Tolosa Development Corp. v. Calgary 1 Grand Riviera, 2012 ABQB 519

Court of Queen ’ s Bench of Alberta Citation: Tolosa Development Corp. v. Calgary 1 Grand Riviera, 2012 ABQB 519 Date: 20120828 Docket: 0801 03393; 0801 13202 Registry: Calgary Between: Docket No: 0801 03393 Tolosa Development Corp. Plaintiff /Respondent - and - Calgary 1 Grand Riviera, ULC, Calgary 1 Grand Riviera, LP, MI Wuk Holdings I, ULC , Nixious Investments Inc. , Tolosa Development Corp., Ulysses Development Corp., Richard Gariepy, Gariepy & Lloyd , Suede Living Inc., Alex Karmis, 11138246 Alberta Ltd., 1155733 Alberta Ltd. Dylan Elash, Manu Chugh Architect Ltd. Eagle Hill Developments Ltd.

Defendants/Applicants - and - Con-Forte Contracting Limited Partnership Intervenor And Between: Docket: 0801 13202 Laurentian Bank of Canada

Plaintiff v. Susan Thompson, Mark Davis, MI Wuk Holdings I, ULC Defendants _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice D.R.G. Thomas _______________________________________________________ I. Introduction................................................................................................................ Page: 2 II. Background to the Mortgage Dispute.......................................................................... Page: 3 III.

Issues.......................................................................................................................... Page: 8 IV. Analysis...................................................................................................................... Page: 9 A. Are the Tolosa Mortgages valid?..................................................................... Page: 9 B. Were funds advanced by Tolosa, as mortgagee, to Grand Riviera and/or MI Wuk, as mortgagors, under the Tolosa Mortgages?.................................................................................. Page: 10 C.

What is the priority as between the Tolosa Mortgages and the various claimants which have registered builders liens against the Calgary I Lands?................................................... Page: 18 V.

Summary of Relief Granted....................................................................................... Page: 20 VI. Costs......................................................................................................................... Page: 20 I. Introduction [ 1 ] This decision deals with an application raising issues about the validity of two mortgages, whether advances were made by the mortgagee to the mortgagors and in respect to the priority as between the mortgagee and a number of lien claimants.

Issues in relation to the validity and enforcement of a number of builders liens claiming monies in Court in Action No. 0801 13202 will be dealt with in a separate decision. II. Background to the Mortgage Dispute

[ 2 ] The Applicants/Defendants, Calgary I Grand Riviera, ULC ( “ Grand Riviera ” ) and MI Wuk Holdings I, ULC ( “ MI Wuk ” ) had owned a parcel described as Plan 0611216, Block H, Lot 41 (the “ Calgary I Lands ” ) purchased by Grand Riviera as the site for a phased residential and commercial project (the “ Project ” ). [ 3 ] Investors described as the GEMBA Group ( “ GEMBA Group ” ), had entered into an arrangement with a developer known as Alex Karmis and his various companies (the “ Karmis Group ” ) for the construction of the Project on the Calgary I Lands. [ 4 ] At the early stages of the development of the Project, the GEMBA Group purchased the Calgary I Lands from the Karmis Group.

Grand Riviera and subsequently MI Wuk were incorporated for the sole purpose of holding legal and beneficial title to the Calgary I Lands. [ 5 ] The Plaintiff/Respondent Tolosa Development Corp. ( “ Tolosa ” ) is a corporation owned and controlled by Richard Gariepy ( “ Gariepy ” ), a solicitor who had done work for the Karmis Group. Gariepy was at all material times the sole shareholder, director and officer of Tolosa.

Gariepy had incorporated Tolosa prior to any dealings between the Karmis Group and the GEMBA Group in respect to the Calgary I Lands. [ 6 ] In what appears to be part of the overall scheme for the development of the Project, Grand Riviera granted two mortgages to Tolosa., including: (

a) A mortgage for 4.5 million dollars, registered against the Calgary I Lands on July 9, 2007, as Instrument No. 071 341 337 (the “ Big Mortgage ” ); and (

b) A mortgage for $335,000.00, registered against the Calgary I Lands on October 10, 2007 as Instrument No. 071 501 881 (the “ Little Mortgage ” ), the Big and Little Mortgages being collectively described in this decision as the “ Tolosa Mortgages ” . [ 7 ] Subsequent to the granting of the Tolosa Mortgages, the Karmis Group failed to arrange construction financing for the Project, or to pay various contractors which had started work on the Calgary I Lands with the result that: (

a) many builders liens and caveats were registered against title to the Calgary I Lands; (

b) the Laurentian Bank of Canada ( “ Laurentian ” ), as mortgagee, commenced foreclosure proceedings in Action No. 0801 13202 against the Calgary I Lands and this Court approved a sale of the Calgary I Lands; and (

c) the balance of the proceeds of the sale of the Calgary I Lands in the amount of $597,057.55 were ordered paid into Court on Action No.0801 13202. The matter before me deals with the disputed claim by Tolosa to these funds. [ 8 ] In respect to what I call the mortgage dispute, the Applicants (Grand Riviera and MI Wuk) seek a declaration that the Tolosa Mortgages are invalid and a direction that the funds in Court in Action No. 0801 13202 be paid to MI Wuk. [ 9 ] In its brief, counsel for Tolosa characterizes the application made by the Applicants/Defendants as being one to reduce the amount secured under the Tolosa Mortgages presumably to zero dollars.

[ 10 ] Con-Forte Contracting Limited Partnership, by its General Partner, Con-Forte Contracting Group Inc. (the “ Intervenor ” ) represented by Mr. Hickerson intervenes in the application of Grand Riviera/MI Wuk. The Intervenor characterizes the dispute in very broad terms as being which of the many parties before the Court should receive the funds paid into Court and more specifically, whether the Tolosa Mortgages rank in priority to the lien holders. [ 11 ] In

summary, the issues raised on this application are the validity of the Tolosa Mortgages and whether any advances were ever made by Tolosa under the Tolosa Mortgages to Grand Riviera and MI Wuk, as mortgagees. [ 12 ] I will deal with the lien claims in relation to the funds in Court once the dispute about the Tolosa Mortgages has been resolved. III. Issues [ 13 ] As between Tolosa and Grand Riviera/MI Wuk, the following issues arise for determination: (

a) Are the Tolosa Mortgages valid? (

b) Were funds advanced by Tolosa, as mortgagee, to Grand Riviera and/or MI Wuk, as mortgagors, under the Tolosa Mortgages? and (

c) What is the priority as between the Tolosa Mortgages and the various claimants which have registered builders liens against the Calgary I Lands? IV. Analysis A. Are the Tolosa Mortgages valid? [ 14 ] For the purposes of this decision, I assume that the Tolosa Mortgages were validly granted and registered against title to the Calgary I Lands. They are complete on their face and are registered against title to the Calgary I Lands.

While it is not clear why they were prepared, signed and registered the Tolosa Mortgages seem to have been part of some incomplete financing arrangement related to the overall development of the Project. It is not necessary to decide whether they are technically valid in a legal sense, rather the main question before me for decision is whether any funds of Tolosa were advanced by it to Grand Riviera and/or MI Wuk under the Tolosa Mortgages. It must be established to my satisfaction on the evidence on this application that the source of the funds now claimed by Tolosa came from and were owned by Tolosa.

I now proceed to deal with that core issue. B. Were funds advanced by Tolosa, as mortgagee, to Grand Riviera and/or MI Wuk, as mortgagors, under the Tolosa Mortgages? [ 15 ] Whether any funds of Tolosa were advanced to Grand Riviera and/or MI Wuk under the Tolosa Mortgages is a question of fact. [ 16 ] The dispute comes before the Court through an application made by Grand Riviera and MI Wuk and those parties must prove

to my satisfaction that no funds owned by Tolosa were advanced by Tolosa to these companies. I raise the question of the burden of proof because in the Action commenced by Tolosa as Plaintiff the onus of proof would in the normal course lie on Tolosa to show that it had advanced its own funds. Here the Applicants and the Intervenor have brought forward a considerable amount of evidence which shows that Tolosa did not advance any of its own monies to the mortgagors.

That material has shifted the evidentiary burden back to Tolosa to put forward some clear and cogent evidence that the funds which it claims it advanced were funds belonging to Tolosa in a legal or equitable sense. [ 17 ] In terms of direct evidence on this issue the Applicants, through the affidavit of Glen Yonekura (the “ Yonekura Affidavit ” ) sworn on September 6, 2011, assert that no funds were ever advanced by Tolosa to Grand Riviera or MI Wuk (para. 22 of the Yonekura Affidavit). [ 18 ] This evidence from the Applicants was not challenged directly by Tolosa through counter affidavits .

Therefore, this is some evidence on the part of the Applicants that no funds were ever advanced by Tolosa to the mortgagors. [ 19 ] Tolosa takes the position that funds were advanced on its behalf out of Gariepy ’ s trust accounts held for the Karmis Group.

The sources of funds flowing into the Gariepy trust accounts and those of other lawyers involved are said to include the proceeds of the purchase of the Calgary I Lands by Grand Riviera, the proceeds of sale of other lands controlled by companies controlled or forming part of the Karmis Group, subscriptions paid by individual investors purchasing shares in the company which had previously owned the Calgary 1 Lands prior to it being sold to Grand Riviera and individual “ shareholders ” and other Karmis Group entities whose funds had ended up in the operating accounts of the Karmis Group.

It is unclear as to who the legal or beneficial owners of the funds flowing from these sources were. The evidence and arguments on this point put forward by Tolosa about these sources are, at best, confusing. I observe that the sources identified appear to me to be an after-the-fact construct bordering on a contrivance. There is a distinct lack of clear and cogent evidence from Tolosa identifying the funds as belonging to it. In addition, the multiple roles played by Gariepy also detract from the value of any evidence put forward through him upon behalf of Tolosa.

In the result, I give the evidence provided on behalf of Tolosa as to the source of funds very little weight. [ 20 ] On the other hand, the Applicants and the Intervenor point to the clear admissions arising from the cross-examinations of Gariepy on two affidavits. While no longer registered as a barrister and solicitor Gariepy was, in 2007, a lawyer acting for the Karmis Group. In this litigation he has sworn a number of affidavits, the first one being made on February 10, 2010. He was cross-examined on that Affidavit on April 7, 2010.

That cross-examination resulted in some very clear, and an initial unsolicited admission on behalf of Tolosa, particularly on page 11 of that transcript, lines 4 to 14: 4. Q And so Tolosa advanced the money to pay out certain mortgages which could not be assumed as part of the purchase and placed the mortgage on -- in place instead of those mortgages; correct? A Tolosa didn ’ t advance money. Tolosa took the mortgages. Had the mortgages pledged to Tolosa. Money was advanced by – not by Tolosa, however. Q Okay. A It was not Tolosa ’ s money that was advanced. Q It was – was it Mr. Karmis ’ s money?

A It was. [ 21 ] And also on page 20 of that transcript, lines 18 - 22: 18. Q MR. LENZ: So I think I heard you say that all of the money with respect to this mortgage – the Tolosa mortgage came from was Mr. Karmis ’ s money; correct? A Yes.

[ 22 ] Mr. Gariepy also made a further affidavit on July 2, 2011. He was cross-examined on that Affidavit on July 22 and in the transcript of that examination he gave the following answers (evidence) at page 13, line 15: 15 Q Okay. Now, sir, I think we have established that Tolosa itself did not advance any of its own money with respect to either of the mortgages that are discussed in your affidavit; is that correct? A That ’ s true. Yes. Q All of the money that Tolosa advanced was money that was advanced through your solicitor ’ s trust account, correct?

A That ’ s true. [ 23 ] Some of the answers from Gariepy which I have set out above were virtually unsolicited. The lawyer Gariepy was not only the solicitor to the Karmis Group, but also the sole shareholder, director and officer of Tolosa. His admissions are binding on Tolosa as the Respondent in this application. His statements under oath are clear and cogent admissions that Tolosa did not advance any of its own funds to either Grand Riviera and/or MI Wuk.

I give these admissions by Gariepy which he uttered on two different occasions great weight, particularly because of the unsolicited and spontaneous nature of the first set of admissions. [ 24 ] I observe further that there is an absence of the sort of evidence which one would normally expect to see on a commercial transaction of this magnitude, for example, cancelled cheques representing mortgage advances by Tolosa to the Applicants, copies of accounting records from Tolosa showing advances of its funds, copies of trust ledgers from Gariepy showing movement of funds from Tolosa to the Applicants, evidence of electronic transfers of funds by Tolosa or its banking institution of such funds, etc.

There is simply no such evidence presented to this Court by Tolosa on this Application. [ 25 ] Based on the admissions by Gariepy made on behalf of Tolosa and the absence of the type of evidence which I have just noted, I find as a fact that Tolosa did not advance any of its own monies or even monies to which it may have had some equitable claim under the Tolosa Mortgages to Grand Riviera and/or MI Wuk. I conclude that Grand Riviera and/or MI Wuk have proven to my satisfaction that no funds were advanced by Tolosa to either of these companies under the Tolosa Mortgages. C.

What is the priority as between the Tolosa Mortgages and the various claimants which have registered builders liens against the Calgary I Lands? [ 26 ] Tolosa takes the position that under sections 104 and 14(3) of the Alberta Land Titles Act that Tolosa has priority to the funds in Court. It argues that the Tolosa Mortgages were registered prior to the registration of any of the builders liens which are to be dealt with in another decision. Tolosa claims all amounts were properly secured.

It takes the position that the amounts owing to it under the Tolosa Mortgages exceed the amount of funds now in Court, that the funds in Court are properly charged with the Tolosa Mortgages and should be paid out to it. However, having concluded that no funds were ever advanced by Tolosa, it follows that Tolosa has no claim to the funds now residing in Court. As a result, Tolosa cannot defeat the holders of validly registered builders liens.

I declare that Tolosa did not advance any funds under the Tolosa Mortgages and Tolosa has no entitlement to any of the funds currently held in Court in Action No. 0801 13202. [ 27 ] Grand Riviera/MI Wuk have also sought a declaration that Ulysses Development Corp. has no right or entitlement to the funds held in Court in these Actions.

No opposition is raised to this claim and accordingly that request by the Applicants is granted. [ 28 ] All other requests by Grand Riviera/MI Wuk in respect to lien claims, caveats and payment out of funds in Court to MI Wuk are dealt with in a separate decision which will be issued shortly. V.

Summary of Relief Granted

[ 29 ] It is declared that: (

a) Tolosa did not advance any funds pursuant to the Tolosa Mortgages and Tolosa has no entitlement to any of the funds currently held in Court; (

b) Ulysses Development Corp. has no right or entitlement to the funds currently held in Court; and (

c) The funds held in Court in Action No. 0801 13202 shall continue to be held pending a determination in respect to the various builders lien claims which are found to be valid. VI. Costs [ 30 ] The Applicant and the Intervenor are each entitled to a separate set of costs against Tolosa. Heard on the 22 nd day of February, 2012. Dated at the City of Edmonton, Alberta this 17 th day of August, 2012. D.R.G. Thomas J.C.Q.B.A. Appearances: Ms. Kelsey J. Drozdowski (Bennett Jones LLP) for the Defendants/Applicants - Calgary I Grand Riviera, ULC and MI Wuk Holdings I, ULC Mr. Norman D. Anderson (Shea Nerland Calnan LLP) for the Plaintiff/Respondent - Tolosa Development Corp. Mr. Glen Hickerson

(Wilson Laycraft) for the Intervenor - Con-Forte Contracting Group Inc.