Court File and Parties

COURT FILE NO.: CV-22-77988-00 DATE: 2023 07 31

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

MICHAEL ST. JEAN REALTY INC. Plaintiff

- and -

SCARFONE HAWKINS LLP Defendant

Counsel: B.G. Blay, for the Plaintiff M.R. Kestenberg and T.M. Slahta, for the Defendant

HEARD: April 6, 2023

REASONS FOR JUDGMENT

LEMAY J

[1] The Plaintiff, Michael St. Jean Realty Inc. (“SJR”) is a real estate brokerage based in Hamilton. SJR and its predecessor corporation had an agreement with 467 Charlton Avenue Inc. (“467”), a condominium developer, to market units in a development in Hamilton. The development was at 467 Charlton Avenue, and will be referred to as “the Property”. SJR was to be paid commissions for units that it was involved in selling.

[2] 467 had borrowed money in order to finance the construction project and had secured those loans against the property. Unfortunately, 467 got into financial trouble and ended up defaulting on its loans. In spite of the default, the condominium units continued to be sold. The money from the sales of the units was paid to the Defendant, Scarfone Hawkins LLP (“Scarfone”) in trust.

[3] 467’s creditors directed Scarfone to pay the money that Scarfone was holding in trust out to the creditors, the CRA and other parties. No payments were made to SJR. SJR commenced an action against Scarfone, alleging that there was an agreement with 467 that the commissions owing to SJR would be held in trust specifically for SJR by Scarfone and that Scarfone improperly paid the commissions out to other parties, particularly 467’s creditors.

[4] Although SJR has sued 467 for the recovery of the commissions owing, SJR has not advanced the trust claim against 467 directly. SJR has no written documentation to support either the existence of the trust or its claim that Scarfone was aware of the trust. Scarfone has brought a motion for summary judgment seeking the dismissal of SJR’s claim.

[5] For the reasons that follow, Scarfone’s motion for summary judgment is granted and SJR’s action is dismissed.

Background Facts

a) The Condominium Development

[6] SJR’s predecessor company entered into an agreement with 467 on or about January 26th, 2017. It was described as the Vista Condo Sales Agreement (“VCSA”) and covered units sold at the Property. There is no dispute in this litigation that the VCSA is binding on, and inures to the benefit of, SJR. The Property had three towers, known as the Eastern Tower, the Central Tower and the Western Tower.

[7] In addition, in October of 2017, 467 obtained financing from Centurion Mortgage Capital Corporation (“Centurion”) by way of a commitment letter. That commitment letter provided, inter alia, a $35 million charge/mortgage to be registered against the Property and a General Security Agreement (“GSA”). The commitment letter was dated October 30th, 2017, the GSA was dated April 17th, 2018, and the charge was registered on the land on May 10th, 2018. All of these events predate Scarfone’s retainer in this matter.

[8] The commitments between 467 and Centurion were changed in July of 2019. The charge/mortgage was increased to $50 million, and a further GSA was executed. Both of these documents were executed/registered on September 18th, 2019.

[9] In addition to the Centurion security, 467 obtained financing from 2615533 Ontario Inc. (“261”), and granted 261 a security that was behind the Centurion security in priority.

[10] In 2020, 467 experienced financial difficulties and defaulted on its obligations to both Centurion and 261. As a result of this default, Scarfone agreed to hold proceeds of the sale of the condominium units in trust and not to release the proceeds without direction from Centurion. This brings me to the role of Scarfone Hawkins in this case.

b) Scarfone Hawkins’ Role

[11] Scarfone was retained in January of 2019 to complete individual condominium unit purchase and sale transactions at the Property. They fulfilled that role and continued to receive money on account of these sales. The amounts received were in the millions of dollars.

[12] After 467’s financial difficulties became apparent, Centurion took steps to enforce its security. As a result of those steps, Scarfone became a party to an undertaking where Scarfone agreed not to release the funds it was holding in trust without a direction from Centurion. As of July 31st, 2021, Scarfone was holding over $9 million in funds in its trust account.

[13] In August of 2021, Centurion transferred all of its security rights and interests to 261. Centurion and 261 provided a release and joint direction to 467 and Scarfone, which required the Lawyers to hold certain amounts for the Canada Revenue Agency, hold other amounts for a replacement security and pay the balance to the Vitulli Law Group. Those steps were carried out.

[14] Further directions were received from 261’s counsel to pay the remaining funds out, except for a holdback for ongoing operating expenses. Ultimately, all of the funds that Scarfone held in its trust account were disbursed. There was no direction from either Centurion or 261 to disburse any of the money to SJR.

c) The Negotiations Between 467 and SJR

[15] In late 2019, Getty Gatto was retained by SJR because none of the commissions owing for the sales had been paid. He wrote to 467’s principals in January of 2020, and received a reply from Mr. Mark Abradjian, who was 467’s external counsel. It should be noted that Mr. Abradjian is a partner in a different Hamilton law firm and is not affiliated, in any way, with Scarfone.

[16] There was correspondence between Mr. Gatto and Mr. Abradjian throughout 2020. However, no resolution of the matter was reached. As a result, on September 2nd, 2020, SJR commenced a lawsuit against 467, seeking payment of commissions on the sales of individual units at the Property. This lawsuit does not contain an assertion of a trust claim between SJR and 467.

[17] After the litigation had started, there were further discussions between Mr. Gatto and Mr. Abradjian. On January 15th, 2021, Mr. Gatto sent an e-mail to Mr. Abradjian in which he set out the terms of a proposed resolution and stated, “I also need confirmation that all commission for Units already sold are being held in trust by your client’s Real Estate Lawyers.” The response was that “my understanding is that the commissions for sold units are indeed being held by the real estate lawyer.”

[18] The draft minutes of settlement that were exchanged later in January of 2021 set out various terms of settlement. They make no mention of an obligation for either 467 or Scarfone to hold the monies in trust. The draft minutes also do not require either 467 or Scarfone to establish a separate trust account for the specific benefit of SJR. I should also note that, at this point, there is no evidence that Scarfone was involved in any of these negotiations.

[19] Between February and May of 2021, there were continued negotiations between Mr. Gatto and Mr. Abradjian. Those discussions led to an e-mail exchange on April 22nd, 2021, which ends with an e-mail from Mr. Gatto which says, inter alia, “my understanding is our agreement still stands but check.” It ultimately appears that an agreement is reached, but a final signed copy of said agreement is not attached to any of the Affidavits in this case.

[20] After the agreement is concluded, counsel at Scarfone, Mr. James Mahler, is contacted and advised of the agreement. On May 11th, 2021, Mr. Mahler asks a series of questions about how the agreement is to be implemented. The e-mail ends with the following passage:

In short, based on the attached, we are not clear on when and how we are to pay the commission amounts we are holding for already complete sales and/or the commission amounts which will be payable for "Phase 3" closings. Please consider and advise.

[21] Subsequently, Mr. Gatto sent an e-mail on June 8th, 2021 asking for the settlement funds to be paid out. The e-mail from Mr. Gatto includes the following passage:

Now we have drawn up minutes of settlement and I am told that we need to ensure the creditors will agree to pay out the commissions. Mark and Jim we have all been in this a long time and I have never heard of an institution refusing to pay the real estate agents.

Having said the above I have been instructed to seek a summary judgement for the unpaid commissions unless I receive an answer by Friday that the settlement is acceptable and that outstanding commissions will be paid forthwith. Please appreciate my position. I have a very angry client who I keep stalling. I do not want to go this route but please appreciate my position.

Mark we have worked well together and been able to resolve this very favorably for your client but I need your assistance to wrap this up.

[22] After that e-mail was sent, Mr. Gatto’s Affidavit indicates that he had no further contact with either Mr. Mahler or Mr. Abradjian. On August 12th, 2021, SJR received 467’s Notice of Intention to Make a Proposal, presumably in bankruptcy.

d) SJR’s Litigation Against Scarfone

[23] SJR’s claim against Scarfone was started by way of a Statement of Claim dated January 26th, 2022. SJR’s claim was for breach of trust, interference with economic relations and detinue. The action was defended by Scarfone.

[24] Ultimately, a summary judgment motion was argued before me. The claims of interference with economic relations and detinue were not pursued by SJR in its arguments before me. Their factum focused exclusively on the issue of whether a trust exists. In any event, I would note that, on the facts I have set out below, it does not appear to me that either claim would be sustainable.

[25] As a result, I will address this motion on the basis that, if the trust claim is not supportable, then the action should be dismissed.

Issues

[26] There are two issues in this case, as follows:

a) Whether this is an appropriate case for summary judgment?

b) If so, whether SJR can assert a trust claim against Scarfone.

[27] I will deal with each issue in turn.

Issue #1- Is Summary Judgment Appropriate?

[28] Yes.

[29] The test for summary judgment is set out in Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87. The first question that I must consider is whether there is a genuine issue requiring a trial. As set out at paragraph 49 of Hryniak, there is no genuine issue requiring a trial where the summary judgment process:

a) Allows me to make the necessary findings of fact;

b) Allows me to apply the law to the facts; and

c) Is a proportionate, more expeditious and less expensive means to achieve a just result.

[30] These principles are applied in a two-step process. First, I determine whether there is a genuine issue requiring a trial based only on the evidence before me. Then, if there appears to be a genuine issue requiring a trial, I would determine whether the need for a trial can be avoided by using the enhanced powers under the Rules of Civil Procedure: Royal Bank of Canada v. 1643937 Ontario Inc., 2021 ONCA 98 at para. 24.

[31] On a summary judgment motion, each party must put their best foot forward. Ramdial v. Davis (Litigation Guardian of), 2015 ONCA 726 at para. 27. I am entitled to assume that the record before me is complete, and that it contains all the evidence that a party would present at a trial: Broadgrain Commodities Inc. v. Continental Casualty Company, 2018 ONCA 438 at para. 7.

[32] I should deal with one specific fact relating to the issue of “putting your best foot forward”. Counsel for SJR points out that there was no evidence from Mr. Abradjian and that I should, therefore, draw an adverse inference against Scarfone. I disagree for two reasons:

a) There is no property in a witness. If SJR thought that Mr. Abradjian would provide evidence that was helpful to their position, it would have been open to them to try and lead it. There is no reason why Scarfone was required to lead Mr. Abradjian’s evidence. As I have noted at paragraph 15, Mr. Abradjian has no connection to Scarfone.

b) More importantly, the discussions between Mr. Abradjian and 467 could be privileged. 467 is not a party to this litigation, and Scarfone cannot waive privilege on behalf of 467. It is, therefore, difficult to see how Scarfone could have compelled any evidence from Mr. Abradjian. I will return to the significance of SJR’s action against 467 below.

[33] In any event, I am of the view that this is an appropriate case for summary judgment. As will be seen, I have concluded that there is no genuine issue requiring a trial. To explain why I have reached that conclusion, I will now analyze SJR’s trust claims.

Issue #2- Was Scarfone Hawkins Holding Monies in Trust Specifically for SJR?

[34] In order to succeed on this question, SJR must establish that there is a trust that was specifically created for it by 467 and that Scarfone, as a stranger to the trust, was aware of the terms of the trust. In my view, SJR fails on both questions.

[35] I start with the question of whether a trust was created by 467. In order to succeed on this question, SJR would have to establish the following:

a) That an agreement was reached between SJR and 467.

b) That the agreement that was reached included specific provisions for a trust to be imposed on the monies being held by Scarfone.

[36] Based on the history set out above, there was an agreement between 467 and SJR. The key question is whether part of the agreement was to create a specific trust. I have concluded that there were no such provisions for three reasons.

[37] First, 467 and SJR reduced their agreement to writing. There was nothing in that written agreement that required a trust to be created to keep the payments in a special, segregated trust account. The creation of a trust would have been a significant part of this agreement. Given that it was not covered in the written agreement, it is logical to infer that it was never part of the agreement.

[38] Second, if 467 had created a trust, then one would have expected SJR to raise that as an allegation in the litigation with 467. The fact that SJR never raised that in the litigation with 467 also leads to the inference that there was no trust created in the agreement between 467 and SJR.

[39] Finally, there is no mention of a specific trust anywhere in any of the documentation that was filed in this motion. It is not mentioned in either the draft minutes of settlement or in any of the correspondence that was exchanged between the parties.

[40] The closest that the documentation comes to mentioning a trust is as set out at paragraph 17. In those e-mails, a question is raised by Mr. Gatto about whether the monies are being held in trust. The response is that they were in the lawyer’s trust account. Every lawyer who is holding funds for a client will hold them in their trust account. This is not evidence of a creation of a specific trust.

[41] On this point, I acknowledge that the money received by Scarfone was being paid into trust. However, the nature of the payments must be kept in mind. They were payments made by purchasers for units in the Property. How these payments were distributed was up to 467 to determine. In other words, the mere payment of monies into Scarfone’s trust account did not create a trust in favour of SJR. Further steps would have been required to create a trust and, as described above, there is no evidence that any of those steps were taken.

[42] This brings me to the issue of whether there were oral representations between Mr. Gatto and Mr. Abradjian that created a trust. In his Affidavit, Mr. Gatto deposes as follows:

9. On October 16, 2020, I requested that Mr Abradjian cause his client to pay the outstanding commissions. I advised Mr Abradjian that if SJR did not receive timely payment, SJR would bring a motion for a Mareva injunction. 467, through counsel, offered that it would put all sale proceeds into a special trust account held by Scarfone Hawkins, who was acting for 467 on the unit sales.

[43] Based on the record, there are three problems with this statement as follows:

a) On cross-examination, Mr. Gatto has no notes to confirm this alleged discussion. Given the potential significance of this issue, the absence of notes is, in my view, indicative that there was no agreement to create a trust.

b) As noted at paragraph 37, the alleged agreement to create a trust was not included in the actual agreement that was reached by 467 and SJR.

c) None of the documentation in this case suggests that there was a creation of a specific trust in favour of SJR.

[44] Counsel for SJR argues that Mr. Gatto’s Affidavit raises an issue of credibility. I disagree. I accept Scarfone’s argument that a self-serving Affidavit is not sufficient to create a genuine issue requiring a trial in the absence of detailed facts and supporting evidence. Guarantee Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423 at para. 31 and the cases cited therein.

[45] In this case, there is nothing other than Mr. Gatto’s assertion that there were discussions between himself and Mr. Abradjian about creating a trust. He has no notes to support this assertion and there are no specifics about either when he had the alleged conversations with Mr. Abradjian or what precisely was said in those conversation. In addition, as noted above, there is no other evidence that supports Mr. Gatto’s assertion. In the absence of any other evidence, this is precisely the self-serving Affidavit that the Supreme Court described in Gordon Capital Corp. The Affidavit is not sufficient, on its own, to require a trial of an issue, especially in light of my other findings.

[46] In any event, however, even if there were discussions about the creation of a trust that led to an agreement, SJR must also demonstrate that Scarfone was aware of the specific trust. Scarfone is a stranger to the trust, if it exists. In Bullock v. Key Property Management Inc., (1997) 33 O.R. (3d) 1, the Court of Appeal stated:

As the law presently stands, a stranger to a trust will be held liable for a breach of that trust by the trustee only where the stranger has actual knowledge or is reckless or wilfully blind as to both the existence of the trust and the dishonest conduct of the trustee in connection with the trust. The inquiry must be directed to what the stranger to the trust actually knew or suspected and not to what the stranger would have known had reasonable inquiries been made. Failure to make reasonable inquiries may have evidentiary value in determining what the stranger to the trust in fact knew or suspected, but it is not a basis for the imposition of liability as a constructive trustee.

[47] In this case, counsel for Scarfone (Mr. Mahler) was aware that the monies were in Scarfone’s trust account. However, there is nothing on the record to indicate that he was aware that there was a specific trust that had been allegedly created by 467. The closest that the record comes to demonstrating any knowledge on the part of Scarfone is found in the testimony of Mr. Mahler, as follows:

Q. And then your e-mail goes on in parentheses and says, "All of these funds are being held in trust for realty commissions." Do you see that?

A. Yes, I do.

Q. So if Scarfone Hawkins was holding 23 funds in trust for the realtor on July 20th, 24 2021, when do you say that changed?

A. That statement doesn't say the funds were being held in trust for the realtor.

[48] There is nothing in either this evidence or the underlying e-mail that suggests that Scarfone knew it was holding these funds in a specific trust for SJR. All that can be inferred from this testimony, and the underlying e-mails, is that Scarfone was holding the monies in its trust account awaiting further instructions from 467.

[49] Further, there is no evidence that there was any dishonest conduct in respect of the trust, if one existed. The monies that had been received by Scarfone were subject to the arrangements that 467 had with its creditors. Scarfone paid out the monies that were held in its trust account in accordance with the instructions of the creditors.

[50] As a result, even if there was a specific trust that existed in favour of SJR in this case, SJR has failed to demonstrate either that Scarfone knew about the trust or that there was dishonest conduct on anyone’s part in respect of these monies.

Conclusion

[51] For the foregoing reasons, the summary judgment motion is granted and SJR’s action is dismissed.

[52] The parties are encouraged to agree on costs. Failing an agreement, Scarfone has fourteen (14) days from today’s date to serve and file costs submissions. Those submissions are to be no more than three (3) single-spaced pages, exclusive of bills of costs, offers to settle and case-law.

[53] SJR shall have fourteen (14) days from the receipt of Scarfone’s costs submissions to serve and file their costs submissions. Those submissions are also to be no more than three (3) single-spaced pages, exclusive of bills of costs, offers to settle and case-law.

[54] For the purposes of filing costs submissions, the parties are to both upload them to CaseLines and provide an electronic copy to my judicial assistant. There are to be no extensions of the deadline for costs submissions, even on consent, without my leave. In the event that I do not receive costs submissions in accordance with the timeline set out above, then there will be no costs.

LEMAY J Released: July 31, 2023