ONTARIO SUPERIOR COURT OF JUSTICE

SMALL CLAIMS COURT

Toronto

ORDER OF THE COURT

Claim No. SC-23-00002796-0000

B E T W E E N

NAGHMEH HARANDI; HASHEM SEYEDJALILI

and

Plaintiff(s)

ELHAM TAGHAVI SHOUSHTARI; MAHMOOD SHATERPOURKHIABAN; ELUX DESIGN GROUP INC.; FRANK LORETO

Defendants(s)

BEFORE: Deputy Judge Mirilyn Sharp

HELD BY: ☒ In person ☐ Videoconference ☐ Teleconference ☐ In writing ☐ Hybrid

DATE: March 16, 2026 at 10:00 AM EST

EVENT TYPE: Continuation of Trial Appealable

APPEARING:

Plaintiffs: NAGHMEH HARANDI AND HASHEM SEYEDJALILI

Representaive:

Defendant: FRANK LORETO

Respresentative: KRISTEN HOGG and DELILA BIKIC

ORDER OF THE COURT

On March 16, 2026, a continuation of the February 9, 2026 trial was held in this matter following Mr. Loreto’s mid trial request made on February 9, 2026 seeking an adjournment so he could retain counsel. On March 16, 2026 Mr. Loreto was unable to commit to attending a third day of trial on any day in March of 2026, so the Court sat until 6:35 pm to accommodate Mr. Loreto. At the end of the day, Mr. Loreto’s lawyers asked to file written submissions which request was granted. Their 10-page submission filed on March 17, 2026 dealt with cases Mr. Loreto’s lawyers claimed disentitled the Plaintiffs to succeed on their breach of trust claim. I gave the parties an opportunity to file submissions regarding a proposed amendment to the Plaintiffs’ Claim in light of

(a) the new documents produced by Mr. Loreto on Friday March 13, 2026, (b) the new evidence presented by Mr. Loreto on March 16, 2026 concerning a possible scam being perpetrated on the Plaintiffs, and (c) Mr. Loreto’s 10 page submission. I received the submissions regarding the proposed amendment on March 19, 2026. Having reviewed the evidence and read the submissions, I now release my Written Reasons:

Summary of the Key Facts and My Conclusions

1. This action arises out of a proposed Asset Purchase Agreement dated January 26, 2023 in which 1000394368 Ontario Ltd. was named as the “Purchaser”, the Plaintiffs Naghmeh Harandi and Hashem Seyedjalili were named as the “Individual Purchasers”, the Defendant Elux Design Group Inc. was named as the “Vendor”, and the principals of the Vendor, the Defendants Elham Taghavi Shoushtari and Mahmood Shaterpourkhiaban were named as the “Principals” (the “Proposed Asset Purchase Agreement”).

2. The Proposed Asset Purchase Agreement was drafted by the Defendant Frank Loreto, the lawyer acting for the Vendor and the Principals, who appear to have defrauded the Plaintiffs and disappeared with the Plaintiffs’ money. Mr. Loreto testified that he prepared the original draft and that he “negotiated it on behalf of his clients”. He made various amendments to the draft, some of which he said were “to protect everyone including the Plaintiffs”.

3. The final draft of the Proposed Asset Purchase Agreement contemplated the purchase of certain equipment owned by the Vendor for a purchase price of $170,000.00 with a February 1, 2023 closing date or such date as the Vendor and Purchaser may agree upon. A

$35,000.00 deposit was to be paid by the Purchaser upon execution of this agreement. A further $100,000.00 was to be paid on closing and a final $35,000.00 was to be paid one month after closing. All equipment was to be held in escrow until payment in full.

4. Mr. Loreto testified that he “purposely” did not put the words “trust” or “in trust” in the Proposed Asset Purchase Agreement as his clients “had a cash flow problem” and “wanted to use the money”. If that was his intention, and I do not believe it was, he would have included a provision that said “Vendor to have use of the deposit before closing”.

5. Even if Mr. Loreto did “purposely” not include the words “trust or “in trust” which I find to be an after-the-fact attempt to justify his improper release of the deposit, he did not convey this intention to the Plaintiffs either before they signed the Proposed Asset Purchase Agreement or when he asked them to deposit the $35,000.00 deposit into his Trust Account.

6. Mr. Loreto testified that after the Plaintiffs signed the January 26, 2023 Proposed Asset Purchase Agreement he sent a void Trust Account cheque to the Plaintiffs’ lawyer Felorin Rahi so the $35,000.00 deposit could be paid directly by the Plaintiffs into his Trust Account.

7. In accordance with Mr. Loreto’s request, the Plaintiffs deposited a bank draft dated January 26, 2023 in the amount of $35,000.00 payable to “Frank Loreto Trust Account Barrister & Solicitor” into Mr. Loreto’s Trust Account. The Plaintiff, Naghmeh Harandi, who gave her evidence in a clear, consistent and forthright manner with documentary support at every turn, testified that the Plaintiffs paid the deposit to Mr. Loreto in trust with a clear understanding that the money would be held by him until the transaction closed.

8. Mr. Loreto’s position, that the parties never intended for the deposit to be held in trust pending the closing, makes no sense. If the parties intended for the Vendor to have the money before closing, why didn’t Mr. Loreto ask the Plaintiffs to simply send the money directly to his clients?

9. When asked in reply examination why he instructed the Plaintiffs to put the deposit into his Trust Account, Mr. Loreto responded “because I was going to put it in the trust account until I see fit to release it, it was a 3 step process…I was not allowed to release the money when I received it…I did not release it until I was allowed in my experience to release it”.

10. I find that the Plaintiffs, Ms. Rahi, and Mr. Loreto clearly understood that the $35,000.00 deposit was to be held by Mr. Loreto in trust and released only after the transaction had closed.

11. Mr. Loreto’s clients never signed the Proposed Asset Purchase Agreement and the deal never closed through no fault of the Plaintiffs. The Plaintiffs were entitled to get their deposit back.

12. Ms. Rahi requested the return of the $35,000.00 deposit from Mr. Loreto numerous times after his clients advised late on February 7, 2023 that they were no longer interested in selling. At least 15 emails were written by Ms. Rahi to Mr. Loreto between February 8, 2023 and March 24, 2023, many of which he ignored, until he finally admitted to Ms. Rahi that he had released the deposit to his clients. He did not disclose the date of the release nor the fact he had paid a portion of the deposit to himself. This was disclosed for the first time on day two of the trial.

13. The Plaintiffs sued Mr. Loreto and his clients to recover their $35,000.00 deposit. The Defendant clients disappeared with the money, failed to appear at the scheduled Settlement Conferences, failed to pay the costs award made against them and eventually their Defence was struck. The action proceeded against Mr. Loreto.

14. As was only revealed on March 13, 2026 (3 years after the fact) Mr. Loreto had released the Plaintiffs’ $35,000.00 deposit on February 7, 2023 (just hours before his clients backed out of the deal) notwithstanding that the Proposed Asset Purchase Agreement was not signed by his clients and notwithstanding that most of the other required closing documents had not been signed or delivered to the Plaintiffs or Ms. Rahi.

15. Neither the Plaintiffs nor their litigation lawyer, Weston Powell from Powel Litigation were aware when this action was commenced in April of 2023 that Mr. Loreto had not only released the $35,000.00 deposit before his clients signed the very document upon which the deposit was based (the Proposed Asset Purchase Agreement), he also took $3,000.00 of the Plaintiffs’ deposit money for himself, and sent the remaining $32,000.00 to his clients.

16. Mr. Loreto maintains he was entitled to release the deposit to his clients even though they had not signed the Proposed Asset Purchase Agreement. This position is patently untenable.

17. I find that Mr. Loreto became a trustee when he accepted the Plaintiffs’ deposit into his Trust Account knowing, because of his involvement in the deal, that the deposit funds had only one purpose. I find that Mr. Loreto assisted in the fraudulent scheme of his clients by releasing the deposit before his clients had signed the Proposed Asset Purchase Agreement. While I do not have sufficient evidence to conclude that Mr. Loreto knowingly assisted his clients’ dishonest and fraudulent design, I find that he was wilfully blind to the numerous red flags apparent throughout his dealings with these clients and that he released the deposit in face of those red flags in order to pay his own outstanding account.

Day One of the Trial

18. At the outset of the February 9, 2026 trial. I indicated to the parties that it was my understanding that the main issue to be determined was whether or not Mr. Loreto was authorized to release the $35,000.00 deposit to his clients.

19. Mr. Loreto, who appeared as a self-represented Defendant, responded that the other major issue was “when did the transaction close”. When I suggested to Mr. Loreto based on my reading of the pleadings that the transaction had not closed, he maintained that it had closed. Mr. Loreto went on to say that “the deal was consummated according to the agreement,” that it “closed on February 1, [2023]”, and that he “had the money in trust before the closing”.

20. When I pointed out to Mr. Loreto that there was nothing in his Defence that suggested that the transaction had closed on February 1, 2023, or that the monies were still in trust when the transaction closed, Mr. Loreto insisted for a second time that the deal had closed. He went on to say that “the money was released on February 1, [2023].”

21. I reiterated that the main issue I wanted Mr. Loreto to research was whether or not he was entitled to release the deposit paid to him in trust without the consent of the other side. I indicated that if he had any case law supporting his position, he should present it to me. At that point, Mr. Loreto insisted for a third time that “the deal-according to the agreement of purchase and sale, all the requirements of the deal to be consummated occurred.”

22. I find that Mr. Loreto’s submissions on this crucial issue were an attempt to mislead the Court.

23. As was recently noted by Justice Myers in Kapahi Real Estate Inc. v. Elite Real Estate Club of Toronto Inc , 2026 ONSC 1438, often the cover-up is worse than the initial error, which comes from the original “often the cover-up is worse than the crime”.

24. During Ms. Harandi’s evidence in chief, Mr. Loreto became visibly upset following my rulings on his objections. He asked me to recuse myself and then sought an adjournment so he could retain counsel. I granted his adjournment request on terms, including that:

(a) Mr. Loreto was to retain counsel to assist him with the trial and with his motion to have me recused if he and his counsel felt that a recusal motion was warranted;

(b) the trial would continue on Monday March 16, 2026 before me; and

(c) if Mr. Loreto wanted to bring a recusal motion, he was to file materials by March 9, 2026.

25. Mr. Loreto reported this matter to his insurers on February 12, 2026 and counsel was retained by LawPRO on March 3, 2026. Mr. Loreto did not bring a recusal motion.

The New Documents

26. In anticipation of the trial scheduled to take place on Monday March 16, 2026, Mr. Loreto’s counsel served a 90-page Brief of Documents on the Plaintiffs at 12:03 pm on Friday March 13, 2026. A few hours later, at 4:08 pm on Friday March 13, 2026, counsel for Mr. Loreto served a 26-page Supplementary Brief of Documents on the Plaintiffs.

27. The Brief had a February 7, 2023 cheque for $32,000.00 payable to Mr. Loreto’s client (Elux) noting “sale proceeds” and instructions to “certify, make a copy, deposit @RBC, NO HOLD”.

28. Despite the fact that this action was commenced on April 19, 2023 and Mr. Loreto filed his Defence on May 10, 2023, it wasn’t until 4 pm on Friday March 13, 2026 (almost 3 years later) just before the second day of trial, that this significant piece of evidence, potentially showing that Mr. Loreto kept a portion of the $35,000.00 deposit for himself, was produced.

29. Further, in the over 100 pages of documents filed by Mr. Loreto, there is only an unsigned version of the Proposed Asset Purchase Agreement. Mr. Loreto did not have a fully executed version of the Proposed Asset Purchase Agreement in his file, nor did he have signed versions of the other required closing documents when he released the Plaintiffs’ deposit. The representations he made to the Court on day one of the trial, insisting the transaction had closed were untrue as evidenced by his failure to produce the signed closing documents.

30. Needless to say, an asset purchase agreement signed by only one party, is not an agreement.

Day Two of the Trial

31. The continuation of the trial proceeded on March 16, 2026, with Mr. Loreto being ably represented by Kristen Hogg and Delila Bikic. Until that time, Mr. Loreto, a lawyer of some 45 years, had been defending himself in this action from May of 2023. In all that time he failed to disclose the following facts which only came to light after he produced his documents:

(a) he paid himself $3000.00 from the Plaintiffs’ deposit monies;

(b) he paid his clients the remaining $32,000.00 even though they had not signed the Proposed Asset Purchase Agreement or most of the other closing documents; and

(c) hours after he released the $32,000.00 to his clients, they backed out of the deal.

32. Mr. Loreto testified that in January of 2023 he had suspicions about his clients, wondering whether he could trust them. He testified that he was having difficulties with his clients including that they had failed to honour their promises to pay him a retainer and that he was not prepared to continue working for them. He then said that when he finally did receive a retainer cheque, it bounced, and he wondered whether his clients were acting in good faith.

33. Mr. Loreto testified that after his clients backed out of the deal late on February 7, 2023 only hours after receiving the $32,000.00, he thought his clients were “trying to scam the Plaintiffs”. He went on to say that he couldn’t reach his clients for 5-7 days and thought “the fix is in”. Mr. Loreto testified that he sent emails to his clients telling them to return the money, that he would put back his fee, and that they could return the money to the Plaintiffs and get mutual releases signed. He said that despite his client’s promises, he “never saw them again”.

34. I find that even after Mr. Loreto had improperly released the Plaintiffs’ deposit, he misled the Plaintiffs and Ms. Rahi by continuing to advise them, as evidenced by the numerous emails exchanged between Mr. Loreto and Ms. Rahi, that his clients were still willing to proceed with the transaction and that they had signed the necessary closing documents to that effect.

35. He even went so far as to tell Ms. Rahi in an email sent at 2:15 pm on February 8, 2023, 14 hours after his clients had backed out of the deal and at a time when, by his own admission, he thought his clients were attempting to scam the Plaintiffs, that “pursuant to the Agreement,

$100,000 is now due and payable”. It is simply astonishing that Mr. Loreto would demand this

$100,000.00 when his clients had yet to sign the Proposed Asset Purchase Agreement.

Red Flags

36. I find that before Mr. Loreto released the Plaintiffs’ deposit on February 7, 2023, he was aware

of and wilfully blind to numerous red flags including, but not limited to, the following:

(a) his clients had advised him they had “a cash flow problem” and needed a cash infusion;

(b) his clients had failed to tell him about the two PPSA liens registered against the equipment they were selling to the Plaintiffs such that Mr. Loreto had to amend article 2.02 of the Proposed Asset Purchase Agreement to reflect that the assets to be purchased by the Plaintiffs were not free and clear of all encumbrances as he had originally understood and, in fact, had significant liens on them in excess of the deposit amount;

(c) his clients had not obtained the Landlord’s consent to transfer the Lease where the equipment was kept notwithstanding his January 24, 2023 email to Ms. Rahi, advising that the existing Lease had been transferred to the Vendor with the Landlord’s consent. None of the documents produced showed a fully signed version of the Landlord’s consent;

(d) his clients had repeatedly failed to pay his invoices and/or retainer as reflected in the January 11, 2023 and January 16, 2023 emails in which Ms. Rahi told the Plaintiffs that Mr. Loreto was not willing to co-operate to complete the work needed until he was paid;

(e) his clients, by his own admission at trial were unreliable, having made multiple promises to pay his retainer and/or fees which promises were not kept;

(f) his clients had sent him at least one cheque in January 2023 that bounced;

(d) he thought his clients might not be acting in good faith;

(e) he was starting to wonder if he could trust his clients; and, most significantly

(f) his clients had not signed the Proposed Asset Purchase Agreement.

Mr. Loreto’s Dishonesty – The Cover Up

37. Mr. Loreto produced only 3 documents in this litigation prior to Ms. Hogg and Ms. Bikic becoming involved in March of 2026. The 3 documents Mr. Loreto produced were:

(a) The Proposed Asset Purchase Agreement signed only by the Plaintiffs;

(b) His March 20, 2023 email addressed to Ms. Rahi in which he describes a March 9, 2023 phone call with a lawyer from Krupe Law who allegedly advised Mr. Loreto that the Plaintiffs wanted to close the deal. In the email Mr. Loreto writes that “all corporate documents sent by [Ms Rahi]” to him have been “executed by [his] clients”. He then concludes “if anyone is in breach of contract it is [the Plaintiffs]”; and

(c) His March 24, 2023 email addressed to Ms. Rahi in which he says “the monies were released after the closing date”, “undertakings requested by you re rent arrears etc. were given” and “the subject equipment is being used by [the Plaintiffs]”. He then went on to say “I have been instructed by my clients not to release the $35,000.00 since they consider your clients in breach of contract” [emphasis in original].

38. The March 20, 2023 email was sent by Mr. Loreto to Ms. Rahi almost six (6) weeks after he had, unbeknownst to the Plaintiffs or Ms. Rahi, released $32,000.00 of the Plaintiffs’ deposit to his client and almost six (6) weeks after his clients had advised they “are no more interested to sell”. Mr. Loreto did not produce any of the documents he alleges were executed by his clients. Ms. Harandi gave evidence directly contradicting Mr. Loreto’s assertion that “all corporate documents sent by [Ms. Rahi]” to him had been “executed by [his] clients”.

39. The March 24, 2023 email likewise contains false and misleading statements geared toward hiding from the Plaintiffs and Ms. Rahi the true state of affairs. Mr. Loreto told Ms. Rahi the monies were released after the closing date, when he knew there had been no closing. He never produced any of the signed undertakings referenced in this email, nor was the subject equipment ever used by the Plaintiffs, as testified to by Ms. Harandi. Lastly, he advised Ms. Rahi on March 24, 2023 (6 weeks after he had already released the deposit money to his client) that he has been instructed “not to release the $35,000.00”.

40. Mr. Loreto’s positions, both in his submissions on day one of the trial and during his testimony on day two were by and large unsupported, inconsistent with the documents, and frankly, not believable. I find that the March 20, 2023 and March 24, 2023 emails are all those things.

41. Other than these 3 documents, no other documents were produced by Mr. Loreto until LawPro became involved notwithstanding Rule 13.03 (2) requiring service of any document to be relied on at trial that was not attached to the Defence at least 14 days before the June 17, 2024 Settlement Conference, and notwithstanding Rule 18.02(1) requiring service of documents at least 30 days before trial. Mr. Loreto’s documents should have been produced by June 3, 2024 or at the latest by January 10, 2026. They were produced on March 13, 2026.

42. Now that Mr. Loreto has produced his entire file, it is apparent that his representations to the Plaintiffs and Ms. Rahi about his clients having signed the closing documents were patently false. Further, he led Ms. Rahi to believe he was justified in releasing the funds. According to his emails, it was the Plaintiffs who breached the deal. Most significantly, he never mentioned to the Plaintiffs or Ms. Rahi that he had kept $3000.00 of the Plaintiffs’ money for himself.

43. I find that Mr. Loreto was dishonest in his dealings with the Plaintiffs and Ms. Rahi, and that he continued to make unsupportable assertions throughout this litigation including in his Defence, in his submissions to the Court on day one of the trial, and in his testimony on day two of the trial. In addition to the emails he sent to Ms. Rahi on March 20, 2023 and March 24, 2023, and in addition to the submissions he made on day one of the trial insisting that the transaction had closed, Mr. Loreto claimed both in his Defence and in his testimony on March 16, 2026 that the release of the deposit was justified as the Plaintiffs had use of the equipment.

44. He maintained this position notwithstanding that the unsigned Proposed Asset Purchase Agreement provided that “All equipment shall be held in escrow until payment in full”. When asked in cross-examination whether signatures were needed from his clients in order for the Plaintiffs to be able to use the equipment, Mr. Loreto refused to acknowledge that because the equipment had not been transferred to the shell company Purchaser (of which the Plaintiffs were 55% owners) the equipment owned by Mr. Loreto’s client could not be used.

45. Mr. Loreto’s position that the Plaintiffs received consideration for their $35,000.00 deposit as they could “use” the equipment located in premises the Landlord had yet to assign to the Purchaser, in the face of an unsigned Asset Purchase Agreement is manifestly unsupportable.

Should the Plaintiffs be Entitled to Amend their Plaintiffs’ Claim

46. The Plaintiffs’ Claim against Mr. Loreto is based on an alleged breach of trust. When the Plaintiffs’ Claim was prepared, the Plaintiffs did not know, among other things, (a) that Mr. Loreto had paid a portion of the deposit to himself, (b) that Mr. Loreto’s clients had never signed the Proposed Asset Purchase Agreement and (c) that Mr. Loreto’s clients were attempting to, in Mr. Loreto’s words, “scam the Plaintiffs”. For the reasons set out below, I find that an amendment to the Plaintiffs’ claim is appropriate.

47. I find that the new documents that were served on the Plaintiffs on March 13, 2026 (including

the February 7, 2023 certified cheque made payable to Mr. Loreto’s client in the amount of

$32,000.00 and the absence of a fully executed version of the Proposed Asset Purchase Agreement) as well as the new evidence given by Mr. Loreto on March 16, 2026 (including but not limited to his evidence concerning his client’s financial troubles, the unpaid invoices, the bounced cheque, and, most significantly, his decision to pay himself $3,000.00 from the

$35,000.00 deposit) have transformed this case from one that appropriately involved allegations of breach of trust as against Mr. Loreto to one that is now more appropriately characterized as involving a fraud being perpetrated on the Plaintiffs by Mr. Loreto’s clients.

48. The question is whether in light of the evidence produced by Mr. Loreto at the last minute, the Plaintiffs should be entitled to amend their claim against Mr. Loreto to assert that he facilitated his clients’ fraud either by being a knowing participant or by being wilfully blind to the fraud that was being perpetrated by his clients against the Plaintiffs.

49. Mr. Loreto’s clients have long vanished. Had the Plaintiffs been provided with the evidence known only to Mr. Loreto in a timely manner, they would have made a claim against Mr. Loreto alleging at the very least, wilful blindness to the fraud that was being perpetrated against them.

50. Within their Plaintiffs’ Claim filed in April of 2023, the Plaintiffs sought at paragraph 1 (e) “Any other remedy this [H]onourable court sees fit”. With the extraordinarily late disclosure of these additional documents (three years after the action was commenced), I see fit to allow the Plaintiffs to seek damages against Mr. Loreto for wilful blindness to the scheme being perpetrated by his clients against the Plaintiffs. I also see fit to allow the Plaintiffs to increase the amount claimed from $35,000.00 to $50,000.00.

51. Mr. Loreto submits through his counsel’s March 19, 2026 submissions that to permit these amendments following the conclusion of trial would be:

(a) a significant infringement of Mr. Loreto’s procedural rights to a fair trial;

(b) disreputable to the administration of justice;

(c) untenable based on the evidence adduced at trial; and

(d) in any event, statute-barred.

52. Mr. Loreto argues that under the Rules of the Small Claims Court (the “Rules”) a party may amend their claim only if it is done at least 30 days before trial, within a shorter period if authorized on a motion, or on consent of all the parties. Mr. Loreto neglects to mention that he breached the Rules himself, including Rule 13.03 (2) requiring delivery of documents at least 14 days before the Settlement Conference and Rule 18.02(1) requiring disclosure of documents 30 days before trial. This is the very reason a late amendment is now required.

53. By virtue of Rule 1.03 (1) the primary objective of the Rules is to enable the court to secure the just, most expeditious and least expensive determination of every proceeding on its merits in accordance with section 25 of the Courts of Justice Act. Rule 1.03 (2) requires the Court to apply the Rules liberally to promote the primary objective.

54. Rule 2.01 provides that a failure to comply with the Rules is an irregularity, and that the court may grant all necessary amendments or other relief, on such terms as are just, to secure the just determination of the real matters in dispute. Rule 2.02 provides that if necessary in the interest of justice, the court may dispense with compliance with any rule at any time [emphasis added].

55. While Rule 12.01(3) requires service of an amended claim at least 30 days before trial unless the court, on motion, allows a shorter period, I find that in light of the primary objective of the Rules, I have the discretion to dispense with the requirement that an amended claim be served at least 30 days before trial and I can allow the amendment now where, as here, it is necessary in the interest of justice.

56. In my view, allowing Mr. Loreto to rely on his documents while he was clearly in breach of Rule 13.03(2) and Rule 18.02 (1) by failing to serve his documents in a timely manner, and then denying the Plaintiffs the right to amend their Plaintiffs’ Claim in response to his extraordinarily late disclosure of these documents would not be fair.

57. Had Mr. Loreto produced his documents in advance of the trial, as he was obligated to do, the Plaintiffs would have had time to consider the impact of the new documents on the allegations made and amount sought in their Plaintiffs’ Claim. At that point they would have been fully within their rights to amend their Plaintiffs’ Claim. Should I now disallow the late amendment because Mr. Loreto’s late delivery of his documents prevented the Plaintiffs from requesting the amendments in a timely fashion?

58. Mr. Loreto also relies on the Rules of Civil Procedure (and cases decided thereunder) to support his position that a late amendment should not be allowed. However, pursuant to Rule 1.03.1, resort to the Rules of Civil Procedure should only occur where the Rules “do not cover a matter adequately.” The Rules speak directly to late amendments and, as such, there is no basis upon which to rely on the Rules of Civil Procedure or the cases decided thereunder.

59. Further, in that the Plaintiffs were self-represented by the time this matter got to trial, they cannot be faulted for not realizing in the 48 hours before the second day of trial was to start that the new documents produced by Mr. Loreto might entitle them to seek damages against him on a basis and in an amount other than originally sought.

60. I have determined I have discretion to (a) dispense with compliance with any rule at any time if it is in the interests of justice (b) allow the Plaintiffs to amend their claim to seek relief in accordance with the evidence produced at the last minute and (c) allow the Plaintiffs to amend their claim to seek the maximum $50,000.00 now allowed in Small Claims Court.

61. I have carefully considered whether Mr. Loreto would be prejudiced by my decision to allow an amendment at this stage and have determined that no prejudice resulting from the late amendment would be suffered by Mr. Loreto. While he argues he would have presented his case differently had he known about the causes of action and amounts now being contemplated, the very same argument can be made by the Plaintiffs. Had the Plaintiffs known 14 days before the Settlement Conference or even 30 days before trial that Mr. Loreto had paid himself $3,000.00 from the Plaintiffs’ deposit and released the remaining

$32,000.00 to his clients when he did not have a signed Asset Purchase Agreement or most of the other required closing documents, they would have pled their case differently.

62. Further, while Mr. Loreto asserts he would have called his clients as witnesses had he known about the amendments, he advised the Court that his former clients have disappeared. We know they failed to appear at either of the Settlement Conferences in June of 2024 and March of 2025 and that they were noted in default after failing to pay a costs award. The notion that these former clients would have attended the trial to testify had the Plaintiffs amended their Claim 30 days before trial (as they would be entitled to do as of right) and/or that their evidence would have helped Mr. Loreto defend any new allegations is, in my view, highly improbable.

63. Mr. Loreto also asserts that an allegation or finding of fraud against him could be career ending and that it would be irreparably prejudicial for the Court to engage in fact-finding after the conclusion of trial to make such findings for such a serious and un-pleaded cause of action. The difficulty with this argument is that the Court’s job is to engage in fact finding after the conclusion of the trial.

64. Whether or not the Claim is amended, the Court is entitled to make findings based on the evidence as presented. As such, no additional prejudice will be suffered by Mr. Loreto as a result of findings made that match the amendments. Any alleged irreparable prejudice would be the result of Mr. Loreto’s actions, not the result of a late amendment.

65. I find it is in the interests of justice to allow the Plaintiffs to amend their Plaintiffs’ Claim to accurately reflect the facts they learned following Mr. Loreto’s extraordinarily late production of documents. Mr. Loreto cannot, on the one hand, seek this Court’s indulgence to (a) obtain an adjournment in the middle of trial in order to retain counsel (b) serve over 100 pages of documents 48 hours before day two of the trial and (c) file 10 pages of written submissions and legal arguments without prior notice to the self-represented Plaintiffs, and then turn around and ask the same Court to deny the Plaintiffs an opportunity to amend their Plaintiffs’ Claim in response to the late delivered evidence and submissions.

66. While Mr. Loreto argues it would be “disreputable to the administration of justice” to allow the amendments, it is my view that it would be disreputable to the administration of justice if only one party was entitled to the Court’s indulgences and the other party was not.

The Issue

67. Did Mr. Loreto have and breach an obligation to hold on to the Plaintiffs’ deposit pending the closing of the Proposed Asset Purchase Agreement or at the very least, pending the signing of the Proposed Asset Purchase Agreement and if so, did Mr. Loreto’s release of the Plaintiffs’ deposit in the face of all the red flags make him liable to reimburse the Plaintiffs for (a) their lost deposit and (b) all losses the Plaintiffs incurred attempting to recover their lost deposit.

The Law

68. On day two of the trial, counsel for Mr. Loreto referred me to a number of cases dealing with breach of trust: Lu v. Dentons, 2025 BCSC 2003, Michael St. Jean Realty v. Scarfone Hawkins LLP, 2023 ONSC 4425, and Re Earth Boring Co. Limited et al., 2026 ONSC 1242. She submitted that none of the cases supported a finding of breach of trust where the plaintiff was a “non-client” of the lawyer who was alleged to have breached the trust. The cases appeared to be distinguishable, and I specifically asked counsel several times if she had any cases from Ontario that were similar to the situation in this case. She advised she did not. Her written submissions contained no additional cases on this issue.

69. In Green Light Solutions Corp. v. Baker, 2021 BCCA 287 (“Green Light”) the BCCA held at paragraph 30 that an agreement to pay funds “in trust” to a party’s lawyer may, in appropriate circumstances, result in that lawyer becoming trustee to a non-client, even where the non- client is adverse in interest to the lawyer’s client. The BCCA referred to the Ontario Court of Appeal decision in Royal Bank of Canada v. Fogler, Rubinoff (C.A.) (“Fogler”) noting that in Fogler-like circumstances, the agreement could have resulted in the lawyer becoming the non-client’s trustee. The Court in Green Light also referred to the test for a knowing assistance claim as one which establishes on a balance of probabilities that the lawyer assisted with knowledge, recklessness or wilful blindness in a dishonest and fraudulent scheme on the part of his client.

70. In Green Light, the BCCA determined that the deposit of a third-party’s funds into a lawyer’s trust account, without more, was insufficient to make him a trustee over them. Because there was no evidence that the lawyer in Green Light had ever consented to act as a trustee over the deposit, the Court reviewed the 3 additional bases under which the lawyer could nonetheless be found to have occupied such a role: (a) implied acceptance, when the lawyer deals with trust property for reasons that cannot be clearly linked to another purpose (b) as a trustee de son tort (or de facto trustee) as a result of having possessed or administered trust property with actual or constructive knowledge of its status and (c) knowingly assisting in a dishonest and fraudulent design. The lawyer’s conduct was found not to fall within any of these categories. He had played no role in negotiating the agreement (and was actually unaware of its existence until the plaintiff requested the return of the deposit) and had not had any contact with the plaintiff; he received the deposit without any express notice that it was subject to a trust; in response to his inquiry regarding whether there were any limitations on the funds, he was advised there were no limitations on the use to which the funds could be put; and other than transferring the funds out on the client’s instructions, he did not administer it in any way.

71. In Fogler the headnote reads: Trusts and trustees -- Breach of trust -- Law firm accepting funds from bank in trust to be applied to purchase of shares on behalf of client if negotiations successful -- Negotiations breaking down -- Law firm paying its own fees out of trust funds and distributing remainder to client -- Bank suing for breach of trust -- Law firm liable.

72. The lawyer in Fogler was negotiating on behalf of a client to buy out the client’s other partners in a business. The lawyer suggested the client should place $180,000 in the lawyer’s trust account, to be applied to the purchase price if the purchase completed. The purpose was to facilitate the transaction, and as a show of good faith to the potential vendors. The client agreed, and requested an advance in that amount from the loan for the buyout that he had previously arranged with the plaintiff bank. The bank provided the advance. The understanding between the client and the bank was that the advance would be put towards the purchase price if the transaction completed, and would be returned to the bank if it did not. The trial judge found that the client had adequately communicated the basis on which he had received the money to the lawyer, and that the lawyer received the funds subject to the same conditions that had been imposed on the client. When the negotiations between the client and the vendor broke down, the lawyer transferred $100,000 of the deposited funds out of his trust account, to cover unpaid legal fees, and paid the rest to the client. The bank sued the law firm for breach of trust. The law firm was found liable. The Ontario Court of Appeal found that by dealing with the money in this way - contrary to the terms of the trust and knowing of those terms - the lawyer became liable as a trustee de son tort. In the course of his analysis, Dubin

C.J.O. made the following comments:

38As has been noted, the moneys came into the hands of the law firm by way of a draft drawn on the bank in favour of the law firm in trust. Putting [the lawyer]'s evidence at its highest, and apart from the finding of the trial judge as to his specific knowledge, [the lawyer] was uncertain as to the exact nature of the trust. That being so, before taking title he was, in my opinion, obliged to make inquiries of the bank in order to ascertain the manner in which he could deal with the moneys.

73. The B.C. Court of Appeal released a decision on March 18, 2026 (the day after Ms. Hogg’s and Ms. Bikic’s submissions were filed) confirming that both Green Light and Fogler remain good law. In Mattu v. Punjab Law Group LLP, 2026 BCCA 112 (“Mattu”), the BCCA reviewed the relevant cases, and said the following:

30In Green Light, the deposit of a third-party’s funds into a lawyer’s trust pursuant to a loan agreement was found to be insufficient to make the lawyer a trustee over the funds. Justice Abrioux… distinguished Fogler on the facts, but accepted its analysis:

30…As it makes clear, an agreement to pay funds “in trust” to a party’s lawyer may, in appropriate circumstances, result in that lawyer becoming trustee to a non-client, even where the non-client is adverse in interest to the lawyer’s client. I also accept that in Fogler-like circumstances, the Agreement could have resulted in [the lawyer] becoming [the third-party’s] trustee...

74. The BCCA in Mattu also accepted the 3 other potential avenues of liability as a trustee when a lawyer receives trust funds from a non-client: (a) implied acceptance when a lawyer deals with trust property for reasons that cannot be clearly linked to another purpose; (b) becoming a de facto trustee from possessing or administering trust property knowingly (constructively or actually); and (c) knowingly assisting in the trustee’s dishonest and fraudulent design. The BCCA agreed that the facts in the Mattu case were not comparable to Fogler, and that the trial judge properly rejected the notion that designating a payment as being “in trust” in itself imposes a trust obligation, where the terms of the governing contract indicate otherwise. The BCCA referred to Esser v. Luoma, 2004 BCCA 359, where the Court found that a notary, and by analogy a solicitor, may be liable to a third party if the third party shows there is “something more” present to establish proximity, such as reasonable reliance or a contractual duty. The BCCA agreed with the trial judge that no duty of care arose because the lawyer in that case was not presented with circumstances that would provide the “something more” needed to establish a relationship of proximity with the non-clients.

Was Mr. Loreto a Trustee of the Plaintiffs’ Deposit

75. As confirmed in the cases above, an agreement to pay funds “in trust” to a party’s lawyer may, in appropriate circumstances, result in that lawyer becoming trustee to a non-client, even where the non-client is adverse in interest to the lawyer’s client. There are several factors that distinguish this case from cases where a non-client plaintiff unsuccessfully sues a lawyer who is alleged to have breached a trust by releasing funds from his or her trust account including:

(a) Mr. Loreto prepared the first draft of the Proposed Asset Purchase Agreement;

(b) Mr. Loreto was involved in the negotiation of the Proposed Asset Purchase Agreement;

(c) Mr. Loreto made various revisions to the Proposed Asset Agreement that he said were “to protect everyone including the Plaintiffs”;

(d) Mr. Loreto knew, because he drafted the Proposed Asset Purchase Agreement, that the

$35,000.00 was to be a deposit toward the purchase of the listed equipment;

(e) Mr. Loreto knew, because he drafted the Proposed Asset Purchase Agreement, that it required all equipment to be held in escrow until payment in full;

(f) Mr. Loreto knew, because he drafted the Proposed Asset Purchase Agreement that there was no provision allowing the Plaintiffs’ deposit to be released to his clients until the assets had been transferred to the Purchaser;

(g) Mr. Loreto knew, because he was involved in the negotiation and drafting of the Proposed Asset Purchase Agreement that the Plaintiffs expected that their deposit would be held in trust pending the closing of the transaction;

(h) Mr. Loreto initiated the process by which the Plaintiffs’ deposit cheque would be deposited

directly into his Trust Account by sending a void Trust Account cheque to Ms. Rahi;

(i) Mr. Loreto testified that he instructed the Plaintiffs to put the deposit into his Trust Account “because I was going to put it in the trust account until I see fit to release it, it was a 3 step process…I was not allowed to release the money when I received it…I did not release it until I was allowed in my experience to release it”; and

(j) Ms. Harandi whose evidence I have accepted on all matters, clearly understood that the

$35,000.00 deposit was to be held by Mr. Loreto in trust and released only after the transaction had closed.

76. While not germane to my finding, I am reinforced by the fact that for 6 weeks, Mr. Loreto actively hid from the Plaintiffs and Ms. Rahi the fact that he had released the Plaintiffs’ deposit. If he thought he was justified in releasing the deposit because he was not holding the funds in trust pending the closing, why did he wait so long to tell them what he had done? Similarly, Mr. Loreto hid the fact that he had paid $3,000.00 of the Plaintiffs’ deposit to himself. Again, while not germane to my finding, if Mr. Loreto thought he was justified in releasing part of the Plaintiffs’ deposit to himself, why did he hide that fact for three years?

Fraud Claim

77. Mr. Loreto argues that the claim of fraud is not tenable and is statute barred. He says 4 requisite elements must be proven on a balance of probabilities to sustain the tort of civil fraud:

(a) A false representation by the defendant;

(b) Some level of knowledge of the falsehood of the representation on the part of the defendant (whether knowledge or recklessness);

(c) The false representation caused the plaintiff to act; and

(d) The plaintiff’s actions resulted in losses.

78. I find that Mr. Loreto’s clients were perpetrating a fraud on the Plaintiffs by having them agree to provide a $35,000.00 deposit as part of a Proposed Assset Purchase Agreement they had no intention of signing. Mr. Loreto facilitated that fraud by releasing the Plaintiffs’ deposit to his clients when he knew they hadn’t signed the Proposed Asset Purchase Agreement or the required closing documents. I find that Mr. Loreto released the deposit on February 7, 2023 because he wanted to get paid and he decided he could simply use the Plaintiffs’ money to do so rather than chasing after his clients to pay his invoices and risk receiving another NSF cheque. I find that at best, Mr. Loreto was wilfully blind to the scam being perpetrated by his clients on the innocent Plaintiffs. He certainly facilitated the scam by depositing a certified cheque for $32,000.00 directly into his client’s bank account with a “no hold” instruction. He never explained why he chose February 7, 2023 to release the funds but I suspect it was because his cash strapped clients were refusing to pay his bills and he wanted the money.

79. I have no hesitation in concluding (a) that Mr. Loreto falsely represented to the Plaintiffs through his words and actions that their deposit would only be released when his clients had, at the very least, signed the Proposed Asset Purchase Agreement (b) that Mr. Loreto knew when he accepted the Plaintiffs’ $35,000.00 deposit into his Trust Account that he had to hold onto it until at the very least his clients had signed the Proposed Asset Purchase Agreement

(c) that the false representation caused the Plaintiffs to deposit the $35,000.00 into Mr. Loreto’s Trust Account on the understanding he would hold the money in trust pending the closing of the transaction and (d) that the Plaintiffs suffered a loss as a result, including the loss of their $35,000.00 deposit and all costs incurred trying to recover it.

80. As for the argument the claim is statute barred, I find the Plaintiffs only discovered on March 16, 2026 (a) that Mr. Loreto did not have a signed version of the Proposed Asset Purchase Agreement in his file (b) that he released their funds on February 7, 2023 and (c) that he paid

$3,000.00 to himself. As such, their claim is not statute barred. Mr. Loreto cannot hide documents from the Plaintiffs for three years and then complain when the new facts entitle the self-represented Plaintiffs to amend their Plaintiffs’ Claim.

Is Mr. Loreto Liable to the Plaintiffs for Releasing their Deposit to Himself and his Clients

81. Mr. Loreto’s March 17, 2026 submission ignores the fact that the Proposed Asset Purchase Agreement was never signed by his clients. As such, any reliance by Mr. Loreto on the terms of that document to justify releasing the Plaintiffs’ deposit to his clients is problematic. According to Mr. Loreto, Article 2.03 of the Proposed Asset Purchase Agreement was deliberately drafted by him in a way that would allow him to release the Plaintiffs’ deposit from his trust account before the deal closed and it seems before his clients had signed the Proposed Asset Purchase Agreement. I have rejected Mr. Loreto’s position on this for the reasons given at paras 4,5,8 and 9. Tellingly at no time during his evidence did Mr. Loreto say his clients had signed the Proposed Asset Purchase Agreement. I find they did not sign it. I simply do not see how he can rely on Article 2.03 to justify the release of the deposit 7 days after he received it when the Proposed Asset Purchase Agreement was not fully executed.

82. While Mr. Loreto misrepresented to the Court on day one of the trial that the deal had closed, he wisely abandoned that position after Ms. Hogg and Ms. Bikic took over his defence on day two of the trial. Nonetheless Mr. Loreto maintains he was entitled to release the Plaintiffs’ deposit to himself and his clients in the face of the unsigned Proposed Asset Purchase Agreement. This position is patently untenable.

83. Mr. Loreto admitted during his examination that he had been having difficulty with his cash strapped clients in January of 2023 (only weeks before he released the Plaintiffs’ $35,000.00 deposit to his clients and himself) as they were not paying his invoices and/or retainer. Mr. Loreto testified that when he finally received payment for his invoices and/or retainer from his clients in January of 2023, their cheque bounced. He testified that when the cheque bounced, he wondered if he could trust his own clients and whether they were acting in good faith. While he claims his suspicions were allayed when his clients finally came up with the money and an excuse about the bank making an undisclosed error, I find this evidence lacking in credibility.

84. I have found that Mr. Loreto released the Plaintiffs’ deposit on February 7, 2023 because he wanted to get paid and he decided he could simply use the Plaintiffs’ money to do so rather than chasing after his unreliable clients to pay his invoices and risk receiving another NSF cheque. I find that Mr. Loreto, a lawyer with 45 years of experience, deliberately hid this cheque from the Plaintiffs because he knew what he did was wrong. Whether this also amounts to conversion is a matter that can be left for another day.

85. I have found that at best, Mr. Loreto was wilfully blind to the scam being perpetrated by his clients on the innocent Plaintiffs. He certainly facilitated the scam by depositing a certified cheque for $32,000.00 directly into his client’s bank account with a “no hold” instruction before his clients had even signed the Proposed Asset Purchase Agreement. In my view, Mr. Loreto is responsible for the Plaintiffs’ loss of their deposit.

86. I find that Mr. Loreto assisted his clients in a dishonest and fraudulent scheme by releasing the Plaintiffs’ deposit before the Proposed Asset Purchase Agreement was signed, while ignoring the numerous red flags that were apparent throughout his dealings with these clients.

87. Mr. Loreto testified that he deposited $32,000.00 of the Plaintiffs’ money directly into the his client’s bank account on February 7, 2023 such that when his clients wrote to him a few hours later to advise they were no longer interested in proceeding with the transaction, Mr. Loreto did not have the ability to retrieve the $32,000.00 for the Plaintiffs. When he tried to retrieve the money he had sent them, his clients “disappeared” and were “unreachable”.

88. In the face of this evidence, Mr. Loreto seeks to avoid liability to the Plaintiffs by relying on case law that he says prevents this Court from finding in the Plaintiffs’ favour. While there are cases that hold that, by and large, a lawyer cannot be held liable to a non-client for breach of trust, I find that those cases are distinguishable from the facts in this case. Further, while the case law supports the view that a lawyer does not owe a duty of care to a non-client in certain circumstances, I find that those circumstances are not present in this case. Mr. Loreto was either involved in or wilfully blind to the scam being perpetrated on the Plaintiffs by his clients.

89. I have already determined that to the extent an amendment to the Plaintiffs’ Claim is required, it has been granted both in terms of the causes of action being alleged against Mr. Loreto and in terms of the amount being claimed. Mr. Loreto can’t hide documents from the Plaintiffs for three years and then complain when the Plaintiffs seek to amend their claim to accord with the new evidence and to recover additional money because of the new evidence.

Conclusions

90. I find that Mr. Loreto became a trustee when he accepted the Plaintiffs’ deposit into his Trust Account knowing, because of his involvement in the deal as set out at paragrah 75, that the deposit funds had only one purpose. I find that Mr. Loreto assisted in the fraudulent scheme of his clients by releasing the deposit before his clients had signed the Proposed Asset Purchase Agreement. While I do not have sufficient evidence to conclude that Mr. Loreto knowingly assisted his clients’ dishonest and fraudulent design, I find he was wilfully blind to the numerous red flags apparent throughout his dealings with these clients as set out at paragraph 36, and that he released the deposit in face of those red flags to pay his own outstanding account.

91. I have determined that Mr. Loreto must reimburse the Plaintiffs for:

(a) their $35,000.00 deposit together with pre judgment interest from January 30, 2023 (the day the funds were deposited into his Trust Account) at the pre-judgment interest rate of 4% payable within 30 days after the release of this Endorsement; and

(b) any money the Plaintiffs spent on lawyers in their attempts to recover the $35,000.00 deposit up to a maximum of $15,000.00 together with pre judgment interest from February 7, 2023 (the day the funds were improperly released by Mr. Loreto) at the pre- judgment interest rate of 4% payable within 30 days after the release of this Endorsement.

Expenses Item 91 (b)

92. With respect to item 91 (b) the Plaintiffs’ lawyer, Ms. Rahi wrote numerous emails to Mr. Loreto after he had released the deposit, and in an effort to retrieve it. Only Mr. Loreto knew it was irretrievable. Ms. Rahi no doubt charged the Plaintiffs for her time. The Plaintiffs also retained litigation counsel (Weston Powell and Ocean Enbar) who assisted the Plaintiffs in seeking to recover their deposit money in this proceeding. Their names appear on the Plaintiffs’ Claim and/or on the various Orders arising from the earlier Settlement Conferences. The Plaintiffs are entitled to be reimbursed for any money they spent on lawyers in their attempts to recover the $35,000.00 deposit up to a maximum of $15,000.00. But for Mr. Loreto’s wilful blindness in the face of all the red flags that were readily apparent, the deposit would not have been released, and the Plaintiffs could have been made whole before incurring those costs.

93. I would ask the Plaintiffs to file with the court by no later than 4 pm on March 26, 2026 a list of all expenses they incurred in their efforts to recover their $35,000.00 deposit, together with supporting documentation including any invoices from their lawyers for time and expenses incurred after February 7, 2023 (including invoices from Ms. Rahi, Weston Powell, and Ocean Enbar), and including any receipts for filing fees, service of the Plaintiffs’ Claim, or any other expense related to recovering their deposit. My intention is to award the Plaintiffs the full amount of these expenses up to a maximum of $15,000.00 provided the expenses are reasonable.

94. If the parties would prefer to simply agree upon an amount to be paid by Mr. Loreto to the Plaintiffs for these 91 (b) expenses, the parties should advise the Court by 4 pm on March 26, 2026 that they have come to an agreement on the expenses to be reimbursed by Mr. Loreto to the Plaintiffs, and the final amount will be included in my Costs Decision.

Costs

95. The parties are also encouraged to resolve the issue of costs keeping in mind Rule 19.05, Rule 19.06, and s. 29 of the Court of Justice Act. If the parties cannot agree, costs submissions should be emailed to the trial co-ordinator with a copy to the other side as follows:

(a) the Plaintiffs will provide costs submissions by March 26, 2026;

(b) the Defendant will provide costs submissions by March 31, 2026; and

(c) the costs submissions of each party are to be no longer than two double spaced typed pages (not including any settlement offers).

I thank Ms. Harandi and Mr. Loreto’s counsel for their professionalism in conducting this trial.

March 23, 2026 yr. 2026