Court File and Parties

COURT FILE NO.: CV-22-686192

DATE: 20220829

ONTARIO SUPERIOR COURT OF JUSTICE

RE: RONG SHI, Applicant

-and-

2614723 ONTARIO CORPORATION, MAX WRIGHT REAL ESTATE COROPORATION carrying on business as SOTHEBY'S INTERNATIONAL REALTY CANADA, MAHZAD PAHLAVAN and CHANGJIN SHI, Respondents

BEFORE: FL Myers J

COUNSEL: David A Brooker for the Applicant

Terry Walman, for Changjin Shi, the third and fourth mortgagee

2614723 Ontario Corporation, the second mortgagee, by Gary Liu in person

No one appearing for Max Wright Real Estate Corporation carrying on business as Sotheby's International Realty Canada, the real estate broker, or for Mahzad Pahlavan, the purchaser.

HEARD: August 29,2022

CASE CONFERENCE ENDORSEMENT

[1] In response to an urgent communication from the applicant’s counsel, the court convened a case conference in connection with a proposed real estate transaction scheduled to close tomorrow.

[2] The respondent Mahzad Pahlavan has agreed to buy a house from the applicant for $6,888,000. The closing is set for tomorrow.

[3] The real estate broker Sotheby’s is holding the purchaser’s deposit in the amount of $740,000 before interest. Of that amount, the broker apparently claims 5% commission in the amount of $377,872 inclusive of HST. It says it holds the remaining $362,128 for the vendor on closing.

[4] There are four mortgages registered on title. There are also property tax and utility arrears outstanding.

[5] The purchase price will not be enough to pay out priority claims and the third mortgage in full.

[6] The vendor says he hopes to close to minimize his liability to the third mortgagee. The economic reality is that the vendor has no equity in the property. The third mortgagee is the person who risks loss and will receive the benefit of added recovery. He is the “plimsoll creditor” as that term was coined by Farley J.

[7] To try to maximize the third mortgagee’s recovery, the vendor and third mortgagee have demanded that the broker pay the full amount of the deposit to the vendor to help the deal close tomorrow. They submit that the broker has no right to hold the funds whether for its commission or otherwise.

[8] There is no doubt that, in bankruptcy, a mortgagee’s secured claim against the proceeds of mortgaged land takes stands in priority to a real estate broker’s contractual claim for commission against the bankrupt vendor. Re Century 21 Brenmore Real Estate Ltd., 1980 CanLII 1790 (ON CA).

[9] But, this is not a bankruptcy in which competing claims to funds are being advanced. Rather, the applicant seeks an order that he is entitled to the funds currently being held by the brokerage under the contracts among the parties.

[10] I am not able to make the final order sought today at an urgent case conference. The brokerage has not been formally served with the lawsuit. I am told that the agent involved has been sent material by email. However, there is no listing agreement. I do not know the degree to which the brokerage knows about this transaction. The application materials have not yet been sent to anyone who is said to be an officer or director or licensed broker at the brokerage.

[11] The issues in this case are not as clear as in Century 21. The standard contractual documents and regulatory environment have changed in the ensuing 40 years. While there is no doubting that a secured claim against proceeds of pledged collateral has priority in bankruptcy over an unsecured contractual claim against a bankrupt, there are trust issues under the current documents that may be different than what was asserted in Century 21.

[12] The agreement of purchase and sale says that the deposit will be “held in trust pending completion or other termination of this Agreement and to be credited toward the Purchase Price on completion”. Mr. Brooker and Mr. Walman submit that this creates a trust for the vendor and purchaser. While they ask me to order that the trust funds be paid to the vendor today or tomorrow, the purchaser has not signed a direction to require or consent to this payment at this time. Even on their own submission therefore, without unanimous consent of the beneficiaries, there is an issue as to how the court is to make the order sought.

[13] At the bottom of the signature page, the Sotheby’s real estate agent Jane Zhang has signed a commission trust agreement declaring that all money received by Sotheby’s as Listing Brokerage,

“…as contemplated in the MLS® Rules and Regulations of my Real Estate Board shall be receivable and held in trust. This agreement shall constitute a Commission Trust Agreement as defined in the MLS® Rules and shall be subject to and governed by the MLS® Rules pertaining to Commission Trust

[14] The trust declared is over all funds received or receivable by Sotheby’s. The trust is in favour of the Co-Operating Broker. In this case, Sotheby’s double ended the deal and is listed as the Co-operating Brokerage as well.

[15] Perhaps Sotheby’s must pay the deposit to the vendor’s lawyer on closing and then await payment of its commission if there are any proceeds left after the mortgagees are paid in full. If that is so, then the commission trust will apply only to funds received by Sotheby’s from the lawyer for the vendor. In this case, there will be no funds left to pay commissions after the mortgagees are paid.

[16] But, another possible reading of the trust language in the agreement of purchase and sale is that Sotheby’s has declared that it holds the deposit that it has received under that agreement in trust for itself.

[17] In the agreement of purchase and sale, the vendor and purchaser also acknowledge the relationships among the broker(s) as follows:

The Buyer and the Seller both acknowledge that the types of representation as defined in the Real Estate and Business Brokers Act, 2002 were explained prior to the execution of this offer and the Confirmation of Co-operation and Representation was completed prior to the offer being signed by the buyer and reviewed and signed by the Seller

[18] The Confirmation of Co-operation and Representation is a document appended to the agreement of purchase and sale that is referred to in the paragraph quoted immediately above. It is signed by the vendor and purchaser. It apparently was entered into before the parties signed the agreement of purchase and sale. That may suggest that it has been affirmed by the vendor and purchaser. But, at minimum, the effect of the reference to the Confirmation of Co-operation and Representation in the agreement of purchase and sale needs to be considered.

[19] The Confirmation of Co-operation and Representation provides for payment by the listing Brokerage to the Co-operating Brokerage of a commission of 2.5% plus HST. It continues,

COMMISSION TRUST AGREEMENT: If the above Co-operating Brokerage is receiving payment of commission from the Listing Brokerage, then the agreement between Listing Brokerage and Co-operating Brokerage further includes a Commission Trust Agreement, the consideration for which is the Co-operating Brokerage procuring an offer for a trade of the property, acceptable to the Seller. This Commission Trust Agreement shall be subject to and governed by the MLS® rules and regulations pertaining to commission trusts of the Listing Brokerage’s local real estate board, if the local board’s MLS® rules and regulations so provide. Otherwise, the provisions of the OREA recommended MLS® rules and regulations shall apply to this Commission Trust Agreement. For the purpose of this Commission Trust Agreement, the Commission Trust Amount shall be the amount noted in Section 3

above. The Listing Brokerage hereby declares that all monies received in connection with the trade shall constitute a Commission Trust and shall be held, in trust, for the Co-operating Brokerage under the terms of the applicable MLS® rules and regulations

[20] Might the brokerage submit that it holds the deposit in trust until completion? Or might it assert that it holds at least its commission in trust? Or might it submit that it holds one-half (i.e. 2.5%) in trust for itself as Co-operating Broker? Are these clauses and the relevant regulatory rules and regulations incorporated by reference sufficient to make a difference to the general holding from Century 21 and other cases?

[21] I cannot answer these questions today. I have no one before me for the broker making submissions as to its rights and obligations. I have not seen any of the regulatory provisions. During the case conference no one made any reference to the existence or meaning or scope of the commission trust or the Confirmation of Co-operation and Representation.

[22] I note that Mr. Walman has previously written to counsel opposite that the agents need to show agreement of both the vendor and the purchaser to successfully assert a trust over the deposit. Do the documents signed by them suffice?

[23] I cannot make a final decision on the meaning and scope of the agreement of purchase and sale in the 2022 regulatory context at a case conference today with the application having just been issued and not yet served.

[24] Accordingly, I adjourn this case conference to a case conference on September 1, 2022 to schedule the application. It is incumbent on the applicant to ensure that Sotheby’s has notice of the case conference.

[25] Whether the deal closes tomorrow will depend on whether Mr. Walman’s client agrees to let it close without the brokerage’s agreement to pay over the amounts it claims to hold in trust. Will it risk letting the purchaser walk away and try to hold the brokerage liable for any loss or is a bird in the hand the best outcome in a falling market? These are tactical questions for Mr. Walman, his client, and Sotheby’s. If the deal cannot close without some more answers from the court, then that is the parties’ choice.

[26] The second mortgagee has delivered a discharge statement that claims $56,840 in fees that are disputed by the vendor as unlawful penalties as described in P.A.R.C.E.L. Inc. v. Acquaviva, 2015 ONCA 331.

[27] The second mortgagee’s lawyer Ms Zhang was not available for the case conference convened on short notice today. The principal of the second mortgagee Mr. Liu attended. He advised that his company objects to the use of privileged documents by the applicant in his application material. In addition, he indicated that the second mortgagee is prepared to discharge its mortgage pending the determination of the validity of its claimed fees provided that the fees are secured by payment into court equal to the full amount claimed plus interest and costs.

[28] The vendor proposed the payment into court and I agree that it is a reasonable process to resolve the issues between the vendor and the second mortgagee.

[29] Mr. Brooker submits that $5,000 should be paid for interest and costs bearing in mind proportionality. In my view, the mortgagor (actually the third mortgagee) bears the risk of disproportionality. If the claim to avoid the second mortgagee’s fees fails, the second mortgagee will be entitled to interest and full cost recovery under the terms of the second mortgage. But, by that time, the rest of the proceeds will have been paid to the third mortgagee. Moreover, the third mortgagee may advance claims on its shortfall against the vendor. As the second mortgagee would have priority over the third mortgagee, I do not see it as fair or equitable to minimize the payment into court to make the second mortgagee bear the risk of a shortfall and make it chase either the third mortgagee or a potentially insolvent vendor.

[30] I am cognizant that only about $57,000 in fees are in issue. The mortgagor and Mr. Walman’s client should also be cognizant of the economics at play in suing over such a modest amount. There are four different fees contested. If the matter is heard quickly, I cannot imagine costs being much under $25,000 on a full indemnity basis. Then there is a year long risk of an appeal and costs to be incurred at that level. The amount to be secured is the full interest and costs of the entire process as would be secured in priority if the second mortgage remained in place.

[31] Accordingly, I order the second mortgagee to provide a discharge upon the applicant paying it $852,281.04 and paying into court the aggregate sum of $97,000 to stand as security for the second mortgagee’s claim for disputed fees, interest, and costs. The sum to be paid into court consists of $57,000 for the disputed fees + $25,000 for costs + $5,000 for interest + $10,000 for costs of an appeal and/or contingencies The judge who finally hears the claims about the legality of the fees will deal with the disposition of funds in court.

[32] The court will schedule the hearing of the claim concerning the second mortgagee’s fees on September 1, 2022 as well. Counsel should speak in advance. If the matter cannot be settled economically, then counsel should agree on the timing of the necessary steps.

FL Myers J

Date:, August 29, 2022