Court of Appeal for Ontario

Date: March 31, 2017

Docket: C61412

Judges: Juriansz, Brown and Miller JJ.A.

Between

Alexander Bimman and 2182474 Ontario Inc.

Plaintiffs (Appellants/Respondents by way of cross-appeal)

and

Arkadi Neiman, Corayana Enterprises Limited, 1050828 Ontario Ltd., Canadian Investment & Consulting Central Corporation, Larwest Canada (Caribbean) Inc., 2182158 Ontario Ltd., 1765350 Ontario Inc., 1771636 Ontario Ltd., Edward Poberezkin, Victor Itkine, Roman Shmulik, Alex Glozman and Corayana Services Ltd.

Defendants (Respondents/Appellants by way of cross-appeal)

Counsel:

Igor Ellyn, Q.C. and Evelyn S. Perez-Youssoufian, for the appellants/respondent by way of cross-appeal

David A. Shiller and J. Thomas Curry, for the respondents/appellants by way of cross-appeal

Heard: February 27-28, 2017

On appeal from: The judgment of Justice Arthur M. Gans of the Superior Court of Justice, dated April 16, 2015, with reasons reported at 2015 ONSC 2313.

Brown J.A.:

I. OVERVIEW

[1] The appellants, Alexander Bimman and 2182474 Ontario Inc. ("218"), were minority investors in the respondent, Corayana Enterprises Limited ("CEL"), which owned several multi-unit residential complexes in Thompson, Manitoba. CEL acquired the properties and renovated them, for subsequent sale or lease.

[2] Bimman's company, 218, initially held 20% of CEL's issued shares. In early 2010, CEL required further funds to renovate its properties. Unable to secure third party financing, CEL's shareholders made two cash calls – on January 11 and February 11, 2010. Bimman declined to participate in either cash call; all other shareholders participated.

[3] Relying on a provision in their November 3, 2009 Shareholders' Agreement (the "SHA"), the majority of CEL's shareholders approved the issuance of additional shares to shareholders who had participated in the cash calls, thereby diluting Bimman's ownership interest in CEL.

[4] As a result of that and other conduct, Bimman commenced an action, in which he ultimately sought relief under the oppression remedy provisions of s. 248 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16. By the time of the trial, the parties had agreed that a parting of the ways was required. The main issues for trial therefore became: (i) had the respondents engaged in oppressive conduct; and (ii) if they had, how many CEL shares did the appellants own and what was their value as of December 31, 2013, the agreed-upon valuation date for a buy-out?

[5] The trial judge found, in effect, that the respondents had engaged in conduct that was unfairly prejudicial to the appellant's interests by issuing too many shares on the January and February 2010 cash calls. That finding is not in issue on this appeal.

[6] In his Judgment, the trial judge granted declarations (i) specifying the number of shares CEL ought to have issued on the two cash calls and (ii) the resulting ownership interest of the appellants in CEL, which he fixed at 11.08%. The trial judge then valued the appellants' shares in CEL as of December 31, 2013 at $858,468.31, and he ordered the respondents to purchase those shares for that amount, plus pre-judgment interest.

[7] Both parties take issue with the trial judge's determination of the appellants' shareholding in CEL and the value of those shares.

[8] Both raise additional issues.

[9] The appellant, Bimman, submits the trial judge erred in only awarding him damages of $112,068 for a deferred management fee; he contends the trial judge should have granted him judgment for $250,000. As well, the appellants argue the trial judge erred in awarding them only partial indemnity costs of $780,312.50; they submit they are entitled to substantial indemnity costs of $1,324,419.70.

[10] On his part, the respondent, Victor Itkine, submits the trial judge erred in awarding punitive damages of $25,000 against him.

[11] For the reasons set out below, I would dismiss the appeal. I would grant the appellants leave to appeal the trial judge's award of costs, but I would dismiss their costs appeal.

[12] I would allow the cross-appeal, in part. I would set aside the award of punitive damages against Itkine. I would increase the number of shares that ought to have been issued for the February 11, 2010 share call from 5,743 to 6,071, thereby, reducing the value of the appellants' shares in CEL as at December 31, 2013 from $858,468.31 to $842,971.52.

II. THE INTERPRETATION OF S. 6.01 OF THE SHA

[13] The parties' respective challenges to the trial judge's findings about 218's shareholdings in CEL following the two cash calls and their value as of December 31, 2013 engage two key issues: (i) the interpretation of s. 6.01 of the SHA; and (ii) the inclusion of certain amounts by the trial judge in his valuation of CEL's shares. In this section, I will consider the first issue.

A. The issue stated

[14] The parties entered into a November 3, 2009 shareholders' agreement. Article 3 dealt with share ownership. Section 3.01 contained a table setting out each shareholder's "contribution loan", which together totaled $1 million. As well, the table recorded the percentage ownership of each shareholder, its share quantity, and its share capital. In the case of 218, the table showed it had a 20% ownership interest in CEL, reflected in 2,000 issued shares, with a share capital of $20.

[15] In late 2009 and early 2010, CEL required more funds to renovate the buildings it had acquired. A search for external, third-party financing proved unsuccessful.

[16] Article 6 of the SHA dealt with "financing". Section 6.01 provided as follows:

ARTICLE 6 – FINANCING

6.01 When funds are required to meet financial obligations of the Corporation or continue business operations, shareholders shall have the option to obtain external loans or financing, provided that the terms of such financing are satisfactory to simple majority of the shareholders.

If such funds cannot be obtained from external loans or financing,

(a) Each shareholder shall have the option to advance its proportionate share of the funds required and any such advance shall be without interest.

(b) If one or more than one of the shareholders do not agree or fail to make the advance after a reasonable period of time, given the then existing circumstances, shareholders who contributed the necessary funds shall have the option to receive new shares. Issuance of such new shares by Corayana shall be contingent on the agreement of simple majority of the shareholders. The number of the new shares to be received by contributors would be based on their contributions and the then current values of the shares before and after the contributions.

[17] At a January 11, 2010 shareholders' meeting, the majority approved a cash call requiring the infusion of $250,000, of which Bimman, through 218, would be required to provide $50,000. He refused.

[18] At a February 11, 2010 shareholders' meeting, the majority approved a further cash call of $1.35 million. Again, Bimman refused to participate.

[19] As a result of Bimman's refusal, the remaining shareholders invoked section 6.01(b) of the SHA and issued an additional 4,000 and 21,600 shares to those shareholders who met the cash calls. The trial judge held CEL issued too many additional shares in respect of the cash calls. He reduced the number of shares CEL should have issued on each cash call to 2,307 and 5,743 respectively.

[20] At trial, the appellants relied heavily on the argument that Bimman's interest in CEL should not be diluted at all because the issuance of shares in response to the two cash calls engaged the criminal interest rate provisions in s. 347 of the Criminal Code, R.S.C. 1985, c. C-46 and should be set aside. The trial judge rejected that argument. The appellants do not pursue it on appeal.

[21] Instead, they advance an argument that played a secondary role at trial: s. 6.01(b) only entitled participating shareholders to an issuance of shares based upon their pro rata contribution to the amount of funds the non-participating shareholder had refused to contribute, not upon the overall amount of their contributions. The appellants contended the words "necessary funds" in s. 6.01(b) referred only to the amount the non-participating shareholder had refused to contribute. The trial judge did not address this argument in his trial reasons, implicitly rejecting it.

[22] However, following the release of the trial reasons, the appellants brought a motion, which the trial judge described in para. 1 of his resulting endorsement (2015 ONSC 3076):

The plaintiffs bring a motion to amend the Reasons for Judgment ("the Reasons") that I released on April 16, 2015: Bimman v. Neiman, 2015 ONSC 2313. Putting the issues simply, they ask that I formally "adjudicate" on an interpretation of the words "the necessary funds" found in Article 6.01(b) of the Shareholders' Agreement, set out verbatim at paragraphs 66 and 137 of the Reasons.

[23] The trial judge concluded it would not be appropriate for him to adjudicate on the appellants' request. At para. 6 he stated:

However, I make the following observations in this Addendum to my Reasons for Judgment:

a. A reading of my Reasons indicates that while I did not deal with the argument sought to be revisited in this motion head on, which I am not in any event obliged to do in the discharge of my duties as a jurist, I implicitly rejected the interpretation asserted again in this motion. I was very much alive to the issue when it was argued and as I wrote the judgment.

b. The argument now advanced by the plaintiffs was not rooted in any facts to which my attention was directed during the evidence portion of the trial, nor during argument. In effect, it was a gloss put on the words of the November Shareholders' Agreement by plaintiffs' counsel. It was, as I observed during argument, a "4 a.m. inspiration," which all good counsel have in the heat of battle. It was not plaintiffs' counsel's primary or strongest argument.

c. Put otherwise, the argument advanced by plaintiffs' counsel was not within the reasonable contemplation of the parties at the time the Shareholders' Agreements were being negotiated. Indeed, while the words "necessary funds" were used in an earlier draft of the August Agreement, when Article 6.01(b) was debated by Itkine and Bimman in various email exchanges, its use in the earlier iteration of the agreement actually undercuts the plaintiffs' suggested interpretation in my view.

d. Finally, this proposed interpretation is not referenced in the pleadings, which although not those of trial counsel, still must be considered in defining the issues for trial and judgment. In that respect, a review of paragraph 6 of the Plaintiffs' Reply and Defence to Counterclaim is most instructive.

[24] The appellants renew their argument about the interpretation of "necessary funds" in s. 6.01(b) of the SHA on this appeal.

B. Analysis

[25] The SHA was a one-off contract negotiated amongst CEL's shareholders. In those circumstances, the deferential standard of appellate review applies to the trial judge's interpretation of s. 6.01 of the SHA: Sattva Capital Corp. v. Creston Molly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 52-53; Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, 404 D.L.R. (4th) 258, at para. 24.

[26] I see no palpable and overriding error in the trial judge's interpretation of s. 6.01. His interpretation of the phrase "necessary funds" as meaning the total contributions made by the participating shareholders in response to a cash call is a reasonable one, in light of the language of the section as a whole and the purpose of s. 6.01 within the overall scheme of the SHA – i.e. to generate operating funds for CEL when outside financing proved unavailable.

[27] I do not accept the appellants' contention that the interpretation results in a commercial absurdity. On the contrary, s. 6.01(b) would operate to incent a shareholder in a closely-held, thinly capitalized, nascent corporation to participate in the continued financing of the company's operations when outside financing proved unavailable. The risk of significant ownership dilution by not participating in cash calls would encourage further shareholder contributions.

[28] Finally, while the minutes of the January 11 and February 11, 2010 shareholders' meetings record Bimman's refusal to participate, they do not record any objection by him to the issuance of shares calculated using the interpretation of s. 6.01 adopted by the trial judge.

[29] Accordingly, I would not give effect to this ground of appeal by the appellants.

III. THE CALCULATION OF THE NUMBER OF ADDITIONAL SHARES AND THE VALUE OF 218'S SHARES

[30] Both sides advance grounds of appeal based on errors they submit the trial judge made in calculating the proper number of additional shares that should have been issued on the cash calls, as well as the value of 218's shares as of December 31, 2013. I propose to deal first with the grounds advanced by the appellants, followed by those put forward by the respondents.

A. The appellants' grounds of appeal

The trial judge erred in awarding shares for the respondents' net $1 million contributions

[31] The appellants submit the trial judge erred in awarding the respondents additional shares for the net $1 million they contributed to CEL in response to the first and second cash calls. They submit his errors lay in interpreting the words "necessary funds" in s. 6.01(b) of the SHA as "all the loan money advanced by the defendants" and in calculating the number of new shares using their value at the time of the shareholder contributions, instead of the date of issuance of the shares.

[32] This submission simply is a variant of the appellants' ground of appeal concerning the interpretation of s. 6.01(b), a submission which I have not accepted for the reasons set out earlier. For the same reasons, this submission also must fail.

The trial judge should have calculated the value of CEL shares as of March 31, 2010, not as of the dates of the cash calls

[33] The appellants submit the trial judge erred when he calculated the proper number of new shares using values of CEL as at the dates of the cash calls – January 11 and February 11, 2010. They contend the calculation properly required using the value of CEL as at March 31, 2010, the date the additional shares were issued.

[34] The trial judge explained why he rejected March 31, 2010 as the proper valuation date at paras. 160-161 of his reasons:

Mr. Ellyn did not lump all the events of the month of March as I have, but argued that because the shares in respect of each of the two cash calls were not subscribed for and issued until March 31, the dilution was not complete until that date. Hence, he argued that Bimman's interest remained at 20% for valuation purposes as a result of a finding of oppression.

While this argument had some appeal, in my view it would only succeed if I found that the cash calls were either not necessary or a ruse at the relevant time, and that none of the money had been contributed along the way. I am satisfied the evidence belies those conclusions. Therefore, I hold that Bimman's interest in CEL as at March 31, 2010, should be reduced to 11.08%. I now must embark upon a calculation of its value as at December 31, 2013, which is the date of reckoning the parties are agreed is my starting point.

[35] The trial judge's finding that the other shareholders made their contributions before March 31, 2010 is not in dispute. The trial judge's selection of the contribution dates as the dates for valuation faithfully tracks the language of s. 6.01(b) of the SHA, which provides that the number of new shares would be based on both (i) the contributions of the participating shareholders and (ii) the "then current values of the [CEL] shares before and after the contributions." Accordingly, I see no error in his conclusion on this issue.

The evidentiary effect of the Minutes of the February 11, 2010 shareholders' meeting

[36] Finally, the appellants submit the trial judge erred by failing to give effect to what they characterize as an admission by the respondents that the appellants' shareholding in CEL was not diluted as a result of the January 11, 2010 shareholders' meeting. In support of this submission, they point to the minutes of the February 11, 2010 meeting that record Bimman's required contribution was $270,000, which would reflect a continuing 20% shareholding by 218.

[37] The respondents argue the entry in the February 11 minutes was nothing more than a clerical error. When the rest of the evidence is considered in its entirety, it was clear the other shareholders were taking the position 218's shareholding had been diluted by reason of its failure to participate in the January 11 cash call.

[38] I accept the respondents' submission. What the appellants style as an admission is nothing more than a recording error. I give no effect to this ground of appeal.

B. The respondents' cross-appeal

The "add back debt" issue

[39] In Appendix 1 to his reasons, the trial judge showed how he calculated the number of shares CEL should have issued on the first and second cash calls, as well as what Bimman's resulting diluted ownership interest should have been.

[40] His calculations for the shares issued on the February 11, 2010 cash call started with an "en-bloc adjusted book value" for CEL of $1.823 million. In using that number, the trial judge accepted the "en-bloc fair market value" of CEL as at February 11, 2010 derived by the appellants' expert business valuator, Bruce Roher, on Schedule 1B to his supplementary report dated November 18, 2014. The supplementary report resulted from the trial judge's request, part-way through Roher's examination-in-chief, that the parties' business valuators engage in a form of "hot-tubbing" on the share valuation calculations. Although they could not agree on a joint submission to the trial judge, Roher provided a supplementary report.

[41] Roher's Schedule 1B showed that in calculating CEL's February 11, 2010 en-bloc value he included a $250,000 amount for "add back debt". The respondents' expert, Paul Mandel of Collins Barrow, would not have included that number. The trial judge made a general finding that he preferred Roher's evidence over that of Mandel.

[42] There is no dispute the $250,000 for "add back debt" referred to the amount of the contributions made by shareholders on the January 11, 2010 cash call.

[43] The respondents advance two reasons why the trial judge erred in accepting Roher's inclusion of the $250,000 in his February 11 en-bloc valuation of CEL.

[44] First, they submit the trial judge committed a calculation error by including the $250,000 when, in his reasons, he had found the net contributions made on the January 11 cash call only totaled $150,000.

[45] I accept this submission. It was an oversight by the trial judge not to have adjusted the February 11 en-bloc book value amount on his Appendix 1 to reflect that finding. Appendix 1 should have showed the value as $1,723,000.

[46] Second, the respondents submit the trial judge erred in including any amount, even the $150,000, as "add back debt" in calculating CEL's February 11, 2010 en-bloc value. They contend the error resulted from the trial judge's failure to accept an admission Roher made during his cross-examination. Roher was asked whether his inclusion of $250,000 in "add back debt" was based on the assumption the $250,000 was used to purchase shares "and there is not debt". He agreed. Roher was then asked if the $250,000 was debt, would the amount come out of his calculation. He agreed it would. On re-examination, Roher was asked whether it would be appropriate to add back the $250,000 "if the shareholders had paid for their shares in January." He answered it would.

[47] I am not persuaded the trial judge made any reversible error on this point. In his reasons, the trial judge characterized the issuance of shares pursuant to s. 6.01(b) as a result of loans, or contributions, made by participating shareholders as a "hybrid debt-equity transaction". As a result of that finding, the probative value of the "admission" by Roher on which the respondents rely to establish an error by the trial judge becomes far from clear. Roher did not opine on whether the "add back debt" amount should form part of the valuation calculation in the event the transaction was regarded as a hybrid debt-equity one.

[48] The respondents rely on no other evidence to support this ground of appeal. Both parties advise they do not want this case remitted back to the trial court; they want this court to deal finally with all issues. That being the case, this court is left in the position that it has no expert evidence before it concerning the treatment of the $250,000 in light of the trial judge's characterization of the transaction as a hybrid debt-equity one. In those circumstances, the respondents have not discharged their burden of demonstrating the trial judge made a material error.

[49] I therefore would not give effect to the argument that the trial judge erred in including any amount as "add back debt" in calculating CEL's February 11, 2010 en-bloc value. However, I would allow this ground of appeal to the extent that trial judge's reasons should have used the amount of $1,723,000 for the February 11, 2010 CEL en-bloc adjusted book value, instead of $1,823,000.

The valuation of Buildings Nos. 1 and 2

[50] In calculating CEL's en-bloc adjusted book value as of January 11 and February 11, 2010, the trial judge used values determined by Roher, which estimated the market values of CEL's real estate properties on both dates. In Schedule 1D to his November 18, 2014 supplementary report, Roher valued Building No. 1 at $1.9 million on both dates and Building No. 2 at $900,000 on January 11 and $1.9 million on February 11, 2010. By contrast, Mandel valued each building as of February 11, 2010, before adjustments, at $1.733 million, based on a December 24, 2009 valuation by Red River Appraisal.

[51] The respondents submit the trial judge erred in relying on Roher's January and February values for Building No. 1, and the February value for Building No. 2, because they were the product of using impermissible hindsight. Instead, they argue the trial judge should have relied on the values in the December 24, 2009 Red River Appraisal.

[52] Valuation is more art, than an exact science; mathematical certainty is not demanded, because it is not possible: Debora v. Debora (2006), 83 O.R. (3d) 81 (C.A.), at para. 51. A valuation exercise must look at the situation as of the valuation date. Hindsight information generally is not relevant to the valuation exercise, except for the purpose of measuring the accuracy of projections or testing the assumptions used by valuators: New Quebec Raglan Mines Limited v. Uffe Blok-Andersen, [1991] O.J. No. 3472 (C.J.), at para. 2; Hall v. Atto, [2004] O.J. No. 463 (S.C.), at para. 23, aff'd 2005 CarswellOnt 7087 (Div Ct.).

[53] I am not persuaded the trial judge erred in relying on the contested valuation numbers for Buildings Nos. 1 and 2 used by Roher in his Schedule 1D. Roher explained how he arrived at his $1.9 million valuation for each building in a lengthy Footnote No. 1 to Schedule 1D. It is true that the first part of the footnote referred to events that occurred after the valuation date:

Fuller Landau based the market value on the subsequent sale price of Buildings 1 and 2 of $1,950,000 less estimated construction costs of $50,000. As the purchaser and vendor were negotiating from the fall of 2009, Fuller Landau assumed that the subsequent purchase price is the most reasonable estimate of the market value at each date.

[54] However, Roher went on to address the value Red River arrived at in December 2009. His footnote continued:

The Red River Appraisal of December 2009 of Buildings 1 and 2 used an average of the Income Approach and the Direct Comparison Approach. Only one comparable was used in the Direct Comparison Approach (68 Fox Bay) and that comparable was discounted by 15% due to size difference between 68 Fox Bay and the Buildings 1 and 2. The same comparable (68 Fox Bay) was used in Red River's 2013 appraisal in the Direct Comparison Approach, however, the selling price was not discounted as it had been in Red River's 2009 Appraisal. Had Red River not discounted the comparable in its 2009 appraisal, the 2009 appraised value would have been $1,882,000 which approximates the estimated market value used by Fuller Landau.

[55] At trial, the respondents did not take issue with the admission of Roher's supplementary report. Nor did they cross-examine Roher on his valuation of Buildings Nos. 1 and 2.

[56] When read in the light of his critique of the Red River 2009 appraisal, Roher's reference in Footnote No. 1 on Schedule 1D to a post-valuation date event takes on the character of a testing of the Red River valuation, not a stand-alone hindsight valuation. In those circumstances, I conclude it was open to the trial judge to consider and accept the en-bloc adjusted book values of CEL using the real estate values set out by Roher on Schedule 1D.

[57] I would not give effect to this ground of cross-appeal.

The value of Corayana Services Limited ("CSL")

[58] Establishing the en-bloc fair market value of CEL as of February 11, 2010 required determining the fair value at that date of a related company, CSL, which had been incorporated in December 2009. CSL began generating income in late February 2010.

[59] Roher estimated the fair market value of CSL as of February 11, 2010 at $150,000 and used that value to calculate the en-bloc value of CEL. The trial judge, in turn, accepted that value. The respondents submit the trial judge erred in so doing.

[60] I am not persuaded by their submission. Several pieces of evidence were adduced before the trial judge on this issue. Mandel, the respondents' business valuator, estimated CSL's value at the time at $30,000 using a normalized income approach based on expected pre-tax earnings. Roher testified CSL's value was higher than that. As part of his in-trial supplementary report, he estimated CSL's value at $150,000. He also wrote that "Mr. Mandel and I discussed the value of CSL. We agreed that the value was in the range of $100,000 to $200,000 in 2010 and 2013." Finally, in re-examination Roher advised the trial judge that one factor he took into account in valuing CSL was its recent securing of a contract with Vale.

[61] The trial judge preferred the evidence of Roher to that of Mandel in all respects. Given that finding, and in light of the evidence before the trial judge about CSL's value as of February 11, 2010, I cannot say the trial judge committed reversible error in accepting and using Roher's estimated value of $150,000. Accordingly, I would not give effect to this ground of cross-appeal.

C. Summary

[62] By way of summary, I would dismiss the appeal on the share issuance issues. I would allow the cross-appeal only to the extent of holding that Appendix 1 to the trial judge's reasons should have used the amount of $1,723,000 for the February 11, 2010 CEL en-bloc adjusted book value, instead of $1,823,000.

[63] Let me describe how that affects the calculations shown on Appendix 1 to the trial judge's reasons.

[64] Using the amount of $1,723,000 changes the February 11, 2010 share value to $140 per share [$1,723,000/12,307], thereby increasing the number of shares that ought to have been issued from 5,743 to 6,071 [$850,000/$140 per share]. Accordingly, in para. 1(b) of the Judgment, 6,071 shares should be substituted for the trial judge's finding of 5,743 shares that ought to have been issued as of February 11, 2010. And in para. 2(b) of the Judgment, 15,529 shares should be substituted for the trial judge's finding of 15,857 shares that were invalid and thereby cancelled.

[65] That reduces Bimman's ownership at that date from the 11.08% found by the trial judge to 10.88% [2,000 shares / (12,307 + 6,071 = 18,378) shares], requiring para. 3 of the Judgment to be varied accordingly.

[66] Using the trial judge's finding that CEL's value at December 31, 2013 was $7,747,900, Bimman's 10.88% shareholding was worth $842,971.52. Consequently, I would vary para. 4 of the Judgment to reduce the value of the appellants' shares in CEL from $858,468.31 to $842,971.52.

IV. DEFERRED MANAGEMENT FEE

[67] Section 6.02(c) of the SHA provides for the payment to CEL's directors of a "deferred management fee – flat $500,000.00 for the entire period of the project's existence." There is no dispute that the two directors at the relevant times were Bimman and Neiman.

[68] The trial judge awarded Bimman $112,068 as his share of the Deferred Management Fee ("DMF"). Bimman contends the trial judge erred by not awarding him 50% of the DMF, or $250,000. Bimman submits the trial judge's award was arbitrary because it was not based on the terms of the SHA or the evidence.

[69] I would not accept this submission. First, the trial judge found, at para. 223, that Bimman's "final entitlement to a portion of the DMF was very much a matter left for future negotiation." The appellants have not demonstrated the trial judge committed a palpable and overriding error in so interpreting s. 6.02(c) of the SHA.

[70] Second, the trial judge provided a detailed explanation of how he calculated Bimman's entitlement to the DMF. He stated, at paras. 220-224:

Conversely, I am not persuaded that Bimman's activities prior to October 2009 warrant compensation to the levels he proposes. From my understanding of the project, namely a conversion of very modest apartments to prime rental property in Thompson, the day-to-day activities associated with the renovations were really left to Neiman and the team he assembled to complete. I am satisfied that much of the heavy lifting in respect of the renovation work and the subsequent marketing and rental of the units, if not as entire buildings, was done after Bimman was forced out of the day-to-day management of the Property.

Furthermore, while Bimman may have introduced UCN [University College of the North] to the Property, and may have been instrumental in retaining appraisers to assist in the marketing of the two buildings, the deal that was struck was concluded under Neiman's watch, with little or no Bimman involvement.

I have not lost sight of the fact that Bimman was forced out of the management group as a result of exaggerated, if not unfounded, allegations of impropriety bordering on embezzlement. I have concluded that while Bimman's resignation was perhaps ill-advised, the defendants, with Itkine at the helm, made his life positively miserable during this period of time. He had no alternative but to resign, if only to secure his entitlement to a healthy portion of the DMF, a negotiation which never took place, notwithstanding earlier promises from Itkine to the contrary.

Bimman did not, however, have a reasonable expectation to one half of the amount reserved for the DMF, or $250,000, after his resignation and based on the status of the development to that date. Indeed, it does not appear that he ever asserted such a claim, as it is not evidenced in any of the meeting minutes either prior to or following the date of his resignation and into early 2010. His final entitlement to a portion of the DMF was very much a matter left for future negotiation.

That said, I am satisfied that but for the timing of his forced resignation from CEL, he would have been permitted to stay and participate in the management of the project and undoubtedly would have been entitled to an increased share of the DMF, a share greater than that to which the defendants suggest he's entitled. In that respect, I find that he is entitled to share in the DMF up to the end of March 2010, the moment in time that I have held that the oppression took place. This adds an additional five months to the calculation. Using the straight mathematical formula that both parties are agreed to, this calculation yields a DMF entitlement of $112,068.

[71] Those findings were open to the trial judge to make on the record before him. I see no basis for appellate intervention.

V. COSTS APPEAL

[72] As mentioned, the trial judge awarded the appellants their costs of the action fixed at $780,312.50 on a partial indemnity scale.

[73] The appellants submit they should have received a higher award. They contend the trial judge erred by (i) not awarding costs on a substantial indemnity scale, (ii) not awarding costs for pre-trial motions argued before Newbould J., (iii) reducing the amounts of experts' fees recoverable as disbursements, and (iv) awarding $5,000 in costs to the respondents for a post-trial motion.

[74] I would not accept any of those submissions.

A. The appropriate scale of costs

[75] Although the appellants acknowledge the choice of the appropriate scale of costs lies within the discretion of a trial judge, they argue the trial judge committed two errors of principle in refusing to award them substantial indemnity costs.

[76] First, they submit that since the respondents made allegations of fraud against them, substantial indemnity costs should follow. Bimman and his corporation, Bimman Real Estate Services Inc., had contracted with a local paint store owner, Lucy Lambert, to involve some of the CEL work crew in painting projects in Thompson (the "Lambert Contracts"). In October 2009, Bimman was accused of having misappropriated CEL's funds and taken the Lambert Contracts to the detriment of that company, complaints that were repeated by the CEL board in the months that followed.

[77] While an unsubstantiated pleading of fraud can expose a party to substantial indemnity costs, and while the respondents made such an allegation in respect of the Lambert Contracts, the trial judge explained, at para. 8 of his costs endorsement (2015 ONSC 4144), why, in the end, that pleading did not attract costs on a higher scale:

Lead counsel for the Defendants, from the drop of the puck at trial, downplayed the importance of the Lambert Contracts and their impact on the decision-making process surrounding the raising of funds necessary to finance CEL in the formative days, a process counsel allowed was critical to the ultimate success of CEL. This approach, whether undertaken by plan or happenstance, meant that the allegations of fraud formed more a part of the Plaintiffs' overall mantra than the Defendants' defence or counterclaim, the latter of which I suggested in the Trial Judgment had all but disappeared or was unsupported by any damage evidence. [Emphasis added]

[78] Second, the appellants submit the trial judge acted inconsistently in awarding punitive damages against Neiman and Itkine, but not awarding substantial indemnity costs against the respondents. I do not agree. An award of punitive damages does not automatically translate into an award of substantial indemnity costs. An award of costs acts to provide fair and reasonable indemnity for legal expenses incurred when assessed in light of all of the factors enumerated in rule 57.01(1) of the Rules of Civil Procedure, which include not only the nature of the allegations asserted in a proceeding, but also how a party conducts a proceeding. The trial judge's cost endorsement disclosed he took all relevant factors into account. At para. 39, the trial judge explained how he balanced them:

On balance, I am satisfied, having regard to the matters described above, that a payment of costs to the Plaintiffs on a partial indemnity basis only is appropriate in all the circumstances. I decline to award costs of any aspect of this case on a substantial indemnity basis since I am not persuaded that there was clear evidence throughout of "reprehensible, scandalous or outrageous conduct" to warrant an award of elevated costs, even though, I dare say, that the allegations of Bimman's alleged misdeeds loomed large throughout the stages of the proceedings ramping up to trial. In any event, I am of the view that the award of punitive damages sounded a note of condemnation to the "lead" Defendants for their sometimes inappropriate behaviour.

[79] I see no error in principle in how the trial judge exercised his discretion in awarding costs on a partial indemnity scale.

B. Costs of the motions before Newbould J.

[80] Newbould J. dismissed competing pre-trial motions brought by the parties in respect of property sales proceeds paid into court. Newbould J. left the costs of both motions to the trial judge, who concluded, at para. 27 of the costs endorsement, "neither side came away as a clear winner at day's end." As a result, the trial judge decided "there will be no order as to costs of the motion and cross-motion".

[81] The appellants submit the trial judge erred in failing to "appreciate that by reserving costs to the trial judge, Newbould J. was indicating that the result of the trial should influence the disposition of costs of these motions." I disagree. Newbould J. left the costs of the motion to the trial judge; he did not order costs in the cause of the action. The trial judge explained why no costs order should be made in respect of the motions. He made no error in principle in so exercising his discretion. I give no effect to this ground of appeal.

C. Recoverable experts' fees

[82] In determining the appellants' recoverable disbursements, the trial judge reduced claimed business valuator fees by 25% to $169,137, plus HST. He also reduced the claimed real estate appraiser's fees from about $58,000 to $35,000, plus HST. The appellants submit the trial judge erred in so doing.

[83] I see no error. A party is free to pay a retained expert whatever amount of fees it sees fit. However, courts do not act as a "rubber stamp" automatically approving claimed experts' fees. Part II, Item 26 of Tariff A under the Rules of Civil Procedure only permits a party to recover "a reasonable amount" for experts' reports. In the present case, the trial judge subjected the appellants' claimed disbursements for experts' reports to the required reasonableness analysis. He concluded the claimed amounts were excessive when compared with the fees charged for similar work by the respondents' experts and after taking into account the usefulness of the work for the issues that remained "live" at trial. In sum, he properly discharged his duty to vigilantly review the reasonableness of claimed experts' expenses. I would give no effect to this ground of appeal.

D. The $5,000 cost award for a motion

[84] The trial judge released his reasons on April 16, 2015. The appellants then brought a "remediation" motion in writing asking the trial judge to adjudicate on their "necessary funds" SHA interpretation argument described above at paras. 21 to 23. By reasons released on May 19, 2015, the trial judge dismissed the motion "with costs". In his July 2, 2015 costs endorsement, the trial judge awarded the respondents costs of the "remediation" motion in the amount of $5,000.

[85] The appellants spent some time at the hearing arguing the trial judge erred in so doing because he failed to provide them with an opportunity to make submissions on the appropriate amount of costs to be awarded.

[86] I see no merit in this submission. On May 9, 2015, the appellants submitted a bill of costs in which they sought partial indemnity fees of $3,257.63 for their remediation motion. In light of that "ask" by the appellants, an ultimate award of $5,000 "all in" to the respondents for the motion was fair and reasonable. The trial judge committed no error in awarding that amount.

E. Summary

[87] I would grant the appellants leave to appeal the trial judge's award of costs, but I would dismiss their costs appeal in its entirety.

VI. PUNITIVE DAMAGES

[88] The trial judge found the activities of Neiman and Itkine "amounted to a 'marked departure from ordinary standards of decent behavior'" and awarded punitive damages of $25,000 jointly against them "for such appalling behaviour".

[89] Neiman does not appeal that award. Itkine does, submitting it was unfair for the trial judge to make such an award when the appellants had not sought punitive damages against him in their pleadings.

[90] It is common ground the appellants did not include a claim for punitive damages against Itkine in their pleadings and only sought such damages when they made their closing submissions at trial.

[91] Whether a defendant has been taken by surprise by a defective pleading must be decided in the circumstances of the particular case: Whiten v. Pilot Insurance Co., 2002 SCC 18, [2002] 1 S.C.R. 595, at para. 88. The question is whether the defendant had adequate notice of his possible jeopardy for personal liability and an adequate opportunity to respond to the claim: Alfano v. Piersanti, 2012 ONCA 297, 291 O.A.C. 62, at para. 163.

[92] In the circumstances of the present case, such notice was not given until the evidence had closed. That was not fair to Itkine. A party should know before a trial starts the extent of his or her jeopardy. Itkine did not. Accordingly, the trial judge erred in awarding punitive damages against Itkine. I would set aside that part of his Judgment.

VII. DISPOSITION

[93] For the reasons set out above, I would dismiss the appeal, including the appeal of costs.

[94] I would allow the cross-appeal in two respects only.

[95] First, I would set aside the award of punitive damages against Itkine in para. 9 of the Judgment.

[96] Second, I would vary paras. 1(b), 2(b), 3 and 4 of the Judgment in the manner described in paras. 63 to 66 above.

[97] Para. 5 of the Judgment specifies the amount the respondents are to pay 218 for its shares in CEL, which includes pre-judgment interest. Before us, the parties did not make submissions about how to recalculate pre-judgment interest. However, the amount in para. 5 of the Judgment needs to be revised. Accordingly, as part of their submissions on costs, the parties shall include an agreed-upon recalculation of the amount to be substituted in para. 5.

[98] I would encourage the parties to agree on the costs of the appeal. If they cannot, any party seeking costs may file brief written submissions of up to 3 pages in length, together with a Bill of Costs, no later than Thursday, April 14, 2017. Any party against whom costs are sought may file brief responding submissions no later than Monday, April 24, 2017.

Released: March 31, 2017

"David Brown J.A."

"I agree. R.G. Juriansz J.A."

"I agree. B.W. Miller J.A."

Footnote

[1] The appellants abandoned their argument that the issuance of the shares pursuant to the resolutions made at the January 11 and February 11, 2010 shareholder meetings was invalid for want of proper notice.