East Winds Caribbean Limited Partnership v Reti, 2016 ABQB 536

Court of Queen’s Bench of Alberta Citation: East Winds Caribbean Limited Partnership v Reti, 2016 ABQB 536 Date: 20160926 Docket: 1401 12822 Registry: Calgary Between: East Winds Caribbean Limited Partnership, a Limited Partnership and 1742897 Alberta Ltd. Plaintiffs - and - George Reti, Marilyn Reti, East Winds Caribbean Limited Partnership Ltd., Octopus Holdings Ltd and Solunqua Orchards Ltd. Defendants AND George Reti and Octopus Holdings Ltd. Defendants / Plaintiffs by Counterclaim - and - East Winds Caribbean Limited Partnership Ltd., And East Winds Resort Ltd. Plaintiffs / Defendants by Counterclaim _______________________________________________________ Memorandum of Decision

of J.B. Hanebury , Master in Chambers _______________________________________________________ [ 1 ] George Reti had a dream. He had discovered a rundown resort in Santa Lucia that he believed he could turn into a world- class destination. He solicited investors and invested his own money to make that dream a reality. A Limited Partnership was established and he was the sole director, shareholder and officer of the General Partner. Later, he raised more money to buy adjacent properties. However, facing personal financial issues back in Canada, Partnership money was diverted to his personal holding company.

He does not deny this. He could not repay it, and the directors of the Limited Partnership unilaterally cancelled the units in the partnership held by another of his holding companies. [ 2 ] The Limited Partnership and the new General Partner seek

summary judgment against him and his companies for the outstanding funds. He and his company cross-apply for

summary judgment against the Limited Partnership and the new General Partner for a set-off of the value of the cancelled units against any money he owes. [ 3 ] Mr. Reti acknowledges he owes money to the new General Partner and that the value of the cancelled units can be set off against that debt. The primary issue between the parties is one of accounting and I have concluded that neither party has filed evidence sufficient for this court to grant either the relief sought. The applications require an assessment.

FACTS [ 4 ] A detailed overview of the facts is provided as it may ultimately prove useful at the assessment. [ 5 ] In September, 2005, George Reti solicited investors to provide funds for a resort property on the island of St. Lucia, called East Winds Beach Resort. Twenty-two investors, the limited partners, invested $8,000,000 US in the Limited Partnership, East Winds Caribbean Limited Partnership (LP), purchasing a total of 40 units. [ 6 ] Octopus Holdings Ltd., a company with Mr. Reti as an officer and director, purchased 10 LP units for $2,000,000 US, the largest share of units in the LP.

A split of the units occurred with the result that Octopus then owned 40 units. [ 7 ] Mr. Reti controlled and was the sole shareholder, officer and director of East Winds Caribbean Limited Partnership Ltd. (GP), the General Partner of the LP. [ 8 ] In 2007 the LP Agreement was amended.

The Amended Agreement provided that the GP “exercise the powers and discharge the duties of its office…honestly and in good faith and in the best interests of the Limited Partners”…and “exercise the degree of care, diligence and skill that a reasonably prudent person providing services of a similar nature would exercise in comparable circumstances”: s. 5.8(a). [ 9 ] The GP was specifically given the authority to carry out the business and operations of the LP, in “a prudent and reasonable manner”.

The Amended Agreement specifically forbade the GP from entering into any transactions or contracts with non-arms-length parties, unless approved by ordinary resolution of the Limited Partners: s. 1.1(w), 5.2, 5.1(b). [ 10 ] The Amended Agreement required the GP to invest funds not immediately required in short term Canadian government or bank securities: s. 5.4(n). [ 11 ] In mid-2007 Mr. Reti approached the limited partners, advising that he had been able to negotiate the purchase of a neighbouring property, the “Taylor lands”.

As a result the LP raised a further $2,175,000 from the limited partners in order to buy the Taylor lands. The funds necessary to purchase the Taylor lands were deposited in the account of the GP. [ 12 ] The sale did not proceed as the vendor of the Taylor lands apparently cancelled the conditional sale contract in October, 2008. [ 13 ] However, the 2009 financial statements prepared by the GP reported that there was a “binding agreement” for the Taylor lands and that, as the “satisfactory licences” had not been received, the money was in a GIC at a Canadian Chartered Bank.

In 2012 the investors were told that the purchase was “legally abandoned in 2008” but would be “reactivated”, and the funds were invested with a “Canadian Registered Corporation” and secured by a $3,850,744 CAD debenture. [ 14 ] What Mr. Reti failed to advise the investors was that, contrary to the requirements of the Amended Agreement, he had transferred those funds to a company owned and controlled by him and his wife, Solunqua Orchards Ltd. That company granted the GP a debenture more than a year after the transfer, with an interest rate of 10% per annum.

The debenture was never registered, and it is alleged that it then had, and now has, little or no value. [ 15 ] It is also alleged that Mr. Reti used GP funds over a period of years to pay numerous personal expenses. [ 16 ] In 2010 Mr. Reti incorporated a new company called Ridge Development Corporation (Ridge) in order to acquire another property that neighboured the East Winds Resort, the Egerer lands. Ridge purchased the Egerer lands for $1,098,000 East Caribbean dollars and two years later executed a declaration of trust in favour the LP.

The limited partners allege that they were not advised of this arrangement as no annual budget was presented for approval. In conjunction with this purchase, Mr. Reti and the General Partner granted the bank security against the Resort for $2,688,200 East Caribbean dollars, $993,000 East Caribbean dollars more than needed for the purchase of the Egerer lands. It is alleged this excess money also went to Mr. Reti and his companies. [ 17 ] In 2013 the limited partners began to have concerns about the financial affairs of the Resort and queried Mr. Reti. A meeting

was ultimately held where Mr. Reti admitted that he had transferred funds to his company without authorization. [ 18 ] In November 2013, the GP and Mr. Reti entered into a forbearance agreement with the limited partners. The agreement confirmed that the GP made an unauthorized investment of funds belonging to the LP, contrary to the terms of the Amended Agreement.

The parties agreed that the authority to manage the business of the LP would be delegated to a third party and the GP agreed to provide “true and complete” disclosure of its and the LP’s financial affairs, including information in relation to the purchase of the Egerer lands by Ridge. The GP and Mr. Reti agreed to return to the Partnership “all funds from the unauthorized investment together with interest calculated at 10% per annum (compounded) before April 30, 2014.” [ 19 ] The agreement appointed Mr.

Lyon, a chartered accountant, as the third party delegate. [ 20 ] From November 2013 to November 2014 (or September, 2015) Mr. Lyon assumed operational control of the LP and conducted a review of all of its and the GP’s books and records. In August 2014, a new GP was incorporated (new GP), of which Mr. Lyon was a director. [ 21 ] The money was not repaid by Mr. Reti as contemplated in the Forbearance Agreement. [ 22 ] In April, 2014, as a result of a directors’ resolution by the GP, the LP cancelled Octopus’ 40 units without its knowledge or consent.

The resolution said that the units were “redeemed for cancellation” and the GP issued a credit note to Octopus for the “fair market value” of the units as of December 15, 2013. The credit note stated that it was satisfied by a reduction in the amount alleged owed by Mr. Reti. [ 23 ] The new GP’s valuation of the cancelled units at December 15, 2013, was determined by BDO Puerto Rico, P.S.C. to be $24,436 US each, for a total value of $977,440 US. BDO’s evaluation was attached as an exhibit to the affidavit of Mr. Sembo, on behalf of the LP. [ 24 ] Mr.

Reti only discovered the cancellation of Octopus’ units when he undertook a corporate search in December 2015. [ 25 ] Mr. Lyon, filed a short affidavit, in support of the LP’s application for

summary judgment. In it he sought to quantify the amount taken by Mr. Reti. [ 26 ] He stated that the improper transfers, inclusive of interest as allowed in the forbearance agreement, totalled $3,552,936 US as of September 15, 2015. He attached two summaries, which he said that he had prepared based on the GP’s books and records. The second

summary excluded the amounts sought by Mr. Reti for management fees and included interest at 10 percent per annum. [ 27 ] Mr. Lyon also attached to his affidavit an email exchange he had with Mr. Reti that he alleged demonstrates Mr. Reti’s concurrence with the amount claimed owing. [ 28 ] In the first email Mr. Lyon asked Mr. Reti if he had time to review the statement he had forwarded (that statement was not included in the materials before the Court). He said that he understood Mr. Reti had different numbers. [ 29 ] Mr.

Reti responded: I’ve just returned from Kelowna late last night, and we’ve had another grandchild last night as well. I can go over the numbers with you some time later this afternoon – I think the only real difference is that I have been quoting a principal amount, and your calculation includes interest on both the Debenture and the Shareholder Loan. There are also some $35K in expenses which we have not claimed… – none of which pertain to the MasterCard receipts…. [ 30 ] Mr. Lyon was not cross-examined on this affidavit. [ 31 ] Mr.

Reti filed several affidavits in response and in support of his cross-application seeking a proper credit for the value of the LP units held by Octopus. [ 32 ] He admitted that in 2008 he took the funds set aside for the Taylor land purchase from the LP through his holding company, Solunqua Orchards Ltd. and the company issued an unregistered debenture the following year for $3,500,000 US with simple interest at 10%. The debenture was to protect the Taylor land funds and $1,050,000 US owed for the purchase of new LP units by Octopus. The debt matured on September 30th, 2010. [ 33 ] In cross-examination Mr.

Reti could not confirm exactly how much of the Taylor lands money he took. He acknowledged that the GP received $1,874,000 US for that purpose but said that some of those funds were used for capital improvements at the Resort. [ 34 ] Mr. Reti acknowledged he owes money to the Partnership but disputed the amounts calculated by Mr. Lyon and raised a number of issues about the calculations. [ 35 ] He also alleged that the procedure for the determination of the value of Octopus’ units and the claim for set-off are improper, and in any event, the units are today worth $3,000,000 US, ie. $75,000 US per unit.

He stated that the underlying assets support that value, and pointed out that a number of the partners who sought to sell their units in 2013 ascribed an even higher value to their units. Finally, he pointed out that Octopus pledged those units as security to the Bank of Nova Scotia, and their cancellation Mr. Reti said, will cause Octopus difficulties with its banker. [ 36 ] Mr. Reti and Octopus’ counterclaim seeks damages for the improper cancellation of the units, a proper evaluation of the units, set-off against any funds owed by Mr.

Reti, approximately $36,000 in unpaid expenses, and compensation for a personal guarantee Mr. Reti says that he put in place to support a loan to the GP. ISSUES

[37] Mr. Reti and Octopus Holdings conceded in argument that they were now prepared to accept the repudiation of the contractand the cancellation of the units held by Octopus and agreed that any funds owed to Octopus could be set off against the debt owed byMr. Reti. [38] Mr. Reti has admitted taking money from the GP. Therefore, the issues to be considered in the applications are: how much isowing by Mr. Reti; is there an amount that should be set-off; and, if set-off should occur but the amount of set-off cannot be determined,should collection on any judgment granted be stayed? ANALYSIS [39] Before considering these issues it is helpful to provide an overview of the law in relation to

summary judgment. [40] The test for

summary judgment or dismissal states that the application should be granted where no genuine issue for trialexists. This occurs when the judge is able to make a fair and just determination of the merits on the existing record without a trial,because the

summary judgment process allows him or her to make the necessary findings of fact, to apply the law to those facts and is aproportionate, more expeditious and just means to achieve a just result. In such a case,

summary judgment may be granted: Maxwell v.Wal-Mart Canada Corp., 2014 ABCA 383, para. 12. [41] As a result,

summary judgment is denied when there is an issue of “merit” that genuinely requires a trial, or conversely it isallowed when the claim or defence is so compelling that the likelihood it will succeed is so high that it should be determined summarily:P. (W.) v. Alberta, 2014 ABCA 404, para. 26; Beier v. Proper Cat Construction Ltd., 2013 ABQB 351, para’s 56 – 61. [42] However, it is important to note that this does not affect the established legal burdens.

If an applicant discharges the initialevidentiary burden imposed upon it on a balance of probabilities, the evidentiary burden then falls to the respondent to show that there isarguable merit to the case and that there is a compelling reason that it should go to trial. Only when the applicant has met its initialobligation does the onus shift to the respondent to reply, and the legal or persuasive burden is on the applicant throughout: First CapitalHoldings (ALB) Corp .v. Metropolitan Ventures Inc., 2015 ABQB 54, para. 68; 1214777 Alberta Ltd. v. 480955 Alberta Ltd., 2014ABQB 301, para. 19; Lameman v.

Canada (Attorney General), 2006 ABCA 392, paras 13-14, 2008 SCC 14, para.11; Jordan v. AlbertaLaw Enforcement Response Teams, 2013 ABQB 330, para. 26. [43] The Court is to assume that the best evidence from the parties is before it: 1214777 Alberta Ltd., para. 17; Papaschase IndianBand No. 136 v. Canada (Attorney General), 2008 SCC 14 , 2008 SCC 14 (S.C.C.) , para. 19. [44] Generally, statements in an affidavit have no weight if the statements are “self-serving” or in other words, are bare assertions,or simply conclusory or argumentative and without evidentiary support: Access Mortgage Corp.

(2004) Ltd. v. Ares Capital Inc., 2014ABCA 280, para. 59; R Floden Services Ltd. v. Solomon, 2015 ABQB 450 , para’s 21 – 23; Guarantee Co. of North America vGordon Capital Corp., (SCC), [1999] 3 S.C.R. 423, para. 31; Sticks and Stones Communications Inc., v. Holes’sGreenhouses and Gardens Ltd., 2015 ABQB 774, para. 37. [45] Therefore, bald statements without substantiation and self-serving evidence are usually disregarded by the court whendetermining a

summary judgment application: 1214777 Alberta, para. 17; 1250810 Alberta Ltd. v. 1284768 Alberta Ltd., 2010 ABQB125, para. 31; Goldman v. Devine, 2007 ONCA 301 (Ont. C.A.), para. 22; Guarantee Co. of North America, (supra), para. 31. Therespondent cannot raise a genuine issue for trial with mere allegations of fact or the voicing of suspicions without any supportingevidence: Jordan, (supra), para. 28. [46] With that overview of the law of

summary judgment I turn to the first issue for consideration. How Much Money Is Owed by Mr. Reti? [47] As noted above, the initial evidentiary burden is on the applicants. They say they have met that burden by the provision of theaffidavit of Mr. Lyon. As earlier noted, he stated that Mr. Reti owed $3,552,936.99 US as of September 15, 2015. He attached two“summaries” to his affidavit that allegedly support the amount owing. [48] The LP and new GP argued that this evidence was all that was required as Mr. Reti agreed in the Forbearance Agreement tohave Mr.

Lyon undertake an accounting to establish the amount outstanding and Mr. Lyon has done so. Mr. Lyon examined the recordsand talked to Mr. Reti and presented his conclusion as to the amount outstanding. They stated that if Mr. Reti contests this conclusion,the onus is then on him to provide evidence that the conclusion is incorrect. Mr. Reti could have cross-examined Mr. Lyon and chose notto do so. [49] In short, these applicants argue that pursuant to the terms of the Forbearance Agreement the evidence of Mr.

Lyon issufficient and they have satisfied the initial evidentiary burden upon them. [50] I fail to see how the Forbearance Agreement provides the necessary support for this argument. It describes the duties of theGP to be assumed by Mr. Lyon. It requires the release of books and records to Mr. Lyon. It allows for the hiring of auditors andaccountants. It does not say that Mr. Lyon shall do a calculation as to the amount taken, and that calculation shall be accepted as full andfinal proof of the sum owed.

There is no such language found in the agreement. [51] Therefore, the applicants cannot rely on the terms of the Forbearance Agreement and are left to discharge their initialevidentiary burden by either their affidavit evidence, or the admissions of Mr. Reti. For their affidavit evidence they have Mr. Lyon’sevidence, which can be viewed as the evidence of an expert or the evidence of a witness for the applicants. [52] Affidavit evidence by an expert can be considered in a

summary judgment application: rule 6.11(a). However, Mr. Lyon wasnot formally presented as an expert witness. He took over the duties of Mr. Reti in relation to the GP. He became a director of the newGP and he signed the resolution to cancel the units of Octopus. Even the notes on the summaries attached to his affidavit show that he

viewed himself as aligned with the applicants. Generally, an expert provides an opinion that is independent, impartial and objective, and he or she looks to assist a decision maker: White Burgess Langille Inman v. Abbott and Haliburton Co., 2015 SCC 23 , para. 35 . I do not see that Mr. Lyon’s evidence can be accepted as the evidence of an expert. However, even if he were seen as an expert, in my view his opinion has little weight in light of the commentary included in his summaries, as described below. [ 53 ] Mr. Lyon’s evidence can be seen as that of a witness. In his affidavit Mr. Lyon attached two

summary documents to buttress his declaratory statement as to the amount outstanding. There is no backup documentation. The summaries contain no references to specific documents, no copies of cheques or bank drafts, no copies of the general ledger. There is a total dearth of evidence or a reference to evidence that would support the

summary. It is Mr. Lyon’s analysis with nothing to allow the Court to see how he came to the numbers he set out. [ 54 ] Furthermore, the summaries prepared by Mr.

Lyon appear to be draft in nature as they contain unanswered questions and they include comments such as: · Looks like Octopus made payments against visa card · List is difficult to read · Is Reti still owed management fees can we argue he wasn’t entitled to fees retroactively due to fraud? · Gareth’s says ‘gross receipts’ Reti’s says “gross”revenue” from operations · Changed to be expense reimbursement per above accrual? · Looks roughly accounted for in the debenture balance list $27,000 not sure who this is. · Was this booked as 75000? · Was bank loan drawn Feb 2010? · Includes an extra 10K??? [ 55 ] A

summary is allowed by the Court when it is a simplification of calculations that the Court itself could have done from business records made in the ordinary course; it is tendered by a witness in an investigatory role; it is unassailable; it is neutral; and concerns regarding the partiality and reliability of the results are obviated by the nature of the methodology: R. v. Ramratten , 2015 ONCJ 567 , para’s 168, 169. [ 56 ] Mr. Lyon’s summaries do not meet these tests. His work was forensic in nature as he was trying to ascertain the amount of a fraud.

His notes indicate that various judgment calls were necessary in the calculation of the summaries. [ 57 ] The applicants argued that the necessary supporting evidence was found in the bank statements entered as exhibits in the cross-examination of Mr. Reti. However there is no evidence before the Court to link entries found in those statements to amounts found in the summaries. Mr. Lyon does not make this connection in his barebones evidence and neither does Mr. Reti in his cross-examination. [ 58 ] I have come to the conclusion that Mr.

Lyon’s affidavit is insufficient to meet the initial evidentiary burden on the LP and new GP. Mr. Lyon is not an expert and his evidence is conclusory in nature, preliminary in its analysis and unsupported by evidence before the Court. [ 59 ] I turn next to Mr. Reti’s admissions, the other evidence the applicants rely on to meet their evidentiary burden. The applicants allege that Mr. Reti admitted Mr. Lyon’s calculations in his email response to Mr. Lyon. [ 60 ] A review of the emails upon which this allegation is founded reveals that they do not support such an admission. Mr.

Reti was not sufficiently definitive in his response. Furthermore, the attachment to the email sent by Mr. Lyon was not provided to the Court and was apparently a different calculation than the one that is now being advanced. [ 61 ] Mr. Reti does admit stealing the funds that were to be used for the purchase of the Taylor lands and arranging for his company to grant the unregistered debenture. The debenture is not for a fixed amount but is for a “maximum” of $3,500,000 US.

He is uncertain of the exact amount he stole, but acknowledged at one point that it was around $2,000,000 US less an unspecified sum used for capital expenditures at the Resort. [ 62 ] While these admissions are sufficient to grant

summary judgment on the question of liability, they are insufficient to meet the burden on the Applicants to establish the amount outstanding. An assessment of the amount outstanding is necessary. Is There an Amount that Should Be Set-Off? [ 63 ] While the parties originally took the position that the value of the Octopus units should not be set off against any money owed by Mr. Reti, ultimately both sides acknowledged that set-off could occur. The LP and the new GP noted that the Bank of Nova Scotia has a charge against those units and may yet challenge their cancellation.

In any event, they argued, the value of the units cannot be determined summarily as there is conflicting evidence on the record. They acknowledged that if

summary judgment is granted in their favour, they are prepared to defer enforcement of $1,297,062,00 CDN of this amount, being their view of the value of the cancelled units, pending a final determination of their value. [ 64 ] Mr. Reti said that the units are worth $3,000,000 US, but undertook no formal evaluation procedure to come up with this number.

[ 65 ] The resolution cancelling the units held by Octopus stated that “[t]he credit note issued to Octopus shall by satisfied by a reduction of the Retis’ Liability equal to the fair market value to be determined under paragraph 2”. Paragraph 2 provided that the method of determination to be used was that found in the Amended Agreement. The Amended Agreement provides for an evaluation to be done by up to three real estate appraisers. [ 66 ] The Applicants have not followed the requirements to establish the value of the units set out in their own resolution.

Furthermore, the evaluation they did provide was attached to the affidavit of a third party. Opinion evidence that is exhibited to the affidavit of someone other than the alleged expert is either inadmissible or virtually weightless. It is difficult, if not impossible, to question on it, or challenge it: Indarsingh, Re, 2015 ABQB 158 , para. 28 . [ 67 ] The value of the cancelled units owned by Octopus cannot be determined at this time. In any event, set-off is not a concern at this stage as

summary judgment in favour of the plaintiffs for a fixed amount cannot be granted. It would seem appropriate to defer the evaluation of the units to an assessment in conjunction with the evaluation of amount taken by Mr. Reti. CONCLUSION [ 68 ] Rule 7.3(3)(

b) provides that where the only real issue to be tried is the amount sought, that determination may be set down for an assessment. That is the next step to be taken in this case. The applicants are granted

summary judgment against Mr. Reti and his companies for an amount to be determined. The value of the Octopus units can be set off against that amount. That sum also requires an assessment. [ 69 ] A copy of this decision is to be provided to the Bank of Nova Scotia and it is to be given notice of the assessment application. [ 70 ] Finally, it is unclear if Mr. Reti and Octopus wish to continue with the balance of their counterclaim. However, if they do, it is to proceed to trial. [ 71 ] Mr. Reti’s conduct has been egregious. He does not deny that. I am not prepared to deal with costs at this time.

Costs may be spoken to at the assessment. Heard on the 28 th day of June, 2016. Dated at the City of Calgary, Alberta this 26 th day of September, 2016. J.B. Hanebury M.C.C.Q.B.A. Appearances: G. Brian Davison, Q.C. Kenneth P. Reh DLA Piper (Canada) LLP for the Plaintiffs (East Winds Caribbean Limited Partnership) Yarden G. Gershony Rush Ihas Hardwick LLP for the Defendants (Reti)