Court of Appeal for Ontario

Date: 20230726 Docket: C70129 Feldman, Benotto and Roberts JJ.A.

Between

Dag Hrvoic Applicant (Appellant)

and

Melissa Hrvoic Respondent (Respondent)

And Between

Melissa Hrvoic Plaintiff (Respondent)

and

Dag Hrvoic and 1427830 Ontario Corporation Defendants (Appellant)

Counsel: Gregory M. Sidlofsky, for the appellant David Taub and Samuel Mosonyi, for the respondent

Heard: July 6, 2023

On appeal from the judgment of Justice Jana Steele of the Superior Court of Justice, dated November 15, 2021, with reasons reported at 2021 ONSC 7537.

Reasons for Decision

Overview

[1] Dag Hrvoic (“Doug”) [1] appeals the disposition of his application to compel the sale of the common shares held by Melissa Hrvoic (“Melissa”) of a company they co-founded. Doug’s application was tried together with Melissa’s action for a declaration, among other heads of relief, that she owns 50% of the company’s common shares. The trial judge determined that Doug and Melissa held equal shareholdings and valued them in the amount of $10,800,000. She ordered that Doug purchase Melissa’s common shares for the amount of $5,400,000.

[2] Coroza J.A. ordered a partial lifting of the automatic stay pending appeal to the extent of $1,874,400, finding that while the appeal was not frivolous and vexatious, it was not particularly strong because most of the grounds of appeal were grounded in the trial judge’s factual findings and were unlikely to succeed: 2023 ONCA 27. This order was upheld by a panel of this court on April 27, 2023: 2023 ONCA 288.

[3] The parties were married in 1992 and separated in 2010. The parties are still engaged in family law proceedings related to their children. During their marriage they founded Marine Magnetics Inc., a highly successful manufacturing company that makes specialized sensors to measure the earth’s magnetic field. The shareholdings in issue have been held since 2000 by a holding company, 1427830 Ontario Corporation (“1427830”), pursuant to a rollover under s. 85 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.).

[4] Melissa was the lead for sales, marketing and business development until Doug terminated her employment without notice and for cause on March 2, 2020. Melissa’s termination from employment is the subject of a separate ongoing action. Doug is an engineer and geophysicist and the president of Marine Magnetics. Until the termination of her employment, Melissa was the secretary of Marine Magnetics. At Doug’s direction, following separation, Doug and Melissa were always paid equal compensation and equal dividends from the company until the termination of her employment.

[5] Doug submits that the trial judge made numerous reversible errors. In our view, all of the grounds of appeal hinge upon the trial judge’s unassailable findings and effectively amount to an invitation for this court to redo the trial judge’s findings of fact and mixed fact and law absent any error. That is not our task.

[6] These reasons explain why we find no basis to interfere with the trial judge’s decision and dismiss the appeal.

Analysis

[7] The disposition of this appeal requires the consideration of only the following grounds [2]:

(i) Did the trial judge err in concluding that Doug and Melissa held equal shareholdings pursuant to an agreement?

[8] Doug submits that the trial judge’s reasons are insufficient in that there is no legal basis articulated for her declaration that Melissa is entitled to 50% of the company’s common shares. He relies primarily on the fact that the common shares are shown in the original shareholders’ ledger to be divided as 70% to him and 30% to Melissa.

[9] We are not persuaded by these submissions. The trial judge’s reasons explicitly set out that she accepted Melissa’s position as pleaded in her amended statement of claim and evidence that Doug had agreed to give her 50% of the common shares. The corporate records alone of the original shareholdings division are not dispositive of this issue in light of the other evidence that the trial judge was entitled to accept in support of Melissa’s position that the common shares were divided equally between them. This evidence included, importantly, an agreement between Doug and Melissa that the shareholdings would be 50/50 and that Doug would take the necessary steps to reflect the shareholdings as 50/50, their receipt of equal compensation and dividends following the end of their marriage and Doug ensuring that they would be treated equally, and Melissa’s decision not to pursue equalization of net family property in the matrimonial proceedings because she believed she was a 50% shareholder of 1427830, their most valuable asset. These were all factual findings the trial judge was entitled to make based on the record before her, and we see no reason to interfere with them on appeal.

[10] The trial judge rejected Doug’s argument, renewed again on appeal, that the equal dividends reflected the parties’ equal shareholdings of Class D Special Shares. As the trial judge observed, the corporate records did not indicate that Class D Special Shares had ever been issued and that in any event the articles of incorporation provided that the holder of the Class D Special Shares would be entitled to payment “out of any or all profits or surplus lawfully available for dividends remaining after payment of dividends on Common Shares” (emphasis in original). These findings support the trial judge’s conclusion that as a result, the dividends that were paid to Melissa and Doug had to be those paid on the common shares in accordance with the 50/50 shareholdings found by the trial judge.

[11] We therefore reject this ground of appeal.

(ii) Did the trial judge err in her valuation of the shareholdings of the company?

[12] Both parties called their own experts to opine as to the value of the company’s shareholdings. Doug argues that the trial judge erred in failing to give effect to his expert’s opinion that the trial judge indicated she preferred.

[13] We disagree. As she was entitled to do, the trial judge accepted some but not all of each experts’ evidence. Although generally preferring the approach of Doug’s expert, she did not reject Melissa’s expert’s opinion. She determined that the value of the shareholdings should be more than Doug’s expert’s opinion of value but less than the opinion of value proffered by Melissa’s expert. The trial judge’s conclusion was open to her on the record. We see no basis to interfere with it.

(iii) Did the trial judge misinterpret and misapply the “clean hands” doctrine in granting Melissa any remedy?

[14] The “clean hands doctrine” comes from the 18th century maxim that “he who comes to equity must come with clean hands”: see e.g., Pro Swing Inc. v. Elta Golf Inc., 2006 SCC 52, [2006] 2 S.C.R. 612, at para. 22; Bolianatz Estate v. Simon, 2006 SKCA 16, 264 D.L.R. (4th) 58, at para. 116; Dering v. Earl of Winchelsea (1787), 1 Cox 318, 2 E.R. 1184, at pp. 319-320.

[15] Doug submits that Melissa’s improper withdrawals should therefore have disentitled her to the equitable remedy granted by the trial judge. We disagree that the “clean hands” doctrine applies in the circumstances of this case.

[16] First, the trial judge did not grant equitable relief. As we earlier concluded, the trial judge made no error in finding that there was an agreement between Doug and Melissa to increase Melissa’s common shareholdings to 50%. This was not the granting of equitable relief but the finding by the trial judge of the existence of an agreement between the parties and the granting of the relief that flowed from that agreement.

[17] Moreover, because Melissa’s withdrawals from the company and from Doug’s line of credit are unrelated to the proper division of the shares, Melissa’s conduct would not fall within the application of the “clean hands” doctrine: see e.g., BMO Nesbitt Burns Inc. v. Wellington West Capital Inc. (2005), 77 O.R. (3d) 161 (C.A.), at para. 27; Toronto (City) v. Polai, [1970] 1 O.R. 483 (C.A.), at pp. 493-494, aff’d 1972 22 (SCC), [1973] S.C.R. 38.

[18] In any event, the “clean hands” doctrine does not automatically disentitle a party with “unclean hands” from obtaining any relief. Equitable principles are not based on the application of strict rules but are applied at the judge’s discretion and are “crafted in accordance with the specific circumstances of each case”: Pro Swing Inc., at para. 22. As this court observed in Sorrento Developments Ltd. v. Caledon (Town), at para. 5: “It is a matter of discretion for the trial judge whether to refuse to grant equitable relief on the basis that a litigant has not come to court with clean hands”. Here, the trial judge carefully considered the circumstances surrounding both withdrawals.

[19] With respect to the $150,000 withdrawal, the trial judge made a factual finding, based on ample evidence, including that of the company’s accountant, that Melissa’s withdrawal of the $150,000 from her shareholder’s loan account with the company was legitimate and in keeping with the long-standing compensation practice followed by both Doug and Melissa. According to the company’s accountant, both made withdrawals that would be reconciled at year end.

[20] The trial judge did not condone Melissa’s unauthorized withdrawal of the $600,000 from Doug’s line of credit, which Melissa repaid. However, as she was entitled to do, the trial judge exercised her discretion to grant Melissa relief, having regard to all the circumstances, including Doug’s conduct that she found precipitated Melissa’s rash but wrongful act. Para. 61 of her reasons shows that she did not simply excuse Melissa’s conduct because of Doug’s conduct but situated Melissa’s conduct in the context of all the relevant circumstances:

In all the circumstances I would still exercise my discretion and award an equitable remedy. There are complex family dynamics at play here. In fact, the evidence was that there are still ongoing acrimonious family law proceedings related to the children. Doug led Melissa down the garden path regarding her continued equal treatment from the family business. Then, he suddenly pulled the rug out from under her. Melissa panicked. By firing her, Doug had cut off her only source of employment income. All of Melissa's relevant work experience had been gained in a company whose president was now claiming that she was fired for cause. Doug also refused to authorize dividends from the company, without explanation, and Melissa had no other source of income. She made a rash, and I am sure regrettable, decision to withdraw monies from Doug's line of credit, to which she had access. Melissa repaid the money. [Emphasis added.]

[21] There is no basis to interfere with the trial judge’s decision.

(iv) Did the trial judge misinterpret and misapply the test for the commencement of the applicable limitation period?

[22] Doug argues that the trial judge erred in finding that Melissa’s claim for 50% of the company’s common shares was not statute-barred because she knew in 2011 or August 2017 at the latest that she was only a 30% shareholder. He submits that the trial judge erred in rejecting as inapplicable the binding authority of Grant Thornton LLP v. New Brunswick, 2021 SCC 31, 461 D.L.R. (4th) 613.

[23] We are not persuaded that the trial judge made any error. The trial judge properly referenced and applied the provisions of s. 5 of the Limitations Act, 2002, S.O. 2002, c. 24, Sch. B, and her decision is in keeping with the applicable governing principles articulated by the Supreme Court in Grant Thornton.

[24] The trial judge considered when Melissa discovered or ought to have discovered through the exercise of reasonable diligence the material facts on which her claim is based. She then went on, as she was required to do, to consider, under s. 5(1)(iv), when Melissa first knew that, “having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it”. That she implicitly found that Melissa had rebutted the presumption under s. 5(2) of the Act that she knew this “on the day the act or omission on which the claim is based took place” is clear from the trial judge’s reasons. Such a finding is in keeping with the approach taken by the Supreme Court in Grant Thornton, as the trial judge’s rejection of this presumption indicates that based on her findings, she found that Melissa could not have drawn “a plausible inference of liability” until she knew that Doug had not amended the corporate documentation to designate her a 50% shareholder: Grant Thornton, at para. 42.

[25] It was open to the trial judge to find that Melissa was not aware that contrary to her agreement with Doug, Doug had not taken the requisite steps to increase her shareholdings and she remained a 30% shareholder on the books, until Doug finally provided her with the minute books on or around June 19, 2019, despite her repeated earlier requests to see them, or on July 4, 2019 when Doug served the notice of the meeting of the shareholders and directors and sought to remove her as a director and an officer of the company.

[26] The evidence established that Melissa received conflicting information: Doug treated her as a 50% shareholder by ensuring she received equal compensation; and she was told variously that she was a 50% shareholder, a 30% shareholder and a 49% shareholder. As the trial judge found, there were deficiencies in the corporate records.

[27] We agree that in these circumstances, a reasonable person would not have commenced a lawsuit while being treated as a 50% shareholder and Melissa had no reason to think this treatment would not continue or that she had suffered any loss until, at the earliest, when the minute books were produced or later when Doug sought to call the directors’ and shareholders’ meeting. Melissa’s belief that she was a 50% shareholder was additionally reflected, as the trial judge observed, in her failure to claim a 50% equalization share of the shareholdings in the parties’ matrimonial proceedings. The trial judge’s conclusions are rooted firmly in the evidence that she was entitled to accept. We see no error here.

(v) Did the trial judge err in failing to address Doug’s counterclaim?

[28] Doug’s counterclaim is for $4,562.29 of interest that his bank charged him on Melissa’s $600,000 withdrawal from his line of credit. Although the trial judge’s reasons do not explicitly address Doug’s counterclaim, this omission does not affect the outcome. The counterclaim has no merit. As evidenced by his bank’s correspondence with him, Doug admitted on his cross-examination that his bank had agreed to reverse the interest originally charged on the withdrawal. He has therefore not proven any loss.

Disposition

[29] For these reasons, the appeal is dismissed.

[30] We have reviewed the parties’ bills of costs and further written submissions concerning the disposition of costs, including the costs of prior motions regarding transcripts and lifting the automatic stay effected by the appeal which were reserved to this panel. No costs are granted for the unopposed transcript motion. The respondent is entitled to her partial indemnity costs of the stay motion and the appeal in the all inclusive amount of $60,000.

“K. Feldman J.A.”

“M.L. Benotto J.A.”

“L.B. Roberts J.A.”

[1] We refer to the parties by their first names simply for ease of reference and mean no disrespect.

[2] As we uphold the trial judge’s finding of equal shareholdings, it is unnecessary for us to review the trial judge’s imposition of a constructive trust. We therefore should not be taken as endorsing the trial judge’s decision on this issue.