CITATION: Tahmasebi v. Hosseini, 2022 ONSC 6172
DIVISIONAL COURT FILE NO.: 510/21
DATE: 20221102
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
Swinton, D.L. Corbett and Baltman JJ.
BETWEEN:
REZA TAHMASEBI
Justin M. Jakubiak and Martine S.W.
Garland, for the Respondent
Plaintiff/Respondent
– and –
HAMID REZA HAJI HOSSEINI, AMIR
Jeffrey Radnoff, for the Appellants
HAJI HOSSEINI, CURVE LTD. O/A
CURVE MOTOR SPORT, 1741381
ONTARIO LTD., LUXE INC., and AUTO
LUXE and BAHAR DOURGHAMARI
Defendants/Appellants
HEARD at Toronto (by videoconference):
March 24, 2022
REASONS FOR DECISION
D.L. Corbett J.
[1] This is an appeal from the judgment of Diamond J. dated May 26, 2021 (2021 ONSC 3775), awarding the plaintiff $292,000 in damages for oppression under the Ontario Business Corporations Act, RSO 1990, c. B.16 (the “OBCA”).
[2] The decision below was fact driven. The facts found by the trial judge were available on the evidence before him, and those facts grounded the judgment in law. However, I conclude the trial judge made one error of principle in awarding damages for “loss of business value”. For the reasons that follow I would allow the appeal to the extent of setting aside the order to pay $182,000 for loss of business value. In all other respects I would uphold the trial judge’s decision.
Jurisdiction and Standard of Review
[3] This court has jurisdiction over this appeal pursuant to s. 255 of the OBCA. An appellate standard of review applies. Questions of law are reviewed on a standard of correctness. Questions of fact are reviewed on a standard of palpable and overriding error. On mixed questions of fact and law, the standard is palpable and overriding error except for extricable questions of law, which are subject to a correctness standard (Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, [2019] 4 SCR 653, para. 37; Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 SCR 235, paras. 8, 10, 19 and 26-37).
Background Facts
[4] Reza Tahmasebi (“Reza”) and Hamid Hosseini (“Hamid”) were business partners and co-owners of Curve Ltd. From 2007 to the end of 2011, Curve carried on business buying and selling used cars and investing profits in real estate.
[5] In 2012, Reza and Hamid agreed to terminate their business relationship. They agreed to divide the value of the real estate assets between themselves equally. With respect to Curve, the company would be wound up, the vehicles would be sold and the net proceeds would be divided.
[6] Subsequent to these events, Reza brought an action against Hamid (and Hamid’s wife and nephew Amir) claiming fraud and oppression with respect to the operation of Curve and seeking an accounting of funds owed to him. These allegations concerned the operation of Curve between 2009 and 2011, and not issues relating to the division of proceeds of sale of assets on winding up of the company.
[7] The history of the relationship between the parties is set out in paragraphs 14 to 25 of the trial judge’s decision. The appellant does not take issue with these findings on appeal.
[8] Mr. Radnoff, in his able submissions, spent most of his time addressing the third damages issue on appeal, and acknowledged that this was his clients’ strongest point. I did not take him as conceding the other grounds of appeal raised in the Notice of Appeal and in the appellants’ factum and in any event those issues provide context within which the third damages issue arises.
[9] The bulk of the appellants’ written arguments focus on the damages decision of the trial judge. However, admixed in their damages arguments are arguments that the trial judge erred in findings he made on liability issues. Therefore, I structure this decision by first reviewing the trial judge’s liability findings, all of which I would uphold. I then address the damages arguments.
Was there a Termination Agreement?
[10] The trial judge addressed in detail what he identified as the first issue before him: did the parties reach a binding agreement to resolve the wind-up of their business operations that foreclosed the claims advanced in this proceeding? (Decision, paras. 26-44) The trial judge concluded that there was no such agreement.
[11] The appellants argue that the trial judge erred in law in failing to find that the parties entered into a termination agreement and that the terms of this agreement were a complete defence to Reza’s claims. In their factum, the appellants state, in their summary of the facts, that there was a binding termination agreement (which they define as the “Termination Agreement”). This argument is contrary to the facts as found by the trial judge, and thus erroneously characterizes this as a question of law (failing to apply the terms of a binding agreement between the parties), rather than as a question of mixed fact and law (the question of whether there was an agreement, and if there was, what its terms were).
[12] The trial judge’s conclusion is based on a finding that the parties contested and addressed issues between them serially, rather than comprehensively, within an overall framework of winding up their joint enterprises. Jointly owned real estate was sold and proceeds divided, and no claims were advanced in respect to that issue (Decision, para. 29). The parties entered into a share purchase agreement for sale of shares in one of their jointly owned companies (1741381 Ontario Ltd.), and there was litigation in the Small Claims Court over whether Reza had contributed his share of operating expenses of that company – an issue that was settled for $18,698.76 (para. 36). After this amount was agreed it was also agreed that it would be set off against interest payments owed by Hamid in connection with Hamid’s purchase of the shares in the numbered company (Decision, para. 37).
[13] The appellants took the position that the parties reached an agreement on the basis on which they would terminate all their business relations, set out in an email between solicitors in March 2012. The trial judge considered this allegation and concluded as follows:
I cannot agree with Hamid’s position. To begin, the email enclosed a draft Share Purchase Agreement (for matters related to 174), the terms of which ended up being fundamentally different from the actual Share Purchase Agreements ultimately signed by the parties in February 2013. The March 27, 2012 email, at its highest, appears to be “an agreement to agree”, and in fact is more like an offer on the part of Reza. If that email was indeed an offer (and in my view that is the highest form that email could take), there is no evidence of that offer being accepted by Hamid. While Hamid argues that the parties’ subsequent conduct in ultimately signing a Share Purchase Agreement, (ie. selling and splitting the proceeds from the real estate properties) evidences acceptance of the offer and performance of the purported binding agreement, I do not accept that argument. In particular, with respect to Curve [Ltd.], the March 27, 2012 email proposed that Hamid keep Curve after, and only after, a full accounting and reconciliation had occurred. I do not find that Hamid and Reza reached an agreement on all matters that are vital to the resolution of the dispute between them, and the March 27, 2012 email simply deferred legal obligations until an actual final agreement had been reached. (Decision, para. 41)
[14] The trial judge also considered the appellants’ argument that settlement of the Small Claims Court action had the effect of settling all issues between them based on the principle of res judicata. This argument was not consistent with the history of dealings between the parties. The trial judge found that “the subject matter of the Small Claims Court action did not relate to or encompass the issue of the pending winding up of Curve’s business operations” (Decision, para. 43). This finding is consistent with the pleadings and terms of settlement of the Small Claims Court action, and the piecemeal approach taken to dispute resolution by the parties.
[15] It is clear that the parties agreed that Reza would have access to Curve’s books and records for the purpose of satisfying himself on the state of accounts between the parties on Curve’s winding up. The appellants go further and argue that Reza undertook an obligation to do an accounting of Curve based on these records – an accounting that would have no purpose other than to adjust the accounts between the parties on Curve’s winding up. This ongoing process – clearly contemplated by both sides – was related to coming to an agreement in respect to issues respecting Curve. The appellants’ arguments respecting the email in March 2012 and settlement of the Small Claims Court action are inconsistent with the parties’ conduct respecting the financial records of Curve.
[16] I see no extricable questions of law arising from the trial judge’s findings on these issues. They are questions of fact or mixed questions of fact and law. Deference is owed in this court to the trial judge’s findings. In my view, the trial judge’s findings on these points disclose no palpable and overriding errors of fact and are common sense conclusions arising from the factual matrix. This ground of appeal must fail (see: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, paras. 42-61).
Was there Oppressive Conduct?
[17] The trial judge distilled Reza’s complaints into three points allegedly grounding an allegation of oppression (Decision, para. 50):
(a) Hamid did not maintain accurate financial records for Curve;
(b) Hamid used Curve’s funds to pay for his own personal expenses; and
(c) Hamid’s arrangements between Curve and Luxe (a company owned by Hamid’s nephew) “was a sham designed to misappropriate funds.”
[18] The trial judge found oppressive conduct in respect to all three of these grounds (Decision, paras. 64, 69 and 75). Again, these are findings of fact, or findings of mixed fact and law, entitled to deference on appeal. I see no basis on which to intervene in respect to these findings.
(a) Failure to Keep Financial Records
[19] On this issue, the trial judge set out the applicable principles (Decision, paras. 52-55). No argument was advanced that the trial judge erred in respect to his statement of these principles.
[20] The trial judge noted that “most, if not all of the expected source documents were and remain available” and that the question is “whether adequate accounting records were prepared and maintained.” I see no error in this conclusion. Maintaining source documents may be part of, but not all of, the obligation to prepare and maintain adequate accounting records (Decision, para. 57). No argument to the contrary was advanced on this appeal.
[21] The trial judge then made two findings that anchored his conclusion on this issue:
(a) at Hamid’s directions, the company’s bookkeeper prepared and maintained two sets of financial records – one for the bank and the other for Canada Revenue Agency; and
(b) the financial records of dealings between Curve and Luxe were incomplete and – on the limited records available – disclosed potential defalcation.
[22] On the basis of these findings, which are amply supported by the evidence, in the overall factual context, the trial judge’s finding that the failure to keep proper financial records was oppression was reasonable.
(b) Using Company Funds to Pay Personal Expenses
[23] The trial judge found that Hamid used company funds to pay personal expenses. He then considered Hamid’s explanation – that these payments were on account of his agreed compensation of $8,000 per month. On reviewing the records, the trial judge concluded that the financial records did not establish Hamid’s claim that he only received what he was entitled to receive in monthly compensation. The trial judge found that it was Hamid’s onus to show that his use of company money for personal expenses was proper, and that he failed to discharge this onus.
[24] I see no error in principle in the trial judge’s decision on this point. The factual findings he made were available on the evidence. The appellants do not contest these findings directly in their written or oral arguments on appeal, though they impugn them collaterally in their arguments about the nature of the business and the manner in which it was conducted when they address damages issues. In my view there is no basis for this court to interfere with the trial judge’s findings on this point.
(c) Using Luxe to Misappropriate Funds from Curve
[25] The trial judge found that, instead of buying used cars for resale directly from car dealers, Curve adopted a practice of having Luxe buy this inventory and re-sell it to Curve for resale to an end purchaser. Luxe was owned by Hamid’s nephew. Thus, a portion of the net profit of resale was redirected to Luxe.
[26] Hamid took the position that the arrangement with Luxe was put in place with Reza’s knowledge. He testified that things were run this way in order to retain Hamid’s nephew in the business. Reza denied that he knew about this arrangement. Hamid’s nephew testified that he did not discuss these arrangements with Reza and that he had assumed that Hamid had done so.
[27] The trial judge found that the arrangements with Luxe were not disclosed to Reza and that Reza did not know about them. This is a factual finding, available on the evidence, and there is no basis for this court to interfere with it. This finding fully justifies the trial judge’s finding that the arrangement with Luxe constituted oppression: diverting a portion of Curve’s profits to Hamid’s nephew without disclosing that diversion. I see no error in principle in this conclusion.
Summary of Findings on Liability
[28] The trial judge found that there was no binding settlement agreement disposing of the claims in this proceeding. He then found that there was oppression by Hamid in his management of the business and operations of Curve, specifically in respect to the failure to keep proper financial records, the payment of his own personal expenses from company funds, and entering into an undisclosed arrangement with Luxe, as described above. Having made these findings, the trial judge then turned to the appropriate measure of damages for this oppression.
Damages
[29] The trial judge awarded damages of $292,000, comprised of $35,000 for “loss of profits on incremental sales in 2011”, $75,000 in respect to personal expenses of Hamid paid by Curve between 2009 and 2011, and $182,000 in respect to “Loss of Business by Curve”.
[30] The appellants challenge each of these findings.
Preliminary Issue: Proper Financial Records v. Source Documents
[31] Much of the argument directed at the trial judge’s damages conclusions on the first two damages issues is based on the following argument: all of the source documents of Curve were made available to Reza and his expert, and it was for them to prove their damages by recourse to this evidence. They did not do so and the trial judge erred in finding that any damages had been proved when the source documents were not used to establish damages.
[32] The trial court is entitled to decide the case on the basis on which it is presented. Either side could have used source documents to prepare proper financial statements and neither side did so. Had this been done, it would still have required forensic review of source documents for the three heads of damage for which awards were made – and in respect to one of those heads of damage – loss of profit on incremental sales – the calculation still would not have been possible because source documents from Luxe were not disclosed.
[33] Claims have to be adjudicated in a practical manner on the basis of the evidence provided. The appellants’ argument on this point is not that the basis offered for calculating damages did not provide a model for arriving at a fair damages figure, but rather, that there was a better way in which to proceed, by which a more accurate figure could have been found. As quoted below, the trial judge found that Reza’s expert did the best with what she was given – by which I take the trial judge to mean that she had done the best she could given the state of the records and the practical constraints involved: clearly it would make no sense to spend exorbitant amounts for an expert to calculate damages of $35,000. The issue, then, is not whether another route to calculate damages could have afforded a more accurate calculation, but rather, whether the methods adopted by the trial judge were available to him on the evidence, afforded “some evidence” on which to ground his decision, and whether his findings are thereby consistent with the law and disclose no palpable and overriding errors of fact or mixed fact and law.
(a) Loss of Profits on Incremental Sales
[34] The appellants argue that the trial judge erred in accepting the calculation prepared by Reza’s expert on this issue for the following reasons:
(a) the expert relied upon only one year – 2011 – when Curve performed much better in other years;
(b) the finding failed to take account of the conflict between Reza and Hamid during 2011, and the effect that conflict had on the business;
(c) the finding failed to take account of the fact that the parties were spending more time in 2011 on their profitable real estate ventures, reducing the time available to work in Curve.
In the “Facts” section of their factum, the appellants also argue that the trial judge erred in assessing the damages for “loss of profits on incremental sales” on the basis of industry statistics rather than the source documents available to Reza and his expert.
[35] The trial judge addressed each of these arguments in his reasons. First, the trial judge started with the observation that “Luxe received proceeds from sales of vehicles that would otherwise have been earned by Curve” and this head of damage was to compensate for this oppression (Decision, para. 85). This statement flows from the finding of oppression on this ground.
[36] The trial judge then noted that Reza’s expert had not been provided with supporting documentation evidencing Luxe’s cost to purchase vehicles sold to Curve (Decision, para. 86). This is a complete answer to the appellants’ argument that Curve’s source documents were provided: without Luxe’s documents to show the purchase price, Curve’s source documents would have been insufficient for the necessary calculation to arrive at total damages.
[37] The trial judge found that Reza’s expert “did the best with what she was given” and that her choices and assumptions were reasonable (Decision, para. 90). The trial judge addressed specifically the choice of 2011 as the base for calculations and explained why he did not accept that conflict between Reza and Hamid could explain the drop (Decision, paras. 89 and 90).
[38] On the findings by the trial judge, Luxe was inserted in the sales process and took revenue in a manner that was oppressive to Reza. This was, on the evidence, a regular way of transacting business, and there would be damages arising from each sale conducted in this way. To coin a phrase from the trial judge’s reasons, the trial judge “did the best with what he was given” and the damages awarded - $35,000 – do not offend common sense given the nature of the oppression found on which this award was based. I would not give effect to this ground of appeal.
(b) Personal Expenses of Hamid Paid by Curve
[39] The appellants argue that the trial judge erred in calculating damages based on industry standards for expenditures rather than on the raw source documents, which were available. I address this issue of principle above. Again, Reza was not required to undertake the task of preparing proper financial records for the business, and Reza, his expert, and the court, were entitled to proceed on a cost-effective and practical manner in determining the damages caused by Hamid’s oppressive conduct.
[40] The appellants argue that Reza’s expert’s calculation of these damages was “inherently unreliable” because she failed to back out legitimate real estate carrying costs. The trial judge addressed this issue and adjusted the damages to take account of this point.
[41] The trial judge accepted the general approach taken by Reza’s expert to calculate this head of damages on the basis of the state of Curve’s financial records. As he noted in his reasons, it was difficult for Reza’s expert to try “to put Humpty Dumpty back together again” given the state of the records. The trial judge accepted Reza’s expert’s conclusion that there were “excess expenses” for the years 2009 to 2011 aggregating $274,741.00. However, the trial judge also accepted the appellants’ argument that some of these expenses were in respect to carrying costs of jointly owned real estate – expenses that would not be faced by comparable used car businesses but which were nonetheless legitimate joint expenses (Decision paras. 93-94). On the basis of this finding, the trial judge, himself, reviewed the lists of expenses derived from a partial review of the general ledger and attempted to quantify “as best as the Court can” the legitimate and illegitimate expenses paid by Curve (Decision, paras. 95 and 96). It was on this basis that the trial judge found damages for this heading of oppression to be $75,000, rather than the $123,000 opined by Reza’s expert. This was a reasonable approach and I see no basis for this court to interfere with it.
(c) Loss of Business Value
[42] Reza’s expert valued Reza’s damages based on the fair market value of his shares if Curve were a going concern. She opined that damages under the heading “loss of business value”, were between $189,000 and $434,000 comprised of two components: (a) the goodwill value of Curve; and (b) an incorrect “due to shareholder” amount in the financial statements (Decision, para. 97).
[43] The trial judge rejected damages related to goodwill because the parties had agreed that the business would be wound up, and Reza had no reasonable expectation of recovering any amount associated with the business’s goodwill (Decision, para. 102).
[44] The trial judge found that the shareholders’ loan listed in the financial statements was not accurate and that appropriate corrections would add $364,000 to Curve’s book value (Decision, para. 104). This, he found, would lead to an award in Reza’s favour of $182,000.
[45] With respect, I conclude that the trial judge erred in this aspect of his award. His task, having found oppression, was to provide an appropriate remedy for the oppression he had found. Pursuant to s. 248(3) of the OBCA, the trial judge had a broad discretion in determining the remedy. However, as he noted at para. 77, “[t]he Court must strive to fashion a remedy that is minimally intrusive and as consistent as possible with the reasonable expectations of the parties.” See as well Naneff v. Con-Crete Holdings Ltd. (1995), 23 O.R. (3d) 48 (C.A.), paras. 22 and 27; Wilson v. Alharayeri, 2017 SCC 39, paras. 45, 53 and 54.
[46] The trial judge held that Reza’s reasonable expectation was that Curve would be wound up with the net equity/profit shared equally between him and Hamid (at para. 98). Neither the fair market value of the shares nor the book value of Curve was relevant to adjustment of accounts between the parties, since, as found by the trial judge, the parties had agreed that Curve would be wound up and its net assets distributed equally. His award is inconsistent with the reasonable expectations of the parties.
[47] There was no finding of oppression linked to the misstatement of the company’s book value (in general) or the state of the shareholders’ loan accounts in the financial records (in particular). There was no finding that shareholders’ loans were repaid but in an incorrect amount. Had this been the allegation, then the claim would have been for repayment of any overpayment that had been made on account of those shareholder loans and, given the manner in which the claim was framed, there would have been an express claim of oppression that Hamid overpaid himself for an erroneous shareholder loan balance. On the evidence, the shareholder loan accounts were fictional numbers, they were not repaid, and they were not to be taken into account in dividing net assets of the company.
[48] Reza’s expert calculated “loss of business value” as her quantification of the understatement of Curve’s book value. That was the basis of her opinion, and her opinion (subject to adjustments in calculations) was the basis of the trial judge’s conclusion on this issue. The premise of this aspect of the damages claim – that an understatement of the book value of Curve could give rise to damages – is as flawed for the misstated shareholder loan accounts as it is for the failure to value goodwill appropriately. There was no sale of Curve as a going concern to a third party; there was no purchase of Reza’s shares by Hamid. There was to be a winding up and distribution of net assets – without regard to the shareholder loan accounts.
[49] The respondent’s argument in his factum on this point was as follows:
The Trial Judge found that Reza had a reasonable expectation that Curve would be wound up, and Reza would extract his net equity/profits from Curve. Based on this reasonable expectation that Reza was entitled to the net equity in Curve, the Trial Judge awarded Reza damages consisting of his 50% share of the fair market value of his shares in Curve. (Factum, para. 79)
[50] This argument confuses concepts, misstates what the trial judge said he was doing and is internally inconsistent. The business was to be wound up and Reza was to receive his 50% share of net proceeds. That statement is correct, and that was the basis on which the trial judge found the parties were to proceed. The book value of the shares, and the fair market value of the shares, are irrelevant to the net equity in the company on a winding up of the company. The shareholders’ loans are only relevant if they are to be repaid before distribution of net proceeds of the sale of assets. In their argument before the trial judge, Reza conflated net proceeds of sale of assets, book value, and fair market value. I am satisfied that it is clear that the case was argued and decided on the basis of this conflation. I find that this award of damages cannot flow from the arrangements for winding up of the company as found by the trial judge, and discloses a reversible error in principle.
Summary on Damages
[51] The trial judge found oppression in respect to Hamid entering into an undisclosed arrangement with Luxe and found damages of $35,000 arising from this conduct. The trial judge found oppression in respect to Hamid’s payment of his own personal expenses from company funds and found damages of $75,000 arising from this conduct. The trial judge found oppression by Hamid in respect to the failure to keep proper financial records, and, although he made no award of damages respecting this particular act of oppression, he did use it as a basis for accepting the methodology of Reza’s expert to calculate the damages of $35,000 and $75,000.
[52] The trial judge did not find that misstatement of the shareholders’ loan accounts was oppression. Such a finding is not subsumed within a general finding of oppression for failure to keep proper financial records: a further finding that damage was caused by the misstatement would have been required, and such a finding was not available on the evidence. Awarding damages on the basis of a diminution of the fair market value, or the book value, of Curve, was an error in principle, given the basis on which Reza and Hamid had agreed to wind up Curve. There was no proper basis to award the $182,000 for “loss of business value of Curve” and I would set aside this aspect of the trial judge’s decision.
Disposition and Costs
[53] For these reasons I would allow the appeal in part and set aside the award of damages of $182,000 for loss of business value. I would dismiss the balance of the appeal.
[54] As success in this court has been mixed, I would order that there be no costs of the appeal. Any issue that arises about the trial costs that were awarded in light of the reduction in damages on this appeal should be addressed in writing before the trial judge, as he may direct.
D.L. Corbett J.
I agree Swinton J.
I agree Baltman J.
Released: November 2, 2022
CITATION: Tahmasebi v. Hosseini, 2022 ONSC 6172
DIVISIONAL COURT FILE NO.: 510/21
DATE: 20221102
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
Swinton, D.L. Corbett and Baltman JJ.
BETWEEN:
REZA TAHMASEBI
Plaintiff/Respondent
- and -
HAMID REZA HAJI HOSSEINI, AMIR
HAJI HOSSEINI, CURVE LTD. O/A
CURVE MOTOR SPORT, 1741381
ONTARIO LTD., LUXE INC., and AUTO
LUXE and BAHAR DOURGHAMARI
Defendants/Appellants
REASONS FOR DECISION
D.L. Corbett J.
Released: November 2, 2022