Court refuses to reduce commission payable because lawyer-vendor and realtor did not have clean hands


Pierce v. Catalano



2008 BCPC 0008 

File No:









































Appearing on their own behalf:

Lawrence E. Pierce

Counsel for the Defendant:

B. Hara

Place of Hearing:

Vancouver, B.C.

Dates of Hearing:

October 31, 2007 & November 20, 2007

Date of Judgment:

January 21, 2008



[1]        Mr. Pierce (“Plaintiff”) owned a house in White Rock.  He signed a Multi-Listing Agreement with Wholesale Realty Ltd.  The listing was placed on the MLS Listing Service by Wholesale Realty Ltd.  What was somewhat unusual about the Multiple Listing Agreement, was that:

(a)        Wholesale Realty Ltd. were to be paid, as the listing broker, a flat gross commission of $10,000.00 plus GST, upon the occurrence of any of the standard conditions in the Real Estate Board of Greater Vancouver, Multiple Listing Contract;

(b)        To assist in obtaining a buyer, the listing broker was authorized to pay any co-operating broker $10,000.00 plus GST;

(c)        Wholesale Realty Ltd. would receive a flat fee of $600.00 “up front” for their anticipated assistance in effecting an eventual sale of the property.


[2]        The $600.00 was paid to Wholesale Realty Ltd., the house was listed on MLS for $975,000.00 and a perspective buyer came forth.

[3]        The prospective buyer was a Mr. Little.  He came to see the house with his friend, Mr. Leonard Lauriente.  Mr. Little made an offer to the buy the house, but that offer “collapsed”.

[4]        Approximately one month later, Mr. Lauriente was at the Art Knapp Nursery in Surrey.  The Plaintiff and his partner, Ms. Margaret Leader, by coincidence, were there also.  Ms. Leader recognized Mr. Lauriente from the previous month when he had viewed the house with Mr. Little.  She asked Mr. Lauriente if he was perhaps interested in buying the house.  She told him that the Little offer had collapsed, as had two other offers.  Mr. Lauriente said that he had recently been away on vacation in Cuba and had not wanted to get involved in purchasing any property that his friend, Mr. Little, was still interested in.  He went on to say that if Mr. Little was no longer a potential buyer, he would be interested in possibly buying the property.

[5]        Mr. Lauriente has a cousin, Mr. Catalano, who is a real estate agent.  Mr. Lauriente was in the home construction business and had, in the past, exclusively used Mr. Catalano as his realtor.  Mr. Lauriente told Ms. Leader and Mr. Pierce that “my cousin, the realtor will contact you”.  Mr. Lauriente testified that there was no discussion about not using realtors, reducing fees or commissions.  Mr. Lauriente said that he certainly would not have been able to make any commitments at all concerning any fees or commissions that Mr. Catalano would be entitled to.  He also said that he would not think about buying a property without a realtor.   Mr. Lauriente testified that he was fairly certain that Mr. Catalano had actually also written Mr. Little’s (collapsed) offer to buy the property a month before.

[6]        The Plaintiff’s testimony was different.  He said that Mr. Lauriente told him that he had a realtor friend who would write up the contract and charge him just a couple of thousand dollars.  Ms. Leader testified that no one mentioned anything about anyone reducing their fees or commissions.

[7]        I find as a fact, that there was no discussion about reducing commissions or fees and the only mention of a realtor being involved, occurred was Mr. Lauriente told the Plaintiff and Ms. Leader, that his realtor cousin would phone them to make an offer.

[8]        The next thing that happened was that Mr. Catalano drove out to the Whiterock property and presented a written offer to the Plaintiff for $950,000.00.  The Plaintiff took the offer and drove home to think about it.  The next day, the Plaintiff called Mr. Catalano and said that he was planning to make a counter-offer.  Mr. Catalano told him that his client wasn’t interested in a counter-offer, so he shouldn’t bother.  Before the call, the Plaintiff had written into the offer, a counter-offer of $960,000.00, but then scratched it out, after speaking with Mr. Catalano.  The Plaintiff then signed the Acceptance of the Offer as it was originally made and immediately faxed it back to Mr. Catalano.  The price agreed to was $950,000.00

[9]        Mr. Catalano and Mr. Pierce never discussed with one another, even the “possibility”, of reducing Mr. Catalano’s fees.  There were several opportunities to do so.  Such a discussion could have been initiated by the Plaintiff during his face to face meeting with Mr. Catalano or when he sent faxes to Mr. Catalano.  Those opportunities were available to the Plaintiff during the approximately four weeks of discussions between the Plaintiff and Mr. Catalano.

[10]       When Mr. Catalano testified, he said that Mr. Lauriente never asked him to reduce his fees or commission;  Mr. Pierce didn’t ask him to reduce his fees or commission;  Ms. Leader did not ask him;  and no one from Wholesale Realty asked him, either.  He said that he certainly never would have volunteered to reduce his fees or commission.  Mr. Catalano testified that he had written the failed original Offer to Purchase for Mr. Little;  that he had been Mr. Lauriente’s realtor on a number of previous purchases and sales.  He said that he wrote up the Offer for Mr. Lauriente and, as was the custom, he telephoned Mr. Mikulas of Wholesale Realty Ltd. to arrange for presentation of the Offer.  Mr. Mikulas told him that he could present the Offer directly to the Plaintiff and he did so.  The Plaintiff took the Offer with him overnight;  the Plaintiff, called him the next day to say he would be counter-offering at $975,000.00;  and Mr. Catalano said that he told the Plaintiff that his clients were not interested in a counter-offer.  A few moments later, the Plaintiff called him back, saying that he would be faxing back an Acceptance of the Offer at the offered price of $950,000.00.  There was no discussion about reducing Mr. Catalano’s fees during either their one face to face meeting, their telephone conversations and, nothing was written in the Acceptance that the Plaintiff faxed back to Mr. Catalano.

[11]       The sale, presumably, was to press ahead at a sale price of $950,000.00, with commissions and fees being as they were set out in the original Multi-Listing Agreement as between Wholesale Realty Ltd. and the Plaintiff.  There was a firm, final and binding contract as between the Plaintiff and Mr. Lauriente, and there was a firm, final and binding contract between the Plaintiff and Wholesale Realty Ltd.

[12]       Although Mr. Pierce was correct in saying that, as between Mr. Lauriente and himself, there was a valid and enforceable contract to sell the house to Mr. Lauriente for $950,000.00, there were also other valid and enforceable contracts that Mr. Pierce had signed. He signed a Multiple Listing Agreement with Wholesale Realty Ltd. requiring him to pay (via Wholesale Realty Ltd.) $10,000.00 plus GST to any co-operating broker.  Mr. Catalano was a “co-operating broker” and as “a co-operating broker”, he was entitled to receive a fee of $10,000.00 plus GST. 

[13]       However, it was Mr. Catalano who, after the Offer was presented, chose to muddy the waters in order to facilitate a private arrangement between himself and the buyer, Mr. Lauriente.  Instead of just privately making whatever arrangements for dividing up his $10,000.00 fee, he decided to involve the Plaintiff (Vendor) in these arrangements. Mr. Lauriente previously did some landscaping work for Mr. Catalano.  Mr. Catalano owed him $8,000.00 for the work.  Mr. Catalano decided that if he could re-structure the paperwork of the house sale, without affecting the financial outcome for the vendor (the Plaintiff), he might be able to benefit himself and Mr. Lauriente.  Mr. Catalano’s plan was to have the Contract of Purchase and Sale and the Fee Agreement, reflect a lower price for the house and a lower commission being paid for his real-estate efforts.  The results he sought were:

(a)        Mr. Catalano would end up with a T5 Income Tax Form, showing that he had earned only $2,000.00, rather than a $10,000.00 commission on the sale; and

(b)        Mr. Lauriente would be paid the $8,000 that Mr. Catalano owed him, by being able to buy the house for less.  This would enable Mr. Lauriente, should he wish to do so, to avoid reporting the $8,000.00 as income from his landscaping business.


[14]       He was an experienced realtor and although he intended the two Addendums to be read together as one Addendum, he chose (mistakenly) to fax them to the Plaintiff (Vendor) as two separate and distinct documents.  Neither Addendum made any reference to the other Addendum.  One Addendum (eventually signed by the Plaintiff) reduced Mr. Catalano’s commission to $2,000.00 and the other Addendum (never signed by the Plaintiff) set out a condition to reduce Mr. Catalano’s commission to $8,000.00 and to reduce the selling price from $950,000.00 to $942,000.00

[15]       It is true that Mr. Pierce effectively seized upon the opportunity that presented itself, to sign, accept and return only one of the Addendums (the one that reduced the commission to $2,000.00) rather than both and thereby be able to, “short change” Mr. Catalano and benefit himself, it was Mr. Catalano who opened that door.

[16]       Often, the concept of “Equity” is resorted to, in order to prevent an injustice.  On the surface of it here, there would be an injustice if Mr. Catalano were to receive only a $2,000.00 fee, when he was really entitled to a $10,000.00 fee as per the signed Multi-Listing Agreement which authorized a $10,000.00 commission to a co-operating realtor.  However, the Court has to look at Mr. Catalano’s purpose in faxing those two Addendums to the Plaintiff.  His purpose was not a proper one.  The Court also has to look at the fact that a legally enforceable Contract of Purpose and Sale was in existence:  such a contract could only be amended by an Addendum signed by both Vendor (the Plaintiff) and the Purchaser (Mr. Lauriente).  The Addendum purporting to reduce the price to $942,000.00 and the brokerage fee to $8,000.00 was not signed by both the Purchaser and the Vendor (Plaintiff).  It was only signed by the Purchaser.

[17]       The Court also has to decide whether a contract (Multiple Listing Agreement) which is signed by two parties (Wholesale Realty Ltd and the Plaintiff) can be unilaterally amended by one of the parties (the Plaintiff) by signing an Amendment with some third party (Mr. Catalano) who was not a party to the original contract?  The answer, of course, is no.  That then leaves the original Multiple Listing Agreement in place and enforceable.  The original Multiple Listing Agreement required the Plaintiff to pay (through Wholesale Realty Ltd.), $10,000.00 plus GST to the co-operating realtor, who in this case was, Mr. Catalano.

[18]       Conclusion:

(1)        The Original Multiple Listing Agreement, signed by the Plaintiff and Wholesale Realty, remained legally intact and enforceable;

(2)        The Contract of Purchase and Sale, signed by both the Plaintiff (Vendor) and Mr. Lauriente (Purchaser), remained legally intact and enforceable;

(3)        The Addendum decreasing the sale price to $942,000.00 was not signed and accepted by the Plaintiff (the Vendor) and therefore is not enforceable;

(4)        The Addendum purporting to change the fees payable to the co-operating broker, required the signatures of both signatories to the original Multiple Listing Agreement and the original parties to the Multiple Listing Agreement did not both sign the Addendum and accordingly that Addendum is not valid and enforceable.

(5)        The final result then, is that we had one party, Mr. Catalano, trying to create documentation for an improper purpose (showing less taxable income for himself and Mr. Lauriente), on the one hand and on the other hand, Mr. Pierce, trying to take advantage of an opportunity that arose, whereby he could sign one, rather than two Addendums, and thereby try to reduce the commission which he had originally agreed to pay.  Equity should not come into play here, because neither party has come with “clean hands”.

[19]       Accordingly, the case is decided purely on the law and that is, that Mr. Catalano was and is entitled to a commission of $10,000.00 plus GST.  The Plaintiff’s case against Mr. Catalano, is dismissed.

[20]       Both parties shall, in the circumstances, be responsible for their own costs.




P. R. Meyers

Provincial Court Judge

BC Supreme Court dismisses proposed leaky condo class action lawsuit by McMillan and Hepner against CMHC



McMillan v. Canada Mortgage and Housing Corporation,


2007 BCSC 1475

Date: 20071001
Docket: S056412
Registry: Vancouver


Alan McMillan and Linda Hepner



Canada Mortgage and Housing Corporation


Before: The Honourable Madam Justice Lynn Smith

Reasons for Judgment

Counsel for Plaintiffs

J.R. Singleton, Q.C.
W. Sun


Counsel for Defendant

D.R. Clark, Q.C.
R.D. Garrett


Date and Place of Hearing:

May 14, 15 and 16, 2007


Vancouver, B.C.



I.          INTRODUCTION                                                                                           1

II.         THE PLAINTIFFS’ APPLICATION                                                               4


A.         STANDARD TO BE MET                                                                  11

B.         NATURE OF THE CLAIM                                                                 15

C.        APPLICABLE LEGAL PRINCIPLES                                                 16

            1. Basic propositions of negligence law                                             16

            2. Negligence claims against statutory bodies                                   20

D.        THE STATUTORY FRAMEWORK                                                   26

E.         THE SUBMISSIONS OF THE PARTIES                                          29

            1. Submissions for the Plaintiffs                                                         29

            2. Submissions for the Defendant                                                      33

F.         ANALYSIS                                                                                          37

            1. The first stage of the Cooper/Anns test                                        37

(a) Physical harm to property                                                 38

(b) Negligent Misrepresentation                                             43

(c) Duty to Warn                                                                     43

(d) Conclusion on Categories                                                 46

            2. The second stage of the Cooper/Anns test                                  47

IV.        CONCLUSION                                                                                               47

APPENDIX “A”                                                                                                          48


[1]                Mr. McMillan and Ms. Hepner, the plaintiffs, own a condominium residence in the Villa Positano complex in White Rock, British Columbia.  They purchased it from a developer on October 12, 1996.  In the spring of 2000 it became known that there could be a problem with water leaks and moisture related damage to the complex.  The Strata Council retained building envelope engineers who provided a report concluding that the Villa Positano was suffering premature building envelope deterioration.

[2]                In 2003 a contractor made repairs and implemented modifications recommended by the engineers.  The plaintiffs were assessed a total of $61,795.10 to cover their share of the cost of the repairs.

[3]                The plaintiffs have commenced an action to recover damages from the defendant Canada Mortgage and Housing Corporation (“CMHC”).  They apply to have their action certified as a class action pursuant to the Class Proceedings Act, R.S.B.C. 1996, c. 50.  The defendant disputes their application for certification and also applies for summary judgment under Rule 18A of the Rules of Court, B.C. Reg. 221/90, seeking an order declaring that the defendant owes no duty of care to the plaintiffs and dismissing the plaintiffs’ action with costs.

[4]                The phenomenon of “leaky condos” (of which the plaintiffs say the Villa Positano is an example) has resulted in considerable hardship for many home owners in British Columbia, as documented in the Report of the Commission of Inquiry into the Quality of Condominium Construction in British Columbia by Dave Barrett, Commissioner (Victoria: Minister of Municipal Affairs, June 1998).

[5]                Counsel for the plaintiffs summarizes their position in his written submission as follows:

The Plaintiffs’ claim is that in the course of its investigating housing problems in Canada, CMHC learned of a fundamental flaw in the design and construction of residential dwellings on the West Coast of Canada which CMHC knew, if uncorrected, would lead to wide spread structural failure in these homes.   The Plaintiffs say that with this knowledge CMHC owed to them a private law duty of care to warn the proposed class of these known defects, or to have taken the appropriate steps to arrest further construction of these homes on the west coast of British Columbia.  Not having done so, CMHC was in breach of the duty they owed to the class and have thereby been a major contributor to the leaky condominium debacle on the west coast of British Columbia, which has lead to wide spread structural failure of thousands of homes, hundreds of millions of dollars of damages, and the disenfranchisement of thousands of homeowners.  The situation created cries out for an affordable remedy against CMHC.


[6]                Mr. McMillan and Ms. Hepner assert in their pleadings that CMHC, as a result of investigations it had undertaken, knew that the design of buildings such as the Villa Positano (combining a sealed exterior face of the walls with an energy efficient interior design) would result in the trapping of moisture inside the building, the build-up of mold and fungi, and structural deterioration.  They say that CMHC was under a duty to them and to other owners and prospective purchasers of residential accommodation incorporating that design to pass on the knowledge CMHC had acquired and to take reasonable steps to ensure that design was not used in the construction of west coast residences.  They claim that CMHC was in breach of its duty and of its statutory obligations and that the plaintiffs suffered damage as a result of CMHC’s negligence. 

[7]                The pleadings in the Amended Statement of Claim include the following allegations:

7.         The exterior walls of The Villa Positano were originally designed and constructed to utilize what is commonly known as a “face-seal” assembly, which includes a sealed exterior face of the walls designed to prevent water from entering the wall (“Face Seal Design”), and an energy efficient interior design, being a sealed interior wall designed to prevent heat and vapour transmission from the interior of the building through the walls (“Energy Efficient Design”) the combination of the Face Seal Design and the Energy Efficient Design hereinafter called (the “Envelope Design”).

8.         The Envelope Design was, to the knowledge of CMHC, in wide use on the west coast of Canada and elsewhere in Canada from at least 1981 to the present time.

9.         In or around 2000, The Villa Positano began to exhibit signs of wetting, deterioration, mold and other damage which resulted from water, vapour and moisture ingress into the building envelope, brought about the following combination of events:

(a)        Wind-driven rain penetrated the exterior face of the building envelope through the stucco facing and some imperfections in construction details at wall penetrations, joints and intersections;

(b)        The Envelope Design did not provide a mechanism for water, vapour or moisture which migrated past the exterior or interior cladding into the building envelope to migrate out of the wall assembly, either through the exterior face or the inside face of the building envelope;

(c)        Heat and vapour was transmitted from the inside of the building into the building envelope and resulted in condensation in and around the components of the building envelope; and

(d)        Moisture trapped within the building envelope resulted in the build up of mold and fungi, leading to structural deterioration of the components of the wall assembly.

(collectively described as “Envelope Failure”).

10.       As a result of Envelope Failure, extensive repairs were required to The Villa Positano, as a result of which the Plaintiffs have suffered loss, expense and damage, and other compensable losses and consequences, particulars of which include:

(a)        Their proportionate share of the overall cost to investigate Envelope Failure and repair the damage to The Villa Positano;

(b)        Damage to personal property within their unit;

(c)        The cost of temporary accommodation; and

(d)        Stress and inconvenience related to the investigation and repair of the damage caused by Envelope Failure.

(collectively, the “Damage”).

11.       The business and powers of CMHC are described in section 17 of the CMHC Act as follows:

“17. Subject to section 33 of this Act and to section 100 of the National Housing Act, the Corporation shall, on behalf of Her Majesty and in the place of the Minister, have, exercise and perform all rights, powers, duties, liabilities and functions of the Minister under the Housing Acts or under any contract entered into under those Acts, except the authority of the Minister under those Acts to pay money out of the Consolidated Revenue Fund.”

12.       The powers, duties and functions of CMHC are further set out in the National Housing Act, R.S.C. 1985 c. N-11 (the “Housing Act”), as follows:

“73. It is the responsibility of [CMHC] to cause investigations to be made into housing conditions and the adequacy of existing accommodation in Canada or in any part of Canada and to cause steps to be taken for the distribution of information leading to the construction or provision of more adequate and improved accommodation and the understanding and adoption of community plans in Canada.

74. For the purpose of carrying out its responsibility under this Part, the Corporation may cause

(a) investigations to be made into housing conditions and the adequacy of existing housing accommodation in Canada or in any part of Canada and into measures that may be taken for the improvement thereof;


13.       During the period between in or around 1981 and in or around 1994, CMHC undertook extensive investigation of wall assembly construction and water ingress related envelope failures on both the east coast and west coast of Canada in buildings incorporating the Envelope Design. In the course of those investigations, CMHC gained the following knowledge:

(a)        There was widespread utilization of the Envelope Design in the construction of residential occupancies on the west coast of Canada between 1981 and 1994;

(b)        Residential occupancies constructed using the Envelope Design, such as that used in The Villa Positano, was more likely than not to suffer from deterioration of the building envelope because of Envelope Failure;

(c)        The only way Envelope Failure might be avoided in buildings which utilize the Envelope Design, would be if the exterior face of the building envelope was built to a standard of perfection, and that the prospect of that occurring was remote;

(d)        There was the prospect, if not likelihood, that Envelope Failure might occur by reason of the Energy Efficient Design alone, which promoted the buildup of warm, moist air on the interior of the building which would then migrate and reside in the interior of the building envelope;

(e)        Even if the exterior face of the building envelope which utilized the Envelope Design were to be built to a standard of perfection, the in-service weather conditions and climate of the west coast of Canada would eventually lead to Envelope Failure;

(f)         Residential occupancies constructed on the west coast of Canada and elsewhere in Canada incorporating the Envelope Design were experiencing deterioration of the building envelope because of Envelope Failure; and

(g)        Without the building industry and prospective buyers of homes incorporating the Envelope Design being warned of the prospect of Envelope Failure and the knowledge CMHC had gained, it was likely that such building envelope failures would continue to mount at significant cost to homeowners on the west coast of Canada.

(“CMHC’s Knowledge”)

14.       By reason of its statutory obligations and the knowledge it obtained through its involvement in research into the prospective problems of the Envelope Design, CMHC owed a common law duty to the Plaintiffs, other owners and prospective purchasers of residential accommodation incorporating the Envelope Design to pass on to them most or all of CMHC’s Knowledge and to take reasonable steps to ensure that residential occupancies incorporating the Envelope Design were not built on the west coast of Canada.

15.       Notwithstanding CMHC’s Knowledge, CMHC failed to take the appropriate steps to ensure that its knowledge was passed on to the housing industry or to homeowners or to prospective purchasers of homes and was thereby in breach of its statutory obligations and the common law duty it owed to owners of multi-family dwellings, including the Plaintiffs, and to prospective owners, of homes incorporating the Envelope Design.

16.       As a result of the negligence of CMHC, the Plaintiffs have suffered the Damage.

17.       CMHC’s conduct amounted to a wanton and reckless disregard for the lives and safety of occupants and prospective occupants, including the Plaintiffs, of residential occupancies constructed on the west coast of Canada incorporating the Envelope Design.

18.       The Plaintiffs waive any and all right to recover from CMHC, in this Action, any portion of their loss or damage for which CMHC might reasonably be entitled to claim contribution, indemnity or apportionment, either at common law or pursuant to the Negligence Act, R.S.B.C. 1996. c. 333.


19.       The Plaintiffs bring this action on behalf of all those persons who purchased a residential occupancy, or unit or interest in a residential occupancy located on the west coast of Canada, which was built between January 1, 1982 and December 1, 2005, which incorporated the Envelope Design and which exhibits or has exhibited signs of Envelope Failure.

20.       The Plaintiffs plead and rely on the provisions of the CMHC Act, the Housing Act, the Class Proceedings Act R.S.B.C. 1996, c. 50 and the Negligence Act, R.S.B.C., 1996, c. 333.

[8]                The relief the plaintiffs seek against CMHC is:

(a)        Judgment with respect to the common issue of liability with damages to be assessed as between individual condominium owners and CMHC pursuant to section 27 of the Class Proceedings Act;

(b)        Directions pursuant to section 27 of the Class Proceedings Act for the assessment of individual damage claims;

(c)        Damages for the Plaintiffs against CMHC, including punitive, exemplary and aggravated damages;

(d)        In the event that this action is not certified as a class action, costs on a solicitor and own client basis; and

(e)        Such further and other relief as is necessary.

[9]                The plaintiffs seek to be appointed as representative plaintiffs and to bring this action on behalf of a class of persons which is described in the proposed “class definition” attached to these Reasons as Appendix “A”.

[10]            The requirements to be met by the plaintiffs in their application for an order certifying this as a class proceeding are set out in s. 4 of the Class Proceedings Act:

Class certification

4 (1)     The court must certify a proceeding as a class proceeding on an application under section 2 or 3 if all of the following requirements are met:

(a)        the pleadings disclose a cause of action;

(b)        there is an identifiable class of 2 or more persons;

(c)        the claims of the class members raise common issues, whether or not those common issues predominate over issues affecting only individual members;

(d)        a class proceeding would be the preferable procedure for the fair and efficient resolution of the common issues;

(e)        there is a representative plaintiff who

(i)         would fairly and adequately represent the interests of the class,

(ii)        has produced a plan for the proceeding that sets out a workable method of advancing the proceeding on behalf of the class and of notifying class members of the proceeding, and

(iii)       does not have, on the common issues, an interest that is in conflict with the interests of other class members.

(2)        In determining whether a class proceeding would be the preferable procedure for the fair and efficient resolution of the common issues, the court must consider all relevant matters including the following:

(a)        whether questions of fact or law common to the members of the class predominate over any questions affecting only individual members;

(b)        whether a significant number of the members of the class have a valid interest in individually controlling the prosecution of separate actions;

(c)        whether the class proceeding would involve claims that are or have been the subject of any other proceedings;

(d)        whether other means of resolving the claims are less practical or less efficient;

(e)        whether the administration of the class proceeding would create greater difficulties than those likely to be experienced if relief were sought by other means.

[11]            The first requirement listed, that the pleadings disclose a cause of action, was predominant in the arguments made before me in three days of hearing.  Mr. Singleton accurately describes it as the “eye of the storm” in this case.  I will therefore address that major issue first.


[104]        The defendant CMHC did not manufacture any item used in construction, nor did it have a statutory responsibility to authorize the use of materials, to prescribe construction methods, or to play any direct role in the construction of housing in British Columbia.

[105]        I find that this case does not fall within the category of cases in which a duty to warn has been found, nor is this case analogous to cases under that category.

(d) Conclusion on Categories

[106]        I conclude that the claim by the plaintiffs does not fall into any category of cases where a duty of care has previously been recognized, nor is it analogous to any of those categories.

[107]        Therefore, I must consider whether this is a situation in which a new duty of care should be recognized.

[108]        If there are any factors giving rise to proximity, they must arise from the statutes which create the CMHC and provide its mandate.

[109]        The statutes under which the defendant exists and operates give it no regulatory responsibility with respect to the construction of housing in British Columbia.  There is nothing in either the CMHC Act or the Housing Act which creates a duty of care on the CMHC to individual homeowners.  The legislation is comparable to that in Kimpton, where no duty of care was found.

[110]        The relationship between the defendant and the plaintiffs is far from the close and direct relationship envisioned in Donoghue v. Stevenson.  There is insufficient proximity between the parties to create a duty on the part of the defendant.

[111]        I find it plain and obvious that on the facts pleaded there is no proximity between the plaintiffs and the defendant sufficient to give rise to a prima facie duty of care under the first stage of the Cooper/Anns test.

2. The second stage of the Cooper/Anns test

[112]        If I am wrong that it is plain and obvious that on the facts pleaded there is no proximity, I would find under the second stage of the Cooper/Anns test that there are residual policy considerations (as described in Cooper at para. 37) outside the relationship of the parties that negative the imposition of a duty.  Those residual policy considerations include the likelihood that imposing on CMHC a private law duty of care to individual homeowners would interfere with CMHC’s ability to carry out its responsibility to investigate and publish its findings, and the possibility of indeterminate liability.


[113]        I have concluded that the plaintiffs’ application to certify this action as a class proceeding under the Class Proceeding Act must be dismissed because the pleadings fail to disclose a cause of action.

[114]        It is therefore unnecessary to address the other issues regarding certification.

[115]        The defendant applied for summary judgment dismissing the plaintiffs’ action under Rule 18A.  For the reasons I have given with respect to the plaintiffs’ application, the defendant’s application for summary judgment is allowed because the pleadings fail to disclose a cause of action.

“The Honourable Madam Justice Lynn Smith”



The definition of the Class in these proceedings is proposed as follows:

“AII persons who purchased a residential occupancy, unit or interest in a multiple- family, building located on the West Coast of Canada (more particularly described by the municipalities and regional districts listed in Appendix A) which was built between January 1, 1982 and the date of the Certification Order, and which utilized a Face-Sealed or Concealed-Barrier wall assembly, incorporating Stucco Cladding, a Wood Frame and Air Barrier (“the Envelope Design”). and which persons were required to pay or have been assessed to pay for all or a portion of the costs associated with repairing any such wall assembly as a result of water or moisture ingress into the wall assembly.

“Face-Sealed” refers to a design strategy for rain penetration control that relies on the exterior layer (the wall cladding) of the building envelope assembly to resist all rain penetration.

“Concealed-Barrier” refers to a design strategy for rain penetration control here a sheathing membrane located to the interior of the exterior surface of the wall cladding provides a barrier to resist the penetration of rain water further into the assembly.

“Stucco Cladding” refers to a layer or layers of stucco and related materials or components of a building envelope assembly that constitute the outermost surface of the wall assembly such that it is fully exposed to the exterior environment.

“Wood Frame” refers to a wall, the structural components of which are comprised mainly of wood.

“Air Barrier” refers to one or more layers of materials and components that together control the flow of air across layers of a wall assembly for the purpose of limiting the potential for heat loss / gain, and interstitial water vapour transfer and condensation, due to air movement.



2007 BCSC 1475 McMillan v. Canada Mortgage and Housing Corporation

Judge reserves decision regarding certification of latest proposed leaky condo class action lawsuit

From The Richmond Review:

Judge reserves decision on leaky condo class-action
Leaky condo owners will have to wait as long as two months before the B.C. Supreme Court rules on whether to certify as a class action a lawsuit stemming from the billion-dollar construction crisis. details

White Rock, Ocean Promenade: Condo hotel owners allege mismanagement and misappropriation of funds



Sunray v. Strata Corp. BCS226 et al,


2005 BCSC 417

Date: 20050323
Docket: S82885
Registry: New Westminster


Sunray Advanced Hotel Management Inc.




The Owners of Strata Corporation BCS226, Sandra Marie Carpenter,
Pundyk Investments Inc., Russell John Clinton, Marcus John Law,
Philip Charles Reynolds and Colin David Reynolds, 665618 B.C. Ltd.,
Hadley, Glenmac Corporation Ltd., Lowell Rob Leifso,
Charles Wilfred Zandbergen and Julia Kay Stronks,
Edward Peter James Chibber and Maria Luisa Chibber,
Adrian Alexander Zandbergen and Colleen Jacoba Zandbergen,
Myrna Lee Pudlas and Martin William Pudlas, Victor Michaluk,
Dianne Jean Hatton, Verne Franklin Rosenbrant and Amanda Jane Sutherland, Simpford Holdings Inc., 646249 B.C. Ltd., Rudolf Milz and Helene Berta Milz, Glenmac Corporation Ltd., William Brian Stone and Patricia Margaret Stone, Kathleen Kobelka, Paul William Power, James Grant Hadland and
Maurlice Jean Headland, Zandbergen Estate Ltd.,
Ocean Promenade Developments Inc., Gudrun Klara Tonskamper,
Pundyk Investments Inc., Glenmac Corporation Ltd.,
Pie in the Sky Investments Ltd., Douglas Russell, 665318 B.C. Ltd.,
David Richard Jonash, 666112 B.C. Ltd., Paul Rust Architect Inc.,
Donald Blaine McEachern and Nancy Evelyn McEachern and
Joseph Bertram Smith and Edith Joyce Smith




Carbonite Development Corp., Gundhart Fleischer, Sheila Low


Defendants By Way of Counterclaim

Before: The Honourable Mr. Justice Truscott

Reasons for Judgment

Counsel for the plaintiff:

G. Grunberg

Counsel for the defendants except
Ocean Promenade Developments Inc.
and David Richard Jonash


D.C. Creighton

Counsel for Ocean Promenade Developments Inc. and
David Richard Jonash:


M.R. Frederick

Date and Place of Trial/Hearing:

March 2, 2005


New Westminster, B.C.

[1]                The plaintiff contracted with the defendant owners on February 21, 2003 to manage a hotel called Ocean Promenade All Suites Hotel in which the defendants owned units.  The management agreement is entitled the Hotel Management and Rental Pool Agreement (“the Agreement”).

[2]                The defendant, The Owners of Strata Corporation BCS226, is a strata corporation that owns the common property in the hotel and of which the individual owners are members.

[3]                The plaintiff sues the defendants for damages for breach of the Agreement by terminating its services unilaterally contrary to the terms of the Agreement.

[4]                The defendants plead that they were entitled to terminate the Agreement because the plaintiff refused to allow proper access to its financial records, did not remit provincial taxes collected and misappropriated trust funds that the plaintiff held under the Agreement.

[5]                The defendants counterclaim against the plaintiff as well as against the defendants by counterclaim, Carbonite Development Corp., Gundhart Fleischer and Sheila Low, alleging that the plaintiff misappropriated funds of the defendants by mismanagement of the hotel and by fraudulent diversion of funds and the defendants by counterclaim, through their involvement in the management of the hotel as agents of the plaintiff, breached fiduciary duties to the defendants by mismanagement of the hotel, by misappropriation of funds and by fraudulent diversion of funds for their own use and profit.

[6]                The defendants seek injunctions against the plaintiff and the defendants by counterclaim as well as a declaration of constructive trust against the property of the plaintiff and the defendants by counterclaim.  The defendants also claim punitive and/or exemplary damages.

[7]                To my knowledge no defence to counterclaim has been filed as yet.

[8]                On October 30, 2003, on a without notice application of the defendants, the court enjoined the plaintiff and defendants by counterclaim from dealing with any or all of their assets worldwide but gave them liberty to apply to set aside the order on 24 hours notice (the Mareva injunction).

[9]                On November 12, 2003 the plaintiff and the defendants by counterclaim made such an application to set aside the Mareva injunction and at that time the court ordered that the injunction be vacated only against Carbonite, after:

a)         the plaintiff produced copies of all documents in its possession or control relating to the plaintiff’s management operations of the hotel by 4:00 p.m. November 18, 2003; and

b)         the defendants failed to show cause on or before November 20, 2003 why the assets of the plaintiff and defendants by counterclaim should continue to be enjoined by an order of the court.

[10]            On December 19, 2003 the court ordered that an accountant and representative of the defendants and of the plaintiff attended the plaintiff’s premises at a mutually agreeable time to review all of the plaintiff’s financial statements (including bank statements up to October 31, 2003) and business records including access to computers and computer records.

[11]            Finally, on July 16, 2004 the court ordered that the plaintiff and the defendants by counterclaim promptly ensure that they have produced all documents in their possession or control relating to the operation or peripheral operation of, the cost or expense of, the funding of, or the income of the hotel, including, without limitation, bank deposits.

[12]            In that same order the court directed that the plaintiff and defendants by counterclaim provide to their then solicitor an affidavit disclosing the full value of their assets worldwide, including their location, and the affidavit be placed in a sealed envelope and held in a safekeeping place by that solicitor until further order of the court.

[13]            The defendants now apply to the court for dismissal of the plaintiff’s action under Rule 2(5), for failure of Mr. Fleischer and Ms Low as principals of the plaintiff to attend at the time and place appointed for their examinations-for-discovery, for failure of the plaintiff to produce and allow inspection of documents, and for failure of the plaintiff to answer interrogatories.

[14]            Alternatively, if the action is not dismissed for any of these reasons, the defendant seeks orders setting peremptory dates for examinations-for-discovery and for trial, and for answering interrogatories.

[15]            The defendants also seek an order for release to them of the sealed affidavit held by the former solicitor for the plaintiff and defendants by counterclaim, as well as an order for contempt of the Mareva injunction, and finally an order that the plaintiff post security for costs.

[16]            I propose to deal with each of these applications in the order set out above.

[17]            Rule 2(5) states:

(5)        Where a person, contrary to these rules and without lawful excuse,

(a)        refuses or neglects to obey a subpoena or to attend at the time and place appointed for his or her examination for discovery,

(b)        refuses to be sworn or to affirm or to answer any question put to him or her,

(c)        refuses or neglects to produce or permit to be inspected any document or other property,

(d)        refuses or neglects to answer interrogatories or to make discovery of documents, or

(e)        refuses or neglects to attend for or submit to a medical examination


(f)         where the person is the plaintiff, petitioner or a present officer of a corporate plaintiff or petitioner, or a partner in or manager of a partnership plaintiff or petitioner, the court may dismiss the proceeding, and

(g)        where the person is the defendant, respondent or a third party, or a present officer of a corporate defendant, respondent or third party, or a partner in or manager of a partnership defendant, respondent or third party, the court may order the proceeding to continue as if no appearance had been entered or no defence had been filed.

[am. B.C. Reg. 55/93, s. 2.]

Rule 2(6) states:

(6)        Where a person, without lawful excuse, refuses or neglects to comply with a direction of the court, the court may make an order under subrule (5) (f) or (g).


[18]            The defendants scheduled an examination-for-discovery of Mr. Fleischer for December 20 and 21, 2004, and of Ms Low for January 11 and 12, 2005.  The appointments were served on their then solicitor on November 16, 2004.  On December 1, 2004 that solicitor advised defence counsel of his decision to withdraw but his notice to withdraw was not filed until December 9, 2004.  Meanwhile defence counsel confirmed his intention to go ahead on the scheduled dates.

[19]            On December 15, 2004 defence counsel was advised by Mr. Grundberg that he had been asked to represent the plaintiff and defendants by counterclaim but he had not yet received the file from their previous solicitor and he was scheduled himself to be out of the country at the time of the examinations.  He requested an adjournment until early in 2005 and indicated that Mr. Fleischer and Ms Low would not be attending at the scheduled times.

[20]            Defence counsel in turn advised Mr. Grundberg on December 15th that he viewed this as another tactical delay by the plaintiff and defendants by counterclaim and that he intended to proceed to mark his appointments for Mr. Fleischer and Ms Low if they did not attend on the scheduled dates for examinations.  They did not attend and the defendants now bring on this application to dismiss the plaintiff’s action by reason of their non-attendance.

[21]            Ms Low says that she did not attend her scheduled examination because she was told by previous counsel that the defendants had not made complete disclosure of their documents and because Mr. Grundberg would not accept her retainer until he had a complete file from the former solicitor.  Accordingly, without a lawyer she and Mr. Fleischer did not wish to attend their examinations but they had no difficulty in attending once Mr. Grundberg had the files, all relevant documents had been disclosed and he was in a position to attend with them.

[22]            There has been no trial date arranged for this action.  Defence counsel puts the blame on the plaintiff but it is equally available for the defendants to set the action down for trial, particularly as they have a counterclaim in existence.  I decline to set a peremptory date myself.

[23]            Mr. Grundberg has offered to arrange discoveries of his clients once he gets the files from their former solicitor.

[24]            I think the plaintiff should be given the chance to retain legal representation before having to attend their examinations.  I am not prepared to dismiss this action for failure of Mr. Fleischer and Ms Low to attend their examinations the first time they were scheduled.

[25]            If the plaintiff and defendants by counterclaim do not retain Mr. Grundberg on the record or do not retain other counsel within the next month so that their examinations can be arranged, defence counsel at that time will be at liberty to set down their examinations unilaterally and proceed.

[26]            On the somewhat related issue of service on the plaintiff and defendants by counterclaim, I point out that Rule 4 covers the requirements.  In addition the plaintiff’s former solicitor filed a notice of withdrawal under form 12A.  If no notice of change of solicitor or notice of intention to act in person has been filed by the plaintiff and defendants by counterclaim, then according to Rule 16(9) the last known address of the party becomes the address for delivery as indicated in form 12A.

[27]            This application for dismissal for failure of Mr. Fleischer and Ms Low to attend their examinations as scheduled, is dismissed.

Failure to Disclose Documents

[28]            The order of the court of December 19, 2003 required an accountant and representative of the defendants and of the plaintiff to attend at the plaintiff’s premises to review all of the plaintiff’s financial and business records including access to computers and computer records.

[29]            Such an attendance did take place on January 23, 2004.  However, the evidence is in conflict as to whether the plaintiff produced all of its financial and business records as required, at that time.

[30]            This issue came before the court again on July 16, 2004 before Mr. Justice Crawford.  Before him at that time were competing affidavits of Mr. Stone and Mr. Gardiner, for the defendants, and Ms Low and Ms Lu for the plaintiffs and defendants by counterclaim.

[31]            Mr. Justice Crawford declined to deal with the applications for dismissal of the action and contempt for want of disclosure alleged by the defendants and said that he was dealing with the need to ensure, as promptly as possible, that all the documents of the hotel operation that relate to the income of the hotel, all bank deposits, all documents relating to any peripheral operation and costing of the operation, all documents regarding the expenses of the hotel operation, any documents regarding funding be produced and that there must be an order allowing the plaintiffs to trace the revenues received by Sunray.

[32]            His reasons were translated into a formal order that “the plaintiff and the defendants by counterclaim promptly ensure that they have produced all documents in their possession or control relating to the operation or peripheral operation of, the cost or expense of, the funding of or the income of the Ocean Promenade All Suites Hotel, including, without limitation, bank deposits”.  A tracing order was also made with respect to bank records.

[33]            Since the order of July 16, 2004, Mr. Gardiner has deposed in another affidavit of February 11, 2005 that the documents that the plaintiff and defendants by counterclaim should have produced are still missing.  In answer, Ms Low has deposed in an affidavit of February 21, 2005 that to her knowledge all relevant documents have been produced through their former solicitor and a proper list of documents should have been provided to the defendants.  She also says that for any missing banking documents she has been informed by her former solicitor he had given written authority to the defendants’ solicitor to get these documents directly from the relevant institutions.

[34]            I do not consider that I have sufficient evidence to conclude whether the plaintiff has satisfied the order of Mr. Justice Crawford to ensure full production. 

[35]            The defendants’ application to dismiss the claim for failure to produce or permit to be inspected any document or other property is dismissed.

[36]            I point out that the provisions of Rule 26 dealing with discovery and inspection of documents do allow for applications that require a party to swear an affidavit verifying a list already produced, or require a party to deliver an affidavit dealing with specific documents.  If Mr. Gardiner says that certain documents are still missing the defendant might consider these sorts of applications first.


[37]            The defendants served interrogatories on the plaintiff and defendants by counterclaim, for answering by their representatives Ms Low and Mr. Fleischer, on October 29, 2004.

[38]            On December 1, 2004 the then solicitor for the plaintiff and defendants by counterclaim replied by letter that the questions posed, in his opinion, did not relate to any of the matters raised in the statement of claim or defence.

[39]            Counsel for the defendants takes the position that the interrogatories must only relate to a matter in question in the action, not necessarily confined to the statement of claim or defence, and in this case relate to the matter of whether the plaintiff or the defendants by counterclaim have violated the Mareva injunction issued by the court on October 30, 2003.

[40]            In any event, he submits that the interrogatories are relevant to the pleading of misappropriation of funds because the defendant by counterclaim, Carbonite, may have funded a mortgage out of funds misappropriated from the defendants.  Defence counsel points out that the Mareva injunction order itself must have been considered to be relevant to the pleadings to be issued in the first place.

[41]            I agree with defence counsel on this point and I note that the Court of Appeal in British Columbia Lightweight Aggregate Ltd. v. Canada Cement LaFarge Ltd. 1997 4 B.C.L.R. 259 said that whether interrogatories relate to a matter in question in the action can only be ascertained from the pleadings and proceedings in the action as they stand when the interrogatories are issued.

[42]            Counsel for the plaintiff and defendants by counterclaim submits that by law interrogatories are not to include demands for discovery of documents, demands for particulars, nor be in the nature of cross-examination.

[43]            On my review of the interrogatories, numbers 1, 3 and 4 are improper because they seek particulars, numbers 3, 4 and 6 are improper because they seek documents, numbers 5 and 8 are improper because they are in the nature of cross-examination, and number 8 is also improper because it seeks an opinion of law.

[44]            In my opinion interrogatory #7 is irrelevant to any issue in the action because it seeks information on the knowledge of the lawyer which is not relevant to the issue of whether the plaintiff or defendants by counterclaim violated the Mareva injunction.

[45]            Only interrogatory #2 remains intact and it is my conclusion that it is unnecessary for the plaintiff and defendants by counterclaim to answer this question which can be easily answered by the defendants themselves through checking the state of title in the Land Title Office after the sale was completed.

[46]            In any event, the issue canvassed by the interrogatories is the subject of the contempt application before me for which affidavits have been filed that essentially answer the substance of the interrogatories.

[47]            The application to dismiss the action for failing to answer interrogatories is dismissed.

The Sealed Affidavit

[48]            An affidavit of the worldwide assets of the plaintiff and defendants by counterclaim was ordered by the court on July 16, 2004, to be sealed and deposited with their then counsel until further order of the court.  It is my understanding that such an affidavit was in fact sworn and deposited with that counsel.

[49]            Defence counsel now seeks to have the affidavit delivered up to the defendants for comparison to the disclosure of assets to date by the plaintiff and defendants by counterclaim and because the former counsel holding the affidavit is no longer acting for the plaintiff and defendants by counterclaim.

[50]            I do not consider the fact that counsel is no longer acting to be any reason to deliver up the affidavit to the defendants.  That counsel has a continuing obligation to keep that affidavit until further order of the court unless he applies to be relieved of that responsibility.

[51]            I do not understand that the defendants are in possession of any order of the court entitling them to know of all of the assets of the plaintiff and defendants by counterclaim worldwide, prior to any judgment.  Accordingly I do not consider there to be any basis to allow the delivery of this affidavit for any comparison to any already existing knowledge of assets of the plaintiff and defendants by counterclaim.

[52]            The reasons for judgment of Crawford J. of July 16, 2004 indicate that the conditions of access to the sealed affidavit might turn on how the parties complied with the orders for disclosure, subject to the discretion of the court hearing such an application for access.

[53]            Since I am not satisfied that it has been established before me that the plaintiff and defendants by counterclaim have not made the necessary disclosure I am not prepared to order release of the sealed affidavit.  This application is also dismissed.

Contempt of the Mareva Injunction

[54]            The Mareva injunction was issued October 30, 2003.  Defence counsel says that in October 2004 a mortgage owned by the defendants by counterclaim, Carbonite, was discharged from property in Abbotsford on sale of that property and that this was a breach of that injunction order issued against it.

[55]            Counsel for the plaintiff and defendants by counterclaim submits that while the mortgage was made out for a principal amount of $2.5 million, the evidence of Ms Low is that the mortgage represented security for future advances only by Carbonite which were never made, and as a consequence the mortgage secured no interest in the property.

[56]            The evidence of Ms Low is uncontradicted and her credibility cannot be assessed on affidavit evidence alone.  As a consequence I cannot say that Carbonite Development Corp. has violated the order of the court.

[57]            Mr. Alperstein says in his letter (undated) that none of the sale proceeds were paid to Carbonite Development Corp. and I have no contrary evidence.

[58]            If the mortgage in fact had no value then it was not any asset of Carbonite disposed of in violation of the court order.  This application is also dismissed.

Security for Costs

[59]            The defendants seek an order that the plaintiff post security for costs in the event it is ultimately unsuccessful in its claim, failing which its action should be stayed.

[60]            Section 236 of the Business Corporation Act, S.B.C. 2002 Chap. 57, states:

If a corporation is the plaintiff in a legal proceeding brought before the court, and if it appears that the corporation will be unable to pay the costs of the defendant if the defendant is successful in the defence, the court may require security to be given by the corporation for those costs, and may stay all legal proceedings until the security is given.

[61]            The defendants rely upon the evidence of Mr. Gardiner, their forensic accountant, who says that on his review of documents he has from the plaintiff he concludes that the company is impecunious and would not be able to pay an award of costs made against it in the event it is unsuccessful in the lawsuit.  He states that as at October 31, 2003 the amount in the plaintiff’s account was only $187.34.

[62]            The defendants also rely on evidence of Ms Higgins, a lawyer with the plaintiff’s solicitor’s law firm, who attaches a Determination of the Director of Employment Standards, dated February 11, 2005, that Mr. Fleischer and Ms Low and the plaintiff and a company, United Catering and Hotel Services Incorporation, owe to the director $13,101.89 for unpaid employee wages and an administrative penalty.

[63]            Defence counsel also points to other evidence concerning the financial positions of the defendants by counterclaim, but they do not appear to me to be relevant to an issue of the financial position of the plaintiff.

[64]            Defence counsel submits that the defendants have made out a prima facie case that the plaintiff will be unable or unlikely to be in a position to pay costs, if awarded to the defendants.  He submits that the burden then shifts to the plaintiff to demonstrate that it has exigible assets of sufficient value to satisfy an award of costs to the defendants, or to demonstrate that the defendants lack a meritorious defence, or to show that any security ordered would visit an undue hardship on the plaintiff thereby stifling any meritorious claim.  He submits that the plaintiff has not demonstrated any of these grounds for denying an obligation to post security for costs.

[65]            Plaintiff’s counsel submits that Mr. Gardiner’s evidence is hardly compelling that the plaintiff is impecunious and submits that the defendants have the burden to show that the plaintiff will not be able to pay costs, should its claims fail, which burden it is submitted the defendants have not met.  Plaintiff’s counsel also points out that Ms Low’s evidence is that she does not agree that any of the parties are impecunious as alleged, and in any event says that if necessary Carbonite Development Corp. undertakes to pay any and all court costs that may be awarded against any of the parties.

[66]            Mr. Gardiner, in another affidavit questions the value of the Carbonite assets listed in Ms Low’s affidavit.

[67]            I think the decision of the Court of Appeal in Kropp v. Swaneset Bay Golf Course Ltd. CA021446, March 12, 1997, is very helpful on this issue.  In that case Finch J.A. (as he then was), writing for the court adopted the principles for security for costs as follows:

[17]      In Keary Development v. Tarmac Construction, [1995] 3 All E.R. 534, the English Court of Appeal considered s.726(1) of the Companies Act 1985, reviewed a number of authorities applying that provision or its predecessors, and then set out the principles which emerged from those cases.  The principles are stated at pp. 539-542, and may be summarized in this way:

Posted by Dr. CondoRot ( Legal Issues, Condo Hotels & Resorts, White Rock, White Rock, Ocean Promenade ) :: Permalink :: Trackbacks (0)

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


                                                 Date: 19980618
Docket: H950201
Registry: Vancouver




B.C. LTD. doing business as MOUNTAIN WEST







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.


[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.

[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

[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

[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

[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

[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."