COURT FILE NO.: CV-16-561920 DATE: 2022-03-14

ONTARIO SUPERIOR COURT OF JUSTICE

B E T W E E N:

FOREMOST FINANCIAL CORP., FOREMOST MORTGAGE HOLDING CORPORATION, TELB MORTGAGE HOLDING CORPORATION IN TRUST FOR ADRIAN BACCI, REMO & ELDA BACCI, SANTINO & MARGHERITA BARTOLINI, GIOVANNI COLACINO, JOSEPH BURDI, ANNA COLACINO, AUTOMATED MANAGEMENT LTD., ESSTATE OF RINA COPPO, NIVES D’ANGELO, LEO GERSKUP, SARAH GERSKUP, JOE GOLD LIMITED, SHARYN & JODY GOLDBERG, 614921 ONTARIO LIMITED, DINAPET HOLDINGS LIMITED, ESTATE OF SAM GOLDMAN, DR. H. BRIAN GOLDMAN MEDICINE PROFESSIONAL CORPORATION, GAYLE GOLDMINTZ, NORINE GOODMAN, CAROLE GREENSPAN, GEORGE ISAAC, BERNARD & ESTHER JADD, ROD KARPEL & CRISSY MIRSKY-KARPEL, DOROTHY KUSHNER, NANCY LEVY, JOHN LOCKWOOD INVESTMENTS LTD., CARLA MALLOZZI, VINCENZO & CARLA MALLOZZI, SILVANO & RENATA MORASSUT, ELLEN NEWMAN, MERLE NOWACK, FRANK & MARIA PEZZENTE, J ERRY & JUDY RUMACK, ANNA & VANESSA SARRAINO, GIACINTO ABBONIZIO, ANTONIO SAVIO, 697350 ONTARIO LIMITED, L. AND S. INVESTMENTS INC., LUKE & SUSAN SOLDA, LUIGI & MARIA TRAINA AND PAUL VALANNE & WING-YEE HUI and COMMUNITY TRUST COMPANY, IN TRUST FOR RRIF AND RRSP OWNERS, CATHERINE SMITH-FRIEDMAN, STEVEN FRIEDMAN, CAROLE GREENSPAN, JAMES GREENSPAN, GEORGE ISAAC, ANGELA MANNA, ANNINA MESIANO, DOMENIC MESIANO, MARIO MORAS, PAUL NEWMAN, MERLE NOWACK, RENEE SHAW, SEYMOUR SHERMAN, WENDY SWITZER COCOMILE AND LUIGI TRAINA

W. Rapoport, for the Plaintiffs Plaintiffs (Responding Parties)

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CUSHMAN & WAKEFIELD LTD. and DANNY IP, AACI PROFESSIONAL REAL ESTATE APPRAISER Defendants (Moving Parties)

E. Bowker and L. Clark, for the Defendants

HEARD: March 1, 2022, via Zoom

REASONS ON MOTION FOR SUMMARY JUDGMENT

Justice J. Fregeau

Introduction

[1] The defendants seek an Order dismissing the negligent misrepresentation and breach of contract claims of the plaintiff, Foremost Mortgage Holding Corporation (“FMHC”) together with costs of this motion and the action.

[2] On November 19, 2021, the parties consented to an Order dismissing that part of the action brought by all plaintiffs but for Foremost Financial Corp. (“FFC”) and FMHC. That Order shall issue in accordance with the draft Order and consent filed and endorsed by me.

[3] At the hearing of this motion, FFC consented to an Order dismissing its claim against the defendants. An Order shall issue accordingly. The defendants’ costs of this motion as against FFC remain in issue.

Overview

[4] The material background facts are not in dispute.

[5] The original plaintiffs were co-mortgagees who advanced a loan as part of a syndicated mortgage deal with respect to 53 units at the commercial condominium complex Newton Square in Markham, Ontario (the “property”).

[6] The plaintiffs allege that they relied on an appraisal (the “appraisal”), prepared by the defendants, when they advanced mortgage financing for the property. The appraisal estimated the market value of the property to be $14,240,000.00 as of November 12, 2021.

[7] The language of the appraisal explicitly precludes its use by anyone except parties authorized in writing. The cover letter to the appraisal, dated November 18, 2010, was addressed to CTC Bank of Canada and stated that the appraisal was prepared for mortgage financing purposes and the exclusive use of CTC Bank of Canada:

This appraisal is prepared at the request of Markham Developments Inc. for the exclusive use of CTC Bank of Canada. It may not be distributed to or relied upon by other persons or entities without written permission of the Appraiser.

[8] The defendant, Danny Ip, authorized FFC to rely on the appraisal by letter dated May 26, 2011, addressed to Mr. Tim Bankier, Foremost Financial Corp (the “reliance letter”):

As per the request of Canadian Mortgage Capital Corporation, we authorize Foremost Financial Corp. to use the above original appraisal report for mortgage financing purposes.

[9] The plaintiffs concede that FFC was the party to whom the reliance letter was addressed and the party that received the reliance letter. The limiting language contained in the reliance letter is also not in issue.

[10] FMHC is a wholly owned subsidiary of FFC. FMHC and other plaintiffs registered a mortgage on the property on June 30, 2011, in the amount of $9,000.000.00 (the “mortgage”). The mortgage lists FMHC and others as chargees. FMHC advanced 66% of the loan with the other plaintiffs advancing the balance. FFC was not a chargee and did not advance any funds on the mortgage. Markham-Kirkham Developments (“MK Developments”), the chargor, defaulted on the mortgage in July 2014.

[11] FMHC alleges that it relied on the appraisal prepared by the defendants in deciding to advance the mortgage financing and that it suffered a loss following the default of MK Developments. FMHC alleges that the appraisal was negligently prepared and claims against the defendants for negligent misrepresentation and breach of contract.

The Issues

1. Is this an appropriate case for summary judgment?
2. Did the defendants owe a duty of care to FMHC because of the reliance letter it provided to FFC?

[12] The defendants’ Amended Notice of Motion seeks an Order dismissing the entire action. FMHC’s breach of contract claim was noted as an issue by the defendants in its factum on this summary judgment motion. In their factum, the defendants simply submitted that FMHC did not have a contract with them. The issue was not addressed by the defendants in oral submissions. FMHC did not address the breach of contract claim in either their factum or oral submissions.

The Positions of the Parties

The Defendants

[13] The defendants submit that there are no genuine issues in this action requiring a trial and that the action is well-suited for summary judgment. The defendants contend that the only issues are narrow and discrete issues of law. The defendants suggest that the evidentiary record is modest, document driven and sufficient to determine the legal issues on a motion for summary judgment. The defendants submit that the court is not required to make any credibility assessments or to weigh conflicting evidence to decide the legal issues raised.

[14] The defendants contend that the language of the Appraisal, the Appraisal’s covering letter, and the reliance letter are clear and explicit – only authorized parties may rely on the Appraisal, and the only manner in which a party is so authorized is with the written permission of the Appraiser. The defendants submit that FFC, and not FMHC, received that authorization.

[15] The defendants do not dispute that FMHC is a wholly owned subsidiary of FFC. However, that economic reality does not alter their relationship at law - the two corporations are separate and distinct legal entities and it was FFC that the Appraiser authorized to rely on the Appraisal, not FMHC, according to the defendants.

[16] The defendants submit that, given these circumstances, FMHC’s claim fails on at least two of the five required elements of the tort of negligent misrepresentation.

[17] First, the defendants contend that they did not owe FMHC a duty of care. The defendants submit that the law has never found a duty of care between the author of an appraisal report and a subsidiary of the parent corporation authorized to rely on it.

[18] The defendants suggest that establishing a prima facie duty of care begins with a proximity analysis which focusses on what undertaking of responsibility was actually given by the defendants. The defendants submit that they gave no undertaking of responsibility to FMHC. The defendants contend that they expressly disavowed any responsibility for non-authorized parties who relied on the Appraisal in both the Appraisal and the reliance letter.

[19] The defendants suggest that FMHC’s negligent misrepresentation claim asks the court to recognize a duty of care expressly foreclosed in the undertaking given by the defendants to FFC and CTC Bank of Canada. Mr. Ip did not give an undertaking of responsibility to FMHC. The fact that FMHC chose to rely on the Appraisal does not establish a duty of care, according to the defendants.

[20] The defendants submit that the fact that FMHC is a wholly owned subsidiary of FFC does not change the fact that only FFC, not FMHC, was authorized to rely on the Appraisal. The defendants contend that recognizing a duty of care for related companies when an undertaking is given only to a parent company would fundamentally alter the nature of corporate relationships.

[21] The defendants contend that FMHC was an unauthorized user of the Appraisal to whom they did not owe a duty of care and that FMHC’s negligent misrepresentation claim against them is without merit.

[22] Secondly, the defendants submit that even if it is found that they did owe FMHC a duty of care, FMHC did not reasonably rely on the Appraisal because it was not an intended user of the Appraisal and FMHC ignored the limiting terms and conditions of the both the Appraisal and the reliance letter. The defendants suggest that FMHC did not have a legally proximate relationship with the defendants because the defendants never authorized FMHC to rely on the Appraisal. The lack of reasonable reliance flows from the fact that the defendants did not undertake any responsibility to FMHC.

[23] The defendants submit FMHC is unable to establish two of the required elements of the tort of negligent misrepresentation and that its claim therefore fails.

FMHC

[24] FMHC did not make any substantive oral or written submissions suggesting that this action raises genuine issues requiring a trial such that it cannot be resolved on this summary judgment motion.

[25] FMHC submits that the merits of its negligent misrepresentation claim against the defendants must be analyzed in the context of what it suggests are the unique facts of this case.

[26] FMHC submits that the fact that the reliance letter was addressed to FFC rather than FMHC is “simply a misnomer” and not a deliberate limiting of the Appraisal to exclude FMHC from relying on it. FMHC further submits that the “temporal connection” is also relevant to the analysis – FMHC advanced funds to MK immediately following FFC’s receipt of the reliance Letter.

[27] FMHC submits that this is not a “typical situation” where the limiting language in an appraisal should oust an otherwise foreseeable party from relying on it. FMHC contends that a duty of care should be found in the narrow, exceptional circumstances of this case, namely:

• FMHC’s reliance on the Appraisal was virtually contemporaneous with it being provided to “the incorrectly named party”;
• FMHC, the party relying on the Appraisal, is a wholly owned subsidiary of FFC, the party to whom the reliance letter was directed;
• The reliance letter was intended to be provided to the corporation who was lending the funds for the mortgage for which the Appraisal was being relied on; and
• The limiting language was not a deliberate decision to oust FMHC from relying on the Appraisal.

[28] FMHC further submits that, on the unique facts of this case, there are no policy concerns about indeterminate liability if a duty of care and reasonable reliance are found.

Discussion

[29] In my view, this action can be appropriately resolved by summary judgment. The evidentiary record is thin and document based. There is no need to assess credibility or to weigh conflicting evidence to determine the issues. The motion deals only with issues of law and I am confident that I can apply the law to the non-contentious facts and reach a fair and just determination on the merits. Summary judgment is also a proportionate, expeditious and cost-efficient means to achieve a just result in this case.

The Breach of Contract Claim

[30] As noted above, FMHC’s breach of contract claim was not directly addressed by the parties. The Appraisal was initially prepared for CTC Bank of Canada. Subsequently, pursuant to the reliance Letter, FFC was entitled to rely on it.

[31] Any suggestion that there was a contractual relationship between the defendants and FMHC because of FFC’s contractual relationship with the defendants and the fact that FMHC is a wholly owned subsidiary of FFC, ignores the fact that FFC and FMHC are separate legal entities.

[32] I accept the submission of the defendants that to find a contractual relationship on these facts would be tantamount to a finding that subsidiaries have privity of contract in relation to all contracts entered into by their parent companies.

[33] FMHC’s breach of contract claim against the defendants is dismissed.

The Negligent Misrepresentation Claim

[34] It is a well-established principle of corporate law that corporations are separate legal entities regardless of affiliations with their parent corporations. In Tran v. Bloorston Farms Ltd., 2020 ONCA 440, the Ontario Court of Appeal was required to opine on the extent or reach of the rule in Foss v. Harbottle (1843) 67 ER 189. In doing so, the Court confirmed at paragraphs 1 and 29, as one of two reasons for the rule, the principle that corporations are separate and distinct legal entities.

[35] There is no authority to support a submission that wholly owned subsidiaries and their parent corporations, such as FFC and FMHC, are exempt from the general rule of corporate separateness. FMHC’s claim in negligent misrepresentation must be analyzed in the context of this legal reality.

[36] The required elements of the tort of negligent misrepresentation are also well-established:

1. There must be a duty of care based on the relationship between the representor and the representee;
2. The representation in issue must be inaccurate or misleading;
3. The representor must have acted negligently in making the misrepresentation;
4. The representee must have reasonably relied on the negligent misrepresentation; and
5. The reliance must have resulted in damages to the representee.

[37] There is no existing case law establishing a duty of care between the author of an appraisal report and a subsidiary of the parent corporation authorized to rely on it.

[38] In Barkley v. Tier 1 Capital Management Inc., 2018 ONSC 1956, Perell J. declined to find that the author of an appraisal report owed a duty of care to third parties who had not been granted authority to rely on it. In doing so, Perell J. reviewed the Canadian approach to determining whether a duty of care exists in a particular situation.

[39] Perell J. summarized the duty of care analysis at para. 79 of Barkley:

If a negligence case does not come within an established category, it is necessary to undertake a duty of care analysis. As developed by the caselaw in Canada, there is a four-step analysis. The first step is to determine whether the case falls within a recognized category of negligence case. In Canada, if the relationship between the plaintiff and the defendant does not fall within a recognized class of negligence cases where the defendants have a duty of care to others, then whether a duty of care to another exits involves satisfying the requirement of the next three steps: (1) foreseeability, in the sense that the defendant ought to have contemplated that the plaintiff would be affected by the defendant’s conduct; (2) sufficient proximity, in the sense that the relationship between the plaintiff and the defendant is sufficiently close prima facie to give rise to a duty of care; and (3) the absence of overriding policy considerations that would negate any prima facie duty established by foreseeability and proximity. Thus, in a new category of case whether a relationship giving rise to a duty of care exists depends on foreseeability, moderated by policy concerns.

[40] In Deloitte & Touche v. Livent Inc., 2017 SCC 63, at para. 24, the Supreme Court directed that in cases of negligent misrepresentation, proximity is more usefully considered before foreseeability:

What the defendant reasonably foresees as flowing from his or her negligence depends upon the characteristics of his or her relationship with the plaintiff…and the purpose of the defendant’s undertaking.

[41] Assessing proximity in the duty of care analysis entails asking whether the parties are in such a “close and direct” relationship that it would be “just and fair having regard to that relationship to impose a duty of care in law”. Livent at para. 26, citing Cooper v. Hobart, 2001 SCC 79 at paras. 32 and 34.

[42] The Court in Livent, at para. 30, went on to explain that in cases of pure economic loss arising from negligent misrepresentation two factors are determinative in the proximity analysis: the defendant’s undertaking and the plaintiff’s reliance:

Where the defendant undertakes to provide a representation or service in circumstances that invite the plaintiff’s reasonable reliance, the defendant becomes obligated to take reasonable care. And, the plaintiff has a right to rely on the defendant’s undertaking to do so. These corollary rights and obligations create a relationship of proximity.

[43] At para. 31 of Livent, the Court cautioned that rights, like duties, are not limitless:

Rights, like duties, are, however, not limitless. Any reliance on the part of the plaintiff which falls outside of the scope of the defendant’s undertaking of responsibility—that is, of the purpose for which the representation was made or the service was undertaken—necessarily falls outside the scope of the proximate relationship and, therefore, of the defendants’ duty of care. This principle, also referred to as the “end and aim” rule, properly limits liability on the basis that the defendant cannot be liable for a risk of injury against which he did not undertake to protect. By assessing all relevant factors arising from the relationship between the parties, the proximity analysis not only determines the existence of a relationship of proximity, but also delineates the scope of the rights and duties which flow from that relationship. In short, it furnishes not only a “principled basis upon which to draw the line between those to whom the duty is owed and those to whom it is not”, but also a principled delineation of the scope of such duty, based upon the purpose for which the defendant undertakes responsibility. As we will explain, these principled limits are essential to determining the type of injury that was a reasonably foreseeable consequence of the defendant’s negligence.

[44] As can be seen, the scope of a defendant’s undertaking of responsibility – that is, the purpose for which the representation was made – is central to the proximity analysis.

[45] In this case, in both the Appraisal and the reliance letter, the defendants clearly and expressly excluded any responsibility to non-authorized parties who purportedly relied on the Appraisal. Mr. Ip was not asked to and did not in fact give an undertaking of responsibility to FMHC. The fact that FMHC, a wholly owned subsidiary of FFC, the party whom the reliance letter authorized to rely on the Appraisal, chose to rely on it does not change the duty of care analysis.

[46] While FMHC, on this motion, has raised the issue of “misnomer” and “mistake” in relation to FFC and not FMHC being the addressee in the reliance letter, there is no evidence in the record before me to support that submission.

[47] I accept the submission of the defendants that the recent case of Capital Direct Lending Corp v. Howard & Company Real Estate Appraisers, 2018 ABCA is directly on point.

[48] In Capital Direct, Capital Direct Lending Corp. (“Lending Corp”) and Capital Direct Income Trust (“Income Trust”) sued an appraisal company on the basis that the appraisal was materially incorrect at the time a mortgage loan was advanced by Lending Corp. Lending Corp. commissioned the appraisal which expressly provided it could not be relied upon by any other party without the appraiser’s express permission. The appraisal was directed to “Capital Direct” and did not specify either “Lending Corp” or “Income Trust”. It was not in issue that “Lending Corp” was the client and mortgagee.

[49] Default and a deficiency followed and both “Lending Corp” and “Income Trust” claimed against the appraiser in breach of contract and negligent misrepresentation.

[50] The Master in Chambers, Court of Queen’s Bench of Alberta, concluded that the limiting words in the appraisal were clear – the appraisal was to be relied on only by the client and that client was Lending Corp. The plaintiffs’ claims were dismissed. The Master’s Judgment was upheld by both the Court of Queen’s Bench of Alberta and the Court of Appeal of Alberta.

[51] In my view, the defendants did not owe a duty of care to FMHC. FFC and FMHC organized their business affairs to ensure that they were separate legal entities. The appraisal expressly stated that it was prepared for the exclusive use of the CTC Bank of Canada and that it was not to be relied upon by any other party without the written permission of the appraiser. Pursuant to the reliance letter, Mr. Ip authorized FFC, and only FFC, to rely on the appraisal.

[52] The defendants’ undertaking of responsibility extended firstly to the CTC Bank of Canada and secondly to FFC, the party authorized in writing to rely on the appraisal by Mr. Ip pursuant to the reliance letter.

[53] Any reliance FMHC placed on the appraisal falls outside the scope of the defendants’ undertaking of responsibility and therefore outside the scope of the defendants’ duty of care. The defendants did not owe a duty of care to FMHC, regardless of the fact that FMHC is a wholly owned subsidiary of FFC.

[54] As I have found that the defendants did not owe a duty of care to FMHC, it is not necessary to consider if FMHC reasonably relied on the Appraisal. FMHC’s negligent misrepresentation claim is dismissed.

[55] The defendants are presumptively entitled to their costs of the action and this motion. If the parties cannot agree on costs, they shall file Cost Submissions, not to exceed five pages, exclusive of their respective Costs Outlines and Bills of Costs. The defendants’ Cost Submissions shall be filed within 14 days of the release of this decision; FMHC’s Cost Submissions shall be filed within 7 days thereafter.

The Hon. Justice J. Fregeau Released: March 14, 2022

COURT FILE NO.: CV-16-561920 DATE: 2022-03-14

BETWEEN:

FOREMOST FINANCIAL CORP., FOREMOST MORTGAGE HOLDING CORPORATION Plaintiffs

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CUSHMAN & WAKEFIELD LTD. and DANNY IP, AACI PROFESSIONAL REAL ESTATE APPRAISER Defendants

REASONS ON MOTION FOR SUMMARY JUDGMENT Fregeau J. Released: March 14, 2022 /sf