Chinook Country Properties Ltd v Fraser Milner Casgrain LLP, 2016 ABQB 726

Court of Queen’s Bench of Alberta Citation: Chinook Country Properties Ltd v Fraser Milner Casgrain LLP, 2016 ABQB 726 Date: 20161222 Docket: 1101 08125, 1101 08126, 1101 08127 Registry: Calgary Action No. 1101 08125 Between: Chinook Country Properties Ltd, on behalf of itself and all other members of a class Plaintiff - and - Fraser Milner Casgrain LLP, Toronto Dominion Bank, Bank of Nova Scotia, Luna Morada Investment Corporation, David Jones, Vinny Aurora, Dave Humeniuk, Vincenzo De Palma, Milton Kiehlbauch Defendants Action No. 1101 08126 And Between: Stuart Financial Corporation, on behalf of itself and all other members of a class Plaintiff - and - Fraser Milner Casgrain LLP, Toronto Dominion Bank, Bank of Nova Scotia, Costa Koraal Investment Corporation, David Jones, Vinny Aurora, Dave Humeniuk, Vincenzo De Palma, Milton Kiehlbauch Defendants Action No. 1101 08127 And Between: Barry Mills, on behalf of himself and all other members of a class Plaintiff - and - Bishop McKenzie LLP, Toronto Dominion Bank, Bank of Nova Scotia, El Golfo Investment Corporation, David Jones, Vinny Aurora, Dave Humeniuk, Vincenzo De Palma, Benjamin Aguilera, David LeTourneau Defendants _______________________________________________________ Reasons for Judgment of the Honourable Mr.

Justice G.H. Poelman _______________________________________________________

I. Introduction [ 1 ] This application concerns three separate actions. In each case, the plaintiffs pleaded knowing receipt and knowing assistance, the particulars of which will be discussed later in these reasons. In two cases, negligence is also alleged. In each case, the applicant defendants seek

summary judgment or striking of the plaintiffs’ pleadings. [ 2 ] Each action sets out claims against a number of defendants who are no longer parties, or for whom discontinuances or dismissal orders are expected shortly. Thus, for present purposes, I will ignore allegations against them. II. Statements of Claim A.

Introduction [ 3 ] In the following paragraphs, I set out the main facts alleged and claims made in the three statements of claim against the applicant defendants. [ 4 ] The statements of claim filed by Chinook Country Properties Ltd. (“Chinook”) and Stuart Financial Corporation (“Stuart”) may be conveniently considered together, as they are substantially identical apart from certain details that are inconsequential for these applications. B.

Barry Mills v Bank of Nova Scotia et al (Action No 1101 08127) [ 5 ] These claims relate to a planned beachfront development in Mexico, structured through the Santa Clara Real Estate Investment Fund Limited Partnership (“Santa Clara LP”), the general partner of which was the defendant El Golfo Investment Corporation (“El Golfo”). [ 6 ] Barry Mills subscribed for limited partnership units under offering memoranda dated June 4 and September 20, 2007.

The proposed class is all persons other than the defendants who subscribed for units. [ 7 ] A number of individuals, referred to as “promoters,” were directors and officers of El Golfo and are alleged to owe fiduciary duties to it and to the limited partners. Funds paid by investors acquiring units were deposited “to accounts of the General Partner in the Defendant Banks,” now only the Bank of Nova Scotia (“BNS”).

The promoters allegedly “misappropriated undetermined amounts of those funds for unauthorized purposes,” specifically by transferring them to “other unrelated projects” and “to themselves for their own purposes.” None of those funds have been recovered. [ 8 ] The “Concrete Group of Companies,” one of which was El Golfo, “raised funds . . . for various real estate investments” and “used a separate corporate general partner for each real estate venture.” The group operated about 72 bank accounts at Toronto Dominion Bank and BNS, including accounts in the name of El Golfo. [ 9 ] The promoters “unlawfully [and in breach of the offering memoranda] diverted unspecified funds” from El Golfo’s accounts “and comingled those funds with other funds from other investors” in other projects.

This was a “regular business practice” in the accounts at BNS and was “sufficiently pervasive and regular that [BNS] should have been put on notice that this unlawful activity was being carried on.” [ 10 ] BNS “benefitted financially from the relationship . . . with the Concrete Group.

As a result, the acquiescence by [BNS] to the unlawful comingling of funds, constitutes knowing receipt by those institutions of those unlawful transactions, for which” BNS is liable. [ 11 ] “Additionally, the pervasive nature of the unlawful comingling should have placed [BNS] on notice that this illegality was being committed.” However, BNS failed to stop the comingling as was required, which “amounts in law to providing knowing assistance to the” promoters, for which BNS is liable. C.

Chinook Country Properties Ltd v Fraser Milner Casgrain LLP et al (Action No 1101 08125) and Stuart Financial Corporation v Fraser Milner Casgrain LLP et al (Action No 1101 08126) [ 12 ] These actions relate to planned condominium golf course (Chinook action) and beachfront residential (Stuart action) developments to be structured through separate limited partnerships.

The general partners were, respectively, Luna Morada Investment Corporation and Costa Koraal Investment Corporation. [ 13 ] Chinook and Stuart each subscribed for limited partnership units under offering memoranda dated September 24 and August 27, 2007 for the projects in their respective actions. The proposed class for each action is all persons other than defendants who subscribed for units in the relevant project. [ 14 ] A number of individuals, referred to as “promoters,” were directors and officers of both general partners and are alleged to owe fiduciary duties to them and to the limited partners.

Allegations of misappropriation of investment funds are made in exactly the same terms as in the Mills action. [ 15 ] One of the promoters, Dave Humeniuk, “was under a life-time ban from membership with the Real Estate Council of Alberta,

. . . a material fact that should have been disclosed in the [offering memorandum].” [16] Fraser Milner Casgrain LLP (“FMC”) acted as counsel to the limited partnership in each action and prepared each of theoffering memoranda.

It knew or ought to have known about Humeniuk’s ban, owed a duty to the plaintiff and class to disclose the ban,and failed to do so. [17] In each case, “FMC received consideration in the form of legal fees for its services in receiving and disbursing” theinvestments made by class members, under circumstances “which placed FMC upon enquiry as to the propriety of receiving such funds.”It is liable for the loss that resulted. III. Causes of Action [18] As noted above, the plaintiffs in all three actions pleaded knowing receipt and knowing assistance.

The plaintiffs in theChinook and Stuart actions also pleaded negligence. [19] The elements of knowing receipt and knowing assistance are clearly set out in the leading authorities: Gold v Rosenberg, (SCC), [1997] 3 SCR 767; and Citadel General Assurance Co v Lloyds Bank Canada, (SCC), [1997] 3SCR 805. [20] For knowing receipt, the following elements must be proved: (

a) The defendant received property subject to a trust in favour of the plaintiff (Gold, para 53); (

b) The property was taken from the plaintiff in simple breach of trust (Gold, paras 48 and 53); (

c) The defendant had knowledge of facts sufficient to put a reasonable person on notice or inquiry of the breach of trust or, inother words, constructive knowledge (Gold, para 53); and (

d) The defendant applied the property for its own use and benefit (Citadel, paras 25 to 26). [21] To establish knowing assistance, the following elements must be proved: (

a) There was a trust (Gold, para 34); (

b) The trustee “perpetrated a dishonest and fraudulent breach of trust” (Gold, para 34); and (

c) The defendant had actual knowledge (which may include recklessness or willful blindness, but not merely constructiveknowledge) of the dishonest and fraudulent breach of trust (Gold, para 34); Air Canada v M & L Travel Ltd, (SCC),[1993] 3 SCR 787 at 811; and Dynasty Furniture Manufacturing Ltd v Toronto Dominion Bank, 2010 ONSC 436, 74 CCLT (3d) 286 atparas 112–15. [22] Thus, there are three main differences between the two causes of action. First, knowing receipt requires only a simple breachof trust by the trustee, while knowing assistance requires a dishonest and fraudulent breach of trust.

Second, for knowing receipt, thedefendant’s constructive knowledge of breach of trust will suffice, while a form of actual knowledge is required for knowing assistance.Third, knowing receipt involves a defendant applying the property for its own use and benefit, with no such requirement for knowingassistance. [23] Receiving property for its own use and benefit requires a defendant to have received property in its personal capacity, ratherthan as an agent of the trustee. In paying or collecting money for a customer, a bank acts only as the trustee’s agent, setting up no title ofits own.

On the other hand, it receives the money for its own benefit if it uses the money to reduce or discharge a bank overdraft:Citadel, paras 25 to 26. [24] As explained in Citadel, Gold and Eaton v HMS Financial Inc, 2010 ABQB 635, 497 AR 156, the distinction is based uponthe restitutionary nature of the knowing receipt cause of action.

The action is based on the defendant having received and used theplaintiff’s property, not on a finding of legal fault (as in knowing assistance, where the defendant has aided the trustee’s breach).Knowing receipt “is, at base, simply a question of who has a better claim to the disputed property”: Gold, para 49. [25] Thus, a bank will be unjustly enriched by setting off debt obligations (Citadel, para 30). By contrast, accepting deposits ortransfers and allowing cheques to be written or transfers made does not involve the bank taking title to the funds or using them for itsown benefit.

Receiving fees for banking services is not an unjust enrichment and is insufficient to ground a claim for knowing receipt:Eaton, para 34. IV. Law on

Summary Judgment [26] As noted above, the applicants seek

summary judgment. Rule 7.3(1)(

b) provides that defendants may apply for

summaryjudgment where “there is no merit to a claim or part of it.” [27] The courts recently adopted a “modern” approach to

summary judgment applications. In Hryniak v Mauldin, 2014 SCC 7,[2014] 1 SCR 87, the Court at para 2 encouraged “moving the emphasis away from the conventional trial in favour of proportionalprocedures tailored to the needs of the particular case”, holding at para 5 that “summary judgment rules must be interpreted broadly,favoring proportionality and fair access to the affordable, timely and just adjudication of claims”. The broad principle was stated as

follows at para 49: There will be no genuine issue requiring a trial when the judge is able to reach a fair and just determination on the merits on a motion for

summary judgment. This will be the case when the process (1) allows the judge to make the necessary findings of fact, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result. [ 28 ] The Alberta Court of Appeal has held that the Hryniak v Mauldin approach is consistent with our modern rules, which call “for a more holistic analysis of whether the claim has ‘merit’, and is not confined to the test of ‘a genuine issue for trial’ found in the previous rules”: Windsor v Canadian Pacific Railway Ltd, 2014 ABCA 108 , 572 AR 317 at para 14 . On a

summary judgment application, it must be determined “whether there is in fact any issue of ‘merit’ that genuinely requires a trial, or conversely whether the claim or defence is so compelling that the likelihood it will succeed is very high such that it should be determined summarily”: WP v Alberta , 2014 ABCA 404 , 588 AR 110 at para 16 ; Pyrrah Design Inc v Plum and Posey Inc , 2016 ABCA 12 at para 19 . [ 29 ] Not every factual dispute will prevent

summary judgment. Rather, “there must be a genuine issue of a potentially decisive material fact . . . which cannot be summarily found against the non-moving party on the record revealed by the ‘fair and just process’ ”: 776826 Alberta Ltd v Ostrowercha , 2015 ABCA 49 , 593 AR 391 at para 11 . [ 30 ] Similarly, it has been held that not all conflicts in affidavit evidence preclude

summary judgment; rather, the matter should proceed without oral evidence where the judge can make the necessary findings of fact and apply the law to those facts: Elkow v Sana , 2015 ABQB 803 , 29 Alta LR (6 th ) 246 at para 46 , citing and quoting Sandhu v Siri Guru Nanak Sikh Gurdwara of Alberta , 2015 ABCA 101 , 599 AR 267 at para 79 . As the Court of Appeal emphasized in Ostrowercha at para 11 , the key is whether viva voce evidence is needed to properly resolve the case. [ 31 ] A

summary judgment application cannot be defeated by speculations or assertions that other evidence might be available in the future if the matter is allowed to proceed: Windsor , para 21 ; Pyrrah , para 26. The respondent to a

summary judgment application “must put its best foot forward, and present evidence to show sufficient ‘merit’ to establish a genuine issue requiring a trial”: Windsor , para 21 . [ 32 ] Finally, the modern principles of

summary judgment are applicable to class action proceedings, particularly since one of the objectives of such proceedings is to provide affordable access to justice: Windsor , para 14 . V.

Summary Judgment in Mills Action A.

Summary of Evidence [ 33 ] Useful background facts are contained in Mr. Mills’ affidavits and exhibits, though I note that he had little personal involvement germane to BNS’ role and relied primarily on beliefs formed from documents. [ 34 ] The El Golfo project was established to purchase, hold, develop and sell land in Sonora, Mexico. Funds were raised through two offering memoranda, one issued by the Santa Clara LP and the other by Santa Clara Registered Corp, both providing for purchase of units in the Santa Clara LP. Mr.

Mills says he subscribed to units under both offering memoranda. [ 35 ] However, lands for the El Golfo project were never purchased and investors received no money. In 2009, the entire Concrete Group was placed under monitoring and eventually receivership. The receiver’s investigations disclosed, among other things, that in some instances: (

a) separate bank accounts were not kept for each project; (

b) investor funds from one project were deposited into an account for a different project; (

c) distributions to investors were paid out from the incorrect bank account; and (

d) expenses were paid from whichever bank account had cash on hand without considering to which project the expenses related. [ 36 ] In support of its

summary judgment application, BNS submitted an affidavit sworn on June 30, 2016 by Karl Cyr, the business account manager who handled the Concrete Group’s accounts. He was cross-examined on his affidavit on August 17, 2016. [ 37 ] In his affidavit and questioning, Mr. Cyr stated that, while he was generally aware that the Concrete Group was engaged in real estate development, he had limited knowledge of how they were funded or carried on their business.

BNS had no knowledge of any of the offering memoranda or of their terms, of any terms on which funds may have been received by solicitors, or of any trust relationship between the plaintiffs and any other entities. [ 38 ] The Concrete Group began banking with BNS in June 2007 and ultimately had about 32 accounts – not an unusual number considering the nature of their business, according to Mr. Cyr. Three accounts are relevant to the claims in this action, two for El Golfo and one for Santa Clara Registered Corp.

The accounts were named: • “El Golfo Investment Corporation General Account”; • “Santa Clara Registered Corp.”; and • “El Golfo Investment Corporation Trust Account.” [ 39 ] Mr. Cyr testified that clients can name their accounts whatever they choose. He did not know why one of the accounts was called a “trust account” and recalls no discussion about it.

BNS was not aware of any difference between this account and other Concrete Group accounts; it was just another operating account. [ 40 ] In their brief, the plaintiffs alleged that BNS “negotiated financial instruments which were clearly indicated to be payable ‘in trust.’” However, there is no evidence to support this allegation. No witness gave that testimony and the account statements referred to in

support include no financial instruments or any indication that financial instruments indicated to be payable ‘in trust’ were negotiated by BNS. [ 41 ] Mr. Cyr testified that the El Golfo accounts were “deposit only,” which meant the client had the right to deposit, withdraw or transfer funds to or from other accounts or make payments to third parties. There were, however, no credit facilities attached to the accounts and BNS did not lend money to any of the Concrete Group entities.

The only funds paid to BNS in the context of its banking relationship with the Concrete Group were account service charges and electronic banking fees, which on the three El Golfo accounts totalled $2,922.27. [ 42 ] BNS monitored the accounts through a system it used for deposit only accounts, designed to flag high dollar value deposits and withdrawals. The system was used primarily as a marketing tool. If there were deposits that were seen as an investment opportunity, BNS would contact the customer. Mr. Cyr reviewed reports from this system daily for all branch customers.

None of the monitoring reports for the El Golfo accounts raised any concerns. There were many transfers into, out of and between Concrete Group accounts, but according to Mr. Cyr, there was no reason to believe anything improper was occurring. [ 43 ] BNS froze all of the Concrete Group accounts immediately upon request of the receiver on July 30, 2009. B. Knowing Receipt [ 44 ] I am satisfied based on my review of the evidence that it is highly unlikely the plaintiffs will succeed in establishing the elements of knowing receipt.

For present purposes, it is necessary to address only the third and fourth elements, the elements on which the evidence of BNS focuses. [ 45 ] That evidence establishes, in essence, that BNS allowed the Concrete Group to open a number of “deposit only” or operating accounts. All the accounts were active with various transactions. They were monitored only for unusual amounts, primarily for marketing purposes. [ 46 ] One of the accounts relevant for this action was called a trust account, so named by the client.

On the evidence, there was no discussion with or information given to BNS regarding the account and its name. Thus, BNS had no knowledge of whether a trust was intended to be created or, if so, who were the beneficiaries. [ 47 ] It means little that a client names an account as a trust account. Clients may wish to separate funds in different accounts for a variety of purposes. The word “trust” may indicate a plan to use funds for a certain purpose, but does not necessarily evidence an intention to create a trust.

For example, parents may collect savings in a “trust account” for vacations, education or other special purposes without necessarily showing an intention to create a binding trust. [ 48 ] Similarly, even if an account name suggests that a trust has been created, that says nothing about for whom or what purpose. Moreover, even if there is an actual trust, the bank has no reason to believe that activity in the account means the trust is being breached. Withdrawals or transfers might be in performance of trust objects. [ 49 ] The evidence is that BNS knew of no trust, no offering memoranda and no unlawful conduct.

The plaintiffs say BNS was put on inquiry. It is arguable that the bank had constructive knowledge that these were trust funds. But knowing receipt requires constructive knowledge of a breach of that trust. No evidence comes close to establishing that knowledge. It would require at least some information about the obligations imposed on the Concrete entities by the offering memoranda.

BNS was not even aware of the existence of these lengthy, complex documents and certainly had not received copies or details of their terms. [ 50 ] Finding constructive knowledge of a breach of trust in these circumstances would impose on banks a duty of inquiry into the particulars of every named “trust account,” including whether there was a binding trust and all of its terms. The bank would then be required to monitor every transaction to determine if it complied with the trust.

There is no legal basis for holding a bank to such obligations. [ 51 ] Further, the evidence shows the plaintiffs are highly unlikely to succeed in establishing the fourth element of the knowing receipt cause of action, namely that BNS received trust property for its own use and benefit. “Use and benefit,” as indicated earlier, has a very specific meaning. The bank must have used the funds in its personal capacity – for example, to pay down an overdraft, perhaps incurred by a party related to the client. Earning fees for providing banking services does not qualify as receipt for its own use and benefit.

As explained above, knowing receipt is a kind of unjust enrichment. Thus, a bank may not reduce debts to it by misappropriating funds belonging to another party. However, there is nothing unjust about fees charged for banking services and they are insufficient to ground a claim for knowing receipt: Eaton , para 34 . [ 52 ] The plaintiffs argue that BNS used funds on deposit as a basis to multiply its asset base, thus enabling it to lend out a multiplier of those funds. There may well be some relationship between total funds on deposit and total funds available for lending.

The plaintiffs adduced no evidence of how that relationship works apart from Mr. Cyr’s very general answers to a few questions, as follows: Q. Now it would appear as though the account in terms of the deposits was large enough that it was attracting interest credits; is that correct? A. That’s correct. Q. Now, I’m assuming that at the time the bank was receiving a financial benefit on large deposit accounts, generally speaking? A. I’m not sure what you mean by that. Q. Well, my understanding is that banks typically generate revenues as a result of funds on deposit?

A. Yes, In general terms, yes. Q. And that would’ve been the case in terms of this account. There would’ve been revenue generated to the bank by virtue of the size of these developments? MR. MADSEN: Do you know? A. I do not know for sure, but I would -- Q. MR. DOCKEN: That was generally the case? A. That’s how banks work. [ 53 ] Given the complexity of bank regulations, it is unlikely to be as simple as the direct correlation suggested in the plaintiffs’ argument. They have put forward no evidence to show that BNS used misappropriated funds to further its lending business.

In my view, to find that merely accepting funds for deposit is sufficient to constitute applying property for the bank’s own use and benefit would deprive the fourth element of knowing receipt of any meaning. [ 54 ] Thus, I conclude that the plaintiffs’ claim for knowing receipt has no reasonable prospect of success and BNS’ application for

summary dismissal of that claim is granted. C. Knowing Assistance [ 55 ] As explained earlier, to establish knowing assistance it must be proved that: (

a) there was a trust in favour of the plaintiffs; (

b) the trustee perpetrated a dishonest and fraudulent breach of that trust; and (

c) BNS had actual knowledge of, or at least was reckless or willfully blind about, the dishonest and fraudulent breach of trust. [ 56 ] From my review of the evidence, I conclude it is highly unlikely the plaintiffs can succeed on this cause of action. It is necessary to address only the last element, the one on which BNS’ evidence focuses. [ 57 ] It is important to emphasize that, in contrast to the constructive knowledge that suffices for knowing receipt, knowing assistance requires a form of actual knowledge. I have already found that the evidence does not establish constructive knowledge of a breach of trust.

On the evidence, it is even more unlikely the plaintiffs can show that BNS had a form of actual knowledge of a dishonest and fraudulent breach of trust. Thus, the plaintiffs’ claim for knowing assistance has no reasonable prospect of success and BNS’ application for

summary dismissal of that claim is granted. VI.

Summary Judgment in FMC Actions A.

Summary of Evidence [ 58 ] Nearly identical affidavits were sworn by Bruce Laing (September 1, 2016) and David Erisman (September 10, 2016) in the Chinook and Stuart actions, respectively. Together with exhibits, they set out the facts underlying the actions. [ 59 ] The Concrete Group real estate investment projects were, broadly speaking, organized through the corporate marketing vehicle Concrete Equities Inc. (“Concrete Equities”). Concrete Equities raised funds through offering memoranda specific to each project.

The projects were organized as limited partnerships, each with its own general partner and limited partner. [ 60 ] Investors participated by purchasing limited partnership units associated with specific projects. Investment funds would be made payable to the project’s general partner to be held in trust or to a law firm administering the trust funds.

The offering memoranda provided that funds would be held for two days and then deposited into a bank account for the general partner in trust, or the law firm would deposit the investors’ funds into relevant trust accounts. [ 61 ] The Luna Morada (or Calle Mariposas) project was established to purchase, hold, develop and sell land in Nuevo Vallarta, Mexico. Funds were raised through an offering memorandum issued by Calle Mariposas Limited Partnership (“Calle Mariposas LP”), providing for purchase of units in the Calle Mariposas LP. The general partner was Luna Morada Investment Corporation. Mr.

Laing subscribed for units in the Calle Mariposas LP and made his payment to FMC in trust. [ 62 ] The Conchas Chinas project was established to purchase, hold, develop and sell land in Puerto Vallarta, Mexico. Funds were raised through an offering memorandum issued by Conchas Chinas Real Estate Investment Fund Limited Partnership (“Conchas Chinas LP”), providing for purchase of units in the Conchas Chinas LP. The general partner was Costa Koraal Investment Corporation. Mr.

Erisman subscribed for units in the Conchas Chinas LP and made his payment to FMC in trust. [ 63 ] According to the affidavits, each investment failed because investment funds did not reach their intended destinations, instead being comingled with other Concrete entities’ bank accounts which numbered “some 79 in total,” and ending up in other projects, in the pockets of Concrete principals, and in a Mexican condominium in the name of one of those principals. [ 64 ] The report of the Concrete Group’s receiver states that the funds for the Luna Morada and Conchas Chinas projects were comingled in an FMC account named “Real Estate Development in Mexico.” The receiver did not attempt to segregate the sources and uses of the funds by project, given the significant amount of effort this task would have entailed. [ 65 ] The receiver also reported that each of the offering memoranda stated that the net proceeds raised from subscribers would be

used for acquisition of land, that the land was acquired for both projects, and that the total disbursements for the two projects (including property improvements, construction, building purchase and deposits on land) exceeded funds raised from investors. [ 66 ] Both offering memoranda required that investors provide “a certified cheque or bank draft payable to Fraser Milner Casgrain LLP (in trust)” stated to be for the indicated limited partnership, and deliver the executed documents and funds to the indicated limited partnership “c/o: Fraser Milner Casgrain LLP.” The offering memorandum for the Luna Morada project also stated, under the heading “Income Tax Consequences and RRSP Eligibility,” that “in the opinion of Fraser Milner Casgrain LLP, counsel for the Limited Partnership as it relates to securities and tax law matters,” a number of tax considerations applied.

That statement does not appear in the other offering memorandum. Each plaintiff testified to an “understanding . . . that [FMC] was actively involved in legal work for Concrete Equities, including ‘structuring the transactions’ and was listed as a creditor in the receivership for $26,476 for legal fees for Concrete Equities work. [ 67 ] In affidavits and questioning, Eugene Chen testified that, at the relevant times, he was a solicitor with FMC and acted for the Concrete entities on various matters. Another member of the firm, Carlos Solorzano, was the original client contact.

No one at FMC prepared the offering memorandum issued for either the Luna Morada or the Conchas Chinas project. Further, FMC never provided tax opinions on these projects and required correspondence to be sent to all investors indicating that the Luna Morada offering memorandum was in error by stating that FMC was counsel on securities and tax law matters. [ 68 ] The “understanding” to which the plaintiffs testified appears to be based on Mr. Chen’s questioning, but is not entirely consistent with his evidence.

He testified that he was asked through an FMC colleague to assist in potentially structuring transactions; however the transactions would have related to other investments, as the Luna Morada and Conchas Chinas projects were already up and running. [ 69 ] FMC received trust cheques, though Mr. Chen was not aware of this at the time. FMC’s statement of defence states that it received investments in trust and dispersed trust funds on the instructions of the limited partnership in accordance with the terms of the limited partnership agreement and the offering memorandum, and Mr.

Chen assumes that this is what occurred. He testified that he does not know why FMC was receiving trust funds on these projects, as it had no involvement with respect to the offering memoranda. He is highly doubtful that any trust funds would have been used to cover legal fees. [ 70 ] The receiver’s report refers to an FMC trust account with the description “El Golfo” which in fact related to the Luna Morada and Conchas Chinas projects. Mr.

Chen was not aware of that finding by the receiver and can offer no explanation. [ 71 ] The plaintiffs testified that the Real Estate Council of Alberta (“RECA”) imposed a lifetime ban on Mr. Humeniuk on January 8, 2005 and that FMC represented him in the process leading to that sanctioning. Mr. Chen testified he was aware that Mr. Humeniuk had had some issues with RECA, but was not aware of the details and did not know that FMC had acted for Mr. Humeniuk. B. Knowing Receipt [ 72 ] To establish knowing receipt, the plaintiffs must prove that (

a) FMC received property subject to a trust in favour of the plaintiffs; (

b) the property was taken from the plaintiffs in breach of that trust; (

c) FMC had at least constructive knowledge of that breach of trust; and (

d) FMC applied the property for its own use and benefit. [ 73 ] The evidence establishes that FMC acted for the Concrete Group on a number of matters, but did not do all their legal work. The only role it performed in respect of these two projects was to receive funds from subscribers for limited partnership units, to be held in trust as directed in the offering memoranda. It did not prepare the offering memoranda. [ 74 ] Thus, on the evidence I find that for these two projects, FMC’s role was limited to accepting investors’ funds in trust. If an additional role was contemplated, on the evidence it did not occur.

FMC was obligated to act as a trustee, a role lawyers often play because of their unique status under the statutes and regulations governing their profession. [ 75 ] When a firm of solicitors agrees to accept trust funds, it undertakes to fulfill all duties reasonably associated therewith. At the very least, this must include knowledge of the terms of the trust.

As FMC accepted funds paid pursuant to the offering memoranda, either it was familiar with those terms or should have been. [ 76 ] FMC submits that the plaintiffs’ knowing receipt and knowing assistance claims against it are not as trustee but as a stranger to a trust. That, however, does not change the fact that FMC knew or ought to have known that it was taking funds paid pursuant to the offering memoranda. FMC cannot tenably argue that it was unaware whether the funds were from its client (some Concrete entity) or from investors.

Thus, even as a stranger to the trust between Concrete and the investors, it was impressed with knowledge of the terms of the trust. [ 77 ] However, there is no evidence that FMC, having received trust property, had knowledge of facts that should have put it on inquiry as to possible breach of the trust. The plaintiffs have shown only that FMC received their funds in trust. There is no evidence of what happened to those funds, let alone evidence showing that they were handled in breach of trust.

The case is not made by pointing to other irregularities in the way the Concrete Group managed its projects. [ 78 ] In fact, as FMC points out, the record before me tends to show that the funds were used for the intended purposes. Although the receiver noted intermingling of funds at FMC with respect to these projects, it also confirmed that the lands for the projects were purchased. [ 79 ] More importantly, there is no evidence that FMC had constructive knowledge that the Concrete Group was breaching the trust.

To establish knowing receipt, the plaintiffs must show that FMC should have been aware or put on inquiry that the Concrete Group used funds for purposes other than development of the respective projects. There is no evidence to that effect.

[ 80 ] The last element of the cause of action requires FMC to have applied the property for its own use and benefit. As explained earlier, that means FMC must have used the funds in its personal capacity, because knowing receipt is a form of unjust enrichment. There is no evidence that FMC used misappropriated funds to further its own interest. [ 81 ] Thus, I conclude that the plaintiffs’ claim for knowing receipt has no reasonable prospect of success and FMC’s application for

summary dismissal of that claim is granted. C. Knowing Assistance [ 82 ] Establishing knowing assistance requires proof that: (

a) there was a trust in favour of the plaintiffs; (

b) the trustee perpetrated a dishonest and fraudulent breach of that trust; and (

c) FMC had actual knowledge of, or at least was recklessly or willfully blind about, that dishonest and fraudulent breach of trust. [ 83 ] On the evidence before me, I conclude that it is highly unlikely the plaintiffs can succeed on this claim. It is necessary to address only the last element, the one on which the evidence focuses. [ 84 ] As I noted in connection with the Mills action, knowing assistance requires a higher degree of knowledge – a form of actual knowledge – as opposed to the constructive knowledge sufficient for knowing receipt.

I have already found that the evidence does not establish constructive knowledge of a breach of trust. Accordingly, it is highly unlikely that the plaintiffs can show that FMC had actual knowledge of a dishonest and fraudulent breach of trust. Thus, the plaintiffs’ claim for knowing assistance has no reasonable prospect of success and FMC’s application for

summary dismissal of that claim is granted. D. Negligence [ 85 ] The statements of claim also allege that FMC breached duties of care to the plaintiffs by failing to disclose that Mr. Humeniuk was under a lifetime ban from membership in RECA. FMC did not address in evidence or argument the question of whether it was aware of Mr. Humeniuk’s ban. [ 86 ] The plaintiffs apparently ground this duty of care on the assumption, as pleaded, that FMC prepared the offering memoranda.

However, the evidence is that FMC did not prepare the offering memoranda, did not assist in structuring these transactions, and did not provide legal opinions. [ 87 ] Thus, there is no likelihood that the factual basis of the alleged duty of care could be proved. As a result, even without considering as a matter of law whether the alleged facts would give rise to duties of care, there is no reasonable prospect of success in a negligence claim against FMC and its application for

summary dismissal of that claim is granted. VII. Striking Pleadings That Disclose No Reasonable Claim A. Requirements for Striking Pleadings [ 88 ] Rules 3.68(1)(

a) and (2)(

b) provide that if the circumstances warrant and if a pleading discloses no reasonable claim, all or any part of a claim may be struck out. [ 89 ] The Supreme Court of Canada outlined the general principles that should inform the application of rules on striking pleadings in R v Imperial Tobacco Canada , 2011 SCC 42 , [2011] 3 SCR 45. Those principles may be collected as the following propositions, set out at paras 17, 19, 21 and 22: . . . A claim will only be struck if it is plain and obvious, assuming the facts pleaded to be true, that the pleading discloses no reasonable cause of action . . . .

Another way of putting the test is that the claim has no reasonable prospect of success. Where a reasonable prospect of success exists, the matter should be allowed to proceed to trial . . . . The power to strike out claims that have no reasonable prospect of success is a valuable housekeeping measure essential to effective and fair litigation. It unclutters the proceedings, weeding out the hopeless claims and ensuring that those that have some chance of success go on to trial. . . . Valuable as it is, the motion to strike is a tool that must be used with care. The law is not static and unchanging.

Actions that yesterday were deemed hopeless may tomorrow succeed. . . . Therefore, on a motion to strike, it is not determinative that the law has not yet recognized the particular claim. The court must rather ask whether, assuming the facts pleaded are true, there is a reasonable prospect that the claim will succeed. The approach must be generous and err on the side of permitting a novel but arguable claim to proceed to trial. A motion to strike for failure to disclose a reasonable cause of action proceeds on the basis that the facts pleaded are true, unless they are manifestly incapable of being proven . . . .

It is incumbent on the claimant to clearly plead the facts upon which it relies in making its claim. A claimant is not entitled to rely on the possibility that new facts may turn up as the case progresses. The claimant may not be in a position to prove the facts pleaded at the time of the motion. It may only hope to be able to prove them. But plead them it must. The facts pleaded are the firm basis upon which the possibility of success of the claim must be evaluated. If they are not pleaded, the exercise cannot be properly conducted. [Citations omitted.]

[ 90 ] As emphasized in Imperial Tobacco , because the test requires assessing the possibility of success assuming the facts pleaded are true, all facts essential to the causes of action must be pleaded.

It is not sufficient “to merely make bald allegations that recite the basic elements” of the cause of action in general terms; the necessary facts must be pleaded: JO v Alberta , 2013 ABQB 693 , 576 AR 307 at paras 76 and 77 , quoting and relying upon GH v Alcock , 2013 ABCA 24 at para 58 . [ 91 ] On a motion to strike, pleadings should be liberally interpreted: Tottrup v Alberta (Minister of Environment) , 2000 ABCA 121 , 255 AR 204 at paras 8 and 9 .

Nevertheless, the court has a duty to apply the rule as intended ( Tottrup , para 9 ), and it is not for the court to draft pleadings to save the action: JO v Alberta , 2012 ABQB 599 , 550 AR 51 at para 43 . B. Mills Action 1. Knowing Receipt [ 92 ] To summarize again, knowing receipt requires proof that (

a) BNS received property subject to a trust in favour of the plaintiffs; (

b) the property was taken from the plaintiffs in breach of that trust; (

c) BNS had at least constructive knowledge of that breach of trust; and (

d) BNS applied the property for its own use and benefit. BNS submits that the pleadings fail to make out the first and fourth of these elements. [ 93 ] In my view, reading the pleadings liberally, they adequately allege facts that, if true, would establish that the subject funds were impressed with a trust and that the trust was breached.

Paragraph 22 of the amended amended statement of claim alleges that investment funds were deposited to accounts of the general partner, that the promoters misappropriated some of the funds for unauthorized purposes, including unrelated projects and their own purposes and that funds were diverted and comingled with other funds in a manner that was unlawful and in breach of the offering memoranda. [ 94 ] Similarly, while it does not seem to be in dispute, I am satisfied that paragraphs 44 and 45 of the amended amended statement of claim plead the facts necessary to establish that BNS had constructive knowledge of the breach. [ 95 ] However, the pleadings fail to allege any facts amounting to BNS applying the property for its own use and benefit.

The only plea relating to this element is the allegation at paragraph 46 that “the Banks benefitted financially from the relationship they had with the Concrete Group. As a result the acquiescence by each institution to the unlawful comingling of funds, constitutes knowing receipt by those institutions of those unlawful transactions, for which the defendant institutions are liable”. An allegation that BNS benefitted from a commercial relationship with the Concrete Group says nothing about using trust funds belonging to the plaintiff for BNS’ own personal use and benefit.

As was said in JO v Alberta and GH v Alcock , the addition of a “bald allegation” that the action in knowing receipt is made out does not make it so. [ 96 ] Thus, BNS’ application to strike out the plaintiffs’ claim for knowing receipt is granted. 2. Knowing Assistance [ 97 ] To reiterate, knowing assistance requires proof that: (

a) there was a trust in favour of the plaintiffs; (

b) the trustee perpetrated a dishonest and fraudulent breach of that trust; (

c) BNS had actual knowledge of, or at least was reckless or willfully blind about, the dishonest and fraudulent breach of trust. [ 98 ] As with the pleadings for knowing receipt, I am satisfied, on a liberal reading, that the pleadings are adequate to ground the allegations of a trust and of a breach of that trust. [ 99 ] The pleadings fail, however, on the last element. It is an essential feature of the knowing assistance cause of action that the defendant have knowledge of the dishonest, fraudulent breach of trust, whether actual knowledge, recklessness or willful blindness.

Constructive knowledge or being put on inquiry does not suffice. [ 100 ] The plaintiffs, however, allege only constructive knowledge by BNS. The pleadings say at paragraph 45 that “this practice of comingling of funds was a practice sufficiently pervasive and regular that the Banks should have been put on notice” and at paragraph 47 that “the pervasive nature of the unlawful comingling should have placed the Banks on notice that this illegality was being committed”. [ 101 ] Thus, the pleadings do not disclose a reasonable claim for knowing assistance and the application to strike that claim is granted. C.

Chinook and Stuart Actions 1. Knowing Receipt [ 102 ] For these actions, knowing receipt would require proof that: (

a) FMC received property subject to a trust in favour of the plaintiffs; (

b) the property was taken from the plaintiffs in breach of that trust; (

c) FMC had at least constructive knowledge of that breach of trust; and (

d) FMC applied the property for its own use and benefit. [ 103 ] The statements of claim in these actions describe the raising of investment funds, the fiduciary duties owed by the principals and the misappropriation of the funds for unauthorized purposes (paras. 14, 18, 19, 20 and 22).

Under the heading “Knowing Receipt and Assistance” it is pleaded that “FMC received consideration in the form of legal fees for its services in receiving and disbursing the Investments” and that “FMC received Investments under circumstances which placed FMC upon inquiry as to the propriety of receiving such funds” (paras. 30 and 31). [ 104 ] Reading the pleadings liberally, I consider them adequate in respect of a trust and breach thereof, and, more tenuously, in respect

of constructive knowledge of that breach. [ 105 ] The pleadings, however, fail to include a sufficient allegation that FMC applied trust property for its own use and benefit. The fact that FMC received legal fees for services rendered does not establish that it received trust property for its own personal use and benefit. That element is not pleaded in any fashion. [ 106 ] Accordingly, the application to strike the claims of knowing receipt against FMC is granted for both the Chinook and the Stuart actions. 2. Knowing Assistance [ 107 ] The pleadings in respect of knowing assistance must allege facts sufficient to prove that: (

a) there was a trust in favour of the plaintiffs; (

b) the trustee perpetrated a dishonest and fraudulent breach of that trust; and (

c) FMC had actual knowledge of, or at least was recklessly or willfully blind about, that dishonest and fraudulent breach of trust. [ 108 ] When interpreted liberally, the pleadings may be adequate to establish the first two elements of the cause of action. But with respect to the third element, at most they can be read as alleging constructive notice, as they say only that FMC was placed upon inquiry.

That is a lower standard of knowledge than is required to make out the claim of knowing assistance. [ 109 ] Thus, the application to strike the claim of knowing assistance against FMC is granted for both the Chinook and Stuart actions. 3. Negligence [ 110 ] The statements of claim plead that Mr. Humeniuk was under a lifetime ban from membership with RECA, that FMC knew or ought to have known about this ban, that FMC acted as counsel to the limited partnerships, and in that role prepared the offering memoranda and that FMC owed a duty to the plaintiffs to disclose Mr.

Humeniuk’s ban and failed to do so. [ 111 ] The Supreme Court in Imperial Tobacco cautions at para 21 against striking pleadings where there is a possibility that developing areas of the law may allow a claim to succeed, even if existing authorities have not recognized the particular claim. For purposes of an application to strike, all the facts pleaded must be assumed to be true.

It cannot be said that there is no reasonable cause of action against FMC if it prepared the offering memoranda and thus had intimate involvement in the Concrete Group’s solicitation of investment funds, was counsel for the limited partnership, was aware of the lifetime ban from RECA of one of the principals, and chose not to disclose or ensure that others disclosed that information.

While it is highly unlikely that these essential facts could be proved, particularly FMC’s alleged role in the preparation of the offering memoranda, those alleged facts must be presumed true for this purpose. [ 112 ] Thus, the application to strike the negligence actions against FMC is dismissed. VIII.

Summary of Conclusions [ 113 ] In the result, the applications for

summary judgment in favour of the defendants are granted in the Mills, Chinook and Stuart actions. The application to strike pleadings in the Mills action is granted. The applications to strike pleadings for the claims of knowing receipt and knowing assistance in the Chinook and Stuart actions are granted. The applications to strike pleadings for the negligence claim in the Chinook and Stuart actions are dismissed. [ 114 ] Costs may be spoken to. Heard on the 27 th day of September, 2016. Dated at the City of Calgary, Alberta this 22 nd day of December, 2016. G.H. Poelman J.C.Q.B.A. Appearances: For the Plaintiffs: Clint G. Docken, Q.C. For the Defendants:

J. Patrick Peacock, Q.C., and Mylène D. Tiessen for Fraser Milner Casgrain LLP David T. Madsen, Q.C., for Scotia Bank