Scene Holding Inc. v. Moos, 2014 ONSC 1378

CITATION: Scene Holding Inc. v. Moos, 2014 ONSC 1378

DIVISIONAL COURT FILE NO.: DC-13-0449

DATE: 20140304

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

MATLOW, ASTON & J. DONOHUE, J.J.

BETWEEN:

SCENE HOLDING INC.

Applicant (Appellant in Appeal)

– and –

BRUNO MOOS and ELAYNE GRENIER

Respondents (Respondents in Appeal)

Peter A. Mahoney, for the Applicant (Appellant in Appeal)

Geoff R. Hall and Atrisha Lewis, for the Respondents (Respondents in Appeal)

HEARD: October 2, 2013 at Hamilton

MATLOW, J.

[1]

Introduction and Background

This is an appeal by the applicant from the order of Justice Hambly dated February 20, 2013, made at the conclusion of protracted proceedings between the parties pursuant to the Business Corporations Act, R.S.O. 1990, c. B. 16 (the “Act”). It is brought pursuant to section 255 of the Act which provides for an appeal to the Divisional Court from any order made by the Superior Court of Justice under the Act.

2The parties filed with the application judge an agreed statement of facts and relevant exhibits and they agreed to the truth of the facts set out for the purpose of the hearing before him. No further evidence was tendered

3The applicant was formerly known as Vendage Corp. Its sole shareholder was Morrie Neiss, a pharmacist and businessman. The respondents, who are spouses, were experienced winemakers.

4Vendage and the respondents became the sole shareholders of 1448157 Ontario Inc. (“144”), the operator of a winemaking business in the Niagara region known as “Alvento”. Pursuant to a previous order, it was determined that Vendage owned 50% of the shares of 144 and the respondents, together, owned the other 50%. The parties provided $624,000 in startup capital, $474,240 from Vendage and $149,760 from Moos and Grenier. In return they received shares having a value of $1,000 and a collateral mortgage for $623,000. Subsequent loans, $1,360,525 by Vendage and $19,459 by Moos and Grenier, $1,379,984 in total, were unsecured.

5Alvento was sold as a going concern. The parties’ ultimate dispute related to how the net proceeds of the sale of all of their shares in the corporation, $1,343,427.16, should be distributed and the order in appeal was the Court’s determination of that issue.

[6]

The Issues

The agreed statement of facts set out the issues to be decided by the Court as follows:

Issue #1: Determination of the quantum of outstanding wages

21. It is the position of Mr. Moos and Ms. Grenier that they are owed $75,000.00 in back wages and that it is not worth the expense to have DJB undertake a review that at most might change that number by a few thousand dollars.

22. It is the position of Vendage that DJB should undertake the review.

Issue #2: Distribution of remaining proceeds to shareholders

23. It is the position of Mr. Moos and Ms. Grenier that secured debts, (in this case, the Mortgage) must be repaid by 114 in priority to unsecured debts (in this case, the shareholder advances).

24. It is the position of Vendage that the net funds available for repayment of advances be allocated pro rata to the excess advances of the shareholders, pursuant to clause 5.02 of the Shareholders Agreement.

7Section 5.02 of the Shareholders Agreement reads as follows:

If either Vendage or Moose has loaned funds to the CORPORATION in an amount greater than their respective Vendage Advances or Moose Advances (the “Excess Loan”), then any such excess shall be repaid, subject to the provisions of subsection 10.03 prior to;

a) the repayment of any loans to the other SHAREHOLDER;

b) the redemption of purchase by the CORPORATION of any of its shares; or

c) the payment of any dividends.

8Section 10.03 of the Agreement has no application to the issues in this appeal.

9The application judge highlighted the approach that he was required to take in the circumstances of this case in paragraph 6 of his Reasons which reads as follows:

6These agreements do not answer the question of how the proceeds from the sale of the business are to be divided, in the event that there is not enough to pay the loans that the parties made to Alvento. In my view this must be determined on the basis of the understanding of their business relationship. Alvento was a joint venture. Moos and Grenier would do the farm work and provide some of the start up capital. Neiss was to provide more of the start up capital and money to operate the business before it was self-supporting.

10He then highlighted the practical effect of giving effect to the Vendage position in paragraph 11 of his Reasons which reads as follows:

11On the figures provided to me, based on estimated outstanding wages owed to Moos and Grenier of $75,000, the net proceeds available for distribution are $1,268,427.60. Neiss takes the position that the mortgage should be ignored and the amount of $1,360,525 should be paid to him first.

11The Vendage position was based, in part, on its submission that the words, the reference to “loans”, contained in subsection 5.02 of the Shareholders Agreement ought to be interpreted to include both secured and unsecured loans and that the security created by the parties’ mortgage should be disregarded. This would have resulted in Vendage taking almost all of the funds available for distribution. Vendage would receive $1,250,541 of the $1,343,427.16.

12The practical effect of giving effect to the Vendage position was that Moose and Grenier would be deprived of the mortgage security to which they were entitled pursuant to section 5.02 of the Shareholders Agreement.

13In paragraph 14 the application judge rejected the Vendage position and essentially accepted the position of Moos and Grenier. Paragraph 14 reads as follows;

14I agree essentially with the proposal of counsel for Moos and Grenier for the distribution of the net proceeds of the sale. In my view, the intention of the parties is best achieved by first paying from the net proceeds the wages owing to Moos and Grenier. The mortgage in the amount it was meant to secure should be paid. The balance ought to be divided by applying to each of the loans the proportion of the net proceeds remaining in the total of the excess loans.

14He then went on to make the calculations that flowed in accordance with the principles of insolvency law. Those calculations are reflected in his formal order.

15The application judge rejected the Vendage’s submission that all amounts owing to shareholders should be repaid without regard to the fact that the initial loans were secured and the subsequent advances were not. There is no evidence the respondents ever released or abandoned the protection afforded to them by the collateral mortgage securing their original capital contribution. If the parties ever intended to do what Vendage now claims – namely to postpone their original secured loans to the unsecured “excess” loans that followed – it would have been easy to expressly say so in the subsequent Shareholders Agreement. Absent a clear provision to the contrary in the Shareholders Agreement, the secured debts are properly payable in priority to the unsecured debt.

[16]

Conclusion

I am satisfied that the order in appeal reflects no error of law and that it meets the applicable standard of review which is correctness.

[17]

Costs

The parties have agreed that the costs of this appeal, fixed at $5,000 shall be in the cause of the appeal. Accordingly, the respondents in appeal, Moos and Grenier, are entitled to recover costs from the appellant in appeal, fixed at $5,000.

Matlow, J.

Aston, J.

J. Donohue, J.