Antrex Corporation v. Her Majesty the Queen, [1994] 2 CTC 2073, 94 DTC 1529

Beaubier, J.T.C.C.:—This matter was heard in Toronto, Ontario on March 22 and 23, 1994. It is an appeal pursuant to the General Procedure of this Court. The appellant ("Antrex") called as witnesses Antonio Montemarano, its president and director, and Thomas Hall, C.A., a partner in Deloitte Touche, its accountant. There were no other witnesses.

At the times in question Deloitte Touche was Touche Ross, and the appellant was Lakeview Estates Ltd. ("LEL"), which was later amalgamated into Antrex Corp. In argument counsel agreed that there were two issues for the Court to decide:

1. Was the operating entity in Florida Lakeview Estates Ltd. (hereinafter "Antrex")?

2. Were the moneys forwarded to Florida loans by Antrex or investments by it on either its capital or income account?

In 1983 Mr. Montemarano, through various corporations, was a successful real estate developer in the Toronto area. He had developed a relationship with "Vanguard Trust" and a lawyer named David Melnyk. This had resulted in a new agreement in 1983 whereby profits from real estate developments which Vanguard Trust would finance would be paid equally to Montemarano related and Melnyk related corporations by way of fees. Antrex was used for this by Mr. Montemarano.

David Melnyk introduced Mr. Montemarano to a Montreal group which had three projects in Florida which it wanted Vanguard Trust to finance. Vanguard Trust could not finance in Florida. Therefore Mr. Melnyk proposed that his group and Mr. Montemarano's group would go into the Florida projects on a basis similar to what they had agreed to in Canada. Mr. Montemarano agreed. Initially it was expected that the Montreal group, headed by Gilles Leroux, would acquire the property, do the plans, make the zoning applications and hold 50 per cent of the projects; the Melnyk group would arrange the financing and hold 25 per cent of the projects; and the Montemarano group would attend to the construction, marketing and sales and hold 25 per cent of the projects. The Melnyk and Montemarano groups were to invest U.S. $500,000 into the “Boca Village Market", a food market in which they would be passive investors. They were to invest another U.S. $500,000 into two residential developments in which the Melnyk group would ultimately finance, the Montemarano group would construct, market and sell and the Montreal group would supply the property, plans, zoning and clearances. Thus the Montemarano group would be responsible to invest a total of U.S. $500,000.

Respecting the three projects in question:

1. “Boca Village Joint Venture"

The Boca Village Joint Venture commenced in about September 1983 and was a redevelopment of a food market mall on property leased by K-Mart Corporation in Boca Raton, Florida, to be known as "Boca Village Market". On September 14, 1983 Exhibit A-1 “Boca Village Joint Venture Agreement" was signed by "Antonio Montemarano, as trustee and not individually”. No document was ever signed in relation to this agreement describing for whom Mr. Montemarano was trustee. On September 16, 1983 Mr. Montemarano personally signed a guarantee to a promissory note (Exhibit A-3) in favour of K-Mart Corporation by Boca Village Joint Venture for $200,000. By then U.S. $250,000 had already been transferred to Florida by the Montemarano related corporations "Waldem" and "Monex".

Mr. Montemarano stated that in entering into the Boca Village Joint Venture he was trustee on behalf of the appellant. He also stated that when he signed Exhibit A-1 he "didn't know yet if we were going to have a structure the same as in Ontario.” Paragraph 9 of Exhibit A-1 described "Antonio Montemarano as trustee" contributing U.S. $420 capital and loaning U.S. $500,000 for a 42 per cent interest. The other parties were Gilles Leroux, 20 per cent; Multidev Corporation, 20 per cent and Promodev Ltd., 28 per cent. In paragraph 5 “Antonio Montemarano, as Trustee" has 70 per cent of the voting power in the joint venture.

Exhibit A-2 is an "Assignment of Lease" by K-Mart Corp, to Boca Village Joint Venture. Part of the consideration for this assignment is U.S. $200,000 which Mr. Montemarano testified, as is borne out by Exhibit A-5, was paid by Waldem. Mr. Montemarano stated that this U.S. $200,000 ($247,317.91) was a loan by Waldem to Antrex. However, he also testified that at this time U.S. $500,000 was to be supplied '/2 by the Melnyk group and '/2 by the Montemarano group. It is also noted that Exhibit A-1 describes the $500,000 as a loan, not as an investment of capital. A further verification of this is the fact that Monex transferred U.S. $50,000 on September 14, 1983. This completed the Montemarano commitment of '/2 of U.S. $500,000 to the joint venture, consisting of the entire loan moneys required of it by Exhibit A-1. The sources of the U.S. $250,000 are confirmed by page 2 of Exhibit A-25 dated March 5, 1984.

On May 22, 1984 the appellant, as LEL (Exhibit A-15), and Boca Village Joint Venture (Exhibit A-16) each applied for a loan on the Boca Village Market for U.S. $700,000, by a separate applications to ‘First City development Corp." as sole borrower. Both were refused. These applications coincide with the approximate time when it was concluded that the Melnyk group's U.S. $500,000 would not be forthcoming.

In August 1984, this project was sold to the Larco group.

2. “Lantern Walk"

In about September 1983, Mr. Montemarano caused Lakeview Development Corp. ("LDC") to be incorporated in Florida. He had originally attempted to incorporate a corporation in Florida to be called "Lakeview Estates Ltd.”, but could not register that name.

On October 4, 1983 LDC signed an "agreement for sale and option” (Exhibit A-6) as "buyer"; by this agreement LDC purchased land described in Schedule A, agreed to purchase four model homes, and received options to purchase ten lots. There is no reference in Exhibit A-6 to LDC acting as a trustee. This was signed by Mr. Montemarano for LDC.

Exhibit A-5 shows a bank transfer of U.S. $50,000 ($61,843) on October 4, 1983 and a transfer from A. Montemarano Holdings of U.S. $150,000 ($194,383.36) on December 20, 1983. Paragraphs 4 and 5 of Exhibit A-6 describe the sums of U.S. $50,000 and U.S. $150,000 payable by LDC as follows:

4. Initial Payment: The buyer pays herewith to the seller the sum of $50,0000 for which the seller acknowledges payment.

“All payments in this contract are payable in U.S. dollars" (handwriting and initialled).

5. Joint Control of Certain Moneys: The buyer will deposit upon execution of this agreement $150,000 dollars in an interest bearing bank account in a mutually agreed to financial institution under the joint control of Gilles Leroux and a representative of the buyer, which moneys will only be used for the development cost of the project including construction of the pool, entrance, clubhouse, gates, trailer for sales publicity, operating expenses, and all the items built on the rec. site and the gate which will remain the ownership of the seller or the homeowner's association after being built. Construction of all such improvements shall commence not later than six months from the date of this agreement and construction of the same shall be completed on or before the first anniversary date of this agreement.

Mr. Montemarano testified that the beneficial owners of LDC's interest in Exhibit A-6 were Antrex and the Melnyk group. He testified that after the $200,000 was paid by his group, the Melnyk group was to pay the balance required under the agreement. When they didn’t, he said, "We did it." When asked who did it, he stated it was "Lakeview Estates". Exhibit A-5 shows a further U.S. $50,000 as a bank transfer on January 12, 1984. This brought the total paid by the Montemarano group to U.S. $500,000 which was the commitment between Montemarano and Melnyk. There is no evidence as to the application of this last U.S. $50,000.

3. “Coral Ridge”

On October 25, 1983 J.J. Renard, on Patrick Donan and Associates Co. stationery, wrote a law firm in Palm Beach, Florida, with detailed instructions for “Multilake Joint Venture" between LDC and Multidev Corp. concerning a development of the Coral Ridge property by the parties in equal shares. This joint venture agreement was never completed by the parties. The letter is "Exhibit B” to Exhibit A-7.

On August 22, 1984 LDC and Coral Ridge Terraces, Inc. signed a development agreement (Exhibit A-7) whereby LDC was to construct, market and sell 32 townhouse units at 5200 N.E. 14th Terrace, Fort Lauderdale, Florida. It describes U.S. $40,000 that LDC would disburse as a loan. It also describes $162,517.81 LDC had then disbursed as bearing interest and repayable from profits — first to interest, then to principal (subparagraph (d), page 7). This was signed by someone "per Tony Montemarano" for LDC "a Florida corporation". LDC executed the Coral Ridge development agreement without any reference to a trusteeship or to a representative capacity. The essence of the Coral Ridge agreement, Exhibit A-7, is to provide LDC with a fee per unit for its services, and to repay it for moneys advanced with interest thereon.

The evidence of Thomas Hall is that from at least October 1983 on Mr. Montemarano was considering how to deal with the Florida transactions. Until May 1984 he didn't know what the Melnyk group was doing. If the projects were to be profitable, a U.S. corporation was the appropriate vehicle. If they were not,the appellant should take advantage of the losses. (Exhibit R-1, the Touche Ross memorandum, which was sent to Mr. Montemarano sometime after October 25, 1983.)

It is obvious that Mr. Montemarano tried not to commit himself. The beneficiary of his "trusteeship" of the Boca Village Joint Venture was never designated by him in writing. LDC did not sign anything on the other projects as trustee. None of the money advanced by the related corporations was passed through Antrex, nor were any documents respecting the advances executed by Antrex in favour of those corporations.

On March 1, 1984 a meeting of Tom Hall, Bill Ash and Mr. Montemarano occurred. Minutes of this meeting which are dated March 5, 1984 were prepared by Tom Hall and sent to Mr. Montemarano (Exhibit A-25). In part they read as follows:

2. Investment in Florida Joint Ventures

There are three joint ventures in Florida.

(a) Boca Village Market

(b) Coral Ridge

(c) West Palm

These three joint ventures were initially forecasted to be very profitable. Tony still believes these projects will prove to be profitable. However, he is very upset about the loose way in which his partners appear to be operating these joint ventures. There have been no interim financial statements, cash flow forecasts or management reports. Boca Village Market which was originally scheduled to open on December 15, 1983, now is scheduled to open in September 1984.

Tony has advanced $615,272 in U.S. funds on behalf of these three projects up to February 29, 1984. The source of these funds has been as follows:

Waldem via Oakville I	$200,000
Montemarano Holdings via bank loan	$150,000
Monex	$ 50,000
Lakeview	$215,272

In addition to these advances, Diane Curtin says that a $200,000 loan was arranged in the United States by Tony.

Tony is very anxious to rid himself of these partners. He would either like to take on the projects all by himself or sell out his interests to the partners. If he were to sell out, he is concerned that if a loss would to occur, could it be claimed for tax purposes so that he would get some relief for his loss.

There seemed to be a great deal of uncertainty as to the actual legal entity which was operating in the State of Florida. Diane Curtin has four thick files covering the projects in Florida. Diane Curtin and Tom Hall reviewed these files to try to get a handle on how much money had been paid and what agreements had been signed. After their meeting, Diane Curtin was to review her files and extract out of her files, a summary of what had acutally occurred and what agreements had been signed, highlighting the important facts, such as profit distributions in each agreements.

[Emphasis added.]

When cross-examined respecting why — "There seemed to be a great deal of uncertainty as to the actual legal entity which was operating in the State of Florida", Mr. Montemarano didn't recall.

Minutes dated May 31, 1984 of a meeting held May 30, 1984 (Exhibit A-26) prepared by Tom Hall respecting the investment in Florida read:

On May 30, 1984, a meeting was held in the offices of Lakeview Estates. Present were Tony Montemarano, Bill Ash and Tom Hall. The following matters were discussed.

Investment in Florida

(a) Tony said that additional funds were invested in the projects in Florida in the months of April and May. He was not sure of which companies provided the funds. Tom Hall undertook to review April and May with Haider and Diane Curtin to see what additional funds were invested and which companies provided the funds.

(b) Boca Village Market is now scheduled to begin operations in the fall of 1985.

(c) First City Bank will provide financing of $700,000 to get the operations going plus provide funds for refinancing in the amount of $3.5 million. After this project is refinanced, all advances will be returned to the participants.

(d) In return, First City will receive 50 per cent of the profits. Tony will get 25 per cent of the profits and 25 per cent will go to the remaining three or four other participants. Tony will have 75 per cent of the control of this project.

(e) In the West Palm Beach Joint Venture, a new agreement as been drawn up but it is unsigned at the moment. The new agreement calls for Tony to dispose of his interest and in turn will receive most of his advances back. He expects to lose approximately $30,000.

(f) If there is a loss of $30,000 in West Palm Beach, it was questioned how the investment should be structured in order to permit Lakeview Estates to claim the loss of $30,000.

(g) Coral Ridge Joint Venture — Coral Ridge was originally set up under an old joint venture agreement involving people from Montreal. A new joint venture agreement was drawn up that would involve Tony Montemarano and the participants in the old joint venture. The new joint venture would take over from the old joint venture. At present, the property is in the name of the old joint venture and it would appear that Tony will not be participating in this joint venture at all and will be getting any funds that he has put into the joint venture returned to him. Tony did not expect to either earn a profit or loss.

(h) There was a discussion on the implications of Lakeview Estates being registered in the State of Florida. Can Lakeview Estates own projects in Florida and hire Lakeview Developments to do the management? Therefore, Lakeview Estates would be the company that would be responsible for the profits and their losses and Lakeview Developments would serve only to earn a management fee.

When cross examined on these minutes, Mr. Montemarano recalled paragraph (f); in respect to it he testified that Lakeview Estates Ltd. (Antrex) ”. . .is the company. That is that!" When cross examined respecting paragraph (h) and whether the last paragraph would apply in the future he said, "Anyhow!" Mr. Montemarano was testy and truculent during his cross examination respecting Exhibits R-1 and A-26.

In the Boca Village Joint Venture Agreement (Exhibit A-1) Mr. Montemarano never designated who he was trustee for in writing; he retained his power of appointment. Mr. Hall stated that Mr. Montemarano always referred to the Florida transactions as being done by "Lakeview Estates”, but the documents prepared at the time of the transactions do not support this. Exhibit A-1 indicates that U.S. $250,000 was loaned to the joint venture, and Exhibit A-5 and the testimony indicate that the money came from Waldem and Monex. The only evidence respecting LEL (Antrex) investing the funds are a worksheet of Touche Ross dated 7/84 (Exhibit A-31), the financial statements prepared long after the events, Mr. Montemarano's testimony, and the statements Mr. Hall alleges were made by Mr. Montemarano in 1983 or 1984. Those statements made by Mr. Montemarano in 1983 or 1984, even if accepted, can be explained since “Lakeview Estates" is the name that Mr. Montemarano originally wanted to incorporate in Florida and may very well have been a generic description used by Mr. Montemarano to refer to the Florida projects. There is no documentation in evidence which was executed by the appellant simultaneous with the alleged events of this transaction.

In the circumstances of a transaction involving six figures, two national jurisdictions and various parties (including the Melnyk group, the Montreal group and K-Mart), Mr. Montemarano simply took his chances and did not commit himself. On the evidence before it, the Court finds that the testimony as to the investment by the appellant in the Boc Village Joint Venture agreement is not accepted. The Court finds that the appellant had no interest in the Boca Village Joint Venture Agreement or any funds placed in it. The U.S. $420 capital was Mr. Montemarano's personal investment of capital since he did not designate in writing, or in any other satisfactory form, any other person for whom he was acting as trustee of the capital sum. The remaining money described in Exhibit A-1 as loaned constituted loans to the Boca Village Joint Venture by Waldem and Monex. The evidence is clear that those firms loaned the money and there is no evidence of any intervening person whether it be the appellant, as alleged, or Mr. Montemarano personally. Therefore the Court finds that the U.S. $250,000 loaned by Waldem and Monex, and any other money advanced to Boca Village Joint Venture by Montemarano related persons, constituted loans to the Boca Village Joint Venture since Mr. Montemarano referred to himself as "trustee" and there is no satisfactory evidence of a change of ownership of the loans made by Waldem and Monex.

In the other two ventures, the evidence once again is of six figure numbers, two national jurisdictions and various parties. In such circumstances, documents executed by the parties at the time must be given their due. The evidence, taken as a whole, contradicts the self-serving testimony of Mr. Montemarano. Mr. Hall’s testimony is contradicted by the Touche Ross minutes when they are looked at in the light of the documents executed by LDC and placed in evidence. Once again, a logical explanation of Mr. Hall’s statements that Mr. Montemarano referred to the firm in Florida as "Lakeview Estates" is that he may have been referring to either LDC or all of the projects as "Lakeview Estates”, since that is the name he originally intended to use in Florida. Indeed, Mr. Hall’s minutes make no reference to LDC until the minute dated May 31, 1984 (Exhibit A-26). The assumptions of the respondent are not refuted by the appellant.

The Court finds that LDC was not acting as a trustee for anyone in respect to Exhibit A-6 (Lantern Walk) or Exhibit A-7 (Coral Ridge), and finds that the nature of the money described in the agreements was that described in the agreements themselves. Therefore any money forwarded to LDC for use in Florida constituted loans to LDC which borrowed the money from the Canadian sources, since there is no reference to LDC acting as trustee for anyone in Exhibit A-6 or Exhibit A-7.

The appeals are dismissed.

The respondent is awarded its costs throughout.

Appeals dismissed.