DATE: 20050831
DOCKET: C43360
COURT OF APPEAL FOR ONTARIO
McMURTRY C.J.O., BLAIR J.A., and KOZAK J. (ad hoc)
B E T W E E N :
JOHN PENNINGTON
Jack Berkow, for John Pennington
Respondent
Arnie Herschorn, for the Liquidator, PricewaterhouseCooper Inc.
- and -
Barry Leon and Susan J. Kushneryk, for Chalmers Investment Corp. Ltd.
JAMES HAWLEY, 1047733 ONTARIO LIMITED, 1330 RICHMOND ROAD INC., 1395716 ONTARIO INC., 1399 McPHILLIPS STREET INC., 22700 SOUTH TAMIAMI TRAIL INC., 5400 DIXIE ROAD INC., CANADIAN EQUITY RESOURCES CORPORATION, CANADIAN LONG TERM CARE CORPORATION, CANADIAN LONG TERM INVESTMENTS CORPORATION, FIRST EVEREST PROPERTIES CORPORATION, STEPPE FINANCIAL INC., STEPPE FINANCIAL PARTNERS INC., STEPPE TWO INC., STEPPE FINANCIAL PARTNERSHIP, 840316 ONTARIO LIMITED, 1162315 ONTARIO LIMITED, 155 BALMORAL AVENUE INC., 389762 ONTARIO LIMITED, 478181 ONTARIO LIMITED, 722496 ONTARIO LIMITED, and NORTH SHORE MERCANTILE CORPORATION
Ronald S. Sleightholm, for the appellant
Respondents (Appellant James Hawley)
Heard: August 24, 2005
On appeal from the order of Justice James Farley of the Superior Court of Justice dated April 1, 2005.
BY THE COURT:
Overview
[1] The subject matter of this appeal arises out of a limited partnership dispute involving the Stage West hotel and dinner theatre in Mississauga. Stage West is owned by two Limited Partnerships, which we will call Mayfield No. 1 and Mayfield No. 2. The issue on the appeal is whether two of the limited partners in those Partnerships – Chalmers Investment Corp. and Muhammed Huq – should be entitled to vote on the election of a new general partner. On April 4, 2005, Farley J. ruled that they were.
[2] Mr. Hawley fears that Chalmers and Mr. Huq may be aligned with the interests of the applicant Pennington, through the manager of the limited partnership and its principal, Mr. Pechet. Mr. Hawley appeals from the order of Farley J., arguing that the motion judge misinterpreted the relevant provisions of the Limited Partnership Agreements and erred in finding that the manager, Chalmers and Mr. Huq were not affiliated and in failing to find that they were not dealing at arms length.
[3] For the reasons that follow, the appeal is dismissed.
Facts
[4] Mr. Hawley and Mr. Pennington were business partners. They are the 50% shareholders and the only officers and directors of the corporations that are the respondents in the main application. Because of a breakdown in their relationship over the past few years, Mr. Pennington applied for an order winding up the respondent corporations. On consent, Justice Farley made an order on December 1, 2004 that the corporations be liquidated. PricewaterhouseCoopers Inc. (“PwC”) was appointed liquidator. Farley J. has been supervising the winding-up.
[5] One of the respondents, 5400 Dixie Road Inc., is the General Partner of the Limited Partnerships. The terms of the agreements governing the Limited Partnerships (“the Agreements”) require that if the General Partner becomes insolvent or is wound up the Limited Partnership may be terminated. This is not in anyone’s interests and, as a result, it has become necessary to replace 5400 Dixie Road with a new General Partner. As noted above, this development has spawned the current dispute over who is entitled to vote in that election.
[6] Generally speaking, the Agreements provide that each unit holder is entitled to one vote. There are qualifications, however. Specified entities are disqualified in certain circumstances. In particular, neither the General Partner, the Promoter, the Manager, nor any Limited Partner that is “affiliated” with those entities or not dealing at arms length with them, is entitled to vote on matters relating to the removal or replacement of the General Partner. At issue on this appeal, primarily, is the relationship between the Manager, Mayfield Management Inc., and two of the Limited Partners, Chalmers and Mr. Huq.
[7] Mayfield Management is controlled by Howard Pechet, through his wholly owned corporation, Mayfield Investments Ltd. Mr. Pechet was an original participant in the Stage West project and although he has been removed in some capacities – not willingly, apparently – he remains the manager of its operations, through Mayfield Management. Mr. Huq is a senior employee of Mayfield Management and is the person directly responsible for the day-to-day operations of the complex.
[8] Chalmers Investment is an independent investment corporation. Through Mayfield Investments, Mr. Pechet is a 49% shareholder, however. Mr. Huq is a 17% shareholder and two other persons who are also employees in the Pechet group (Messrs. Tse and Tingle) are each 17% shareholders.
[9] Mr. Hawley argues that the tie-in between Mayfield Management and Chalmers, by reason of the shareholdings of Chalmers and the employment connection between Mr. Pechet and Messrs. Huq, Tse and Tingle, makes Mayfield Management and Chalmers affiliated and not at arms length, for purposes of the Agreements. Accordingly, he submits, neither Chalmers nor Mr. Huq – who are also Limited Partners – should be entitled to vote on the new General Partner.
[10] Needless to say – to return to the original theme – Mr. Pennington and Mr. Hawley are each promoting the election of a different General Partner. Each would be involved in the one they are promoting.
Discussion
[11] In a short but concentrated endorsement – typical of the “real time” decisions that are necessary in these types of proceedings of the Commercial List – Justice Farley ruled that neither Chalmers nor Mr. Huq was affiliated with Mr. Pechet or the Manager in the sense required by the Agreements; nor were they “not dealing at arms length”. We agree with these conclusions.
[12] For these purposes, the Agreements provide that two persons are “affiliated” where one of them directly or indirectly controls (or is directly or indirectly controlled by) the other, or is an officer, director or partner of such person. With respect to “not dealing at arms length”, the Agreements invoke the “related persons” concepts of the Income Tax Act. Essentially, this involves a determination of whether there is “common control” between persons or groups related by blood or family ties (not the case here) or whether the groups are in fact not acting independently of each other.
[13] Mr. Pechet does not control Chalmers directly. His 49% interest, through Mayfield Investments, does not put him in that position: see the Ontario Business Corporations Act R.S.O. 1990, c. B.16, s. 1(5) and the Canada Business Corporations Act, R.S.C. 1985, c. C.44, s. 2(3). Nor is there any direct control in the reverse direction; neither Chalmers nor any of its individual shareholders holds a shareholding position in the Manager.
[14] The question of indirect control is a question of fact, dependent upon the circumstances of each case. Here, Farley J. found, on the record before him, that Mr. Pechet did not control Chalmers indirectly and that Chalmers was not “not dealing at arms length” with the Manager. His findings are supported by the evidence and are entitled to deference, notwithstanding they were made on a motion based on a written record: Equity Waste Management of Canada v. Halton Hills (Town) (1997), 1997 2742 (ON CA), 35 O.R. (3d) 321 (C.A.), at 336. We do not accept the argument that simply because Messrs. Huq, Tse and Tingle are direct or indirect employees of Mr. Pechet, in one capacity, they will necessarily follow his direction in their capacity as shareholders of another entity. Indeed, the only evidence on that issue in the materials indicates that, as shareholders of Chalmers, they have voted against Mr. Pechet on some issues.
[15] Accordingly, we can find no basis for interfering with Farley J.’s finding that neither Chalmers nor Mr. Huq are affiliated with or are not at arms length from the Manager, Mayfield Management.
[16] There is one difference between the Limited Partnership Agreement pertaining to Mayfield No. 1 and that pertaining to Mayfield No. 2 regarding the disqualification of limited partners from voting. Under the latter Agreement, the affiliation and arms length prohibitions do not apply to relations with the Manager. Mr. Hawley argues, however, that Chalmers and Mr. Huq are similarly disqualified because of their relationship with the original Promoter of the Stage West project, Dixie Line Productions Ltd. Mr. Pechet is a director and officer of that company. Dixie Line is a non-active corporation, but, in any event, the finding of no affiliation and of no non-arms length dealings is supportable, in this connection, on the same basis as it is supportable with respect to Chalmers, Mr. Huq, and the Manager.
[17] Finally, the Limited Partnership Agreements provide for the voting disqualification on matters where the specified persons who are disqualified have, or may reasonably be said to have, a conflict of interest. Mr. Hawley argues that Chalmers and Mr. Huq may align themselves with Mr. Pechet and Mayfield Management in attempting to adjust or re-negotiate the management agreement with the new General Partner. Farley J. rejected this concern – correctly, in our view – as mere speculation, and held that the relationships before him did not give rise to a situation where Chalmers or Mr. Huq have, or could reasonably be said to have, a conflict of interest. We see no reason for interfering with this finding.
[18] The distinction between Mayfield No. 1 and Mayfield No. 2 is significant for another reason as well. Mayfield No. 2 was incorporated to hold and to sell fifty-nine units of the original Limited Partnership that had not been sold in the initial offering. Chalmers owns almost 25% of the Mayfield No. 2 units, as well as being a Limited Partner in Mayfield No. 1. Thus, Chalmers has a vote both in the Mayfield No. 1 and the Mayfield No. 2 contexts. It is agreed that the way the voting works is for a vote to take place amongst the Mayfield No. 2 unit holders first; the Mayfield No. 2 vote is then cast on a block basis in the Mayfield No. 1 vote. Accordingly, there was an issue whether Chalmers was disqualified from voting in both instances, or just with respect to Mayfield No. 1, or not at all.
[19] In view of our conclusions above, we do not need to deal with this particular problem. Chalmers is entitled to vote in both contexts.
Other Issues
Fresh Evidence
[20] The appellant brought a motion to introduce fresh evidence on the appeal. The fresh evidence consisted of two documents that Mr. Hawley says further demonstrate the affiliation and non-arms length nature of the relationship between Chalmers and Mayfield Management.
[21] We decline to accept the proposed fresh evidence because, in our view, it fails to meet two of the requirements for the introduction of such evidence. First, if admitted, the documents would not have had an important influence on the result, given the uncertainties surrounding their context, creation, and meaning. Secondly, we are not satisfied they could not have been made available at the time of the hearing through the exercise of reasonable diligence. See Cook v. Mounce (1979), 1979 2039 (ON SC), 26 O.R. (2d) 129 (Div. Ct.).
Standing
[22] Mr. Pennington argued that Mr. Hawley – who is not himself a limited partner – has no standing to bring this appeal. The original motion was brought before the supervising judge by PwC, seeking directions with respect to the qualifications for voting on the election of a new General Partner. Mr. Hawley was a principal proponent of the arguments now being advanced by him, at that stage, however. No objection to his entitlement to do so was made before Farley J. and thus Mr. Hawley was deprived of any opportunity he may have had to take corrective measures. In any event, we do not think it is necessary to deal with this issue, given our conclusions as set out above.
The Nature of the Order Appealed From
[23] Nor do we think it necessary to deal at length with the issue of whether the Order appealed from is a final order or an interlocutory order. There is authority for the proposition that an order made in a contest between a party to a proceeding (Mr. Hawley, here) and someone who is not a party (Chalmers and Mr. Huq) is a final order if the order finally disposes of the rights of those persons in the issue between them. That is the case here. It is the nature of the order that determines its characteristics as “final” or “interlocutory”, not the party who is asserting opposition to it. See Smerchanski v. Lewis (1980), 1980 1699 (ON CA), 30 O.R. (2d) 370 (C.A.); Morse Shoe (Canada) Ltd. v. Zellers Inc. (1997) 1997 1573 (ON CA), 10 C.P.C. (4th) 390 (Ont. C.A.).
Disposition
[24] For the foregoing reasons, then, the appeal is dismissed.
[25] If the parties are not able to resolve the issue of costs, they may make brief written submissions (limited to five pages) within thirty days of the release of this endorsement.
“R. McMurtry C.J.O.”
“R.A. Blair J.A.”
“L.C. Kozak J.”