Court of Appeal for Ontario

Date: 2018-05-28 Docket: C64138

Judges: Rouleau, van Rensburg and Pardu JJ.A.

Between

Charlene Danita Ritchie Applicant (Respondent in Appeal)

and

Philip William Ritchie Respondent (Appellant)

Counsel

Gary S. Joseph and Stephen P. Kirby, for the appellant

Herschel Fogelman and C. Paterson, for the respondent

Heard: April 23, 2018

On appeal from the orders of Justice Theresa Maddalena of the Superior Court of Justice dated July 4, 2017, with reasons reported at 2017 ONSC 4130, and dated September 29, 2017.

Reasons for Decision

Overview

[1] Philip William appeals from two trial decisions that determined issues unresolved by the parties pursuant to partial minutes of settlement. The issues for trial were:

1. Duration and quantum of spousal support;
2. Child and spousal support arrears;
3. Amount to be paid by the appellant to the respondent to reflect the post-valuation-day increase in the value of her shares in Keefer Developments Limited ("KDL"), which she had transferred to him;
4. Disposition of a recreational property in the United States (the "Allegheny Mountain property");
5. Costs.

[2] The appellant submits that the trial judge erred by refusing to deduct losses incurred by Keefer Mansion Inc. ("KMI"), in which KDL had a majority interest, in determining his income for the purpose of support. He also submits that the trial judge erred in her assessment of the change in the value of the KDL shares, in her disposition of the Allegheny Mountain property, and in determining costs.

[3] The issue concerning KMI, as framed for the trial judge, turned on (i) whether certain losses incurred by KMI, and other corporations controlled by the appellant, should be taken into account in determining his income for the purpose of support; (ii) whether the losses incurred by KMI provided a purely personal benefit to the appellant; and (iii) whether this benefit should be considered in determining the post-valuation-date change in the value of the KDL shares.

Income

[4] The appellant retained an expert in business valuation, Michael Carnegie, to provide an opinion as to his income for the purpose of support. This was a complex matter because the appellant controlled, in whole or in part, over 44 corporations. The expert's calculations initially deducted losses generated by two corporations, KMI and Historic Niagara Development LP ("HNDL"), controlled by the appellant. Carnegie testified that HNDL was not expected to continue losing money and the trial judge, on this basis, declined to deduct those corporate losses from the appellant's income. That finding is not challenged on appeal. The trial judge also refused to deduct the losses incurred by KMI in calculating the appellant's income, on the ground that those losses were "incurred entirely and solely for the benefit of the appellant and without the knowledge or consent of" the respondent. The appellant submits that the trial judge erred in refusing to take into account those losses, which were real losses incurred in the operation of the KMI business, in determining his income for the purpose of support.

[5] KDL owned shares in KMI, which leased a historical building, Keefer Mansion, that it operated from 2006 as an inn, with a restaurant, and then as an events venue (the "Mansion"). KMI was under the sole direction and control of the appellant. From approximately May 2012 up to and including the trial date, the appellant, his current spouse and some of their respective children resided in the Mansion. KMI had accumulated substantial losses which were ongoing, and its operations were funded by another of the appellant's companies, MSANF Inc. The trial judge held that KMI was used to fund the appellant's lifestyle, and that the continued operation of its business made no financial sense. KMI had cumulative losses of over $2 million and had lost money for ten years in a row. The appellant's own expert testified that a prudent owner would "stop the red ink," and admitted that there was no economic or commercial reason for the losses to be continually funded, except to personally benefit the appellant.

[6] The trial judge's determination of the appellant's income was reasonable in light of the evidence before her. The appellant acknowledged that his line 150 income as reported on his tax returns did not represent his true income. Even if he was determined to continue to operate KMI at a loss, the court was not, as the appellant argues, bound to accept his "business judgment", when it came to determining his income for the purpose of support.

[7] The appellant was not a credible witness. He was not forthcoming in his evidence about management fees he and others received from the various corporate entities. During cross examination, it became clear that he had incorporated another corporation, through which he funneled monies that contributed to his income. His own expert was not provided with this crucial information. The appellant does not challenge the trial judge's credibility findings on appeal.

[8] The trial judge concluded, at paras. 92-95, as follows:

The respondent continued to assert in his evidence that his actual income for support purposes is about $80,000. I find it is virtually impossible to determine his true income given all the inconsistencies in his evidence as well as the lack of relevant information. The applicant's approach is to utilize the calculations prepared by Carnegie, but to back out of those calculations the losses for KMI and HNDL for reasons already provided.

In the absence of reliable and cogent evidence of the respondent, as well as the absence of a properly instructed expert report, I adopt the approach of the applicant as reasonable in the circumstances.

Therefore, I find the income of the respondent for support purposes as follows:

2012 $326,716 2013 $194,017 2014 $230,530 2015 same as 2014 2016 same as 2014

It remains the responsibility and obligation of the respondent to satisfy the court as to his real income for support purposes. The lack of a properly instructed report substantially hampers the decision-making process of the court. The evidence of the respondent with respect to finances has been vague and unclear. Family law proceedings are all about full and fair disclosure. Anything less is unacceptable and draws adverse inferences. In this particular case, it is clear that full particulars of the respondent's finances have not been provided to his expert or to the court.

[9] There is no basis to interfere with the trial judge's findings about the appellant's income for support purposes.

The Change in Share Value

[10] The appellant submits that the trial judge should not have considered the "personal benefit" he received through KMI in assessing the change in the value of the KDL shares. The appellant did not lead any expert evidence at trial about the change in the value of those shares. The respondent's expert, Steve Ranot, gave evidence of two values. The higher value reflected an exclusion of KMI's losses after the date of separation. The trial judge accepted at paras. 36-38 that the losses incurred by KMI should not be factored into the calculation of the change in the value of the KDL shares:

KMI cannot repay its debt. The Mansion's debt has continued to escalate since the date of separation. The Mansion continues to exist as a personal benefit for the respondent which I will also deal with later herein. The Mansion debt has continued solely for the benefit of the respondent.

The respondent is funding the continued and ongoing losses in KMI, where he now lives, with income from [2009104 Ontario Inc. and MSANF Inc.]. Under the circumstances, the losses in KMI ought to be ignored for purposes of determining the post-separation increase in value.

Therefore, I accept the high value as calculated by Ranot and in his report. I conclude that the value of KDL post-separation is $947,039. The respondent owes to the applicant 20% which is $189,407. Therefore, the respondent shall pay to the applicant $189,407 as the increase in value of KDL. This may be rolled into a holding company created for the applicant for such purposes.

[11] We agree that the extent to which a corporation provides personal benefits to a shareholder, which notionally claims losses or a negative value on the corporate balance sheet, can be a relevant factor in the assessment of the value of the shares.

[12] There is no basis to interfere with this largely factual determination.

Allegheny Mountain Property

[13] The appellant submits that the trial judge erred in ordering him to pay $16,557.50 on account of the Allegheny Mountain trailer only, and not on account of the land lease where the trailer was located. He conceded during the trial that he sold the trailer without the consent of the respondent and used the proceeds to purchase a new trailer which was placed in the name of his current spouse. During the trial, the appellant agreed to pay the respondent $16,557.50 for the trailer.

[14] The precise nature of the parties' agreement was not made clear to the trial judge. The appellant has parked his new trailer on the leased land. The respondent has not in fact had access to the leased land, and does not oppose a change to the judgment to include a release of the lease as well as the trailer. Paragraph 5 of the order shall be changed to add "and on account of the leased land upon which the trailer was located, provided that the appellant shall indemnify the respondent for any income tax consequences to her flowing from the release of the lease."

Costs

[15] The appellant seeks leave to appeal costs and submits that the trial judge erred in awarding costs of $314,566 to the respondent, which was inclusive of over $80,000 in expert fees and other disbursements.

[16] The respondent sought costs on a full indemnity basis and submitted a bill of costs for over $450,000. The appellant submitted his own bill of costs in the sum of $186,045.50.

[17] The appellant submits that the trial judge erred in her costs decision. He argues that no costs should have been awarded since there was a partial settlement, and since he did no worse at trial than he would have had he accepted the offer to settle.

[18] We do not accept these arguments. Spousal and child support were in issue from the beginning of the litigation. This case was quite different from one such as Blank v. Micallef, which is relied upon by the appellant, in which the parties settled all the issues between them, except for costs, and then asked the judge to decide costs without the benefit of a factual context.

[19] The appellant has not articulated any basis to disagree with the trial judge's assessment of the offers made by the parties, at paras. 35-37:

Generally, I accept that the applicant obtained an order that is as favourable as the offer on most of the issues including property, spousal and child support, and arrears, save and except for the equalization payment.

The offer to settle of the respondent, dated May 12, 2016, ignored child and spousal support arrears, and ignored ongoing spousal support.

The offer of the respondent further did not realistically consider any increase in the value of the applicant's 20% interest in KDL. Generally, the respondent's offer was far below what the court ordered. [Footnote omitted.]

[20] The trial judge appropriately applied the relevant cost factors set out in r. 24 of the Family Law Rules, O. Reg. 114/99. At paras. 40-47, she explained:

The issues for trial were of paramount importance to the applicant. The financial issues of the case were complex. Separate and apart from the evidence of the applicant and the respondent, most of the time at trial dealt with the evidence of the experts.

The respondent's actions in this case, no doubt, clearly contributed to the higher costs of this litigation for the applicant. I made various findings in my reasons concerning lack of proper disclosure by the respondent. Further, for unknown reason, the respondent did not engage his expert to prepare an analysis of his income for 2015 and 2016. The respondent formed a new corporation into which he was funneling monies and yet this was not disclosed in advance of trial.

The court found the respondent's answers regarding his finances to be vague and unclear, all of which are outlined in the court's reasons released July 4, 2017.

Whether from bad judgment, carelessness, negligence or otherwise, I concluded that the conduct of the respondent was unreasonable. Legal fees could have been substantially reduced if the respondent had taken a more reasonable approach to this litigation.

The respondent's offer to settle was clearly not a reasonable one.

The court agrees that a consequence of the respondent's offer to settle was that the trial became inevitable with additional costs to the applicant.

The concealment of information relevant to the issues leads the courts to conclude unreasonable conduct which could amount to bad faith on the part of the respondent.

Under the circumstances, it would have been reasonable for the respondent to expect substantial cost consequences given his behavior during the litigation.

[21] The appellant's conduct alone would have justified considering full indemnity costs.

[22] Accordingly, we dismiss the appeal, with costs to the respondent in the agreed sum of $22,000, inclusive of disbursements and HST.

Paul Rouleau J.A.

K. van Rensburg J.A.

G. Pardu J.A.