COURT OF APPEAL FOR ONTARIO
RE:
JOHN HOWARD TESKEY (Plaintiff/Respondent) – and – MIKE GRZELAK (Defendant/Appellant)
BEFORE:
MCMURTRY C.J.O., CATZMAN AND MACPHERSON JJ.A.
COUNSEL:
Jan D. Weir
for the appellant
Andrew J.J. Marek
for the respondent
HEARD:
July 2, 2002
On appeal from the judgment of Justice Frances P. Kiteley dated June 12, 2000.
E N D O R S E M E N T
[1] The appellant, Mike Grzelak (“Grzelak”), appeals from the judgment of Kiteley J. dated June 12, 2000 granting judgment in favour of the respondent, John Teskey (“Teskey”), for $10,000 with pre-judgment interest of $23, 802.75 and costs fixed in the amount of $12,600.
[2] The appellant was invited to a business opportunity to earn income through a distributorship which sold vacation timeshare memberships. He signed a distributorship agreement with Lodestar Network Marketing Inc. As part of that agreement, he also signed a Membership Agreement with Vacation Brokers Club Inc. (“Club”). He also signed a promissory note in the same amount to another entity, Vacation Brokers Inc. bearing interest at 24% per annum. All documents were dated October 31, 1987. The promissory note was assigned to the respondent who was a principal of all three entities.
[3] When Grzelak did not pay for his vacation membership, Teskey sued on the promissory note. In reasons for judgment dated May 5, 2000, Kiteley J. dismissed the action on the basis that Club had never been incorporated and therefore there was no legal entity with whom Grzelak could have entered into the membership agreement. The reason Club was never incorporated was that, at the time, the Ontario Business Corporations Act (“the OBCA”) prohibited the use of the word ‘club’ in a corporate name unless the corporation carried on a sporting or athletic business.
[4] Teskey’s main argument before Kiteley J. was that in April 1987, six months before Grzelak signed his membership agreement, he had caused another company, Vacation Brokers C‑L‑U‑B Inc. (“C‑L‑U‑B”), to be incorporated and that, in essence, Club and C‑L‑U‑B were one and the same legal entity. Accordingly, Grzelak had entered into a contract with a legal entity. Kiteley J. rejected this submission. In her May 5, 2000 decision, she held that Club was not legally incorporated under the OBCA and that Club and C‑L‑U‑B were separate entities. She said:
I do not accept the several explanations offered by Mr. Teskey which were inconsistent and contradictory. I see no basis for his assertion that the companies are the same legal entity.
- [5] Unusually, this did not end the matter. On May 8, Teskey brought a motion under rule 52.10 to call further evidence “to prove the material fact that Vacation Brokers Club Inc. is the same as . . . Vacation Brokers C‑L‑U‑B Inc.”. Kiteley J. granted the motion. Teskey called further evidence, namely the testimony of Marilyn Kunjah and Nancy Meyer, who participated in the drafting and typing of the original corporate documents. Based on their testimony, which was to the effect that they used the words “club” and “C‑L‑U‑B” interchangeably in the documents they prepared, in a decision dated June 13, 2000 Kiteley J. reversed her earlier conclusion:
I therefore make the following changes to my reasons dated May 5, 2000: Paragraph 41 is deleted and the following is substituted: I find that Vacation Broker C‑L‑U‑B Inc. and Vacation Brokers Club Inc. are the same legal entity, namely Vacation Brokers C‑L‑U‑B Inc., a company which was incorporated on April 14, 1987.
[6] Grzelak appeals this decision on two bases. First, he contends that the entire distributorship-membership scheme was a “pyramid scheme” from its inception, contrary to the Competition Act. In her first judgment on May 5, 2000, Kiteley J. said that the record was insufficient for her to determine that issue on the merits or even whether Grzelak had standing to raise the issue. We agree with her conclusion.
[7] The second basis for the appeal is that the trial judge erred by reversing her decision on the OBCA issue. We agree. The trial judge’s reasoning and conclusion in her May 5, 2000 decision were, in our view, sound. We are respectfully of the view that the same cannot be said of the modified reasons on June 13, 2000.
[8] In her June 13 reasons, the trial judge stated:
In the case of the trust deed, there is no evidence that a lawyer was overseeing the draft of the deed. While the trustee has been described as a lawyer, I have no evidence as to his professional contribution to the trust deed. On the basis of the evidence, the trust deed was prepared at the direction of John Teskey, a non-lawyer and typed by Miss Meyer, a person who indicated that the differences with or without dashes or an “S” were of no significance to her.
[9] With respect, this is an incorrect and inadequate basis on which to reverse the well-reasoned and, in our view, compelling analysis the trial judge made in her May 5 reasons. It is incorrect because it is clear from the Trust Deed itself that Club and C‑L‑U‑B are separate entities: see, for example, paragraph 8 where “The Company” which is C‑L‑U‑B and the Club “jointly and severally warrant”. It is inadequate because it is clear from the record that Teskey created a sophisticated business enterprise. He did so with legal advice. Importantly, he testified that his lawyer told him it was necessary to use the name C‑L‑U‑B for his proposed company. He received this information several months before the contract with Grzelak, using the impermissible word ‘Club’, was formed. To conclude that all of these factors, and others, including the trial judge’s description of Teskey’s testimony as “inconsistent . . . contradictory . . . unresponsive and evasive”, should be overridden by the testimony of two clerical employees operating on Teskey’s instructions is, in our view, a serious misapprehension of the evidence.
[10] We conclude that the trial judge was correct in her first decision, but then erred by in effect reversing it in her second decision. Club and C‑L‑U‑B were different entities. Grzelak contracted with Club which, at the time, was not a legal entity.
[11] Finally, this is not a case in which we see any basis for relieving Teskey from his failure to use a legal corporation in his agreement with Grzelak. Teskey used at least four entities for the scheme he established. Only he knows why he did this. Since one of them was not a legal entity, we see no reason for upholding agreements between it and people like Grzelak. Moreover, Grzelak never took a vacation pursuant to the agreement; this is not a case where partial performance by the customer might suggest some relief for the seller.
[12] We would allow the appeal with costs fixed at $20,000.
“R. Roy McMurtry C.J.O.”
“M. A. Catzman J.A.”
“J. C. MacPherson J.A.”