Court File and Parties

Court File No.: CV-22-686234-00CL Date: 2022-12-06 Superior Court of Justice – Ontario

Re: 7539088 Canada Ltd. and 1989474 Ontario Inc., Plaintiffs And: Michael Slattery, MERK Investments Ltd. and Skymark Finance Corporation, Defendants

Before: Osborne J.

Counsel: Lincoln Caylor, Nathan J. Shaheen, and Andrew N. Sahai, for the 7539088 Canada Ltd. and 1989474 Ontario Inc. Milton Davis, Ronald Davis, and Natalia Sidlar, for Michael Slattery, MERK Investments Ltd. and Skymark Finance Corporation

Heard: December 5, 2022

Endorsement

[1] The Plaintiffs seek an order compelling production of documents [primarily financial records] that relate to mortgages held by the Defendants in trust for the Plaintiffs, and an order compelling the Defendants to comply with my order made in this proceeding on October 31, 2022 [on consent] directing the transfer of certain mortgages, including a Québec mortgage and a UK mortgage, to a new trustee.

[2] In this action, the Plaintiffs allege that the Defendants have perpetrated a fraudulent scheme to misappropriate funds advanced by the Plaintiffs for the investment in a series of private mortgages to be secured against title to various properties.

[3] The Plaintiffs commenced this action in August, 2022 following their alleged discovery the month before of the fraudulent scheme. On this motion, they initially sought an order for the interim preservation of property and a Mareva injunction. Today, however, the Plaintiffs seek relief in accordance with the draft order filed which contemplates declaratory relief relating to the trust interests pursuant to which the Plaintiffs allege the Defendants held the relevant mortgages, and the production of documents and records relating to those mortgages on an expedited [14 day] basis.

[4] As became clear during submissions of both the Plaintiffs and the Defendants, the Defendants do not seriously contest the relevancy of the documents sought nor of their obligation to produce same. However, the Defendants submit that some of the documents do not exist, others have already been produced, and the balance ought to be produced in accordance with the ordinary course exchange of affidavits of documents and Schedule A productions in this action.

[5] The principal of the Plaintiffs, Michael Orr [Orr], and the individual defendant Michael Slattery [Slattery] were once friends. To say there has been a breakdown in the friendship and trust relationship would be an understatement.

[6] The Plaintiffs allege that Orr caused the Plaintiffs to make investments over a number of years through the funding of the principal amounts of numerous mortgages issued to customers and clients of the corporate defendants relating to approximately 26 different properties. In respect of each mortgage, Slattery executed a Trust Declaration on behalf of one or other of the corporate Defendants expressly acknowledging the mortgage investment, the interest of one or other of the Plaintiffs, and the fact that the relevant corporate Defendant held the interest in trust for the relevant Plaintiff. Monthly statements with respect to the principal outstanding and repayments received by the relevant purchaser were generated and produced.

[7] The Plaintiffs allege that the Defendants received repayment of the principal amounts pursuant to the mortgages, and discharged the corresponding mortgages, but concealed these facts from the Plaintiffs, generated fraudulent statements purportedly showing that the amounts remained outstanding, and misappropriated the funds.

[8] The Defendants deny any misappropriation and submit that all funds can and will be accounted for.

[9] When the Plaintiffs discovered the allegedly fraudulent scheme in July, 2022, they demanded explanations from the Defendants and when such were not forthcoming, they commenced this action and sought to schedule a motion for interim relief.

[10] On October 31, 2022, when the motion returnable today was already pending, the parties appeared before me to address various matters of compliance with Terms of Adjournment previously agreed to and as referenced in the earlier endorsement of Justice Cavanagh. On consent, I made an order directing the transfer of those mortgages that remained outstanding to a new trustee.

[11] The Plaintiffs allege in the action that they advanced approximately $13.5 million over the years to the Defendants. Approximately $7 million of that amount is represented by the mortgages apparently still outstanding and transferred to the new trustee pursuant to the October 31 order. That leaves, according to the Plaintiffs, approximately $6.5 million of funds unaccounted for. It is these remaining funds and the related mortgages to which the documents now sought by the Plaintiffs are relevant.

[12] The Plaintiffs submit that beneficiaries of a trust have a proprietary right to records relevant to an accounting for the trust property, and are entitled to production immediately. The Defendants submit that it is telling that the Plaintiffs are not pursuing today any relief related to interim preservation of property or a Mareva injunction. They also submit, as noted above, that many records have already been produced and others can be produced in the normal course of this action. There is a dispute about the extent to which a database of documents acknowledged by all parties to have already been produced and which was prepared by prior counsel to the Defendants is in a usable format given the organization and document coding.

[13] I agree with the Plaintiffs that trustees have an obligation to provide "full explanations of all their dealings, and the causes why outstanding assets were not collected or property of the estate has disappeared", and also that beneficiaries have a right in the nature of a proprietary right to records necessary to understand "the mode in which the trust property or their share of it has been invested or otherwise dealt with, and as to where it is and full accounts respecting" [see Maintemp Heating & Air Conditioning Inc. v. Momat Developments Inc., 2002 49469 (ON SC), 59 O.R. (3d) 270 and Ballard Estate, Re, 1994 7307, quoting with approval from O'Rourke v. Darbishire, [1920] A.C. 581 at pp. 626-7].

[14] To be clear, the right of a beneficiary to such production by a trustee is a proprietary right separate and apart from the right of any plaintiff to production of relevant and otherwise properly producible documents in the course of a proceeding and as provided for in the Rules. The proprietary right flows from the beneficial ownership of the beneficiary in the trust property and the derivative right to records relevant to the accounting for such property.

[15] Accordingly, it is not an answer to a request for such documents to say that they will be produced in the ordinary course of litigation. A beneficiary is entitled to such documents when requested, and whether or not the documents might otherwise be producible in the course of litigation by another party. Those documents might be more limited in scope or indeed might be documents of a defendant over which a plaintiff had no proprietary right flowing from a trust.

[16] The demand for the documents that are the subject of this motion was made approximately four months ago, and the Plaintiffs are entitled to them now. The categories of the documents requested are set out in paragraphs 2 (a) through and including (f) of the draft order submitted. I am satisfied that they relate to the particulars of the discharge of any relevant mortgages and related documents and events, all payments of principal amounts made to the Defendants or any of them by borrowers under the relevant mortgages, repayments or application of principal amounts by the Defendants to or for the benefit of the Plaintiffs, any relevant subordination or modification of such mortgages, and the relative priority of such mortgages.

[17] All of those documents appear to be plainly relevant to the issues in the action and, as noted above, relevancy is not seriously contested by the Defendants.

[18] The requested relief in the form of an order directing the production of the documents in a manner that is organized and readily usable, including for greater certainty those produced electronically, is appropriate and in any event is consistent with the obligations that the Commercial List expects from all parties litigating in this Court.

[19] The Defendants maintain that certain documents to which the Plaintiffs have a proprietary right and that have been requested do not exist. That may well be so, but the Plaintiffs are entitled to confirmation from the Defendants that such documents do not exist and the particulars of such information as the Defendants do have as to whether the documents ever existed and if so, what became of them.

[20] The request for these documents was made approximately four months ago. The request ought to be straightforward and there is no reason, even if some documents are required to be obtained from third parties such as accountants, banks or financial institutions, that they cannot be delivered by the Defendants to the Plaintiffs promptly.

[21] Accordingly, the Defendants shall produce the documents set out in the above-noted paragraphs of the draft order, or clear and unequivocal confirmation that such documents do not exist, no later than the close of business on Friday, January 6, 2023 and earlier if they can [even if on a piecemeal basis; the Defendants should not wait until they have exhausted every line of inquiry in respect of every document to produce what they have got].

[22] The documents are to be produced in an accessible and usable format such that they can be, particularly if produced electronically, readily identified and located. To the extent that cooperation from former counsel for the Defendants, which law firm apparently produced the database of some 8,000 documents delivered already, is required, such cooperation is expected.

[23] It follows that in respect of the same documents over which the Plaintiffs have a proprietary right, the Plaintiffs are entitled to make reasonable inquiries and the Defendants have the corresponding obligation to respond [since such requests could and presumably would otherwise be the subject of a subsequent motion for productions to which the Plaintiffs have a right in any event].

[24] Given the acknowledgement and agreement of all parties that there were trust relationships, the relief sought by the Plaintiffs in the form of an order that if the Defendants or anyone acting on their behalf currently possess or receive in the future outstanding payments on account of interest or principal from borrowers in connection with the mortgages that are the subject of this action, such funds shall be remitted forthwith to the new trustee appointed under my order of October 31, 2022.

[25] Finally, with respect to the mortgages that were the subject of my earlier order directing the transfer to the new trustee, it appears today that to such mortgages, one in the Province of Québec and one in the United Kingdom, have yet to be transferred.

[26] Counsel for the Defendants submits today that there is no issue about the requirement that they be transferred and indeed the Defendants have taken all reasonable steps to effect compliance with the earlier order, but that there have been procedural hiccups or delays in those respective jurisdictions which have either been remedied or will be remedied within the next few days and the mortgages transferred. If that is so, no further relief is warranted. If those remaining mortgages are not transferred forthwith, however, the Plaintiffs may seek another attendance before me to seek such directions as may be appropriate to ensure compliance with my earlier order relating to the transfer of the outstanding mortgages to the new trustee.

[27] That leaves the issue of costs of the motion today. The Plaintiffs have submitted a cost outline and seek approximately $84,000 on a full indemnity basis, $76,000 on a substantial indemnity basis and $51,000 on a partial indemnity basis. The Defendants have also submitted a cost outline and seek substantial indemnity costs of approximate $326,000 and partial indemnity costs of approximate $245,000, noting that some of the costs related to preparation for the defence of a motion for Mareva relief, which the Plaintiffs advised only shortly prior to today's hearing that they were not pursuing today.

[28] The quantum sought by each side is significant, but so too are the issues at stake and the scope of the dispute. The Plaintiffs allege a fraudulent scheme and the misappropriation of funds. The Defendants deny any fraud or misconduct, but in any event say that many if not most of the documents that are the subject of the motion today have already been produced. That may be so, and if it is, there are production obligations flowing from my disposition of this motion today will be brief and narrow.

[29] For all of these reasons, in my view it is appropriate to defer a decision on entitlement to, and quantum of, costs, to the trial judge, who will be in a position to assess whether the documents had already been produced and the relevance of all documents. The trial judge will also be in a better position to assess the relative positions of the parties with respect to the appropriateness of relief in the nature of a preservation order or Mareva injunction and any other steps that will by then have transpired prior to trial.

[30] Order to go in a form consistent with this Endorsement. Counsel for the Plaintiffs is directed to prepare a draft order for review by counsel for the Defendants and thereafter and forward it to the Commercial List Office for review and signing by me as soon as possible.

Osborne J.

Date: December 6, 2022