Court of Appeal for Ontario

Date: October 5, 2018 Docket: C65240

Judges: Hourigan, Miller and Trotter JJ.A.

Between

1802248 Ontario Ltd. carrying on business as Anytime Fitness, Ryan Johnson, and Tatiana Johnson

Plaintiffs (Respondents)

and

Michael Allen, Clark Kent, 2487048 Ontario Limited and Orion Fitness Inc.

Defendants (Appellants)

Counsel:

• Edward Spong, for the appellants
• Scott R. Fairley, for the respondents

Heard: October 3, 2018

On appeal from the judgments of Justice R. Cary Boswell of the Superior Court of Justice, dated November 27, 2017, with reasons reported at 2017 ONSC 7041, and dated March 7, 2018, with reasons reported at 2018 ONSC 1561.

Reasons for Decision

Background

[1] The individual respondents (the "Johnsons") operated a fitness club business that they owned through 1802248 Ontario Ltd. ("180"). The individual appellants expressed an interest in purchasing the business. The parties came to terms. The respondents executed an Asset Purchase Agreement on October 30, 2015 with 2487048 Ontario Limited ("248") as the purchaser, acquiring 180's equipment, goodwill, and interest in its leased premises. This agreement was drafted without the benefit of counsel.

[2] 248 is wholly owned and controlled by the individual appellants, and was incorporated for the sole purpose of acquiring the assets of 180.

[3] The appellants took possession of the premises and equipment and began operating the business as of November 1, 2015. Under the terms of the agreement, 248 was to assume 180's obligation under the lease, and, in accordance with the terms of the Asset Purchase Agreement, assume the respondents' obligations under "two loans/lease with respect to certain Equipment being assumed by the Buyer in the amount of approximately Fifty Eight Thousand Dollars ($58,000), with the exact amount to be determined by a current statement to be provided by the Seller at the Time of Closing."

Lease and Financing Arrangements

[4] On November 12, 2015, the respondents entered into an agreement with the landlord of the fitness club premises for the assumption of the lease by 248. However, 180 remained jointly and severally liable for the tenant's obligations for the remainder of the term of the lease. The landlord provided certain rent abatement incentives to 248 that would be forfeit in the event that 248 failed to pay rent over a six month period. The Johnsons remained personally liable on the lease in the event that 248 defaulted during these six months. A default would also trigger the Johnsons' liability under a previous rent deferment agreement between the Johnsons, 180, and the landlord signed in March 2015. Following the six month period, Orion Fitness Inc., a corporation entirely controlled by the individual appellants, would assume the Johnsons' place as guarantor.

[5] 248 was unable to get approval from the respondents' bank to assume 180's two business loans, one for equipment, and the other for leasehold improvements. As a result, the Johnsons arranged with the appellants for the Johnsons to repay the loans, in exchange for a promissory note from 248. That is, the respondents agreed to finance the appellants' acquisition of the business.

Breach and Default

[6] Now in possession of the premises and operating the fitness club, the appellants refused to sign the promissory note, placed a stop payment on a cheque provided to the respondents, and raised objections about whether the full amount of the respondents' loans was genuinely related to the business. Further, 248 immediately defaulted on its obligations under the lease, triggering the Johnsons' obligation to indemnify the landlord.

[7] The appellants took the respondents' business, paid nothing for it, and, by failing to pay rent under the assumed lease, created substantial financial obligations for the respondents.

Motion Judge's Decision

[8] The motion judge was satisfied that there was no genuine issue for trial with respect to 248's obligations under the Asset Purchase Agreement and some portion of the claim related to rent. He found 248 liable and awarded judgment against it in the amount of $85,637.97. The motion judge ordered a mini trial on the question of liability for rent for the period of November 2015 to January 2016. He further ordered that the issue of the individual appellants' personal liability be adjourned to the mini trial, on the grounds that the respondents had not pleaded the basis for personal liability and would need to amend their pleadings.

[9] The respondents subsequently advised the motion judge that they had already amended their Statement of Claim by the time of the hearing of the summary judgment motion, but had inadvertently filed the unamended copy with their motion materials. After a supplementary hearing on the issue of personal liability, the motion judge found that the individual appellants were the controlling minds of 248, and had "used 248 to engage in improper and dishonest conduct." He made the following finding:

[The individual appellants] never intended to make any payment to the [respondents]. They dealt with the [respondents] in an entirely dishonest manner and have simply converted the [respondents'] assets to themselves. Their actions have been high-handed and deceitful.

[10] Having satisfied himself that the appellants' conduct satisfied the criteria given in Transamerica Life Insurance Company of Canada v. Canada Life Assurance Company et al. (1996), 28 O.R. (3d) 423 (Gen. Div.), aff'd [1997] O.J. No. 3754 (C.A.) for piercing the corporate veil, the motion judge granted judgment against the individual appellants in the amount of $58,697.06.

Appellate Analysis

Grounds of Appeal

[11] The appellants raise three grounds of appeal, none of which have merit.

First Ground: Interpretation of the Asset Purchase Agreement

[12] First, the appellants argue that the motion judge erred in his interpretation of the Asset Purchase Agreement. Specifically, they argue that this agreement only required payment for the equipment loan, in the amount of $18,582.87 and not for the leasehold improvements loan.

[13] The motion judge made no error in observing the ambiguity in the language of the Asset Purchase Agreement, namely an apparent mismatch between the reference to equipment and a required payment in an amount far in excess of what would have been required for the payment of the equipment loan only. He applied the only contractually reasonable interpretation of it: that the purchase price was approximately $58,000 and included not only equipment but leasehold improvements.

Second Ground: Foreseeability of Damages

[14] Second, the appellants argue that the motion judge erred in finding that 248's breach of the Asset Purchase Agreement made it liable for damages the respondents incurred when they were unable to pay rent to the landlord under the Assignment Agreement. The appellants argue that the obligations the respondents incurred under the lease were not a foreseeable consequence of breach when the parties executed the Asset Purchase Agreement.

[15] There is no merit to this argument. The appellants breached the Asset Purchase Agreement by failing to make any of the required payments. It was entirely foreseeable that a consequence of this breach would be that the respondents would be unable to meet their obligations to the landlord. It was also foreseeable that this would cause the respondents to forfeit the negotiated rent abatement and become liable for the deferred rent under the March 2015 rent deferment agreement.

Third Ground: Fraudulent Conduct

[16] Finally, the appellants argue that there is no evidence of the individual appellants doing anything that could be construed as fraudulent conduct.

[17] To the contrary, the motion judge ably chronicled the individual appellants' course of action, and drew the available inference that the appellants took the respondents' business without intending to pay for it. These findings were available on the evidence before the motion judge, and there is no basis upon which we could interfere with the motion judge's findings.

Disposition

[18] The appeal is dismissed. The respondents are awarded costs in the amount of $12,500 inclusive of disbursements and HST.

"C.W. Hourigan J.A."

"B.W. Miller J.A."

"Gary T. Trotter J.A."