



COURT OF APPEAL FOR ONTARIO

CITATION: McDowell v. Fortress Real Capital Inc., 2019 ONCA
    71

DATE: 20190131

DOCKET: C64290, C64288, C64289 and C64286

Strathy C.J.O., Feldman and Brown JJ.A.

BETWEEN

Arlene McDowell and
    Saverio Aversa

Plaintiffs/Appellants

and

Fortress
    Real Capital Inc., Fortress Real Developments Inc., Jawad Rathore,

Vincenzo
    Petrozza, Centro Mortgage Inc., Ildina Galati, FFM Capital Inc., Rosalia
    Spadafora, Krish Kochhar, Tony Mazzoli, Saul Perlov, Derek Sorrenti, Sorrenti
    Law Professional Corporation, Olympia Trust Company and Financial Services
    Commission of Ontario

Defendants/Respondents

AND BETWEEN

Arlene McDowell

Plaintiff/Appellant

and

Fortress
    Real Capital Inc., Fortress Real Developments Inc., Jawad Rathore,

Vincenzo
    Petrozza, Empire Pace (1088 Progress) Ltd., Building & Development
    Mortgages Canada Inc., Ildina Galati, Derek Sorrenti, Sorrenti Law Professional
    Corporation, Olympia Trust Company and Michael Cane

Defendants/Respondents

AND BETWEEN

David Martino

Plaintiff/Appellant

and

Fortress
    Real Capital Inc., Fortress Real Developments Inc., Jawad Rathore,

Vincenzo
    Petrozza, ADI Developments (Link) Inc., ADI Developments Inc., Building &
    Development Mortgages Canada Inc., Ildina Galati, FFM Capital Inc., Rosalia
    Spadafora, Krish Kochhar, Tony Mazzoli, Saul Perlov, Derek Sorrenti, Sorrenti
    Law Professional Corporation, Olympia Trust Company and Her Majesty the Queen
    in Right of Ontario

Defendants/Respondents

AND BETWEEN

Bryan Madryga and
Eileen Wallace

Plaintiffs/
Appellants

and

Fortress
    Real Capital Inc., Fortress Real Developments Inc.,
Fortress Kempenfelt Bay
    Developments Inc.
, Jawad Rathore, Vincenzo Petrozza, Harmony Village-Lake
    Simcoe Inc., City Core Developments Inc., Building & Development Mortgages
    Canada Inc., Ildina Galati, FMP Mortgage Investments Inc., Michael Daramola,
    Tonino Amendola, Graham McWaters,
FDS Broker Services Inc.
,
Glenn
    May-Anderson
,
Zafar Iqbal Khawaja
, Derek Sorrenti, Sorrenti Law
    Professional Corporation, Olympia Trust Company, Grant Edwardh Appraisers and
    Consultants Ltd. and Ian G. McLean

Defendants/
Respondents

Kevin Sherkin and Mitchell Wine, for the appellants

Jeremy Devereux and Jennifer Teskey, for Fortress Real
    Capital Inc., Fortress Real Developments Inc., Jawad Rathore and Vincenzo
    Petrozza

Markus Kremer and Ziad Yehia, for Empire Pace (1088
    Progress) Ltd.

Lisa Parliament and Lauren Ray, for Adi Developments
    (Link) Inc. and Adi Development Group Inc. (incorrectly named in the title of
    proceedings as Adi Developments Inc.)

Heard: June 14, 2018

On appeal from the orders of Justice Paul M. Perell of
    the Superior Court of Justice, dated August 10, 2017, with reasons reported at 2017
    ONSC 4791, 2017 ONSC 4789, 2017 ONSC 4790, and 2017 ONSC 4792.

Feldman J.A.:

A.

Overview

[1]

The appellants are small investors who were induced to invest in four syndicated
    mortgages promoted by Fortress Real Capital Inc. and Fortress Real Developments
    Inc. (the Fortress Companies). Two of those mortgages are in default, but
    certain terms of the mortgages purport to preclude the investors or their
    trustees from enforcing the mortgages now, and possibly forever. The other two
    mortgages were removed from title through power of sale proceedings and protection
    proceedings under the
Companies Creditors Arrangements Act
, R.S.C.
    1985, c. C-36. As a result of these sales, newly-incorporated companies linked
    to Fortress became the owners of the lands, free from the mortgages in which
    the appellants had invested.

[2]

The appellants brought class proceedings against, among others, the individuals
    and corporations who had promoted and formally sold the investments, two
    principals of Fortress Real Capital Inc. and Fortress Real Developments Inc.,
    who were directors and officers of those companies, the lawyer who had
    purportedly provided independent legal advice to the appellants in respect of
    their investments, the trustees who held the appellants investments in trust,
    and the mortgagors who granted the syndicated mortgages. The appellants seek a
    remedy for the effective loss of their investments.

[3]

The appellants primary allegations are that the proposed defendants failed
    to properly disclose, or misled them about, key information regarding the
    development projects, particularly in relation to the risks of investing. They
    seek to enforce the two remaining mortgages, either directly or indirectly
    through the trustees, to rescind contracts relating to the investments, and to
    obtain damages for breach of fiduciary duty, breach of contract,
    misrepresentation, and negligence.

[4]

Eight of the defendants in the four class actions brought motions to
    strike the pleaded claims against them under Rule 21 of the
Rules of Civil
    Procedure
, R.R.O. 1990, Reg. 194. Four of those motions were settled, and
    four proceeded. The motion judge struck the pleadings against Fortress Real
    Capital Inc., Fortress Real Developments Inc., and Olympia Trust Company with
    leave to deliver Fresh as Amended Statements of Claim. Those orders are not
    under appeal.

[5]

The motion judge dismissed three of the claims and did not grant leave
    to amend. Those were: 1) the claims against the individual respondents Jawad
    Rathore and Vincenzo Petrozza, who were directors and officers of the Fortress Companies
    at the relevant times; 2) the claims against the respondent Empire Pace (1088
    Progress) Ltd., mortgagor of one of the remaining syndicated mortgages; and 3)
    the claims against the respondent Adi Developments (Link) Inc. and Adi
    Development Group Inc. (collectively Adi), mortgagor and guarantor of the
    other remaining syndicated mortgage. The appellants appeal those orders. They
    also appeal the costs orders awarded in favour of Empire Pace and Adi.

[6]

For the reasons that follow, I agree with the motion judge that the
    claims disclose no reasonable cause of action against the respondents Jawad
    Rathore and Vincenzo Petrozza in their personal capacities. I would uphold his
    decision to dismiss those claims without leave to amend. However, I do not agree
    that the claims to enforce the mortgages against Empire Pace and Adi should be
    struck out on a r. 21 motion as disclosing no reasonable cause of action. As a
    result, I would set aside the orders striking the actions against Empire Pace
    and Adi together with the costs awards in their favour.

B.

Facts

[7]

The four proposed class actions concern investments in four land
    development projects. The pleaded facts are taken to be true for the purpose of
    determining whether the pleadings should be struck under r. 21 as disclosing no
    reasonable cause of action. The pleadings relied on for the purposes of these
    motions are four proposed draft pleadings that have been amended a number of times.

The Four Development Projects

[8]

In the brief descriptions of the four land development projects I
    provide below, I focus on the facts that are relevant to the orders under
    appeal.

(1)

The Empire Pace Ten88 Project, Scarborough

[9]

Arlene McDowell is the proposed representative plaintiff in the Ten88
    Project class action. Empire Pace is an Ontario corporation incorporated in
    2012 to own and develop the Ten88 Project in Toronto. Mr. Rathore and Mr.
    Petrozza are directors and officers of the Fortress Companies and are both
    shareholders of Empire Pace. While the pleading states that Empire Pace is a
    related company to Fortress, the pleading does not describe the legal basis for
    that assertion.

[10]

On
    or before August 13, 2012, Empire Pace signed a loan agreement where it agreed
    to borrow an amount not to exceed $20 million from Fortress Developments, with part
    of the loan secured and part unsecured. Fortress assigned its interest in the
    secured portion of the loan to Olympia Trust Company in trust and to Mr.
    Sorrenti in trust. Mr. Sorrenti acted as both trustee for the investors
    interests in the loan as well as the lawyer who purportedly provided
    (personally or through his law office) independent legal advice to the
    investors.

[11]

Empire Pace entered into an agreement (the Empire Pace Loan Agreement)
    with Olympia and Mr. Sorrenti, as trustees, under which a syndicated second
    mortgage was registered against the Ten88 property as security for their
    portion of the loan.

[12]

Under the Loan Agreement, Empire Pace agreed to pay interest at 8% per
    annum, payable quarterly. The loan had a three-year term, maturing on August
    10, 2015, with a right to extend the maturity date by six months. Empire Pace
    also agreed to pay a variety of other fees and charges and to share profits. One
    of the terms entitled Fortress to retain 35% of all amounts raised from
    investors as an advance on anticipated profits and for commissions and legal
    fees.

[13]

Under the Empire Pace Loan Agreement, Mr. Sorrenti and Olympia Trust
    agreed to subordinate the syndicated mortgage to construction financing of up
    to $110M. They also agreed to grant partial discharges, postponements, and a
    standstill in certain circumstances.

[14]

Empire Pace granted the syndicated second mortgage on August 15, 2012.
    The syndicated mortgage is a document registered on title against the Ten88
    Project lands. It contains a priority, standstill, forbearance, and
    postponement provision. This provision precludes investors representatives
    from acting upon their security in the event of default until all other project
    financing has been repaid, or until the lenders of that financing approve of
    the action in writing. The pleadings allege that this provision was given
    without consideration and was inadequately disclosed to investors in the
    syndicated mortgage.

[15]

Ms. McDowell, who works in the information technology sector, decided to
    invest $25,000 in the syndicated mortgage after receiving information and
    promotional material about the Ten88 Project. She met with a mortgage agent and
    a notary to close her investment transaction. During the meeting, she had a
    phone conversation with Mr. Sorrenti, who provided her with legal advice
    respecting her investment. She alleges that the legal advice she was given was
    inadequate and not independent.

[16]

At the meeting Ms. McDowell received, and in some instances completed or
    signed, a number of documents. Where the documents are relevant to this appeal,
    I will address them in more detail in my analysis.

[17]

Construction on the Ten88 Project began in July 2013. In July 2014,
    Empire Pace borrowed $28M in construction financing from Meridian Credit Union.
    The security was a first mortgage on the property; Mr. Sorrenti and Olympia
    also delivered a postponement that was registered on title. Empire Pace
    exercised its right to extend the loan term by six months to February 10, 2016.
    On February 5, 2016, investors received a Memo advising that the Project was
    75% sold with occupancy to begin in the spring or summer of 2017. The Memo also
    stated that the Loan will now enter a period of interest accrual for the
    remainder of the term as also allowed by the standstill, postpone[ment] and
    subordinate provisions. Interest would be accrued from February 10 until the
    completion of the Ten88 Project, and would be paid with the principal upon
    completion.

[18]

The appellants allege that as nothing in the documentation and agreements
    pertaining to the syndicated mortgage allows for a period of interest accrual,
    the loan has been in default as of February 10, 2016. Neither Mr. Sorrenti nor
    Olympia has taken any steps to enforce the syndicated mortgage since that time.
    Ms. McDowell commenced this proposed class action on September 9, 2016. In
    addition to alleging that Empire Pace is in default of the Empire Pace Loan
    Agreement, Ms. McDowell alleges that Empire Pace cannot enforce any standstill
    provisions in the syndicated mortgage document against her. She also alleges
    that Empire Pace made misrepresentations to her that she relied on in deciding
    to invest in the Project.

[19]

In respect of Mr. Rathore and Mr. Petrozza, Ms. McDowell alleges that,
    as directing minds of Fortress, they should be held responsible for its
    wrongdoing. She further alleges that the individual respondents spoke on behalf
    of Fortress at investment seminars and stressed the safety and security of Fortress
    investments, and that they were negligent and should be held accountable for
    the appellants losses because they obtained substantial monetary benefit from
    Fortresss activities. There is, however, no pleading that Ms. McDowell either
    attended a meeting or seminar where Mr. Rathore or Mr. Petrozza were present, or
    relied on any representation made by Mr. Rathore or Mr. Petrozza at a meeting
    or seminar.

(2)

The Adi Sutton Project, Burlington

[20]

David Martino is the proposed representative plaintiff in the Sutton Project
    class action. Adi Developments (Link) Inc. (formerly Adi Developments Sutton
    Inc.) and Adi Development Group Inc. are related Ontario corporations. Adi
    Developments (Link) Inc. was incorporated to develop a mixed-use project in
    Burlington, Ontario. Both Mr. Rathore and Mr. Petrozza have an interest in Adi.

[21]

In August 2012, Fortress began to market investments in the Sutton
    Project. The Fortress defendants made presentations and the investments were
    marketed through brokers.

[22]

On or before September 4, 2012, Adi Developments (Link) Inc. signed a
    loan agreement where it agreed to borrow an amount not exceeding $11.6M from
    Fortress Developments, with part of the loan secured and part unsecured.

[23]

Fortress assigned its interest in the secured portion of the loan to Mr.
    Sorrenti in trust. Adi Developments (Link) entered into an agreement with Mr.
    Sorrenti (the Adi Loan Agreement) under which a syndicated mortgage was
    registered against the Sutton property as security for Mr. Sorrentis portion
    of the loan. Adi Development Group signed the Adi Loan Agreement as guarantor.

[24]

The Adi Loan Agreement contained similar terms to those in the Empire
    Pace Loan Agreement. Notably, under the Adi Loan Agreement, Mr. Sorrenti agreed
    to subordinate his security to construction financing of up to $49.5M. He also
    agreed to grant partial discharges, postponements, and to standstill in certain
    circumstances.

[25]

After the execution of the Adi Loan Agreement, Mr. Sorrenti agreed with
    Adi to a priority, standstill, forbearance, and postponement provision in the
    syndicated mortgage. It precludes investors representatives from acting on
    their security in the event of default until all other project financing has
    been repaid, or until the lenders of that financing approve of the action in
    writing.

[26]

Mr. Martino is a licensed mortgage agent who was an employee of the
    defendant FFM Capital Inc. He decided to invest $50,000 from an RESP account he
    had for his childrens education after receiving promotional material about the
    Sutton Project. His clients and family members invested a further $510,000 in
    the syndicated mortgage. Much of it was RRSP money.

[27]

Mr. Martino received, and in some instances completed or signed, a
    number of documents. Where those documents are relevant to this appeal, I will
    discuss them in more detail in my analysis. Mr. Martino was purportedly
    provided with independent legal advice by way of a phone call with Mr. Sorrenti
    or a lawyer in Mr. Sorrentis office or under Mr. Sorrentis direction.

[28]

In
    July 2014, Adi began to sell units in the Sutton Project; in June 2015,
    construction began on the Project.

[29]

On
    July 1, 2015, Adi extended the term of the loan to April 4, 2016. On October
    14, 2015, Adi granted a mortgage in the amount of $16M to Aviva Insurance
    Company of Canada. Mr. Sorrenti subordinated the syndicated mortgage to the new
    mortgage from Aviva Insurance, as well as to two other mortgages granted by
    Adi, one to Sorrenti Law Professional Corporation and another to Cameron
    Stephens Financial Corporation. Those two mortgages totalled about $13.16M.
    Construction liens were also registered on title to the Sutton Project lands,
    which the appellants allege constituted default under the provisions of the Adi
    Loan Agreement.

[30]

In
    April 2016, the investors were advised that the Project had entered an ongoing
    standstill, subordinate and postponement arrangement with a period of
    interest accrual in accordance with the standstill, postponement, and
    subordinate provisions of the syndicated mortgage loan.

[31]

Mr.
    Martino alleges that Adi defaulted on the loan on April 4, 2016, when the
    principal and interest owing was not repaid. Nothing in any of the
    documentation and agreements pertaining to the syndicated mortgage provides for
    a period of interest accrual at any time, and Mr. Sorrenti has not taken any
    steps to act on Adis default under the Adi Loan Agreement.

[32]

In May 2016, the investors were advised that it was necessary to
    increase the postponement to construction financing from $49.5M to $121M.
    Investors were requested to authorize the postponement. Mr. Martino refused.

[33]

Unbeknownst to investors, on April 5, 2016, Adi had already borrowed
    $75M from Meridian Credit Union to finance the construction of the Project on
    the security of a first mortgage of the property. Mr. Sorrenti had postponed
    the syndicated mortgage to Meridians security five weeks before notifying
    investors.

[34]

Mr. Martino commenced the proposed class action on September 27, 2016.
    He alleges that Adi, as borrower and as guarantor, is in default under the
    provisions of the Adi Loan Agreement, and that Adi cannot enforce any
    standstill provisions contained in the syndicated mortgage document against
    him. He also alleges that Adi made misrepresentations to him that he relied on
    in deciding to invest. Mr. Martinos allegations against Mr. Rathore and Mr.
    Petrozza are the same as those made in the Ten88 Project class action. And
    similarly, there is no pleading that Mr. Martino attended a meeting or seminar
    where Mr. Rathore or Mr. Petrozza were present, or relied on any
    representations made at such a meeting or seminar.

(3)

The Collier Centre Project, Barrie

[35]

The only facts about the Collier Centre Project that are relevant on
    appeal relate to the involvement of the respondents, Mr. Rathore and Mr. Petrozza.
    Ms. McDowell and Mr. Aversas legal claims against Mr. Rathore and Mr. Petrozza
    are the same as those made in the Ten88 and Sutton Project class actions, but
    the Collier Centre pleadings contain different facts relating to the
    interactions between Mr. Rathore and Mr. Petrozza and the appellant Mr. Aversa.

[36]

Arlene McDowell and Saverio Aversa are the proposed representative
    plaintiffs in the Collier Centre Project class action. Mady-Collier Centre Ltd.
    was incorporated to develop a mixed-use development in Barrie, Ontario. By
    agreement dated July 17, 2012, Mady-Collier agreed to borrow up to about $17M
    from Fortress Developments. Fortress assigned its interest in the secured
    portion of that loan to Olympia in trust and to Mr. Sorrenti in trust.
    Mady-Collier entered into an agreement with Olympia and Mr. Sorrenti under
    which a syndicated third mortgage was registered against the Collier Centre Project
    lands as security for their portion of the loan.

[37]

Ms. McDowell decided to invest $80,000 in the syndicated mortgage after
    receiving information and promotional material about the Project. The material
    did not come from Mr. Rathore or Mr. Petrozza.

[38]

Mr. Aversa, who works in construction, decided to invest $15,000 from
    his TFSA account. His wife, Adriana, also decided to invest $15,000 from her
    TFSA account. Mr. Aversa was introduced to the Collier Centre Project by an
    employee of the defendant FFM Capital Inc., who sent him a document prepared by
    Fortress describing the risk profile of the syndicated mortgage investment. He
    was invited to attend several Fortress seminars, at some or all of which Mr.
    Rathore and Mr. Petrozza spoke about the appeal of the particular Fortress
    investment.

[39]

Mr. Aversa attended at least one seminar where Mr. Rathore spoke. Mr.
    Rathore discussed his history in the business, the quality of the investments,
    and said that the investments were safe and secure. He stated that Fortress was
    solicited by many developers but only dealt with the best and most experienced.

[40]

In December 2014, construction of the Collier Centre stopped. In January
    2015, Mady-Collier filed for and obtained protection under the
Companies
    Creditors Arrangement Act
. In 2015, the principals of Fortress
    incorporated Fortress Collier Centre Ltd., which purchased the assets of the
    Collier Centre in a transaction approved by order of the Ontario Superior Court
    of Justice. The order extinguished the investors rights in the syndicated
    mortgage.

[41]

Fortress Collier Centre has agreed that all available cash flow after
    repayment of all construction and other financing required for acquisition,
    construction, development, leasing and sale of the [Collier Centre]...and after
    payment of all other costs to complete the [Collier Centre] not otherwise
    financed and appropriate reserves for future expenses and warranty claim, will
    be made available for repayment to investors in the syndicated mortgage. Ms.
    McDowell and Mr. Aversa allege that this is an empty commitment, and that they
    have effectively lost their entire investment.

[42]

On August 8, 2016, Ms. McDowell and Mr. Aversa commenced this proposed
    class action.

(4)

The Harmony Simcoe Project, Barrie

[43]

Again,
    the only facts about the Harmony Simcoe Project that are relevant to this
    appeal relate to the involvement of Mr. Rathore and Mr. Petrozza.

[44]

The
    facts surrounding the syndicated mortgage used to finance the Harmony Simcoe Project
    are substantially similar to those of the other three projects. The default
    events were most similar to those in respect of the Collier Centre Project. The
    syndicated mortgage went into default and, ultimately, power of sale
    proceedings commenced by the first mortgagee removed the syndicated mortgage
    from title (the syndicated mortgage being the second mortgage registered
    against the Project lands at that time). The power of sale proceedings again transferred
    title to a company controlled by Fortress, Fortress Kempenfelt Bay Developments
    Inc. (FKBD).

[45]

Mr.
    Rathore was a director and officer of both Fortress Developments and FKDB at
    the relevant times. Mr. Petrozza was an officer of Fortress Developments, a
    director of Fortress Capital, and a director and officer of FKDB at the
    relevant times. Mr. Rathore and Mr. Petrozza both have interests in Harmony
    Village-Lake Simcoe Inc., the corporation that held title to the land
    underlying the Project until title was transferred to FKDB under power of sale
    proceedings. Mr. Petrozza signed the transfer of title to FKDB on behalf of FKDB.

[46]

There
    are no facts pleaded relating to any specific interactions between the proposed
    representative plaintiffs, Bryan Madryga and Eileen Wallace, and Mr. Rathore
    and Mr. Petrozza. The appellants allegations against Mr. Rathore and Mr.
    Petrozza are virtually identical to those in the other three actions, except
    for the specific representations made by Mr. Rathore to Mr. Aversa in the
    Collier Centre Project. Also, the allegations relate to Mr. Rathore and Mr.
    Petrozzas positions both as directors and officers of Fortress and of FKBD,
    while the allegations in the other three actions relate to their positions as
    principals of Fortress alone.

C.

Decisions Below

[47]

The
    motion judge delivered four separate sets of reasons, repeating much of the factual
    background and legal framework of the claims in each. He dismissed the claims in
    negligence, misrepresentation and breach of fiduciary duty against Jawad
    Rathore and Vincenzo Petrozza without leave to amend in all four proposed class
    actions. He found that the pleadings in all four actions failed to plead
    material facts to show that their conduct was tortious in itself or that it
    exhibited a separate identity of interest from that of their corporations. He
    found that the pleadings did not disclose a reasonable cause of action against
    Mr. Rathore and Mr. Petrozza in their personal capacity.

[48]

The
    motion judge also dismissed the actions against Empire Pace and Adi for
    enforcement of the mortgages on two bases, and refused to grant leave to amend.
    First, the appellants did not have standing to enforce the syndicated
    mortgages, as the mortgages are documents under seal to which the appellants
    are not parties. The sealed contract rule prevents them from enforcing the
    mortgages, because it prevents non-parties from suing on sealed contracts.
    Second, even if the appellants could step into the shoes of their trustees and
    sue to enforce the mortgages in equity, their rights would be no better than
    those of the trustees, who are barred by the standstill provisions in the
    mortgage documents from enforcing the mortgages without the written approval of
    prior-ranking secured lenders. The motion judge also found that it was unclear
    how a syndicated mortgage could be enforced in a class action where some of the
    investors in the mortgage loan might opt out.

[49]

The
    motion judge concluded that no purpose would be served by granting leave to
    amend the pleadings because the appellants would already have pleaded the
    consent of the prior-ranking lenders if it existed, and they did not.

[50]

Further,
    the motion judge concluded that it was clear from the documents incorporated
    into the pleadings that the standstill provisions contained in the mortgage
    documents had been adequately disclosed to the appellants and to the parties to
    the Loan Agreements. He also made a finding that no additional consideration
    from Empire Pace and Adi was necessary for the inclusion of the standstill
    provisions.

[51]

On
    those bases, the motion judge concluded that the mortgages were not currently
    enforceable and dismissed the actions against Empire Pace and Adi without leave
    to amend.

D.

Issues

[52]

The
    appellants raise the following issues on this appeal:

(1)

Did the
    motion judge err in law by striking out the personal claims against the two
    principals, Mr. Rathore and Mr. Petrozza, as disclosing no reasonable cause of
    action?

(2)

Did the
    motion judge err in law by finding that the sealed contract rule prevents the
    appellants from enforcing the syndicated mortgages at common law?

(3)

Did the motion
    judge err in law by finding that the appellants cannot enforce the syndicated
    mortgages in equity through a class proceeding because:

(a)

it is plain and obvious that the standstill provisions bar the
    appellants from enforcing the syndicated mortgages in equity, and

(b)

it is plain and obvious that the
    mortgages are unenforceable through a class proceeding because some investors
    may opt out?

E.

Analysis

Standard of review

[53]

All
    parties agree that the standard of review on an appeal from a motion judges
    order that strikes a claim under r. 21.01(1)(a) or (b) is the correctness
    standard.

(1)

Did the motion judge err in law by striking out the personal claims against
    the two principals, Mr. Rathore and Mr. Petrozza, as disclosing no reasonable
    cause of action?

[54]

The
    claims against the individual respondents sought to hold them responsible, as
    the directing minds of the Fortress Companies, for Fortresss alleged breach of
    contract, breach of fiduciary duty, misrepresentation, and negligence. The
    motion judge followed this courts decisions in
Normart Management Ltd. v.
    West Hill Redevelopment Co.
(1998), 37 O.R. (3d) 97 (C.A.), at pp. 102-3,
    and
AGDA Systems International Ltd. v. Valcom Ltd.
(1999), 43 O.R.
    (3d) 101 (C.A), leave to appeal refd, [1999] S.C.C.A. No. 124, at pp. 112-13,
    which in turn followed
ScotiaMcLeod Inc. v. Peoples Jewellers Ltd.

(1995),
    26 O.R. (3d) 481 (C.A.), in holding that a director or officer of a corporation
    will not be personally liable for actions taken on behalf of the corporation
    unless some of their conduct is tortious in itself or exhibits a separate
    identity of interest from that of the corporation. He held that none of the
    four pleadings disclosed any such conduct.

[55]

In
ScotiaMcLeod
, at pp. 490-91, Finlayson J.A. described the requirements
    for finding directors or officers personally liable:

The decided cases in which
    employees and officers of companies have been found personally liable for
    actions ostensibly carried out under a corporate name are fact-specific. In the
    absence of
findings of fraud, deceit, dishonesty or want of authority
on
    the part of employees or officers, they are also rare. Those cases in which the
    corporate veil has been pierced usually involve transactions where the use of
    the corporate structure was a sham from the outset or was an afterthought to a
    deal which had gone sour. There is also a considerable body of case-law wherein
    injured parties to actions for breach of contract have attempted to extend
    liability to the principals of the company by pleading that the principals were
    privy to the tort of inducing breach of contract between the company and the
    plaintiff: see
Ontario Store Fixtures Inc. v. Mmmuffins Inc.
(1989),
    70 O.R. (2d) 42 (H.C.J.), and the cases referred to therein. Additionally there
    have been attempts by injured parties to attach liability to the principals of
    failed businesses through insolvency litigation. In every case, however, the
    facts giving rise to personal liability were specifically pleaded.
Absent
    allegations which fit within the categories described above, officers or
    employees of limited companies are protected from personal liability unless it
    can be shown that their actions are themselves tortious or exhibit a separate
    identity or interest from that of the company so as to make the act or conduct
    complained of their own
. [Emphasis added.]

[56]

The
    appellants submit that the motion judge erred in his conclusion because the
    following seven types of allegations that were pleaded were sufficient in law
    to meet the
ScotiaMcLeod
test:

·

While Fortress illegally operated as an unlicensed mortgage
    brokerage and assumed but failed to meet the statutory duties of a mortgage
    brokerage under the
Mortgage Brokerages, Lenders and Administrators Act,
    2006
, S.O. 2006, c. 29, Mr. Rathore and Mr. Petrozza failed to carry out
    their statutory duty to ensure that Fortress met its statutory obligations;

·

They breached their common law duty of care as well as their
    fiduciary and statutory duties that arose because Fortress took on the duties
    of a mortgage brokerage under the Act;

·

They knew or ought to have known about Fortresss pleaded
    breaches of contract, duty of care, and fiduciary duty;

·

Knowing that Fortresss breaches would likely cause the
    appellants significant harm, they took no steps to prevent that harm;

·

They spoke on behalf of Fortress at investment seminars and
    stressed the safety and security of the Fortress investments;

·

They were negligent and did not meet the standard of care
    expected of them in the circumstances; and,

·

They acted outside the scope of their duties to Fortress.

[57]

I agree with the motion judge that these allegations do not provide any
    particulars of tortious conduct separate from that of the companies. Nor do any
    of the pleadings contain sufficient particularity to be able to identify any
    such conduct.

[58]

The appellants also submit that because the pleading sets out numerous
    claims of fraud, deceit and dishonesty by Fortress and that the two directors
    and officers knew or ought to have known about it, their conduct of permitting
    it to occur fits within the test.

[59]

The respondents say first, that this assertion was not made to the
    motion judge; and second, that there is no specific pleading of fraud, deceit
    or dishonesty on the part of the respondents. Again, I agree that without
    specifically pleaded allegations of fraud, deceit or dishonesty by the
    individual respondents, it is not possible to assess whether any such alleged
    misconduct can lead to a finding of personal liability.

[60]

Finally, the appellants point to the fact that in
ScotiaMcLeod
,
the court allowed the action to proceed
    against the two most senior officers of Peoples. Finlayson J.A. described the
    basis for the claim against the senior officers, at p. 495:

It is alleged against them that
    they were directly and personally involved in the marketing of the debentures
    and that they were involved in making certain representations personally which
    were relied on by the appellants. The appellants have also made an allegation
    of negligent misrepresentation against both of them personally.

[61]

The
    appellants submit that the four proposed statements of claim describe similar
    actions by Mr. Rathore and Mr. Petrozza and that these actions made them
    directly and personally involved in Fortresss improprieties.

[62]

With
    respect to this submission, only the Amended Amended Statement of Claim in the
    Collier Centre action contains a pleading alleging that the respondents made representations
    to one of the appellants. At paras.116-18, the appellants plead:

116. Thereafter, Aversa was invited to several Fortress
    seminars, some or all of which featured Rathore and Petrozza as the speakers
    extolling the appeal of the particular Fortress investment.

117. Aversa attended at least one seminar at which Rathore
    spoke. Rathore talked about his history in the business, the quality of the
    investments and that the investments were safe and secure. He also spoke about
    Fortress commitment to charitable endeavors.

118. Rathore stated Fortress was
    solicited by many developers but only dealt with the most experienced and best
    ones.

[63]

There is, however, no pleading that Mr. Aversa relied on any
    representation made by Mr. Rathore. Nor is there a specific pleading of
    negligent or fraudulent misrepresentation by him, or that the representations
    were being made personally and not on behalf of Fortress.

[64]

As there is no pleaded legal basis for a personal claim against the two
    principals, I would not give effect to this ground of appeal. I also agree with
    the motion judge that there is no basis to grant leave to amend. The pleading
    has been amended a number of times, and the law on this issue is clear. If
    there were any relevant allegations, they would have been made already; no
    purpose would be served by granting leave to amend:
Piedra v. Copper Mesa
    Mining Corp.
, 2011 ONCA 191, 332 D.L.R. (4th) 118, at para. 98.

(2)

Did the motion judge err in law by finding that the sealed contract rule
    prevents the appellants from enforcing the syndicated mortgages at common law?

[65]

The relief the appellants claim against the respondents Empire Pace and
    Adi includes judicial sale of the lands underlying the two developments, the Ten88
    Project and the Sutton Project, rescission of all agreements with respect to
    the appellants investments in the projects, an equitable tracing order in
    respect of the investment funds Empire Pace and Adi received, payment of all
    principal and interest owing due to Empire Pace and Adis default under the
    Loan Agreements, and damages for misrepresentation.

[66]

Empire Pace and Adi moved for a declaration that the provisions of the syndicated
    mortgages prohibit the appellants from enforcing them and for an order
    dismissing the action against Empire Pace and Adi. The motion judge defined the
    issue between the parties as whether the appellants had standing to enforce the
    respective syndicated mortgages.

[67]

The mortgages were entered into between Empire Pace and Mr. Sorrenti and
    Olympia Trust as trustees, and between Adi and Mr. Sorrenti as trustee. The
    appellants are not parties to the syndicated mortgages.

[68]

The motion judge referred in his reasons to s. 13 of the
Land
    Registration Reform Act
, R.S.O. 1990, c. L.4, which provides that a
    mortgage that is not executed under seal has the same effect for all purposes
    as if it had been executed under seal. As a result, the sealed contract rule
    applies to the syndicated mortgages. That common law rule provides that only the
    signatories to a contract under seal may sue or be sued on it.

[69]

The appellants argue that the motion judge erred in law by finding that
    the sealed contract rule applies to both disclosed and undisclosed principals.
    They argue that the rule only applies to undisclosed principals, and that
    because Empire Pace and Adi knew that the trustees were acting on behalf of the
    appellants and the other investors, they are disclosed principals. As such, the
    appellants may sue on the mortgages.

[70]

I would not give effect to this argument. The sealed contract rule was recently
    affirmed by the Supreme Court of Canada in
Friedmann Equity Developments
    Inc. v. Final Note Ltd.
, 2000 SCC 34, [2000] 1 S.C.R. 842. In that case,
    an agent and bare trustee for the undisclosed beneficial owners of property entered
    into a mortgage with the mortgagee, a corporate lender. When the mortgage went
    into default, the mortgagee sued the beneficial owners personally on the
    covenant given by the agent in the mortgage.

[71]

In
Friedmann
, as in this case, the operation of s. 13 of the
Land
    Registration Reform Act
had the effect of making the mortgage a document
    under seal. The mortgagee asked the court to set aside the sealed contract rule
    and allow its action against the undisclosed principals to proceed. The court
    declined to do so. Instead it affirmed the rule.

[72]

While the court discussed the rule in terms of its application to
    undisclosed principals, it is clear from the context of the courts discussion that
    the rule also applies to disclosed principals. The court began its explanation
    and analysis at para. 15 by stating the general rule in agency law as follows:

When a third party contracts with
    an agent and the contract is not under seal,
the principal has the same
    rights and liabilities under the contract whether he or she was disclosed to
    the third party
Therefore undisclosed principals can sue and be sued in their
    own name on any simple contracts made on their behalf by their agents as long
    as those agents have acted within the scope of their delegated authority in so
    doing. [Emphasis added.]

[73]

The
    general rule has been criticized because it allows people to sue one another on
    a contract even where one person is not named as a party to that contract. The
    court in
Friedmann
noted, however, that one could avoid the general
    rules consequence either by expressly limiting liability to the named parties
    or by executing the contract under seal: at para. 18. One of the effects of executing
    a contract under seal, at common law, is that only a named party can sue on a
    covenant in the contract: at para. 20.

[74]

The
    appellants position is that while they were not named as parties to the
    syndicated mortgages, their specific identities and the fact that the syndicated
    mortgages were being held for their benefit was disclosed to Empire Pace and
    Adi because Empire Pace and Adi knew that the trustees were acting on behalf of
    investors and because they signed documents that identified each of the
    investors as a holder of a beneficial interest in the Loan Agreements. Whether
    that makes the appellants disclosed principals who were not made parties or
    undisclosed principals, the result must be the same. Had the contract not been
    executed under seal, as principals, they could have sued or been sued on it.
    The effect of the sealed contract rule is to both protect them from suit and
    preclude them from having the right to personally enforce the security at
    common law.

[75]

The
    motion judge correctly found that the sealed contract rule prevents the
    appellants from suing to enforce the syndicated mortgages at common law.

(3)

Did the motion judge err in law by finding that the appellants cannot enforce
    the syndicated mortgages in equity through a class proceeding?

[76]

The
    motion judge acknowledged that in circumstances where a trustee who is a party
    to a sealed contract takes no steps to enforce the contractual obligations of
    the other party, the beneficiaries of the trust may enforce the rights of
the trustee in equity by bringing the action and
    including the trustee as a party to the action.

[77]

This rig
ht was recognized by the Supreme Court
    in
Friedmann
,
where the court discussed the decision of the
    English Court of Appeal in
Harmer v. Armstrong
,
[1934] 1 Ch. 65
    (Eng. C.A.). Bastarache J. stated that the
Harmer
decision merely
    provides a procedural method for the beneficiaries of a trust to effectively
    force the trustee to enforce its rights under agreements under seal for their
    benefit: at para. 29. The equitable right is based on the law of trusts, not the
    law of contract, and therefore it does not constitute an exception to the
    sealed contract rule. Bastarache J. also explained that the equitable rule does
    not have the effect of creating a legal relationship between the beneficiary
    and the contracting third party. Therefore, the third party may not use the
    rule to sue the beneficiary, and, importantly for this case, when the beneficiary
    sues to enforce the contract, it is to enforce the agreement 
according to
    its tenor
 (emphasis added), meaning the beneficiary is asserting the trustees
    rights and not his or her own: at paras. 28, 30.

[78]

Based
    on his reading of the syndicated mortgages, the motion judge found that the
    trustees, having granted the specific standstill provisions in the respective
    syndicated mortgages, would not themselves be able to enforce those mortgages
    without the written consent of the prior-ranking mortgagees in accordance with
    the terms of the standstill provisions. The standstill provisions read:

13. Priority, Standstill, Forbearance and Postponement

The Chargee acknowledges that the Chargor will be arranging for
    additional financing to facilitate the development of the project on the Lands
    which shall include but not be limited to soft and hard cost financing,
    marketing financing, additional equity and surety bonding/financing to be
    secured by real estate charge(s) and personalty [and any and all renewals and
    replacements thereof]
[1]
(the Senior Security). The current amount of the loans to be evidenced by the
    Senior Security are $100,000,000
[2]
(the Total Senior Security) which Total Senior Security shall increase from
    time to time as may be necessary to reflect any necessary adjustments to the
    project as to scope of the project or anticipated costs (the Total Adjusted
    Senior Security). The Chargee agrees with the Chargor as follows: []

C. STANDSTILL/FORBEARANCE

1.The Chargee
    hereby covenants and agrees that from and after the date hereof, to and until
    the date of repayment of the outstanding indebtedness secured under the Total
    Adjusted Senior Security and the complete discharge thereof (which period of
    time is hereinafter referred to as the Standstill Period), the Chargee shall
    not take, direct, initiate, pursue or otherwise participate in (either directly
    or indirectly) any collection, realization or enforcement proceedings or
    remedies against (or otherwise affecting) the Chargor (nor against any party or
    parties who may be entitled to claim contribution or indemnity against the
    Chargor), nor against the Lands (or any portion thereof), nor against any
    chattels, fixtures, rents, leases and/or other personal property situate upon,
    within, or affixed to, or otherwise relating to the Lands or the Condominium
    complex (or any portion thereof), as a result of any breach, default or
    non-compliance with any covenants, conditions, representations, warranties,
    terms and/or provisions of this Chargee (or any portion thereof) save and
    except any enforcement proceedings or remedies first approved of in writing by
    all of the holders of the Total Adjusted Senior Security, which approval may be
    unreasonably withheld.

[79]

The motion judge rejected the appellants submission that in an equitable
    enforcement action, the appellants could challenge the interpretation and
    enforceability of the standstill provision. He further found that, in any event,
    there would be no merit to any such challenge: the standstill provisions
    meaning is plain, and it requires the prior consent of the senior security
    holders to any proceeding enforcing the lenders security. Finally, he found
    that based on the pleadings and the documents incorporated by reference into
    the pleadings, the standstill provision was adequately disclosed to the parties
    to the Loan Agreements as well as to the appellants themselves.

(3)

(a) Is it plain and obvious that the standstill provisions bar the appellants
    from enforcing the syndicated mortgages in equity?

[80]

As Brown J.A. recently explained in
Brozmanova v. Tarshis
, 2018
    ONCA 523, at paras. 10-13, there are two types of procedures available under
    the
Rules of Civil Procedure
to dispose of a contested claim. One
    involves leading evidence to prove or disprove the claim as pleaded; the other is
    to dismiss all or part of the claim on the basis that, regardless of the
    evidence, the claim cannot succeed as a matter of law.

[81]

In my view, the motion judge erred by proceeding to decide the equitable
    claims for mortgage enforcement using r. 21 (among the latter type of law-based
    procedures), and by dismissing them as bound to fail in law.

[82]

In drawing his conclusion that the claims for equitable enforcement of
    the mortgages against Empire Pace and Adi disclose no reasonable cause of
    action, the motion judge made three findings which required an evidentiary
    basis: 1) that properly interpreted, the standstill provision in the syndicated
    mortgages barred the appellants from enforcement; 2) that the standstill
    provision in the syndicated mortgages was adequately disclosed to the parties
    to the Loan Agreements; and 3) that the standstill provision in the syndicated
    mortgages was adequately disclosed to the appellants.


[83]

Regarding the first finding, the Supreme Court of Canada held in
Sattva
    Capital Corp. v. Creston Moly Corp.
, 2014 SCC 53, [2014] 2 S.C.R. 633, at
    para. 50, that the interpretation of a contract is a question of mixed fact and
    law. Therefore, a party is entitled to lead relevant evidence regarding the
    surrounding circumstances of the contracts formation or its context to aid in
    its interpretation. Interpreting the standstill provision in this case is no
    exception: to determine its effect on the appellants ability to enforce the syndicated
    mortgages in equity in the particular circumstances of this case, relevant
    evidence may be available.

[84]

The second two findings are clearly factual. The motion judge relied on
    the documentary record before him in making those findings, but again, the
    appellants are entitled to lead evidence both to aid in the interpretation of
    those documents and to prove what was disclosed and when.

[85]

Even without further evidence, with respect, the motion judges finding that
    the standstill provisions were adequately disclosed does not bear scrutiny. A
    review of the relevant documents shows that while a standstill provision is
    referred to in most of the key documents, the various references to a
    standstill provision are worded in different ways: for example, the Adi Loan
    Agreement contains a provision in which the trustee, Mr. Sorrenti, agreed to
    enter into such standstill agreements as shall be
reasonable in the
    circumstances
 (emphasis added).

[86]

Since the effect of the standstill provisions, on their face, is to make
    the appellants security essentially unenforceable and ensure that they will
    never recover their investment in the event of default, one could argue that
    the standstill provision that was ultimately granted in the syndicated
    mortgages was not reasonable in the circumstances or that its actual effect was
    not disclosed to the investors. Whether any non-disclosure would affect the
    enforceability of the standstill provision in equity by or on behalf of the
    trustees will be an issue of law to be determined once the evidentiary findings
    are made.

(3)

(b) Is it plain and obvious that the mortgages are unenforceable through
    a class proceeding because some investors may opt out?

[87]

The
    motion judge did not find that it was plain and obvious that the claim could not
    succeed because the appellants have a very small interest in the loans to
    Empire Pace and Adi and because some investors could opt out of the proposed
    class action. He only raised the issue. In my view, the determination of this
    issue is premature and not a reason to strike the claim on a r. 21 motion.

Other grounds

[88]

The appellants have pleaded relief other than enforcement of the
    syndicated mortgages against the Empire Pace and Adi respondents. The other
    relief they seek includes: payment of all principal and interest owing under
    the Loan Agreements (which are not under seal themselves, but any enforcement of
    which may be affected by the existence of the sealed syndicated mortgages); rescission
    of all agreements respecting their investments in the syndicated mortgages; equitable
    tracing of all of their investment funds; and damages for Empire Pace and Adis
    misrepresentation of certain information respecting the investments, including the
    value of the mortgaged properties. The motion judge dismissed the actions
    against Empire Pace and Adi without addressing the viability of any of these
    claims. The only one he referred to was the rescission claim, which he assumed the
    appellants would elect to abandon if they ultimately chose to enforce the syndicated
    mortgages. As these claims were not struck out by the motion judge, they will
    remain in the Empire Pace and Adi actions together with the equitable mortgage
    enforcement claims.

F.

Conclusion

[89]

For
    the reasons outlined above, I would uphold the motion judges decision to
    strike the claims against Mr. Rathore and Mr. Petrozza without leave to amend.
    However, I would allow the appeal with respect to the balance of the orders.

G.

Costs of the motions

[90]

The
    appellants also sought to appeal the costs orders made in favour of the Empire
    Pace and Adi respondents. As I would allow the appeal in respect of those
    claims, I would also set aside the costs awards.

H.

Costs of the appeal

[91]

It was agreed at the hearing that the parties would attempt to agree on
    the costs of the appeal following release of these reasons.

[92]

If the parties are unable to agree on the costs of the motion or the
    appeal, they may make brief (maximum three pages) written submissions to the
    court. The appellants submissions shall be made within three weeks following
    release of these reasons and the respondents within two weeks thereafter.

Released: G.R.S. January 31, 2019

K. Feldman J.A.

I agree. G.R. Strathy C.J.O.

I agree. David Brown J.A.





[1]
The language in the square brackets is only included in the Adi mortgage
    document, registered against the Sutton Project lands.



[2]

This amount is from the Empire Pace mortgage document,
    registered against the Ten88 Project lands. The amount included in the
    equivalent provision in the Adi mortgage document, registered against the
    Sutton Project lands, is $45,000,000.


