter. Stone indicated that it would be seeking compensation for the $13,652 overpayment in respect of this issue plus lawyer and auditor costs it expended to deal with this issue for a total of $29,814.

[64] The October 31, 2019 letter makes it clear that this analysis was based upon the assumption that the parties who held the shares did so on behalf of the Acquired Funds and Mr. Stone’s cross-examination evidence is consistent with this. In his affidavit, Mr. Stone explains that at the time he wrote this letter he did not fully appreciate the facts and was eager to resolve the issue. He agrees that if the Cooltech Debentures had actually been substituted with the Cooltech/Infosonics Shares immediately, and the Cooltech/Infosonics Shares were in Marquest’s and then Stone’s possession, then the pricing error would have been $13,642 as set out in his letter. The difficulty is that the custodian never received the Cooltech/Infosonics Shares which were not and were never controlled by Marquest. The Cooltech/Infosonics Shares were held by an entity called LogiQ Capital 2016 (“LogiQ”). By the time Stone received the Cooltech/Infosonics Shares on November 1, 2019, they were illiquid and worth very little. By the end of 2019, they were valued at $1,000.

[65] Mr. Stone says that Stone’s concern has always been compliance with the regulatory framework.

[66] Accordingly, despite the October 31, 2019 letter, Stone says that because they did not have custody of the Cooltech/Infosonics Shares, as a legal matter, they could not be properly listed as an asset and did not contribute to the value of the Acquired Funds. They were worth zero until received in custody. In the alternative, it says that it was entitled to rely on Marquest’s list of assets and acted reasonably in immediately writing down the Cooltech Debenture to zero to mitigate its damages.

[67] Marquest has provided no law or legal theory which supports its argument that Stone is precluded from pursuing its claim because of the contents of the October 31, 2019 letter. I am satisfied with Stone’s explanation that its statement in the letter was a legal error based upon a misapprehension. It is clear to me that this is a complex issue and Stone was attempting to resolve it with Marquest in an amicable manner.

[68] In my view, as long as Marquest did not accept any offers to settle made by Stone, Stone was at liberty to take a different position in this lawsuit than in the October 31, 2019 letter.

[69] In a breach of contract claim, the innocent party is entitled to be put in the same position as if the contract had not been breached. Damages must also be reasonably foreseeable. In my view, it was reasonably foreseeable that if Stone did not have accurate information on the assets in the Acquired Funds and did not have possession of the Cooltech/Infosonics Shares or any information about them, Stone would have to take steps to address any pricing errors. Marquest does business in the industry and should be aware of the regulatory framework.

[70] As well, I accept Stone’s explanation that the correct way to value the fund would be based upon information which Stone had, not on information which had never been disclosed to it, and that asset values should only be determined based upon assets actually in the fund manager’s (or the custodian’s) possession. In that regard, if the asset is not in the fund manager’s or the custodian’s possession, the asset manager cannot evaluate the asset on an ongoing basis as required to determine if it should be sold or kept. In this case, the Cooltech/Infosonics Shares were publicly traded, the value could change and it makes no commercial sense that they would be included in the asset value. Mr. Brockelsby conceded when cross examined that if Stone or the custodian did not have the shares in their possession, Stone could do nothing with them.

[71] He also conceded that the during the relevant period, the share price was going down and that the Cooltech value recorded should also be going down given that it is the same asset. He gave the following answers in that regard:

Q So if InfoSonic starts trading in March of 2018… A M’hm Q …and the price fluctuated, but this Cooltech asset did not fluctuate, I would suggest to you that the Cooltech asset is not being priced correctly. A. Technically, yes

[72] While Mr. Brockelsby’s position is that the pricing difference was not sufficient to trigger a repricing, his admission on this issue is broader than simply what it means for the pricing of the asset. He is conceding that Stone did not, and could not, on a regular basis, as required by the regulatory framework, price whatever the Cooltech asset was, properly and make decisions accordingly. If the shares were going down in value, Stone did not know and could take no steps to mitigate that.

[73] I find Stone’s position compelling and consistent with the securities regulatory framework and moreover, the public interest.

[74] The Investment Funds Institute of Canada (“IFIC”) Bulletin Number 22 makes it clear that the investment fund manager has an ongoing obligation to assess the value of funds held and correct errors. These are some relevant provisions:

Notwithstanding the cause of the NAV error, the investment fund manager is ultimately responsible for the costs of NAV error corrections. The investment fund manager may determine whether it can, in turn, recover the losses or costs of the NAV error correction from another party (such as the custodian, valuation service provider etc) (p.1)

These guidelines relate to the statutory and fiduciary obligations of investment fund managers for valuation discrepancies in the calculation of NAV of an investment fund…(p. 3)

These guidelines are based on the understanding that investment fund managers have the ultimate responsibility (delegated from the trustee) to value the investment fund, whether this is undertaken directly by the investment fund manager or outsourced to a third party. (p. 3)

[The definition of the NAV differential] constitutes a current test (“at the time of computation”), rather than one based on hindsight and would include both securities and other assets/liabilities valuation misstatements as well as those misstatements arising due to incorrect calculation of the number of issued and outstanding units. (p.3)

…With respect to correction of portfolio NAV errors, the standard of care that should specifically be observed (and which is generally captured in the statutory standard of care under s. 116 of the Securities Act (Ontario) is:

A fund’s assets shall be valued using accurate and up-to-date prices and foreign currency rates. The fund manager shall obtain information that is reasonably available from reputable sources, commercial or otherwise, and shall apply that information reasonably and prudently in computing the fund’s NAV. (p. 4)

At the investment fund level, the total loss or benefit that has been incurred should first be determined. To the extent the investment fund benefitted from the NAV errors, such gains will be retained at the investment fund level. If the investment fund incurred a loss, it should be reimbursed by the investment fund manager, who in turn can determine whether it can ultimately recover the losses or costs of NAV error correction from another party. The compensation to the investment fund should be accurately calculated and accrued in the investment fund within a reasonable time. (p. 5)

[75] Further, while there are recommendations as to how investment managers should address NAV valuations, investment managers are directed to “determine their own policy as they see fit.” IFIC Bulletin 22 directs them to “have polices that clearly define what constitutes a NAV error…including threshold levels that would require an adjustment and how to correct such NAV errors.” (p. 1) Therefore, in my view, Stone had some leeway to deal with this issue as it saw fit.

[76] In my view, Stone’s approach to valuation is consistent with the regulatory framework within which it operated. Stone calculated the pricing error to be $70,908 on the basis that the Cooltech Debenture was valued at zero and the Cooltech/Infosonics Shares not being included. Stone provided detailed calculations supporting this in a letter to Marquest dated April 4, 2019 which forms part of the record and which indicates that Stone used its existing pricing policies and procedures as well as IFIC Bulletin # 22 as a guideline.

[77] Marquest has not provided any evidence or argument which contradicts Stone’s calculation of the pricing error if the Court accepted that the Cooltech Debenture had to be valued at zero and that the Cooltech/Infosonics Shares could not have any value as they were not in Stone’s possession. Therefore, I accept Stone’s calculation in this regard. I note again that Stone had some discretion within the regulatory framework to establish its own procedures as to how to address valuation and Marquest has not provided any evidence or argument regarding Stones polices or its calculations, apart from its position that the Cooltech Debenture and/or Cooltech/Infosonics Shares should have been given value—a position which I have rejected.

[78] I also accept that it incurred $18.198.44 in costs to conduct this analysis. It has provided evidence to support these expenses. Further, I find that these costs were reasonably foreseeable. Stone is entitled to these fees pursuant to section 1.8 of the Purchase Agreement as part of its breach of contract claim.

TFSA Filing issue

[79] Stone alleges that Marquest failed to file TFSA returns for 2013 to 2017 for TFSA accounts that held the Acquired Funds when the Acquired Funds were under Marquest’s management in breach of s. 1.1(p) of the Purchase Agreement which provides as follows:

1.1(p) each Acquired Fund currently meets, and at all times since its creation has met, the requirements set out in the ITA to qualify as a “mutual fund trust” or “mutual fund corporation”, as the case may be, and has qualified as a mutual fund trust or mutual fund corporation under such Act throughout each of its taxation years. All tax returns for each Acquired Fund have been prepared and filed within the prescribed period (taking into account all extensions of due dates) in accordance with the ITA, and all tax information slips required to be filed with Canada Revenue Agency and any other applicable taxation authorities have been prepared in accordance with the ITA and accurately describe the amount and character for purposes of the ITA of any distributions, dividends, designations or allocations filed when required and all tax information slips have been delivered to holders of securities thereof when required under and in accordance with the ITA (other than failures to make such deliveries arising from the return of correspondence by the post office as undeliverable by any reason and any inadvertent or immaterial omission to make such deliveries provided that any and all such omissions could not result in the application of a material amount of penalties and interest). For each Acquired Fund, distributions, allocations and dividends (as the case may be) have been made in such amounts to holders of securities thereof such that there is no liability (contingent or otherwise) in respect of any Acquired Fund to pay taxes under the ITA (including any tax under section * thereof) or any other applicable taxation laws for any prior completed taxation year, and the tax information slips accurately set out the proper tax characterization of such distributions, allocations or dividends.

[80] Marquest explains that it had prepared all TFSA returns and had understood them to be filed properly with the Canada Revenue Agency (the “CRA”) in late 2019. When Marquest became aware that the returns had not been filed, Marquest investigated the matter and filed the returns to the satisfaction of the CRA.

[81] Moreover, Marquest paid all late filing fees.

[82] In my view, Stone has proven that Marquest breached the above provision by failing to have filed the TFSA filings as of the date of the Purchase Agreement. Section 1.1(p) represents and warrants that all required filings have been made.

[83] Marquest argues that Stone has not proven any damages: Stone has received no client complaints with respect to the TFSA filing issue and has not incurred any losses to date. Marquest has informed Stone that, should any claims come forward, it would investigate the claims and resolve any issues to the extent that Marquest was responsible. Marquest confirmed this in a letter dated November 20, 2019.

[84] Stone acknowledges that there does not appear to be further damages as a result of the TFSA late filing issue at this time but they could arise and it values the contingent liability as $12,500 but does not explain why.

[85] At this stage, Stone has not proven any damages related to this issue and in my view its theoretical contingent claim is insufficiently explained.

[86] Accordingly, in this proceeding I am declaring that Marquest breached the Purchase Agreement by failing to file the necessary withholding taxes and awarding nominal damages in the amount of $100. Marquest has taken responsibility for this issue and has advised Stone that it would remedy any issues for which it may be responsible in the future. Accordingly, should any damages arise for which Marquest is responsible and for which it refuses to comply with this secondary agreement, Stone will be in a position to sue on that second contract.

The Withholding Tax issue

[87] As part of its obligation as a fund manager, Marquest remitted $108,319.77 of withholding taxes to the CRA and Revenue Québec on behalf of all investors in the Acquired Funds in 2018 (the “Withholding Taxes”). It is agreed by the parties that this amount was an overpayment for which it would receive a refund.

[88] As Stone took over the Acquired Funds in 2018, in the normal course, Marquest would have to file for the Withholding Taxes for its portion of 2018 and Stone would apply for the balance. However, Stone and Marquest agreed to cooperate and have Stone file a single tax return for the Acquired Funds in 2018. This would result in investors receiving a single tax slip from Stone.

[89] Although Marquest initially denied this agreement, Stone produced an email dated October 3, 2018 confirming such agreement was in place and Mr. Brockelsby conceded on cross-examination that he was not personally involved.

[90] Because Stone was filing a single return for all tax liability for 2018, Stone says that Marquest was required to transfer the tax Marquest withheld from Marquest’s CRA account to Stone’s CRA account so that Stone would have enough money to pay the total tax liability for the Acquired Funds. However, this particular discussion is not documented. There is no evidence that Stone wrote to Marquest following up on this issue at the relevant time of this alleged agreement. This does not form part of any of the closing documents. Further, it would not be possible for Marquest to perform that transfer itself. The most Marquest could do is provide a consent or direction to the CRA to do so.

[91] As a result, Stone filed a tax return which assumed all of Marquest’s tax liability without the CRA having a credit in Stone’s CRA account for the Withholding Taxes paid by Marquest.

[92] In October 2019, this issue came to Stone’s attention and it wrote to Marquest concerned about exposure to late fees given lack of progress. Stone followed up several times without any response.

[93] On November 28, 2019, Stone formally outlined to Marquest that it needed to execute directions in order to facilitate the transfer of the Withholding Tax funds to the Stone CRA account. Upon receipt of these directions, it executed them and submitted them to the CRA.

[94] By the summer of 2020, Stone had received some, but not all, of the Withholding Tax funds in its CRA account. It accordingly released part of the Holdback Funds in the amount of $54,862.36 representing the Withholding Tax Funds which it had already received in its CRA account. As noted above, there is currently a total of $136,431.33 paid into court representing the $47,054.80 of outstanding Withholding Tax funds and the $89,376.44 for the Pricing Error.

[95] Stone had been assessed late penalties for its Revenue Québec and non-resident liabilities of $3,457.02 plus ongoing interest but these have been waived.

[96] I do not agree that Marquest’s failure to file these directions with the CRA constituted a breach of s.1.1(p) of its representations, warranties and covenants in the Purchase Agreement. These directions were not part of the closing documents or specifically required by the Purchase Agreement. Further, Marquest had properly remitted all Withholding Taxes. The problem is where they were recorded in the CRA database.

[97] Further, Stone has raised any genuine issue that there was any side agreement that Marquest would have to take steps such as filing directions to ensure that amounts in its CRA account were transferred to Stone’s. There is no documentary evidence of this in a transaction that is filled with documents.

[98] Finally, the CRA has confirmed that Marquest has filed all necessary Withholding Taxes. Marquest provided the necessary direction to have these amounts transferred and Stone does not refer to anything else it thinks Marquest should do.

[99] In summary, I have found neither a breach of contract related to this issue nor any evidence of damages if such breach had occurred. As such, in my view there is no genuine issue requiring a trial with respect to this issue.

Set-off

[100] Marquest had argued that that even if Stone has raised genuine issues requiring a trial in respect of its counterclaim, there is no genuine issue with respect to the Note and Stone may not claim set-off. Given that I have decided with finality the issues raised by Stone’s counterclaim, there is no need for me to consider this issue. To the extent that this may be required to address Stone’s holding back of payments due pursuant to the Note, in my view, Stone had a proper claim to equitable set-off.

[101] As acknowledged by Marquest, equitable set-off applies when it is unjust to allow one party to enforce payment without accounting for the other claim: Citibank Canada v. Confederation Life Insurance Co, 1996 CarswellOnt 3219, at para 7.

[102] In Telford v. Holt, [1987] 2 SCR 193, the Court held that the defendant must show some equitable ground for being protected against the plaintiff’s demand; that equitable ground must go to the root of the plaintiff’s claim; the defendant’s claim must be so clearly connected with the plaintiff’s claim that it would be manifestly unjust to allow the plaintiff to enforce payment without considering the cross-claim; the two claims need not arise from the same contract and that liquidated and unliquidated claims are on the same footing.

[103] In my view, Stone’s counterclaim in this case easily satisfies this test. It arises from a Purchase Agreement in respect of which the Note was given. Its claim goes to the root of Marquest’s claim for payment pursuant to the Note since it is in respect of breaches of this Purchase Agreement and in my view it would be manifestly unfair and unjust to allow Marquest to enforce payment without considering Stone’s claim.

[104] I also reject Marquest’s assertion that Stone cannot claim equitable set-off because it has been acting in bad faith. Marquest only began offering to provide assistance to Cooltech with respect to the Cooltech Debenture issue after Stone had already addressed the pricing issue on its own after attempts to obtain information from Marquest failed. Stone’s reluctance to engage in ongoing discussions in respect of this, in circumstances where Marquest was trying to bill Stone for assistance it provided with Stone’s audit, was justified.

[105] Although Marquest says that Stone’s actions in holding back the funds and claiming set-off are “cynical litigation tactics” to avoid paying amounts due, it is clear that Stone was dealing with actual breaches of contract and actual potential damages. It stretches credulity to assert that Stone was making up all of these issues to avoid paying amounts due under the Note. Stone actually paid money into the fund to correct valuation errors. It released funds as issues with the CRA were resolved.

The Note

[106] Notwithstanding this, the amount held in court and payable pursuant to the Note exceeds the damages that I have found Stone suffered. Accordingly, I award Marquest summary judgment on the net amount owed pursuant to the Note after deduction of amounts which are owed to Stone on its counterclaim.

Conclusion

[107] In my view, on the basis of the record before me, I have been able to reach a fair and just determination on the merits on this motion for summary judgment and have concluded that proceeding by summary judgment in this case is appropriate. Summary judgment is a proportionate and just result in this case. In my view, there is no genuine issue which requires a trial.

[108] In the end, I find that Marquest is liable for breach of contract in respect of the Cooltech Debenture issue in the amount of $89,376.44 and that it is liable for nominal damages in respect of the TFSA Issue in the amount of $100. I dismiss Stone’s claim for any damages in respect of the Withholding Tax Issue. Stone is liable for the net amount owed pursuant to the Note after deduction of amounts owed pursuant to its counterclaim.

[109] There are moneys in court and I direct the parties to consider my ruling and attempt to agree to the specific remaining amounts owed pursuant to the Note inclusive of any applicable interest, as well as the total amount of damages payable pursuant to Stone’s counterclaim with interest. I would also ask that they use this information to calculate how the moneys in court get paid out to the parties. If the parties cannot agree on the calculations, they may make written submissions at the same time as their costs submissions as follows, no longer than four pages:

a. Stone within 7 days of these reasons; and b. Marquest within 7 days thereafter.

Papageorgiou J. Released: April 9, 2021