Court File and Parties
COURT FILE NO. CV-21-00660864-0000 DATE: 20230606
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
1819472 Ontario Corp. Plaintiff – and – John Barrett General Contractors Limited, James J. Zaza jr., JJZ Grounds Maintenance Inc., James S. Zaza Sr., Linda Truong, Bich van Truong, Cathy Truong-Ruetas, Frank Repchik, Wm. J. Trotter & Associates and Meiko Terashima Defendants
Counsel: Shawn Tock, for the plaintiff Vito Scalisi, for the defendants (except John Barrett General Contractors Limited)
Heard: January 24, 2023, by video conference, at Toronto
Reasons for Decision
S.T. Bale J.
Introduction
[1] In this action, the plaintiff alleges that it was defrauded by its then principal, James J. Zaza Jr. (“Zaza”), who caused it to loan $2,413,226.26 to another corporation he controlled, John Barrett General Contractors Limited (“JBGC”), knowing that the funds would never be repaid. The plaintiff further alleges that Zaza then caused JBGC to distribute the funds to family members and friends before assigning JBGC into bankruptcy.
[2] On this motion, the defendants (other than JBGC which remains an undischarged bankrupt) move for judgment dismissing the action on the ground that it is statute-barred by s. 4 of the Limitations Act, 2002. For simplicity, I will refer to the moving defendants as “the defendants”.
Background facts
[3] Up until 2010, Susan Barrett (“Barrett”) held the common shares of JBGC which operated Kleinberg Nursery in Woodbridge, Ontario. Barrett’s husband, Patrick Barrett, owned the land on which the nursery operated.
[4] In 2010, Zaza agreed to purchase the land and business. He incorporated the plaintiff, 1819472 Ontario Corp. (“9472Ont.”), to purchase the land, and 1819471 Ontario Corp. (“9471Ont.) to hold the shares of both JBGC and 9472Ont.
[5] The purchase price for the land was $525,000 with a mortgage back for the full amount, and for a seven-year term. The purchase price for Barrett’s shares in JBGC was $2,375,000, with $400,000 to be paid in cash and a promissory note for $1,975,000. Both the mortgage and note were due and payable on April 19, 2017. Payment of the promissory note was secured by a general security agreement, a share pledge agreement, and a cross-collateral agreement which provided that any default under the mortgage would be a default under the note, and vice versa.
[6] In September 2016, the plaintiff paid out the vendor take-back mortgage and in February 2017, it sold the land for $3.1 million to a third party. On completion of the sale, the plaintiff received net closing proceeds of $2,948,221.45.
[7] On April 12, 2017, Zaza assigned 9471Ont. into bankruptcy, and on April 19, 2017, 9471Ont. failed to make the payment of $1,975,000 then due to Barrett. On May 1, 2017, Zaza assigned JBGC into bankruptcy. Angela Pollard was appointed insolvency trustee in both cases.
[8] In her report dated May 22, 2017, the trustee reported that JBGC had obtained loans of $1,466,857.94 and $924,075 from the plaintiff and had used the funds to pay debts of JBGC to “various parties including the Business Development Bank, Royal Bank of Canada, Canadian Imperial Bank of Commerce, Frank Repchik, the Company legal counsel and accountant.”
[9] In May 2018, Barrett obtained an order under s. 161 of the Business Corporations Act appointing an inspector to investigate the loans from the plaintiff to JBGC and the distribution of funds by JBGC. The inspector’s report dated November 5, 2018 contained details of the amounts paid by JBGC and the persons to whom each payment was made. Those details included evidence that payments were made to Zaza’s friends and family and that the amount paid to the banks were in payment of loans which Zaza and members of his family had personally guaranteed. The inspector concluded:
Zaza Junior directed 472 to loan $2.4 million to JBGC in February 2017 instead of approving a dividend distribution to the shareholder of 472 to distribute $1,975,000 to 471 in order that 471 can repay its debt to Barrett when it came due on April 19, 2017. After making the direction to pay the 472 Payments, as described in the Application, Zaza Junior directed his legal counsel to advise Barrett that payment is forthcoming even though he had already directed Banks to make the 472 Payments and it did not appear he had any other means of making the payment to Barrett. Shortly thereafter, he assigned both 471 and JBGC into bankruptcy.
Analysis
Overview of parties’ positions
[10] The defendants’ position is that the limitation period began to run as early as May 2017, or at the latest, on November 17, 2017. They argue that the plaintiff had actual or constructive knowledge of its claim in May 2017, based upon the bankruptcy trustee’s report. They argue that it had actual knowledge of the plaintiff’s claims, based upon the affidavit sworn by Barrett on November 17, 2017, in support of her application under s. 161 of the Business Corporations Act.
[11] This action was commenced on April 20, 2021. If the plaintiff discovered its claim as early as November 17, 2017, as the defendants argue, the claim would be barred by s. 4 of the Limitations Act, 2002.
[12] The plaintiff’s primary position is that the claim was not discovered until Barrett took control of the corporation in January 2021. In the alternative, counsel argues that the claim was discovered, at the earliest, when the inspector released his report on November 5, 2018. If the claim was not discovered before that date, it would not be statute-barred (taking into consideration the suspension period of 182 days resulting from the enactment of the Emergency Management and Civil Protection Act).
When did the plaintiff discover the claim?
[13] The question to be determined is not when Barrett discovered the claim; but rather, when the plaintiff discovered the claim. The plaintiff, being a corporation, is a separate legal entity from those who hold its shares or control its operations. It would have discovered the claim when the knowledge of an individual who had discovered the claim could be attributed to it.
[14] The defendants’ position is based on the premise that Barrett’s knowledge should be attributed to the plaintiff as of May 2017. Based upon the bankruptcy trustee’s statement that she had “released” the shares of the plaintiff to Barrett pursuant to her security, they argue that as of May 19, 2017, she was the sole shareholder of the plaintiff. Based upon a letter from Zaza’s lawyer dated May 23, 2017, in which he advises Barrett’s lawyer that Zaza had resigned his positions as a director and officer of the plaintiff, the defendants argue that as of that date, Barrett was effectively the plaintiff’s principal. I disagree.
[15] When the trustee said that she was “releasing” the shares in the plaintiff to Barrett, she could be saying no more than that she recognized Barrett’s security and conceded that the unsecured creditors had no interest in the shares. This could not have the effect of transferring the shares into Barrett’s ownership. As a secured creditor, in order to take ownership of the shares, she had to comply with the foreclosure procedure in Part V of the Personal Property Security Act.
[16] On December 21, 2020, Barrett’s lawyer wrote to Angela Pollard giving her 15 days’ notice, in accordance with s. 65(2) of the PPSA, that Barrett proposed to accept the collateral in full satisfaction of the amount owed to her by 9471Ont. In the absence of any objection from the trustee, Barrett took ownership of the collateral (including the shares of 9472Ont.), pursuant to ss. 65(6) and 65(6.1) of the Act.
[17] In January 2021, Barrett filed a “notice of change” with the Ministry of Consumer and Business Services reporting that Zaza had ceased to be a director on May 23, 2017, and that she had been elected a director on January 6, 2021. She then commenced this proceeding on April 21, 2021.
[18] Barrett did not take title to the shares of the plaintiff until January 6, 2021. Beginning with the resignation of Zaza on May 23, 2017, the plaintiff had no officers or directors or other individual whose knowledge could be attributed to it, until Barrett was elected a director on January 6, 2021. It was on that date that the limitation period began to run.
[19] The defendants argue that it doesn’t matter whether Barrett was an officer or director of the plaintiff in May or November 2017. They argue that what matters is that she then had a remedy available to her under the general security agreement, and that she had an obligation to use reasonable diligence in pursuing the claim which, if successful, would accrue to her benefit. I disagree for two reasons. First, it is the person with the claim (in this case, 9472Ont.) that is required to exercise reasonable diligence. In this case, 9472Ont. was not capable of doing so until Barrett became a director. Second, based upon the limited information received from the bankruptcy trustee, it was reasonable for her to commence the proceeding that she did commence (her application under s. 161 of the Business Corporations Act), in an effort to uncover the evidence necessary to determine what further proceedings might be appropriate.
Disposition
[20] For the reasons given, the defendants’ motion for judgment will be dismissed.
[21] If the parties are unable to agree on costs, I will consider brief written argument provided that it is emailed to monica.mayer@ontario.ca, no later than June 27, 2023.
“S.T. Bale J.”