COURT FILE NO.: 391/08
DATE: 20090430
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
Swinton, Low and Karakatsanis JJ.
B E T W E E N:
1413910 ONTARIO INC. carrying on business as BULLS EYE STEAKHOUSE & GRILL
Applicant/Respondent in Appeal
- and -
hilary marian mCLENNAN
Respondent/ Appellant
Geoff R. Hall and Julie K. Parla, for the Applicant/Respondent in Appeal
Melvyn L. Solmon, for the Respondent/Appellant in Appeal
HEARD at Toronto: April 2, 2009
LOW J.
[1] Hilary Marian McLennan (the appellant) appeals from the judgment of C. Campbell J. dated November 28, 2008. The judgment arises from an application brought by the respondent, 1413910 Ontario Inc. (hereinafter "Bulls Eye") for an oppression remedy under s. 248(2) of the Ontario Business Corporations Act, R.S.O. 1990, c. B. 16, as amended (the OBCA).
[2] The hearing under s. 248(2) was bifurcated. The application judge released his decision on July 4, 2008 finding that there had been oppression of Bulls Eye in the conduct of the affairs of Select Restaurant Plaza Corporation. A hearing as to remedy followed on November 13, 2008 and reasons were released on November 28, 2008 requiring the appellant to pay to Bulls Eye the sum of $786,683.36.
THE FACTS
[3] The appellant is the widow, estate trustee and sole beneficiary of the estate of John Keith McLennan, who died in 1998. John Keith McLennan was the sole shareholder of J.K. McLennan Developments Limited (Developments). Developments was the sole shareholder of Select Restaurant Plaza Corporation (Select). After the death of John Keith McLennan, the appellant became an officer and director of Developments. She appointed her brother, Victor McCullough, to be president of Select. Thus the appellant indirectly had control of and owned the shares of Select.
[4] Select's asset was a commercial plaza in which Bulls Eye was a tenant. On June 19, 2003, Select terminated Bulls Eye's lease in the plaza.
[5] Bulls Eye sued Select for a declaration that the termination of lease was wrongful and for damages. On February 13, 2004, a declaration of wrongful termination was granted on a summary judgment motion by Matlow J. The assessment of damages was deferred to trial of an issue. Select appealed the judgment granting the declaration. The declaration was upheld. The trial for assessment of damages took place in April, 2006 and, on June 30, 2006, judgment issued in favour of Bulls Eye in the amount of $699,465.48. Select appealed from the judgment assessing damages. Its appeal was quashed with costs.
[6] Between the judgment of February 13, 2004 declaring wrongful termination and the judgment of June 30, 2006 quantifying damages with interest and costs, Select's plaza was sold on July 19, 2005 for $10,225,000.00. Within days, the entire net proceeds of the sale of $3,818,132.91 (after paying out the registered mortgage and executions and various sums to lawyers) were paid out to the appellant and were put into her personal bank account. There were no assets remaining in Select to satisfy Bulls Eye's judgment when its damages were quantified in June, 2006.
[7] Prior to the closing of the sale of the plaza, Bulls Eye had been apprehensive that a circumstance of this kind might arise. On May 26, 2005, Bulls Eye had brought a motion to the court seeking the appointment of a receiver to control the sale and its proceeds or alternatively for an order requiring Select to pay into court the sum of $600,000 pending the outcome of the assessment of Bulls Eye's damages for wrongful termination of lease.
[8] The evidence from Select on Bulls Eye's motion for appointment of a receiver is central to the determination by the application judge of Bulls Eye's application for an oppression remedy.
[9] Select responded to Bulls Eye's motion for a receiver by filing the affidavit of Victor McCullough, president of Select and the appellant's brother. In his affidavit, McCullough stated that there would be almost $2,000,000 in equity after paying out encumbrances.
[10] McCullough was cross-examined. In response to the question"What are the legal obligations of Select with respect to application of the proceeds of the sale of the Plaza?", the answer was "To pay all of the creditors as required by law."
[11] In response to the question as to what debts Select had, the answer was "Mortgages, executions, accrued salary of McCullough in the amount of approximately $1,200,000. All other creditors are being paid currently."
[12] In response to the question"What does Select intend to do with the approximately $2 million of equity following sale of the Plaza?", the answer was "No plans."
[13] In response to the question"Does Select plan on keeping the money in a bank account or in cash?", the answer was "the money would be kept in a bank account or invested."
[14] There was no disclosure that there was any intention to pay out all of the net proceeds of the sale to the appellant and no disclosure that the net proceeds would be paid out almost immediately following the closing of the sale.
[15] The motion for the appointment of a receiver was heard by Dunnet J. who dismissed it on the basis that there was no evidence that the defendants were removing assets from the jurisdiction and no persuasive evidence that the defendants were dissipating their assets.
THE APPLICATION AND THE ORDER APPEALED FROM
[16] As there were no assets remaining in Select to satisfy its judgment, Bulls Eye brought an application under s. 248(2) of the OBCA for relief.
[17] Section 248 (1) to (3) of the OBCA provide:
- (1) A complainant and, in the case of an offering corporation, the Commission may apply to the court for an order under this section.
(2) Where, upon an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates,
(a) any act or omission of the corporation or any of its affiliates effects or threatens to effect a result;
(b) the business or affairs of the corporation or any of its affiliates are, have been or are threatened to be carried on or conducted in a manner; or
(c) the powers of the directors of the corporation or any of its affiliates are, have been or are threatened to be exercised in a manner,
that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation, the court may make an order to rectify the matters complained of.
(3) In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,
(j) an order compensating an aggrieved person;
[18] In his reasons finding that Bulls Eye had been subject to oppression, Campbell J. held that while Bulls Eye was not a judgment creditor, it was a creditor in that it had a legal right to damages. He held that while ordinarily the oppression remedy would not be available to a creditor simply by virtue of the fact that there was debt owing to him by the corporation, this case was exceptional, in that Bulls Eye was led to have a reasonable expectation, based on the evidence adduced and the answers given on cross-examination and filed on the receiver motion before Dunnet J., that its judgment would be paid out of the proceeds of sale of Select's plaza. Accordingly, Bulls Eye was a complainant within the meaning of the statute.
ISSUES RAISED ON APPEAL AND THE STANDARD OF REVIEW
[19] The appellant's position is that the application judge erred in law in granting a remedy under s. 248(2) of the OBCA because Bulls Eye was not a creditor. The appellant argues that the application judge erred in finding that Bulls Eye's had a reasonable expectation that Select would have assets to satisfy its judgment and that the defeat of those expectations amounted to oppression. The appellant argues that the application judge erred in fashioning a remedy that resulted in Bulls Eye obtaining a priority ahead of other unsecured creditors. The appellant argues that the application judge erred in finding that the appellant did not have an equitable mortgage for a sum comprising $1,533,330.61 paid to Canada Life on May 22, 2003, $666,969.39 paid to the city of Mississauga on May 22, 2003, and a further $65,827.35 paid to Canada Life. The appellant argues that the application judge erred in rejecting her assertions that she was owed $1,353,000, being 22% of the amount she paid to settle the litigation over the estate of her late husband, and that Victor McCullough, her brother, was owed $1,200,000 by Select for management fees and $90,000 for other funds advanced.
[20] There is no dispute concerning the standard of review. Questions of law are reviewed on a standard of correctness. Questions of fact and questions of mixed fact and law will be interfered with only if there is a palpable and overriding error unless, in the case of the latter, there is some extricable error in principle amounting to an error in law (see Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C. R. 235).
WAS BULLS EYE A CREDITOR UNDER THE OBCA WHEN APPELLANT HAD THE PROCEEDS OF SALE PAID TO HERSELF?
[21] Whether a person having a judgment declaring a business corporation liable to him in damages in an amount to be assessed at a trial of the issue is a creditor of the corporation for purposes of s. 248(2) of the OBCA is a question of law.
[22] The culminating act amounting to oppression was the payment of the entire net proceeds of sale of Select's real property to the appellant. At the date of that act, Bulls Eye had a judgment establishing Select`s liability to pay damages in such amount as may be found by the trial judge but it did not yet have its damages quantified and reduced to a judgment. The appellant's argument is that in the absence of having obtained a judgment for a specific sum, Bulls Eye was not a creditor at the time of the payment to the appellant in July 2005 and therefore could not be a complainant under s. 248(2) of the OBCA.
[23] Section 245 of the OBCA defines complainant as follows:
"complainant" means,
(a) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates,
(b) a director or an officer or a former director or officer of a corporation or of any of its affiliates,
(c) any other person who, in the discretion of the court, is a proper person to make an application under this Part.
[24] While creditors are not necessarily complainants simply by virtue of the existence of a debtor/creditor relationship with a business corporation, a creditor may be a proper person to make an application for an oppression remedy in the discretion of the court. At the time of the launching of the application under s. 248(2), Bulls Eye had a judgment for a specific sum of money and was clearly a creditor. It is not seriously disputed that it was open to the application judge to entertain its application to be a complainant and to seek relief under s. 248(2).
[25] More difficult is the question of whether Bulls Eye was a creditor at the time of the acts held to constitute oppression, that is, from May, 2005 through July, 2005.
[26] The application judge was alive to the variety of meanings of the term "creditor".
[27] He held that although Bulls Eye was not a "judgment creditor" in the sense of holding an enforceable judgment for a sum certain, referring to Stephen v. Stewart (1943), 1943 271 (BC CA), 59 B.C. R. 297, that was not an end of the matter. In coming to the conclusion that Bulls Eye was a creditor for purposes of the s. 248(2) application, the application judge relied on the more comprehensive and fundamental definition in Black's Law Dictionary, 6th ed. at p. 388:
… The word is susceptible of latitudinous construction. In its broad sense the word means one who has any legal liability upon a contract, express or implied, or in tort; in its narrow sense, the term is limited to one who holds a demand which is certain and liquidated. In statutes the term has various special meanings, dependent upon context, purpose of statute, etc.
The term "creditor" within the common-law and statutes that conveyances with intent to defraud creditors shall be void, includes every one having right to require the performance of any legal obligation, contract, or guaranty, or a legal right to damages growing out of contract or tort, includes not merely the holder of a fixed and certain present debt, but every one having a right to require the performance of any legal obligation, contract or guaranty, or a legal right to damages arising out of contract or tort, and includes one entitled to damages for breach of contract to convey real estate, notwithstanding the abandonment of his action for specific performance.
[28] There is no definition of "creditor" in the OBCA.
[29] Unless there is a compelling reason in the context of an oppression remedy application for construing the word in its technical sense of a "judgment creditor" or in the sense of a person to whom an obligor owes a liquidated sum certain whether reduced to a judgment or not, it is preferable to look to the context in which the term appears and to the purpose of the legislation itself.
[30] There is, in my view, no compelling reason to hold that the term creditor should be construed in the narrow sense. It is by mere happenstance that there was a significant hiatus between the issuance of the declaration establishing liability and the judgment quantifying it. As of the date when the judgment for liability issued, a relationship arose in which Select owed an obligation to Bulls Eye and Bulls Eye was owed an obligation by Select. While those parties could reasonably disagree as to the monetary extent of the liability, it was clear that they were in a particular relationship of proximity and that the manner of conduct of the obligor's affairs could have significant consequences on the obligee.
[31] Section 248(2) of the OBCA gives recognition to the fact that there are a number of classes of persons who have a legitimate stake in the manner in which the affairs of a business corporation are conducted, creditors among them, and it prevents those having power and control over the affairs of a business corporation from exercising that power with impunity.
[32] The question that arises on the particular facts of this case is whether a person who has been adjudged to be entitled to as yet unquantified damages from the corporation is entitled to less protection from the unbridled exercise of power by those in control of the corporation than a person who is owed a liquidated amount, whether reduced to a judgment or not.
[33] When one examines the list of persons whose interests are recognized in s. 248(2) --"security holder, creditor, director or officer", it is apparent that the kinds of interests recognized and protected are (a) varied, (b) not necessarily pecuniary and (c) if pecuniary, not necessarily grounded in a present and crystallized loss.
[34] The oppression remedy is designed to address, where oppression is found, the imbalance of power on the part of those in control with the vulnerability on the part of those having a genuine stake in the affairs of corporation but no control over its conduct. In my view, a person to whom the corporation owes an obligation affirmed by judgment but as yet unquantified by assessment of damages, is in no less vulnerable position vis à vis the corporation and has no less a legitimate stake or interest in the manner in which the affairs of the corporation are conducted than one to whom a liquidated sum is owed.
[35] There is no case on point. Neither Royal Trust Corp. of Canada v. Hordo, [1993] O.J. No. 1560, nor Awad v. Dover Investments Inc., 2004 30248 (ON SC), [2004] O.J. No. 3847 (S.C.J.) referred to by the appellant are of assistance.
[36] In my view, the application judge was correct in concluding that Bulls Eye became a creditor at the time of the liability determination in February 2004 and in informing his decision by reference to the broader and more fundamental construction of the term "creditor". It is that construction which harmonizes with the purpose and intent of the oppression remedy in the statute.
DID THE APPLICATION JUDGE ERR IN FINDING OPPRESSION?
[37] The appellant next argues that the application judge erred in finding that Bulls Eye had a reasonable expectation that there would be funds available to meet its judgment and that the thwarting of that expectation constituted oppression. This is a question of mixed fact and law. There is no dispute that as a matter of law, the expectation must be objectively reasonable. As stated in Re BCE Inc., 2008 SCC 69 at para. 62,
As denoted by "reasonable", the concept of reasonable expectations is objective and contextual. The actual expectation of a particular stakeholder is not conclusive. In the context of whether it would be "just and equitable" to grant a remedy, the question is whether the expectation is reasonable having regard to the facts of the specific case, the relationships at issue, and the entire context, including the fact that there may be conflicting claims and expectations..
[38] The application judge wrote, at paragraph 20 of the reasons,
What is clear from the material filed is that neither the Applicant nor the Court was told of that intention at the time of the Receivership motion in May of 2005, and indeed the statements made would lead any rational person to believe that of the proceeds from the sale, there would be sufficient funds kept in Select to satisfy any judgment.
[39] It is clear from the above paragraph that the application judge applied the correct principle, that is, the objective test, and in my view, he was correct in the conclusion that the expectation was objectively reasonable.
[40] The appellant argues that application judge erred in holding that there had been oppression. Whether conduct is oppressive is essentially a finding of fact.
[41] The conduct was egregious in the extreme. It was a concerted effort by the appellant, with the assistance of her brother Victor McCullough, to evade payment of Select's obligation to Bulls Eye. The accomplishment of that objective involved placing misleading statements before the court on Bulls Eye's receivership motion to persuade (successfully) that there would be about $2,000,000 kept in the company, either banked or invested, and that there was no danger of dissipation of assets. The only reasonable inference that can be drawn from the facts as they unfolded is that the appellant's plan was to do exactly what the court and Bulls Eye were assured would not be done, namely to strip the company of its assets. There is no reasonable basis for interfering with the application judge's findings on the evidence that there had been oppressive conduct.
DID THE APPLICATION JUDGE ERR RESPECTING REMEDY?
[42] The balance of the appellant's arguments go to remedy. The appellant urges that even if the application judge was correct that Bulls Eye was a creditor and a proper complainant and that there had been oppressive conduct warranting a remedy, Bulls Eye should not be awarded more than it would recover as one creditor among others, sharing pro rata with unsecured creditors but behind secured creditors in the assets of the corporation.
[43] On the assumption that the principle is the correct one to have applied, the result is determined by the findings of fact as to what were and were not valid debts of Select and, if the total of debt owed exceeded the total paid out to the appellant, what, if any portion of Select's debt to the appellant were secured.
[44] The appellant argues that Select owed her $1,533,330.61 paid to Canada Life on May 22, 2003, $666,969.39 paid to the city of Mississauga on May 22, 2003, and a further $65,827.35 paid to Canada Life all secured by way of equitable mortgage together with interest thereon totaling $585,739.84 based on a rate of 12% (totaling $2,266,127.35). Bulls Eye agrees that the three principal sums above were debts owed by Select to the appellant but does not accept that they were secured by an equitable mortgage. Bulls Eye also does not accept that the interest payable is 12% and asserts that the proper total interest is $157,118.18.
[45] At the remedy phase of the hearing, the appellant had an opportunity to adduce evidence of other debts owed by Select and she did so.
[46] The application judge rejected the appellant's claim that Select owed her $1,353,000, an amount consisting of 22% of the total settlement paid by her to settle litigation concerning her late husband's estate. There is no reasonable basis for interfering with this finding. It was not an amount paid by the appellant on behalf of Select or to protect Select's interests. It was an amount paid by the appellant to protect her own interest in her late husband's estate and was clearly not a debt owed by Select to her.
[47] The application judge also rejected for want of proof the allegation that Select owed $1,200,000 to Victor McCullough for management fees (at the rate of $200,000 per year) plus $90,000 for other funds advanced by him. His reasons for rejection of these claims lie in the lack of credibility in the evidence about them as well as in the absence of evidence that would reasonably be expected to exist if the debts were genuine. There is no basis for interfering with these findings of fact. It is not for this court on appeal to re-weigh the evidence and the evidence before the application judge amply supports his conclusion.
[48] Had the application judge accepted all of the alleged debts as valid, the total amount of Select's debt would have been $7,345,021.
[49] The total of the debts alleged to be owing by Select but rejected by the application judge as valid debt was $3,793,688 (some but not all of which was the subject of appeal). The application judge also rejected the appellant's claim for interest on the "equitable mortgage" at 12% of $585,739.84, substituting the sum of $157,118, calculated at the same rate applicable to the debt to Bulls Eye, resulting in a further reduction of $428,621. The debts recognized as valid totaled $2,423,244, owed by Select to the appellant (not taking into account personal expenses of the appellant of $130,311 paid by Select).
[50] In light of the fact that the net proceeds from the sale of Select's real property was $3,818,132, there were ample funds after deduction of the debt properly owed by Select to the appellant to pay the judgment to Bulls Eye in full with interest. Even if interest were allowed on the debt to appellant at the rate of 12% there would be sufficient funds to pay the Bulls Eye judgment in full. It is therefore academic and unnecessary to deal with the argument that the application judge erred in finding that there was no equitable mortgage securing the indebtedness to the appellant.
[51] For the foregoing reasons, the appeal is dismissed.
[52] We are not persuaded that substantial indemnity costs are warranted in this appeal. Costs are to the respondent, fixed at $15,000.
Low J.
Swinton J.
Karakatsanis J.
Released: April 30, 2009
COURT FILE NO.: 391/08
DATE: 20090430
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
Swinton, Low and Karakatsanis JJ.
B E T W E E N:
1413910 ONTARIO INC. carrying on business as BULLS EYE STEAKHOUSE & GRILL
Applicant/Respondent in Appeal
- and -
hilary marian mCLENNAN
Respondent/ Appellant
REASONS FOR JUDGMENT
Low J.
Released: April 30, 2009