CITATION: Todd Family Trust v. Barefoot Science Technologies Inc., 2013 ONSC 523
DIVISIONAL COURT FILE NO.: DC-11-00318-00
DATE: 20130125
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
MATLOW, KITELEY & LEDERER JJ.
BETWEEN:
TODD FAMILY TRUST also known as the TODD CHILDRENS TRUST and FUTURE IMAGE HOLDINGS CORPORATION
Applicants
Responding Parties
Respondents in Appeal
– and –
BAREFOOT SCIENCE TECHNOLOGIES INC., ROY JOHN WILLIAM GARDINER and DAYL MARIE ARMSTRONG
Respondents
Moving Parties
Appellants in Appeal
David MacKenzie & Stephanie Legdon, for the Todd Family Trust and Future Image Holdings Corporation Applicants/Responding Parties in Appeal/Applicants in the application
Jonathan Rosenstein, for Roy John William Gardiner and Dayl Marie Armstrong, Responding/Moving Parties / Appellants is appeal
HEARD: September 19, 2012, at Oshawa
LEDERER J.:
Introduction
[1] This is an appeal by Gardiner and Armstrong, (the “moving parties”), with leave, from the order of a motions judge, dated April 14, 2011. By that order, the motions judge dismissed a motion brought by the moving parties, pursuant to s. 103(6)(a)(ii) of the Courts of Justice Act, R.S.O. 1990 c. 43 (the “Act”), for an order discharging a certificate of pending litigation which the responding parties had obtained pursuant to an order made by the same judge and registered against the moving parties’ land described below. The motions judge’s reasons are reported at Todd Family Trust v. Gardiner, 2011 ONSC 1855.
[2] Section 103(6) of the Act reads as follows:
Order discharging certificate – The court may make an order discharging a certificate,
(a) where the party at whose instance it was issued,
(i) claims a sum of money in place of or as an alternative to the interest in the land claimed,
(ii) does not have a reasonable claim to the interest in the land claimed, or
(iii) does not prosecute the proceeding with reasonable diligence;
(b) where the interests of the party at whose instance it was issued can be adequately protected by another form of security; or
(c) on any other ground that is considered just,
and the court may, in making the order, impose such terms as to the giving of security or otherwise as the court considers just.
[3] I observe at the outset that s. 103(6) provides for a statutory review of the certificate of pending litigation.
Disposition
[4] For the reasons that follow, this appeal is allowed. The order on appeal is set aside and the certificate of pending litigation is discharged.
Background
[5] The applicants (“Todd”) invested in a group of related corporations, including the respondent, Barefoot Science Technologies Inc. (“BST”). The business of BST and other related corporations was the manufacturing and marketing of a special shoe insert which is protected in Canada and in other countries by various patents. The other respondents to the motion, Roy John William Gardiner and Dayl Marie Armstrong ( “Gardiner” and “Armstrong”), are spouses and were, respectively, the Chief Executive Officer and the Communications Director of BST.
[6] Todd purchased shares in BST. These shares were purchased from Gardiner and Armstrong at a price that was significantly lower than the price of the same shares being sold from the company treasury, sixty-seven cents as opposed to one dollar. On October 14, 2005, Todd paid the sum of $295,000 and received the shares. On behalf of Todd, it is alleged that this investment was made “…in large part out of compassion for both Gardiner and Armstrong and because…they would make a better contribution to the company if they were placed in a different home” (see: Notice of Application, dated July 10, 2009, at para. 45; and, Affidavit of Lance Todd, sworn on November 23, 2010, at paras. 49 and 50).
[7] On November 10, 2005, Gardiner and Armstrong purchased a house on property described municipally as 5037 Franklin Street in Claremont, Ontario. Among the allegations made by Todd is that the Barefoot companies were operated from the house and that Gardiner and Armstrong charged $3,000 per month as rent at a time when the business was without money and looking for investors (see: Notice of Application, dated July 10, 2009, at paras. 49-51 and Affidavit of Lance Todd, sworn on November 23, 2010, at paras. 53 to 58 and 91 to 94).
[8] The business has not succeeded as the parties hoped or expected it would. On May 5, 2009, two of the Barefoot companies (Barefoot Science Holdings Inc. and Barefoot Science Group Marketing Inc.), made an assignment in bankruptcy. BST is not bankrupt and is the owner of the patents. In the face of the bankruptcies and the associated financial difficulties, there has been a falling-out between the parties.
[9] Those responsible for Todd believe that Gardiner and Armstrong were responsible for a broad spectrum of corporate wrongdoing which led to the failure of the business. They also believe that there was no need for the assignments in bankruptcy because financing was available and management was capable of continuing the operation in a viable manner. They allege that the Board of Directors relied on incomplete, incorrect and misleading information about the financial affairs of the companies. They go on to say that Gardiner and Armstrong have taken salaries, charged exorbitant rent for the use of their home as the place of business, given themselves fraudulent preferences and, without prior notice to Todd, wrongfully claimed priority over the patents that are the foundation of the business. They also express concern as to the accuracy, honesty, supportability and reliability of the financial and accounting records of the Barefoot companies.
The Proceedings
[10] As a result of these disputes, three separate proceedings were commenced:
• Todd sued Gardiner and others for breach of contract and misrepresentation. It was alleged that the existence of agreements under which the control of the patents, in the event of insolvency, reverted to Gardiner had been hidden from Todd (see: Court File No. CV-09-014500).
• Gardiner commenced an application to determine the priority of the interests in the patents (see: Court File No. 61543/09).
• Todd commenced an application seeking to remove Gardiner and Armstrong from any role or involvement in the operation of the BST, to review and set aside actions undertaken by them with respect to that company and to replace them either with appointees of Todd or a third party receiver-manager. While no reference is made to it in the original Notice of Application, what was sought was an oppression remedy and, as such, depends on the Business Corporations Act, R.S.O. 1990, B. 16 s. 248 (see: Court File No. 61875/09).
[11] The Notice of Application issued in respect of the last of these proceedings includes a claim for a certificate of pending litigation. On July 14, 2009, five days after the notice of application is dated, without notice to Gardiner, Armstrong or BST, Todd obtained a certificate of pending litigation to be registered in respect of 5037 Franklin Street in Claremont, Ontario, the property where Gardiner and Armstrong reside and where the business of the Barefoot companies was operated.
[12] In order to complete the history of these proceedings, it is necessary to record that, on March 31, 2011, a fourth proceeding was commenced by Todd against Gardiner, Armstrong and some of the Barefoot companies, including BST (see: Court File No. 3810-11). The Statement of Claim in this action makes reference to the Business Corporations Act, supra, s. 248 (oppression remedy) and, in thirty-eight paragraphs, lists the remedies sought by the plaintiffs. It repeats the general thrust of the third of the proceedings to which I have already referred. In short, the plaintiffs assert that Gardiner and Armstrong should be removed from any involvement with the Barefoot companies and should be required to explain or justify acts they have taken. On November 16, 2011, an order was made consolidating the four proceedings. The consolidated action is to be governed by the pleadings in the fourth of the proceedings.
Certificates of Pending Litigation
[13] Certificates of pending litigation are designed to protect unregistered interests in land. The registration of a certificate of pending litigation allows a party to protect such an interest by putting others on notice that a claim is being made. The Act constitutes a complete code for obtaining a certificate of pending litigation, as well as for its subsequent discharge. It provides that a certificate of pending litigation can issue only in circumstances where an interest in land is in question and where the party at whose instance the certificate is issued has a reasonable claim to that interest in land. It provides that a certificate of pending litigation can be discharged if the party who obtained it does not have a reasonable claim to the interest in the land claimed (see: ss. 103(1), 103(4) and 103(6)(a)(ii) of the Act). In short:
...[if] the proceeding does not involve an interest in land, then the plaintiff is not entitled to a certificate of pending litigation”.
(see: Morden & Perell, The Law of Civil Procedure in Ontario LexisNexis Canada Inc. 2010, at p. 191, referring to Reid v. Carr, [1924] O.J. No. 507, 26 O.W.N. 204 (Ont. H.C.J.); Jenkins v. McWhinney (1912), 5 D.L.R. 883 (Ont. Master); Memphis Holdings Ltd. v. Plastics Land Partnership, [1989] O.J. No. 705, 35 C.P.C. (2d) 177 (Ont. H.J.C.); Namasco Ltd. v. Globe Equipment Sales & Rentals (1983) Ltd., [1985] O.J. No. 459, 2 C.P.C. (2d) 242 (Ont. H.C.J.))
Standard of Review
[14] There are two issues to be reviewed:
a) Did the motions judge err in finding that the court has a broad equitable discretion to refuse to discharge a certificate of pending litigation?
This is a question of law. “No deference is shown. If the appeal court has a view that is different from that of the lower court on what the applicable law is, it is its view that governs.” (see: Morden & Perell, The Law of Civil Procedure in Ontario, supra, at p. 821).
b) In this action, is there is a reasonable claim for an interest in land?
This is an issue of mixed fact and law. “Matters of mixed fact and law lie along a spectrum” from “palpable and overriding error” to correctness depending on the particular case and question (see: Housen v. Nikolaisen, 2002 S.C.R. 33 at, respectively, paras. 36 and 10).
Analysis
Issue a): Did the motions judge err in finding that the court has a broad equitable discretion to refuse to discharge a certificate of pending litigation?
[15] The judge on the motion to discharge held that she was “entitled to exercise discretion in equity and look at all the relevant matters between the parties in determining whether or not a CPL should be vacated” (see: Todd Family Trust v. Gardiner 2011 ONSC 1855, at para. 22).
[16] This was an error in law. There is no broad equitable discretion available to a judge on a motion to grant or discharge a certificate of pending litigation. For such a certificate to be granted and, on a motion to discharge maintained, there must be a reasonable claim to an interest in land.
[17] In refusing to discharge the certificate of pending litigation, the motions judge relied on the following paragraph, from G.P.I. Greenfield Pioneer Inc. v. Moore, (2002), 58 O.R. (3d) 87 (C.A.), as demonstrating the breadth of the discretion provided by s. 103(6) of the Act:
Although in his reasons for declining to discharge the CPL [the motions judge], appears to have made a finding that the respondent had a reasonable claim to an interest in land, it was not necessary for him to do so. Read as a whole, his reasons indicate that he appreciated that in ruling on the motion he was exercising the discretion conferred by s. 103(6). In my view, it is clear that in declining to discharge the CPL the [motions judge] correctly applied the test on a motion under s. 103(6)(a)(ii), namely, whether there is a triable issue as to the reasonableness of the registrant’s claim to an interest in the land. There is no doubt that the evidence in the respondent’s affidavit opposing the motion to discharge the CPL supports such a result...
[Emphasis added]
(G.P.I. Greenfield Pioneer Inc. v. Moore, supra, at para. 22)
[18] This does nothing more (or less) than confirm the wording of s. 103(1) of the Act that an interest in land be “in question” and the wording of s. 103(4) and s. 103(6)(a)(ii) that there be “a reasonable claim to an interest in land”. It may be that arriving at this finding includes the exercise of discretion, but such discretion is circumscribed by the need to comply with that requirement. Any discretion that applies is exercised in that context. The court is not free to grant or fail to discharge a certificate of pending litigation where there is no claim to an interest in land.
[19] In finding there was a broad discretion to leave the certificate of pending litigation in place, the judge on the motion also relied on Clock Investments Ltd. v. Hardwood Estates Ltd. [1977] O.J. No. 2331, 16 O.R. (2d) 671 (Div. Ct.).
[20] This was an appeal from an order vacating a lis pendens. In upholding the order, the court commented on the discretion available to the motions judge:
…I am of the opinion that the governing test is that the Judge must exercise his discretion in equity and look at all of the relative matters between the parties in determining whether or not the certificate should be vacated.
(Clock Investments Ltd. v. Hardwood Estates Ltd, supra, at para. 9)
[21] There is nothing in this that allows for changing the character of a certificate of pending litigation such that it need no longer involve the claim to an interest in land. The case concerned such a claim.
[22] This situation is governed solely by s. 103 of the Act.
[23] I conclude that the motions judge erred in law in applying a broad and general equitable discretion in determining that the certificate of pending litigation should not be discharged. She did this without considering whether the plaintiffs have a reasonable claim to an interest in the land.
Issue b): In this action, is there is a reasonable claim for an interest in land?
[24] Neither the Notice of Application in the original proceeding nor the Statement of Claim in the consolidated action demonstrates a claim for an interest in land. They both seek an assortment of remedies that relate to the conduct of the business and the ownership of the patents. The Statement of Claim asks for damages and an order setting aside a lease between, on the one hand, Gardiner and Armstrong and, on the other hand, the Barefoot companies. There is nothing seeking ownership or claiming any other form of interest in the property.
[25] The proposition is that the sale of the shares for less than their market value and the charging of rent the companies could not afford contributed to the oppression of the minority interests in the business (see: Notice of Application Court File No. 61875/09, at para. 48; and Statement of Claim Court File No. 3810-11, at para. 49). There is no suggestion as to how either of these complaints demonstrates a reasonable claim to an interest in land.
[26] In identifying the source of funds used to purchase the home, the reasons of the motions judge go beyond the $295,000 received from the sale of the shares by Gardiner and Armstrong to Todd. There are no allegations in the pleadings and the court was not directed to any evidence that would support the idea that any money taken from the Barefoot companies, other than the $295,000 obtained through the sale of the shares, was used by Gardiner and Armstrong to buy the house. In other words, whatever else Gardiner and Armstrong are alleged to have done, none of it, as pleaded, could lead to a reasonable claim to interest in the land.
[27] Counsel for Todd submitted that “the interest in the property is gained via the oppression remedy” (see: Respondent’s Factum, at para. 29). This proposes that awarding an interest in land could be a way for the court to “rectify the matters complained of” (see: Business Corporations Act, s. 248). There is nothing in the pleadings or the evidence that explains the basis upon which it could be argued that the rectification of whatever wrong is demonstrated by Gardiner and Armstrong selling the shares or renting the property would lead to the granting of an interest in land. In the Statement of Claim, the relief requested is damages, the removal of Gardiner and Armstrong from the business, the review of acts they undertook and the takeover of the operations by a receiver-manager or appointees of Todd. There is no claim to an interest in land.
[28] The decision of the motions judge suggested that it would be open to the trial judge to order the tracing of any “...monetary benefits in the nature of rent paid or the sale of shares......into the property against which the CPL is registered” (see: Todd Family Trust v. Gardiner, supra, at para. 21). This was not pleaded in either the Notice of Application or Statement of Claim in the consolidated action. In the absence of any pleading, we are left to speculate on how a judge might find the basis to make a tracing order leading to the recognition that the plaintiffs have an interest in the land either as a result of the purchase of the shares or the payment of the rent.
[29] A tracing order is a remedy which enables a successful claimant, who proves (i) a breach of fiduciary duty leading to (ii) a constructive trust, to locate the funds or property impressed with the constructive trust (see: Waxman v. Waxman, [2002] O.J. No. 3533 (SCJ) at, paras. 5-13, per Sanderson J. and 44 BLR (3d) 165 (C.A.) at paras. 581 and 582). Despite the broad remedial power conferred by s. 248 of the Business Corporations Act, there must be some connection between the claim for oppression and the recognition of a constructive trust. There still has to be a reasonable claim to an interest in the land. The pleadings would have to explain the foundation for the claim and the evidence would have to confirm that, in the circumstances, the claim was a reasonable one.
[30] In this case, the fiduciary duty is said to have been owed, not to Todd but to the Barefoot companies. The breach of the duty is said to be the sale of shares for less than those that could have been purchased from the corporation itself and the use of the money obtained by the sale to Todd for the purchase of a home (see: Respondent’s Factum, at para. 29). The breach appears to be based on the premise that the fiduciary duty, whatever its foundation, would prohibit an officer of a company from selling his or her own shares. Assuming this to be true, what is the basis for the claim to an interest in the land? How does this alleged breach of fiduciary duty lead to a constructive trust? If the sale of the shares had not been made or if it had been made at the same value as the shares being offered for sale by the treasury, how would the company have suffered and the interests of other shareholders been oppressed? There is no evidence to suggest that, in either of those events, Todd or anyone else would have purchased the shares from the corporation. There may or may not be answers to these questions, but none was pleaded or is clear from the evidence. Nothing is pleaded as to how the payment of the rent could lead to a constructive trust or to a direct claim for an interest in the home.
Conclusion
[31] The motions judge erred by failing to give effect to s. 103 of the Act. The appeal is granted. The certificate of pending litigation is discharged.
Costs
[32] At the conclusion of the hearing, counsel expressed the expectation that they would be able to agree as to costs. If they are, the court office should be informed in order that the file may be closed. In the event that they cannot, we will consider written submissions on the following terms:
On behalf of Gardiner and Armstrong, no later than fifteen days following the release of these reasons. Such submissions are to be no longer than four typed pages, not including any Costs Outline or Bill of Costs and case law that may be included.
On behalf of the Todd Family interests, no later than ten days thereafter. Such submissions are to be no longer than four typed pages, not including any Costs Outline or Bill of Costs and case law that may be included.
In reply, if necessary, on behalf of Gardiner and Armstrong, no later than five days thereafter. Such submissions are to be no longer than one typed page.
MATLOW J.
KITELEY J.
LEDERER J.
Released: January 25, 2013
CITATION: Todd Family Trust v. Barefoot Science Technologies Inc., 2013 ONSC 523
DIVISIONAL COURT FILE NO.: DC-11-00318-00
DATE: 20130125
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
MATLOW, KITELEY & LEDERER JJ.
BETWEEN:
TODD FAMILY TRUST also known as the TODD CHILDRENS TRUST AND FUTURE IMAGE HOLDINGS CORPORATION
Respondents on the appeal
(Applicants in the application)
– and –
BAREFOOT SCIENCE TECHNOLOGIES INC., ROY JOHN WILLIAM GARDINER and DAYL MARIE ARMSTRONG
Appellants on the appeal
(Respondents in the Application)
REASONS FOR JUDGMENT
LEDERER J.
Released: January 25, 2013