Kindrachuk v. Belseck, 2012 ABQB 515

Court of Queen ’ s Bench of Alberta Citation: Kindrachuk v. Belseck, 2012 ABQB 515 Date: 20120814 Docket: 0901 14719 Registry: Calgary Between: James M. Kindrachuk Plaintiff - and - Faron Belseck, William Cazabon, Michael J. Bondar, 1351911 Alberta Ltd., Tuncer Bacheli, Eli Otakie and Royal Bank of Canada Defendants _______________________________________________________ Reasons for Judgment of J.T. Prowse, Q.C. Master in Chambers _______________________________________________________ [ 1 ] The plaintiff in this action, James A. Kindrachuk, is referred to as a ‘straw buyer’.

He obtained mortgage financing from the Royal Bank of Canada (“RBC”) and used the mortgage funds to purchase a house that he had no intention of occupying or, in the long run, owning. [ 2 ] Mr. Kindrachuk says, in so many words, that he was tricked into becoming a straw buyer by a number of parties, including Bill Cazabon, who was a ‘mortgage specialist’ for RBC. Mr. Kindrachuk has brought forward some evidence that Mr. Cazabon was

involved in the fraud. [ 3 ] Mr. Kindrachuk sued various parties, including Mr. Cazabon and RBC, seeking damages for deceit and negligence, and a declaration that RBC is not entitled to pursue Mr. Kindrachuk for non-payment of the RBC mortgage if the mortgage falls into default (it is not presently in default). [ 4 ] RBC issued a counterclaim against Mr. Kindrachuk, seeking a declaration that its claim against Mr. Kindrachuk arose out of fraud, fraudulent misrepresentations and false pretenses such that any judgment it may obtain against Mr. Kindrachuk (if the RBC mortgage falls into default) would survive if Mr.

Kindrachuk became bankrupt and subsequently obtained a discharge from bankruptcy. [ 5 ] RBC seeks

summary dismissal of the claim against it on the basis that Mr. Kindrachuk was a participant in a fraudulent transaction, and is barred from suing RBC pursuant to the doctrine of ex turpi causa non oritur actio (out of fraud, no action arises) [ 6 ] There is an exception to the ex turpi causa doctrine, which is known as in pari delicto . That exception has been expressed as follows: “if the parties to an illegal contract are not in pari delicto , the court in certain circumstances will allow the less blameworthy to recover what he may have transferred to the other.

This relief is granted to the plaintiff upon proof that he has been the victim of fraud, duress or oppression at the hands of the defendant, or that the latter stood in a fiduciary position towards him and abused it” - Cheshire and Fifoot ’s Law of Contract (8 th ed) pp.342-3. [ 7 ] My conclusion is that Mr. Kindrachuk’s action against RBC should go to trial and not be summarily dismissed, for the reasons which follow.

Actions involving complicated and subtle issues of law should be determined at trial, and not summarily [ 8 ] As I stated in Genstar Development Co. v Plains Midstream Canada ULC , 2012 ABQB 457 , 2012 CarswellAlta 1271 at paragraph 19 : In

summary judgment applications courts have declined to provide

summary relief where there are difficult or intricate legal issues: see 732311 Alberta Ltd. v. Paradise Bay Spa & Tub Warehouse Inc. , 2003 ABQB 228 , 2003 CarswellAlta 392, [2003] 8 W.W.R. 80, 15 Alta.L.R. (4 th ) 42, 332 A.R. 315 at para 56 . Likewise, in the context of

summary judgment, it has been stated that

summary disposition should be declined where a legal issue is so unsettled or complex and nuanced that it should not be decided on a paper record: see Papaschase Indian Band No. 136 v. Canada (Attorney General) , 2004 ABQB 655 , 2004 CarswellAlta 1170, 43 Alta.L.R. (4 th ) 41, [2005] 8 W.W.R. 442, 365 A.R. 1 at para 53 . [ 9 ] In my view, the application of the ex turpi causa and in pari delicto doctrines to straw buyer situations, where there is evidence that an employee or agent of the lender was involved in the fraud, is a complicated and nuanced matter.

Absent trial-based precedents, the applicability of these doctrines to straw buyer situations should not be decided summarily. [ 10 ] Needless to say, a straw buyer should not be able to hold off a foreclosure or deficiency claim merely by asserting that employees of the lender were involved in the mortgage fraud. The buyer needs to bring forward some evidence to support this assertion, as Mr. Kindrachuk has done in this case. Case law regarding

summary determinations based on ex turpi causa [ 11 ] My view that

summary judgment is not appropriate in a situation such as this rests on a number of prior decisions which I will now review.

[12] The nature of the doctrine of ex turpi causa in Canada is established by three Supreme Court of Canada decisions, all of whichwere made following trial. See: Letkeman v. Zimmerman, (SCC), [1978] 1 S.C.R.1097, 79 D.L.R. (3d) 508, 17 N.R.564, [1977] 6 W.W.R. 741, 1977 CarswellSask 113; Canada Cement LaFarge Ltd. v. British Columbia Lightweight Aggregate Ltd., (SCC), [1983] 1 S.C.R. 452, 145 D.L.R. (3d) 385, 47 N.R. 191, [1983] 6 W.W.R. 385, 1983 CarswellBC 812; and Hall v.

Hebert, (SCC), [1993] 2 S.C.R. 159, 101 D.L.R. (4th) 129, 152 N.R. 321, [1993] 4 W.W.R. 113, 1993 CarswellBC92. [13] The Alberta Court of Appeal dealt with a case where a chambers judge summarily dismissed an action based on ex turpi causa in Zickerfoose v Barotto Sports Ltd.,1992 ABCA 359 , 7 Alta.L.R.(3d) 359, 12 C.P.C. (3d) 128, 99 D.L.R. (4th) 57, 131 A.R. 292,1992 CarswellAlta 215. The Court of Appeal held that it was inappropriate to dispose of the case based on admissions which supportedthe ex turpi defence.

It stated: No case was cited to us in which a court summarily dismissed a suit under the ex turpi doctrine. It is possible that the relevant questionhere is whether brief, almost momentary, possession by a 14-year-old of a forbidden item mandates dismissal of any suit he brings inrespect of the incident, on the ex turpi causa doctrine. We do not like to decide that question finally, because the facts are likely to shift,and because the facts found at trial may well make this precise question academic in this lawsuit.

It is enough for this motion and this appeal to say that we have some significant doubts about any rule so rigid as to mandate dismissal ofsuch a suit. [14] Counsel for RBC referred me to the Supreme Court of British Columbia decision in Royal Bank v. Parmar, 2005 BCSC 1155, 36 R.P.R. (4th) 300, 2005 CarswellBC 1898. In my view, that case supports the position taken by Mr. Kindrachuk.

While the court inParmar prevented the borrower from using equitable set-off to shelter the borrower from repaying the loan, the decision contemplatedthe borrower taking a separate action against the lender due to the involvement of the lender’s employee in the mortgage fraud. That isthe very kind of lawsuit which Mr. Kindrachuk is asserting in this case, and which RBC is seeking to summarily dismiss. [15] In MCAP Service Corp. v. Molina-Tan, 2009 ABQB 472, 503 A.R. 1, 2009 CarswellAlta 2333, there was no evidence tosubstantiate the borrowers’ allegation that the lender was a participant in the fraudulent scheme.

A comment was made in the decisionthat ex turpi causa prevented the borrowers from defending against the lender’s claim, but the learned Master clarified that comment inher later decision of First National v. Kulaga, 2012 ABQB 8, 2012 CarswellAlta 27 at para. 23, as follows: As noted in MCAP and Molina-Tan ... ‘participants in a scheme of this kind cannot then ask the court that it refuse to enforce thecontract that they signed on the basis of its illegality ...’ They do not have the requisite clean hands to do so. However, this legal principle cuts both ways.

If the lender was involved in some way in the fraud, it too may have difficulty enforcingthe contract due to its legality. [16]

Summary determination was made against the straw buyer in The Toronto-Dominion Bank v. Khosla, 2010 ABQB 652, 2010CarswellAlta 2138 where there was no evidence that employees of the lender were involved in the fraud. The court observed, however,that “when the pleadings and facts indicate a possible involvement in the fraud of a bank employee or agent, or a misrepresentation bythem,

summary judgment may be denied” (para. 19). [17] In Dhillon v Sefcik (unreported Alta.Q.B. Action # 0901-09483, Dec. 03, 2010) ex turpi causa was summarily applied againstthe straw buyer. There was, however, no evidence that the lawyer who acted for the borrower and lender had any knowledge of fraud. [18] The opposite result occurred, and the matter was remitted to trial, in First National v. Kulaga, 2012 ABQB 8, 2012 CarswellAlta27, where there was evidence that the lawyer (who acted for the borrower and the lender) had knowledge that something was amiss.

[ 19 ] In Royal Bank v. Levy , 2011 ABQB 700 , 89 C.C.L.T. (3d) 289, 2011 CarswellAlta 2022, it was the straw buyer who tried to have the lender’s claim dismissed based on ex turpi causa due to alleged involvement of the lender’s employee in the fraud.

Summary judgment was refused and the court observed: Deterrence of RBC’s alleged negligence in supervising or overseeing the activities of its employee, if proved can be addressed not only by the defence of contributory negligence but also by the principles of vicarious liability and imputed knowledge, and by consideration of whether RBC breached its statutory obligations to oversee the activities of its employees under the Bank Act, and, if so, how that may affect RBC’s right to a remedy.

All these are issues for trial ... [ 20 ] Triable issues were likewise found, given some evidence of fraud or misrepresentation by agents or employees of the lender in CBC v. Lucas , 2012 ABQB 402 , 2012 CarswellAlta 1095, and Scotia v Aab , 2012 ABQB 464 , 2012 CarswellAlta 1278. [ 21 ] Another recent decision which, in my view, supports the advisability of a trial in a case involving ex turpi causa is Bartlett v. Bartlett , 2012 ABQB 122 , 2012 CarswellAlta 437.

While that action involved a matrimonial property claim, rather than mortgage fraud, the court reviewed the scope of ex turpi causa and concluded “it is clear from the cases that the application of the doctrine is a discretionary exercise by the Court”. [ 22 ] In my view, the Court requires the type of detailed fact finding available at trial in order to correctly exercise its discretion. Conclusion [ 23 ] Given the evidence that an RBC employee may have been involved in the mortgage fraud in question, the decision as to how the doctrines of ex turpi causa and in pari delicto should affect Mr.

Kindrachuk’s claim against RBC should be left to trial, where the decision can reflect the fullness and subtleties of the evidence. Accordingly I refuse to order

summary dismissal of Mr. Kindrachuk’s action against RBC. Costs [ 24 ] If counsel cannot agree as to costs then representations as to costs may be made at the convenience of counsel. Heard on the 26 th day of June, 2012. Dated at the City of Calgary, Alberta this 14 th day of August, 2012. J.T. Prowse, Q.C. M.C.C.Q.B.A. Appearances:

Ellery C. Lew Witten LLP for the Defendant, Royal Bank of Canada George C. Stewart Stewart and Stewart for the Plaintiff