Gemba LLC v Nixious Investments Inc, 2015 ABQB 812

Court of Queen ’ s Bench of Alberta Citation: Gemba LLC v Nixious Investments Inc, 2015 ABQB 812 Date: 20151223 Docket: 0801 02426, 1001 03254, 0801 03393 Registry: Calgary Between: Docket: 0801 02426 Gemba LLC, Gemba Fund Two LLC, Duke Capital Partners LLC, Glen Yonekura, Calgary I Grand Riviera ULC, Mi Wuk Holdings I ULC, Calgary II Grand Park ULC, Anthony Plaza II ULC, Calgary III Grand Haras ULC, Kibbee Enterprises III, ULC, Calgary IV Grand Royal ULC, Yosemite District Holdings IV ULC, Calgary V Grand Darlington ULC and Motherlode Aero V ULC Plaintiffs - and - Nixious Investments Inc, Tolosa Development Corp, Ulysses Development Corp, Richard Gariepy, Gariepy & Lloyd LLP, Suede Living Inc, Alex Karmis, 11138246 Alberta Ltd, 1155733 Alberta Ltd, 1176168 Alberta Ltd, 1145497 Alberta Ltd, Manu Chugh Architect Limited and Eagle Hill Developments Ltd.

Defendants And Between: Docket: 1001 03254 Tolosa Development Corp Plaintiff - and – Calgary 1 Grand Riviera ULC, Calgary 1 Grand Riviera LP and Mi Wuk Holdings I ULC

Defendants _______________________________________________________ Memorandum of Decision of the Honourable Madam Justice C.S. Anderson _______________________________________________________ Introduction [ 1 ] This is an application by the Plaintiffs (collectively referred to as “GEMBA”) for an attachment order in relation to funds payable to Tolosa Development Corp. (“Tolosa”) pursuant to a settlement agreement. Tolosa is a company owned and controlled by a lawyer, Richard Gariepy. Mr.

Gariepy was counsel for a developer in Calgary, Alex Karmis and his related companies (collectively referred to as “Karmis”) with whom the Plaintiffs invested approximately $15 Million. Background [ 2 ] This matter was initially before me as a two day trial of an issue to determine the validity of a mortgage asserted by Tolosa over what is known in these proceedings as Calgary I Lands (“Tolosa Mortgage”). GEMBA challenges the validity of the Tolosa Mortgage. [ 3 ] Calgary I Lands were subject to foreclosure proceedings, commenced by a prior mortgagee.

After that mortgagee was paid out, $597,057.55 remained from the sale, which was held in trust. The Tolosa Mortgage was next in line. [ 4 ] A number of lienholders had also commenced an action (#0801-01987) regarding the Calgary I Lands (the “Lienholders”). The Tolosa Mortgage, then in the position of a first mortgage, had priority over the Lienholders. [ 5 ] On August 17, 2012, Justice Thomas found, on affidavit material, that the Tolosa Mortgage was invalid.

That decision was successfully appealed (in December 2013) and ordered to trial. [ 6 ] At the outset of the trial of an issue and without informing or consulting with counsel for GEMBA, Tolosa and the Lienholders advised the Court that they had entered into a settlement agreement (Final Settlement Agreement”) in relation to the funds being held in trust. [ 7 ] In response, GEMBA brought an application for an attachment order attaching any funds payable to or on behalf of Tolosa from the settlement agreement. GEMBA relies upon

section 17 of the Civil Enforcement Act, RSA 2000, c C-15, which allows a claimant to apply to this Court for an attachment order in certain circumstances . [ 8 ] It is important to note that this Court did not make any substantive findings with respect to the validity of the Tolosa Mortgage. Previous Attachment Order [ 9 ] The Lienholders and Tolosa had earlier reached a settlement agreement (“Initial Settlement Agreement”). However, the Initial Settlement Agreement was merely tentative because it would only proceed if GEMBA’s application for an attachment order (over any proceeds payable to Tolosa) was denied.

The application was heard and granted in February 2014 by Hall J: 2014 ABQB 197 . As a result of Justice Hall’s decision, the Initial Settlement Agreement did not proceed. [ 10 ] Hall J. summarized the application before him as follows (at paras 7 and 8): In order to avoid further litigation, the Lienholders, who are the next in line to the remaining funds after Tolosa, are proposing to enter into a settlement agreement with Tolosa. Currently, the liens are valued at $643,836.34 plus any applicable interest in costs: Eaglehill at

para 9. As title stands, GEMBA would be the last party paid after Tolosa and the Lienholders. GEMBA has not appealed the decision which validated the Lienholders’ claims. Consequently there is no scenario where any funds from the sale of Calgary I Lands remain for GEMBA, as the value of the builders’ lien is greater than the value of the remaining funds. GEMBA makes this application to attach Tolosa’s share of the funds from the proposed settlement. [ 11 ] Hall J. found (at paras 39 and 40): There are numerous allegations against multiple defendants.

The standard of success likely varies greatly with respect to each cause of action and each defendant. However, given the clear admissions by Mr. Gariepy, it would seem that at least some of GEMBA’s claims against him have a reasonable likelihood of success when the evidence presented to date is viewed objectively. Further, given the affidavit evidence of Mr. Yonekura stating that Mr. Gariepy owns and controls Tolosa as its sole director and shareholder, it appears that at least some of GEMBA’s claims against Tolosa would have a reasonable likelihood of success.

Based on the pleadings and affidavit evidence before me the applicants have met the first branch of Section 17(2) test. The applicants have a reasonable likelihood of success in their overarching claim again Tolosa. Application for Second Attachment Order [ 12 ] The settlement amounts reached in the Final Settlement Agreement have not been disclosed. The Final Settlement Agreement is not tentative and not dependant upon whether an attachment order is granted over the funds payable to Tolosa. [ 13 ] Hall J.’s order prohibited the distribution of the funds, except by further order of the court.

On May 22, 2015, in response to submissions of counsel, I ordered the distribution of the funds to the Lienholders, pursuant to the Final Settlement Agreement. Prior to granting the order, however, counsel for Tolosa gave an undertaking that any settlement funds payable to or on behalf of Tolosa would be held in trust, pending the outcome of this application for an attachment order. I note that the undertaking purports to allow the payment of Mr. Gariepy’s travel expenses, but this exception was rejected by this Court.

No funds are payable to or on behalf of Tolosa without further order of this Court. [ 14 ] There are three differences between the application before me and that of Hall J. in the initial attachment application. First, the Law Society Proceedings against Mr. Gariepy have now concluded and agreed Statements of Facts arising therefrom were before me. Second, whereas the application before Hall J. was based upon affidavit evidence, I had the additional benefit of viva voce evidence. Third, Tolosa now argues that any funds payable will not go to Tolosa but to Tolosa’s counsel for payment of legal fees.

Viva Voce Evidence [ 15 ] The affidavits of Mr. Glen Yonekura (February 27, 2014; August 28, 2013; April 2, 2012; and January 21, 2010) that were before Hall J. in his decision regarding the initial attachment order were also before me. [ 16 ] Mr. Yonekura testified in these proceedings. I found Mr. Yonekura to be a credible and compelling witness. I am satisfied that Mr. Yonekura’s viva voce evidence did not contradict, upset or call into question any relevant affidavit evidence that was before Hall J. [ 17 ] The evidence in the affidavits was summarized by Hall J. and I do not propose to recite them here.

I am satisfied that GEMBA advanced more than $15 Million to Karmis through Mr. Gariepy’s trust account for the development of five properties. Four of the five properties have been foreclosed or sold at the time of these proceedings. While there remains an issue as to the amounts that have been returned to GEMBA, regardless, I accept that GEMBA has established a prima facie case arising from these investments. [ 18 ] With regard to the evidence of Mr. Gariepy, to the extent it conflicted with Mr. Yonekura’s evidence, I prefer the evidence of Mr. Yonekura. Much of my concern regarding Mr.

Gariepy’s testimony arises from his evidence regarding his resignation from the Law Society of Alberta, which will be discussed more fully below. However, given my concerns, I do not accept Mr. Gariepy’s evidence (which conflicts with Mr. Yonekura’

s) that Mr. Yonekura was aware, at the time of the signing the Tolosa Mortgage, that Mr. Gariepy was the director and shareholder of Tolosa. [ 19 ] Mr. Gariepy testified that Tolosa did not advance its own funds to pay out the mortgages nor were any of the funds advanced from any bank account in Tolosa’s name. The funds were advanced by Mr. Gariepy’s client, Karmis. There was no documentation to support the relationship between Tolosa and Karmis with respect to the funds. [ 20 ] Given these clear admissions by Mr. Gariepy, Hall J.’s conclusions set out above (in para 11 herein) continue to hold true today.

Law Society Proceedings [ 21 ] Mr. Gariepy faced 18 Citations before the Law Society of Alberta. These Citations included the misappropriation of trust funds, conflict of interest, fraud, irregularities in trust accounting and breaches of undertakings. [ 22 ] An investigation was conducted and a hearing commenced. The hearing was adjourned on May 10, 2013 and did not conclude as a result of a settlement agreement reached with Mr. Gariepy. A Statement of Facts was agreed to on March 19, 2014 and a Supplemental Statement of Facts was agreed to on September 11, 2014. [ 23 ] In the Statements of Facts, Mr.

Gariepy acknowledged poor accounting practices and breaches or failures to comply with undertakings and trust conditions. Mr. Gariepy acknowledged a number of other concerns or transgressions (set out in the Statement of Facts and Supplemental Statement of Facts) including that some of the funds disbursed by him were in regard to a project in Mexico, in which he had a personal interest.

[ 24 ] On March 19, 2014, Mr. Gariepy applied to resign from the Law Society of Alberta. He agreed and undertook to never apply for reinstatement. Costs were fixed at $169,244.59, which costs would be payable in the event that Mr. Gariepy was relieved of his undertaking not to apply for reinstatement. [ 25 ] Mr. Gariepy testified that at the time of his resignation he was not making admissions of any dishonesty or fraud or any wrongdoing. In the transcript of the proceedings, entered in these proceedings, it stated that has been no admission of fraud or any intentional or criminal behaviour on the part of Mr.

Gariepy. While there may not be any admission before the Law Society of any criminal or intentional misconduct, there is certainly ample evidence of wrongdoing. [ 26 ] Mr. Gariepy was adamant that he resigned under

section 32 of the Legal Professions Act , RSA 2000, c L-8 , and not

section 61 . Before me he testified that a resignation under

section 61 of the LPA was more serious as it was tantamount to disbarment. Before the Law Society, however, he agreed that a resignation under

section 32 was more serious (as it hindered his ability to reapply for membership). [ 27 ] Mr. Gariepy’s testimony regarding the Statements of Facts and the Law Society of Alberta’s proceedings, and in particular his evidence that his decision to resign was influenced by his approaching retirement, was troubling and unsettling, as was his attempt to minimize the significance of his resignation. While a trial judge may ultimately make further findings on these proceedings, I am satisfied on the evidence before me that the Law Society proceedings were serious and call into question Mr.

Gariepy’s professional conduct and obligations as a lawyer. To the extent that the outcome of the Law Society proceedings is new evidence before this Court, I find this evidence further supports a finding in GEMBA’s favour. Requirements of the Civil Enforcement Act (“CEA”) [ 28 ] GEMBA relies on

section 17 of the CEA . It states: Attachment Order 17(1) A claimant may apply to the Court for an attachment order where (

a) The claimant has commenced or is about to commence proceedings in Alberta to establish the claimant’s claim, or [...]`

(2) On hearing an application for an attachment order, the Court may, subject to subsection (4), grant the order if the Court is satisfied that (

a) there is a reasonable likelihood that the claimant’s claim against the defendant will be established, and (

b) there are reasonable grounds for believing that the defendant is dealing with the defendants exigible property, or is likely to deal with that property, (

i) otherwise than for the purpose of meeting the defendant’s reasonable and ordinary business or living expenses, and (ii) in a manner that would be likely to seriously hinder the claimant in the enforcement of a judgment against the defendant. [ 29 ] GEMBA gave an undertaking to compensate Tolosa for any damages in the initial attachment order and has so provided in these proceedings.

If this undertaking is an issue in these proceedings, I can hear further argument on this point. [ 30 ] With respect to the issue of not being required to prove actual dissipation of assets, I note that GEMBA’s evidence is even stronger in this second application for an attachment order, having heard Mr. Gariepy’s testimony that he would seek to pay some of the funds to unsecured third party investors (who invested prior to GEMBA). Mr.

Gariepy testified that although there is no legally binding reason for him or Tolosa to pay or assist these third party investors, he would try to do so because he felt an obligation to assist them. [ 31 ] The reasoning of Hall J., in granting the initial attachment order under the CEA , equally applies in these proceedings before me. I adopt his reasoning here. I would add that the additional evidence before me, regarding the outcome of the Law Society proceedings and Mr. Gariepy’s evidence that he would use the funds to pay unsecured third party investors, further supports Hall J.’s findings.

Despite Tolosa’s argument that GEMBA has not demonstrated any wrongdoing by Tolosa (as opposed to Karmis), given Mr. Gariepy’s testimony including his admitted irregular accounting practices, I would issue the attachment order. First, however, I must consider Tolosa’s argument that it have access to the funds to pay its legal fees. Payment of Legal Fees [ 32 ] Unlike the application for an attachment order before Hall J., Tolosa argues in this application that a reasonable and ordinary business expense may include legal fees under section 17(2) (b)(

i) of the CEA . [ 33 ] Mr. Gariepy testified that a majority of the funds designated for Tolosa would be used to pay its legal fees. I do not know the exact amount designated to be paid to or on behalf of Tolosa. Nor do I know the exact amount of legal fees outstanding. To address this uncertainty, Tolosa argues that, notwithstanding Mr.

Gariepy’s testimony (regarding the unsecured third party investors), I can order that any surplus funds (over and above legal fees owing) be used to pay Tolosa’s future legal fees. [ 34 ] Tolosa argues that it is entitled under the mortgage agreements to its solicitor-client costs. However, the very issue of the validity of the mortgages was not argued before or decided by me and remains very much in dispute between the parties. The trial of that issue was circumvented by Tolosa’s application regarding the Final Settlement Agreement.

[ 35 ] Tolosa also argues that under section 17(2) (b)(

i) of the CEA , Tolosa is allowed to deal with its property to meet its ordinary business expenses (which includes its legal fees). To accept this argument, I would have to find that these funds are ostensibly Tolosa’s property. [ 36 ] Tolosa turns to the tests set out in CIBC v Credit Valley Institute of Business and Technology (2003), 119 A.C.W.S. (3d) 826 (Ont. S.C.J.) ) and Metalworks Canada Ltd.

Warrack , 2014 ABCA 389 , to support its claim. [ 37 ] In applying the first stage of the Credit Valley - whether the defendant has other assets available to pay its expenses other than those frozen by court order - I accept that Tolosa does not carry on any business operations or have any assets. As such, Tolosa meets the first stage of Credit Valley. [ 38 ] The second and third stages of Credit Valley require that I consider whether any of the funds are from a source other than the plaintiff and whether the defendant is entitled to use the non-proprietary assets to pay his legal costs.

I am unable, on the evidence before me, to trace the origin of the funds in question. Tolosa did not advance its own funds. Mr. Gariepy testified that funds came from Karmis (although no documentation exists to support Karmis’ interest arising therefrom). GEMBA’s investments with Karmis flowed through Mr. Gariepy’s trust account. Mr. Gariepy has acknowledged accounting irregularities with his trust account, including using funds from his trust account for a project in Mexico in which he had a personal interest. Neither Tolosa nor GEMBA have traced or established the source of the funds.

However, the Alberta Court of Appeal in Metalworks directed that the burden does not solely rest with the defendant (to disprove a plaintiff’s proprietary claim). The plaintiff must show a prima facie case that it has a proprietary interest in the funds.

I am satisfied, given my reasoning above, that GEMBA has established such a prima facie case regarding the funds. [ 39 ] If I am wrong regarding GEMBA having met the second and third stages of the Credit Valley test, in considering the fourth stage of Credit Valley , I am not satisfied, in balancing the competing interests of the parties, that Tolosa should be permitted to use these funds (that Tolosa admits are not its and for which no documentation exists to establish another interest) to pay its legal fees.

Order Granted [ 40 ] In the result, I am satisfied, having read the affidavits and having heard the evidence of Mr. Yonnekura and Mr. Gariepy, that GEMBA has met the requirements under the CEA and accordingly an attachment order will issue attaching any of the funds payable to or on behalf of Tolosa. Should this be an issue, I will hear argument as to where the funds should be held pending the final resolution of this matter.

Distribution of the funds payable to or on behalf of Tolosa will be prohibited except by further order of this Court. [ 41 ] Further, having heard no compelling reason for not doing so, I am also ordering that Tolosa disclose the Settlement Sum as set out in Final Settlement Agreement. Heard on the 20 th day of May, 2015, and on the 14 th day of September, 2015 and on the 13 th day of November, 2015. Dated at the City of Calgary, Alberta this 23 rd day of December, 2015. C.S. Anderson J.C.Q.B.A. Appearances: E. B. Mellett for the Plaintiffs/Applicants N.D. Anderson for the Defendants/Respondents