



COURT OF APPEAL FOR ONTARIO

CITATION: Gillani v. Karmali, 2014 ONCA 325

DATE: 20140425

DOCKET: C56943

Epstein, Pepall and van Rensburg JJ.A.

BETWEEN

Navroz Gillani

Plaintiff (Respondent)

and

Shiraz Karmali

Defendant (Appellant)

H. James Marin, for the appellant

Michael McQuade, for the respondent

Heard: March 18, 2014

On appeal from the judgment of Justice James M. Spence of
    the Superior Court of Justice, dated March 21, 2013, with reasons reported at
    2013 ONSC 1691.

Pepall
    J.A.:

[1]

The appellant appeals from a judgment awarding damages of $57,000 to the
    respondent based on breach of a constructive trust by the appellant.

Background

[2]

In 2001 and 2002, Salim Damji promoted a fraudulent investment scheme
    involving the sale of shares in corporations referred to collectively as STS.  STS
    was engaged in selling a teeth whitening product that apparently, Colgate Palmolive
    was going to purchase.  Investors were given the opportunity to subscribe for
    STS shares that would be issued when they were offered to the public.  The
    share subscriptions were offered by individuals known as collectors.

[3]

Many members of the Ismaili community, to which the parties belonged,
    were eager to buy shares in STS.  Prior to the events in issue in this
    litigation, the respondent had made three investments and subscribed for $45,500
    worth of STS treasury shares.  To effect the third of these investments, he
    wrote a cheque for $35,000 in favour of Mr. Damji, the promoter. The cheque was
    clearly stated to be in trust.  Later, the respondent sought to obtain more shares
    in STS.  This latter share subscription is the focus of the judgment under
    appeal.

[4]

The respondent, age 45, is related by marriage to the appellant, age 69:
    the respondents wife is the stepdaughter of the appellants brother.  The
    appellant and the respondent discussed the proposed share subscription.  The
    appellant was not a collector himself, but arranged for the respondent to meet
    with Mr. Suleman, who was a collector
[1]
. 
    Mr. Suleman, age 67, had been a friend of the appellant for about 35 years;
    indeed, they had held a joint bank account together since the late 1980s.  According
    to the trial judge, Mr. Suleman was in a position to arrange to place a
    subscription through Kassam Juma
[2]
(who served as an intermediary for Mr. Damji) and to settle the terms that
    would be acceptable (at para. 29).

[5]

The trial judge rejected the respondents testimony that he did not meet
    with Mr. Suleman, that his purchase was to be of the appellants personal shares,
    with the purchase monies to be held in trust, and that the appellant would
    guarantee any loss.  Indeed, the trial judge specifically found that there was
    no evidence that the appellant agreed to hold the purchase funds in trust or
    that he guaranteed against any loss on the shares.  Rather, the trial judge concluded
    that the respondent obtained an agreement to enable him to purchase shares of
    STS at $1.50 per share when the STS shares were issued.  The amount that he was
    to be able to invest was to be $35,000 or, implicitly, whatever other amount
    Mr. Suleman might negotiate (at para. 35).

[6]

The respondents wife provided a cheque to Mr. Suleman for the purchase
    of STS shares.  It was dated November 9, 2001 and was in the amount of $57,000.
    The cheque was made payable to the appellant.  Unlike the respondents earlier
    cheque for $35,000 in favour of Mr. Damji, this cheque was not stated to be in
    trust, and the trial judge found that the money was not to be held in trust.  That
    said, the trial judge found that the appellant, the respondent and Mr. Suleman
    understood that the $57,000 cheque was for the purpose of subscribing for the
    purchase of STS shares.

[7]

There was no evidence or finding that suggested that the $57,000 was not
    to be intermingled with other funds.  There was no evidence or finding as to
    when the subscription had to be effected.

[8]

Mr. Suleman testified that he tried to give the cheque to Mr. Damjis
    intermediary, Kassam Juma, so that it could be put towards the purchase of STS
    shares on behalf of the respondent, but it was refused.  Mr. Suleman notified
    the appellant.  The two men decided to hold on to the funds in the hope that Mr.
    Juma would ultimately accommodate the investment and the shares could be subscribed
    for at a later date.  On November 9, 2001, the appellant deposited the cheque
    and four other cheques for a total aggregate amount of $115,500 into the joint
    bank account he shared with Mr. Suleman.

[9]

Soon after, the joint account was reduced to approximately $20,000. 
    However, the funds in the account were later replenished.  According to Mr.
    Suleman, funds were regularly transferred back and forth between his line of
    credit account and the joint account.  The trial judge concluded that many
    and, perhaps virtually all of the transactions recorded in the bank statement
    for the joint account were for Mr. Suleman alone.

[10]

Mr.
    Suleman testified that subsequently, Mr. Juma agreed to sell more shares.  That
    said, Mr. Suleman also testified that he learned that Mr. Juma would not accept
    the $57,000 cheque for a purchase on behalf of the respondent.  On December 24,
    2001, Mr. Suleman wrote a cheque for $115,000 payable to Salim Damji I/T,
    which the trial judge concluded probably meant in trust.  The cheque was
    signed by the appellant.  It cleared the joint account on December 28, 2001.  The
    signature for deposit on the back of the cheque was that of Salim Damji.

[11]

Mr.
    Suleman testified that the cheque for $115,000 incorporated the $57,000 payment
    by the respondent to subscribe for the shares.  The trial judge did not reject
    that evidence.  He concluded, however, that because the cheque recited Mr.
    Sulemans name on the memo line, any claim against Mr. Damji and STS would
    belong to Mr. Suleman.  At para. 66 of his reasons, the trial judge determined that
    the respondent was entitled to believe that Mr. Suleman would apply the $57,000
    to purchase for him an entitlement to receive shares from STS, but that the
    $57,000 was never applied in that way.  On the other hand, at para. 79 of his
    reasons, he determined that on December 24, 2001, the appellant paid to
    subscribe for shares in STS for the respondent on the terms of his arrangement.

[12]

Before the
    fraud was discovered, Mr. Suleman prepared a distribution list for the STS
    shares that described the investors and the particulars of each investment. 
    This list itemized the respondents investment of $57,000.

[13]

The
    initial public offering never occurred and no shares were ever issued by STS.  The
    fraudulent investment scheme promoted by Mr. Damji was discovered in April
    2002.  It was said to have defrauded investors of amounts approaching $100
    million.  Mr. Suleman testified that he personally lost $1.5 million and the
    appellant testified that he lost $250,000.  In April 2002, Mr. Damji pleaded
    guilty and was convicted of fraud.

[14]

The
    respondent never recovered his $57,000 investment.  At trial, he sought to find
    the appellant liable for this loss.

[15]

The trial
    judge did not suggest in his reasons that either Mr. Suleman or the appellant
    knew of, or were complicit in, Mr. Damjis fraud.

Trial Judges Reasons

[16]

The trial
    judge found the appellant liable on the following basis:

·

there was a constructive trust between Mr. Suleman and the respondent;

·

the appellant shared with Mr. Suleman the responsibility for
    purchasing and delivering the STS shares to the respondent;

·

the appellant agreed with Mr. Suleman to the plan to deposit the
    cheque in their joint bank account and await a later opportunity to deal with
    the purchase of shares;

·

when he learned that the subscription would not be accepted right
    away and neither he nor Mr. Suleman could tell how long it would be until the
    funds could be applied to the subscription, the appellant took no steps to cause
    the funds to be returned to the respondent and his wife, nor did he do anything
    to ensure that the funds were kept available for the purchase;

·

although the joint account was replenished, most of the funds
    were applied by Mr. Suleman to other purposes; and

·

the appellant therefore facilitated the breach by Mr. Suleman of
    the constructive trust and was therefore also responsible for that breach. The
    doctrine of trustee
de son tort
 applied to the appellants conduct. 
    He became a constructive trustee and his conduct constituted a breach of that
    constructive trust.

Analysis

[17]

The
    appellant advanced five grounds of appeal; however, in my view in order to
    dispose of the appeal, only two of these grounds need to be addressed.

(a)

The Pleadings

[18]

The
    appellant submits that the respondent did not plead a theory of constructive
    trust in his statement of claim, and the trial judge erred in finding liability
    and awarding damages on the basis of a theory that was not pleaded.

[19]

The
    version of events proffered by the respondent on the one hand, and the
    appellant on the other, differed significantly.

[20]

The version
    of events pleaded by the respondent was as follows:

·

Mr. Damji wrongfully and fraudulently made misrepresentations, or
    caused them to be made, with a view to fraudulently inducing members of his
    community and others to purchase shares. He represented and assured them that
    their payments would be received and held in trust.

·

Mr. Damji misappropriated the trust monies.

·

The appellant approached the respondent and, as a favour to the
    respondent, offered to sell his own personal shares in STS at the rate of $1.14
    per share, a family price and less than the prevailing rate.

·

The appellant promised to reimburse the respondent for any loss.

·

The respondent agreed to purchase the shares. His $57,000 was to
    be held in trust by the respondent pending receipt of the appellants shares.

·

The respondent did not receive the shares.

·

When the respondent discovered Mr. Damjis fraud, he confronted the
    appellant, who disclosed that the $57,000 had been used for other business
    ventures.

[21]

Based on
    this version of events, the respondent pleaded that the appellant wrongfully breached
    their agreement; fraudulently misappropriated or wrongfully converted the
    $57,000 for his own benefit and that of Mr. Suleman; unjustly enriched himself
    by using the $57,000; and breached his duty to the respondent to hold the
    $57,000 in trust, as described.  The respondent also pleaded that the appellant
    owed him a fiduciary duty and breached it by misappropriating the $57,000 and
    using it for one or more business ventures without the respondents knowledge
    or consent.  The remedies the respondent sought included a tracing order and the
    imposition of a constructive trust in his favour against the corporations or
    business ventures in which his $57,000 was in any way used or invested.

[22]

The trial
    judge did not find that any of the allegations the respondent made were proven,
    with the exception of the allegations he made about Mr. Damji, who was not a
    party to the action.

[23]

Consistent
    with his pleading, the respondents opening statement did not refer to liability
    based on a constructive trust:

My client essentially pleads that he made a contract with this
    man, pursuantarrangement [
sic
], pursuant to which he agreed to acquire
    from him some shares in the STS fraudulent entity of Mr. Damji, from [the
    appellant] personally.  That his monies were to be held in trust pending
    receipt of the shares, and that [the appellant] guaranteed to him that he would
    not suffer any loss by reason of this transaction its a credibility case, youll
    have to decide between Mr. Gilliani, on the one hand and on the other hand Mr.
    Karmali.

[24]

The trial
    judge found that, contrary to the assertions and testimony of the respondent, there
    was no agreement to buy the shares from the appellant, no agreement to hold the
    $57,000 in trust, and no guarantee against the risk of loss.  There was no express
    finding of a breach of fiduciary duty or that the appellant had misappropriated
    the respondents funds and used them in one or more business ventures.  Nor was
    there a finding that the appellant had been unjustly enriched at the
    respondents expense.  Nonetheless, the trial judge went on to find that the
    claim the respondent had made out against the appellant was a claim of breach
    of constructive trust based on the doctrine of trustee
de son tort
.

[25]

I agree with
    the appellant that the theory of liability relied upon by the trial judge was
    not pleaded.  The only reference to a constructive trust is in the request for
    relief found in paragraphs 1(b) and 24(d) of the statement of claim, and this
    relates to the imposition of a constructive trust as a remedy and not as a basis
    for liability.  There is no reference whatsoever to trustee
de son tort
.

[26]

Moreover,
    the appellant was caught by surprise as the theory of the case on which the
    trial judge found liability was similarly not advanced in the respondents
    opening submissions.  In my view, the trial judge erred in deciding liability
    and awarding damages on a basis that was not pleaded.  It is fundamental to the
    litigation process that lawsuits be decided within the boundaries of the
    pleadings so that the parties know the case they have to meet and can address
    the issues through their evidence at trial: see
Wilson v. Beck
, 2013
    ONCA 316, 307 O.A.C. 10, at para. 27, citing
Rodaro v. Royal Bank of Canada
(2002), 59 O.R. (3d) 74 (C.A.), at para. 60.

[27]

I would
    therefore give effect to this ground of appeal.

(b)

Breach

[28]

The
    appellant also submits that even if breach of constructive trust had been
    pleaded, the trial judge erred in finding such a breach by the appellant.

[29]

I agree.

[30]

Even if
    for the purposes of this appeal I assume, without deciding, that there was a
    trust, there was no evidentiary basis for finding any breach.

[31]

The trial
    judge found that the appellant facilitated the breach by Mr. Suleman of the
    constructive trust by agreeing to the plan to deposit the cheque in the joint
    bank account and await a later opportunity to deal with the purchase of the
    shares.  In doing so, the appellant took no step to cause the funds to be
    returned to the Gillanis when it turned out that the subscription would not be
    accepted right away and neither he nor Mr. Suleman could tell how long it might
    be until the funds could be subscribed (at para. 72).  The trial judge
    concluded that since the appellant did nothing to ensure that the funds were
    kept available for the subscription, he thereby facilitated Mr. Sulemans
    withdrawal of the funds from the joint account.

[32]

The breach
    of trust the trial judge identified was the failure to return the money.
    However, there was no finding that there was an express or implied term that
    the money would be returned. There was no evidence that either Mr. Suleman or
    the appellant failed to carry out any obligation under any terms of a trust or
    other arrangement.  There was no restriction on where the funds were to be
    deposited.  The trial judge stated, at para. 79, that on December 24, 2001, the
    appellant paid to subscribe for shares in STS for the respondent on the terms
    of his arrangement.

[33]

The
    appellant did not guarantee delivery of the shares, nor was there any agreement
    as to when the share subscription was to occur.  There was no evidence that Mr.
    Suleman or the appellant were required to keep the funds separate. Indeed, Mr.
    Suleman testified that he only received a commission if and when the Colgate
    transaction went through.  Whatever he collected, he sent to Mr. Damji.

[34]

There is
    nothing in the record that would suggest that the appellant participated in any
    wrongdoing by Mr. Suleman or did anything wrong himself.  Moreover, as
    mentioned, both the appellant and Mr. Suleman suffered significant losses
    themselves.  Based on
Air Canada v. M & L Travel Ltd.
,
[1993] 3 S.C.R. 787, at p. 789, whether
    personal liability may be imposed on a stranger to a trust depends on whether the
    strangers conscience is sufficiently affected to justify the imposition of
    liability.  Here, the record could not sustain such a conclusion.  The money
    was delivered to subscribe for shares and any trust purpose was achieved.  The
    loss arose not because of anything the appellant did, but because of the fraud
    perpetrated by Mr. Damji.

[35]

I would
    therefore also give effect to this ground of appeal.

Disposition

[36]

I would
    allow the appeal, set aside the judgment and dismiss the action.  I would
    reverse the costs award below and order the respondent to pay the appellants
    costs of this appeal in the amount of $24,000 inclusive of disbursements and
    applicable taxes.

Released:

SEP                                       S.E. Pepall
    J.A.

APR 25 2014                          I agree Gloria
    Epstein J.A.

I
    agree K. van Rensburg J.A.





[1]
The Ontario Securities Commission had advised Mr. Suleman that his involvement
    with the distribution of STS shares may trigger the application of the
    registration and/or prospectus requirements under the
Securities Act
,
    R.S.O. 1990, c. S. 5.



[2]
He is occasionally referred to as Kassu in the record.


