Edmonton Region Community Board for Persons with Developmental Disabilities Plaintiff - v. -, 2010 ABQB 786

Court of Queen ’ s Bench of Alberta Citation: Persons with Developmental Disabilities, Edmonton Region Community Board v. Pearl Villa Homes Ltd., 2010 ABQB 786 Date: 20101208 Docket: 0303 22486 Registry: Edmonton Between: Edmonton Region Community Board for Persons with Developmental Disabilities Plaintiff - and - Pearl Villa Homes Ltd., 650425 Alberta Ltd., Bashir Qureshi and Nazli Qureshi Defendants _______________________________________________________ Memorandum of Decision of the Honourable Madam Justice J.M. Ross _______________________________________________________ I. Introduction [ 1 ] In this case management application, the Defendants seek

summary dismissal of the Plaintiff’s claim for a constructive trust on certain lands or the proceeds arising from the sale of the lands.

II.

Facts [ 2 ] The action concerns the government body, Edmonton Region Community Board for Persons with Developmental Disabilities (the “Plaintiff” or “PDD”), which was created by the Alberta government to provide assistance to persons with developmental disabilities, and its former private contractor, Pearl Villa Homes Ltd. (“Pearl Villa”). [ 3 ] PDD alleges that between 1998 and 2000, PDD and Pearl Villa entered into agreements under which Pearl Villa provided services to persons with developmental disabilities, with funding for the services provided by PDD. [ 4 ] PDD alleges that from 2000 to 2003, Pearl Villa over-billed and was remunerated by PDD for over $3 million in services it did not actually provide.

PDD alleges that Bashir and Nazli Qureshi (collectively, the “Qureshis”), as the directors, officers, shareholders and controlling minds of Pearl Villa, caused Pearl Villa to wrongfully pay out the money to the Qureshis or to a corporation owned and controlled by them, 650425 Alberta Ltd. (“650").

PDD says the money was used to pay down the mortgage on the Qureshis’ personal home, as well as mortgages on properties owned by 650 (jointly, the “Lands”). [ 5 ] PDD brought an action against Pearl Villa, 650 and the Qureshis (the “Defendants”) for breach of contract, false representations, and receipt and retention of overpayments by Pearl Villa.

PDD claimed damages, an order tracing monies paid by PDD to Pearl Villa and subsequently to the other Defendants, and a constructive trust over the Lands. [ 6 ] PDD registered caveats and a certificate of lis pendens against the Lands alleging an interest in the Lands arising by way of constructive trust. Pursuant to agreement between the parties, the Lands were sold with proceeds of the sales to be held in trust as replacement for the Lands.

The issue on this application is whether the Plaintiff has an arguable claim for a constructive trust regarding the Lands, and therefore the proceeds in place of the Lands. [ 7 ] In a separate application PDD sought a pre-judgment attachment order pursuant to the Civil Enforcement Act, R.S.A., c. C- 15, s. 17.

While the order was initially granted ex parte , it was set aside by Veit J. on the ground that the Plaintiff had not established that the Defendants were dealing with their exigible property other than in the ordinary course of business and in a manner likely to seriously hinder the Plaintfiff: Edmonton Region Community Board for Persons with Developmental Disabilities v. Pearl Villa Homes Ltd., 650425 Alberta Ltd., Bashir Qureshi and Nazli Quereshi , 2003 ABQB 1026 . III.

Parties’ Positions [ 8 ] The Defendants’ position is that the fundamental relationship between Pearl Villa and PDD was contractual, and that: 1) PDD cannot succeed in establishing a cause of action that would found a constructive trust, because it cannot prove unjust enrichment or wrongful acquisition of property; or 2) PDD cannot demonstrate entitlement to a constructive trust in relation to the Lands, because a monetary remedy would be adequate and because there is no nexus between the alleged wrongdoing and the acquisition of the Lands. [ 9 ] The Plaintiff’s position is that it may be able to prove a cause of action in unjust enrichment or wrongful conduct that would found a constructive trust, and that it may further be able to establish entitlement to a constructive trust as a remedy pursuant to the principles of tracing.

IV. Law and Analysis 1 . The test for

summary dismissal [ 10 ] The parties are agreed that the test for

summary dismissal is whether it is “plain and obvious that the action cannot succeed”: Boudreault v. Barrett , 1998 ABCA 232 , 219 A.R. 67 at para. 9 . In this case, the Defendants bear the burden of showing that it is plain

and obvious that either, 1) PDD cannot succeed in establishing a cause of action that would found a constructive trust; or 2) PDD cannot demonstrate entitlement to a constructive trust as a remedy. [ 11 ] I would add the clarification that developing or novel areas of law should not be decided in

summary judgment applications, without the benefit of a full exploration of the facts: Romano v. D’Onofrio (2005), 2005 CanLII 43288 (ON CA) , 262 D.L.R. (4 th ) 181 (Ont. C.A.) ; Shell v. Barnsley , 2006 MBCA 133 , 208 Man. R. (2d) 264 ; and Dechant v. Law Society (Alberta) , 2006 ABQB 908 , 70 Alta. L.R. (4 th ) 284 , 406 A.R. 4 . [ 12 ] In Romano , a defamation case, the Ontario Court of Appeal overturned the granting of

summary judgment on the basis that it was not clear if the term “broadcast” included words spoken at a microphone and loudspeaker to a crowd.

The appellate court stated, at paras. 8 and 9: The decision whether words spoken at a public gathering into a microphone constitutes libel or slander under the Act is both novel and significant and involves an analysis not only of the microphone technology and perhaps other technologies for comparison and context, but also the policy behind the distinction between libel and slander under the Act.That type of interpretive analysis should only be done in the context of a full factual record, possibly including appropriate expert evidence: Spasic Estate v.

Imperial Tobacco Ltd. (2000), 2000 CanLII 17170 (ON CA) , 49 O.R. (3d) 699 (Ont. C.A.) . at paras. 22-23, leave to appeal to S.C.C. refused, [2000] S.C.C.A. No. 547. [ 13 ] In Shell v. Barnsley , the Manitoba Court of Appeal in overturning a decision to grant

summary judgment held at para. 14 that the complexity of a legal issue is an important consideration when deciding whether

summary judgment is appropriate. It stated, at para. 17: Therefore, in light of the complexity of the issues before the motions judge in a developing area of the law, I conclude that this case should not have proceeded in a

summary manner. My view is strengthened by the fact that the motion was premised on assumptions concerning the pleadings and the facts. The important legal issues which exist in this case must be founded on pleadings not at issue and on a full factual underpinning. [ 14 ] Romano was applied in the Alberta case of Dechant at paras. 77-83 . At para. 82, the Court stated: I agree with Dechant that the torts in the main action are not yet fully developed, and consequently it is not appropriate to make a final determination on them in a

Summary Judgment application. This is the same approach as was taken by Master Funduk in Del Harder v. Denny Andrews Ford Sales Inc. (1995), 1995 CanLII 9118 (AB KB) , 173 A.R. 23 (Alta. Master) . While considering a motion for

Summary Judgment in a case involving the liability of a manufacturer to an eventual consumer for non-dangerous shoddy products, he noted that the law with respect to the duty owed was 'chaos' ( Del Harder at paras 29-32 ). Accordingly, he declined to make a legal determination as to whether or not such a duty exists in the context of a

Summary Judgment application. This approach has also been endorsed by the Honourable William A. Stevenson and the Honourable Jean E. C ôté in Civil Procedure Encyclopedia (Edmonton: Juriliber, 2003) at 31-31 as authority for the proposition that a Court cannot order

Summary Judgment in a case where the legal issues with respect to liability are unclear. 2. Can the Plaintiff establish a cause of action that would found a constructive trust? [ 15 ] The Supreme Court of Canada has held that a constructive trust may be granted where “good conscience so requires”: Soulos v. Korkontzilas , 1997 CanLII 346 (SCC) , [1997] 2 S.C.R. 217 , at para. 34 . There are at least two main routes to the granting of a constructive trust. One is by establishing unjust enrichment; the other is on proof of wrongful acquisition of property, also referred to as wrongful conduct.

As the Supreme Court stated in Soulos at para. 39 : Canadian courts also recognize the availability of constructive trusts for both wrongful acquisition of property and unjust enrichment. Applying the English law, they have long found constructive trusts as a consequence of wrongful acquisition of property, for example by fraud or breach of fiduciary duty. [ 16 ] The categories of actions founding a constructive trust are not necessarily closed. As stated by the Court stated in Soulos at para. 35 :

Good conscience as a common concept unifying the various instances in which a constructive trust may be found has the disadvantage of being very general. But any concept capable of embracing the diverse circumstances in which a constructive trust may be imposed must, of necessity, be general. Particularity is found in the situations in which judges in the past have found constructive trusts. A judge faced with a claim for a constructive trust will have regard not merely to what might seem “fair” in a general sense, but to other situations where courts have found a constructive trust.

The goal is but a reasoned, incremental development of the law on a case-by-case basis. [ 17 ] The Supreme Court also stressed the need to keep the door open to constructive trusts in International Corona Resources Ltd. v. Lac Minerals Ltd. , 1989 CanLII 34 (SCC) , [1989] 2 S.C.R. 574 , at 579 : There is no unanimous agreement on the circumstances in which a constructive trust will be imposed. Some guidelines can, however, be suggested. First, no special relationship between the parties is necessary.

Insistence on a special relationship would undoubtedly lead to relationships being created in order to justify a remedy. Secondly, the constructive trust is not reserved for situations where a right of property is recognized. That would limit the constructive trust to its institutional function, and deny to it the status of a remedy, its more important role. [ 18 ] PDD’s Amended Statement of Claim summarizes the claims against the Defendants as based on breach of contract, false representations, and receipt and retention of overpayments.

PDD does not argue that its claim for breach of contract could result in the imposition of a constructive trust. It argues that the facts which it has pleaded also support actions in unjust enrichment and fraud, which are causes of action that may result in the imposition of a constructive trust. The sufficiency of PDD’s pleading was not in issue in this proceeding, so I will assume that the pleading does permit PDD to argue causes of action in unjust enrichment and fraud. a. Unjust enrichment [ 19 ] The test of unjust enrichment is laid out in Pettkus v.

Becker , 1980 CanLII 22 (SCC) , [1980] 2 S.C.R. 834 at 848 . In order to show unjust enrichment, PDD must prove 1) Pearl Villa was enriched; 2) PDD suffered a corresponding deprivation; and 3) there was an absence of juristic reason for the enrichment and deprivation. As the Defendants are seeking

summary dismissal, they must show that it is plain and obvious that PDD cannot succeed at establishing this claim. [ 20 ] PDD argues that the Defendants’s receipt and retention of overpayments created an unjust enrichment. The Defendants were enriched by Pearl Villa’s $3 million in over-billing, part of which found its way into the hands of the Qureshis and 650. PDD suffered a corresponding deprivation by having to pay out the approximately $3 million more than was required.

There was no juristic reason - such as contract or disposition of law - to justify the enrichment. [ 21 ] The Defendants argue that the monies gained under the alleged over-billing cannot constitute an enrichment on the ground that, if the monies were gained wrongfully, it was as a result of a breach of contract. The Defendants cite Re BA Energy Inc . , 2009 ABQB 647 , 15 Alta L.R. (5 th ) 86 , which references, at para. 29, the case of Luscar Ltd. v. Pembina Resources Ltd. (1994), 1994 ABCA 356 (CanLII) , 162 A.R. 35 (C.A.) , leave to appeal denied [1995] S.C.C.A. No. 6.

The citation refers to para. 117 of Luscar , which states: Where there exists a contract under which parties are governed, and one party gains by a breach of the same, that party is not truly enriched, because the breaching party takes that gain subject to its liability for breach of contract. [ 22 ] Therefore, the Defendants argue, if Pearl Villa breached its contract, it would bear liability for that breach and cannot be enriched. [ 23 ] In BA Energy , Romaine J. noted that under the Luscar principle, it was “doubtful” whether the Plaintiff could establish that the Defendant was enriched (para. 29).

She went on to find that, even if the criteria of enrichment and deprivation could be satisfied, there would be a juristic reason for the enrichment in that the Plaintiff had failed to take advantage of its contractual right to access the disputed funds when they were available to it. As a result of that failure to assert a claim, it should not be given priority over other unsecured creditors through the use of the constructive trust remedy (paras. 31-32). This creates an important distinction between BA Energy and the case at hand.

[ 24 ] Luscar was an appeal of a trial decision. The Court of Appeal’s statement above followed its finding that the relationship between the parties was confined to a contractual one only. That determination has not been made in this case and cannot be made until trial. Luscar itself supported the Plaintiff’s entitlement to claim concurrent causes of action arising from the same set of facts.

As stated in Luscar at para. 44: By analogy, in a situation where contract and equity are applied to the same set of facts, the mere fact that the parties have dealt with the matter expressly in their contract does not necessarily mean they intended to exclude the right to sue in equity, if such an independent right exists. The parties should not be prohibited from seeking the appropriate remedy for the wrong that occurred. Conceptually, there is no reason an obligation could not give rise to an equitable cause of action as well as a contractual one. [ 25 ] The different standards required at trial and in a

summary dismissal application create an important distinction between Luscar and this case. Luscar does not preclude the necessity for a trial to determine the nature of the relationship between the parties. [ 26 ] In addition, the Plaintiff submits that the principle cited in Luscar – that breaching parties take subject to liability and therefore can never be enriched – runs counter to the subsequent decision of the Supreme Court of Canada in Garland v.

Consumers Gas Co. , 2004 SCC 25 , [2004] 1 S.C.R. 629 , which dealt with a class action for criminally excessive late fees charged under commercial gas supply contracts. [ 27 ] In Garland , the Supreme Court found unjust enrichment and ordered restitution, even though the parties were also governed by contract, and the Plaintiffs could have pursued a remedy in contract. In considering the requirement of enrichment, the Court at para. 32 preferred a “straightforward economic approach” that simply asks the question of whether payment was received.

The Court stated at para. 36: The law on this question is relatively clear. Where money is transferred from plaintiff to defendant, there is an enrichment. [ 28 ] Both Luscar or Garland are, of course, binding on me. The question of which applies is a difficult legal issue that should be determined in the context of all relevant facts as established at trial.

I conclude that it is not plain and obvious that the Plaintiff cannot prove that the Defendants were enriched. [ 29 ] The Defendants raise arguments that PDD did not suffer a deprivation because the contracted for services were delivered, and that Pearl Villa’s right to make a profit under the contract provides a juristic reason for any enrichment. Those arguments depend on findings of fact regarding disputed terms of the contract, and therefore must await trial. [ 30 ] I conclude that it is not plain and obvious that the Plaintiff cannot succeed in establishing unjust enrichment. b.

Wrongful conduct [ 31 ] Although it is not necessary, I will also consider the Plaintiff’s claim that it is entitled to a constructive trust based on wrongful conduct. [ 32 ] The prerequisites for a constructive trust based on wrongful conduct are laid out in Soulos , at para. 45 . The following four conditions “generally should be satisfied”: 1) The defendant must have been under an equitable obligation, that is, an obligation of the type that courts of equity have enforced, in relation to the activities giving rise to the assets in the defendants’ hands;

2) The assets in the defendants’ hands must be shown to have resulted from deemed or actual agency activities of the defendants in breach of his equitable obligation to the plaintiff; 3) The plaintiff must show a legitimate reason for seeking a proprietary remedy, either personal or related to the need to ensure that others like the defendant remain faithful to their duties; and 4) There must be no factors which would render imposition of a constructive trust unjust in all the circumstances of the case; e.g., the interests of intervening creditors must be protected. [ 33 ] The Defendants argue firstly that the allegation of fraud by Pearl Villa does not amount to wrongful conduct as defined in Soulos because the relationship between Pearl Villa and PDD was governed by contract only, not any equitable obligation.

Further, the Lands owned by 650 and the Qureshis did not result from Pearl Villa’s wrongdoing. Finally, it would be unjust to impose a constructive trust on property of 650 and the Qureshis when only Pearl Villa is accused of wrongdoing. [ 34 ] While the Amended Statement of Claim does not plead a pre-existing fiduciary relationship between PDD and any of the Defendants, it does allege that monies and assets acquired by them as a result of the actions complained of are held in trust pursuant to a constructive trust.

This raises the issue of whether an equitable obligation may arise out of the alleged fraud or retained overpayments, rather than from a pre-existing relationship. [ 35 ] In this regard, I note that Soulos does not clearly stipulate that there must be a pre-existing fiduciary relationship to establish entitlement to a constructive trust based on fraud.

In fact, there are indications in Soulos that suggest this may not be necessary: the statement that the four conditions generally should be met (para. 45); the provision of two examples of wrongful conduct: fraud or breach of fiduciary duty (para. 39); and the direction that courts should consider past cases in which courts have found constructive trusts (para. 35). International Corona Resources, at 579, also makes the last point, and comments specifically that “no special relationship between the parties is necessary.” The British Columbia Court of Appeal in Tracy v.

Instaloans Financial Solutions Centres (B.C.) Ltd. , 2010 BCCA 357 , [2010] B.C.J. No. 1439 , at para. 26 noted that commentators have pointed out that “the reference to an ‘equitable obligation’ in Soulos seems to have been intended to encompass more than ‘fiduciary duty’.” P. D. Maddaugh and J. D. McCamus, The Law of Restitution (Canada Law Book: Looseleaf), at para. 5:200.30 assert that equity has long imposed a constructive trust where a fraud has been perpetuated, and that no pre-existing fiduciary relationship need be shown.

I conclude that the nature of any equitable obligation required to found a constructive trust is a developing area of law. It should not be decided in a

summary judgment application, without the benefit of a full exploration of the facts. [ 36 ] The remaining issues raised by the Defendants relate to the relationship or lack thereof between the Qureshis and 650, and the Lands which they owned, and alleged wrongdoing by Pearl Villa. There are two responses to these issues. One is that the Amended Statement of Claim does allege wrongdoing by the Qureshis and that they were the controlling minds of both Pearl Villa and 650. These allegations must be dealt with at trial.

The second is that, even if the Qureshis and 650 did not breach any duty to PDD, there is an issue as to whether property can be traced into their hands and into the Lands that they owned. I will address this issue in more detail below when considering whether PDD may be able to demonstrate entitlement to a constructive trust as a remedy. [ 37 ] I conclude that it is not plain and obvious that the Plaintiff cannot succeed in establishing entitlement to constructive trust based on the Defendants’ wrongful conduct. 2. Can the Plaintiff demonstrate entitlement to a constructive trust as a remedy? a.

Requirements for remedy of constructive trust [ 38 ] The Defendants argue that, even if the Plaintiff succeeds in establishing entitlement to a cause of action that may found a constructive trust, the default remedy is a monetary award, not a constructive trust: Peter v. Beblow , 1993 CanLII 126 (SCC) , [1993] 1 S.C.R. 980 at 997 . For a constructive trust to arise, the Plaintiff must show 1) that a monetary award is inadequate; and 2) that there is a link between the Plaintiff’s contribution and the property in which the constructive trust is claimed: Peter v. Beblow at 997.

[ 39 ] In determining whether a monetary award is inadequate, the Court may consider whether the Defendants have the funds to pay a money judgment, as well as any difficulty the Plaintiffs may have in enforcing the judgment: Peter v. Beblow at 999; Mustard v. Brache , 2006 ABCA 265 , 397 A.R. 361 at para. 19 . It is not plain and obvious that PDD cannot succeed with regard to this requirement.

Evidence obtained during the course of the litigation shows that, since Veit J.’s 2003 decision, Pearl Villa has disposed of essentially all of its assets. [ 40 ] There is an issue regarding the requirement of a nexus or link between the action and the Lands. None of the Lands belonged to Pearl Villa, the party with which PDD had a contractual relationship. Apparently the 650 properties were rented to Pearl Villa as group homes. It is not clear that this would provide a nexus between the alleged wrongdoing, which arose in relation to the provision of services, and the Lands.

In any event, there is no allegation relating to the use of the 650 properties in the Amended Statement of Claim and the Plaintiff does not rely on this as providing a nexus to the Lands. The Plaintiff’s position is that the required nexus or link to the Lands and its entitlement to a constructive trust arise through the equitable remedy of tracing. c.

Remedy of tracing [ 41 ] The Amended Statement of Claim seeks the remedy of tracing with respect to monies paid by PDD to Pearl Villa and subsequently paid to the other Defendants, and further seeks the remedy of constructive trust over such monies or assets acquired with them. [ 42 ] The remedy of tracing at common law or in equity allows claimants to track property into other hands or other assets. In Citadel General Assurance Co. v.

Lloyds Bank Canada , 1997 CanLII 334 (SCC) , [1997] 3 S.C.R. 805 , at para. 57 , the Supreme Court of Canada adopted the following principles of tracing set out by the English Court of Appeal in Agip (Africa) Ltd. v. Jackson , [1990] 1 Ch. 265 , aff’d [1992] 4 All E.R. 451 , at pp. 466 : Both common law and equity accepted the right of the true owner to trace his property into the hands of others while it was in an identifiable form. The common law treated property as identified if it had not been mixed with other property.

Equity, on the other hand, will follow money into a mixed fund and charge the fund. [ 43 ] There is evidence before the Court that the funds obtained by Pearl Villa were transferred to the Qureshis and 650, and used by them to pay down mortgages on the Lands. Mr. Hart Chappelle, Chief Executive Officer of PDD, deposed that Bashir Qureshi acknowledged to him that about $400,000 received by Pearl Villa from PDD was used for purposes other than the provision of services, and that money from PDD was used to pay down mortgages on 650 properties.

Nazli Qureshi has deposed that a $341,625 mortgage on the Home was satisfied in part by a $100,000 shareholders loan from Pearl Villa and $90,000 in income received by Nazli and Bashir from Pearl Villa and 650. The Plaintiff seeks to trace funds from Pearl Villa to the Qureshis and 650 and from there to the Lands. The requested orders would require equitable tracing and lead to a constructive trust, an equitable property right in the Lands. [ 44 ] The Supreme Court in Citadel General Assurance observed that there are similarities and differences between restitutionary principles and the rules of tracing.

While accepting that a common thread may run through the cases, the Court added that the distinction between these areas of the law should be maintained (at para. 59): [I]t is neither necessary nor desirable to confuse the traditional rules of tracing with the restitutionary principles . . . This does not mean, however, that a restitutionary remedy and a tracing order are mutually exclusive. Where more than one remedy is available on the facts, the plaintiff should be able to choose the one that is most advantageous. In this case the plaintiff did not seek a tracing order.

It is therefore unnecessary for me to decide whether such a remedy would have been available . . . [ 45 ] In Tracy v. Instaloans , the plaintiff did seek a tracing order and a constructive trust, and the British Columbia Court of Appeal reviewed the applicable legal tests.

On the question of what form of proprietary link is required to establish a constructive trust, the Court held that the required link would be shown if the Plaintiffs established a “proprietary entitlement” to funds in the hands of persons who collected unlawful charges, and if they were able to trace those funds into other hands, subject to the limitations of the tracing process (paras. 33, 41).

[ 46 ] In this case, the Plaintiff may be able to establish a “proprietary entitlement” to the funds in Pearl Villa’s hands. This follows from the conclusion that I have already reached that there is an arguable claim that Pearl Villa was unjustly enriched by receipt of those funds or that the funds were acquired through wrongful conduct. The funds themselves, in Pearl Villa’s hands, would certainly be closely linked to the alleged wrongdoing.

Once that initial proprietary entitlement is shown, the issue would then become whether the property can be traced into other hands and other property. [ 47 ] These cases suggest two possible approaches that may determine the availability of a constructive trust as a remedy. Citadel General Assurance suggests that the restitutionary principles that determine the availability of a constructive trust may not apply in a tracing case, in which case it may not be necessary for the Plaintiff to demonstrate a link between the Plaintiff’s contribution and the lands. Alternatively, Tracy v.

Instaloans indicates that the required link is demonstrated by establishing a proprietary entitlement to property in its original form in the hands of a wrongdoer, and then tracing that property into other hands or forms. Again, this is a developing area of law that should not be determined in a

summary judgment application, without the benefit of a full exploration of the facts. [ 48 ] I find that the Defendants have not shown that PDD cannot succeed in establishing an entitlement to a constructive trust in the Lands through the law of tracing. The issues must be dealt with at trial. VI. Conclusion [ 49 ] The Defendants have failed to establish it is plain and obvious that the Plaintiff cannot succeed in its claim for a constructive trust in the Lands. The

summary dismissal application is dismissed. The parties may speak to me regarding costs if they are unable to agree. Heard on the 27 th day of August, 2010. Dated at the City of Edmonton, Alberta this 8 th day of December, 2010. J.M. Ross J.C.Q.B.A. Appearances: Mr. Gordon McKenzie, Q.C. Bishop McKenzie LLP for the Plaintiff Mr. Dennis L. Picco Fraser Milner Casgrain LLP for the Defendants