SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: 1566/04
DATE: 2012-03-12

RE: JAMES B. HAWLEY and THE AGED GINGKO TRUST, Plaintiffs

AND:

JOHN PENNINGTON, and THE JOHN K. PENNINGTON FAMILY TRUST NO. 1, FASKEN, HUBLAND INVESTMENTS LTD. and NORTH SHORE MERCANTILE CORPORATION, Defendants

BEFORE: HOURIGAN J.

COUNSEL:
Ronald S. Sleightholm, Counsel for the Plaintiffs

Craig R. Colraine, Counsel for the Defendants

HEARD: March 7, 2012

ENDORSEMENT

Nature of the Motion

[ 1 ] The defendants, John Pennington and the John Pennington Family Trust No. 1, (“Pennington Trust”), move for summary judgment dismissing the claim of the plaintiffs, James Hawley and the Aged Gingko Trust (“Ginko Trust”).

[ 2 ] The plaintiffs claim that Pennington’s conduct as a director of Kananaskis Alpine Resort Inc. (‘KARI”) is unfairly prejudicial to them and unfairly disregards their interests. They seek a declaration that KARI is required to have three directors and that Mr. Hawley be appointed as a director, and further seek an order creating a unanimous shareholder agreement.

Facts

[ 3 ] Pennington and Hawley were partners in business from 1992 to 2003 through various corporate entities. Since the end of the business relationship in 2003, the parties have engaged in a series of legal proceedings.

[ 4 ] In 1996, Pennington and Hawley acquired KARI, which is the general partner of the Lodge at Kananaskis Limited Partnership. They also acquired 350136 Alberta Ltd. (“350 Alberta”), which is the general partner of the Mountain Inn at Ribbon Creek Limited Partnership. These partnerships owned hotels in Kananaskis, Alberta, which operated collectively as a single entity, the Delta Lodge.

[ 5 ] At the time of the acquisition of KARI and 350 Alberta, Pennington and Hawley both became officers and directors of each company. Equal shares in the companies were held by the Pennington Trust and Mr. Hawley, who later transferred his shares to Ginko Trust.

[ 6 ] For reasons of refinancing, the partnerships were required to be at arm’s length. Consequently, Pennington agreed to resign as an officer and director of 350 Alberta and the Pennington Trust agreed to sell its shares to Hawley. In turn, Hawley agreed to resign as an officer and director of KARI sold his shares in KARI to the Pennington Trust.

[ 7 ] At the same time the restructuring was completed in 1997, option agreements were entered into by Pennington and Hawley, which provided that the Pennington Trust and Hawley would have a right to purchase from the other for the price of $1.00, one-half of the shares of the other party’s company.

[ 8 ] In 2003, Pennington engaged in negotiations with Massachusetts Mutual Life Insurance Company (“Mass Mutual”) because the partnerships were unable to maintain the debt service cover ratio required by their loan agreement.

[ 9 ] At the time of these negotiations with Mass Mutual, Hawley gave notice of his intention to exercise his option to purchase back his interest in KARI in the name of Ginko Trust. This transaction required the approval of Mass Mutual. Mass Mutual eventually consented to the share purchase.

[ 10 ] The defendants take the position that this approval was provided on the basis that Hawley was prepared to sign a Pledge Agreement and Guarantee. They assert that Hawley refused to provide the Pledge Agreement and Guarantee from the Ginko Trust unless he was appointed as a director of KARI and that Pennington refused to appoint him as a director.

[ 11 ] There is a difference of opinion regarding the impact of Hawley’s refusal to provide the Pledge Agreement and Guarantee. The defendants say that Mass Mutual treated it as an event of default. The plaintiffs deny that Mass Mutual required the document to be executed. In any event, the issue is of little importance because ultimately Pennington was able to reach a resolution with Mass Mutual and refinance with a new lender in March of 2005.

Position of the Parties

[ 12 ] The defendants submit that there is no evidence that Pennington’s conduct was in any way intended to be or was actually oppressive towards the defendants or that he made decisions detrimental to KARI or its shareholders. The defendants submit that this is an appropriate case for summary judgment as the allegations are vexatious and an abusive process and are also duplicative of another proceeding between the parties (the “Omnibus Action”).

[ 13 ] The plaintiffs submit that the issues in this action should be consolidated with the Omnibus Action. They further submit that it would not be in the interests of justice to determine the issue on a summary judgment basis, and that the case should proceed to trial and not be determined on a record of affidavits and cross-examinations.

Analysis

(a) Summary Judgment

[ 14 ] The Ontario of Appeal in Combined Air Mechanical Services v. Flesch, 2011 ONCA 764 , 2011 CarswellOnt 13515 (Ont. C.A.) provided guidance regarding the amendments to Rule 20.

[ 15 ] The Court identified the following classes of cases that is generally appropriate for the utilization of the summary judgment rule:

(i) where the parties agree it is appropriate to determine an action by way of a motion for summary judgment;

(ii) where a claim is without merit; and

(iii) where the trial process is not required in the interests of justice (see paras. 40 to 44 of Combined Air) .

[ 16 ] The court defines that a test as one of full appreciation of the evidence (at para. 50):

In deciding of these powers should be used to weed out a claim as having no chance of success or be used to resolve all or part of an action, the motion judge must ask the following question: can the full appreciation of the evidence and issues that is required to make dispositive findings be achieved by way of summary judgment, or can this full appreciation only be achieved by way of a trial?

[ 17 ] The court provided examples (at paragraphs 51 to 52) of when the summary judgment rule should not generally be utilized (e.g. cases involving multiple findings of fact, conflicting evidence, numerous witnesses and/or a voluminous record). It also provided examples where the rule should generally be utilized (e.g. document driven cases with limited testimonial evidence, limited contentious factual issues, and/or a record that can be supplemented, at the motion judge’s discretion, by hearing oral evidence).

[ 18 ] The full appreciation test is the standard by which I must consider the motion for summary judgment in this action.

(b) Duplicative Proceedings

[ 19 ] The defendants submit that the subject matter and cause of action in the within proceeding is the same as in the Omnibus Action which is ongoing and that the motion for summary judgment should be granted on this basis.

[ 20 ] The law is clear that duplicative litigation which could potentially render inconsistent results and increase costs is to be avoided (see Danyluk v. Ainsworth Technologies Inc., 2001 SCC 44 ). The court also has powers under the doctrine of abuse of process to stay any action which a court determines would be manifestly unfair to a party or which would bring the administration of justice into disrepute (see Toronto (City) v. CUPE, Local 79, 2003 SCC 63 , 2003 CarswellOnt 4328 (S.C.C.)).

[ 21 ] I agree with the submission of the defendants that this action is duplicative of the Omnibus Action. However, I do not find that the appropriate course is to grant summary judgment on this basis. Rather, as suggested by the plaintiffs, the appropriate course is to consolidate the actions. In this way, costs are reduced and the potential for inconsistent results is eliminated.

[ 22 ] Notwithstanding the foregoing, an order for consolidation will be unnecessary if I determine that the defendants have met the test for summary judgment.

Merits of the Action

[ 23 ] At its essence, Hawley’s case comes down to a complainant that he was not appointed as a director of KARI.

[ 24 ] As an Alberta corporation, KARI is subject to provisions of the Alberta Business Corporations Act , RSA 2000, c.B-9. Pursuant to s. 101(2) of that legislation, a corporation need only have more than one director when it is a distributing corporation. A distributing corporation is defined as a corporation that is a reporting issuer for the purposes of the Securities Act , RSA 2000, c.S-4. KARI is not a reporting issuer. There is, therefore, no obligation to have more than one director under the Alberta legislation. The plaintiffs’ reliance on the Alberta Business Corporations Act in support of their position that more than one director must be appointed is wrong in law.

[ 25 ] Section 242 of the Alberta Business Corporations Act provides remedies that are similar to the Ontario legislation with respect to oppression. The court has broad powers to correct any act or omission that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation.

[ 26 ] The fundamental questions to be determined in any claim for oppression are:

1. Does the evidence support the reasonable expectation the claimant asserts?; and

2. Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest? (see BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 , 2008 CarswellQue 12595 (S.C.C.)).

[ 27 ] The analysis in oppression cases focuses on the reasonable expectations of the complaining party. The question on a motion for summary judgment is whether I can determine that issue based on the material before me. In my view, this is an appropriate case for the use of the summary judgment rule.

[ 28 ] I find that the plaintiff’s claim of oppression is entirely without merit. The statement of claim offers only the baldest of allegations regarding oppression. The real complaint appears to be that Pennington refused to appoint Hawley a director.

[ 29 ] In his affidavit sworn April 29, 2011, Hawley states that he commenced the action for appointment “because I was being asked to personally guarantee a mortgage loan made by Massachusetts Mutual Life Insurance Company, to the full extent of my investment in KARI.”

[ 30 ] It is not possible that the plaintiffs could reasonably expect that Hawley would be appointed as a director of KARI simply because the Ginko Trust became a shareholder after exercising the option to purchase. The option agreement does not provide that with the exercise of the option the purchasing party has a right to become a director. There is also no evidence before the court on this motion that the issue of the appointment of a purchasing party as a director was ever discussed. Further, as noted above, the Alberta legislation does not require the appointment of more than one director.

[ 31 ] To the extent that the claim against the defendants is more broadly based with respect to the operation of the company by Pennington, again, I find no evidence of oppression whatsoever. The claim consists of vague allegations that Pennington is acting unilaterally in his management of the company. Pennington is the sole director and officer is not under any obligation to consult with Hawley or to receive his impute. There is nothing in the evidence before me which even suggests that Pennington’s conduct entitles Hawley to relief under section 242 of the Alberta Business Corporations Act .

Disposition

[ 32 ] The motion for summary judgment is granted.

[ 33 ] If the parties cannot agree on costs, they may make brief written submissions to me. The defendants’ costs submissions are due on or before March 26, 2012. Responding submissions from the plaintiffs are due on or before April 11, 2012, and any reply submissions are due on or before April 17, 2012.

HOURIGAN J.

Date: March 12, 2012