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CIVIL PROCEDURE - Pleadings - Failure to disclose a cause of action or defence

Friday, March 08, 2019 @ 8:40 AM  


Lexis Advance® Quicklaw®
Appeal by the plaintiffs from a decision of a motions judge striking certain claims without leave to amend. The appellants were small investors induced to invest in four syndicated mortgages on four development projects. Two of those mortgages were in default, but certain terms of the mortgages purported to preclude the investors or their trustees from enforcing the mortgages now and possibly forever. The other two mortgages were removed from title through power of sale proceedings and protection proceedings. Newly-incorporated companies linked to Fortress then became the owners of the lands, free from the mortgages in which the appellants had invested. The appellants brought class proceedings against the individuals and corporations who had promoted and formally sold the investments. The appellants’ primary allegations were that the proposed defendants failed to properly disclose, or misled them about, key information regarding the development projects, particularly in relation to the risks of investing. The motion judge dismissed the claims against the directors and officers of the Fortress Companies and against the mortgagors of the two remaining syndicated mortgages. Based on his reading of the syndicated mortgages, the motion judge found that the trustees, having granted the specific standstill provisions in the respective syndicated mortgages, would not themselves be able to enforce those mortgages without the written consent of the prior-ranking mortgagees in accordance with the terms of the standstill provisions. The motion judge rejected the appellants’ submission that in an equitable enforcement action, the appellants could challenge the interpretation and enforceability of the standstill provision. He found that the standstill provision was adequately disclosed to the parties to the Loan Agreements and to the appellants themselves.

HELD: Appeal allowed in part. The motions judge did not err in striking the claims against the directors and officers of the Fortress Companies for Fortress’s alleged breach of contract, breach of fiduciary duty, misrepresentation, and negligence but erred in striking the claims against the mortgagors. None of the pleadings disclosed conduct on behalf of the directors that was tortious or exhibited a separate identity of interest from that of the corporation. The motion judge did not err in law by finding that the sealed contract rule prevented the appellants from enforcing the syndicated mortgages at common law. The motion judge erred, however, by proceeding to decide the equitable claims for mortgage enforcement using Rule 21 and by dismissing them as bound to fail in law. It was not plain and obvious that the standstill provisions barred the appellants from enforcing the syndicated mortgages in equity. A review of the relevant documents also showed that while a standstill provision was referred to in most of the key documents, the various references to a standstill provision were worded in different ways. Whether any non-disclosure would affect the enforceability of the standstill provision in equity by or on behalf of the trustees would be an issue of law to be determined once the evidentiary findings were made. The determination of whether the mortgages were unenforceable through a class proceeding because some investors might opt out was premature and not a reason to strike the claim on a Rule 21 motion.

McDowell v. Fortress Real Capital Inc., [2019] O.J. No. 509, Ontario Court of Appeal, G.R. Strathy C.J.O., K.N. Feldman and D.M. Brown JJ.A., January 31, 2019. Digest No. TLD-March42019013