Presidents Court, (White Rock): Architect dies; condo project underdesigned; Court dertermines Willem and Peter Kerkoff breached trust

 

                                                 Date: 19980618
Docket: H950201
Registry: Vancouver

IN THE SUPREME COURT OF BRITISH COLUMBIA

BETWEEN:
FALCON PACIFIC FINANCIAL CORPORATION

PLAINTIFF
AND:

KERKHOFF INVESTMENT SYNDICATION CORPORATION,
WILLEM KERKHOFF, PETER KERKHOFF, BRIDGE
ELECTRIC CORP., ABC BLIND CORPORATION, CANADA
SCAFFOLD SUPPLY CO. LTD., HERTCO KITCHEN MFG.
LTD., PACIFIC WEST SYSTEMS SUPPLY LTD., 382541
B.C. LTD. doing business as MOUNTAIN WEST
MECHANICAL, EXPERT STONE PAVING AND LANDSCAPING
LTD., GOUGH ELECTRIC, division of GUILLEVIN
INTERNATIONAL INC., BUENA VISTA PROJECTS LIMITED
PARTNERSHIP, BUENA VISTA TWO PROJECTS LIMITED
PARTNERSHIP

DEFENDANTS
AND:

KERKHOFF INVESTMENT SYNDICATION CORPORATION,
WILLEM KERKHOFF, PETER KERKHOFF, KERKHOFF REAL
ESTATE SYNDICATION LTD., KERKHOFF GROUP INC. and
KERKHOFF PROJECTS MANAGEMENT LTD.

THIRD PARTIES

REASONS FOR JUDGMENT

OF THE

HONOURABLE MR. JUSTICE HARDINGE


Counsel for the Plaintiff: Robin N. McFee


Counsel for the Defendant Barry B. Kerfoot
Buena Vista Two Projects Kathryn S. Lever
Limited Partnership:

Appearing for Kerkhoff Investment Peter Kerkhoff
Syndication Corporation, Willem
Kerkhoff and Peter Kerkhoff

Dates and Places of Hearing: March 31 to April 3, 1998
Vancouver, B.C.



I. INTRODUCTION

[1] These proceedings were commenced by a petition for
foreclosure of a third mortgage granted by Kerkhoff Investment
Syndication Corporation ("KISC") to Falcon Pacific Financial
Corporation ("Falcon"). They were converted into an action on
May 18, 1995 by order of Huddart, J. (as she then was).
Subsequently a third party notice was issued wherein the
defendant, Buena Vista Two Projects Limited Partnership
("BVII") claims a right of indemnity against the co-defendants
KISC, Willem Kerkhoff ("Willem"), Peter Kerkhoff ("Peter"),
Kerkhoff Real Estate Syndication Ltd. ("KRES"), Kerkhoff Group
Inc. and Kerkhoff Projects Management Ltd. (collectively "the
Kerkhoff defendants").

[2] On an application by Falcon pursuant to Rule 18(A) for an
order nisi of foreclosure, Tysoe J., on October 3, 1996,
granted the order against KISC, the registered owner of the
subject property and Buena Vista Projects Limited Partnership
("BVI") the beneficial owner of a portion of the subject
property. He directed there should be a trial in respect of
Falcon's claim as against BVII.

[3] Several of the parties named as defendants ceased to
participate in the proceedings prior to the commencement of the
trial. They had been named as defendants because they had
registered lien claims for work done and services provided. I
was told that all those claims have been resolved.

[4] The remaining claim of Falcon is for enforcement of the
terms of a third mortgage purporting to charge lands the
beneficial owner of which is BVII, and granted by KISC to
secure the repayment of a loan to KISC in the amount of
$575,000 plus interest at the rate of 50% per annum. The money
raised by this means was used to satisfy a requirement of the
prime lender for additional capital to be invested in BVI. The
third party proceedings were commenced by BVII against the
Kerkhoff defendants for indemnification in respect of the
financial loss it will suffer if Falcon is successful in the
foreclosure action.

[5] The facts out of which the proceedings arose are, to an
extent, complicated by the number of different entities among
the Kerkhoff defendants and the role of each. However, the
issue raised by the claim of Falcon is quite different from
those raised by the third party proceedings. I shall,
therefore, deal with the facts and the issue in the foreclosure
proceeding first. I will then deal separately with the facts
and issues in the third party proceedings.
II. FORECLOSURE PROCEEDINGS

[6] The facts relevant to the action (petition) for
foreclosure are relatively uncomplicated. However, to put them
into perspective it is necessary to refer to some of the
surrounding circumstances.

[7] Falcon is, as its name implies, a company the purpose of
which is to engage in financial transactions. One of the types
of financial transactions in which it engages is to provide
financial services to clients for a fee. Such services include
the lending of money and securing its repayment by means of
mortgages. Mr. Charles Croft ("Croft") is a shareholder,
director and the president of Falcon Pacific. As such, he is
the company's operating mind.

[8] KISC is the general partner in BVI. KRES is the general
partner in BVII. In addition to being the general partner in
BVI, KISC is also the registered owner of all the real property
that is the subject matter of these proceedings. Willem and
Peter are the operating minds of KRES and KISC. As Tysoe J.
said in his reasons for judgment:

The Kerkhoff group of companies...represent
themselves to be successful real estate developers in
the Lower Mainland...

[9] In September 1991 Willem and Peter decided to assemble a
parcel of land in the City of White Rock and to construct a
condominium complex thereon to be known as Presidents Court.
The complex was to be constructed in two phases. The first
phase ("Phase 1") would occupy approximately one half of the
assembled land. The second phase ("Phase 2") would occupy the
other half. They also decided that, apart from some common
elements, Phase 1 would be developed and the units in it sold
before the development of Phase 2 commenced.

[10] The land on which Phase 1 was to be developed consisted of
three contiguous city lots. Phase 2 was to be developed on
three adjoining lots.

[11] The vehicle chosen as the means of raising equity capital
for both phases of the Presidents Court project was limited
partnerships. In January 1992, BVI was formed to develop Phase
1. KISC was the general partner and registered owner of the
Phase 1 lots. In June 1992, BVII was formed for the
development of the Phase 2 lots. KRES was its general partner
but the property was registered in the name of KISC. It
executed declarations of trust stating it held the first group
of lots in trust for BVI and the second group in trust for
BVII.

[12] When the time came, early in 1993, to obtain construction
financing so that construction of Phase 1 could commence,
Richmond Savings Credit Union ("the Credit Union") was
approached. It agreed to extend a line of credit of
$5,000,000. Among the conditions included in the loan
agreement was that the mortgage to secure repayment of the loan
be registered against the three lots on which Phase 1 was to be
constructed and also the lots that had been purchased for Phase
2 of the overall development of the Presidents Court Project.

[13] Although it was not planned to commence the development of
Phase 2 prior the completion of Phase 1, the City required that
all the land that would eventually be used for both Phase 1 and
Phase 2 be consolidated into a single parcel. That requirement
was made a condition for granting a re-zoning application that
would permit commercial and condominium development on lands
previously zoned for single family residential purposes. The
consolidation was also made a condition of the issuance of a
building permit for Phase 1.

[14] It was known to the limited partners in BVII that the
construction and sale of the units in Phase 1 had to be
completed before construction of Phase 2 could start. For that
reason none of the Kerkhoff defendants thought it necessary to
advise the limited partners of BVII of the decision to
consolidate. Therefore, without reference to the limited
partners of BVII a plan of consolidation was filed in the Land
Titles Office. That plan consolidated all six lots into a
single parcel. Thus, not only were the requirements of the
City met, but one of the conditions of the loan agreement was
also met as the Credit Union mortgage would now have to be
registered against the title of the consolidated parcel formed
from the six separate lots.

[15] Another requirement of the Credit Union was that an
unrestricted indemnity agreement be provided by a party
acceptable to it. KISC arranged to obtain such an agreement
from Falcon for a fee of $250,000. That fee was advanced by
Falcon. Security for its repayment was a second mortgage in
its favour registered against the consolidated parcel. The
limited partners were not consulted or immediately advised of
this arrangement either.

[16] After the necessary financing was in place and a building
permit issued, construction of Phase 1 commenced. For several
reasons, problems soon arose that led to substantial cost
overruns. Not least among the problems was the discovery,
after the untimely death of the architect, that the structure
of the building being erected as the principal component of
Phase 1 was seriously under-designed. This led to the
necessity of doing expensive remedial work.
[17] Eventually it became apparent that the cost of developing
Phase 1 was going to be significantly higher than budgeted at
that point, the Credit Union gave notice that it would cease to
make further advances of the construction finances unless
$575,000 of additional capital was injected into the project.

[18] By the time the crisis for Phase 1 arose the financial
market conditions had altered a great deal from the time when
the initial financing had been arranged. Partly as a result of
large losses that were being experienced by many of the
country's major financial institutions, the money supply for
real estate development had become very tight.

[19] Being unable to arrange to obtain, from any other source,
the additional $575,000 needed to satisfy the Credit Union's
demand, KISC requested Falcon to put up the additional funds.
It agreed to do so. Repayment of this loan was to be secured
by means of a third mortgage registered against the
consolidated properties.

[20] Falcon is the alter ego of the witness, Charles Croft
("Croft"). He is a shareholder, director and president of
Falcon. Through another company (Eaglecroft Real Estate
Services Ltd.) in which he is also a major participant, Croft
had acquired an interest in two of the units in Phase 1. He
also testified he had had previous business dealings with the
Kerkhoff defendants. Those dealings had been financially
successful.

[21] Croft testified that he reluctantly agreed to advance
additional funds for Phase 1. He said he did so mainly because
the alternative to doing so might be the inability of KISC to
complete Phase 1 followed by the foreclosure of the Credit
Union's mortgage. That, in turn, would likely have led to the
Credit Union demanding that Falcon make good on the indemnity
agreement.

[22] The agreement, when formalized, contained a clause in
which KISC warranted it had sufficient title and right to grant
a third mortgage of the parcel of land into which the original
lots had been consolidated. Willem and Peter witnessed the
affixing of the corporate seal of KISC to the agreement. Both
of them also signed the agreement as co-covenantors. The
consent of BVII to this mortgage was purportedly given by KRES
as general partner of BVII.

[23] The interest rate specified in the agreement was 50% to be
calculated semi-annually. That may, at first blush, be thought
to be an inordinately high rate of interest. However, my
brother Tysoe has already held that, in all the circumstances
here, the rate of interest was neither illegal nor
unconscionable. Therefore, I do not need to deal with that
particular issue.

[24] Falcon and KISC both retained solicitors to draw and,
where necessary, register the documents required to perfect the
third mortgage. Croft instructed his solicitor to obtain
security covering the same property as that against which the
Credit Union's first and Falcon's second mortgage were
registered.

[25] In a letter to Falcon following completion of registration
of the third mortgage, KISC's solicitor reported that, in his
opinion, it had been duly authorized "by all necessary
corporate action of and executed and delivered by KISC with the
authorization and consent of the beneficial owners of the land,
Buena Vista Projects Limited Partnership and Buena Vista Two
Limited Partnership." 

 

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