Legal Blog

Lies, Damn Lies

At times, one reads a case and wonders “Why did the defendant not settle?” We asked ourselves this question while reading the decision in 6071376 Canada Inc. v. 3966305 Canada Inc., 2019 ONSC 3947 (SCJ). As we describe some of the lies of the defendant, remember: the defendant admitted almost all of the facts and, for those it disputed, it provided no documents to support its position.

Investment

An individual (“BadGuy”), through his one-man corporation, entered into an agreement of purchase and sale for a commercial Ottawa property. He arranged financing and agreed to guarantee the mortgage. BadGuy required a $584,000 down payment to close the transaction. He had 60% of it and needed an additional 40% (i.e. $233,600).

Enter the plaintiffs, three California residents who had some vague ties with BadGuy’s brother. They had some money to invest and BadGuy seemed like a real nice trustworthy guy. They also would be able to count on BadGuy’s brother as their eyes and ears regarding the project. Big mistake.

The deal was simple: the plaintiffs incorporate an Ontario corporation and fund it for $233,600, their corporation provides that money to BadGuy’s corporation, and BadGuy’s corporation takes title to the commercial property and holds a 40% interest in the commercial property for the plaintiffs.

And so it was; the transaction closed in 2003.

Subterfuge

BadGuy, through his corporation, sold the commercial property in 2006 for net proceeds of $1,289,000. In addition, BadGuy had, over the three years, collected the rent, paid the expenses, and pocketed the net revenue in an amount that, even as of the date of the trial, was unknown.

The plaintiffs knew nothing of the sale and, of course, BadGuy sent no money to them. Instead, BadGuy, through his corporation, used all of the sale proceeds in 2006 to purchase another commercial property in Ottawa for substantially more money. He sold that second property in 2012 for a $1,470,000 profit.

 Queries

The reasons for decision were not specific as to when the plaintiffs requested information and what they did between 2003 and 2012. We know only the following:

• BadGuy never advised the plaintiffs about the sale of the first property or the purchase of the second.
• In 2008, BadGuy told the plaintiffs that he would be ready to transfer their share of the net rental revenue as soon as his accountant advised him of the tax withholdings and mentioned that he expected to put the first property up for sale.
• In February 2012, the plaintiffs came to Ottawa from California to speak to BadGuy face-to face, at which time BadGuy advised them that he would pay their share of the net rental revenue as soon as the plaintiffs revived their Ontario corporation.
• At that meeting, when asked for financial information, BadGuy told the plaintiffs that he lost his documents in a flood (i.e. the dog ate his homework), but would shortly give them financial information for the 2009 – 2011 financial years.
• BadGuy provided nothing. When the plaintiffs followed up in April 2012, BadGuy again promised information and again provided nothing – because, having sold the property six years before, no information existed.

The plaintiffs finally smelled the coffee in November 2014 and commenced their action – in the name of their now-revived Ontario corporation. They did not just claim for the lost investment and profit on the sale of the first property, they claimed 40% of the profit from the second property.

Limitations

BadGuy claimed a limitations defence. He noted that the final meeting was in February 2012, but that the plaintiffs did not commence their action until September 2014. We would have gone back further in time. The plaintiffs did almost nothing from 2003 to 2008 and then to 2012. When should a reasonable investor expect to receive money and information regarding an investment?

The judge glossed over this and stated the following:

“At the time the Plaintiff Principals made their second trip to Canada in February 2012 to meet with Mahmood directly, there were no plans to sue Mahmood. He promised that information would be forthcoming. He had repeatedly lied to them and continued to do so during the course of that meeting, leading the Plaintiff Principals to believe that the Hull Project was an ongoing business. During the course of their meeting in 2012, the parties developed an action list to address various outstanding issues based on the assumption that the Hull Project was still an on-going matter. The Plaintiff Principals state that as of the date the action was filed on September 2, 2014, they did not know that the Hull Project had been sold. I accept that representation.”

We acknowledge that a limitation period cannot expire based on a defendant’s lies, but, when the plaintiffs received no information or money for nine years, were they being reasonable and diligent to do nothing? We feel that they were not and that the judge was charitable to them because BadGuy’s lies had angered him.

Fiduciary

The judge spent five paragraphs concluding that BadGuy, personally, was a fiduciary. The judge held that BadGuy, as the directing mind of his corporation, (i) agreed to act in the plaintiffs’ best interests, (ii) had possession of the plaintiffs’ money, (iii) knew, or should have known that the plaintiffs relied or trusted him with their investment, and (iv) gave no regular reports.

Again, we feel that the judge’s analysis was lacking. In effect, he was conflating the concepts of a fiduciary relationship with the concept of personal liability.

Personal

After concluding the BadGuy was a fiduciary personally, the judge then held that BadGuy was personally liable. That analysis was redundant if BadGuy were a fiduciary, but very necessary if he were not.

The judge held that BadGuy was using his corporation to misappropriate the plaintiffs’ money “for his own purposes” and, on that basis, was personally liable for its acts. Right decision, but not for stellar reasons.

The analysis for personal liability should have been stated as follows: the corporation was being used for a fraudulent purpose; BadGuy was in control; and the court can and should pierce the corporate veil in this situation.

Damages

The judge calculated the damages to be (i) 40% of the net sale proceeds of the first property (ii) 40% of the reduction in the principal of the original financing; and (iii) 40% of the net income produced while owning the first property. He also awarded punitive damages of $200,000 resulting from BadGuy’s outrageous and reprehensible activities. The judge did not award 40% of the profit on the sale of the second property; rather, he merely awarded prejudgment interest on the damages relating to the first property. He did so because he found that the parties’ original agreement did not reach beyond the plaintiffs’ participation as a 40% owner in the first property.

The judge also ordered substantial indemnity costs to the plaintiffs.

Result

Why did BadGuy not settle? He had made a substantial offer to settle, but not nearly high enough.

However, did BadGuy actually lose the action? Perhaps not. He made a lot of money from the purchase and sale of the second property, perhaps enough to offset the punitive damages and the costs award. Everything else that he was ordered to pay was just money he owed to his investors regardless.

 

Image courtesy of geralt.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.