CITATION: Stefaniak et al v. Perry Murphy et al, 2010 ONSC 971
DIVISIONAL COURT FILE NO.: DV1468
DATE: 2010-05-21
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
PIERCE RSJ, MATLOW AND POWER JJ.
BETWEEN:
Philip Stefaniak, 1178509 Ontario Limited, Sil-Jack Investments Limited and 547994 Ontario Limited
Appellants/Respondents
– and –
Perry Murphy and 88335 Ontario Inc.
Respondents/Applicants
Mr. G. Meiklejohn, for the Appellants/Respondents
Mr. G. Sirman, for the Respondents/Applicants
HEARD: February 3, 2010 at Ottawa, Ontario
REASONS ON APPEAL
PIERCE RSJ.
Introduction
[1] The appellants, Philip Stefaniak, Sil-Jack Investments Limited, and 547994 Ontario Limited appeal the order of Mr. Justice R. Scott dated August 14, 2008 which granted the respondent, Perry Murphy, interim costs of $35,000 in his action for an oppression remedy under the Business Corporations Act, R.S.O. 1990, c. B16. The case is reported as Murphy v. Stefaniak [2008] O.J. No. 3106.
[2] We are of the view that this appeal must be allowed for reasons that follow.
Background
[3] Mr. Murphy wished to develop certain lands in the Kingston area. However, his funds were insufficient for the purpose. Murphy located an investor, Stefaniak, and entered into a joint venture with him to develop the property. Title to the lands was held by 1178509 Ontario Limited. When the joint venture agreement was entered into, Stefaniak held all of the existing shares of 1178509.
[4] Stefaniak financed the project through two corporations he controlled, Sil-Jack Investments Limited and 547994. Security for financing was provided in the form of mortgages against the land. The agreement provides that when the first mortgage was repaid to Sil-Jack and the second mortgage was repaid to 547994 together with the interest payable, the 100 common shares would be divided and 50 shares transferred to Murphy.
[5] The appellant characterizes Murphy’s interest in the shares as security until the mortgages were paid. Both men personally guaranteed the mortgages. The characterization and effect of the agreement between the two men is in dispute. However, the agreement provides that upon payment of the mortgages and letters of credit related to the development, residual profits will be shared equally between Stefaniak and Murphy.
[6] The agreement stipulates that Stefaniak shall become the president of 1178509 and Murphy shall be a director.
[7] The appellants concede that Mr. Stefaniak is the controlling mind of the appellant corporations, Sil-Jack Investments Limited, and 547994. The agreement between the parties is silent as to voting.
The Positions of the Parties
[8] The appellants contend that the corporate defendants are mortgagees in relation to the financing of the development and that Sil-Jack took Murphy’s shares as security for payment of the mortgages, which the appellants claim are in default. They also submit that the scope of s. 249 (4) of the Business Corporations Act limits orders for payment of interim costs to corporate defendants or their affiliates as defined in the Act. The appellants argue that the defendant corporations are not affiliates as set out in the Act.
[9] The respondent submits that s. 248 (3) of the Act is broad enough to encompass an order made against an individual who is, as here, the controlling mind of the “target” corporation. Murphy contends that his claim for an oppression remedy goes beyond an accounting on the mortgages, claiming a transfer of shares in 1178509, a discharge of the mortgages, release of his guarantee, and a share in the profits of the development.
Standard of Review
[10] On a pure question of law, the standard of review is correctness. See: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, (S.C.C.) paras 8, 10, and 28. A determination whether there is jurisdiction to hold Stefaniak personally liable to pay interim costs is a matter of statutory interpretation. Therefore the standard of review on this issue is correctness.
[11] Where the court must consider the facts and apply them to the law, the question is one of mixed fact and law. That is the process the motions judge undertook when deciding if the appellant corporations were affiliates as defined by s. 249 (4) of the Act. In those circumstances, the reviewing court should not interfere absent a palpable and over-riding error.
Analysis
Should an order be made against Stefaniak personally?
[12] The parties agree that the motions judge applied the correct test for determining whether special circumstances justified an award of interim costs under the Act:
the applicant is in financial difficulty;
the applicant’s financial difficulty is connected to the alleged oppressive conduct and his difficulties arise from the pursuit of the law suit;
but for an interim costs award, the applicant could not pursue the oppression action; and
the applicant has established a case of sufficient merit to warrant the costs order.
[13] Oppression remedies are described in s. 248 of the Act. These include interim or final orders. An interim costs order may be made against the target corporation or its affiliate. Upon a finding of oppression, the court may craft an order to address the oppressive conduct.
[14] Section 249 (4) is limited to interim costs orders. It provides:
In an application made or an action brought or intervened in under this Part, the court may at any time order the corporation or its affiliate to pay the complainant interim costs, including reasonable legal fees and disbursements, for which interim costs the complainant may be held accountable to the corporation or its affiliate upon final disposition of the application or action.
[15] It appears that on the argument of the motion, the issue of personal liability for interim costs was raised only in reply. Unfortunately, the motions judge did not have the benefit of considered argument by counsel on the issue. A plain reading of s. 249 (4) specifically excludes an order against an individual. This section narrows the broad remedies available on an interim or final basis under s. 248 (3) of the Act. In our view, the court lacked jurisdiction to make an interim award of costs against an individual pursuant to s. 249 (4). For this reason, the appeal by Mr. Stefaniak of the order of interim costs against him is allowed.
Are the defendant corporations affiliated?
[16] As we have observed, s. 249 (4) limits the scope of an order for interim costs to the “target” corporation or its affiliate. Are Sil-Jack and 547994 Ontario affiliated for the purposes of the Act? If so, then the court has jurisdiction to order them to pay interim costs.
[17] Section 1 (1) of the Act defines “affiliated” as “an affiliated body corporate within the meaning of subsection (4).” Subsection (4) defines the term “affiliated body corporate” as follows:
For the purposes of this Act, one body corporate shall be deemed to be affiliated with another body corporate if, but only if, one of them is the subsidiary of the other or both are subsidiaries of the same body corporate or each of them is controlled by the same person.
[18] “Control” is defined in s. 1 (5) of the Act as follows:
For the purposes of this Act, a body corporate shall be deemed to be controlled by another person or by two or more bodies corporate if, but only if,
(a) Voting securities of the first-mentioned body corporate carrying more than 50 per cent of the votes for the election of directors are held, other than by way of security only, by or for the benefit of such other person or by or for the benefit of such other bodies corporate; and
(b) The votes carried by such securities are sufficient, if exercised, to elect a majority of the board of directors of the first-mentioned body corporate.
[19] In argument, the appellants acknowledged that Stefaniak was the controlling mind of Sil-Jack and 547994. Stefaniak contended he took half of Murphy’s shares as security for payment of the mortgages which haven’t been paid. The appellants argue that, pursuant to s. 1 (5) (a) of the Act, the holding of shares as security takes the appellants outside the scope of the section.
[20] On the facts of this case, it would appear to be beyond dispute that those corporations could, in law, be affiliates of 1178509 only if Stefaniuk held shares in 1178509 carrying more than 50 per cent of the votes for the election of directors “other than by way security only”. On the evidence that was before the motion judge, such a finding could not reasonably have been made.
[21] It has been Stefaniuk’s position throughout these proceedings that he held 50 per cent of the shares in 1178509 for himself and the other 50 per cent of the shares as security of loans made to 1178509 by Sil-Jack and 537994.
[22] This position is also advanced by the respondent, Murphy, in paragraphs 10 and 12 of his affidavit sworn on April 11, 2005, filed in support of the motion below and in his letter of August 14, 1997, to Tom Troughton, a copy of which was attached as exhibit “I” to Murphy’s affidavit. It, or a position similar to it, is also advanced throughout the factum filed by the respondents on this appeal.
[23] Murphy’s position, whether or not borne out in the eventual outcome of these proceedings, is inconsistent with any entitlement to interim costs by any of the respondents. Indeed, the position advanced by Murphy is inconsistent with the jurisdiction which the motions judge assumed in granting the order in appeal. It would be unseemly if Murphy could correctly be granted relief based on a jurisdiction that he, in effect, denied under oath existed.
[24] It would appear from his reasons for decision that the motions judge did not consider the application of the provisions of the Act which define the words critical to a correct interpretation of the jurisdiction of a judge to make an order for interim costs. These include section 249 (4) (scope of jurisdiction), section 1 (1) (definition of “affiliated”), section 1 (4) (definition of “an affiliated body corporate”) and, especially, section 1 (5) (“control”). Without a careful analysis of these provisions, it would have been practically impossible for him to apply the law correctly to the motion before him.
[25] For the reasons set out above, the appeal is allowed and the decision of Mr. Justice R. Scott dated August 14, 2008 is set aside.
Costs
[26] Costs of the appeal are reserved pending receipt of submissions by the parties, to be filed at the office of the court at Ottawa in triplicate within 30 days.
Pierce, RSJ
Matlow, J
POWER J. (dissenting in part)
[27] With respect, while I am in agreement with the majority on the disposition of this appeal concerning the order made against Mr. Stefaniak personally, I have reached a conclusion different from the majority with respect to the order of Scott J. insofar as it affects the corporate appellants, 1178509, Sil-Jack and 547994.
[28] In my opinion it is important to observe that the joint venture agreement cites that Mr. Stefaniak “currently holds the issued 100 common shares of 1178509 ...” Notwithstanding that the joint venture agreement sets out rights and obligations with respect to Sil-Jack and 547994, those corporations were not named as parties to the agreement nor did they sign the agreement. The agreement purports to be an agreement between 1178509 Ontario Limited, Stefaniak and Murphy notwithstanding that the agreement is signed only by Murphy and Stefaniak, both of whom signed as having authority “to bind the corporation”.
[29] The agreement states: “The parties herein and thereto having authority to bind the respective & relevant companies.” There is no doubt in my mind but that Stefaniak, at that time, had “authority” over all three corporations.
[30] The agreement cites that, upon payment of the mortgages in favour of Sil-Jack and 547994, Stefaniak will transfer the 100 common shares owned in his name in 1178509 to be divided 50/50 between Stefaniak and Murphy. The joint venture agreement also provides that Murphy will resign as President of 1178509 and that Stefaniak “shall assume the title”.
[31] The motion’s judge found that the financing required for the development in question was “eventually provided by Sil-Jack, a company which at the relevant times, was owned and operated entirely by Stefaniak. He did not specifically make reference to 547994; however, the facts are clear that the same situation existed with respect to it – it was effectively owned and operated by Stefaniak.
[32] There can be no doubt but that the motion’s judge found that Murphy was a “claimant” within the meaning of the Business Corporations Act at least insofar as 1178509 is concerned. He did not discuss in his reasons whether he was a claimant against the other limited companies, Sil-Jack and 547994. I will deal with this later in these reasons.
[33] If it is assumed that the target “corporation” is 1178509, there is, in my opinion, a triable issue regarding whether Sil-Jack and 547994 are companies affiliated to 1178509. It appears to me that, in reaching his decision, the motion’s judge considered, as he was entitled to do, not only the contractual arrangements between the parties but, as well, their status as it had evolved over the years and as it existed at the time the motion was heard. I am not persuaded that he was incorrect in treating Sil-Jack and 547994 as affiliates of 1178509.
[34] Section 1(4) of the Act states that:
“For the purposes of this Act, one body corporate shall be deemed to be affiliated with another body corporate if, but only if, one of them is the subsidiary of the other or both are subsidiaries of the same body corporate or each of them is controlled by the same person.”
[35] Section 1(5) states that:
“For the purposes of this Act, a body corporate shall be deemed to be controlled by another person or by two or more bodies corporate if, but only if, (a) voting securities of the first-mentioned body corporate carrying more than 50 per cent of the votes for the election of directors are held, other than by way of security only, by or for the benefit of such other person or by or for the benefit of such other bodies corporate; and (b) the votes carried by such securities are sufficient, if exercised, to elect a majority of the board of directors of the first-mentioned body corporate.”
[36] In my view, the facts that were before the motion’s judge were such that it was open to him to conclude that there was control by Stefaniak within the scope of the Act. In my further opinion it cannot be definitively said at this time that the shares of Sil-Jack and 547994 were held for “security only”. In other words, I am not satisfied that it has been demonstrated on this appeal that the motion’s judge made a palpable and overriding error in making the order in question. I disagree with the majority’s conclusion that the motion’s judge could not reasonably have reached the finding he made (see paragraph 20).
[37] Although it is not specifically pleaded in the Amended Notice of Application, it seems to me that Murphy and 883535 Ontario Inc. can correctly argue, as they did, that 1178509 is not the only “target” corporation. Indeed, in my opinion, it can be validly argued that Sil-Jack and 547994 are also target corporations and, therefore, subject to an interim award of costs not only on the ground that they are corporations affiliated with 1178509 but as target corporations.
[38] Murphy and 883535, in paragraph 25 of the Respondent’s Factum, state the following proposition:
“This approach fails to consider that Sil-Jack Ltd. and 547994 Limited can also be considered ‘the corporation’ as construed by section 249(4) of the OBCA which therefore renders the ‘affiliate’ and ‘control’ argument moot.”
[39] The principal authority relied on for this proposition is the decision of Fortnum v. Royal City Plymouth Chrysler (1999) Ltd., 2006 42789 (ON SC), [2006] O.J. No. 5154 (S.C.J) where Leitch J. notes that a complainant includes, as aforesaid, “any other person who, in the discretion of the court, is a proper person to make an application under this Part.” At paragraphs 13 and 14 of her decision, Leitch J. said:
“The position of the applicant is that it is well established that a creditor has status to bring an application as a complainant pursuant to s. 245(1)(c) of the OBCA. The applicant relies on the decision in Sidaplex-Plastic Suppliers Inc. v. Elta Group Inc. (1995), 1995 7419 (ON SC), 131 D.L.R. (4th) 399, affirmed (1998), 1998 5847 (ON CA), 40 O.R. (3d) 563 (C.A.) for that proposition. In that case, the applicant's security for its judgment lapsed as a result of inadvertence and thereafter, the debtor sold the bulk of its assets. The proceeds of sale were used to repay other indebtedness of the creditor and thus eliminated the liability of its sole director, officer and shareholder who had guaranteed that indebtedness.
[40] The applicant also relies on Downtown Eatery (1993) Ltd. v. Ontario (2001), 2001 8538 (ON CA), 54 O.R. (3d) 161 (C.A.) in asserting his position as a complainant within the meaning of s. 248 of the OBCA. In Downtown Eatery, the party seeking to obtain an oppression remedy was a party who obtained a judgment for damages for wrongful dismissal but was unable to collect on his judgment because the debtor corporation and related entities had reorganized several years after the action commenced. The applicant in that case was successful in obtaining an oppression remedy on the basis that he had a reasonable expectation that the company's affairs would be conducted with a view to protect his interests. As a result of Downtown Eatery it is clear that critical to the finding that a party is a complainant entitled to seek an oppression remedy is the requirement that it be:
a) ... established that a complainant has a reasonable expectation that a company's affairs will be conducted with a view to protecting his interests.”
[41] I conclude, therefore, that, on the motion, it was open to Murphy to argue that he had status to bring the application against Sil-Jack and 547994 because of their significant involvement in the joint venture. He, in my opinion, can argue that he had a reasonable expectation that the affairs of Sil-Jack and 547994, as participants in the joint venture and as corporations controlled by Stefaniak, would conduct their affairs with a view to protecting his interests.
[42] Even if the majority is correct in its conclusion that Sil-Jack and 547994 are not affiliates of 1178509, 1178509 remains a target corporation and, therefore, the order should remain insofar as it is concerned.
[43] In summary, the motion’s judge possessed a broad discretion in determining whether to make the order in question. His decision, as aforesaid, insofar as the corporations are concerned, in my opinion, is not one that should be interfered with as constituting a palpable and overriding error.
[44] Accordingly, for the foregoing reasons, I agree with the majority that the appeal by Mr. Stefaniak of the order for the payment of interim costs against him personally should be allowed but that, otherwise, the appeal should be dismissed insofar as 1178509, Sil-Jack, and 547994 are concerned.
Power, J
Released: May 21, 2010
CITATION: Stefaniak et al v. Perry Murphy et al, 2010 ONSC 971
DIVISIONAL COURT FILE NO.: DV1468
DATE: 2010-05-21
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
BETWEEN:
Philip Stefaniak, 1178509 Ontario Limited, Sil-Jack Investments Limited and 547994 Ontario Limited
Appellants/Respondents
– and –
Perry Murphy and 88335 Ontario Inc.
Respondents/Applicants
REASONS FOR JUDGMENT
PIERCE RSJ, MATLOW AND POWER JJ.
Released: May 21, 2010