Court of Appeal for Ontario
DATE: 20211008 DOCKET: C68288
Benotto, Brown and Harvison Young JJ.A.
BETWEEN
ESC Enterprises Inc. and Strongco Plastics Ltd. Applicants (Appellants in Appeal)
and
1867295 Ontario Inc., Marcelo Hernandez, Marisa Hernandez, Strongco Ltd., Dourada Investment Inc. and Carlos Lopes Respondents (Respondents in Appeal)
DOCKET: C68289
BETWEEN
Marcelo Hernandez and StrongCo Ltd. Applicants (Respondent on Appeal)
and
ESC Enterprises Inc. and Strongco Plastics Ltd. Respondents (Appellants on Appeal)
Counsel: David P. Preger, for the appellants ESC Enterprises Inc. & Strongco Plastics Ltd. Maya Poliak, for the respondents Marcelo Hernandez, Marisa Hernandez and Strongco Ltd.
Heard: September 7, 2021 by video conference
On appeal from the order of Justice Gilmore of the Superior Court of Justice, dated March 18, 2020.
Reasons for Decision
[1] These two appeals arise out of a failed business plan which attempted unsuccessfully to revive a bankrupt manufacturing company.
[2] The plan involved a secured loan to a new entity that would operate a business. The bankrupt manufacturing company would transfer its assets to the new company and a general security agreement would be provided. A Quitclaim Deed was to be provided regarding the assets which were referred to as the “Trailered Assets”.
[3] Unfortunately, this project failed as well.
[4] At issue is whether the Trailered Assets are subject to the security agreement. This depends on whether the Quitclaim is enforceable. The motion judge concluded that the Quitclaim was not a valid contract and hence was not enforceable.
[5] Meanwhile, the former operator of the failed company sought payment for work that he had done in anticipation of the new business. The motion judge awarded him a salary on the basis of unjust enrichment.
[6] For the reasons that follow, we dismiss the appeal involving the assets because the Quitclaim is unenforceable. However, we allow the appeal with respect to the salary to be paid to the former operator.
Facts
[7] The appellant ESC Enterprises Inc. (“ESC”) is held by a sole shareholder, Ed Siu-Chong (“Ed”). Ed owns 50% of the shares of the appellant Strongco Plastics Ltd. (“Plastics”). The respondent Marcelo Hernandez (“Marcelo”) and his business partner operated a company “BuiltRite”, which manufactured windows, doors, decking systems and prefabricated housing components. BuiltRite was deemed bankrupt on October 31, 2017.
[8] In November 2017, a representative from BuiltRite approached ESC with a business plan. The plan contemplated a convertible loan of $1 million, secured against BuiltRite assets worth $5.5 million. There were two types of assets: 1) the unencumbered “Trailered Assets”, which included dies worth $2 million and were owned by a separate company, Strongco Ltd. (“Strongco”) [1] ; and 2) the encumbered “Warehoused Assets”, which were owned by BuiltRite. Some of the Trailered Assets had been loaned from a third party and would not form part of the security for the proposed investment.
[9] Ed proposed an alternative structure whereby a new company would operate the business. Ed would advance funds to the new company on a secured basis. On February 2, 2018, the new company, Plastics, was incorporated. It was agreed that Plastics would purchase the Warehoused Assets from the facility where they were stored, and Strongco would roll the Trailered Assets into Plastics.
[10] In February 2018, ESC registered a security interest under the Personal Property Security Act (“PPSA”) for all of Plastics’ inventory, equipment, accounts, personal property and motor vehicles. On March 14, 2018, to secure advances under the loan, Plastics executed a Grid Promissory Note and a General Security Agreement in favour of ESC. Thus, ESC is the sole registered secured creditor of Plastics under the PPSA.
[11] On March 14, 2018, a Unanimous Shareholders Agreement (“USA”) was signed between the principals of the corporations. At this time, ESC executed an undertaking in favour of Plastics, stating that ESC would advance an aggregate of $1 million, less all amounts advanced at any time and listed in the grid promissory note. The advancement would occur provided “there is no impediment to the advancement of the business of the Corporation on a profitable basis, other than the failure of the undersigned to advance the amounts provided for herein on the terms set forth herein.”
[12] To effect a “roll in” of the Trailered Assets into Plastics, a Quitclaim Deed dated February, 2018 was prepared by counsel for ESC and Plastics. The Quitclaim Deed stated that Strongco quitclaimed all right, title and interest in and to the personal property and assets listed in “Schedule A” for the benefit of Plastics. When the Quitclaim was signed on April 13, 2018, Schedule A was blank. Marcelo’s counsel advised counsel for ESC and Plastics that Schedule A would need to be revised once Marcelo had inventoried the equipment, and then a revised Schedule A would be “slip sheeted” in. Marcelo never completed an inventory, and no Schedule A was “slip sheeted” in.
[13] By August 1, 2018, there was insufficient remaining committed capital to resume the business. The parties agreed to sell the Trailered Assets and Warehoused Assets. On October 2, 2018, while attempting to sell the assets, Marcelo raised the question of their ownership.
[14] In February 2019, Marcelo sold certain dies for $85,000, notwithstanding the question of their ownership.
[15] The parties agreed that Marcelo was to receive an annual salary of $100,000 plus a yearly bonus of up to $40,000. They disagree as to when the salary was to commence.
Decision Below
[16] There were two applications in the court below giving rise to these two appeals.
[17] In the first application, the appellants ESC and Plastics sought an order declaring that equipment had been transferred to Plastics. The motion judge dismissed the application on the basis that the Quitclaim agreement was not enforceable. ESC and Plastics appeal.
[18] In the second application, the applicant Marcelo sought compensation for work he had performed. The motion judge granted his application. ESC and Plastics appeal.
(1) The application by ESC and Plastics
[19] The application judge determined that the Quitclaim was not a binding contract because it lacked certainty and because no consideration was given for the Quitclaim. The application judge held that the Quitclaim was unclear as to which assets formed part of Schedule A, there was no agreement on the timing of the purported transfer of assets from Strongco to Plastics and the words “roll-in” were never defined. Further, the application judge held that consideration for the Quitclaim was intended to be ESC’s advance of $1 million to Plastics, which was never completed. The application judge also determined that the dies were never transferred to Plastics by way of Schedule A and therefore that Marcelo was within his rights to sell the dies.
(2) Application by Marcelo for salary
[20] The application judge ordered that ESC pay Marcelo for work performed for Plastics from January to August 2018. She found that ESC was unjustly enriched by Marcelo’s services from January to August 2018, as Marcelo was deprived of a living, ESC benefited from his services and there was no reason for the deprivation. She ordered ESC to pay Marcelo $66,666 for January to August 2018, being the prorated amount of a salary of $100,000.
Analysis
(3) The appeal by ESC and Plastics
[21] We see no error in the application judge’s determination that the Quitclaim is unenforceable. When it was signed in April 2018, Schedule A was blank, and it was unclear to the parties which assets would have formed part of Schedule A. The Quitclaim did not specify the timing for the transfer of assets. Neither party had a real understanding of what the Quitclaim represented. Therefore, the agreement cannot constitute an enforceable contract.
[22] The appellants submit that even if Schedule A to the Quitclaim was not technically finalized, equity will treat it as finalized, as “equity considers done that which ought to have been done” and Marcelo should have conducted the inventory. However, the lack of an up-to-date Schedule A was not the only issue with the Quitclaim. As the application judge noted, the Schedule A was blank, the parties were unclear which assets would be listed in Schedule A, and other terms in the Quitclaim were uncertain. The Supreme Court of Canada recently reaffirmed the applicable test for finding that an agreement exists at common law in Owners, Strata Plan LMS 3905 v. Crystal Square Parking Corp., 2020 SCC 29, 450 D.L.R. (4th) 105, at para. 37: “The test is objective, and the offer, acceptance, consideration and terms may be inferred from the parties’ conduct and the surrounding circumstances.” Here, essential terms could not be inferred due to the parties’ unclear intentions. These standalone issues with the Quitclaim, aside from the issues with Schedule A, mean that even if equity treated Schedule A as finalized the Quitclaim would still be unenforceable. Thus, the appellants cannot rely on the equitable maxim to render the Quitclaim enforceable.
[23] Although the appellants submit that there is an “abundance of proof” that the dies were intended to be rolled into Plastics, they fail to point to any actual proof. The only mention of the dies in any documents prepared by the parties was in the original promotional PowerPoint presentation, but there was no evidence to link the dies to the final business deal. In any event, since the Quitclaim was not enforceable, the dies were not transferred to Plastics.
[24] The appeal by ESC and Plastics is dismissed.
(4) Marcelo’s Salary
[25] The application judge’s determination with respect to Marcelo’s salary cannot stand for three interrelated reasons.
[26] First, she accepted Marcelo’s evidence that he never agreed to forgo his salary. She said: “Marcelo denies that he ever agreed to forgo his salary and potential bonus”. She did not consider two emails that Marcelo sent indicating the starting date for his salary:
On April 5, 2018 Marcelo wrote:
When we first made our deal and had dinner all together, we expressed that evening our requirement of an advance so that we can keep a float for 10k each and you replied by saying that you would help us once we start moving the equipment.
Unfortunately, I don’t believe that any of us were expecting things to drag this long and our situations have only [become] tighter. We would like to humbly request if it could be possible to receive an advance from the company for 10k each for tomorrow Friday April 06, 2018 which can be accounted against our payroll once we initiate so that we are able to catch up with our outstanding payments. [Emphasis added.]
On October 6, 2018 Marcelo wrote to say that he has gone “without pay or advances as promised”.
[27] When the application judge concluded that Marcelo had never intended to give up salary for the period before the corporation was up and running, she did not discuss these emails which appear to indicate that the agreement was not to pay during the preparation phase.
[28] Second, the application judge’s conclusion with respect to unjust enrichment is set out in two short paragraphs:
[91] I find that ESC has been unjustly enriched by Marcelo’s services between January and August 2018. Marcelo has been deprived of a living for himself and his family during that period, and ESC has benefitted from Marcelo’s experience and services without having to compensate him for those services. There was no reason for such a deprivation as it defies logic that Marcelo would forgo payment for his services in this factual scenario.
[92] As such, the test for unjust enrichment in Consulate Ventures Inc. v. Amico Contracting and Engineering (1992) Inc., 2007 ONCA 324, 282 D.L.R. (4th) 697, at paras. 95-99 has been made out and Marcelo should receive the sum of $66,666 being the prorated amount of a salary of $100,000 for January to August 2018. Consulate Ventures at para. 99 explains the ingredients of a juristic reason for the award:
Thus, where the claim for restitutionary relief is based on quantum meruit, as in this case, an explicit mutual agreement to compensate for services rendered is not a prerequisite to recovery. It suffices if the services in question were furnished at the request, or with the encouragement or acquiescence, of the opposing party in circumstances that render it unjust for the opposing party to retain the benefit conferred by the provision of the services. See Fridman, supra, at pp. 290-92; Nicholson v. St. Denis (1975), 57 D.L.R. (3d) 699 (Ont. C.A.), leave to appeal to S.C.C. refused, [1975] 1 S.C.R. x.
[29] The application judge did not provide an analysis, in light of the emails to explain the request, of ESC’s encouragement or acquiescence to Marcelo’s work.
[30] Third, Marcelo’s work was done for Plastics, not ESC. Yet ESC was ordered to pay. Even though the main shareholder of each corporation is the same person, we see no reason to pierce the corporate veil and require ESC to pay for work done for Plastics. This court in Yaiguaje v. Chevron Corporation, 2018 ONCA 472, 141 O.R. (3d) 1, at para. 65, citing Transamerica Life Insurance Co. of Canada v. Canada Life Insurance Co. (1996), 28 O.R. (3d) 423 (S.C.), explained the circumstances in which a corporate veil can be pierced: 1) when the court is construing a statute, contract, or other document; 2) when the court is satisfied that a company is a “mere facade” concealing the true facts; and 3) when it can be established that the company is an authorized agent of its controllers or its members, corporate or human. These factors are not present here. Consequently, even if unjust enrichment had been established, it could not attach to ESC.
Disposition
[31] For these reasons, the appeal by ESC regarding the assets (C68288) is dismissed. The appeal regarding the salary to Marcelo (C68289) is allowed.
[32] Each party shall bear their own costs of the appeal and the applications at the court below.
“M.L. Benotto J.A.”
“David Brown J.A.”
“A. Harvison Young J.A.”
[1] The record is not clear whether Strongco or BuiltRite owned the Trailered Assets. However, because Marcelo’s sister was the sole officer and director of Strongco, and all parties were involved in the project, the distinction is of no moment.