Wiens v. 1814047 Ontario Inc., 2020 ONSC 7634

CITATION: Wiens v. 1814047 Ontario Inc., 2020 ONSC 7634

DIVISIONAL COURT FILE NO.: DC-19-58

DATE: 2020-12-11

SUPERIOR COURT OF JUSTICE – ONTARIO

DIVISIONAL COURT

RE: JOHN WIENS, Plaintiff/Appellant

AND:

1814047 ONTARIO INC., JPW NIAGARA LIMITED, EVA KESSEL and ROB DIDOMENICO, Respondents (Respondents in Appeal)

BEFORE: R. D. Gordon, Lederer, Favreau JJ.

COUNSEL: Aaron Dadouch, for the Plaintiff/Appellant Michael Valente, for the Respondents

HEARD at Toronto: October 30, 2020

ENDORSEMENT

LEDERER, J.

Introduction

1This an appeal from the refusal of an application for leave to commence a derivative action and to plead in the name of the corporation in an action already underway. This is a dispute between shareholders. For all the effort of the Appellant to suggest otherwise, there is nothing more.

2The appeal is dismissed.

Background

3The business of concern (1814029 Ontario Inc.) operates a golf course in Niagara-on-the-Lake. The Appellant’s interest in the business is held by a corporation (JPW Niagara Limited) which he owns jointly, with his wife. JPW Niagara Limited owns one half of the shares in 1814029 Ontario Inc. The other half of the shares are held by 1814047 Ontario Inc., the shares of which are held by two other corporations: Willowbank Estates Inc. and Bear Properties Inc. The shareholders of Willowbank Estates Inc. are Eva Kessel and Rob DiDomenico. Bear Properties Inc.is owned by the Estate of James Forbes who was active at the time the golf course was purchased and 1814029 Ontario Inc. was incorporated. James Forbes died in 2012.

4The Appellant, John Wiens, through two corporations he controlled, operated two businesses, the Riverbend Inn (controlled by Riverbend Inn Niagara-on-the-Lake Ltd.) and Niagara-on-the-Lake Golf Club (controlled by JPW Enterprises Limited). Both companies went into receivership. Riverbend Inn Niagara-on-the-Lake Ltd. was sold. After its debts were paid, the excess proceeds ($565,000) from the sale were used to reduce the debt owed by JPW Enterprises Limited. This, in turn, reduced the amount needed to be paid to the receiver to purchase the golf course. John Wiens and his wife wished to retain control of the golf course. They could not obtain the necessary financing. They sought partners. They found investors in James Forbes, Eva Kessel and Rob DiDomenico. Together, they incorporated 1814029 Ontario Inc. and purchased the golf course from the receiver.

5To facilitate the purchase, financing was obtained from the Royal Bank of Canada in the amount of $1,000,000, 1814047 Ontario Inc. advanced $700,000 as a shareholder loan and JPW Niagara Limited provided $40,000 also as a shareholder loan. A shortfall of $30,000 remained. This was advanced by1814047 Ontario Inc., adding to the loan it had made.

6Whatever goodwill may have existed did not last for long. Litigation has been ongoing between the parties since 2013. There are two actions:

• one commenced in 2013 by JPW Niagara Limited against the law firm that had incorporated 1814029 Ontario Inc. alleging that, in so doing and in the legal advice it had provided, the firm had failed to protect the interests of JPW Niagara Limited (the “Lawyer Negligence Action”), and
• the second, commenced in 2014 by JPW Niagara Limited against 1814029 Ontario Inc., 1814047 Ontario Inc., Eve Kessel, Rob DiDomenico and the Estate of James Forbes claiming both “lost equity” and an oppression remedy (the “Shareholder Dispute Action”).

7During 2018 the Appellant commenced a claim on behalf of 1814029 Ontario Inc. against defendants in both the Lawyer Negligence Action and the Shareholder Dispute Action. At the same time, also in the name of 1814029 Ontario Inc., he purported to file Statements of Defence and Cross-claims to the Statement of Claim and Counterclaim in the Shareholder Dispute Action. The action was dismissed, and the proffered pleadings struck because leave had not been obtained.

8Having failed in the first effort, the Appellant determined to try again. He sought leave for pleadings to be filed on behalf of 1814029 Ontario Inc. in the Shareholder Dispute Action and to commence a derivative action. The Respondents named in the application are the shareholders of the corporations that hold shares in 1814029 Ontario Inc. not including the Estate of James Forbes. The law firm is not named. The application was heard by the same judge who had dismissed the action and struck the pleadings. Leave was refused and the application dismissed. This is an appeal from that refusal.

The Test

9The application for leave is required under section 246 of the Business Corporations Act.¹ The test that applies when such an application is made is in the legislation. It requires the Court to be satisfied that:

(a) the directors of the corporation or its subsidiary will not bring, diligently prosecute or defend or discontinue the action;

(b) the complainant is acting in good faith; and

(c) it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued.²

The Standard of Review

10The parties agree that the standard of review is that found in what has become the seminal case of Housen v. Nikolaisen.³ Under that case the standard of review on a question of law is correctness and of fact is palpable and overriding error. The law is not in issue. Both the authority for the application and the test that applies are accepted by the parties. As constituents of the legislation, this would be hard to deny. The substantive facts, that is the facts that determine the issues are also not disputable. The issue is the application of the facts to the law. These are questions of mixed fact and law. In Housen v. Nikolaisen these are said to fall on a spectrum ranging from correctness, on one end, to palpable and overriding error on the other.⁴ The determination of where on the spectrum the question may fall is dependent on its particularity (generally questions of fact, the determination of which have no continuing or precedential value tending to the palpable and overriding error end of the spectrum) or generality (leaning towards questions of law that have precedential value that may apply to other cases tending to the correctness end of the spectrum).

11In this case it was submitted, on behalf of the Appellant, that where there is a belief in the merits of the proposed derivative action, a presumption of good faith is created, and an applicant has prima facie met the test of good faith. It is said that the presumption is only rebuttable with actual evidence to the contrary.⁵ The Respondents do not agree. They say that if the Court accepts that the applicant believes in the merits of its claim, it is a prima facie indication that the applicant is acting with proper motives, not that it has prima facie satisfied the good faith prong of the test.⁶ This is the application of a factual finding (belief in the merits) to the accepted test (the good faith of the complainant). Certainly, it is arguable that the question of how the test of good faith is to be applied could have value beyond this case. If I were required to I would, as the factum of the Respondents suggests, find that a demonstrated belief in the merits does not create a rebuttable presumption, rather all the facts that are brought to bear should be considered in a determination of whether the applicant was acting in good faith.⁷ As it is, it does not matter to the case at hand. As will become evident, the question of whether the applicant acted in good faith is not determined by the presence or absence of belief in the merits. To be clear, in this case, if there is such a presumption it is rebutted.

The Appellant’s Concerns

12For the moment I set to the side the test and the standard of review. What is it in the decision of the judge that forms the foundation for this appeal?

13In general terms, a derivative action allows a shareholder to prosecute or defend an action on behalf of the corporation. It presupposes that the corporation’s interests will not otherwise be adequately protected. As noted by the judge who heard the application, there would have to be a benefit that will arise from the action that would warrant the expense of the litigation.⁸

14The Appeal Book and Compendium filed by the Appellant includes the Statement of Claim issued in the name of 1814029 Ontario Inc. and dismissed on the earlier motion.⁹ The defendants were all the shareholders of the companies holding shares in 1814029 Ontario Inc. and two law firms and lawyers associated with them.¹⁰ The Compendium filed by the Respondents includes a Statement of Claim, not issued but referred to as a “Proposed Statement of Claim”.¹¹ It is referred to, but not exhibited, in an affidavit sworn by the Respondent Eva Kessel on September 5, 2018.¹² As noted in that affidavit, the only difference between the two versions of the Statement of Claim is the inclusion in the first (the one issued and dismissed) and the absence in the second of one of the two law firms as a defendant.¹³ I repeat that the application for leave includes only shareholders of companies holding shares of 1814029 Ontario Inc. but not all of them. It does not include the Estate of James Forbes. It also does not include Klaus Reif¹⁴, or either of the law firms or the lawyers. It follows that any benefit from the requested pleadings or the proposed derivative action would have to be with respect only to those named in the Application.

15The two Statements of Claim do include, as a defendant, JPW Niagara Limited. This is the company through which John Wiens and his wife own the shares on 1814029 Ontario Inc. and, as importantly, is the plaintiff in the two actions already underway. The proposed claim against JPW Niagara Limited includes:

i. General damages in the amount of $100,000;

ii. Aggravated and punitive damages in the amount of $50,000.

16The damages claimed against the other defendants are $1,000,000 in general damages, $250,000 in special damages and aggravated and punitive damages in the amount of $250,000.¹⁵ One might wonder why the damages sought by 1814029 Ontario Inc. from JPW Niagara Limited would be so much less than from the others. The fact is that the Proposed Statement of Claim, while making allegations specifically naming 1814047 Ontario Inc., Eva Kessel, Rob DiDomenico and James Forbes as well as Klaus Reif, Sullivan Mahoney, Victor Muratori and Rocco Vacca, makes none against JPW Niagara Limited. In the absence of any allegation of a breach it is difficult to see how JPW Niagara Limited is to be found liable for anything or how the interests of 1814029 Ontario Inc. will be advanced by an action seeking such damages.

17This is underscored by the obvious. John Wiens is the, or in the company of his wife, an operating mind of JPW Niagara Limited. In commencing an action in the name of 1814029 Ontario Inc. he is proposing to sue, in the name of 1814029 Ontario Inc., interests he owns. If this derivative action proceeds or the suggested pleadings allowed, he will be in a conflict. The Application Judge noted that the presence of a conflict is an appropriate consideration in determining whether to grant leave.¹⁶ The potential conflict is demonstrated by the prayer for relief against JPW Niagara Limited. Apart from damages, an order is sought “against the Defendant JPW Niagara Limited… for”:

i. An interim and interlocutory Order enjoining the Defendant [being JPW Niagara Limited] from exercising its powers as shareholders to pay any interest or principal on any shareholder loans without the unanimous agreement of all shareholders.¹⁷

18It is not clear how JPW Niagara Limited could arrange for the payment of the interest on shareholder loans made to 1814029 Ontario Inc. but it is certain that, through the derivative action, John Wiens proposes the order be made against a company the actions and activities of which he controls. No order is required. The actions to be enjoined are within his authority.

19The Appellant raises the concern that JPW Niagara Limited is making a claim for lost equity that would be to the detriment of 1814029 Ontario Inc.¹⁸ which, without that company’s direct involvement, would go unchallenged. This concerns the $565,000 which was the excess left after the sale of hotel business by the receiver. The money was paid to the receiver to reduce the debt of the golf business and, it follows, the cost of the purchase of that business from the receiver. As perceived by John Wiens, this was money that should have been credited as a contribution to that purchase. In short, it should have been treated as a shareholder loan by JPW Niagara Limited to 1814029 Ontario Inc. If the claim succeeds the debt load of 1814029 Ontario Inc. will increase and its equity be reduced. If the risk of this is real, the defence of the claim does not require a derivative action or the pleadings requested within the existing action. In the Shareholder Dispute Action (the one in which John Wiens seeks leave to have 1814029 Ontario Inc. plead), JPW Niagara Limited is the plaintiff and 1814029 Ontario Inc. is a defendant: the first can make the claim and the second can defend it.

20Insofar as this issue involves these parties, it is demonstrative of a dispute between shareholders. If the $565,000 is a debt owed to JPW Niagara Limited, it will be to the benefit of John Wiens; if it is not, the equity in 1814029 Ontario Inc. it represents will remain in that company and the interest in it divided between the shareholders. It may be that this issue reflects on the alleged breaches of the law firm¹⁹ but, as has already been reviewed, the law firm was not a party to the Application. Even if it had succeeded, or if this appeal is granted, there will be no leave allowing for any pleading over, or derivative action, against the lawyers or the law firm.

21For a time, interest was paid to the shareholders on the loans they had made in furtherance of the purchase of the golf course business. The Board of Directors of 1814029 Ontario Inc. passed a resolution calling for payment of interest on those loans. Some time later a new lawyer was retained by John Wiens, apparently to act on behalf of the 1814029 Ontario Inc. The lawyer raised a concern as to the legality of the interest payments. He was concerned that these payments were in breach of the credit agreement between 1814029 Ontario Inc. and the Royal Bank. As a result, there were discussions between the parties and a settlement negotiated. The interest payments were paid to the bank in reduction of the first mortgage it holds.

22The principal shareholder loan ($700,000), made by 1814047 Ontario Inc., was secured by a promissory note that could be called on demand and by a collateral mortgage registered against the lands on which the golf course is located. In or around October 2017, a notice of intention to enforce the security was served and a demand for payment made. The demand and the notice of intention were in violation of the mortgage held by the Royal Bank. The mortgage was to be paid out before the shareholder loans could be. It was the demand that caused John Wiens to retain the new lawyer. The issue was resolved. No steps were taken to enforce the demand. It was retracted. This occurred at the same time as the resolution of the issue of payment of interest on the shareholder loans. The settlement agreement included that JPW Niagara Limited, John Wiens and his wife would not commence any legal proceeding against the shareholders of 1814047 Ontario Inc. relating to the interest payments or the demand.

23The Application Judge noted:

JPW objected to the interest payments and the funds have now been paid to RBC to reduce the indebtedness on its first mortgage. This claim is for interest of the corporation would have earned if the interest on the shareholders loans was not paid. This is a relatively modest claim.²⁰

24I note that to the extent that monies go to paying down the mortgage held by the Royal Bank they reduce what is owed to the bank and inure to the benefit of the shareholders through increased equity. With respect to these issues, the application Judge concluded:

The essence of the claim on behalf of the corporation that it is not covered by the shareholders dispute is the claim for interest as a result of the payments being made on the shareholders loan. The issue of the improper claiming of the shareholders loan and 047’s demand were addressed in correspondence. Counsel for 047 withdrew the demand and 047 and JPW agreed that any monies paid as interest would be paid to RBC to reduce the indebtedness on the RBC mortgage.²¹

25These issues having been resolved there is no point in granting leave to allow pleadings and a derivative action that concern them. Counsel for the Appellant submitted that these issues continued to raise “equitable concerns”. There are none. The issues were settled.

26What remained unresolved, was the cost of the lawyer retained by John Wiens to assist with the issues concerning interest paid on shareholder loans and the demand. There is a dispute as to whether John Wiens had the authority to retain the lawyer. As it is, the lawyer has been paid $33,292.70.²² The Application Judge concluded:

… what was unresolved was the legal fees that had been incurred purportedly on behalf of 029 to address the issue of the interest payments and improper demand. I observe that these are modest sums in the context of the dispute between the parties. As noted by Dietrich J. in Agisheva, it is appropriate to consider the propriety of commencing a costly derivative action to recover what may be modest amounts of money. That is certainly the case here.²³

Application of the Test and the Standard of Review

27The Respondents acknowledge that the first part of the test has been met. The Board of Directors refuse or are unable to commence the action.

28It is plain, the third part of the test is not met. There would be no benefit to the corporation in the bringing the derivative action or in its pleading in the action already underway. The issues raised are either:

• resolved (the payment of interest on the shareholder loans and the demand),
• are so modest as to not justify litigation (the lawyers’ fees and any remaining suggestion that interest on the payment of the loans is a loss to 1814029 Ontario Inc.), or
• are available to be dealt with by the parties in the action as it stands (the claim for loss of equity through the alleged requirement that the $565,000 be treated as a shareholder loan).

29This first and third parts of the test having been resolved in this way, there is no need to consider whether the Appellant acted in good faith. The Application Judge was careful to consider this both in respect of the proposed derivative action and the pleadings for which leave was requested. He found that the Appellant did not act in good faith. One need go no further than the conflict that would arise in John Wiens guiding the litigation on behalf of both JPW Niagara Limited and 1814029 Ontario Inc. to understand and accept the judge’s finding. If it is necessary to go further there is the fact that a claim for damages with no allegation that would sustain the claim leads away from any suggestion that the action is founded in good faith.

30I turn to the standard of review. This case is driven by the facts. There is nothing that extends the circumstances or the findings beyond the case at hand. If required I would find that this tends to be at the end of the spectrum that reflects the requirement that there be a palpable and overriding error. There is none. It does not matter. There is no other answer available. The Application Judge was correct in his refusal of the application. He recognized this for what it is: a shareholder dispute removed from any independent interest of the corporation at its centre:

In this case, there is a dispute between two equal shareholders. The shareholders want a corporate divorce as evidenced by the shareholder dispute. The proposed derivative action, would only serve to increase the costs, thereby reducing the value of 029’s shares. I am satisfied that any issues in the proposed derivative action can be addressed in the context of the [Shareholder Dispute Action]…²⁴

31The appeal is dismissed.

Costs

32As agreed by the parties, costs to be paid by the Appellant to the Respondents, who are the successful party, in the amount of $15,000.

Lederer, J.

I agree _______________________________ R. D. Gordon, J.

I agree _______________________________ Favreau, J.

Date: December 11, 2020

Footnotes

1. 1R.S.O. 1990, c. B.16. Section 246(1) states:
   Subject to subsection (2), a complainant may apply to the court for leave to bring an action in the name and on behalf of a corporation or any of its subsidiaries, or intervene in an action to which any such body corporate is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the body corporate.
2. 2Ibid at s. 246(2)
3. 32002 SCC 33, [2002] 2 SCR 235
4. 4Ibid at paras. 28 and 36
5. 5Factum of the Appellant at para. 34 relying in part on Gartenberg v Consolidated Stone Industries Inc., 2005 CarswellBC 2203 (B.C.C.A.)
6. 6Factum of the Respondents at para. 41
7. 7Ibid at para. 41
8. 8Wiens v 1814047 Ontario Inc. 2019 ONSC 5759 at para. 11 referring to Winfield v. Daniel, 2004 ABQB 40, 128 A.C.W.S. (3d) 706 at para. 36
9. 9Appellant’s Appeal Book and Compendium, Volume 2 at p. 252: Affidavit of Eva Kessel, sworn September 5, 2018 at Exhibit B
10. 10The named defendants were: 1814047 Ontario Inc., JPW Niagara Limited, Klaus Reif, Eva Kessel, Rob DiDomenico, The Estate of James Forbes aka Jim Forbes, Sullivan Mahoney Lawyers, Victor Muratori, Rocco Vacca, Scarfone Hawkins LLP. and Michael Valente
11. 11Compendium of the Respondents, 1814047 Ontario Inc., Eva Kessel and Rob DiDomenico, Volume 2 at p. 361 (Tab 23)
12. 12Affidavits of Eva Kessel, sworn on September 5, 2018 at paras. 16:
    Now, John seeks leave of the Court to commence a derivative action on behalf of 029 (the “Proposed Action”) and to deliver the 029 Defences.
13. 13See the style of cause in the first of the two Statements of Claim and paragraphs 11,12 and 62-67 of that Claim, which are not present in the second Statement of Claim. Also see Affidavit of Eva Kessel, sworn September 5, 2018 at para. 17:
    I note that the Proposed Claim no longer names Valente or SHLLP, which leads me to suspect that the issuance of the 029 Claim was merely a tactic engaged by John to force the adjournment of the 047 Summary Judgment Motion.
14. 14Klaus Reif is described as the “life partner of Eva Kessel” and the “business partner of Rob DiDomenico”. It is alleged that he took part in decision with respect to 1814029 Ontario Inc. as if he was a shareholder when he was not one.
15. 15“Proposed Statement of Claim”: (Compendium of the Respondents, 1814047 Ontario Inc., Eva Kessel and Rob DiDomenico, Volume 2 at p. 361 (Tab 23)) at para. 1: This said to be as against the defendants “Sullivan Mahoney lawyers (hereinafter “Sullivan Mahoney”), Victor Muratori, Rocco Vacca, 1814047 Ontario Inc. (hereinafter “047”), Klaus Reif, Eva Kessel, Rob DiDomenico, and the Estate of James Forbes aka Jim Forbes. For reasons that are not explained, and I cannot discern, there is a second prayer for relief against Klaus Reif, on his own, this one for general damages of $1,000,000, special damages of $500,000 and aggravated and punitive damages in the amount of $500,000.
16. 16Wiens v 1814047 Ontario Inc. supra (fn. 7) at para. 11 referring to Melnyk v. Acerus Pharmaceuticals Corporation, 2017 ONSC 1285, 277 A.C.W.S. (3d) 747 at para. 76 aff’d 2018 ONSC 1353, 289 A.C.W.S. (3d) 744; Agisheva v. Petrov, 2019 ONSC 3872, 308 A.C.W.S. (3d) 530 at paras. 38-39
17. 17Proposed statement of Claim, supra (fn. 9) at para. 1 (c) (iii)
18. 18Factum of the Appellant at para. 44 and 68 and Factum of the Respondents at para. 56. The Factum of the Appellant at para. 68 seems to acknowledge that the claim for lost equity is not to at issue in the proposed derivative action but the parties appear to be treating it as a live issue, the paragraph states:
    The primary claim advanced by JPW concerns the alleged loss of $585,000 in its equity, which JPW claims was not, but ought to have been, recognized during 029’s structuring. This claim is not at issue in the 029 proposed derivative claim; it is also proposed to be defended in the 029 pleadings in 55427/14 and concerns facts and circumstances prior to 029’s formation
19. 19Factum of the Respondents at para. 12
20. 20Wiens v 1814047 Ontario Inc. supra (fn. 7) at para. 18
21. 21Ibid at para. 24
22. 22Compendium of the Respondents, 1814047 Ontario Inc., Eva Kessel and Rob DiDomenico, Volume 2. at p.342 (Tab. 20): Answers to the undertakings of John Wiens from his cross-examination on November 6, 2018
23. 23Wiens v 1814047 Ontario Inc. supra (fn.7) at para. 24. For the citation of Agisheva v. Petrov see supra (fn. 14)
24. 24Ibid at para. 26