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Bad investing advice and promissory notes: When can you sue and why

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“If it’s too good to be true, it probably is.” Any combination of stressful circumstances, a high degree of trust, inexperience or internet expertise replacing real expert advice might result in a person ignoring a minimizing clear warning signs that they are about to enter less than prudent contractual relations or make a poor investment. Such was the case in Reimer v The South Asian Post Media Inc.2018 BCSC 2205 (CanLII).

The plaintiff, Ms. Reimer, first met the primary defendant, Mr. Gravelle, in his capacity as a religious leader. She attended his house often for teachings and developed a trust for him. This trust may have been a factor in Ms. Reimer confessing in the financial difficulty she was experiencing as a result of having assets, but no income. Mr. Gravelle was also a realtor and Ms. Reimer had asked about selling her house to downsize and free up cash.

Mr. Gravelle, upon learning that Ms. Reimer’s home was mortgage free, instead suggested she take out a mortgage and invest the proceeds. Eventually Mr. Gravelle arranged for Ms. Reimer to invest $250,000 in a company, South Asian Post, through Mr. Gravelle’s company, W.Y. Atap, for a term of three years. Ms. Reimer was enticed with a promised simple interest rate of 12% per annum; a very decent return as compared to most investments.

The loan was backed by a promissory note from South Asian Post and its principal, Mr. Sewak. Ms. Reimer was further enticed to make this investment through Mr. Gravelle telling her he was a shareholder in South Asian Post and had invested money in the business himself.

Ms. Reimer ultimately loaned $228,359 from a mortgage and her personal savings to South Asian Post. The promissory note promised was provided and it included a statement that the guarantors would put up additional security in the form of four shares in South Asian Post to be held in trust by Mr. Gravelle. Mr. Gravelle also provided a personal guarantee for the sums loaned.

Scheduled interest payments were made, but Mr. Gravelle informed Ms. Reimer near the end of the three-year term that the loan could not be paid. A one-year extension was sought and granted with further guarantees exchanged. At the end of the extension year, Ms. Reimer was again told that the loan could not be repaid and a further one-year extension was granted.

Near the end of the second extension period, Ms. Reimer was growing concerned about being repaid. Mr. Gravelle assured her that, although South Asian Post was going to be unable to repay the loan, Mr. Gravelle would pay the loan from his own funds given that he was a guarantor.

The time for repayment of the loan came and went without repayment. Mr. Gravelle made a few partial payments of accruing interest in the months to follow, but the full amount of interest and principal were never repaid. Ms. Reimer was unable to recover any funds from South Asian Post or Mr. Sewak when she obtained a default judgment against them.

The Court upheld the guarantee provided by Mr. Gravelle, in part, on the basis that he received consideration for the guarantee in the form of his being a shareholder and creditor of South Asian Post and, as such, benefited from Ms. Reimer’s funds being invested in that company. There was evidence he also obtained finders fees in relation to Ms. Reimer’s loan. The court rejected the notion that Mr. Gravelle’s guarantee would be voided if Ms. Reimer’s mortgage was paid off.

The words of the loan did make it unclear if interest would continue to accrue at a rate of 12% after the loan, but the Court relied on Bank of America Canada v. Mutual Trust Co.2002 SCC 43 (CanLII), among other authorities, in finding that, absent exceptional circumstances, interest continues to accrue at contractually agreed upon interest rates in post-breach loans. The court held that Mr. Gravelle was liable for the principal and accrued interest of $143,015.40 less the amount Mr. Gravelle already paid, being $21,743.59.

The court went on to analyze whether there had also been negligent misrepresentation and analyzed the following factors for such a tort as set out in Queen v. Cognos, Inc.1993 CanLII 146 (SCC), [1993] 1 S.C.R. 87:

  • there must be a duty of care based on a “special relationship” between the representor and the representee;
  • the representation must be untrue or inaccurate or misleading;
  • the representor must have acted negligently in marking said representation;
  • the representee must have relied, reasonably, on said negligent representation; and
  • the reliance must have been detrimental to the representee, causing damages.

The court found that each element was met against Mr. Gravelle and the company he controlled and through which Ms. Reimer loaned her funds.  The court found that the appropriate award of damages for negligent misrepresentation was the principal amount of the loan, plus pre-judgment interest calculated under the Court Order Interest Act, minus the amount that Mr. Gravelle has already paid.

The court’s ultimate findings of liability were summarized in para. 95 as follows:

  • Mr. Gravelle was personally liable to Ms. Reimer in breach of contract for damages in the amount of $359,630.81.
  • In the alternative, Mr. Gravelle was personally liable to Ms. Reimer in negligence for damages in the amount of $238,359, plus pre-judgment interest calculated under the Court Order Interest Act from January 2013 until December 2018, minus $21,743.59 on account of interest already paid.
  • Gravelle’s company, W.Y. Atap, was liable to Ms. Reimer in negligence for damages in the amount of $238,359, plus pre-judgment interest calculated under the Court Order Interest Act from January 2013 until December 2018, minus $21,743.59 on account of interest already paid.
  • Mr. Gravelle and W.Y. Atap were both liable to Mr. Reimer in breach of contract for damages in the amount of $62,556.
  • All other claims against the defendants Mr. Gravelle and W.Y. Atap were dismissed.
  • All claims against the remaining defendants were dismissed. 

Reimer is illustrative of the risks of private investing and placing trust in parties that have a personal interest in investing your funds in specific ventures. The promised return rate of interest as well as Mr. Gravelle’s own interests in South Asian Post were red flags that may have been missed or ignored as a result of the pre-existing relationship between Ms. Reimer and Mr. Gravelle and the financial difficulties Ms. Reimer was experiencing.

The case does demonstrate that there are several legal paths to seek to recover against parties who negligently or improperly obtain and invest your funds as well as the various remedies available for each of those paths. If a person finds themselves the victim of a poor investment, there may be many ways by which to seek recovery of their lost investment.

By Jeremy Burgess, Pushor Mitchell LLP

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In addition to our regular guest bloggers, Inside Internal Controls blog published by First Reference, provides occasional guest post opportunities from various subject matter experts on the topics of risk management and best practices in finance and accounting, information technology, environmental issues, corporate governance, sales/marketing and operations, not-for-profits and business related issues in Canada. If you are a subject matter expert and would like to become an occasional blogger, please contact Yosie Saint-Cyr at editor@firstreference.com. If you liked this post and would like to subscribe to Inside Internal Controls blog click here.
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