COURT OF APPEAL FOR ONTARIO DATE: 20240502 DOCKET: COA-23-CV-0751

Miller, Favreau and Copeland JJ.A.

BETWEEN

1819472 Ontario Corp. Plaintiff (Respondent)

and

John Barrett General Contractors Limited, James J. Zaza Jr., JJZ Grounds Maintenance Inc., James S. Zaza Sr., Linda Truong*, Bich Van Truong, Cathy Truong-Ruetas*, Frank Repchik, WM. J. Trotter & Associates* and Meiko Terashima*** Defendants (Appellants*)

Counsel: Vito S. Scalisi and Rauf Azimov, for the appellants Shawn Tock, for the respondent

Heard: April 3, 2024

On appeal from the order of Justice Stephen T. Bale of the Superior Court of Justice, dated June 6, 2023, with reasons at 2023 ONSC 3411.

B.W. Miller J.A.:

A. Introduction

[1] The respondent corporation, 1819472 Ontario Corp. (“9472”), alleges that it was defrauded by its former principal, the appellant James J. Zaza Jr. (“Zaza”) and various others. The respondent, now controlled by Susan Barrett (“Barrett”), brought an action alleging that Zaza caused it to loan approximately $2.5 million to another corporation controlled by Zaza, John Barrett General Contractors Limited (“JBGC”), causing another related corporation to default on a promissory note to Barrett in the process.

[2] On a motion for summary judgment, the appellants argued that the action was commenced outside of the relevant limitation period and is statute-barred. They sought to have the action dismissed on that basis. The motion judge found the action not to be statute-barred and dismissed the motion.

[3] For the reasons that follow, I would dismiss the appeal.

B. Factual overview

[4] Barrett and her husband operated Kleinburg Nursery, a garden centre in Woodbridge. Barrett owned the common shares of John Barrett General Contractors Limited (“JBGC”), which owned the business, and Barrett’s husband owned the lands on which the nursery operated.

[5] Zaza was formerly an employee of JBGC. Intending to retire, Barrett and her husband agreed to sell the lands and business to him. Zaza incorporated two corporations for the purpose of acquiring the business and lands: 9472, which purchased the lands through a $525,000 vendor take-back mortgage that matured on April 12, 2017; and 1819471 Ontario Corp. (“9471”), which acquired the shares of both 9472 and JBGC. The shares of JBGC were purchased by 9471 from Barrett partly through a $400,000 cash payment, and partly through a promissory note payable by 9471 for the balance of approximately $1.9 million. The obligations from the business and property purchases were cross-collateralized, such that a default of one was stipulated to be a default of the other.

[6] Subsequently, there was a default under the promissory note.

[7] The vendor take-back mortgage was paid out in September 2016. In early 2017, 9472 – at that time under the control of Zaza – sold the land to a third party for $3.1 million, netting proceeds of $2,948,221.45. Barrett objected at the time that this was a violation of the agreement for the sale of JBGC, and the effect would be to deprive her of the collateral that secured the promissory note given by 9471.

[8] Zaza then caused 9472 to disburse the sale proceeds before assigning 9471 into bankruptcy on April 12, 2017. 9471 then defaulted on the payment of the roughly $1.9 million that was due to Barrett under the promissory note and which had been secured by the lands. Barrett was 9471’s only creditor.

[9] Zaza then assigned JBGC into bankruptcy as well. An insolvency trustee was appointed in both JBGC’s and 9471’s bankruptcy.

[10] On May 22, 2017, the trustee reported that JBGC had obtained loans of $1,466,857.94 and $924,075 from 9472 and had used the funds to pay debts to “various parties”, primarily institutional lenders. The trustee said that as Barrett was 9471’s only secured creditor, she was “releasing” the shares in 9471 to Barrett. The trustee was unable to locate the share certificates, and no share certificates were provided to Barrett. The shares in 9472 were registered to 9471 at that time.

[11] The next day, on May 23, 2017, Zaza resigned his positions as director and officer of 9471. Thereafter, 9471 had no directors and no officers.

[12] A year later, in May 2018, Barrett obtained an order under s. 161 of the Business Corporations Act, R.S.O. 1990, c. B.16, appointing an inspector to investigate the loans from 9472 to JBGC made after the sale of the lands, and the subsequent disbursement of funds by JBGC. On Barrett’s evidence, she sought the appointment because of information she had received from third parties that Zaza had misused corporate resources, and because she believed the trustee had not investigated how the proceeds of sale of the property had been distributed.

[13] On November 5, 2018, the inspector released his report, in which he detailed the amounts paid by JBGC and the persons to whom they were paid. The inspector’s report detailed that a substantial proportion of the funds from the sale of the property were loaned to JBGC, and then distributed to Zaza’s family members and others who were not arm’s length from Zaza.

[14] Two years later, on December 21, 2020, Barrett’s solicitor gave notice to the trustee in bankruptcy, pursuant to s. 65(2) of the Personal Property Security Act, R.S.O. 1990, c. P.10 (“PPSA”), that Barrett proposed to foreclose on 9471’s property, which was its shares in 9472. The trustee did not object, and Barrett took ownership of the shares of 9472. Barrett’s position is that prior to this notice, she had asserted to the trustee that she was entitled to the shares but had not taken the steps to acquire title that were required by the PPSA. Thereafter, Barrett became the sole officer, director, and shareholder of 9472.

[15] Barrett filed a notice of change with the Ministry of Consumer and Business Services, reporting that Zaza ceased to be a director in 2017 and that she had been elected director on January 6, 2021. She discovered that Zaza had not caused 9472 to file a claim in JBGC’s bankruptcy. She then filed a proof of claim on behalf of 9472 and caused 9472 to commence the action to recover funds disbursed by Zaza through 9472 to JBGC.

[16] Barrett caused 9472 to commence this action against the appellants on April 20, 2021.

C. The summary judgment motion

[17] The appellants brought a motion for summary judgment, seeking dismissal of the action on the basis that it was statute-barred under the Limitations Act, 2002, S.O. 2002, c. 24, Sched. B. The appellants argued that Barrett learned of the claim in May 2017, and the limitation period began to run at that time, expiring two years later.

[18] The motion judge found instead that the limitation period began to run on January 6, 2021, when Barrett became a director of 9472. He found that knowledge of the alleged fraud could not be attributed to 9472 prior to that time, because no one with knowledge of the alleged fraud controlled 9472 prior to Barrett’s appointment. As 9472 is the plaintiff and not Barrett, the question was not when Barrett first knew of the acts complained of, but when that knowledge could be attributed to 9472.

[19] The motion judge rejected the appellants’ argument that Barrett’s knowledge could be attributed to 9472 in May 2017, when the bankruptcy trustee had stated that she had “released” the shares of 9472 to Barrett pursuant to her security. The motion judge found that the release of the shares to Barrett could not have the effect of transferring ownership of the shares to Barrett. As a secured creditor, Barrett had to comply with the foreclosure procedure under the PPSA to take title:

When the trustee said that she was “releasing” the shares in the plaintiff to Barrett, she could be saying no more than that she recognized Barrett’s security and conceded that the unsecured creditors had no interest in the shares. This could not have the effect of transferring the shares into Barrett’s ownership. As a secured creditor, in order to take ownership of the shares, she had to comply with the foreclosure procedure in Part V of the Personal Property Security Act.

[20] The motion judge also found that in light of the limited information she received from the trustee in bankruptcy, it was reasonable for Barrett to bring the application to have the inspector appointed.

D. Analysis

(1) Jurisdiction

[21] Both parties agree that the order under appeal is a final order, and that this court accordingly has jurisdiction. Parties, of course, cannot confer jurisdiction if a court does not have it: J.N. v. Durham Regional Police Service, 2012 ONCA 428, 294 O.A.C. 56, at para. 25; 2650971 Ontario Inc. v. Shameti, 2022 ONCA 62, at para. 7. But the fact that parties agree about what transpired in the court below and agree about what question the motion judge intended to resolve through the order issued, can give a reviewing court some comfort about the nature of the order under appeal.

[22] Notwithstanding that the parties take no issue with the court’s jurisdiction to hear this appeal, the form of the order under appeal here does not make the legal basis of the order obvious, which necessitates some effort to determine whether this court in fact has jurisdiction. Had the motion judge followed this court’s direction in Skunk v. Ketash, 2016 ONCA 841, 135 O.R. (3d) 180, and other cases, that an order dismissing a motion for summary judgment should clearly state that the motion judge is exercising a power to finally decide some question of fact or law, this exercise would not have been necessary. Jurisprudence from this court supports the observation that it will often be the case that a dismissal of a motion for summary judgment that has been brought solely on the basis that the claim has been brought out of time will be a final order: Lax v. Lax (2004), 70 O.R. (3d) 520 (C.A.); Kowal v. Shviak, 2012 ONCA 512, 296 O.A.C. 352. The appellants rely on this authority and the respondent agrees.

[23] However, it is not invariably the case that a dismissal of a motion for summary judgment that was brought solely on the basis of a limitation period will be a final order. In Vanden Bussche Irrigation & Equipment v. Kejay, 2016 ONCA 613, Weiler J.A., sitting in chambers, concluded that in dismissing the summary judgment motion, the motion judge below would not have sent the matter to trial unless the motion judge had determined that the limitation period raised a genuine issue for trial: at para. 11. In that case – a simple debt action – the limitations defence was the only live issue and had the summary judgment motion judge intended to decide it, it would have been a straightforward matter to have simply granted summary judgment to the plaintiff. Not having done so led to the conclusion that there needed to be a trial to determine the viability of the limitations defence. Although the current case is unlike Vanden Bussche in that there are substantive triable issues that necessitate a trial in any event, it is nevertheless necessary to explain the basis of this court’s jurisdiction over this matter from first principles.

[24] It is uncontroversial that where a defendant brings a successful motion for summary judgment on the basis that the action is statute-barred due to having been commenced out of time, the resulting order is final, and an appeal lies to this court. Matters are more complicated where the motion is instead dismissed.

[25] The complication results from an ambiguity that can be present in the dismissal of a summary judgment motion. In dismissing the motion, a motion judge may have either intended to: (1) decide a substantive issue – in this case, whether the limitations defence is available – or; (2) decide that there is a genuine issue requiring trial, without intending that any findings made be binding on any subsequent proceeding: Skunk, at para. 34; Ashak v. Ontario (Family Responsibility Office), 2013 ONCA 375, 115 O.R. (3d) 401, at para. 7. In order to avoid the uncertainty generated by this potential ambiguity, there is a presumption that, unless the motion judge specifically references the powers under r. 20.05(1) or r. 20.04(4) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, to make binding determinations of fact or law, and specifies what material facts or questions of law are now not in dispute, the motion judge did not intend to make binding determinations of fact or law, and those determinations will remain to be made by the trial judge: Ashak, at para. 11; Skunk, at para. 36.

[26] As a matter of best practice, a motion judge who intends to make a final determination on a question of fact or law ought to state the rule under which the determination has been made in the order issued: Skunk, at para. 36. And although a failure to make such a statement in the order suggests that no such determination or finding was made, this failure is not determinative: in some cases, to determine what has been decided, it is necessary to look at the reasons: Vanden Bussche, at para. 10; Walchuk Estate v. Houghton, 2015 ONCA 862, at para. 14, citing Ball v. Donais (1993), 13 O.R. (3d) 322 (C.A.); Abbott v. Collins (2002), 62 O.R. (3d) 99 (C.A.); and Ashak, at para. 17. This is one of those cases.

[27] In the case at hand, the order under appeal simply states that the motion for summary judgment is dismissed, without referencing any of the subrules or stating any factual or legal issues decided. Similarly, the notice of motion simply references r. 20 generally. Reading these alone, the general rule would suggest that the intention of the order was simply to decide that there is a triable issue and leave the determination of the limitations defence to be decided subsequently by the trial judge. The order would therefore not be a final order, and the appeal would lie to the Divisional Court with leave.

[28] The parties understood, however, that the motion judge had intended to decide the legal question of whether the action had been commenced within the time period stipulated by the Limitations Act, and that this was intended to be a final order. I agree that the reasons for decision make this conclusion abundantly clear, although the formal order does not.

[29] There was only one issue argued on the summary judgment motion – whether the action had been commenced within two years of the plaintiff gaining knowledge of the facts giving rise to the cause of action. None of the material facts were in dispute. Losing the motion would necessarily mean that the appellants would thereafter be disentitled to raise the defence at trial, unless the reason that the motion was dismissed was because the motion judge determined it was an issue that required a trial to decide.

[30] But nothing in the reasons suggests that the motion judge had any concerns about deciding the sole matter in issue on the record before him. The reasons do not, for example, express any concerns about credibility or the need for viva voce evidence. The limited scope of the motion explains why the motion judge did not grant summary judgment in favour of the plaintiff: the liability of the appellants was simply not before him for determination. The only issue was the limitations defence.

[31] Although it would have been advisable for the motion judge to have referenced r. 20.04(4) in the order, there was no confusion – and could be no confusion – about the nature of the order that was made. The order was a final order that disposed of the issue of the limitations defence. The appeal is properly brought in this court.

(2) The Limitations Act defence

[32] The appellants argue that the motion judge erred: (1) in finding that the limitation period did not begin to run in May 2017, when they argue that Barrett first became aware of 9472’s claim; and (2) in finding that Barrett was reasonably diligent in making inquiries as to the appellants’ identities.

[33] As explained below, I do not agree that the motion judge erred.

(a) When did 9472 first have knowledge?

[34] The appellants argue that Barrett knew, as of May 2017, that 9472 had loaned a substantial sum of money to JBGC and that most of these monies had not been accounted for by the trustee in bankruptcy. This was attested by the evidence of Barrett herself, on her November 2017 ex parte application, in which she alleged that monies had been paid out to Zaza’s friends and relatives.

[35] This knowledge should have been attributed to 9472 in May 2017, the appellants argue, when Barrett, as a creditor of 9471, first asserted ownership of the shares in 9472 that 9471 held. On the appellants’ submission, Barrett obtained control of 9472’s shares in May 2017, when she asserted her ownership interest in the shares to the trustee, the trustee accepted it, and Zaza made no objection. The appellants argue that from this time, Barrett had control of 9472 and that Barrett’s knowledge of Zaza’s actions could therefore be attributed to 9472. 9472 had constructive knowledge as of May 2017, and actual knowledge as of November 2017, when the inspector’s report was received.

[36] The central issue is when Barrett achieved control over 9472. The motion judge erred, the appellants argue, in not finding that Barrett became the sole shareholder in May 2017. The fact that she took no steps at that time to become a director or officer is irrelevant. There were no directors or officers, and as the sole shareholder she was “in effective control of its affairs and fortunes”: Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795, at para. 36.

[37] The motion judge is said to have erred by focussing on the share certificates, which Barrett obtained in May 2017 but which were not registered to her until January 6, 2021, rather than the legal right of control over the company, which they argue Barrett held as sole shareholder in May, 2017.

[38] Furthermore, the appellants argue that it was an error to find it necessary for Barrett to serve a notice of foreclosure under s. 65(2) of the PPSA to obtain title to the shares, as the trustee had already released the shares to her. Barrett, they argue, was deemed to have irrevocably elected to accept the shares when counsel for Zaza confirmed to the trustee that Zaza had no further interest in 9472 and was not contesting Barrett’s claim.

[39] I do not agree that the motion judge erred. As a secured creditor of 9471, when 9471 defaulted on payment Barrett had certain rights in the collateral held by 9471 that secured the payment obligation. She was entitled to take ownership of the shares of 9472 that were registered to 9471. However, entitlement is not ownership. Part V of the PPSA stipulates the process that must be followed to realize on that collateral. Under s. 65(2), Barrett was required to give notice of the proposal to accept the shares in satisfaction of the debt owed by 9471 to the persons mentioned in s. 63(4) (a) to (d), including the debtor, the owner of the collateral, and every person who has a security interest in the collateral. Only once that notice had been given, and no effective objection was made by any person to whom notice was given, was Barrett deemed by the PPSA to have irrevocably elected to accept the collateral in satisfaction of the debt. Only after those requirements had been fulfilled was Barrett entitled to transfer title of the shares in 9472 from 9471 to herself.

[40] In oral argument, the appellants relied on Atlas (Brampton) Limited Partnership v. Canada Grace Park Ltd., 2021 ONCA 221, at para. 37 for the proposition that courts should take a “functional” approach to the question of whether sufficient notice has been given for the purposes of complying with the foreclosure provisions of the PPSA, and that looking at the factual matrix, sufficient notice was given. In Atlas (Brampton), this court noted that the PPSA does not prescribe any particular form or content of the notice to be given and held that whether notice is adequate is to be determined according to the purpose for which notice is given. That is, whether “on the basis of all the evidence, it is obvious that the debtor knows its creditor is foreclosing on the collateral in satisfaction of the secured obligation, even if the formal notice might be deficient in some sense”: at para. 88. Here, there were no other secured creditors, and Zaza was the only person to whom notice needed to be given. As such, the appellants argue, sufficient notice was given in May 2017, by way of email, when Barrett asserted entitlement to 9472’s shares and counsel for Zaza responded that he did not contest Barrett’s assertion of ownership.

[41] I do not agree with this submission. The circumstances of Atlas (Brampton) were significantly different than the present case. In that case, share certificates were held by the secured creditor as collateral and the security agreement provided an irrevocable power of attorney to the creditor to transfer the shares to the creditor in the event of default. The debtor defaulted on the loan, and the secured creditor purported to foreclose on the pledged shares and retain them in satisfaction of the debt. The debtor objected that it did not receive the notice required by the PPSA of the creditor’s intention to foreclose on the share certificates, informing the debtor that the creditor now purported to retain the share certificates not as collateral, but as satisfaction of the debt. The debtor sought a declaration that it remained the beneficial owner of the shares and sought to redeem the pledged shares by repaying the loan.

[42] In this case, Barrett did not possess the share certificates prior to the default. They only came into her possession after the default occurred. Moreover, the shares here were certificated securities and they were registered to 9471, not Barrett. More generally, the issue confronting the motion judge here was not a debtor’s challenge to foreclosure based on inadequate notice, rather it was a debtor’s insistence that notice occurred over the objections of the creditor and despite the absence of foreclosure until years later.

[43] In this context, the motion judge made findings as to the nature of the correspondence between Barrett’s solicitor and Zaza’s solicitor. Specifically, the motion judge found that the email communications did not amount to more than an assertion of entitlement and that they did not constitute a notice of foreclosure under the PPSA. Instead, the motion judge found that notice was provided on December 21, 2020, when Barrett’s lawyer wrote to the trustee in accordance with s. 65(2) of the PPSA. These were both findings of mixed fact and law, and the appellants have not identified a palpable and overriding error in the finding that the email correspondence was not notice or that the requisite notice occurred on December 21, 2020. I would not interfere with these findings.

[44] Accordingly, there is no basis to interfere with the finding that Barrett’s knowledge could only be attributable to 9472 after foreclosure on January 6, 2021.

(b) Was 9472 reasonably diligent in discovering the claim?

[45] The appellants renew their secondary argument that 9472 was not reasonably diligent in making the necessary inquiries that would have allowed it to identify the appellants as the recipients of the funds in question. Effectively, the argument is that: (1) pursuant to s. 5(2) of the Limitations Act, 9472 is presumed to have discovered the claim on the day the acts took place unless it can establish that it discovered the claim on some other date; but (2) the appellants argue that under s. 5(1)(b) of the Limitations Act, a reasonable person in the circumstances of 9472 ought to have exercised greater diligence and would have discovered the acts by May 24, 2017, when the trustee issued her report, or at the latest November 2017, when Barrett swore an affidavit outlining her belief that Zaza had fraudulently dispersed the funds.

[46] Effectively, the argument is that the limitation period is not tolled while a party fails to investigate matters about which it had reasonable suspicion. Knowledge ought to be attributed to 9472 by November 2017 at the latest, because it was unreasonable for 9472 to have delayed commencing the claim until an investigator could be appointed to pursue a further investigation. That is, by the time of the trustee’s report, 9472 ought to have had suspicion that would trigger the exercise of reasonable diligence: Grant Thornton LLP v. New Brunswick, 2021 SCC 31, 461 D.L.R. (4th) 613, at paras. 45-46. It was unreasonable to postpone commencing an action until such time as an inspector could be appointed and provide a report.

[47] The motion judge made no error in dispensing with this argument. The motion judge found that “based upon the limited information received from the bankruptcy trustee, it was reasonable for her to commence the proceeding that she did commence (her application under s. 161 of the Business Corporations Act), in an effort to uncover the evidence necessary to determine what further proceedings might be appropriate.” It is important to be clear that the motion judge was not suggesting that it would be appropriate to delay commencing an action while assessing whether there would be sufficient evidence to prove the allegations. The motion judge found that although Barrett knew from the trustee’s report that Zaza had distributed funds from 9472 to JBGC to “various parties including the Business Development Bank, Royal Bank of Canada, Canadian Imperial Bank of Commerce, Frank Repchik, the Company legal counsel and accountant”, she did not know that a significant part of the distributions were to non-arm’s length parties, or that the distributions to the banks were believed by the inspector to be repayments of loans guaranteed by Zaza and members of his family.

[48] That is, prior to the inspector’s report, Barrett was unaware of the facts that would make the distributions wrongful. Her November 2017 affidavit in support of the appointment of an inspector demonstrates that she suspected and feared that Zaza had made fraudulent distributions, but the affidavit discloses that she was relying on rumour and was unaware of the facts that would support this suspicion. The motion judge made no reviewable error in finding that the limitation period did not begin to run until after the inspector’s report was issued.

E. Disposition

[49] Accordingly, I would dismiss the appeal. I would award costs of the appeal to the respondent in the amount of $10,000, inclusive of HST and disbursements, as agreed by the parties.

Released: May 2, 2024 “B.W.M.” “B.W. Miller J.A.” “I agree. L. Favreau J.A.” “I agree. J. Copeland J.A.”