Executive Summary: Key Legal and Evidentiary Issues

• Plaintiffs transferred legal title of their property to the defendant trustee to secure financing, creating a trust relationship requiring proper accounting and disclosure.

• The defendant breached trust obligations by failing to disclose mortgage amounts, commingling funds with personal investments in a Ponzi scheme, and using trust property for unauthorized purposes.

• Poorly drafted agreements prepared by the defendant's agent created ambiguity regarding shareholder loans, interest calculations, and construction cost responsibilities.

• An adverse inference was drawn against the defendant for failing to call a key witness (Azim) who had knowledge of the disputed facts.

• Expert accounting evidence confirmed insufficient corporate records existed to verify the defendant's claimed shareholder loans or construction costs.

• The defendant's counterclaim for interest payments and settlement costs was dismissed due to lack of evidentiary foundation and the plaintiffs' non-involvement in the underlying liabilities.

Background of the partnership

Janet and Gerry Morgan owned property at Rocky Mountain Road, Malahat, British Columbia, where they operated a bed and breakfast business known as "Morningside Estates" through a corporation, 679191 B.C. Ltd. Needing investment funds to convert their property into a five-star hotel and bed and breakfast operation, they entered into a partnership arrangement with Dr. Mirza Jesani and his wife Shahnaz Jesani in 2003. The parties agreed to share ownership of the property and business, with the Jesanis providing financing for construction while the Morgans managed daily operations.

The trust arrangement and property transfer

The parties executed multiple agreements, including a Memorandum of Understanding, Shareholders' Agreement, Funding Agreement, and two General Agreements—all poorly drafted by Azim Jessani, who had been engaged by the defendant. On October 13, 2004, the Morgans transferred 100% legal title of the property to the Jesanis to enable them to obtain additional financing. A Declaration of Trust was executed confirming the Jesanis would hold 27% of the property in trust for the Morgans. The plaintiffs were not provided independent legal advice, and the Declaration of Trust was not registered against title to the property.

The Ponzi scheme and undisclosed transactions

Unbeknownst to the plaintiffs, in or around June 2004, the Jesanis became entangled (presumably innocently) in a Ponzi scheme orchestrated by notary public Rashida Samji. The defendant obtained TD Bank mortgage financing of $1,250,000 in October 2004 and later Bank of Montreal financing of $2,125,000 on March 21, 2006, using portions of these proceeds for personal purposes including investing in the Ponzi scheme and paying his personal credit card. The plaintiffs were never informed about these mortgages, the amounts borrowed, or how the proceeds were utilized.

Business operations and accounting failures

Janet Morgan worked full-time as the manager of the Business from 2005 until 2019. Over this period, she received wages totalling $241,146, which was $114,853 less than what she would have received had she been paid the agreed $24,000 per year. The defendant relied on his cousin Alnoor and an accountant named Naguib Dhalla to handle financial matters, but in approximately July 2012, they stopped attending the property for regular accounting visits. The usual accounting, tax filings, and other formalities in respect of the Business and 679191 were not adhered to, and the company was dissolved twice for failure to file the required annual reports—in March 2008 and again on August 27, 2018—all without the plaintiffs' knowledge.

The Trustee's action and property sale

The Ponzi scheme was uncovered in January 2012, and Samji was ultimately convicted and incarcerated. On November 1, 2013, Samji's Trustee in Bankruptcy commenced an action against the Jesanis, 679191, and Ink Media seeking recovery of funds. The plaintiffs had no knowledge of this litigation. In December 2018, the Trustee's Action was settled for the sum of $250,000 payable to the Trustee. On February 18, 2019, the property was sold by the defendant for $2,660,000 with a closing date of October 31, 2019. The defendant paid the settlement amount and discharged the Bank of Montreal mortgage entirely from the sale proceeds without the plaintiffs' knowledge or involvement.

Court's findings on breach of trust

The Court found the defendant breached his trust obligations by failing to account to the plaintiffs regarding the TD Bank and Bank of Montreal mortgages, using mortgage proceeds for personal purposes, allowing the Bank of Montreal mortgage to fall into arrears in 2008 resulting in additional payments totalling $62,888.95, and concealing the Trustee's Action and its settlement. The defendant failed to meet the onus upon him to demonstrate proper accounting, and Mr. Zhang's evidence regarding construction costs was based entirely upon unsubstantiated speculation and hearsay that the Court declined to give any weight.

Ruling and distribution of proceeds

The Court generally found for the plaintiffs and rejected the defendant's claims. The plaintiffs were awarded $1,121,320 from the adjusted sale proceeds, plus $47,866 in restitutionary damages for interest lost due to the defendant's improper use of sale proceeds. The defendant was entitled to $166,644, reduced from his original entitlement due to his sole liability for the $250,000 settlement payment and the personal portion of the Bank of Montreal mortgage totalling $931,874. The defendant's counterclaim was entirely dismissed. The plaintiffs were also awarded their costs of the Claim and Counterclaim at Scale B. The final amounts will include proportionate interest from the term deposit holding the funds, with distribution ordered after the deposit matures on February 26, 2026.