CPI Crown Properties International Corporation v Bartsch, 2016 ABQB 93

Court of Queen ’ s Bench of Alberta Citation: CPI Crown Properties International Corporation v Bartsch, 2016 ABQB 93 Date: 20160216 Docket: 1001 14320, 1201 06189, 1501 05980 Registry: Calgary Between: CPI Crown Properties International Corporation Plaintiff - and - Robert Bartsch and Sheena Bartsch and others Defendants/ Plaintiffs by Counterclaim - and – CPI Crown Properties International Corporation, CPI Crown Capital Corporation, Quotavest Inc. and Nicholas Kazakoff Defendants by Counterclaim _______________________________________________________

Memorandum of Decision

Summary Judgment Applications of the Honourable Mr. Justice R.J. Hall _______________________________________________________ [ 1 ] The Plaintiff CPI Crown Properties International Corporation (“CPI”) sued Mr. and Mrs. Bartsch, for repayment of 3 loans. [ 2 ] The Bartsch’s defended the claim, maintaining, in part, that CPI never forwarded the proceeds of the loans to their intended recipients: therefore, there was no consideration by CPI and therefore no loans enforceable against the Bartsch’s. [ 3 ] CPI now seeks

summary judgment on its claim under 3 loan agreements or promissory notes; the Bartsch’s seek

summary dismissal of the CPI claims. [ 4 ] The Bartsch’s have also counterclaimed against CPI, as well as against CPI Crown Capital Corporation (“Crown Capital”) Quotavest Inc (“Quotavest”) and Nicholas Kazakoff (“Kazakoff”). The counterclaim alleges that, by virtue of the total failure of consideration by CPI aforesaid, the Bartsch’s are entitled to rescission of the loan agreements and rescission of their contracts whereby they made an investment pursuant to a Quotavest Offering Memorandum and another pursuant to a Crown Capital Offering Memorandum.

The Bartsch’s seek repayment to them of the amounts they paid under the loan agreements and the amounts they paid in their investments with Quotavest and with Crown Capital, plus interest at enhanced rates. They claim that misrepresentation induced them to invest. They claim breach of contract and breach of fiduciary duties. They seek an accounting. They seek a declaration that CPI and Crown Capital have been unjustly enriched, and that they should have an equitable right to trace funds.

They seek judgment for all their alleged damages from Kazakoff, claiming that Kazakoff was the directing mind of Crown Properties and Crown Capital, and claiming that the corporate veil should be pierced. [ 5 ] The Bartsch’s now apply for

Summary Judgment on that Counterclaim. The Law regarding

Summary Judgments [ 6 ] Rule 7.3 of the Alberta Rules of Court provides: 7.3(1) A party may apply to the Court for

summary judgment in respect of all or part of a claim on one or more of the following grounds:

a) there is no defence to a claim or part of it;

b) there is no merit to a claim or part of it;

c) the only issue is the amount to be awarded. [ 7 ] Following the decision of the Supreme Court of Canada in Hryniak v. Mauldin , 2014 SCC 7 , the Alberta Court of Appeal has issued two decisions respecting

summary judgments. In Windsor v Canadian Pacific Railway , 2014 ABCA 108 , the court changed the test for

summary judgment from “plain and obvious”, or “clear or beyond doubt”, to a less stringent test of “whether there is any issue of merit that genuinely requires a trial”. If a disposition that is fair and just to both parties can be made on the existing record, then the court should carry it out. [ 8 ] The Court of Appeal explained further in 776826 Alberta Ltd v Ostrowercha , 2015 ABCA 49 , at paras 9-11 : [ 9 ] From the process perspective,

summary judgment can be given if a disposition that is fair and just to both parties can be made on the existing record by using that alternative method for adjudication. [ 10 ] From the substantive perspective,

summary judgment can be granted if, in light of what fair and just process reveals, there is no merit to the claim or no defence to the claim. [ 11 ] Stated another way, in order for the non-moving party’s case to have merit, there must be a genuine issue of a potentially decisive material fact in the case which cannot be summarily found against the non-moving party on the record revealed by the “fair and just process” ... The key is whether the circumstances require viva voce evidence in order to properly resolve the case. Papaschase Indian Band No. 136 v Canada (Attorney General) , 2008 SCC 14 at paras 10 to 11 . [9] When seeking, or defending against, a

summary judgment application, the parties are expected to put their best foot forward. Here the record consists of affidavit evidence and questioning of the parties, either on the affidavits or in the action. Background [10] The Bartsch’s entered into two investments. The first was an investment to obtain 14 Undivided Interest Units in lands (“the

Crown Shores lands”) described in an Offering Memorandum issued by Crown Capital. Crown Capital represented in the Offering Memorandum that it had purchased 90% of the subject lands from CPI, for a purchase price of $5,544,000.00, which purchase price was as yet unpaid.

The purpose for the funds being raised pursuant to the Offering Memorandum was to pay CPI for the purchase of the said 90% of the lands. [11] It was a feature of the Offering Memorandum that the investor could finance 60% of its investment, with such financing to be provided by CPI. [ 12 ] In fact, CPI agreed to finance 80% of the Bartsch’s investment.

In the result, the Bartsch’s subscribed for 14 Undivided Units, at $14,900 per unit, for a total of $208,600. [ 13 ] The Bartsch’s paid Crown Capital’s lawyers 20% of the subscription price ($41,720) and signed a loan agreement with CPI for $125,160, and a promissory note for an additional $41,720. These two amounts totalled 80% of the subscription price, i.e. $166,680. Interest was charged on these loans at 11.75% per annum and repayment schedules were agreed upon. [ 14 ] The Bartsch’s made payments to CPI on the loans until December 2008, but have made no payments since.

CPI sues for the remainder of these debts together with interest under the agreements. [ 15 ] The Bartsch’s do acknowledge receiving the 14 Undivided interest Units in the Crown Shores lands as per the Offering Memorandum; but they say they have now learned that Crown Capital was never paid the 80% of the purchase price that was to be provided by CPI.

The Bartsch’s say they could be seen as now owing Crown Capital that 80%, but for the passage of time and the Limitations Act barring any claim against them by Crown Capital. [ 16 ] CPI says all of the funds being raised were owed to it by Crown Capital from Crown Capital’s purchase of the Crown Shores lands from CPI. CPI exchanged indebtedness from Crown Capital, for indebtedness from the investors to whom CPI lent money.

CPI says it was unnecessary and redundant for it to forward its financing amount to Crown Capital’s lawyers, only to have the same monies returned to it by the lawyers to retire Crown Capital’s debt to CPI. The transactions were accomplished on paper, reducing Crown Capital’s debt to CPI by the amount loaned to the investors by CPI. [ 17 ] That, it would seem, could be the case, had the transaction identified in the Crown Capital Offering Memorandum been carried out, whereby Crown Capital acquired 90% of the lands CPI for the agreed price.

However, CPI learned that, should these transactions go forward as described, CPI would face huge tax consequences; presumably that it would be taxed on the profit realized from the sale to Crown Capital. [ 18 ] As a result the deal was wholly changed by a second Offering Memorandum, which replaced the first one. [ 19 ] Under the second Offering Memorandum, the same monies were being raised, but instead of the purpose being described as the purchase of 90% of the Crown Shores lands by Crown Capital from CPI, the Offering Memorandum expressed that the purpose of the funds being raised was to develop the property.

Gone was any reference to Crown Capital buying the lands from CPI; gone was any reference to monies being owed by Crown Capital to CPI for such a purchase. [ 20 ] The second Offering Memorandum was not presented to the Bartsch’s (who had already made their investment and borrowed from CPI), nor were the Bartsch’s given notice that the rationale for the investment and the intended use of funds had changed. [ 21 ] The Bartsch’s say in these applications, that the argument of CPI that it need not forward the funds to Crown Capital because those funds were owed to it by Crown Capital, now must fail, given the change in structure and the intended use of funds.

Under this second Offering Memorandum, CPI was required to put forth the loaned funds, so that the funds would be available for development of the lands. [ 22 ] The evidence discloses that the funds representing 80% of the Bartsch’s investment were never forwarded by CPI to Crown Capital. While Kazakoff attempted to say that the funds were advanced, the advances to which he refers were with respect to other dealings between CPI and Crown Capital.

Indeed, CPI sued Crown Capital in respect of those other advances, a position that is directly opposed to Kazakoff’s assertions that the loan was retired by replacing it with investor’s loans. [ 23 ] The Bartsch’s therefore say that they do not owe anything to CPI and in fact should have back from CPI the monies they paid CPI under these agreements. [ 24 ] Turning to the Bartsch’s investment in Quotavest, the evidence describes that Quotavest was incorporated with a view to being an RRSP eligible investment corporation. Investors could make an RRSP eligible investment by purchasing common shares in Quotavest.

Quotavest issued an Offering Memorandum soliciting such investments. In the Quotavest Offering Memorandum Quotavest indicated that the funds raised would be used to purchase Undivided Interest Units in the Crown Shores lands pursuant to the first Crown Capital Offering Memorandum or in other lands (the “Crown Vista” lands). It was not specified as to what proportion of an investor’s funds would go to which lands. [ 25 ] The subscription price ultimately, was $14,900 per Quotavest share.

The Bartsch’s subscribed for 4 Quotavest shares, for a total cost of $59,600. [ 26 ] Of that amount, the Bartsch’s paid $11,920 and borrowed the remaining 80%, i.e. $47,680 from CPI on an agreed repayment schedule, at interest of 11.75% per annum. The Bartsch’s signed a promissory note in favour of CPI, evidencing the terms for repayment for the loan. [ 27 ] The Bartsch’s made their payments on this loan to CPI until December of 2008. CPI seeks to have judgment against the Bartsch’s for the remainder plus interest at the agreed 11.75%.

[ 28 ] The Bartsch’s now say, however, that CPI never advanced the $47,680 to Quotavest, and has therefore not performed its part of the bargain. The funds were never advanced to the Bartsch’s. The Bartsch’s say the funds were never advanced by CPI to Quotavest. [ 29 ] While the Bartsch’s received their Quotavest shares, they say that Quotavest never received 80% of the purchase price of those shares. The Bartsch’s say they therefore owe that money to Quotavest (because CPI’s non performance); but by virtue of the passage of time, any claim by Quotavest against them is barred by the Limitations Act .

As for CPI, they say it has not performed; the agreement should be rescinded and they should have their loan payments back. [ 30 ] CPI provided no evidence that it did, in fact, honour its commitment to forward 80% of the subscription price to Quotavest.

Decision [ 31 ] I am satisfied on the evidentiary record that CPI did not forward funds to either Crown Capital or to Quotavest on behalf of the Bartsch’s. [ 32 ] I am satisfied on the evidence that the purpose for which Crown Capital raised funds from investors changed from being the purchase of the Crown Shores lands from CPI to being funds for development of the lands. No amount owing by Crown Capital to CPI referenced in the second Crown Capital Offering Memorandum; no loan from CPI to Crown Capital is referenced in the second Crown Capital Offering Memorandum.

Some different structuring took place within the CPI group of companies; as a result, CPI cannot claim that a debt to it from Crown Capital was being replaced by debt to it from investors who had taken financing loans from CPI. [ 33 ] As CPI never forwarded the loaned funds to the Bartsch’s, or Crown Capital, or Quotavest, CPI has wholly failed to perform its obligations under the loan agreement and the promissory notes. Having never loaned the monies, it is not entitled to repayment, nor to interest. It follows therefore:

a) That the claim in this action by CPI must fail;

b) That the Bartsch’s should have

summary judgment against CPI for all of the monies they paid CPI under the loan agreement and the promissory notes, both with respect to the loan to finance the investment into Crown Capital and the loan to finance the investment into Quotavest. [ 34 ] I direct, as well, that from the time each payment was made by the Bartsch’s to CPI, the Bartsch’s are entitled to interest on the payments to the date of judgment; that interest rate shall be that set by the Judgment Interest Act for pecuniary damages.

I do not enhance the interest rate, as interest paid by the Bartsch’s has already been calculated at 11.75%, which is, by this decision, repayable to them; so the normal rules of judgment interest apply to the totals paid. [ 35 ] The Bartsch’s, however, seek more. They seek

summary judgment against the many defendants by counterclaim for the amounts they invested in both the Crown Capital Offering and the Quotavest Offering. [ 36 ] While clothed in claims for misrepresentation, these claims are essentially claims for fraud.

The argument is that the representations were knowingly inaccurate and the use to which the funds were put were unauthorized uses. [ 37 ] The defence put forth by the Defendants by Counterclaim is that the economics of the project failed; and that these are failed investments, not because of fraud or misfeasance, but because of economic conditions causing the projects to fail. [ 38 ] I am not convinced that such claims can be summarily disposed.

There is much evidence to be heard by the court as to what happened leading to the loss of investment by all parties. [ 39 ] I therefore decline to deal with the Bartsch’s claims for repayment to them of their investments, in a

summary fashion, based on the evidentiary record placed before me. Heard on the 14 th day of December, 2015. Dated at the City of Calgary, Alberta this 16 th day of February, 2016. R.J. Hall J.C.Q.B.A.

Appearances: Alexander Kooiman for CPI Crown Properties International Corporation and Nicholas Kazakoff Justin Lambert and David Marshall for 0738827 BC Ltd and Bartsch