SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: 1487/08
DATE: 2012-03-12

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

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

BEFORE: HOURIGAN J.

COUNSEL:
Ronald S. Sleightholm, Counsel for the Plaintiff

Counsel for the Defendants

HEARD: March 7, 2012

ENDORSEMENT

Nature of the Motion

[ 1 ] The defendants move for summary judgment dismissing the claims of the plaintiffs for relief under the oppression remedy section of the Alberta Business Corporations Act, damages as a result of a breach of duty of good faith and a misrepresentation regarding the cost base of certain shares, and reimbursement of certain legal fees.

The Facts

[ 2 ] In or about April of 1988, Arrowsmith Properties Limited (“Arrowsmith”) was incorporated in Alberta. In 2000, Arrowsmith changed its name to North Shore Mercantile Corporation (“North Shore”).

[ 3 ] The defendant, The John K. Pennington Family Trust No. 1 (which is controlled by the defendant John Pennington) and the plaintiff, the Aged Gingko Trust (which is controlled by the plaintiff James Hawley) were shareholders of Arrowsmith. Both Pennington and Hawley were officers and directors of Arrowsmith. Hawley was the chief financial officer for the company.

[ 4 ] Pursuant to its obligations under the Alberta Stock Exchange, Arrowsmith was required to complete a major transaction within 18 months of being listed. The major transaction chosen was the purchase by Arrowsmith of all the issued and outstanding shares of 1083131 Ontario Inc. (“108 Ontario”), which owned a golf course in Brampton, Ontario (the “Major Transaction”). The vendors in the Major Transaction were the Pennington Trust and the defendant Hubland Investments Ltd. (“Hubland”). The defendant Robert Fasken is the principal of Hubland and was also a director of North Shore.

[ 5 ] The defendants’ involvement as vendors of 108 Ontario was disclosed and known at all times. Both 108 Ontario and North Shore were each represented by independent legal counsel on the Major Transaction.

[ 6 ] The Major Transaction provided that the consideration for the 100 common shares of 108 Ontario was in the form of a share-for-share exchange in the amount of $1.2 million. The transaction was comprised of $535,000 in the form of 2,675,000 common shares of North Shore and $665,000 in the form of 3,325,000 preferred shares of North Shore. The common shares were to be released to the vendors pursuant to a timed escrow and the preferred shares were to be released pursuant to a performance escrow.

[ 7 ] Clause 2.4 of the Share Purchase Agreement provided:

Arrowsmith hereby agrees to execute and file with the Department of National Revenue such elections and other documents as may be required and agrees to assists the Vendors in tendering their Purchased Shares in exchange for the Arrowsmith Common Shares in a tax effective manner.

[ 8 ] As part of the Major Transaction, the Stikeman Elliott law firm wrote to Hawley, among other directors and interested parties, regarding the circular related to the Major Transaction. In that letter, counsel asked that each of the directors of Arrowsmith “review the enclosed circular to confirm that it does contain full, true and plain disclosure of all material facts with respect to the proposed shareholders meetings.”

[ 9 ] On April 2, 2009, Arrowsmith provided a letter to its accountants Grant Thornton which was executed by Hawley in his capacity as chief financial officer and by Pennington representing:

As members of management we believe that the Circular constitutes full, true and plain disclosure of all material facts relating to the affairs of the Company including all events and transactions to April 7, 1999.

[ 10 ] The circular contained the Financial Statements of Arrowsmith prepared by Grant Thornton which included as Appendix ‘A’ a document entitled “Information in Respect of 1083131 Ontario Inc.” In the capitalization section of that document there is reference to 100 common shares and a value of $100. This information is consistent with the value of the shares in the balance sheet of 108 Ontario as contained in Appendix ‘B’ to the Financial Statements of Arrowsmith prepared by Grant Thornton.

[ 11 ] The Major Transaction closed and thereafter all of the financial statements of 108 Ontario listed the value of the shares as $100.

[ 12 ] In 2003, the business relationship between Hawley and Pennington ended. There followed a series of legal proceedings between the parties. One claim was commenced on July 6, 2004 in the Ontario Superior Court of Justice, on the Commercial List (the “Original Oppression Action”). In that claim, Hawley alleged that the financial performance test for release of preference shares from escrow was oppressive. As part of his pleading, at paragraph 39, he stated as follows:

According to Grant Thornton report dated October 6, 2003, if North Shore is dissolved and a liquidating dividend is paid, a significant tax liability results to the Company’s shareholders.

[ 13 ] On November 9, 2005, Hawley wrote to John Plestid of Grant Thornton, in an email. The pertinent portions of that email are as follows:

David Fleice and I have been discussing the ACB of the shares of 1083131 Ontario Inc. (holding the Park Shore Golf Course) which were purchased by North Shore Mercantile Corporation (then named Arrowsmith Properties Limited) back in 1999. PriceWaterhouseCoopers Inc. is the liquidator and is proposing to sell the shares of 1083131, so the ACB is a critical impute into the taxes which will be thrown up on a sale.

I am aware of Grant Thornton’s analysis of a liquidating dividend of North Shore, which was proposed back in October 2003. I am also aware of Grant Thornton’s conclusion reached at that time that the paid up capital of the shares of 1083131 was $100. I was not aware and did not conclude at that time, that this implied that the ACB of the 1083131 shares was also this nominal value.

I had always understood that the ACB of the shares of 1083131 in North Shore’s hands was either of: (i) the $1,450,000 of value of the consideration paid by North Shore, or, alternatively, (ii) the sum of $1,200,000 paid for the common shares plus $250,000 paid separately for the previous shareholders’ existing loan of $250,000 to 1083131. (Either way, it made no difference to me.)

David Fleice has passed along to me today your email to him on November 1 st , 2005. Your email suggests that North Shore’s ACB in the 1083131 shares is only $100, and not the higher figure that I have been working with.

Mr. Plestid responded to Mr. Hawley’s email by way of an email dated November 17, 2005. In that email, Mr. Plestid stated, among other things, the following:

On a share-for-share deal, to have avoided the application of section 85(1) and to have achieved an ACB of $1.2 million the vendors of 1083131 Ontario Inc., and North Shore would have to have filed a joint election under section 85 to report proceeds of disposition equal to the value of the shares. This would have resulted in a capital gain to the vendors of $1.2 million.

It is our understanding that the vendors’ ACB was $100 and from our reading of the financial statements of 1083131 and our inquiries of the PUC of the shares acquired was also $100. It is also our understanding that none of the vendors reported a capital gain on the transaction. A number of other relevant facts were listed in our letter of October 18, 2003 to North Shore’s Board of Directors. We did not receive notification from anyone that any of these facts were incorrect. I am also not aware of the parties filing an election under section 85 so as not to have the provision of section 85.1 apply.

[ 14 ] In an email dated November 18, 2005 from Hawley to David Fleice at PriceWaterhouseCoopers, Hawley states as follows:

My reading of his email suggests that there is, now, one more issue to be considered in the disposition of North Shore. Pennington and Fasken clearly took advantage of the complexity of the situation when North Shore purchased 1083131 to defer their own capital gain and saddle North Shore with it. As things now stand, when North Shore sells 1083131, it will incur the taxable capital gain that was rightfully Pennington’s and Fasken’s. The minority shareholders of North Shore will have to pay the taxes that Pennington and Fasken should have paid at the time of their sale. As I stated in an earlier email to you, everyone else, including the accountants, the Alberta Securities Commission and the other shareholders, expected this and were misled.

[ 15 ] Hawley and the Aged Ginko Trust were initially successful in the Original Oppression Action. However, that decision was overturned by the Ontario Court of Appeal in reasons dated September 28, 2009. In granting the appeal, the court stated as follows:

[66] There was nothing improper with Fogler, Rubinoff LLP’s application to the ASE for the release of shares on behalf of the company. The Escrow Agreement contemplates the application being made either by the security holders or the issuer. The security holders have the right to receipt of the shares and payment for the shares they sold to the issuer and the issuer has the obligation to pay for those shares by release of its security.

[67] It must have been apparent to Hawley at all times, including when he approved the acquisition of the shares of 108, that his shareholding would be deluded once the transaction was completed. Both Pennington and Fasken, or their corporate nominees, would have treasury shares issued to them – Hawley would not. There is nothing “oppressive” about that fact. Hawley is, and was, a meticulous man, as can be seen from his notes on the draft financial statements he reviewed. Arrowsmith acquired all of the shares of 108 and had to pay for it. Pennington and Fasken owned 108’s golf course valued at $1.4 million, via their shareholdings in 108, and were entitled to be paid for it.

[68] There was no objection to the liquidation of Arrowsmith. Hawley consented to the liquidation in 2004 and, accordingly, that cannot in any way be raised by him as “oppressive conduct”.

Law Re Summary Judgment

[ 16 ] 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.

[ 17 ] 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) .

[ 18 ] 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?

[ 19 ] 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 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).

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

Nature of the Claims

[ 21 ] The essence of the plaintiffs’ claim on the first cause of action is that the defendants acted in a dual capacity in the Major Transaction and took advantage of the situation and saddled North Shore with an unexpected tax obligation.

[ 22 ] With respect to the second cause of action they allege that Fogler Rubinoff was acting as counsel only for the defendants Pennington and Fasken and point to the fact that the firm was instructed to release the shares of Fasken and Pennington from escrow and that the firm supported the idea of appointing a director of North Shore who was a business associate of Fasken. Therefore the plaintiffs state that Fasken and Pennington should reimburse North Shore for the legal fees paid to the firm.

Limitations and Related Defences

[ 23 ] There is no issue that the limitation period for both causes of action is two years under the Limitations Act S.O. 2002, c. 24 . The issue is when the limitation period began to run.

[ 24 ] With respect to the tax issue, the defendants argue that the limitation period began to run, at the latest, on November 9, 2005 when Hawley wrote to Grant Thornton and made clear that he understood the potential adverse tax consequences of a sale of the shares. They submit, relying upon Charlton v. Beamish , (2004) CarswellOnt 4565 (Ont. S.C) , that even if the plaintiffs did not appreciate the extent of their damages that does not stop the limitation period from running. Therefore, they argue that the limitation period expired in November of 2007 and that, as the action was commenced in March of 2008, it is statute barred.

[ 25 ] Section 5.(1) of the Limitations Act provides as follows with respect to the discovery of a claim:

5.(1) A claim is discovered on the earlier of,

(a) the day on which the person with the claim first knew,

(i) that the injury, loss or damage had occurred,

(ii) that the injury, loss or damage was caused by or contributed to by an act or omission,

(iii) that the act or omission was that of the person against whom the claim is made, and

(iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it; and

(b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a).

[ 26 ] The plaintiffs rely on the recent Ontario Court of Appeal decision in Everding v. Skrijel, 2010 ONCA 437 .

[ 27 ] In my view, the present case is closer to the situation in Everding than it is to the facts of Charlton. In the case at bar the plaintiff knew, at least by November of 2005, about a potential claim. It was not a situation where just the extent of the loss was unknown but a situation where no loss would be triggered at all until that sale of the shares. It was only on the sale of the shares for an amount over $100 that they would have suffered any injury, loss or damage as contemplated by subsection 5(1) of the Limitations Act . I recognize that it is perhaps unrealistic to suggest that the sale of the shares could have been undertaken in a tax neutral manner but I cannot say on the record before me that such a transaction was impossible. Thus the limitation period did not begin to run until the shares were sold.

[ 28 ] I find that the claims asserted by the plaintiffs related to the tax issue are not statute barred. Given my finding on the limitation defence, the doctrines of res judicata , issue estoppel and abuse of process are inapplicable.

[ 29 ] With respect to the issue of the fees paid to Fogler Rubinoff, I note that the accounts complained of date from March 3, 2004 to August 11, 2004. This action was not commenced until March 6, 2008, almost four years after the last account was rendered. Nowhere in their responding materials do the plaintiffs explain the delay in making this claim. Clearly the claim was made more than two years after the claim was discovered or discoverable and is, therefore, statute barred.

[ 30 ] I would also stay this part of the action as an abuse of process as the plaintiffs are clearly trying to get around the earlier decision of the Court of Appeal. I note that the Court of Appeal indicated in its decision that there was nothing inappropriate about Fogler Rubinoff applying for the release of the shares. To allow the action to proceed would violate the principles of judicial economy, consistency, finality and integrity of the administration of justice (see Toronto (City) v. C.U.P.E. , Local 79 , 2003 SCC 63 , 2003 CarswellOnt 4328 (S.C.C.), at paragraph 37 ).

Claim on the Merits

[ 31 ] The first issue is whether the conduct of the defendants with respect to the Major Transaction entitles the plaintiffs to relief under the oppression remedy sections of the Alberta legislation.

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

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

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 Debenture Holders , 2008 SCC 69 , 2008 CarswellQue 12595 (S.C.C.)).

[ 33 ] The actions of Pennington and Fasken regarding the Major Transaction do not trigger the provisions of the oppression remedy section of the Alberta Business Corporations Act , which is similar to the provisions of the Ontario legislation. There is no evidence that the reasonable expectations of the defendants have been violated in any way. The cost base for the shares was listed in the circular and the only reasonable expectation of any party would be that that cost base would be utilized in determining capital gains.

[ 34 ] Counsel for the plaintiff submits that his client is also asserting a claim of breach of good faith by Pennington and Fasken as directors. Good faith was not specifically pleaded nor was the statutory requirement of a director and officer to act in good faith referenced in the statement of claim. It goes without saying that allegations of misconduct of corporate officers and directors must be pled with precision. That was not done in this case.

[ 35 ] In any event, I find that there has been no breach of the duty of good faith. The involvement of Pennington and Fasken on the other side of the Major Transaction was disclosed and well known to all the parties. They took the appropriate step of abstaining from voting because they had an interest in the transaction. The transaction itself was approved by the shareholders who had the benefit of legal counsel.

[ 36 ] A claim is also made of misrepresentation. Although not specified in the manner required by rule 25.06(8) of the Rules of Civil Procedure , in argument counsel submitted, in effect, that the misrepresentation is of omission as the tax consequences were not explained in the circular.

[ 37 ] This claim ignores the fact that the cost base for the shares was specifically listed in the circular. Clearly the tax consequences of the sale would have been apparent to anyone who took the time to review the document. Therefore, there was no material omission and, to the extent that it has been pleaded, no misrepresentation.

[ 38 ] Finally, I turn to the second cause of action, being the claim for reimbursement of legal fees. To the extent that I am wrong regarding my conclusions reached above that this part of the action is statute barred, res judicata and should be stayed an abuse of process, I have considered the merits of this claim.

[ 39 ] Pennington swore an affidavit wherein he stated that Fogler Rubinoff acted solely in the interests of North Shore and not in the interests of the defendants. He also stated that the actions of the firm were or should have been raised in the earlier proceeding and that the claim is statute barred. In his reply affidavit Hawley does not respond in any way to the Pennington affidavit regarding the law firm. Indeed, other than a mention of the firm in the context of another proceeding, there is no mention of Fogler Rubinoff in the affidavit.

[ 40 ] The plaintiffs have an obligation to put their best foot forward on a motion for summary judgment. There is no evidence whatever that is tendered to suggest that there is something wrongful in the payment of Fogler Rubinoff’s accounts. This claim must be dismissed.

[ 41 ] I find that this is an appropriate case to grant summary judgment dismissing all of the plaintiffs’ claims. As the motion’s judge I have a full appreciation of the facts and issues. The action is entirely without merit.

Disposition

[ 42 ] The motion for summary judgment is granted.

[ 43 ] 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