T. Films S.A. et al. v. Cinemavault Releasing International Inc. et al.

[Indexed as: T. Films S.A. v. Cinemavault Releasing International Inc.]

Ontario Reports

Ontario Superior Court of Justice,

Divisional Court,

Molloy, Linhares de Sousa and Wilton-Siegel JJ.

19, 2016*

• This judgment was recently brought to the

attention of the editors.

Corporations -- Oppression -- Applicant entering into sales

agency agreement with CRI which appointed CRI as its exclusive

sales agent to distribute applicant's film -- Directing mind of

CRI and other companies subsequently restructuring film

distribution operations so that [page493] another of those

companies collected CRI's receivables for 2011 and CRI was

wound down -- CRI unable to remit distribution revenue to which

applicant was entitled under agreement -- Arbitrator awarding

applicant amount due under CAA -- Applicant applying to enforce

award -- CRI successfully asserting claim for oppression --

Application judge not erring in finding that restructuring was

carried out for purpose of stripping CRI of its assets so that

it could not fulfil its financial obligations under agreement

-- Directing mind acting in manner which was oppressive and

unfairly prejudicial to applicant and being personally liable

for arbitral award.

133 O.R. (3d) 492 | 2016 ONSC 404

Case Summary

Trusts and trustees — Breach of trust — Applicant entering into sales agency agreement with CRI which appointed CRI as its exclusive sales agent to distribute applicant's film — Directing mind of CRI and other companies subsequently restructuring film distribution operations so that another of those companies collected CRI's receivables for 2011 and CRI was wound down — CRI unable to remit distribution revenue to which applicant was entitled under agreement — Arbitrator awarding applicant amount due under CAA — Applicant applying to enforce award — CRI successfully asserting claim for breach of trust — Application judge not erring in finding that distribution revenues were trust funds and that directing mind and his other companies were liable for knowing assistance in breach of trust.

The respondent CRI entered into a sales agency agreement (the "SAA") with the applicant T. Films in 2004 pursuant to which the applicant appointed CRI as its exclusive authorized sales agent to distribute the applicants' film. The respondent S was the directing mind of CRI and the other corporate respondents. In 2011, S restructured the respondents' film distribution operations. At that time, CRI's only material assets were accounts receivable (the "2011 receivables") representing distribution revenues from various films of which CRI had been appointed the sales agent. As part of the reorganization, another of the corporate respondents collected the 2011 receivables in the following 12 months and the business of CRI was wound down. In early 2012, the applicants initiated an arbitration against CRI claiming that CRI had not remitted all of the distribution revenue to which the applicants were entitled under the SAA. The arbitrator found in favour of the applicants. The applicants then brought an application to enforce the arbitration award against CRI. In that application, CRI asserted a claim for oppression and breach of trust against the other respondents. The applicants obtained judgment against CRI enforcing the award. CRI's oppression and breach of trust claims were upheld and the other respondents were found to be liable for the award. The respondents appealed.

Held, the appeal should be dismissed.

A motion by the respondents to adduce fresh evidence on appeal was dismissed because that evidence was available at the time of the hearing of the application, so that the respondents were unable to meet the due diligence requirement.

The SAA provided that the film was to be treated separate and apart from any other pictures licensed to CRI, and that the payments were to be "treated as separate and independent accounting units and not cross-collateralized or set-off as between the Picture and any other picture or agreement between Sales Agent and Owner and amounts due for the Picture or other picture(s) may not be used to recoup amounts unrecouped for any other picture(s), or vice versa". The application judge did not err in finding that the parties intended to create a trust of [page494] the revenues earned on sales and distribution of the film and that such monies, when received, constituted trust funds in CRI's hands. The respondents other than CRI were liable for knowing assistance in a breach of trust, being the transfer of the 2011 receivables in the face of CRI's obligation to remedy its breach of trust by the placing in trust of the 2011 receivables in the amount of the award.

The evidence established that the distribution business of CRI was wound down and transferred to the other corporate respondents, that former employees of CRI continued to work for those other corporate entities, and that no consideration was paid to CRI for the transfer of its operations and assets to the other corporations. The application judge did not err in concluding that there was no bona fide business purpose for the restructuring, and that it was carried out for the purpose of denuding CRI of its assets such that it was not in a position to fulfil its financial obligations to the applicants under the SAA. The application judge was entitled to conclude that S acted in a manner which was oppressive and unfairly prejudicial to the applicants and which attracted personal liability for the arbitration award.

Cases referred to

Air Canada v. M & L Travel Ltd. (1993), 15 O.R. (3d) 804, [1993] 3 S.C.R. 787, [1993] S.C.J. No. 118, 108 D.L.R. (4th) 592, 159 N.R. 1, J.E. 93-1761, 67 O.A.C. 1, 50 E.T.R. 225, 45 A.C.W.S. (3d) 801; Centre City Auto Sales Inc. v. Kalsatos, [2013] O.J. No. 2564, 2013 ONCA 373; Housen v. Nikolaisen, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, 2002 SCC 33, 211 D.L.R. (4th) 577, 286 N.R. 1, [2002] 7 W.W.R. 1, J.E. 2002-617, 219 Sask. R. 1, 10 C.C.L.T. (3d) 157, 30 M.P.L.R. (3d) 1, 112 A.C.W.S. (3d) 991; Sengmueller v. Sengmueller (1994), 17 O.R. (3d) 208, [1994] O.J. No. 276, 111 D.L.R. (4th) 19, 69 O.A.C. 312, 25 C.P.C. (3d) 61, 2 R.F.L. (4th) 232, 45 A.C.W.S. (3d) 1101 (C.A.); T. Films S.A. Future Films (Three) Ltd. v. Cinemavault Releasing International Inc., [2015] O.J. No. 96, 2015 ONSC 6608 (S.C.J.)

Statutes referred to

Business Corporations Act, R.S.O. 1990, c. B.16, ss. 248 [as am.], 255

APPEAL from the decision of the application judge.

Robert B. Cohen, for applicants/respondents in appeal.

Harvin D. Pitch, respondents/appellants in appeal.

The judgment of the court was delivered by

WILTON-SIEGEL J.: —

A. Introduction and Background

1. The appeal

[1] The appellants, Cinemavault Releasing International Inc. ("CRI"), Cinemavault.com Inc. ("Cinemavault Canada"), Cinemavault International Inc. ("Cinemavault International") and Nicolas Stiliadis ("Stiliadis"), the directing mind of these corporations (collectively, the "appellants"), appeal an order dated January 12, 2015 of Penny J. (the "order") granting, among [page495] other relief, judgment in favour of the respondents T. Films S.A. ("T. Films"), Thema Production S.A. ("Thema") and Future Films (Three) Limited ("Future" and, collectively with T. Films and Thema, the "respondents") in the amount of an arbitration award described below, being US$495,594.71 plus prejudgment interest. The reasons of the application judge are set out in his reasons for decision dated January 12, 2015, which were released as [2015] O.J. No. 96, 2015 ONSC 6608 (S.C.J.) (the "reasons").

2. The parties

[2] T. Films and Thema Productions are Luxemburg companies, and Future is a British company. Together, they produced a motion picture entitled "THREE" (the "picture").

[3] CRI is an Ontario corporation that was a distributor of films on behalf of film owners. Cinemavault International is also an Ontario corporation that acts as a film distribution agent.

[4] Cinemavault Canada is a Canadian corporation that was in the business of acquiring rights to motion pictures which it distributed through sub-agents and sub-distributors internationally. On June 1, 2004, Cinemavault Canada entered into a distribution agreement with CRI appointing CRI as its agent to distribute motion pictures for which Cinemavault Canada had acquired ownership or other rights. The appellants say that, by an undated assignment lacking a necessary schedule identifying the relevant assets, Cinemavault Canada assigned all of its motion pictures to an affiliated corporation, Vaultco Inc. ("Vaultco"), on September 1, 2011. In turn, Vaultco substituted Cinemavault International for CRI as its sales agent to distribute such motion pictures pursuant to a sales agency agreement dated the same date.

[5] Cinemavault.com, Inc. ("Cinemavault U.S.") is a California corporation that distributed films as a "sub-agent" of CRI in the United States and elsewhere

[6] At August 31, 2011, the only material assets of CRI were accounts receivable totalling approximately $1.88 million (the "2011 receivables") representing distributions revenues from various films of which CRI had been appointed the sales agent. On or about September 1, 2011, the Cinemavault Group of Companies restructured their film distribution operations. As part of the reorganization, Cinemavault International collected the 2011 receivables in the following 12 months and the business of CRI was wound down. In addition, Cinemavault International replaced CRI as the sales agent for Vaultco pursuant to the arrangements described above. The appellants' position regarding this reorganization is discussed in greater detail below. The [page496] activities described in this paragraph are herein collectively referred to as the "restructuring".

[7] In these reasons, CRI, Cinemavault International, Cinemavault Canada, Cinemavault U.S. and Vaultco are collectively referred to as the "Cinemavault Group of Companies".

3. The relationship between CRI and the respondents

[8] T. Films entered into a sales agency agreement dated February 9, 2004 with CRI (the "SAA") pursuant to which T. Films appointed CRI as its exclusive authorized sales agent to distribute the picture. CRI carried out that distribution from 2006 until CRI ceased carrying on business in 2011.

[9] At the time that the parties entered into the SAA in 2004, CRI also entered into a distribution agreement appointing Cinemavault U.S. as its exclusive distributor of the picture in the United States and certain other countries. Moneys received by Cinemavault U.S. as a result of the distribution of the picture were credited back to CRI.

[10] Pursuant to the SAA, all distribution revenue was divided between T. Film and CRI pursuant to a formula (the "formula"). A collection agent (the "collection agent") was to be appointed pursuant to a collection agreement (the "collection agreement") to be entered into between the parties. The collection agent was to receive the gross receipts and pay the parties in accordance with the formula.

[11] The parties did not appoint a collection agent because the parties could not agree on the terms of the collection agreement. The parties agreed instead to continue the SAA without a collection agent. Accordingly, CRI collected the revenue and remitted T. film's share according to the formula during the years 2006 to 2011.

4. The arbitration

[12] The respondents initiated an arbitration in early 2012 against CRI claiming that CRI had not remitted all of the distribution revenue to which the respondents were entitled under the SAA. CRI initially defended the arbitration. The arbitrator granted an interlocutory order allowing T. Films to exercise its audit rights under the SAA. CRI refused to co-operate with the audit and did not comply with the order. In late 2012, CRI failed to deposit its share of the arbitration fees. CRI was subsequently noted in default under the applicable arbitration rules and its defence was struck. In March 2013, the arbitration proceeded on an undefended basis. [page497]

[13] On April 22, 2013, the arbitrator awarded T. Films the amount of US$332,389 plus interest of US$26,829, for a total of US$359,218 (the "award"). This amount represented the arbitrator's determination of the shortfall of moneys that should have been remitted by CRI to T. Films under the formula from the sale and distribution of the picture. On May 1, 2013, the arbitrator awarded T. Films substantial indemnity costs in the amount of US$136,376.71. The total of the award and the costs award, being US$495,594.71, is herein referred to as the "total award".

[14] CRI neither appealed nor paid the amount of the total award.

5. The application

[15] Subsequently, in May 2013, the respondents commenced an application in the Superior Court to enforce the total award against CRI. In that application, CRI also included a claim for oppression and breach of trust against Cinemavault Canada, Cinemavault International and Stiliadis.

[16] By way of relief, the respondents sought, among other things, (1) a judgment enforcing the total award against CRI; (2) a declaration that Stiliadis conducted the business and affairs of CRI and the other Cinemavault group of Companies, including the corporate appellants, in a manner that was oppressive of the respondents; (3) an order that CRI and the appellants compensate the respondents for the amounts owing pursuant to the total award; and (4) a declaration that the transfer of the assets of CRI pursuant to the restructuring constituted a fraudulent conveyance and justified a piercing of the corporate veil such that the appellants other than CRI are also liable for the amount of the total award.

[17] By order dated September 13, 2013, Stinson J. granted judgment against CRI enforcing the total award and transferred the remainder of the application to the Commercial List. The remainder of the application was heard by the application judge who, as mentioned, awarded judgment against the other appellants, Cinemavault Canada, Cinemavault International and Stiliadis, as set out in the order.

[18] In the hearing before the application judge, the oppression claim of the respondents focused on allegations that Stiliadis had caused CRI's assets at August 31, 2011, principally the 2011 receivables, to be assigned to other companies in the Cinemavault Group of Companies during the 2012 fiscal year of CRI for no consideration as part of the restructuring. The respondents alleged that the restructuring was undertaken for the benefit of Stiliadis and to the detriment of the creditors of [page498] CRI, in particular the respondents, as CRI thereafter lacked moneys to pay the award.

B. Jurisdiction of the Court and Standard of Review

[19] The Divisional Court has jurisdiction to hear this appeal pursuant to s. 255 of the Business Corporations Act, R.S.O. 1990, c. B.16 (the "OBCA"), which provides that an appeal lies to the Divisional Court from any order made by the court under that statute.

[20] The standard of review is set out in Housen v. Nikolaisen, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, 2002 SCC 33, in paras. 6-10 and 36-37. On a pure question of law, the standard of review is correctness. The standard of review for findings of fact is that such findings are not to be reversed unless it can be established that the trial judge made a "palpable and overriding error". Questions of mixed fact and law are subject to the "palpable and overriding error" standard unless it is clear that the trial judge made some error of law or principle that can be identified independently of the judge's application of the law to the facts of the case.

C. The Decision of the Application Judge

[21] The application judge made two principal findings in his reasons. First, he found that the assets and business operations of CRI were transferred by the appellants to other companies within the Cinemavault Group of Companies after the 2011 fiscal year of CRI and that this action constituted oppression under s. 248 of the OBCA. On this basis, the application judge found the appellants liable for the amount of the total award. Second, the application judge found that the proceeds from the sale and distribution of the picture received by CRI from its customers constituted trust funds, with the result that the transfer of the assets and business of CRI to companies within the Cinemavault Group of Companies after the 2011 fiscal year of CRI constituted a breach of trust for which the appellants were liable. The liability for breach of trust was limited to the amount of the award and did not include the costs of the arbitration.

[22] The appellants appeal both findings of the application judge. I will address each in reverse order after first addressing a motion of the appellants to adduce fresh evidence.

[23] For completeness, the application judge also determined that it was not necessary to consider the other arguments of the respondents relating to assignment, fraudulent preference and piercing the corporate veil on the basis that, in his view, these arguments rely on the same underlying factual matrix as the foregoing issue and such causes of action are merely alternate [page499] legal theories for arriving at what amounts to the same result based on the same facts. The appellants have not raised any grounds of appeal in respect of these findings.

D. Preliminary Issue -- Fresh Evidence Motion

[24] In connection with this appeal, the appellants brought a motion to adduce fresh evidence as described below. The motion was heard at the commencement of this hearing. After a break for deliberations, the president of the panel advised the parties that the appellants' motion was denied for written reasons to follow. The following sets out the written reasons for such determination.

1. Background to the motion

[25] In an answer to an undertaking given prior to the hearing of the application, the appellants produced information to the effect that revenue had been collected in respect of the 2011 receivables relating to 40 contracts with various buyers/ distributors identified therein in amounts that apparently totalled approximately $1.1 million (the "contracts"). The respondents sought copies of such contracts and banking records recording the deposit of such funds. The appellants failed to provide such records prior to the hearing of the application and the hearing proceeded without the benefit of such production and information.

[26] After receipt of the order, a change of counsel for health reasons and the filing of a notice of appeal of the order, the appellants sought leave to extend the time to perfect its appeal. As a condition of such extension of time, the respondents sought an order compelling production of such documentation. The respondents sought such information for use in an examination-in-aid of CRI for purposes of enforcement of the total award. By order dated March 25, 2015, Sanderson J. granted the requested extension of time on the condition that the appellants produce such documentation.

[27] By affidavit dated March 25, 2014 of Gerry Moraitis (the "Moraitis affidavit"), which was delivered at the hearing of the extension motion, the appellants delivered copies of the contracts, which they say represented all of the contracts referable to the 2011 receivables. They also delivered a worksheet showing the recipient corporation of the revenues received in respect of the 2011 receivables, evidence of payment and a further worksheet identifying the written off receivables. This new documentation is herein collectively referred to as the "March 2015 information". [page500]

[28] Subsequently, the appellants also engaged the investigative and forensic accounting group of their auditors, MNP Ltd. ("MNP"), to prepare a report principally on two matters: (1) a reconciliation of the accounts receivable sub-ledger of Cinemavault International as of August 31, 2012 to the 2011 receivables; and (2) an explanation of the reduction of the 2011 receivables from $1,883,892 as at August 31, 2011 to nil at August 31, 2012.

[29] MNP delivered a forensic accounting report dated October 6, 2015 (the "MNP report"). Its principal conclusions are as follows. First, the total accounts receivable attributable to the 40 contracts identified by the appellants was $2,282,384, which included an item in the amount of $422,598 described as "miscellaneous adjustments in a credit amount" in the U.S. dollar accounts receivable. Second, of the 2011 receivables, $1,214,568 was collected and $825,572 was written off, leaving an outstanding accounts receivable balance of $202,997. In addition, the total amount collected after August 31, 2011 relating to the picture was $17,253, representing payments from two customers of CRI.

[30] By their motion, the appellants sought leave to adduce the March 2015 information and the MNP report as fresh evidence on this appeal.

2. Analysis and conclusions

[31] The test for admitting fresh evidence, as confirmed by the Court of Appeal in Centre City Auto Sales Inc. v. Kalsatos, [2013] O.J. No. 2564, 2013 ONCA 373, is the test set out in Sengmueller v. Sengmueller (1994), 17 O.R. (3d) 208, [1994] O.J. No. 276 (C.A.), at pp. 210-11 O.R., as follows:

Section 134(4)(b) of the Courts of Justice Act, R.S.O. 1990, c. C.43, gives a court to which an appeal is taken discretion "in a proper case" to "receive further evidence by affidavit, transcript of oral examination, oral examination before the court or in such other manner as the court directs". What concerns the court is not whether it can admit new evidence, but whether the appeal before it is "a proper case" in which to do so.

The normal basis on which an appeal court in this jurisdiction will exercise its discretion in favour of admitting fresh evidence is clear and well-established. It will do so when (1) the tendered evidence is credible, (2) it could not have been obtained, by the exercise of reasonable diligence, prior to trial, and (3) the evidence, if admitted, will likely be conclusive of an issue in the appeal.

(Citation omitted) [page501]

[32] Of significance for present purposes, the test is normally applied as a conjunctive test. I will address the application of each branch of this test to the present circumstances.

[33] The appellants cannot meet the due diligence requirement on their own admission. The evidence which the appellants seek to adduce was clearly available at the time of the hearing of the application. The appellants chose not to produce this evidence. Their counsel acknowledged that they had no excuse. It is difficult not to draw the inference that the appellants chose to withhold the evidence until the appellants who have assets, particularly Stiliadis, were found jointly and severally liable with CRI, which is judgment proof. Whatever the explanation for the appellants' actions, the absence of any reasonable explanation for their failure to produce the evidence, notwithstanding that the information was in their possession at the time of the hearing of the application, is sufficient to dismiss the leave motion. In addition, even if a court could admit fresh evidence in exceptional circumstances notwithstanding an applicant's failure to meet the due diligence requirement of this test, the court declined to exercise its discretion in this case for the further reasons set out below which address the remaining two requirements of the test.

[34] Most importantly, there are a sufficient number of unanswered questions respecting the proposed evidence that it cannot be said that the evidence is reliable on its face. If admitted, it would be necessary to establish a process for cross-examinations to test the credibility of the proposed evidence as well as for responding materials and, quite probably, a further hearing on the reliability and significance of the evidence.

[35] Among other issues, as mentioned, MNP identified a miscellaneous adjustment in a credit amount of $422,598 and a remaining account receivable balance of $202,997. Such amount would appear to represent assets that, if collectible, would be available to satisfy a material portion of the award. The appellants were unable to assist the court as to the nature of, or explanation for, this account balance, whose description in the MNR report is likewise unhelpful. In addition, certain of the evidence in the Moraitis affidavit is incorrect on its face and is superseded by the MNP report. In this regard, the MNP report provided materially different figures for the revenues collected in respect of the 2011 receivables and for the 2011 receivables that were written off from the figures included in the Moraitis affidavit. The MNP report also treated the earlier spreadsheets included in the March 2015 information as incomplete and inaccurate. It is not correct to suggest that there was simply [page502] a transposition error between the $750,000 amount of revenues collected and the $1.1 million of receivables written off, as the appellants suggested.

[36] Lastly, while the proposed evidence may address certain issues pertaining to the reorganization, counsel for the appellants acknowledged that it does not answer all the questions raised before the application judge. In particular, as discussed further below, the evidence that the appellants seek to introduce does not address the issue of the existence of a trust in favour of the respondents, which grounds a separate basis upon which the application judge found each of the appellants liable as discussed below.

[37] Having determined that this fresh evidence is not admissible, it follows that any grounds of appeal based on the failure of the application judge to take into account the terms of the contracts that were not in evidence before him, or before this court, must fail. The significance of this observation is addressed below.

E. Analysis: The Breach of Trust Claim

1. The decision of the application judge

[38] The application judge held that the parties intended to create a trust of the revenues earned on sales and distribution of the picture and that such moneys, when received, constituted trust funds in CRI's hands. Accordingly, the application judge held that the amount of the award found to be owing by the arbitrator, being US$359,218 (inclusive of interest), represented trust funds for which CRI is liable to account as trustee. The application judge then found that Stiliadis, Cinemavault Canada and International knowingly participated in a breach of trust and knowingly received trust funds which they knew to be the rightful property of the respondents and were therefore liable in the amount of the award for knowing participation in a breach of trust. I understand these findings to constitute findings of liability in tort based on each of knowing assistance in a breach of trust and knowing receipt of trust funds.

[39] In reaching his conclusion that all moneys received on account of the sales and distribution of the picture were trust funds, the application judge addressed each of the three "certainties" required to establish the existence of a trust and found that each was satisfied in the present case.

[40] With respect to the certainty of subject matter, the application judge held that it was clear that the subject matter of the trust was the revenue derived from the sale and distribution of [page503] the picture and that such revenue could not be commingled with other revenues of CRI. He based this conclusion on paras. 18(i) and (ii) of the SAA, which the application judge held made it abundantly clear that such revenues had to be kept "separate and apart" from revenues derived from any other picture and that CRI had a duty to account for and allocate those revenues on that basis.

[41] With respect to the certainty of objects, the application judge found that the objects were clearly set out in the SAA. He held that the beneficiaries of the trust are the payees identified in para. 9 of the SAA, which he considered clearly and unambiguously prioritized the interests of the various beneficiaries to the "Gross receipts" pursuant to the "waterfall" set out therein.

[42] The principal issue before the application judge was the requirement to establish an intention to create a trust. The application judge found that this requirement was satisfied based on the agency relationship between CRI and the respondents and certain other provisions of the SAA, together with the testimony of Stiliadis regarding his understanding of the provisions of the agreement. The relevant provisions of the reasons of the application judge are as follows [at paras. 73, 74 and 77]:

In conclusion on the intention issue, CRI was a fiduciary. It was obliged to collect and distribute revenues earned from distributing the applicants' property -- part of which "belonged" to the applicants as owners of that property. CRI was liable to the applicants for those revenues. It was obliged to deliver accurate accounts for its receipt and allocation of those funds. And, it was required to treat the applicants' property, and any payments received from sales and distribution of that property, separate and apart from any other property or any other payments.

This evidence, all of which is admitted or is plain from the contemporaneous documents, constitutes evidence which establishes, on a balance of probabilities, that the parties intended to create a trust in respect of revenues earned on sales and distribution of the Picture.

Based on the foregoing analysis, I am satisfied that sales and distribution revenues from the Picture were subject to a trust and constituted trust funds in CRI's hands. The amounts found owing by the arbitrator under his initial award -- that is, US $359,218 -- were previously unaccounted for, unpaid revenues derived from sales and distribution of the Picture; funds which "belonged" to the applicants. Those amounts were, therefore, trust funds for which CRI is liable to account as trustee. The amount of the arbitrator's final award, dealing with costs, was not subject to a trust.

[43] The application judge found the appellants liable for breach of trust based on four principal propositions: (1) that the moneys received in respect of the sale and distribution of the picture were trust funds; (2) that CRI committed a breach [page504] of trust in failing to place such moneys in trust upon their receipt and that such breach of trust continued up to and including August 31, 2011; (3) that upon the restructuring the appellants received moneys that were available to be placed in trust by CRI to remedy its continuing breach of trust; and (4) that Stiliadis was the directing mind of the Cinemavault Group of Companies. On the basis of these four propositions, the application judge could find that Stiliadis was liable in tort for knowing assistance in a breach of trust and knowing receipt of trust funds. He could also find that the corporate appellants were liable in tort for knowing assistance in a breach of trust. I have the following observations and conclusions regarding each of these propositions.

[44] The finding of the application judge regarding proposition (1) has been set out above and need not be repeated here.

[45] The finding of the application judge regarding proposition (2) -- being a continuing breach of trust on the part of CRI prior and including up to August 31, 2011 -- follows from the findings of the arbitrator and the application judge. The arbitrator found that CRI failed to remit the full amount of moneys owing in respect of revenues from the picture for the years 2006 to 2011. Given the finding of the application judge that such moneys should have been placed in trust, CRI was liable for a breach of trust in respect of such moneys when it used them for its own corporate purposes rather than remitting them to the appellants. This breach of trust continued until August 31, 2011.

[46] For the following reasons, the application judge could proceed on the basis of proposition (3) -- that the 2011 receivables included receivables, the receipt of which generated moneys at least equal in amount to the total award, that CRI was not required to hold in trust in favour of other parties and were, therefore, available to be placed in trust by CRI to remedy its continuing breach of trust.

[47] The appellants chose not to put copies of the contracts before the application judge. The appellants limited the disclosure to a list of the contracts and the associated accounts receivable included in the 2011 receivables. Without copies of the contracts, the application judge had no evidence regarding the terms and conditions pertaining to the sales agency arrangements in respect of the related motion pictures. Therefore, the application judge had no evidence that any moneys received on account of the 2011 receivables were required to be held in trust by the CRI for the owners of these motion pictures. [page505]

[48] Similarly, the appellants also failed to provide evidence which established their position on this appeal that substantially all of the revenues included in the 2011 receivables pertained to films owned by Cinemavault Canada that were received in trust by Cinemavault International pursuant to its arrangements with Cinemavault Canada and, therefore, were not available to satisfy the respondents' claim. It does not appear that the appellants raised this suggestion until they provided the March 2015 information. As mentioned, the evidence before the application judge was limited to the information regarding the contracts described above. That evidence reflected numerous third party owners or distributors, unrelated to Cinemavault Canada, without, as mentioned, any evidence as to the terms of the contracts.

[49] Lastly, the appellants do not deny proposition (4) -- that Stiliadis was the controlling person of the Cinemavault Group of Companies.

2. The appellants' grounds of appeal

[50] The appellants effectively assert three grounds of appeal regarding the findings of breach of trust, knowing assistance in breach of trust and knowing receipt of trust funds.

[51] First, they argue that the application judge erred in finding that the moneys received from the sale and distribution of the picture were impressed with a trust. Their main argument is that, in finding an intention of the parties to create a trust, the application judge misconstrued certain provisions of the SAA, principally ss. 1 and 2, insofar as they permitted sub-licensing by CRI, s. 9, insofar as the definition of "Gross receipts" included credits by sub-licensees, and s. 18 which prohibited cross-collateralization.

[52] Section 18 of the SAA reads as follows:

The Picture will be treated separate and apart from any other pictures licensed to Sales Agent, whether in this agreement or otherwise, and the payments applicable to the Picture will be treated as separate and independent accounting units and not cross-collateralized or set-off as between the Picture and any other picture or agreement between Sales Agent and Owner and amounts due for the Picture or other picture(s) may not be used to recoup amounts unrecouped for any other picture(s), or vice versa. Gross Receipts, Distribution Expenses and any other amount(s) due to Sales Agent hereunder may be cross collateralized among all Rights [i.e., among the different sources of revenue from the Picture] in the Territory.

[53] Second, as an additional basis for their submission that the moneys attributable to the sale or distribution of the picture were not required to be held in trust and could therefore be used for corporate purposes, the appellants submit that a substantial portion of the revenues attributable to the sale or distribution of the [page506] picture were received by Cinemavault U.S. and credited to CRI pursuant to inter-corporate arrangements within the Cinemavault Group of Companies rather than actually paid to CRI. They also say that, in the absence of an express requirement to hold the moneys in a separate trust account, CRI was entitled to commingle the moneys it received from the sale or distribution of the picture with its corporate funds and to use such moneys for corporate purposes. They rely on the decision of the Supreme Court in Air Canada v. M & L Travel Ltd. (1993), 15 O.R. (3d) 804, [1993] 3 S.C.R. 787, [1993] S.C.J. No. 118 in making this argument.

[54] Third, the appellants argue that, even if a trust is established, the application judge erred in finding that moneys in the amount of the award were held in trust as of August 31, 2011 and/or were included on the 2011 receivables. The appellants say that their liability should be limited to the actual amount of moneys included in the 2011 receivables attributable to the picture, which they say was $17,253.

3. Conclusions regarding the grounds of appeal regarding the findings of breach of trust, knowing receipt and knowing assistance

[55] I propose to address the appellants' grounds of appeal in order.

[56] First, the findings of an intention of the parties to create a trust, and thereby of the existence of a trust of moneys received on the sale or distribution of the picture, are findings of mixed fact and law. I see no palpable and overriding error of the application judge in making this determination.

[57] The appellants do not challenge the findings of the application judge that, given a finding of an intention to create a trust, the respondents had demonstrated the remaining two "certainties" required to establish a trust. There is also ample evidence in the record of an intention of the parties to create a trust arrangement despite the absence of express language to that effect.

[58] In particular, the existence of an agency relationship pertaining to the collection and remittance of moneys in accordance with the "waterfall" in s. 9 of the SAA, the arrangements pertaining to the collection agent, and the provisions of s. 18(ii) pertaining to financial reporting and audit rights support this conclusion. In addition, the testimony of Stiliadis on cross-examination discussed below reinforces the conclusion. Lastly, as the application judge notes, the imposition of a trust in order to provide protection to the respondents makes commercial sense in the context of CRI's business, which involved continuous streaming of revenues from numerous distribution contracts. [page507]

[59] I am also not persuaded that the application judge misconstrued the significance of the provisions of the SAA. The right to sub-license distribution rights is not inconsistent with a trust relationship of moneys received by CRI. Nor is the crediting of moneys on an inter-corporate basis inconsistent with a trust relationship. If such a relationship exists, CRI has an obligation to ensure that moneys received by its sub-licensees are also held in trust by such sub-licensees or that moneys equal to any credit granted in its favour are placed in trust by CRI.

[60] I accept that s. 18 of the SAA could be interpreted to relate only to the relationship between CRI and the respondents, or to address only accounting requirements, which in either case weakens the force of this provision as support for the finding of a trust. However, there are, in my opinion, sufficient indicia of a trust even if this provision were interpreted narrowly. More significantly, Stiliadis' own testimony, which the application judge recited in his reasons, reveals that he understood the cross-collateralization clause, and by extension the arrangements under the SAA generally, to create trust obligations even if he did not use express trust language.

[61] Second, I see no basis for the appellants' suggestion that CRI was not required to hold in trust the moneys received or credited in its favour by sub-licensees in respect of the sale or distribution of the picture. I have dealt with the argument in respect of moneys credited by sub-licensees, including Cinemavault U.S., above. More generally, in my view, the present circumstances are similar to, if not stronger than, the circumstances in Air Canada.

[62] In Air Canada, the Supreme Court held that directors of a corporation can be personally liable in tort for knowing assistance in a breach of trust where the directors are aware that moneys received by a corporation are to be held in trust for a third party and not used for general corporate purposes of the corporation. Air Canada does not provide an exception from the operation of this rule where the third party did not expressly stipulate that such moneys would be held in a trust account, as the appellants suggest. In any event, as the application judge noted in the present case, the SAA effectively contemplated such an arrangement pursuant to a collection agreement that was never entered into.

[63] Lastly, as mentioned, the appellants argued on this appeal that all of the 2011 receivables pertained to films owned by Cinemavault Canada, the proceeds of which were impressed with a trust in its favour and were therefore not available to satisfy the respondents' claim. That submission is based on [page508] evidence that was not before the application judge and is not before this court by virtue of the court's determination of the appellants' motion to adduce fresh evidence. More importantly, there was no evidence before the application judge establishing that the moneys received by CRI in respect of the contracts were to be held in trust by CRI in favour of the third parties named in such contracts under the terms thereof. Accordingly, given the evidence before him, the application judge did not err in declining to find that the liability of the corporate appellants should be limited to $17,253.

[64] Based on the foregoing, I find no error of the application judge in holding Stiliadis liable in tort for knowing assistance in a breach of trust and knowing receipt of trust funds or in finding the corporate appellants, other than CRI, liable for knowing assistance in a breach of trust. I will address the finding of the application judge regarding the liability of the appellants separately as between Stiliadis and the corporate appellants.

[65] I do not see any basis for setting aside the finding of liability of Stiliadis based on the determination of the trial judge regarding the existence of a trust and Stiliadis' involvement as the controlling mind and will of the Cinemavault Group of Companies. As such, he is liable for participation in CRI's breach of trust when it received revenues from the sale and distribution of the picture in the period 2006 to 2011, and applied such moneys for its own corporate purposes rather than placing them in trust. In addition, Stiliadis is also liable for knowing assistance in breach of trust to the extent that the corporate appellants received moneys after the restructuring that could have been placed in trust to remedy CRI's continuing breach of trust. Similarly, by virtue of his involvement in the corporation that controls the Cinemavault Group of Companies, Stiliadis benefitted from the application of trust moneys by CRI for its own corporate purposes and/or the receipt of such moneys by Cinemavault Canada or International. As such, he is also liable for knowing receipt of trust moneys in the amount of the award.

[66] The finding of the application judge that the appellants are also liable for knowing assistance in a breach of trust proceeds on the basis that the 2011 receivables included revenues in respect of the sale or distribution of films that were not subject to a trust of such revenues in the hands of CRI when received. As mentioned, to the extent there was a reasonable basis for this finding, the application judge could reasonably find that CRI had sufficient assets at August 31, 2011 to rectify the breach of trust which occurred when it applied moneys received in respect of the sale or distribution of the picture for its own [page509] corporate purposes. Such breach of trust was a continuing breach of trust up to and including August 31, 2011 because CRI failed to remedy the breach of trust by placing other moneys in trust. Given the involvement of Stiliadis with the corporate appellants, these companies would be deemed to have had knowledge of the continuing breach of trust by CRI and the availability of the proceeds of the 2011 receivables received on the restructuring to remedy such breach of trust.

[67] Based on the foregoing, the application judge could reasonably find the corporate appellants liable for knowing assistance in a breach of trust, being the transfer of the 2011 receivables in the face of CRI's obligation to remedy its breach of trust by the placing in trust proceeds of the 2011 receivables in the amount of the award.

F. Analysis: The Oppression Claim

1. The decision of the application judge

[68] The following sets out the decision of the application judge in respect of the respondents' oppression claim [at paras. 29, 36, 39, 40, 42]:

The evidence establishes beyond peradventure that the distribution business of CRI was wound down and transferred to other Cinemavault entities. Former employees of CRI continued to work for these other Cinemavault entities. No consideration was paid to CRI for the transfer of its operations and assets to other Cinemavault entities. None of this is denied.

Cinemavault's document production in these proceedings has been sporadic and incomplete. Mr. Stiliadis' answers on cross-examination with respect to the details around which corporations earned which distribution revenues, and why, were often evasive and largely unhelpful. Nevertheless, it appears that, without any notice to the applicants, CRI at some point assigned its rights under the SAA to Cinemavault.com. On September 1, 2011, Cinemavault.com assigned its distribution rights to another Cinemavault entity, Vaultco Inc. On the same day, Vaultco Inc. appears to have assigned its newly acquired distribution rights to International.

All the evidence -- contracts, assignments, transfers, financial and tax reporting -- leads to only one conclusion. Mr. Stiliadis used the Cinemavault companies interchangeably to achieve whatever ends were thought desirable at the time. He cannot, under the law articulated in Sidaplex-Plastic and SCI, supra, treat his corporations' contractual and financial obligations like an elaborate shell game where, unless the pea happens to sit under the shell selected by a creditor, Mr. Stiliadis and his companies are judgment proof.

I conclude that the restructuring of Cinemavault's business, by at least September 2011 (including the diversion of distribution revenue from CRI to [page510] Cinemavault.com and International) not only had the effect, but was carried out for the purpose, of denuding CRI of its assets such that it was not in a position to fulfill its financial obligations to the applicants under the SAA. None of this was disclosed to the applicants. There is no way that the applicants could have foreseen this conduct nor was there any way that they could have protected themselves from it. I therefore find the applicants Cinemavault.com and International have, with CRI, acted in a manner which was oppressive and unfairly prejudicial to the applicants. The amount of the unpaid revenue was determined by the arbitrator. Cinemavault.com and International are therefore liable, along with CRI, to the applicants for the combined arbitration award.

In this case, Mr. Stiliadis was the directing mind of the Cinemavault operating corporations and the corporations, Koukla and 2101628 Ontario Ltd., which held the controlling interest over the operating corporations. He derived a direct personal benefit from the reorganization of Cinemavault's business operations. Funds that the arbitrator found ought to have been paid to the applicants were diverted within the Cinemavault group to Mr. Stiliadis' ultimate benefit. I conclude, therefore, that qua director Mr. Stiliadis, through the control he exercised over the Cinemavault companies, acted in a manner which was oppressive and unfairly prejudicial to Cinemavault's creditors, namely the applicants. I therefore find Mr. Stiliadis to be personally liable for the arbitration award as well.

[69] The application judge also rejected the appellants' submission that a forensic inquiry should be conducted to determine whether, and to what extent, trust funds owing to T. Films were in fact transferred from CRI to the other corporate appellants. He held that a forensic accounting was not necessary because the facts in support of the respondents' claims were clear.

2. The appellants' grounds of appeal

[70] The appellants submit that the restructuring was made for a bona fide purpose. They also submit that the restructuring did not prejudice the creditors of CRI principally because, as mentioned, they say that, in accordance with the sales agency agreement between CRI and Cinemavault Canada, all moneys received on account of the 2011 receivables were to be held by CRI as trust funds on behalf of Cinemavault Canada.

[71] With respect to the picture, the appellants say that most of the revenue was received in the years 2006 to 2009. The appellants acknowledge having received substantial revenues in respect of the picture during this period and that such amounts were not paid by CRI to the respondents. Apparently, these moneys were used by CRI for its own corporate purposes. As mentioned, the appellants submit that Cinemavault International collected a total of only $17,253 on account of the sale and distribution of the picture pursuant to two of the contracts after [page511] September 1, 2011. The appellants submit that any remedy in favour of the respondents for oppression should therefore be limited to this amount. They say that, if necessary, a reference should have been ordered by the application judge to determine the amount owing in respect of the picture.

3. Conclusions regarding the appeal of the finding of oppression

[72] The finding of oppressive activity for the purpose of s. 248 of the OBCA rests on the following principal findings.

[73] First, the application judge found that the CRI business, including the 2011 receivables, had been transferred for no consideration to other members of the Cinemagroup Group of Companies, principally Cinemavault International. The appellants do not dispute that CRI's business was transferred for no consideration. They suggest, however, that Cinemavault U.S. received the CRI business, and collected the 2011 receivables. There is little evidence to support such a finding. As the application judge held, the evidence more strongly supports the conclusion that Cinemavault International received the CRI assets, including the 2011 receivables which it proceeded to collect to the extent possible.

[74] Second, as set out above, the application judge held that there was no bona fide business purpose for the restructuring and that the principal purpose of the restructuring was to defeat CRI's creditors. There was also a reasonable basis for this conclusion. The restructuring occurred after Stiliadis learned of the respondents' claim. On cross-examination, Stiliadis repeatedly refused to offer a specific purpose for the restructuring.

[75] Third, as mentioned, the application judge proceeded on the basis that the 2011 receivables which were transferred from CRI to the other corporate appellants in the restructuring were not receivables the proceeds of which were required to be placed in trust in accordance with agreements between the owners of the relevant motion pictures and CRI. On this appeal, the appellants submit that the application judge erred in failing to hold that the creditors of CRI, including the respondents, were not prejudiced by the restructuring proceeds (except to the extent of an admitted claim of $17,253) on the basis that the contrary was true, that is, that the proceeds of all of the 2011 receivables were required to be held in trust for the owners of the various films to which they relate. For the reasons set out above, I have concluded that the application judge was entitled to proceed as he did based on the record before him. [page512]

[76] Fourth, as a related matter, the appellants' principal ground of appeal is that the application judge erred in failing to find that, apart from two contracts, all of the contracts referable to the 2011 receivables pertained to films owned by Cinemavault Canada or other third parties for which all revenues received in respect of the distribution of the relevant films were required to be held in trust for such parties. As mentioned, any evidence to such effect was not before the application judge. Nor is it before the court, as it was excluded on the court's determination of the appellants' motion to adduce fresh evidence. For the reasons set out above, the application judge could reasonably decline to make such findings on the record before him.

[77] Fifth, the application judge held that these circumstances breached the respondents' reasonable expectations. This is a question of mixed fact and law for which there is ample support in the case law and in the evidence.

[78] Given the foregoing findings and Stiliadis' involvement as the controlling mind and will of Cinemavault Canada and International, the application judge found that these corporations participated in oppressive activity. He also found that Stiliadis' participation in the restructuring, as the controlling mind and all of the Cinemavault Group of Companies, and the direct personal benefit that he derived from the restructuring through the controlling shareholder of these corporations, also constituted oppressive activity on his behalf which attracted personal liability. There is also ample support in the case law for these findings, including the cases referred to by the application judge.

[79] Based on the foregoing, I conclude that there is no basis for setting aside any of these conclusions upon which the application judge based his decision. Accordingly, the appeal of the finding of the application judge regarding the respondents' oppression claim is denied.

G. Conclusion and Costs

[80] Based on the foregoing, the appeal is dismissed. The respondents were therefore substantially successful on this appeal. They seek costs of the extension motion before Sanderson J., for which costs were reserved to this court, of the motion to adduce fresh evidence and of this appeal aggregating approximately $25,600. The appellants have not provided a costs outline on any of these matters but suggest that their aggregate costs would be in the range of $40,000 to $50,000. The costs sought by the respondents are well within the range of what is reasonable for an appeal of this nature, and obviously within the expectation of the opposing party. Accordingly, costs are awarded [page513] in favour of the respondents for each of these three proceedings in this application in the aggregate amount of $25,600 on an all-inclusive basis.

Appeal dismissed.

End of Document