COURT FILE NO.: 646/01

DATE: 20030604

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

LANE, MEEHAN AND LINHARES DE SOUSA JJ.

B E T W E E N:

ANGELA BUSET, Executrix under the Last Will and Testament of Joseph Buset, deceased, and JOSEPH BUSET HOLDINGS LIMITED

Appellants

• and -

BUSET APARTMENTS LIMITED and DAWSON PROPERTIES LIMITED

Respondents

Megan Shortreed, for the Appellants

John J. Chapman, for the Respondents

HEARD: June 4, 2003

LANE J.: (Orally)

1This is an appeal from the judgment of Mr. Justice McCartney, dated August 28, 2001, made upon the written record before him which is also before us. McCartney J. dismissed the appellant's application for a declaration that the conduct of the respondent Dawson Properties Limited, or its directors, was oppressive, or unfairly prejudicial to or unfairly disregarded the appellant's interests.

2The appellants ask that the judgment be set aside and replaced by a judgment in their favour declaring that the appellants as minority shareholders of Dawson have been oppressed, contrary to s.248(2) of the Business Corporations Act.

3The appellants also seek an order for an investigation of the financial affairs of Dawson and an order setting aside certain agreements entered into between Dawson and Shebandowan Holdings Limited and between Dawson and Robert Keenan. They also ask that Dawson make an interim payment to them on account of the price that will be paid for their shares and that Dawson buy their shares at fair market value. It is common ground that if there is to be a buy-out there must be a valuation and quite possibly a trial to determine value.

4By way of background, the five Buset brothers were involved in investment dealings over the past forty years, mostly involving real estate development. Each of them was an equal owner of these investments but the evidence established, and the judge found, that only four had any day-to-day involvement with the investment vehicles that they established over the years. Joseph Buset had little or no involvement, particularly in latter years due to some personal problems.

5Dawson was one of their investment vehicles and they collectively held fifty percent of it, ten percent each. They had two partners in Dawson who together owned the other fifty percent: Mr. Keenan and Mr. Perlin through a holding company.

6Joseph Buset died on April 8, 2000 and this application is brought by his wife as executrix. The allegations made may be summarized. There was an allegation that monies had been improperly paid to other family members to the exclusion of Joseph Buset and his family and that the next generation of family members who were becoming the operating minds of the companies had been abusing their positions.

7The learned judge found that this complaint was never more than mere speculation on the part of the applicants and had been completely neutralized by the affidavits filed on behalf of the respondents. Before us, this matter was not pressed by counsel for the appellant.

8The next allegation is one concerning a project called the Thunder Bay Harbour Project and which apparently had difficulty getting underway and Dawson Properties actually lost money. The allegation was that Mr. Keenan was paid an improper fee. The learned judge found that there was no evidence to substantiate this allegation and again that matter was not pressed before us.

9Two matters that were pressed before us were the Shebandowan agreement and the loan to Mr. Keenan. As to the Shebandowan agreement the learned judge found that in the early 90's, Dawson Properties became quite active in developing properties and an agreement was drawn up between Dawson and Shebandowan (which was Mr. Keenan's holding company) under which Shebandowan and therefore Keenan would be paid a development fee for his work on the various projects he was developing for Dawson. This fee was based on a percentage of the project value as determined by a formula. The applicants complain that Mr. Keenan had a conflict of interest because he was both the principal of Shebandowan and a director of Dawson and that this conflict had not been disclosed. It was also suggested that the remuneration was excessive.

10The learned judge found that entering into that agreement with Robert Keenan was a business decision made by the directors which produced handsomely for Dawson; that the agreement was in the records of the company; and that it was common knowledge of all concerned that Mr. Keenan was a Director of Shebandowan as well as of Dawson and was doing business with Dawson on many of its developments. He found that although there had been a failure to file the document contemplated by s.132(1) of the Act, that would have added nothing to the knowledge of Dawson.

11The appellant has submitted that payment of management fees under the Shebandowan agreement was improper and that there was a conflict of interest. We observe that no expert evidence was brought before the judge to say that the terms of the agreement were not reasonable for the services rendered. We find no error in the learned judge's finding that the Shebandowan agreement was a reasonable business arrangement and that Mr. Keenan's interest in Shebandowan was common knowledge. Indeed that interest is disclosed in the very agreement. No question of failure to disclose arises on these facts.

12The most heavily pressed matter was the loan to Robert Keenan. Before dealing with that matter it is appropriate to consider the submissions that were made as to the standard of review. The widely accepted standard for appeals from the order of a judge is that the decision must be demonstrated to have been clearly wrong. This standard applies both to the findings of fact and to the application of legal principles. The leading case on that for a long time has been Stein v. "Kathy K." (The Ship), [1976] 2 S.C.R. 802. In more recent years there have been cases building on the "Kathy K.". In Equity Waste Management of Canada et al. v. Corporation of the Town of Halton Hills (1997), 35 O.R. (3d) 321, the Court of Appeal said that a reviewing court may vary or set aside the decision of a motion judge where the judge "disregarded, misapprehended, or failed to appreciate relevant evidence" or "made a finding not reasonably supported by the evidence or drew an unreasonable inference from the evidence".

13More recently still, in the case of Housen v. Nikolaisen 2002 SCC 33, [2002] 211 D.L.R. (4th) 577, the Supreme Court of Canada held that the standard for review on a pure question of law was that an appellate court is free to replace the opinion of the trial judge with its own; that is to say that the standard is correctness. The standard of review for findings of fact is different. The court reaffirmed the Stein and "Kathy K." test, that such findings are not to be reversed unless it can be established that the trial judge made a palpable and overriding error.

14I turn now to consider the final objection made to the conduct of the company. As I said, this had to do with the fact that Dawson made a loan to Mr. Keenan who was at the time its president and a director. The loan is objected to on two grounds: it was not a proper exercise of business judgment to make the loan at all; and also on the basis that the terms of the loan did not accord with proper business judgment.

15The learned judge described the situation in his reasons as follows:

"In 1994 Dawson Properties Limited invested in an apartment project in Miami, Florida, known as Fairway View Apartments. Robert Keenan was the driving force behind this project. Dawson had a 30% interest in the project and Keenan a 24% interest. As the project progressed, cash calls were made, and at a certain point in time Keenan was unable to make his contribution. In order to ensure the project was completed, Dawson loaned Keenan the money he required for his cash call. Unfortunately the project was not a success, it was sold and Keenan as of this date still owes Dawson about $479,000 on which he pays interest."

16The evidence before the judge and us is that the agreement to make the loan was made in circumstances where the company believed it had no alternative in order to keep the project going. It was submitted to us that there were alternatives. The company could have taken over the interest of Mr. Keenan; the company ought to have obtained security documentation etc.

17The learned judge considered these submissions at par. 17 where he writes:

"With respect to Allegation #1, i.e. the loan to Robert Keenan, the directors made a decision which they felt was in the best interest of the company and likely was. What they were doing was cutting their losses and indeed at that point they likely did not expect any losses in the end. It was very much an internal matter, and it was recorded on the books of the company."

He goes on to deal with disclosure which is not really an issue.

18The appellant submits that this aspect of the decision should be set aside, urging that, as a business decision, it is unexplained how it benefited the company. In our view, the evidence before the judge demonstrates support for his findings that the directors felt the making of the loan was in the best interest of the company and a second finding that the making of the loan likely was in the best interest of the company.

19Considering the judge's decision, we observe that there had been a forty year history of profitable dealings between these parties, that Mr. Keenan was the driving force of the Florida project, that profit and not loss was expected from the completion of the building project. We note that the alternative of taking over Mr. Keenan's interest rather than lending him the money carried the downside of exposing Dawson to responsibility for further cash calls if more money was required to complete the project; and possibly a loss of his services. We see no error in the judge's conclusion that this was a decision which the directors bona fide felt was in the best interest of the company and that it likely was.

20More problematic is the question of the manner of making this loan, as it was documented only in the accounts of the company. There was no director's resolution or similar record. Like most decisions of this company, it appears there was in fact no meeting of a formal nature, the evidence was that all business for many years had been done informally. There was no promissory note or other signed acknowledgement of the loan by Mr. Keenan. There was no repayment schedule established. There was no interest rate established nor indeed any written obligation to pay interest at all.

21It is clear that the documentation surrounding this loan was seriously deficient. On the other hand, this failure was clearly not directed at the applicant nor did it have the effect of disadvantaging the applicant to a larger degree than any other shareholder.

22Although the learned judge spoke in his reasons in terms of fault, he explained in the same passage that he meant that in the sense of a person in a minority position being prejudiced by the majority. While fault may not be the most appropriate term to use, the explanation is correct in the context of the Act.

23We cannot find that the application judge was wrong to conclude on these particular facts that there was no oppression of the applicant. Accordingly, the appeal is dismissed.

24We have now had submissions as to costs. In our view, the failure of the company to document its activities generally, and the loan to its president in particular, lies at the root of these proceedings. In the circumstances we will make no order as to costs in favour of either party.

LANE J.

MEEHAN J.

LINHARES DE SOUSA J.

Date of Reasons for Judgment: June 4, 2003

Date of Release: September 9, 2003

COURT FILE NO.: 646/01

DATE: 20030604

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT