Akelius Canada Ltd. outmaneuvered by The Wynn Group of Companies in their sale of eight buildings to Timbercreek Asset Management

LINK TO AKELIUS CANADA TORONTO TENANTS YOUTUBE CHANNEL

CASE BROUGHT BY AKELIUS CANADA LTD

CITATION: Akelius Canada Inc. v. 2436196 Ontario Inc. et al., 2018 ONSC 6138

COURT FILE NO.: CV-16-547529

MOTION HEARD: 20180613

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Akelius Canada Inc., Plaintiff

AND:

2436196 Ontario Inc. and B’nai Fishel Corporation, Defendants

BEFORE: Master P.T. Sugunasiri

COUNSEL: Calina, V., Counsel for the Plaintiff/Moving Party

Clark, S., Counsel for the Defendants

HEARD: June 13, 2018

REASONS FOR DECISION

[1] The Plaintiff and Defendants are sophisticated parties to a commercial real estate contract involving eight properties in Toronto (“Properties”). The transaction was set to close on January 7, 2016. However, due to what the Plaintiff characterizes are breaches on the part of the Defendants, the transaction did not close. The crux of the claim is that the Defendants failed to convey good title to certain properties by failing to discharge mortgages, thereby scuppering the deal. As a result of this alleged breach of contract, the Plaintiff claims damages that are specified in paragraph 45 of the Statement of Claim (“Claim”) but not limited to lost income and the difference between the market value of the Properties at closing and the purchase price.

[2] The Defendants’ explanation for failing to discharge the mortgages was that they were closed mortgages and could not be discharged. They plead that they made all reasonable efforts to discharge the mortgages before the closing date, but were unable to do so through no fault of their own.

[3] The dispute in this motion arises from the examination for discovery of the Defendants’ representative, Mr. Wynn. In particular, two groups of documents have been refused. Refusals Group A seeks information to establish the Plaintiff’s measure of damages. The information sought is:

a. The financial statements of the defendant corporations, to the extent they exist, from 2010 to 2015.

b. Whether any corporate entities aside from B’nai Fishel obtained revenue from the properties;

c. Any financial statements from any companies that obtain revenue from the Properties.

d. To advise of all of the revenue that was earned by the Wynn Group with respect to the Properties from 2010 to present;

e. To the extent that there is no individual financial statements that related only to the Properties, to advise of the total EBITDA and the net income for the Properties for the period from 2010 to present; and

f. To produce any appraisals that have been done on the Properties subsequent to January 2016.

[4] Refusals Group B explores the steps taken by the Defendants to discharge the offending mortgages. In particular, the Plaintiff seeks:

a. Whether, by the end of 2015, Mr. Wynn had sought legal advice with respect to the ability to discharge any of the mortgages.

b. The substance of any legal advice that was provided to Mr. Wynn with respect to the ability to discharge the mortgages.

c. Whether any advice was requested or received with respect to commencing the defeasing process or the ability to defease the mortgages.

[5] In or around April of 2018, the Wynn Group of Companies, of which the Defendants are members, entered into an asset purchase agreement with Timbercreek Asset Management to sell more than $1 billion worth of Toronto properties including some of the properties at issue in the litigation (“Timbercreek APA”). The Plaintiff seeks disclosure of the Timbercreek APA on the basis that it is relevant to the measure of damages suffered by the Plaintiff.

[6] For the brief reasons that follow, I order the Defendants to provide answers to all of the questions in Refusals Group A. For item a, only the Defendants’ financial statements relating to the Properties need to be disclosed. For items b and c, the production order only applies to companies in the Wynn Group and only to financial statements related to the Properties.

[7] In Refusals Group B, the Defendants shall answer whether they sought advice about their ability to discharge the mortgages and the defeasing process. Finally, the Defendants shall make the Timbercreek APA available for inspection by counsel for Plaintiff and one instructing officer from Akelius.

Refusals Group A

[8] The test for disclosure at the discovery stage of a proceeding is one of relevance. I agree with the Plaintiff that the scope of discovery is broader than the documents that may be found to be probative at trial. Proportionality is also a factor in determining the scope of discovery. In the present case, the Plaintiff seeks financial information that it says are relevant to its measure of damages. In particular, it argues that the revenue generating history of the Properties is relevant to establishing or determine lost income.

[9] The Defendants argue that the revenue enjoyed by the Defendants and/or the Wynn Group of Companies is irrelevant to the question of how much the Plaintiff would have made if the sale had closed. That figure, they submit, is driven by two numbers. The first is the amount of rents paid by the tenants. The Plaintiff is already in possession this information. The second is operating cost of the buildings. According to the Defendants, this is entirely dependent on how a landlord chooses to run the buildings. In turn, those projected costs are entirely within the knowledge of the Plaintiff and has nothing to do with how the Defendants chose to operate the buildings. Finally, the Plaintiff already has information from 2015 from its due diligence process for the transaction.

[10] In my view, the Defendants’ arguments are better left for trial or summary judgment. It may be that the profits enjoyed by the Defendants ultimately have no probative value in establishing damages, or that there is a better method of their calculation. This is a triable issue. At this stage, how much income the Properties have historically derived, is relevant. The fact that the Plaintiff already has the financial information from 2015 does not preclude it from obtaining the information from prior years.

[11] Having said that, proportionality must also come into play and tempers the Plaintiff’s broad request. If the goal is to understand what income may have been lost, the Defendants need only to provide financials in relation to the Properties, or if not available, disclosure of the revenue earned and/or net income. They need not open up all of their books and records from any other lines of business. Further, the disclosure order only applies to companies in the Wynn Group that derived income from the Properties. If there is a company outside of the Wynn Group that derived income from the Properties, it is premature and procedurally unfair to order disclosure of that company’s financial records without notice of such a request to the company.

[12] In a similar vein, any appraisals of the Properties would be relevant to damages. I do not agree with the Defendants that the Plaintiff has limited damages in paragraph 45 to the difference in the value of the Properties from the date of closing and the purchase price. Paragraph 45 enumerates heads of damages but preserves the Plaintiff’s right to pursue other damages. Much time was spent on the jurisprudence relating to what the appropriate valuation date is for the Properties in a transactional case such as this. It is not appropriate in the context of this motion to choose one over the other. The jurisprudence offered by the parties simply confirms that this is a triable issue to be determined at a later date. Therefore any valuation of the Properties after the failed closing date is at this point relevant.

The Timbercreek APA

[13] This takes me to the Timbercreek APA. The Defendants urge that the Timbercreek APA is not relevant to assessing the value of the Properties in this action because of the uniqueness of the bundling of properties in each transaction and because this transaction occurred after the failed closing date. Again, this is a triable issue. It may be that with the assistance of experts, the trier of fact will conclude that the value assigned to some of the properties in the Timbercreek APA may not be an appropriate measure of damages in this action. At this early stage of discovery however, it is relevant to the issue of damages. To balance the privacy rights of any non-parties to this litigation, however, I do not order disclosure of the APA but rather grant counsel for the Plaintiff and one representative an opportunity to inspect it.

Refusals Group B

[14] This group of questions seek whether or not the Plaintiff received legal advice on the discharge of the offending mortgages and what that the substance of the advice was. In making this request, the Plaintiff argues that this information should be disclosed because it is either not covered by solicitor-client privilege or the Defendants have waived the privilege. In defending the Claim, the Defendants plead that they could not have removed the mortgages prior to closing because the mortgages were closed and that even if open, discharge required the consent of third parties who were holders of certain mortgaged back security instruments. They also plead that they took all reasonable steps to discharge the mortgages. In so pleading, the Plaintiff submits that the Defendants have put their legal knowledge in issue which implicitly waives any privilege.

[15] With respect, I disagree with the Plaintiff’s characterization of the Defendants’ pleading. I do not read the defence as putting into issue their knowledge of the law such that privilege is waived. The Plaintiff asks that I draw the inference that knowledge of the law of mortgages and how they are discharged lies beneath the statement that the Defendants were “unable” to discharge the mortgages. This makes any legal advice a material part of the defence. I am not prepared to make such an inference such that solicitor-client privilege is waived. As noted by Justice Perell in Creative Career Systems Inc. v. Ontario, 2012 ONSC 649, materiality of legal advice is not sufficient to justify its compelled disclosure (see para. 29). Rather, to justify a party being required to answer questions of the content of advice, the party must utilize the presence or absence of legal advice as a material element of the defence.

[16] In this case, the Defendants do not do so, neither in the pleadings, nor at discovery. Mr. Wynn was asked questions about these paragraphs of the defence at discovery and at no time did he indicated that his failure to discharge the mortgage was as a result of reliance on legal advice or even his legal knowledge of open and closed mortgages. In fact, Mr. Wynn spoke about his understanding to be derived from reading the mortgage documents and from discussing the issue with the mortgagee.

[17] Based on the foregoing, I deny the Plaintiff’s request to obtain disclosure of any legal advice that the Defendants received about the mortgages.

[18] Whether or not the Defendants received any advice is a different issue. I was not provided any jurisprudence to suggest that the fact of obtaining advice falls within the scope of solicitor-client privilege. Given that the Defendants allege that they took all reasonable steps and made diligent efforts to discharge the mortgages, it is a relevant question whether or not they sought legal advice as one of the steps. Answering this question in no way waives the privilege over the substance of the advice (see Justice Corbett’s comments in Guelph (City) v. Super Blue Box Recycling Corp., 2004 CanLII 34954 (ON SC), [2004] OJ No 4468 (SCJ) at para. 88).

Conclusion:

[19] For the foregoing reasons, the Defendants shall provide answers to all of the questions in Refusals Group A. For item a, only the Defendants’ financial statements relating to the Properties need to be disclosed. For items b and c, the production order only applies to companies in the Wynn Group and only to financial statements related to the Properties.

[20] Second, the Defendants shall make the Timbercreek APA available for inspection by counsel for Plaintiff and one officer of the Plaintiff.

[21] Third, with respect to Refusals Group B, the Defendants shall answer whether they sought advice about their ability to discharge the mortgages and the defeasing process.

Costs:

[22] Some costs submissions were made at the hearing. However, given the result, I urge the parties to come to an agreement on costs failing which they may make brief submissions. If the parties cannot agree on costs by October 26, 2018, the Plaintiff may make costs submissions of no more than three-pages, double-spaced in addition to its costs outline. Those submissions shall be served on the Defendants and emailed to my Assistant Trial Coordinator at Christine.Meditskos@ontario.ca by November 5, 2018. The Defendants shall serve and file their submissions by email to Ms. Meditskos by November 13, 2018 with the same page and line restriction. I have the Defendants’ costs outline but they may submit an updated one if they so desire.

Original Signed

Master P. Tamara Sugunasiri

Date: October 13, 2018

OUTCOME OF CASE - REASONS FOR DECISION

CITATION: Akelius Canada v. 2436196 Ontario Inc., 2019 ONSC 372

COURT FILE NO.: CV-16-547529

DATE: 20190205

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

AKELIUS CANADA LTD.

Plaintiff

– and –

2436196 ONTARIO INC. and B’NAI FISHEL CORPORATION

Defendants

)

Daniel S. Murdoch and Vlad A. Calina, for the plaintiffs

Crawford G. Smith and Khrystina McMillan, for the defendants

HEARD: January 8, 2019

)

) )

)

G. DOW, J.

REASONS FOR DECISION

[1] The plaintiff seeks a Mareva injunction to protect its ability to recover the damages it seeks arising from the aborted sale of eight apartment buildings in the Parkdale neighbourhood of Toronto, Ontario.

Background

[2] The plaintiff is a commercial real estate company incorporated in accordance with New Brunswick law and with its head office in Stockholm, Sweden. The defendants are also real estate companies that were the registered owners of the eight apartment buildings and are part of the Wynn Group of Companies with registered offices in Toronto.

[3] Through law firm and real estate representatives, the parties drafted and entered into an Agreement of Purchase and Sale on August 25, 2015 (the “Agreement”). It was scheduled to close on January 7, 2016. The purchase price was $228,958,320.00.

[4] The Agreement contains clauses upon which each parties relies as will be referred to below. As part of its investigation regarding the status of the properties, the plaintiff conducted searches and learned of and advised the defendants of various mortgages which needed to be discharged. This was in accordance with clause 5.2(f) of the Agreement that they receive “free and clear” title to the properties.

[5] Clause 5.2 provided this condition could only be waived by the plaintiff. Clause 5.3 provided, amongst other things, that if any of the conditions in clause 5.2 were not satisfied or waived “this Agreement shall be terminated null and void and of no further force or effect whatsoever and no party shall have a claim against any other party hereto”. It also provided a return of the $9,000,000.00 paid as a deposit.

[6] Clause 5.4 further detailed clause 5.2(f) by stating that both parties were required to “use reasonable and diligent efforts” to satisfy the conditions in clauses 5.1 and 5.2. “Reasonable and diligent effort” was defined to exclude “resorting to litigation or paying material amounts of money to third parties which are not otherwise owing to such third parties”.

[7] The mortgage which appears to have led the failure to complete the transaction was $1,074,970.00 which was closed and not repayable until April 1, 2016. A defeasance cost was obtained and calculated to be $1,359,363.00 of which some portion would have been payable in any event. There was also evidence this was obtained at a point where it could not be completed on or before January 7, 2016.

[8] In October, 2015, the plaintiff discovered one of the properties had an empty underground storage tank under the driveway leading to an underground garage which reduced the value of the property. This resulted in an negotiated reduction in the purchase price of $225,400.00 with a resulting Waiver and Amending Agreement executed on November 2, 2015.

[9] The parties, through their solicitors, proposed or began negotiations to resolve the issue of the mortgages which included whether the existing mortgages could be assumed, the closing date extended or the purchase price adjusted. The defendants stressed this exchange in its submissions given the letter from counsel for the plaintiff stating its intention to close on January 7, 2016 or seek its remedy at law was not delivered until December 18, 2015 or 20 days before closing. This letter (marked as Exhibit EE of the Motion Record) stated the plaintiff “has no interest whatsoever in renegotiating any of the previously agreed-upon terms of the Agreement”. On December 31, 2015, counsel for the defendants advised the existing closed mortgage could not be repaid without the consent of the lender and such consent had not been obtained.

[10] Counsel for the plaintiff forwarded a tender package on January 7, 2016 which included all requisite documents including the availability of funds being in counsel for the plaintiff’s trust account.

[11] The Statement of Claim was issued February 26, 2016. The damages sought in paragraph 1 were for a declaration that the Agreement had been breached, $45,000,000 and return of the deposit. It also claimed a Certificate of Pending Litigation. No interlocutory relief was sought to obtain the Certificate of Pending Litigation. It was not in dispute that the deposit was returned. The litigation proceeded. This included examination for discovery of the defendants’ representative, Paul Wynn on June 15, 2017.

[12] This motion appears to have been precipitated by the April 30, 2018 public announcement that the Wynn Group of Companies was selling its Greater Toronto Area apartment buildings to Timbercreek Asset Management. The defendants refused production of the Agreement of Purchase and Sale which was ordered be produced by Master Sugunasiri on October 16, 2018 and confirmed the eight properties that are the subject matter of this litigation were included. The total purchase price for these eight properties was $281,964,318.00 or $56,564,318.00 more than the plaintiff had agreed to pay for these properties in 2015. No other evidence as to the value of the plaintiff claims against the defendants has been tendered aside from professional fees incurred as part of negotiating and (failing to) complete the Agreement to close January 7, 2016 which was in the amount of $690,631.38.

[13] The defendants’ evidence is that the Agreement of Purchase and Sale with Timbercreek Asset Management closed on September 20, 2018. By correspondence from plaintiff’s counsel, the plaintiff demanded the defendant “keeps sufficient funds in the defendant company to satisfy any potential judgment” and provide “satisfactory evidence of these funds being retained.” There was no evidence as to a specific amount. In correspondence dated October 17, 2018, real estate counsel for the defendant set out its reasoning for refusing to agree to this demand. This motion was scheduled on November 16, 2018.

Analysis

[14] The issue is whether the plaintiff is entitled to the extraordinary remedy of a Mareva injunction and, if so, in what amount. Mindful that the circumstances giving rise to this relief often involves an initial ex parte application following discovery of the loss and the concern the asset is imminently going to be removed from the jurisdiction and become untraceable, not all of the usual principles will require the same scrutiny. As referred to by counsel, in Chitel et al v. Rothbart et al 1982 CanLII 1956 (ON CA), [1982] O.J. No. 3540, the Court of Appeal adopted Lord Denning’s assessment of the requirement for:

1) full and frank disclosure of all matters material to the judge;

2) particulars of the claim against the defendant, the grounds for the claim and the amount involved recognizing points made against it by the defendants;

3) the grounds for the belief the defendants have assets;

4) some grounds for believing there is risk of the assets being removed before judgment; and

5) the plaintiff must give an undertaking as to damages.

[15] The principles identified in clauses 1, 2 and 5 are standard in this province. A supplementary affidavit was filed at the outset of the motion to remedy the plaintiff having failed to clearly provide the necessary undertaking required in clause 5.

[16] The principle in clause 1 strikes me as more important where the motion is brought an ex parte. However, it is clear that having been given notice of what was being sought, the responding strategy by the defendants has been to minimize or avoid detailing whether there is any substance to the plaintiff’s assertions. For example, the defendants’ chose to tender its evidence through its real estate counsel as opposed to a more responsible person such as an employee, officer or director of the defendants. The real estate lawyer was cross-examined and refused to answer questions about where the proceeds of the sale of the eight apartment buildings to Timbercreek are currently located.

[17] It is clear that the defendants held assets with considerable value exceeding the amount claimed in the Statement of Claim at the outset of this litigation in 2016. It is clear the nature of the asset has changed as a result of the sale that closed September 20, 2018. It is clear the nature of the asset is now in a liquid form capable of being removed from this jurisdiction or to shareholders. As a result, I am satisfied that the plaintiff has fulfilled or attempted to fulfill its obligation under clause 1.

[18] Similarly, the position or strategy of the defendants to not disclose its plan for this now liquid asset satisfies me the principles in clause 3 and clause 4 have been met. I am reinforced in my conclusion about removal of the asset from the jurisdiction by the comments in the press release about the transaction in May, 2018 which was not contested or rebutted by the defendants. That is, the international nature of the Wynn Group of Companies and its assets were noted. The statement in the press release describes that the deal “is said to include all of Wynn’s multi-family properties in Canada.” It also supports the plaintiff’s request that any Mareva injunction granted be world-wide in its effect. To do so was recognized in the decision of S.F.C. Litigation Trust LT (Trustee of) v. Chan, 2017 ONSC 1815 (Div. CT.). This is addressed beginning at paragraph 27 of the Court’s decision with the conclusion, at paragraph 36 “it is clear that when an equitable remedy is sought the court ought to consider the guideline set out in Chitel, but ultimately the Court must consider what is just or convenient.”

[19] This leads to the next issue, a review of the purpose of the injunction in ensuring, as noted in paragraph 38, “that a judgment can be enforced in the exceptional circumstances where the plaintiff, after making the required full and frank disclosure, establishes a strong prima facie case in the merits.”

[20] In this matter, there is a dispute about the meaning and effect of certain clauses in the Agreement of Purchase and Sale between the parties. I have identified those differences in my summary of the background above. To that end, it is clear and I conclude the plaintiff has made out a sufficiently strong prima facie case.

[21] This leads to determining in what amount the world-wide Mareva injunction be granted. Plaintiff’s counsel, in its submission, relied on the difference between the price it agreed to by the eight apartment buildings in January, 2016 with what they were sold for in September, 2018, or 33 months later. The amount, of $56,564,318.00 is more than $11,000,000.00 greater than the amount sought in the Statement of Claim. It ignores a variety of relevant considerations in the assessment of damages such as:

1) a Statement of Claim which does not include a claim for the increase in the value of the property post-closing;

2) why such a valuation of the property 33 months later is an appropriate determination of the quantum of damages;

3) the particulars of the damages claimed are contained in paragraph 45 of the Statement of Claim and identifies only lost income, the difference in market value at closing and the closing date, financing, professional, consulting and other costs associated with negotiating the Agreement of Purchase and Sale;

4) efforts at mitigation which, in this instance, would include what steps were taken to invest the funds raised to pay the purchase price and the amount realized.

[22] As a result, the plaintiff’s request for the injunctive relief of $56,564,318.00 must fail. The only alternative amount for which there was evidence is the financing, professional and consulting costs tendered as evidence totaling $690,631.38 plus HST.

Conclusion

[23] The plaintiff is granted a world-wide Mareva injunction against the defendants in the amount of $690,631.38. If the parties cannot agree on the form and content of the order, they shall arrange a chamber’s appointment before me to settle same. As agreed to between the parties, costs are fixed in the amount of $25,000.00 inclusive of fees, HST and disbursements and payable by the unsuccessful party, here the defendants to the successful party, the plaintiff, forthwith.

_____________________________

Mr. Justice G. Dow

Released: February 5, 2019