Court File and Parties

CITATION: 2128445 Ontario Inc. v. Sherk, 2017 ONSC 5996

DIVISIONAL COURT FILE NO.: DC-17-848-ML

DATE: 20171108

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

N. Spies, M. G. J. Quigley, M. G. Ellies JJ.

B E T W E E N:

2128445 ONTARIO INC. and RICHARD SHERK

Applicants (Responding Parties)

• and -

MARK SHERK, VERGE INSURANCE BROKERS LIMITED, 1729628 ONTARIO INC., MARICK BROS. INVESTMENTS INC. and BENT NAIL HOLDINGS (ST. CATHARINES INC.)

Respondents (Moving Parties)

COUNSEL:

M. Moloci and D. Thompson, for the Applicants (Responding Parties)

Ian R. Dick, for the Respondents (Moving Parties)

HEARD at Hamilton: October 5, 2017

REASONS FOR DECISION

ellies j.

OVERVIEW

[1] This is a motion brought under s. 21(5) of the Courts of Justice Act, R.S.O. 1990, c. C.43 in which the moving parties, Mark Sherk, Verge Insurance Brokers Limited (“Verge”), and the other corporate respondents (collectively, “Mark”) seek to set aside an order made by Nightingale J. on May 31, 2017. In the order (the “Nightingale order”), Nightingale J. quashed an appeal by Mark to this court from an order of Arrell J. made on November 28, 2016 (the “Arrell order”). Nightingale J. quashed the appeal on the basis that the Arrell order was interlocutory and, therefore, Mark ought to have sought leave to appeal to this court.

[2] In addition to asking that the Nightingale order be set aside, Mark asks that we make a declaration that the Arrell order was automatically stayed by virtue of the appeal, pursuant to r. 63.01 of the Rules of Civil Procedure, R.R.O. 1990, O. Reg. 194.

[3] For the following reasons, I would dismiss Mark’s motion. Nightingale J. was correct to hold that the Arrell order was interlocutory because it did not dispose of any of Mark’s rights in the litigation.

BACKGROUND

[4] This motion is but one of a number of legal skirmishes that have taken place between Mark and the applicants, Richard Sherk and 2128445 Ontario Inc. (collectively, “Richard”). Mark and Richard are brothers who were once the sole equal shareholders of Verge.

[5] The legal battle began when Richard retired from the business in April 2012. It is being fought on two fronts. One centers on the value of Richard’s shares in Verge. The value of those shares was to be determined in accordance with the provisions of a shareholder’s agreement entered into in October 1990 and a memorandum of understanding (“MOU”) entered into in October 2002. Pursuant to these agreements, an independent valuator determined that the value of Richard’s shares in Verge ranged between $7,294,000 and $8,030,500, depending upon the presence or absence of a non-competition covenant and a minority discount. The MOU required that 50% of the value of the shares be paid at closing and that the balance be paid in ten equal annual instalments, together with interest at the prime rate.

[6] Richard commenced an application under s. 248 of the Business Corporations Act, R.S.O. 1990, c. B.16 (the “the oppression application”) in connection with the value of his shares in Verge. The application itself is not contained in the record before us. Based on the court file number assigned to it and the facts set out below, it was probably commenced in 2012.

[7] The other legal battlefront lies in an action Mark commenced against Richard and others (the “damages action”), and a related action commenced against Verge by a former employee in which Verge has added Richard as a third party (the “third party claim”). In the damages action and the third party claim, Mark and Verge allege that Richard and his son began to compete against Verge after Richard’s retirement. Mark estimates the damages in the damages action to be approximately $2,500,000.

The Turnbull Order

[8] In 2013, Richard brought a motion within the oppression application, seeking (among other things) an advance payment of $5,200,000 for his shares. For some reason, that motion was not heard until 2015, when it was argued before Turnbull R.S.J. (as he then was), who was acting as case management judge in the related proceedings. Based on Mark’s willingness to make an advance payment in order to gain control of Verge, Turnbull R.S.J. held[^1] that he could make an interim order without having to make a prima facie finding of oppression (reasons, at para. 31). Relying on the decision in Watkin v. Open Window Bakery Ltd., 1996 8284 (ON SC), [1996] O.J. No. 894 (S.C.), on November 30, 2015, Turnbull R.S.J. ordered that a commercial closing take place regarding Richard’s shares (the “Turnbull order”). Pursuant to the Turnbull order, Mark was to purchase Richard’s shares for $7,500,000 within 90 days of the order “without prejudice to the right of either party to claim a higher or lower amount for those shares at the hearing of the oppression application or the trial of the damages action” (reasons, para. 34).

[9] Turnbull R.S.J. ordered that, in accordance with the MOU, 50% of the $7,500,000 (i.e. $3,750,000) be paid at closing. He ordered that the further sum of $1,125,000 be paid, representing annual payments of 10% of the purchase price (in the amount of $375,000 each) for the years 2013, 2014 and 2015, together with interest at the prime rate on those payments. Turnbull R.S.J. also ordered that the remaining sum of approximately $2,625,000 be paid into court to the credit of “this action” and “remain in court until further order of the court” (reasons, at para. 36). It is unclear what he meant by the word “action”. The proceeding in which Richard’s motion was brought was an application, not an action. However, I believe that Turnbull R.S.J. intended to refer to Richard’s oppression application, and not Mark’s damages action, as he specifically referred to the court file number associated with the oppression application.

[10] In describing the money paid into court (the “Turnbull funds”), Turnbull R.S.J. stated (at para. 39):

In essence, it will act as a form of security or “cushion” for the potential claims raised by Mark relative to the alleged misconduct of Richard at the time of his departure from Verge.

[11] Turnbull J. also stated (at para. 40) that:

In the event the court determines Richard Sherk and 2128445 Ontario Inc. are entitled to a greater sum for their shares, they can enforce such a judgment in the customary way. If the court determines that Verge and/or Mark (Sherk) has suffered damages which exceed the sum paid into court, they too can enforce the judgment in the ordinary way.

[12] Pursuant to the Turnbull order, the parties entered into a share purchase agreement (the “SPA”) dated February 26, 2016. The SPA called for the sale of Richard’s shares to take place at the $7,500,000 price and on the other terms set by Turnbull R.S.J. Importantly, at the time the SPA was entered into, the oppression application and the damages action were set to proceed to trial in October 2016. The SPA required that the balance of the purchase price eventually decided upon by the court or agreed upon by the parties, if any, was to be paid in six equal annual instalments, commencing on February 26, 2017. I will return to this fact in the discussion that follows.

[13] Subsequent to the making of the Turnbull order, and apparently after entering into the SPA, the parties came to an agreement on the value of Richard’s shares. They agreed that the shares were worth $7,854,250, a sum that was $354,250 higher than the value set by Turnbull R.S.J.

[14] The trial did not take place in October 2016, as anticipated. Instead, on consent, it was adjourned without a fixed date.

The Arrell Order

[15] On October 18, 2016, Richard moved before Arrell J. for an interim payment out of the Turnbull funds[^2]. Arrell J. granted Richard’s request for reasons released on November 28, 2016[^3]. He held that it was “reasonable and fair” that Richard receive the payment due in February 2017[^4] pursuant to the SPA (reasons, at para. 14).

[16] Arrell J. wrote (at para. 14):

There is no evidence before me that Richard would be unable to pay any judgment awarded in this matter, especially now that he received a substantial amount pursuant to the order of Turnbull J. No logical argument has been put to me that would deprive Richard of the funds that belong to him pursuant to the Turnbull formula. Should there be a judgment against him it can be enforced in the ordinary way if what remains in court is insufficient, as correctly pointed out by Turnbull J.

[17] Arrell J. ordered that the sum of $632,448.29 be paid to Richard out of the Turnbull funds (the “Arrell order”). This sum represented 50% of the $354,250 difference between the price of the shares as set by Turnbull R.S.J. and the price as agreed upon by the parties (the “agreed price”), as well as the payment due under the Turnbull order for 2016, annual payments for 2013, 2014, and 2015, and interest on the annual payments, all adjusted upwards based upon the agreed price. This payment left just over $2 million as the Turnbull Funds.

[18] Mark appealed the Arrell order to the Court of Appeal. On March 7, 2017, the Court of Appeal quashed the appeal on the basis that it had been brought in the wrong court. The court transferred the appeal to the Divisional Court “without prejudice to the parties to raise whatever arguments they wish in respect of the Divisional Court’s jurisdiction.”

The Nightingale Order

[19] Richard brought a motion seeking to quash Mark’s appeal to the Divisional Court on the basis that the Arrell order was an interlocutory order and that Mark was therefore required to seek leave to appeal, which he had failed to do. Nightingale J. (the “motion judge”) granted Richard’s motion on May 31, 2017. It is this order that Mark now seeks to set aside before this panel.

ISSUE

[20] Section 21(5) of the Courts of Justice Act (the “CJA”) provides that:

A panel of the Divisional Court may, on motion, set aside or vary the decision of a judge who hears and determines a motion.

[21] The parties agree that the test for setting aside an order under s. 21(5) is the general appellate test, namely, whether the motion judge made an error of law or a palpable and overriding error of fact: Overseas Missionary Fellowship v. 578369 Ontario Ltd. (1990), 1990 6771 (ON CA), 73 O.R. (2d) 73 (Ont. C.A.). The issue, therefore, is whether such an error was made by the motion judge in deciding that the Arrell order was interlocutory, and not final.

ANALYSIS

[22] As the motion judge correctly set out early in his analysis, an order is interlocutory rather than final if it does not determine the real subject matter in dispute between the parties, as opposed to some collateral matter. The order may be final in the sense that it determines the very question raised in a motion, but it is interlocutory if the merits of the case remain to be determined: Hendrickson v. Kallio, 1932 123 (ON CA), [1932] O.R. 675, [1932] 4 D.L.R. 580 (Ont. C.A.); Buck Bros. Ltd. v. Frontenac Builders Ltd. (1994), 1994 2403 (ON CA), 19 O.R. (3d) 97 (Ont. C.A.), at para. 8.

[23] As the motion judge also correctly stated in his endorsement (para. 11):

The starting point is to look at the order itself and not the reasons for judgment. In some cases, however, to determine whether an order is truly final or interlocutory, one needs to look at the reasons. If the reasons showed [sic] that the party has been deprived of a substantial right or defence that could resolve all or part of the proceedings, then the order is final [citing Walchuk Estate v. Houghton, 2015 ONCA 862.][^5]

[24] Mark argues that the Arrell order was final in that it determined his rights in three respects, namely:

(1) It determined his entitlement to the Turnbull funds [^6];

(2) It determined his right under s. 2.2 of the SPA to have the Turnbull funds held in escrow pending the final determination of the action; and

(3) It resulted in a determination that he was required to pay interest to Richard on the annual payments.

[25] I would reject all of these arguments. Mark had no right to the Turnbull funds and the rights he did have were not affected by the Arrell order.

Mark’s Rights Under the Turnbull Order

[26] Mark contends that the Turnbull funds stand as security for his claim for damages in the damages action[^7]. He argues that the effect on his right to recover against the Turnbull fund is analogous to the effect on the mortgage holder in Mountainview Mall Ltd. v. Greymac Trust Co., [1985] O. J. No. 1237 (Div. Ct.). I disagree.

[27] In Mountainview Mall, the motion judge ordered that Greymac Trust Company (“Greymac”) stop taking enforcement proceedings under a mortgage and that it provide Mountainview Mall Ltd. (“Mountainview”) with a discharge of the mortgage upon payment into court by Mountainview of the amount owing under the mortgage, together with interest at a certain rate. However, the amount of interest that accumulated on the money paid into court was less than the amount of interest that would have been payable under the mortgage. Greymac had not sought such an order before the motion judge, nor had it consented to such an order.

[28] Greymac appealed the order to the Divisional Court. As in the present case, Mountainview sought to quash the appeal on the basis that the order was interlocutory. The Divisional Court held that the motion judge had no jurisdiction to order the discharge of the mortgage under s. 11 of the Mortgages Act, R.S.O. 1980, c. 296. It also held that the order requiring Greymac to discharge the mortgage was a final order. Therefore, the court ordered that the appeal of that part of the motion judge’s order be transferred to the Court of Appeal.

[29] Mountainview Mall is clearly distinguishable from the case at bar. In Mountainview Mall, the Divisional Court held (at para. 15) that, by ordering the discharge of the mortgage, the order had the effect of irrevocably depriving Greymac of the right under the mortgage to recover the full amount of interest payable and to do so using power of sale proceedings. Mark had no analogous rights under the Turnbull order.

[30] It must be remembered that the Turnbull funds were paid into court because of a motion brought by Richard within the oppression application, and not by Mark. There was no motion by Mark for security of any kind. Mark never sought to create substantive rights in the Turnbull funds. Notwithstanding the comments of Turnbull R.S.J. and Arrell J. to the effect that the Turnbull funds stand as some form of security for Mark in the event that Richard was found in the future to have damaged the company, the Turnbull order did not create a right to the Turnbull funds as security for those or any other damages, as suggested by Mark, in the absence of some formal request on Mark’s part.

[31] The Turnbull order was an interim order made at Richards request in the oppression application. It was intended to remedy the fact that Richard had received nothing for his shares since retiring in 2012 (reasons, para. 29). It was also intended to address the fact that Mark required control of Verge in order to facilitate the purchase of Richards shares (reasons, para. 32). By virtue of the Turnbull order, Richard was deprived of any control of Verge. The order clearly contemplated that Richard should receive annual payments towards the purchase price for his shares each year pending the trial, including 2016. As I will explain when I address the next issue, the terms of the SPA show that parties understood and acknowledged this.

[32] The Turnbull order gave Mark no right to the Turnbull funds that was altered in any way by the Arrell order. The payment to Richard of a portion of the Turnbull funds is not like the loss of Greymac’s rights under the mortgage in Mountainview Mall. The Turnbull order gave Mark no substantive rights beyond those he has at law and no procedural rights beyond those he has under the Rules of Civil Procedure. Those rights are unaffected by the Arrell order. Mark is still entitled to recover the full amount of damages and pre-judgment interest, if any, owing by Richard in the damages action. What he is not entitled to, and never was, is execution ahead of judgment. In short, the Turnbull order was not akin to the mortgage in Mountainview Mall.

[33] Any right that Mark has to the Turnbull funds is contingent upon the successful prosecution of his damages action and the right to set-off preserved in s. 111 of the CJA and s. 2.4 of the SPA Neither the Turnbull order nor the Arrell order impair Mark’s ability to successfully prosecute that action in the slightest, let alone deprive him of that opportunity altogether.

Mark’s Rights Under the SPA

[34] Mark contends that, by virtue of the SPA, the Turnbull funds were all to be held in escrow. He submits that the Arrell order deprived him of the right to those funds. That is not correct. The SPA did not create any greater right on Mark’s part to the Turnbull funds than did the Turnbull order. More importantly, the SPA implicitly acknowledged Richard’s entitlement to an annual payment for 2016.

[35] The SPA was clearly built around the Turnbull order. In s. 1.1, the “Final Purchase Price” was defined as meaning the purchase price determined pursuant to the “Final Determination of the Actions and Application”. “Final Determination” was defined as including either a final determination of the court or a concurring decision of the parties.

[36] Section 2.2(1) of the SPA, under the heading “Payment”, defined the Turnbull funds as part of the purchase price for Richard’s shares “held in escrow by the Court” pending the Final Determination.

[37] Section 2.2(2) of the SPA provided in part that:

… without prejudice to the rights of the Parties … the payment in respect of the Final Purchase Price, if any determined pursuant to the Final Determination, to be made by the Purchasers (whether payable by the Court pursuant to the release of the Escrowed Amount or otherwise payable by the Purchasers) to the Seller, in excess of the amount set forth in Section 2.2(1)(a) hereof, shall be payable in 6 equal annual instalments with the first such instalment payment due on February 26, 2017 and each successive annual payment to be made on the anniversary thereof, with the final payment to be made on February 26, 2022. The Parties hereby agree to direct the Court, upon the Final Determination, to pay the Escrowed Amount to give effect to this Section 2.2(2) by paying only such portion of the then payable instalment payments owing to the Seller (in respect of the Purchaser Adjustment Amount) with the balance of the Escrowed Amount to be paid forthwith to the Purchasers. [Emphasis added.]

[38] This section of the SPA demonstrates that the parties understood that the Turnbull order contemplated that Richard would receive an annual payment in 2016. As already mentioned, the Turnbull order was based on the MOU. The MOU called for 10 annual payments. The Turnbull order dealt with only three, for the years 2013, 2014 and 2015. Section 2.2(2) of the SPA called for six annual payments to Richard, beginning on February 26, 2017. That left one payment -- the payment for 2016. Although the payment for 2016 is not expressly mentioned in either the Turnbull order or the SPA, it is clear from the fact that the SPA only called for six further payments that the parties contemplated that there would be a payment for 2016. I believe that the reason it was not mentioned was because everyone expected that the trial would be held in October 2016, at which time any amount due for that year and subsequent years would be determined.

[39] Section 2.2(2) expressly contemplated a Final Determination of the court prior to February 26, 2017 and annual payments by Mark to Rick thereafter. The Arrell order simply reconciled the Turnbull order to take into account the agreed price and the fact that the trial had been adjourned. As Richard argues, it also gave effect to the parties’ intentions as expressed in the SPA.

[40] Section 2.4 of the SPA, entitled “Set-off”, explicitly acknowledged Mark’s right to set-off any damages found owing by Richard in the damages action against the Final Purchase Price. It read:

Notwithstanding anything contained herein, the Parties expressly acknowledge and agree, intending that the Court may rely hereon, that the Purchasers shall be entitled to set off any amount owing by the Purchasers to the Seller hereunder and in respect of the Final Purchase Price … against any amount owing by the seller or Rick to Mark Sherk, the Purchasers or any of the Corporations pursuant to the Actions, the Application or a breach of any representation, warranty or covenant contained in this Agreement or any Ancillary Agreement.

[41] Importantly, the SPA did not provide Mark with any right to claim set-off specifically against the Turnbull funds. The Turnbull funds were not escrowed to the account of Mark. They were set aside and held in escrow to the credit of the oppression application, in respect of which either Mark or Richard could ultimately prove successful. Nor did the SPA preclude the motion that Richard brought before Arrell J.

Richard’s Entitlement to Interest

[42] Mark contends that, by ordering him to pay interest to Richard on the annual payments, the Arrell order had the effect of finally determining Richard’s right to claim such interest.

[43] In determining whether an order is interlocutory or final, courts have sometimes considered whether the issue can be said to be res judicata: Stoiantsis v. Spiron, 2008 ONCA 553, 91 O.R. (3d) 184, at para. 26. That cannot be said in this case.

[44] It was Turnbull R.S.J. who first ordered that interest be paid on the annual payments. His order was based on the terms of the shareholder’s agreement and the MOU, referred to above. As I have stated, Arrell J. simply reconciled that order. Nothing in the reasons of either judge could be interpreted as giving rise to a final determination of the issue of interest. Rather, it is clear that Turnbull R.S.J. ordered that interest be paid on an interim basis in order to reflect the expectations of the parties (reasons, paras. 25-29), without prejudice to their right to argue otherwise at trial.

[45] In any event, before this Court, counsel for Richard undertook that his client would not be arguing at trial that the issue of interest on annual payments was res judicata. That is sufficient to deal with this argument made on Mark’s behalf: Grand River Enterprises et al v. Burnham, 2005 6368 (ON CA), at para. 12.

CONCLUSION

[46] The motion judge made no error of law and no palpable and overriding error of fact in concluding that the Arrell order was interlocutory. The motion to set aside his order, therefore, ought to be dismissed.

[47] In light of the conclusion I would reach regarding the interlocutory nature of the Arrell order, there is no need to consider whether the order is stayed pursuant to r. 63.01.

COSTS

[48] At the conclusion of the hearing of the appeal, the parties agreed that costs in the amount of $10,000, all-inclusive, should be awarded in favour of the successful party. Therefore, I would order that Mark pay costs in that amount to Richard within 30 days of the release of these reasons.

Ellies J.

I agree

Spies J.

I agree

Quigley J.

Released: November 8, 2017

[^1]: 2015 ONSC 7213.

[^2]: According to the affidavit of Mark, sworn on September 21, 2016, in response to Richard’s motion, Richard was seeking payment out of court in the amount of $2 million, which was much more than Arrell J. allowed.

[^3]: 2016 ONSC 7772.

[^4]: I believe that Arrell J. misstated the date. As I will explain, the Turnbull order contemplated payments to Richard each year pending trial. As I will also explain, the SPA acknowledged this by calling for six annual payments, not seven, beginning in February 2017. I believe Arrell J. meant to refer to the 2016 payment contemplated by Turnbull R.S.J. when he mistakenly referred to the 2017 payment. The calculation set out at para. 16 of Arrell J.’s reasons refers to “the 2016 scheduled payment”. There is no reference to the payment due in February 2017 in his calculation.

[^5]: See also Delaney Boat Lines and Services Ltd. et al. v. City of Barrie (1976), 1976 709 (ON CA), 15 O.R. (2d) 675, 2 C.P.C. 103 (Ont. C.A.), at para. 6; Wiggle et al. v. Allstate Insurance Co. of Canada (1984), 1984 45 (ON CA), 6 O.A.C. 16, 49 O.R. (2d) 101 (Ont. C.A.), at paras. 7-8; Ball v. Donais (1993), 1993 8613 (ON CA), 64 O.A.C. 85, 13 O.R. (3d) 322 (Ont. C.A.), at para. 3.

[^6]: The argument is worded differently in Mark’s factum. In the factum (at para. 36(a)), Mark argues that the Arrell order finally determined Richard’s entitlement to the amount ordered paid out by Arrell J. (called “the amount” in Mark’s factum). The argument is the same regardless of whether the right affected was Richard’s or Mark’s or whether it is to all or only some of the Turnbull funds.

[^7]: Mark does not contend that the Turnbull funds stand as security for costs. If he did, there would be no question that the Arrell order was interlocutory. By virtue of r. 56.07 of the Rules of Civil Procedure, the amount of security required for costs may be increased or decreased at any time. Such orders are not, and cannot be, final: Websports Technologies Inc. v. Cryptologic Inc. (2005) 5 C.P.C. (6th) 340 (Ont. S.C., Master), para. 9; Shuter v. Toronto Dominion Bank, 2007 CarswellOnt 8302 (Div. Ct.), paras. 10-11.