APAC Limited v. Cronin, 2019 ONSC 86

CITATION: APAC Limited v. Cronin, 2019 ONSC 86

DIVISIONAL COURT FILE NO.: DC 28/18

DATE: 20190104

ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT

Henderson, Fregeau and Matheson, JJ.

BETWEEN:

APAC LIMITED Applicant/Respondent in Appeal

– and –

PATRICK CRONIN and INTERRA MANAGEMENT GROUP LIMITED Respondents/ Appellants in Appeal

COUNSEL: John K. Downing and Jack Masterman, for the Applicant (Respondent in Appeal) Matthew Diskin and Meredith Bacal, for the Respondents (Appellants in Appeal)

HEARD at London: November 30, 2018

REASONS FOR DECISION

MATHESON J.

[1] This is an appeal from a decision of Garson J. dated May 24, 2018, granting the applicant’s oppression application. The appeal is brought under s. 255 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”). The appellants also challenge the related costs decision dated July 25, 2018, for which leave to appeal is required.

[2] The application judge found oppression and ordered the appellants to produce certain financial documents relating to the business of the appellant company, Interra Management Group Limited (“Interra”), to the applicant minority shareholder, APAC Limited.

[3] For the reasons set out below, the appeal is dismissed and leave to appeal the costs order is denied.

Brief background

[4] The appellant Interra is a real estate development and management company that was co-founded by the appellant Patrick Cronin along with Colin Jackson in about 2004. Cronin controls 65 percent of the shares of Interra through a family trust. Jackson controls the respondent on this appeal, APAC, which owns 35 percent of Interra, through a family trust. There is no executed shareholders agreement. Cronin and Jackson were also the initial directors of Interra.

[5] Between 2004 and 2012, Jackson ran the day-to-day operations of Interra. During this period, Interra bought a total of four commercial plazas, two of which were sold at a profit that was divided proportionately between Jackson and Cronin.

[6] Jackson moved to California in 2012. The two agreed that Cronin would assume responsibility for the day-to-day operations of Interra. However, Jackson continued to be involved and Interra continued to own just the two plaza properties.

[7] Jackson returned to London, Ontario in 2014 and continued to work with Cronin on Interra business. However, communications between them became erratic in 2016.

[8] Jackson became concerned about the financial circumstances of Interra. He requested updated information from Cronin and was ultimately given copies of Financial Overview documents regarding each plaza, which Jackson had himself prepared earlier on, with handwritten changes by Cronin. The changes included a $500,000 second mortgage on one of the two plazas, Belle River Plaza, registered in 2015, of which APAC had no prior notice.

[9] Belle River had been purchased in 2004 for about $2.35 million. When Jackson learned of the second mortgage, he had property searches done for both plazas. Those searches showed two more mortgages against Belle River Plaza, totaling over $2 million, which had not been disclosed to APAC.

[10] Jackson also did a corporate search and discovered that he was no longer listed as a director and an Evan Cronin was listed as a director as of 2015, even though there had been no shareholders meeting.

[11] In August 2017, Jackson asked Cronin to call a shareholders meeting. Cronin refused to do so. Cronin wanted to delay calling a shareholders meeting until after the 2016 and 2017 financial statements were completed.

[12] Later on, Cronin also indicated that if Jackson was prepared to sell his interest in Interra to him, a full accounting would be provided as part of the sale process.

[13] The parties began to correspond through counsel. APAC requested financial information but its requests were continually refused. The appellants took the position then and now that a shareholder is only entitled to information if there is a specific provision of the OBCA requiring it. APAC commenced this application.

[14] Interra’s financial year-end was May 31. The 2016 financial statements were ultimately provided to APAC in January 2018, about nineteen months after the end of the 2016 financial year. They did not provide an explanation for the need for the additional mortgages or what was done with those funds. As well, they revealed several concerning loans and expenses not previously disclosed, including the following:

(i) an apparent loan to an unidentified person for $1,104,015 in 2016;

(ii) an increased loan receivable from APAC;

(iii) a loan from Interra to Cronin’s family trust for $65,000; and,

(iv) a series of expenses and fees that appeared to be significantly higher than past years, including $122,613 for “Refinancing and Professional fees.”

[15] As of the hearing of the application in April 2018, the 2017 financial statements remained outstanding despite having been promised earlier. Other requests for financial disclosure were denied. No shareholder meeting had been called.

Application decision

[16] The application judge summarized the law in regard to the oppression remedy under s. 248 of the OBCA as set out in BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 S.C.R. 560. No legal error has been demonstrated in this regard.

[17] The application judge applied those legal principles and found oppression. He found that the applicant had a reasonable expectation of ongoing access to the requested financial disclosure and involvement in certain categories of business decisions such as acquiring new debt. He found that, viewed objectively, there were a number of material concerns about the finances of this business. Cronin’s actions in refusing to disclose the requested financial information on behalf of Interra, constituted oppressive, unfair and prejudicial behaviour that disregarded the minority shareholder APAC’s interests. The application judge found that Cronin was treating Interra as his own private entity, as if he was the only investor or shareholder.

[18] The application judge ordered financial disclosure that related to the specific concerns that had been identified by the applicant. On costs, the application judge halved the amount requested by the applicant and ordered that costs be paid by Cronin, and not Interra, given Cronin’s conduct in relation to this matter.

Issues

[19] This appeal gives rise to the following issues:

(i) whether the application judge erred in conflating the interests of the minority shareholder APAC with the interests of Jackson, giving rise to procedural unfairness; and,

(ii) whether the requirements of the oppression remedy were fulfilled and capable of supporting the order.

[20] There is also the issue of the costs order if leave is granted, specifically whether the application judge erred in awarding costs against the respondent Cronin and not Interra.

Standard of review

[21] As set out in Basegmez v Akman, 2018 ONSC 812 (Div. Ct.), at para. 7, the following standard of review from Wilson v. Alharayeri, 2017 SCC 39, [2017] 1 S.C.R. 1037, at para. 59, applies to appeals from OBCA oppression decisions:

Three principles govern the applicable standard of review. First, absent palpable and overriding error, an appellate court must defer to the trial court’s findings of fact. Second, an appellate court may intervene and substitute its own decision for the trial courts if the judgment is based on “errors of law ... erroneous principles or irrelevant considerations”. Third, even if it was not so based, an appellate court may intervene if the trial judgment is manifestly unjust. [Citations omitted.]

[22] With respect to procedural fairness, the issue is not the standard of review but whether the required procedural fairness was provided.

[23] With respect to the costs appeal (if leave is granted), there is no dispute that an appellate court should only set aside a costs award when the judge at first instance made an error in principle or if the costs award is plainly wrong.

Procedural fairness

[24] The appellants submit that the application judge erred in wrongly imputing Jackson’s expectations on APAC and submit that since Jackson himself was not an applicant, his expectations were not within the bounds of the notice of application. The appellants submit that this amounted to procedural unfairness since they could not have been expected to respond to Jackson’s “irrelevant evidence” about his expectations.

[25] We do not find that there was the alleged procedural unfairness. In the ordinary way, Jackson delivered an affidavit in support of his company’s application. As was ultimately conceded in oral argument on this appeal, the company must act through people and Jackson was its principal. Just as Cronin delivered an affidavit for Interra, Jackson did so for APAC. In turn, the grounds in the notice of application itself and the related evidence from Jackson set out in detail the steps upon which the company relied for its oppression application including the course of conduct between the two people involved – Jackson and Cronin. Not surprisingly, the steps relied on by APAC were taken by Jackson.

[26] The appellants rely on part of the reasons for decision in which the application judge addresses their position that no remedy may be granted because Jackson was not a party. The application judge noted that Jackson could have been a party, but more importantly the application judge found that APAC was a shareholder in Interra, was therefore entitled to seek relief under the oppression remedy and that Jackson controlled APAC. The application judge further found that, practically speaking, any information ordered to be produced to APAC would be given to and dealt with by Jackson. The application judge indicated that in the circumstances, he was going to refer to Jackson and APAC interchangeably in his reasons for decision. We do not find that this nomenclature choice demonstrated procedural unfairness or other reviewable error.

[27] The appellants also submit that the application judge erred in basing his decision in part on Jackson’s involvement in the decision-making for Interra, yet that course of conduct is set out in the grounds in the notice of application and related evidentiary materials.

[28] It is apparent from the correspondence between counsel before the hearing of the application and the court proceedings that there was sufficient notice of what was at issue. No procedural unfairness has been demonstrated by the appellants.

Requirements of oppression remedy

[29] There is no dispute that, as set out in BCE, the test for oppression is as follows:

(i) the claimant must establish the reasonable expectations that it claims have been violated; and,

(ii) the claimant must show that these reasonable expectations were violated by corporate conduct that amounts to oppression, unfair prejudice or unfair disregard of a relevant interest.

[30] There is also no dispute that many factors may be considered in determining reasonable expectations. Factors include the nature of the corporation, the relationship between the parties, past practices, representations and agreements, the fair resolution of conflicting interests between corporate stakeholders and general commercial practice: BCE, at paras. 72-80.

[31] The appellants submit that the application judge erred because the required elements of the test for oppression were not met. In part, this submission is based on the use of Jackson’s evidence in support of his company’s expectations. Those arguments have been addressed and dismissed above.

[32] The application judge considered the relevant factors to determine what reasonable expectations had been objectively established. He concluded on the evidence before him that APAC had a number of reasonable expectations, including ongoing access to financial disclosure regarding the financial stability of Interra and any distributions to the other shareholder by way of loans or fees. These findings were amply supported by the evidence and in turn support the remedial order made in this case.

[33] In addition, the appellants submit that the application judge failed to account for changes in Interra’s business practices after Jackson and Cronin began their venture, including Jackson’s move to California for a period of time. However, the application judge did have regard for those changing roles. Interra was a closely-held corporation with two shareholders. It was variously run by two people, Jackson and Cronin. The application judge noted that the degree of their involvement changed from time to time. Jackson’s involvement did not end when he moved, and continued upon his return.

[34] The appellants further submit that the application judge erred by finding that “mere questions and concerns” amounted to oppression. The appellants submit that Jackson raised only questions and concerns and has not established any wrongful conduct or compensable injury. On the contrary, the application judge found that there was oppressive conduct and unfair prejudice, including the refusal to provide pertinent financial information in the face of increased unexplained borrowing of millions of dollars. The application judge found that Cronin was treating Interra as a “sole proprietorship” – as his “own entity in which he is the only investor or shareholder.”

[35] The appellants have also submitted that APAC should only be entitled to receive the specific documents required under the OBCA. Although not withdrawn, this argument was not the focus in oral argument and runs contrary to the well-accepted broad remedial scope of the oppression remedy. The Court may make any order it thinks fit. The oppression remedy “seeks to ensure fairness – what is ‘just and equitable’”: BCE, at para. 58. It calls for a fact-specific, contextual inquiry looking at “business realities, not merely narrow legalities”: BCE, at para. 58.

[36] The appellants further submit that an order for disclosure only is not a proper use of the oppression remedy. They submit that the order made is essentially pre-action discovery. They submit that it would be a different matter if APAC had sued alleging oppression and brought a motion for disclosure within that proceeding. In a similar vein, the appellants submit that APAC should have waited for a shareholder meeting and asked its questions there, or cross-examined Cronin and asked for the information then. These arguments ignore the realities recognized by the application judge that APAC has a “clear and pressing interest” in assuring itself of the financial viability and stability of Interra. The appellants have throughout refused the information and taken the position that this minority shareholder is not entitled to it.

[37] In the circumstances of this case, the application judge found that APAC, the minority shareholder with a 35% interest, had a reasonable expectation of ongoing access to financial disclosure on the matters for which disclosure has been ordered, which was violated by the appellants’ conduct. The appellants have not demonstrated a palpable or overriding error or other reviewable error in this regard.

Costs

[38] The appellants have not established that leave to appeal the costs order should be granted in this case. They rely on the second branch of the test for leave to appeal, specifically Rule 62.02(4)(b) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. They submit that there is good reason to doubt the correctness of the costs order because Cronin had no notice or insufficient notice that he could be ordered to pay costs, and the application judge should not have pierced the corporate veil and ordered costs against him. However, Cronin is a named respondent in the application and the notice of application claimed costs. As a party, he was on notice that he was exposed for a potential costs order in the ordinary course. It was not necessary to pierce the corporate veil to make the order against him nor did the application judge purport to do so.

[39] Further, the appellants have not established any matters of such importance that, in the panel’s opinion, leave to appeal should be granted. The application judge had a broad discretion, which he exercised in accordance with established costs principles. As set out in the costs reasons, the application judge took into account Cronin’s conduct and concluded that costs should not act as a drain on the assets of Interra in the circumstances of this case.

[40] In keeping with the costs order below, the respondent submits that if this appeal is dismissed, costs ought to be ordered against Cronin only because the assets of Interra should not be used to pay costs caused by the conduct of Cronin. We agree, and note that Cronin continues to be putting his interests first, submitting that Interra should pay costs instead of him even though it was his conduct, controlling Interra, that gave rise to the oppression.

Orders

[41] This appeal is dismissed and leave to appeal the costs order is denied. Cronin shall pay the respondent costs in the amount agreed between the parties regarding quantum, specifically $10,000, all inclusive.

___________________________ W. Matheson J.

I agree

J. Henderson J.

I agree

J. Fregeau J.

Date: January 4, 2019