Canadian Appliance Source Inc. v. Utradecanada.com Inc.

Ontario Reports

Ontario Superior Court of Justice,

Divisional Court,

Sachs J.

March 23, 2016

130 O.R. (3d) 717 | 2016 ONSC 2023

Case Summary

Civil procedure — Parties — Adding parties — Defendant moving unsuccessfully for leave to amend statement of defence and counterclaim to add plaintiff's sole officer and director and other corporations that were allegedly dominated and controlled by him as parties — Master erring in dismissing motion on basis of lack of evidence to support amendments — Defendant not required to introduce evidence to support proposed new pleadings.

Corporations — Piercing corporate veil — Defendant moving unsuccessfully for leave to amend statement of defence and counterclaim to add plaintiff's sole officer and director and other corporations that were allegedly dominated and controlled by him as parties — Defendant alleging that director used assetless corporation to enter into offer to lease in order to shield himself and his other alter egos from liability — Master erring in finding that proposed pleadings did not disclose tenable cause of action — Proposed pleadings disclosing basis for finding of alter ego liability.

The defendant (plaintiff by counterclaim) brought a motion for leave to amend its statement of defence and counterclaim to add K, the plaintiff's sole officer and director, and other corporations allegedly dominated and controlled by K as parties to the action. The defendant alleged that K entered into an offer to lease using one of his corporations that did not have any assets to shield himself and his other alter egos from liability. The motion was dismissed. The defendant appealed.

Held, the appeal should be allowed.

The master erred in dismissing the motion based on a lack of evidence. Subject to considerations such as prejudice or abuse of process, which did not exist here, there is no requirement on a motion to add a party to introduce sworn or documentary evidence to support the proposed new pleadings.

If the allegations in the proposed amended pleading were accepted as true, they disclosed a basis for a finding of alter ego liability on the basis that K used [page718] his corporations interchangeably and improperly. The master erred in finding that the proposed pleadings did not disclose a tenable cause of action.

Cases referred to

642947 Ontario Ltd. v. Fleischer (2001), 2001 8623 (ON CA), 56 O.R. (3d) 417, [2001] O.J. No. 4771, 209 D.L.R. (4th) 182, 152 O.A.C. 313, 16 C.P.C. (5th) 1, 47 R.P.R. (3d) 191, 110 A.C.W.S. (3d) 568 (C.A.); Schembri v. Way (2012), 112 O.R. (3d) 241, [2012] O.J. No. 4356, 2012 ONCA 620, 7 B.L.R. (5th) 1, 222 A.C.W.S. (3d) 64; Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co., [1997] O.J. No. 3754, 1997 CarswellOnt 3496, 74 A.C.W.S. (3d) 207 (C.A.), affg (1996), 1996 7979 (ON SC), 28 O.R. (3d) 423, [1996] O.J. No. 1568, 2 O.T.C. 146, 62 A.C.W.S. (3d) 891 (Gen. Div.)

APPEAL from an order dismissing the motion for leave to amend the statement of defence and counterclaim to add parties.

Marc Kestenberg, for appellant.

Mark Freake, for respondent.

[1] Endorsement of SACHS J.: — The appellant appeals from the order of Master Brott, dated July 8, 2015, dismissing its motion for leave to amend its statement of defence and counterclaim to add the sole officer and director of the plaintiff ("Mr. Klein"), and a number of other corporations that it alleges that Mr. Klein controls, as parties to the action.

[2] In dismissing the appellant's motion to add other parties, the master found as follows: "The law is clear that the evidence before the court must specifically explain why the party seeks to add other parties."

[3] She also found that"based on the lack of evidence" on the motion before her, the amendments should not be permitted.

[4] The first ground of appeal advanced by the appellant is that the master erred in law when she found that the party seeking to amend a pleading by adding parties must advance evidence to explain why they seek to add other parties.

[5] In making this submission, counsel for the appellant (who was not counsel on the motion before the master) acknowledges that the authorities put before the master stated the law in the way described by the master. However, those authorities were effectively overruled by the Court of Appeal in the later case of Schembri v. Way (2012), 112 O.R. (3d) 241, [2012] O.J. No. 4356, 2012 ONCA 620, a case that was not put before the master.

[6] In Schembri, the Court of Appeal overturned the decision of a motion judge who refused to allow amendments to the pleadings that sought to add two parties. In doing so, the court found, at para. 33, that "[t]he motion judge also erred in suggesting that there must be evidence to sustain . . ." the claim against the party sought to be added. Justice Feldman [page719] was clear that ". . . [there] is not a requirement on a motion to add a party (subject to other considerations, such as prejudice or abuse of process) . . ." to introduce ". . . sworn or documentary evidence to support the proposed new pleadings".

[7] In the case at bar, the master did not find that either of the considerations adverted to by the Court of Appeal above -- prejudice and abuse of process -- existed. Further, there was no evidence before me of any prejudice that could not be compensated for in costs, nor was there any abuse of process. For this reason, I agree with the appellant that the master committed an error in law when she dismissed the appellant's motion on the basis of a lack of evidence to support the proposed amendments.

[8] The master also found that

. . . the proposed amendments fail to set out how or why the proposed additional parties connect in any way to the alleged breach of the offer to lease. Similarly in the draft amended pleading there are not interests of Mr. Klein that are separate interests of himself and the plaintiff. The offer to lease was a written document between the parties who have been named. None of the proposed others were parties to the offer to lease.

[9] In its proposed pleading, the appellant claims that all the corporations he seeks to add as parties were used by Mr. Klein as his

. . . alter egos by way of his single enterprise as a façade to unlawfully and improperly enter into the Offer to Lease with a view to obtaining the benefits thereof while improperly shielding himself completely from the corresponding/commensurate liabilities/obligations in order to avoid same. He improperly and unlawfully misrepresented and used interchangeably the creditworthiness, reputation, business history, sales volumes, etc. of his said alter egos in order to effect his improper and unlawful purposes.

[10] The pleading then goes on to allege that Mr. Klein completely dominated his alter egos and directed them to effect "the improper and unlawful conduct". It also gives some specifics as to how Mr. Klein used his alter egos interchangeably and used information relating to one in relation to the other.

[11] Absent any suggestion of abuse of process or prejudice, there is only one question to be asked about this pleading, namely, does it raise a tenable claim? In answering this question, the allegations in the pleading are to be accepted as "true and provable": see Schembri, at para. 27.

[12] In 642947 Ontario Ltd. v. Fleischer (2001), 2001 8623 (ON CA), 56 O.R. (3d) 417, [2001] O.J. No. 4771 (C.A.), at para. 68, the Court of Appeal for Ontario sets out the circumstances when a court will "pierce the corporate veil" and find "alter ego" liability. In doing so, the court quoted and adopted Sharpe J.' s formulation in [page720] Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 1996 7979 (ON SC), 28 O.R. (3d) 423, [1996] O.J. No. 1568 (Gen. Div.), at pp. 433-34 O.R., affd [1997] O.J. No. 3754, 1997 CarswellOnt 3496 (C.A.): ". . . the courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent and improper conduct".

[13] In its proposed pleading, the appellant pleads that Mr. Klein dominated and controlled all of the corporate entities it seeks to add as parties and used them improperly and unlawfully in relation to the offer to lease, such that the offer could be breached without any fear of actually having to pay an award of damages.

[14] In essence, the appellant's claim against the proposed additional parties is that Mr. Klein entered into the offer to lease using one of his corporations (that did not have any assets) to shield himself and his other alter egos (that did have assets) from liability in relation to that offer to lease. In doing so, he used his corporations interchangeably and improperly. On this basis, the appellant claims that the court should find that the offer to lease was really between Mr. Klein and all of his corporate alter egos, as opposed to just the one that actually signed the offer to lease.

[15] If the allegations in the proposed amended pleading are accepted as true, they do disclose a basis for a finding of alter ego liability. Further, contrary to the findings of the master, the allegations do disclose a connection between the proposed additional parties and the offer to lease. Thus, I find that the master made a palpable and overriding error when she found that the proposed pleadings do not disclose a tenable cause of action.

[16] For these reasons, the appeal is allowed, the order of the master is set aside, and the appellant is granted leave to amend its statement of defence and counterclaim in accordance with the draft filed before the master. As agreed by the parties, the appellant is entitled to its costs of this appeal, fixed in the amount of $12,000, all inclusive. It is also entitled to its costs on the motion below. On that motion, the respondent was awarded costs fixed in the amount of $2,000. The appellant seeks costs in the same amount. In my view, the request is an appropriate one and thus I order that the costs order against the appellant that was made by the master be set aside, and that, instead, the respondent is to pay the appellant its costs for the motion before the master, fixed in the amount of $2,000.

Appeal allowed.

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