Court of Appeal for Ontario

Date: 2017-12-27 Docket: C62632 Judges: Doherty, Benotto and Huscroft JJ.A.

Parties

Between

790668 Ontario Inc., Frezza Management Inc., Elio Frezza, Gina D'Andrea-Vozza, Donna D'Andrea-Hogan, Onorio Frezza, Tara Frezza, Julia Frezza and Michael Frezza

Plaintiffs (Appellants)

and

D'Andrea Management Inc., Daney D'Andrea, D'Andrea Developments Inc., Rick D'Andrea, 1317539 Ontario Inc., 1476335 Ontario Inc., 1052534 Ontario Limited, Aldo Rotondi, Jose Nunes, 1536962 Ontario Ltd., St. Willibrord Community Credit Union Limited, now operating as Libro Financial Group

Defendants (Respondents)

Counsel

For the appellants: William V. Sasso and Nicholas J. Cartel

For the respondents 1476335 Ontario Inc. and Aldo Rotondi: Jonathan F. Lancaster

For the respondent Libro Financial Group: Harry van Bavel

For the respondents D'Andrea Management Inc. and Rick D'Andrea: Richard B. Swan and Hartlee Zucker

Heard: December 19, 2017

On appeal from: The judgment of Justice Johanne Morissette of the Superior Court of Justice, dated August 2, 2016.

Reasons for Decision

Background

[1] The appellants are minority shareholders in a family-owned company, D'Andrea Management Inc. ("DMI"). DMI was used as an investment vehicle by the D'Andrea/Frezza family to acquire a commercial property. The respondent Daney D'Andrea was the director of DMI and oversaw the purchase, development, and management of the property. The appellants alleged that through a series of transactions Daney diverted interests in the property to his benefit and that these transactions were oppressive to their interests. The appellants also alleged a conspiracy between several of the respondents to allow DMI to default on a mortgage so that a company that Daney controlled could take assignment of the power of sale under the mortgage and sell the property.

[2] Following a 19-day trial, the trial judge rejected the appellants' claims and awarded costs to the respondents. The appellants appeal the dismissal of their claims and seek leave to appeal costs. The respondents 1476335 Ontario Inc. and Aldo Rotondi cross-appeal a portion of the cost award.

Factual History

[3] In February 1994 DMI purchased property from Fiberglas for $4.5 million with a $4.1 million vendor take back mortgage. Four years later, Daney sued Fiberglas on behalf of DMI as a result of environmental problems with the property. They settled the lawsuit and the mortgage was reduced to $1.05 million. The respondent Libro Financial Group financed DMI's indebtedness with a $1.3 million-dollar loan in exchange for a first mortgage on the property.

[4] In order to close the deal with Fiberglas and Libro, DMI shareholders were required to discharge their second mortgages against the property. All of DMI's shareholders executed the discharge except for two of the appellants – Peter and Onoria Frezza. The respondents alleged that Peter and Onorio refused to discharge the second mortgage in order to leverage favourable terms in relation to a debt owed by a company owned by Peter to DMI.

[5] In order to complete the Fiberglas deal without the discharge of the second mortgage, Daney incorporated 1317539 Ontario Inc. ("Newco"). To place Libro in the necessary first ranking mortgage position (without Peter and Onorio's consent), DMI assigned the first-ranking Fiberglas mortgage security to Libro through Newco as security for the Libro mortgage. Libro provided the new financing of $1.3 million, secured through the assignment of the Fiberglas first mortgage security, and backed by a personal guarantee of $1.3 million by Daney.

[6] For several months thereafter, Newco made loan payments on the $1.3 million indebtedness to Libro. However, during this period DMI (controlled by Daney at the time) paid Newco the equivalent of the prior loan payments on the former $4.1 million Fiberglas indebtedness. This resulted in a diversion of the economic benefit of the Fiberglas settlement from DMI to Newco for a period of several months, amounting to approximately $217,000. Onorio commenced a derivative action against DMI.

[7] Eventually, the parties reached an agreement for repayment of the $217,000 and Onorio's derivative action was abandoned. Daney agreed to renew his $1.3 million personal guarantee on the condition that he be compensated for this renewal and for his years managing the property. This was done in the form of a management agreement and guarantee fee.

[8] In April 2001, the majority of DMI shareholders resolved to list the property for sale for $2.499 million. Several of the appellants opposed the sale of the property. On June 20 2001, the appellants commenced an oppression action.

[9] DMI defaulted on the Libro loan. In April 2002, Libro issued a notice of sale. The appellants took no steps to redeem the property.

[10] In May 2002, Daney incorporated 1476335 Ontario Inc. ("147"). Libro then assigned its power of sale under the mortgage of the property to 147 and it continued the power of sale proceedings in Libro's place. Jose Nunes, an unrelated party, purchased the property for $1.3 million with a vendor take-back mortgage of $1.125 million. In January 2004, Nunes transferred the property back to 147 for $1.101 million.

Issues on Appeal

[11] Although the appellants raise six grounds of appeal, they can be grouped into two categories:

1. With respect to the oppression remedy, they allege that the trial judge:

a. misapplied the clean hands doctrine as it applies to the oppression remedy;

b. erred in finding that they did not have reasonable expectations;

c. did not give adequate weight to the fact that one of the respondents obtained benefits properly belonging to DMI.

2. With respect to the conspiracy claim arising out of the sale of the property, they allege that the trial judge:

a. erred in the finding that the mortgagees fulfilled their obligation to obtain market value of the property;

b. erred in finding that the appellants had suffered no damages.

Analysis

Standard of Review

[12] We do not agree. The appellants' issues are all based on alleged errors of fact by the trial judge. The trial judge made findings of fact that were supported by the evidence. The appellants can show no misapprehension of fact or error of law.

Oppression Remedy

[13] With respect to the oppression remedy, the trial judge noted that because the oppression remedy is an equitable remedy, it was necessary to consider the conduct of both the defendants and the appellants in the circumstances. She concluded that Peter and Onorio refused to agree to discharge the second mortgage in an attempt to gain leverage over DMI and Daney, in order to renegotiate the original 1994 shareholders' agreement and reduce or eliminate the debt that Peter owed to DMI. She concluded that even if a postponement of the mortgage had been presented, Peter and Onorio would have attempted to extract some benefit.

[14] When claims in equity are made, the court will not reward those who come with unclean hands. The trial judge was entitled to consider and make findings based on the appellants' conduct.

[15] With respect to Daney's conduct, the trial judge concluded that as a result of Peter and Onorio's refusal, Daney had to protect DMI's interests, form Newco, and complete the deal with Fiberglas. She noted that Daney was the only shareholder of DMI "risking his personal financial affairs" through a guarantee. She found that the creation of Newco was not oppressive given that it was in DMI's interests to close the deal with Fiberglass. Further, she found that Daney justifiably no longer wanted to be the only shareholder personally liable on the mortgage – his conduct could not be seen as oppressive.

[16] We note that the trial judge did criticize Daney for his "clearly wrong" conduct in relation to his diversion of the benefit of the Fiberglass settlement to Newco. However, she noted that the agreement to repay the money resolved this dispute and resulted in the abandonment of the earlier derivative action. Further, she observed that the appellants offered no evidence that the amount payable to Daney for the guarantee or his management was unreasonable.

Conspiracy Claim

[17] With respect to conspiracy, the trial judge concluded that no unlawful conspiracy was made out on the evidence. The alleged conspiracy was an agreement that Libro assist Daney in making DMI default on the mortgage, enabling Libro to proceed by way of power of sale against the property and for Daney to be assigned that power of sale.

[18] She rejected the conspiracy claims based on findings of credibility. She found there was no evidence that the sale to Nunes and then back to 147 was intended to cause harm to the appellants. She also found no conspiracy between Libro and Daney, concluding that Libro just wanted to be extricated from the dispute. These findings were open to her on the evidence.

[19] In any event, the trial judge concluded that there had been no proof of damages and we see no error in this regard.

Cross-Appeal on Costs

[20] The respondents Rotondi and 147 seek leave to cross-appeal on costs for two reasons. First, they say that the trial judge should have included the appellants Tara and Michael Frezza as jointly and severally liable for the costs. The trial judge determined that they did not involve themselves in the litigation save for loaning their names as shareholders of DMI. We see no reason to interfere with her discretionary decision to exclude them. Second the cross-appellants submit that the trial judge did not order solicitor and client costs from the date of the offer under the misunderstanding that the offer was not open at the date of trial. It was. On this basis, we allow the cross-appeal by making an adjustment to the costs payable to the cross-appellants. The costs are therefore increased by $18,000 to $266,000 to reflect the full indemnity costs from the date of the offer in accordance with r. 49(10).

Disposition

[21] In conclusion, the appeal is dismissed, the cross-appeal is allowed in part. The appellants are to pay costs of the appeal to the respondents as follows:

• To DMI and Rick D'Andrea, $27,000;
• To Rotondi and 147, $20,000;
• To Libro, $10,000.

[22] These amounts are inclusive of disbursements and HST and are the joint and several liability of the appellants except for Tara and Michael Frezza.

"Doherty J.A."

"M.L. Benotto J.A."

"Grant Huscroft J.A."