Lessons Learned
- If you’re complaining that you’ve been a victim of fraudulent behavior, plead fraud or prepare for monumental disappointment.
- Know who you’re contracting with, be clear about it in the written agreement, and don’t mistake the importance of a party to the construction project as privity of that party to the construction contract.
- A landlord’s tendency to micromanage work done on their property may have consequences when it comes to targeting them with a builders’ lien.
Construction
Rise
In 2014, a chef named Mark Hobson approached Keith Haxton, a landlord alleged to have a reputation in Fort McMurray’s business community for “questionable ethics” and “screwing people over”, about partnering to build a fine-dining Italian restaurant in one of Haxton’s properties – a second-floor unit with a panoramic view and an excellent location near the planned site of an arena complex.
Hobson and Haxton struck a deal involving a $400,000 loan from Haxton through his company Haxton Holdings Ltd., which would also charge rent for the space, and a $200,000 investment from Hobson, as well as investment from other local figures, including a mysterious man known at trial only as “Freddy”.
Hobson incorporated Ristorante Cosa Nostra Inc. and set about construction, for which he hired Timothy Gushue and his numbered company as project manager, and interior decoration, for which he hired the mother-daughter operation Designs by Marlynn Ltd.
Decline
Ristorante Cosa Nostra opened for business in late June of 2015 and found itself in financial trouble instantly, which may have had something to do with an “extortionate” lease rate. Within a month, Hobson had informed Haxton that he was struggling to make his loan and rent payments, and Haxton had asked Hobson to cede all financial management to two of Hobson’s investors, Karen and George Collins.
Designs by Marlynn performed its last work on the project in late June. Its final invoice of $112,000 in July resulted in only partial payment in September, leaving an outstanding balance of $84,000. Gushue’s numbered company completed its project-management work in August, 2015, and issued Hobson a final invoice in October of $153,000 – an invoice which went unpaid. In December, Gushue’s numbered company and Designs by Marlynn both filed liens against the restaurant corporation and against Haxton’s fee simple estate in the commercial building containing the restaurant.
In February, Karen and George Collins asked Hobson to attend a meeting at Ristorante Cosa Nostra. Haxton was also present, as was a witness and a Commissioner for Oaths. Hobson executed a sales agreement acknowledging debt owed to Haxton for late rent and transferring ownership of the restaurant and all of its assets to Haxton in exchange for forgiveness of it. Haxton in turn sold the restaurant and its assets to a numbered company owned by the Collins’ in an agreement containing a covenant that the chattels sold were free of any encumbrance, despite the outstanding liens.
Fall
Haxton then lent Karen and George Collins $300,000 for improvements for another Italian restaurant in the same location, Asti Trattoria Italiana, and cut the lease rate by more than half. The grand reopening occurred in March, the Fort McMurray wildfire occurred in May, George Collins passed away two years later in 2018, and Karen Collins underwent a hip surgery in 2019 that resulted in complications.
In the fall of 2019, Karen Collins put a “temporarily closed” sign on the restaurant’s door, and that door never opened again. Haxton seized and sold the restaurant’s assets, and the space is now a doctor’s clinic.
Litigation
With Hobson’s restaurant corporation and Hobson himself both judgment-proof, Gushue and Christensen’s only realistic possibility of payment for their final invoices involved Haxton. To that end, they plead the existence of an oral contract involving Haxton, and failing that, unjustment enrichment, quantum meruit, negligent misrepresentation, and a valid builders’ lien on the Haxton-owned property.
Gushue and Christensen claimed that they believed they were contracting with Haxton as well as Hobson. They believed that the real backer of the restaurant project was Haxton, who was present during planning meetings, who presented himself as a heavyweight who told Gushue at the end of one meeting “don’t butcher my building” and to “protect my $500,000” (only $400,000 would eventually be loaned to Hobson), and who phoned Gushue near the end of the project about when he would be back to finish incomplete work.
Analysis
The Court found almost all of the witnesses to be less than perfectly credible, and noted that it was immediately apparent during testimony that Haxton had substantially more sophistication and business experience than the others involved in the project: Hobson and Gushue were “clearly at a disadvantage” in any dealings directly with Haxton. On the other hand, the Court noted that Hobson and Gushue were aware of Haxton’s reputation at the outset of the project, and concluded that they had gone forward “with their eyes open”.
While the Court occasionally found Haxton’s testimony suspiciously self-serving, Hobson’s clear feelings even eight years later of having been “betrayed and duped” by Haxton lessened the weight the Court placed on his competing testimony, as did Gushue’s “questionable” record-keeping and invoicing practices.
Oral Contract
In the case of both Designs by Marlynn and Gushue, the Court found that no contract existed with Haxton. Unfortunately for those parties, however much of a heavyweight Haxton came across as during meetings, he was also meticulous about both the chain of instruction and the cash flow: Hobson alone brought Gushue and Designs by Marlynn into the project, only Hobson knew the exact scope of work they were hired to complete and the exact fees they were going to charge, all invoices were submitted to the restaurant corporation, and all payment was expected from the restaurant corporation.
Negligent Misrepresentation
The Court concluded that Haxton had in fact told Gushue that he would be investing $500,000 in the project, not the $400,000 he ultimately did, but the Court could not conclude that a special relationship existed between Haxton and Gushue that would have produced the duty of care required for a finding of negligent misrepresentation: it was not reasonably foreseeable that Gushue would rely on that representation by Haxton, nor was any such reliance by Gushue actually reasonable. A brief introductory meeting in which many critical terms, like costs, fees, and drawings, were discussed only in generalities is a meeting with “too many uncertain and undetermined factors” to produce reasonable reliance or the reasonable expectation thereof.
Unjust Enrichment and Quantum Meruit
For both Gushue and Designs by Marlynn, the primary difficulty with a claim of unjust enrichment was that Haxton never directly received anything of value from either party: everything Haxton acquired was the result of the purchase of the restaurant corporation’s assets from Hobson. The Court likewise found that the deprivation both parties suffered was the result of the restaurant corporation’s failure to pay their invoices, a corporation for which Haxton was a mere creditor at the time of the non-payment.
Fraud
The ugly truth, the Court observed, was that Gushue and Designs by Marlynn’s real complaint was of fraud, specifically Haxton’s engineering of a sale of the restaurant corporation that improperly failed to note the outstanding debts and charges in the sale agreement, and fraud was not plead by either plaintiff.
Fraud, the Court explained, must be explicitly plead as it is a serious allegation, and even using the “realistic and pragmatic” framework which now applies to evaluating the contents of pleadings, a claim of unjust enrichment cannot be allowed to function as a backdoor pleading of fraud.
Builders’ Liens
The plaintiffs were no more successful in their claim of valid and subsisting builders’ liens.
By accepting the validity of the liens throughout many years of litigation and multiple days of trial, Haxton was held to have acquiesced to their validity and was estopped from challenging them. However, in order for the plaintiffs to file a lien against Haxton Holdings’ fee simple interest in its property, Haxton’s corporation would have had to qualify as an “owner” under the Builders’ Lien Act. The definition of an “owner” (inter alia) is a person having an interest in land at whose request, express or implied, and on whose credit, behalf, with whose privity and consent, or for whose direct benefit work is done or material is furnished for an improvement to the land.
The concept of a request, the Court wrote, does not require direct communication between a landlord and a contractor. It does, however, require more than mere knowledge or consent: it requires active participation. While a landlord who has been significantly involved in the design or construction of leasehold improvements can be found to have made an implied request for work to be done, that was not found to be the case here on the evidence provided.
Haxton, the Court found, was “involved in the project from the outset, knew generally what was planned, and monitored what was happening on a fairly regular basis. He was also responsible for financing the majority of the costs of the project.” But his role was passive until the work was almost entirely completed, and none of the renovations were carried out at his request or in a manner he directed.
Ultimately, while it was true that Haxton indirectly benefited from the work, since it facilitated the sale of the leasehold improvements to the Collins’ and the use of the premises to operate another restaurant, the Court determined that a landlord’s reversionary interest did not qualify as a “direct benefit”.
The Court concluded with a remarkable note that it had “tremendous sympathy” for the plaintiffs, whom it was obliged to rule against, and suggested that Gushue in particular should have had reservations about his involvement when he discovered that the majority of the financing was coming from “someone he understood to have a reputation in the local business community for questionable ethics”.