COURT FILE NO.: 6503/06

DATE: 2012-03-12

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: JAMES B. HAWLEY, a partner of STEPPE FINANCIAL PARTNERSHIP, Plaintiff

AND:

JOHN PENNINGTON, HOWARD RUBINOFF and FOGLER RUBINOFF LLP, Defendants

BEFORE: HOURIGAN J.

COUNSEL:
Ronald S. Sleightholm, Counsel for the Plaintiff

Craig R. Colraine, Counsel for the Defendant John Pennington

Christine Fotopoulos, Counsel for the Defendants Howard Rubinoff and Fogler Rubinoff LLP.

HEARD: March 8, 2012

ENDORSEMENT

Nature of the Motion

[ 1 ] The defendants, John Pennington, Howard Rubinoff and Fogler Rubinoff LLP move for summary judgment to dismiss the claim of the plaintiff, James Hawley. The plaintiff claims misconduct by the defendants regarding the operation of 5400 Dixie Road Inc. (“5400”). That company was jointly owned and operated by Pennington and Hawley. The gravamen of the complaint is that the defendants’ conduct led 5400 to lose its sole business.

[ 2 ] The defendants submit that there is no merit to the plaintiff’s claim and that the subject matter of the action is res judicata. They also take the position that the action is an abuse of process and an attempt to circumvent an earlier court process. Accordingly, they submit that this is an appropriate case for summary judgment.

Facts

[ 3 ] Pennington and Hawley were partners in various business operations. The partnership dissolved in 2003. As a result of that dissolution, the parties have engaged in numerous legal proceedings.

[ 4 ] 5400 was the sole general partner of two limited partnerships involved with a hotel in Mississauga called the Stage West Hotel. That hotel was owned by one of the limited partnerships, Mayfield Suites Hotel Mississauga Limited Partnership (“Mayfield No. 1”). The other limited partnership, Mayfield Suites Hotel No. 2 Limited Partnership (“Mayfield No. 2”) holds approximately 25% of the units of Mayfield No. 1.

[ 5 ] Pursuant to the limited partnership agreements for both partnerships, each partnership would terminate and dissolve in 60 days of the dissolution or winding up of the general partner unless the general partner was replaced in accordance with the agreements.

[ 6 ] It was also a term of the mortgage on the property of the partnerships that the appointment of a liquidator for the general partner would constitute an event of default under the mortgage unless such appointment was withdrawn in 30 days.

[ 7 ] In 2003, Pennington notified Hawley that he was dissolving their business relationship. In October of 2004, Pennington commenced an application for the appointment of a liquidator of 5400. Hawley initially opposed the application but ultimately consented to an order that 5400 and other companies be wound up and that a liquidator be appointed by the court. The liquidation order was granted by Justice Farley on December 1, 2004 (the “Liquidation Order”). Pursuant to that order, PriceWaterhouseCoopers LLP (“PWC”) was appointed as the liquidator.

[ 8 ] Pursuant to the partnership agreements, the winding up of 5400 triggered a requirement for a new general partner otherwise the winding up would result in the partnerships being dissolved. It became necessary therefore to appoint a new general partner. Two groups of limited partners circulated petitions on behalf of two different companies as candidates for the replacement of 5400. Pennington was associated with one of the proposed general partners and Hawley was associated with the other proposed general partner.

[ 9 ] PWC brought a motion for directions to the court with respect to conducting a vote to determine which of the two competing candidates would become the new general partner. Justice Farley ordered that Pennington and Hawley were to agree on a process for the replacement of 5400.

[ 10 ] The parties were not able to agree on a process and PWC brought a motion for further directions. There was argument on the return of that motion regarding the entitlement of certain limited partners to vote. Hawley did not oppose or object to the appointment of a new general partner at that time. Justice Farley determined the voting procedure and which limited partners were entitled to a vote pursuant to an order dated April 4, 2005 (the “Election Order”).

[ 11 ] Hawley was not satisfied with the Election Order. He made an offer to PWC to buy the business of 5400. PWC took the position that it did not have the right to sell Pennington’s shares in 5400 and, in any event, that 5400 could not continue as a general partner. Ultimately, Hawley determined that he would appeal the Election Order and moved for a stay which would prevent the election of the new general partner pending the appeal.

[ 12 ] The Court of Appeal declined to grant the stay. In making that ruling, the Court of Appeal noted:

In the event of the bankruptcy or dissolution of the general partner, the partnership agreements provide for dissolution, and the mortgage provides for default. The early election of a new general partner is strongly favoured in light of these provisions.

[ 13 ] In a decision dated August 24, 2005, the Court of Appeal dismissed Hawley’s appeal of the Election Order. The court stated:

The terms of the agreements governing the Limited Partnerships (the “Agreements”). require that if the General Partner becomes insolvent or is wound up the Limited Partnership may be terminated. This is not in anyone’s interest and, as a result, it has become necessary to replace 5400 Dixie Road with a new General Partner.

[ 14 ] At paragraph 10 of its decision, the Court of Appeal stated:

Needless to say – to return to the original theme – Mr. Penning and Mr. Hawley are each promoting the election of a different General Partner. Each would be involved in the one they are promoting.

[ 15 ] PWC proceeded with the election of a new general partner. The result was that Mayfield GP, being the corporation associated with Pennington, was elected as general partner.

[ 16 ] On July 18, 2005, Justice Farley ordered that Mayfield GP was the new and continuing general partner of the partnerships and that PWC should facilitate that company assuming the role. Hawley filed evidence on this motion and made submissions at its hearing. He did not appeal this order.

Positions of the Parties

[ 17 ] The defendants submit that the complaint made by Hawley is res judicata and an abuse of process, and they further submit that the complaints are entirely without merit such that summary judgment should be granted.

[ 18 ] The plaintiff takes the position that Pennington and Rubinoff and his firm wrongfully obtained the business of 5400.

Analysis

(a) Summary Judgment

[ 19 ] 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.

[ 20 ] 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).

[ 21 ] 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?

[ 22 ] The court provided examples 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 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), (see Combined Air paras. 51 to 52).

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

(b) Merits of the Claim

[ 24 ] The precise nature of the claim against the defendants is not apparent from a review of the statement of claim. In the prayer for relief there is a reference to inducing breach of contract, breach of fiduciary duty and misappropriation of corporate and business opportunities.

[ 25 ] At paragraph 10 of the statement of claim the plaintiff pleads:

The actions of Pennington, Rubinoff and Fogler Rubinoff in causing 5400 to lose its sole business, as General Partner of the Partnerships, is the cause of action.

[ 26 ] Similarly in paragraphs 40 and 41, the plaintiff asserts that:

Absent the initiative of Pennington and Rubinoff, 5400 would continue to be the General Partner.

[ 27 ] The plaintiff complains in paragraph 41 of the statement of claim that the “initiative” of Pennington and Rubinoff somehow “destabilized” the situation and “eliminated any chance PWC may have had to realize value for 4500.”

[ 28 ] The plaintiff also complains in paragraphs 27 to 32 about the fact that an Ordinary Resolution prepared by Fogler Rubinoff in or about January of 2005 was misleading because it stated that 5400 had been dissolved instead of wound up. The plaintiff alleges that this action amounted to a breach of some unspecified contract and was a breach of fiduciary duties.

[ 29 ] In his factum the plaintiff states, “ Hawley’s claim is not that an election was held and 5400 replaced as general partner but rather the role which Pennington took in the process and the fact what had been the income of 5400 was taken over by Pennington as his income.”

[ 30 ] Turning first to the fact that Pennington’s is now receiving income that 5400 once received, I am at a loss to see how that fact could possibly ground a cause of action in these circumstances.

[ 31 ] The Liquidation Order was made on consent. The effect of that order was that 5400 was wound up. Under the terms of the partnership agreements unless 5400 was replaced as General Partner, the partnerships would terminate and dissolve. The winding up of 5400 meant that it could not continue on as the general partner and a new general partner had to be found. In short, it was the Liquidation Order itself that deprived 5400 of continuing in business not the actions of the defendants.

[ 32 ] I note that this argument also ignores the fact that Hawley was himself backing an alternative company to serve as general partner. He lost that fight. It is hard to imagine that he would be advancing the claim now made if he had won.

[ 33 ] With regard to the complaint regarding the role that Pennington played in the process by which 5400 was replaced as general partner, the decision of Justice Cumming in Marsh Engineering Ltd. Deloitte & Touche , 2008 CarswellOnt 7933 (Ont. S.C.) is instructive. In that case the plaintiff made a claim against the Bank of Nova Scotia related to payments it received in an insolvency proceeding. It also sought leave to bring a claim against the receiver Deloitte & Touche. Justice Cumming dismissed the motion for leave to sue Deloitte & Touche and granted the Bank of Nova Scotia’s cross motion for summary judgment dismissing the plaintiff’s claim.

[ 34 ] The following sections of the endorsement are apt for present purposes:

[33 ] As well, in my view, the allegations of negligence by the Receiver in administering the receivership are res judicata because the activities of the Receiver were reported to the Court and approved in all respects. Moreover, the asserted action amounts to a collateral attack upon the Court’s several Approval Orders. Hence, the action at hand amounts to an abuse of process.

[38] As well, all of the payments to the Bank were approved by Order of the Court. The individual plaintiff participated in the receivership proceedings and did not contest the approval of the payments to the Bank. The plaintiffs’ allegations amount to a collateral attack upon the several Court Orders approving the actions of the Receiver. In particular, the plaintiffs’ allegations against the Bank in the action at hand amount to a collateral attack upon the Court’s Approval Order of July 11, 2000. The litigation at hand is in essence an attempt by the plaintiffs to re-litigate a claim which the Court has already implicitly determined through the Approval Orders. Toronto (City) v. C.U.P.E., Local79, 2003 SCC 63 , (2003), 232 D.L.R. (4 th ) 385 (S.C.C.) . The action at hand constitutes an abuse of process.

[ 35 ] I find that the action should be stayed as an abuse of process in that the plaintiff is attempting to make a collateral attack on the decisions of Justice Farley and the Court of Appeal from the earlier proceeding, at least insofar as the actions of Pennington are concerned. Hawley participated fully in the earlier proceeding and did not elect to appeal the order of Justice Farley confirming the appointment of the new general partner.

[ 36 ] In any event, there was nothing in Pennington and Rubinoff’s conduct which was in any way contrary to their respective duties as a director and counsel of 5400.

[ 37 ] First, the alleged error in the Ordinary Resolution is a red herring. There is no evidence that it destabilized anything. The resolution itself was not acted upon; it was the Election Order that determined the process for selecting the new general partner. Moreover, there is, as a practical matter, no difference between the statement that 5400 was dissolved and the statement that it was wound up.

[ 38 ] With respect to Pennington’s conduct, the plaintiff relies on the Canadian Aero Service Ltd. v. O’Malley, 1973 23 (SCC) , [1974] S.C.R. 592 line of authority for the proposition that a director cannot obtain a corporate opportunity in which the corporation has a prior and continuing interest. It is hard to imagine a situation more distinguishable on the facts. In Canadian Aero and the other cases relied upon directors appropriated an opportunity that the company could have utilized. In the present case as a result of the Liquidation Order 5400 was wound up. The opportunity to continue acting as general partner was no longer available to the company.

[ 39 ] With respect to the conduct of Rubinoff and his firm, at the hearing of the motion counsel for the plaintiff provided a loose a copy of a case dealing with conflict of interest ( Consulate Ventures Inc. v. Amico Contracting & Engineering, 2010 ONCA 788 ), despite the fact that the issue of conflict of interest was nowhere raised in the statement of claim. In oral argument counsel asserted that the law firm was in a conflict of interest.

[ 40 ] Insofar as the allegation is that Rubinoff breached a duty to 5400 by incorporating a Mayfield general partner at the direction of a third party and drafting the Ordinary Resolution, in my view there is no conflict.

[ 41 ] The retainer with 5400 ended in mid 2003. The Ordinary Resolution was prepared sometime in late 2004 or early 2005. It is true that a lawyer owes an on-going duty of loyalty to a former client. However, the firm’s client was 5400 not Hawley. In addition, given that 5400 was wound up, it is difficult to see how 5400’s interests were in any way impacted by the law firm’s actions.

[ 42 ] The statement of claim also contains a rather vague assertion that Rubinoff and his firm acted against the plaintiff’s interests for their own financial gain. The plaintiff offers absolutely no proof in support of that allegation and in the face of the summary judgment motion did not even bother to examine Mr. Rubinoff.

[ 43 ] I also note that there is no evidence of any damages suffered by the plaintiff as a consequence of the alleged actions of the defendants. The claim is for monies that the plaintiff would have received had 5400 continued as the general partner. The loss of that income is not the result of the actions of the defendants. Rather, it is the result of the Liquidation Order which was consented to by the plaintiff.

[ 44 ] This is a case that cries out for dismissal on a summary basis. The argument in support of the plaintiff’s position was illogical and ran completely contrary to the actual facts and documents. It is frivolous and is a rather obvious effort to get around the previous court rulings. No trial is necessary for the court to have a full appreciation of the facts; it is entirely without merit and should be dismissed.

Disposition

[ 45 ] The motions by the defendants for summary judgment are granted and the action is dismissed against all defendants.

[ 46 ] 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