Loran v. Weissmann

[Indexed as: Loran v. Weissmann]

Ontario Reports

Court of Appeal for Ontario

Watt, Hourigan and Trotter JJ.A.

December 6, 2019

150 O.R. (3d) 700 | 2019 ONCA 962

Case Summary

Wills and estates — Wills — Interpretation — Testator's intent — Testator's will granting to testator's employee an option to purchase testator's company — Employee and estate applying for directions as to purchase price — Application judge favouring opinion of employee's expert, allowing deduction for amounts paid from company to estate for dependent support payments for testator's spouse, and dispensing with requirement in will for collateral mortgage to be secured against employee's residence — Application judge did not improperly exercise discretion — Application judge treated employee as a potential purchaser and not as a beneficiary.

The testator owned an auto supply company. His will granted to one of his employees, the respondent, an option to purchase the company. The purchase price under the option was the lesser of $1.75 million or the price determined by multiplying by 5.5 the company's average earnings over the previous three fiscal periods. The purchase price was to be delivered by promissory note secured by a general security agreement against the company's assets as well as the registration of a collateral mortgage against the respondent's residence. When the respondent attempted to exercise the option he was unable to reach an agreement with the estate, resulting in the parties applying for directions. The application judge found the purchase price to be $529,611, being $716,921 calculated according to the formula in the will, less $187,310 for payments improperly made from the company to the estate after the testator's death. The respondent was also not obliged to provide a collateral mortgage. The estate appealed.

Held, the appeal should be dismissed.

The application judge did not treat the respondent as a beneficiary under the will. The provision in the will regarding the sale of the company was not detailed. It fell to the application judge to give directions that furthered the testator's intention. There was nothing in the will to suggest that the intention was to maximize value on the sale. The judge treated the respondent as a potential purchaser only and not as a beneficiary with an absolute right to purchase the company.

The application judge did not err in dispensing with the requirement for a collateral mortgage. At the time of the execution of the will, the respondent did not own a home. The will did not provide any direction about minimum equity or the assumed value of the security. The judge concluded in the circumstances that from a financial point of view the collateral mortgage was meaningless. The finding was made as part of his discretion to provide directions regarding a commercially reasonable transaction and was owed deference.

The application judge did not err in favouring the opinion of the respondent's valuator to establish the respondent's salary. The salary attributed to the respondent affected the earnings of the company, which in turn affected the purchase price. The normalized amount determined by the respondent's expert was based on survey data from similar companies and found by the application judge to be more persuasive than the unexplained conclusion from the appellant's expert. That was a judgment call for the application judge.

It was within the discretion of the application judge to deduct $187,310 from the purchase price. That amount represented dependent support payments to the testator's common law spouse. The application judge was prepared to grant the estate some leeway in declaring dividends, despite the fact that he found that the estate trustee had refused to provide information about the historical dividend practice. A dividend could have been declared and the support payments could have been paid from the dividend, but that was not what happened. The application judge drew a distinction between dividends and gratuitous payments from the company's cash reserves. That decision was within his discretion and there was no basis to interfere with the exercise of that discretion.

Parties and Counsel

APPEAL by the estate from the judgment of Penny J. of the Superior Court of Justice dated January 4, 2019, regarding a will.

Svetlana Shpigelman, for appellant.

Miranda Spence, for respondent.

Introduction

[1] This appeal arises out of a dispute regarding a provision in the will of the late Ellery Jay Muchmaker. That provision granted the respondent an option to purchase Master Auto Supply Co. Limited ("Master Auto"). Mr. Muchmaker owned Master Auto, and the respondent is a long-term Master Auto employee.

[2] The respondent was given the option to purchase Master Auto for the lesser of $1.75 million or "the price determined by multiplying the earnings of Master Auto (averaged over the last three fiscal periods) by a factor of 5.5". The will provided that the purchase price be delivered by way of a promissory note, with interest payable at 5 per cent per annum. A gross annual payment to the estate of not less than $180,000, to be made in monthly payments, was required. The promissory note was to be secured by a general security agreement against Master Auto's assets as well as the registration of a collateral mortgage against the respondent's residence.

[3] The respondent attempted to exercise his option to purchase Master Auto. However, he was unable to reach an agreement with the estate. The parties appeared before the application judge for directions.

[4] In reasons dated January 4, 2019, the application judge gave directions regarding the sale of Master Auto. He found that the purchase price shall be $529,611, being $716,921 calculated in accordance with the formula in the will, less $187,310, representing payments improperly made out of the company to the estate after Mr. Muchmaker's death. Further, he ruled that the respondent was not obligated to provide a collateral mortgage.

[5] On appeal, the appellant submits that the application judge made the following errors: (i) he treated the respondent as a beneficiary instead of a favoured purchaser; (ii) he dispensed with the requirement of a collateral mortgage; (iii) he accepted the respondent's evidence regarding the amount to be credited for Mr. Muchmaker's salary for the purposes of calculating earnings; and (iv) he deducted from the purchase price monies paid out of the company to the estate. For the following reasons, we do not give effect to these grounds of appeal.

Analysis

(i) Beneficiary vs. Favoured Purchaser

[6] The appellant submits that the application judge treated the respondent as a beneficiary under the will by shifting the testator's intention from maximizing the estate's value to ensuring that the respondent was able to purchase the company. He argues that the application judge interpreted the option as a gift or bequest that must not fail.

[7] There is nothing in the application judge's reasons wherein he explicitly or implicitly treated the respondent as a beneficiary. His reasons evince that he was alive to his obligation to interpret the will in a manner that gave effect to the testator's intention.

[8] We are not persuaded that the will establishes that the testator's intention was to maximize value on the sale of Master Auto. There is no reference to selling at market value and there is no requirement for the trustee to expose the company to the market or to solicit other offers. The application judge found that Mr. Muchmaker intended that the respondent would purchase the company in a "simple, straightforward transaction", the terms and conditions of which would be "as stated in the will and as reasonably required by implication". That finding is consistent with the terms of the will.

[9] The provision in the will regarding the sale of Master Auto was not detailed. It fell to the application judge to give directions that furthered the testator's intention. In so doing, he treated the respondent as a potential purchaser only and not as a beneficiary who had an absolute right to purchase the company. Therefore, we reject this ground of appeal.

(ii) Collateral Mortgage

[10] At the time of the execution of the will, the respondent did not own a home. The application judge noted that the will did not provide any direction about minimum equity or the assumed value of this security. In the circumstances, he concluded that the collateral mortgage was "from a financial point of view at least meaningless".

[11] Neither party disputes that the application judge had the discretion to apply commercially reasonable terms as necessary to carry out the testator's intention. Given that the mortgage requirement was so vague that it provided no security to the estate, the application judge did not err in dispensing with this requirement. His finding was made as part of his discretion to provide directions regarding a commercially reasonable transaction and it is owed deference.

[12] Before leaving this issue, we note that the appellant brought a motion to adduce fresh evidence to the effect that at some point before the execution of the will the respondent owned his own home. We do not believe this evidence is relevant on the appeal and, in any event, it was available prior to the application hearing, had the appellant exercised due diligence. Accordingly, the motion to adduce fresh evidence is dismissed.

(iii) Salary

[13] The salary attributed to Mr. Muchmaker had an impact on the earnings of Master Auto, which, in turn, had an effect on the purchase price for the company. The application judge concluded that the personal benefits paid by Master Auto on Mr. Muchmaker's behalf should be normalized in the earnings formula. The application judge rejected the $70,000 normalization amount proposed by the appellant's valuator and accepted the figure proposed by the respondent's valuator.

[14] The appellant submits that the application judge erred in finding the respondent's expert's determination of salary more persuasive. That figure was based on survey data from other similarly sized printing companies and the appellant says reliance on generalized information fails to account for case specific factors. Specifically, it ignores Mr. Muchmaker's lack of involvement in Master Auto in the relevant three-year fiscal period due to illness and the fact that he was a hands-off manager who sometimes lived overseas.

[15] We do not give effect to this argument. As the application judge noted, the appellant's report does not explain its assessment of the salary at the $70,000 figure. He preferred the position of the respondent's valuator, as he was entitled to do. We note that in advancing this ground of appeal in his factum, the appellant submitted that the figure in his expert report was "just as, if not more, persuasive" than the figure in the respondent's report. This was a judgment call for the application judge, and we are not satisfied that he erred in making it or that there is any basis for appellate interference.

(iv) Support Payments

[16] The estate trustee caused Master Auto to pay certain dependent support payments to Mr. Muchmaker's common-law spouse, totalling $187,310. He did so because the estate lacked liquidity to make these payments. The estate trustee stated that Master Auto "will be made whole" for these payments by means of declaring a dividend from Master Auto to the estate at a later time. The application judge held these funds must be deducted from the purchase price.

[17] The appellant's position is that as the sole shareholder of Master Auto, the estate has the right to withdraw dividends from Master Auto's excess working capital at its pleasure, provided that the withdrawal does not adversely affect the company's functionality. He notes that the application judge did not require an adjustment to be made for the dividends paid following Mr. Muchmaker's death. His point is that there is no principled basis to differentiate between dividends and the support payments that will later be repaid from dividends.

[18] We reject this ground of appeal. The application judge was prepared to grant the estate some leeway in declaring dividends, despite the fact that he found that the estate trustee had refused to provide information about the historical dividend practice. According to the application judge, provided the declaration of a dividend did not impair the company's operation, no adjustment need be made to the purchase price. In his words, the dividend should not be repaid unless "the dividends could be said to have improperly stripped assets from the company to the company's detriment".

[19] The application judge drew the line when it came to the support payments paid to Mr. Muchmaker's common law spouse. While a dividend could have been declared and the support payments could have been paid from the dividend, that is not what happened. Had a dividend been declared, no doubt the application judge would have reviewed same to determine whether it qualified as a stripping of assets. The application judge drew a distinction between dividends and gratuitous payments from the company's cash reserves. That decision was within his discretion and there is no basis to interfere with the exercise of that discretion.

Disposition

[20] For the foregoing reasons, the appeal is dismissed. The estate shall pay the respondent his costs of the appeal and the fresh evidence motion, fixed in the all-inclusive amount of $10,000.

Appeal dismissed.

End of Document