The television air waves are clogged with real estate reality shows – buying properties, selling properties, real estate flipping properties, renovating properties, income properties… There’s a real estate show that demonstrates every facet of the business and it all looks very simple. But I’m pretty sure that not one real estate reality show told you that real estate flipping when purchasing from a Receiver in Ontario can land you in a heap of legal trouble. Here is the story surrounding the Court of Appeal for Ontario case of Meridian Credit Union Limited v. Baig, 2016 ONCA 150.
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Real Estate Flipping
Mr. Ahmed Baig’s corporation bought a downtown Toronto property located 984 Bay Street in a receivership sale. The property was purchased from the court-appointed Receiver with court approval, for $6.2 million in August 2006. Before the deal went through Mr. Baig secretly flipped the property for $9 million, netting a tidy profit of $2.8 million. The Receiver had no clue that when Mr. Baig bought the property he’d already agreed to resell it to Yellowstone Property Consultants (Yellowstone). In fact the Receiver assumed Yellowstone was Baig’s company and neither Mr. Baig nor his lawyer corrected that misunderstanding. On the advice of counsel the deal was structured so that the property would go directly to Yellowstone to avoid duplicate land transfer taxes. What a score for a little paperwork and some creative bookkeeping!
The Flopping
It’s hard to keep a $2.8 million real estate flipping secret and in 2009 Meridian Credit Union Limited (Meridian), the first ranking secured creditor at the time of the sale, and the Applicant in the receivership case, discovered the resale to Yellowstone. Meridian sued Mr. Baig. The Receiver, obliged to maximize the return on assets of any sale, argued it would never have recommended court approval had it known about the real estate flipping.
The Court noted that one of the terms of the Agreement of Purchase and Sale entered into between the Receiver and Mr. Baig’s company stated:
“Article 39 of the agreement of purchase and sale provided that Mr. Baig could assign the agreement to a corporation to be incorporated for the purposes of the sale with the receiver’s consent which could not be unreasonably withheld. However, in respect of any other assignment, the receiver had a consent right and its consent “may be arbitrarily withheld”.”
In the original case in the Ontario Superior Court of Justice, The Honourable Mr. Justice F.L. Myers found that:
“Apart from the normal circumstances where any buyer would be reluctant to tell its vendor that there was another buyer available who would pay substantially more for the property, the fact that the sale occurred in a receivership is important. A receiver requires approval of the court to make a material sale of the debtor’s property. To obtain court approval, a receiver must establish that it engaged in a fair and commercially reasonable process to try to obtain fair market value for the property to maximize realization for the creditors. See: Royal Bank of Canada v. Soundair Corp., 1991 CanLII 2727 (ON CA), 1991 CanLII 2727 (ONCA). If a Receiver learns that it has undersold property it can be in a very difficult position in which it is contractually bound to seek court approval for its sale but it must, at the same time, disclose to the creditors and to the court that it has not maximized realization.”
The Honourable Mr. Justice Myers made the finding that Mr. Baig is liable to Meridian for fraudulent misrepresentation in an amount to be determined by the court.
The Appeal Court Ruled On The Real Estate Flipping
Upholding the lower court decision, the Court of Appeal found Ahmed Baig had deliberately misled the Receiver handling the receivership by failing to alert them to the resale through the real estate flipping. “In certain circumstances, silence and half-truths can amount to a misrepresentation,” the Appeal Court ruled. “Both the appellant and his counsel wanted to prevent the Receiver from discovering the sale to Yellowstone, because the $2.8 million differential in the price would jeopardize court approval,” the Appeal Court said. “Both the appellant and his counsel actively hid the agreement,” the Appeal Court found. Instead of making a fast $2.8 million Mr. Baig was held responsible for the misrepresentations made by his lawyer, who knew documents given to the receiver were false. While Baig had no obligation to disclose the resale agreement, the court decided that his failure to correct the misunderstanding that Yellowstone was his company amounted to fraudulent misrepresentation.
Would this real estate flipping decision be the same in a bankruptcy?
In my view, this ruling would also extend to bankruptcy administrations, as the bankruptcy trustee would be required to obtain either inspector or court approval, and be held to the same high standards as in this case. As professional trustees we are extremely ethical and would never support a fraud or blatant misrepresentation. We help individuals and companies throughout the Greater Toronto Area (GTA) facing financial crisis in need of restructuring and turnaround, receivership or bankruptcy that need a plan for Starting Over, Starting Now. The Ira Smith Team brings a cumulative 50+ years of experience dealing with diverse issues and complex files, and we deliver the highest quality of professional service. Don’t worry about debt; instead take immediate action.
Call us today. If you or your company is trapped in high debt, you need a professional trustee to help you manage the situation before it reaches a critical stage where bankruptcy or receivership is your only option. We have been able to help many individuals and companies carry out a successful debt settlement programs or corporate restructuring and turnarounds. It all began with an initial consultation. The first step is a realistic cash-flow budget. Successful completion of such a program, will free you from the burden of your financial challenges to go on to live a productive, stress-free, financially sound life.
