COURT FILE AND PARTIES

COURT FILE NO.: 08-CV-347903
DATE: 20120405
SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Cutting Edge Films Inc., Judgment Creditor / Moving Party

AND:

International Tour Entertainment Corp., Judgment Debtor / Responding Party

AND:

Terry Graham, Garnishee / Responding Party

BEFORE: Justice E. P. Belobaba

COUNSEL: Heather Mitchell and Frank Bennett for Moving Party

Jordan Potasky and Kenneth Wolfson for Responding Parties

HEARD: March 28, 2012

ENDORSEMENT

[ 1 ] This garnishment matter has been before me in various forms and guises for almost two years. Today’s decision will hopefully bring an end to this protracted post-judgment litigation.

Overview

[ 2 ] Cutting Edge Films (“CEF”) secured a judgment of $115,805 in 2008 against International Tour Entertainment Corp. (“ITEC”) after enforcing an arbitration award for breach of contract and then, as an unsatisfied judgment creditor, garnished ITEC’s sole shareholder and director, Terry Graham on the ground that he was indebted to ITEC. In his Garnishee’s Statement, Mr. Graham said he owed ITEC nothing. In a decision released on October 4, 2010, I found that Mr. Graham’s statement was not truthful and set it aside.

[ 3 ] Before my involvement, CEF had concluded that Mr. Graham owed ITEC a significant amount of money, well over $100,000. In order to confirm the precise amount, CEF attempted to conduct the required examinations. Unfortunately, Mr. Graham was less than co-operative. Over the course of the last four years, CEF was compelled to obtain four production orders, five certificates of non-attendance, and four examination orders. Mr. Graham was also found in contempt of court three times. One finding was overturned. Two were appealed and those appeals are stayed.

[ 4 ] What made the information-getting process particularly difficult for CEF was the fact that Mr. Graham was not only the CEO and sole shareholder of ITEC, he was also the CEO and sole shareholder of his holding company Dungor Holdings and he apparently moved money to, from and between these companies with little or no documentation and even less in the way of detailed recollection. Much of the financial evidence was provided by Armin Fried who was Mr. Graham’s accountant during the times in question.

[ 5 ] CEF has now completed its examinations of Messrs. Graham and Fried.

[ 6 ] In this motion for judgment under Rule 60.08(16), CEF asks that I determine the amount that Mr. Graham owes ITEC and direct that $99,763.56 (the amount of the current indebtedness) be paid directly to CEF. I have reviewed the evidence on this last point and I am satisfied that ITEC currently owes CEF $99,763.56 plus appropriate interest.

Analysis

[ 7 ] CEF says that Mr. Graham actually owes ITEC just over $200,000 - consisting of $118,000 that he took for himself for his personal use and can no longer account for, and $85,000 in corporate dividends ($50,000 in 2006 and $35,000 in 2007) that were paid out while ITEC was insolvent. CEF submits that Mr. Graham is indebted and obliged to repay both of these amounts to the judgment debtor, ITEC, and is thus a legitimate garnishee.

[ 8 ] I will deal with each of these submissions in turn.

(1) The $118,000

[ 9 ] Although it has taken almost four years to obtain this information, it is now agreed that Graham took $154,707.36 from ITEC’s account in Fiscal Year 2008 (“F/Y 2008”). About $32,000 was used to reimburse Graham for legitimate ITEC expenses that had been charged to his personal credit cards, leaving a balance of about $118,000. [^1] The credit card statements eventually produced by Graham show that the $118,000 was used for personal expenses - restaurants, bars, liquor and beer, movies, gas and the repair of Graham’s two cars. Neither Graham nor Fried produced any evidence that any part of the $118,000 was a legitimate ITEC expense. Indeed, in his evidence, Fried agreed that Graham was obliged to account for the $118,000.

[ 10 ] In order to account for the $118,000, Fried focused on the $229,466 that ITEC owed Dungor Holdings and then attributed $135,000 of this indebtedness directly to Graham. Fried recorded this $135,000 attribution in his list of “adjusting entries.” As a result, instead of Graham owing ITEC $118,000, Fried noted that ITEC owed Graham about $10,000 (sic). Fried recorded ITEC’s $10,000 debt to Graham in 2011 when he completed ITEC's F/Y 2008 financial statements.

[ 11 ] CEF submits this is not a proper or credible adjusting entry for the following reasons:

• Fried acknowledged that without the $135,000 set off, Graham would have to account for the $118,000;

• Fried attended examinations in 2009 and 2010 without mentioning the $135,000 debt from ITEC to Graham. At the recent 2012 examination, Fried provided 396 pages of financial records pursuant to a court order that required Graham and Fried to produce “all relevant records”. Only one line on one page (Fried's adjusting entries) mentions the $135,000 debt;

• Fried's one-line adjusting entry was made in 2011, three years after the court judgment in this case. This one-line adjusting entry is the only evidence of a $135,000 debt that ITEC supposedly owed Graham. There was no other evidence of this debt. Indeed, Graham himself testified that he wasn’t sure if Dungor owed him anything;

• Graham said he had no idea what the adjusting entry meant. He was asked specifically if it meant that part of the money which ITEC owed Dungor was shifted to Graham. Graham said he had “no idea.” When asked if he recalled Fried discussing transferring to Graham part of ITEC's debt to Dungor, Graham said he couldn't recall the specifics of the conversation;

• Fried justified substituting Graham for Dungor as an ITEC creditor (in the amount of $135,000) because in his view all of ITEC's and Dungor's and Graham's money came from Graham's pocket. The accounts were therefore “interchangeable” although Fried acknowledged that Dungor was an incorporated company;

• The evidence is clear, however, that the source of ITEC's money was third party loans, tax refunds, loans from Graham and Dungor and the tens of thousands of dollars received from customers. Fried's evidence that all ITEC's money came from Graham is not correct;

• Fried obviously conflated Graham with Dungor and ITEC when he testified that all Dungor's and ITEC's money was really Graham's money and thus the $135,000 set-off was legitimate. However, Graham, Dungor and ITEC are separate legal entities and as the Court of Appeal noted in Terra Nova Systems Inc. v. R&M Trade and Network Inc. [^2] , "[one company's] losses are not [another company's] damages simply because the two companies have a common shareholder and source of capital;"

• Neither ITEC nor Dungor benefitted from the transaction. Graham alone benefited. He paid less tax.

[ 12 ] Adjusting entries are a legitimate accounting technique. Here, however, I agree with CEF. The adjusting entry creating the $135,000 indebtedness did not reflect any legitimate business reality. I find that the sole purpose of the adjusting entry was to hide Graham's liability to repay ITEC's $118,000 which Graham had used for his personal expenses.

[ 13 ] In sum, CEF has established on the evidence before me that Graham owes ITEC $118,000.

(2) The $85,000 in dividends

[ 14 ] I now turn to the $85,000 in dividend payments. CEF argues that Graham took dividends in 2006 ($50,000) and 2007 ($35,000) while ITEC was unable to pay its bills in the ordinary course and was therefore insolvent. Under s. 130 of the Business Corporations Act, [^3] directors are required to repay dividends from an insolvent company. CEF says that Graham therefore owes ITEC a further $85,000.

[ 15 ] As I told counsel during the hearing, I was not prepared to find on the evidence before me that Graham is obliged to return the $85,000 in dividends. Although ITEC was insolvent in 2008, it was not clear that it was insolvent in 2006 and 2007. There is also the argument that the two dividends were reversible and could, even now, be re-characterized as payments of salary or management fees. I acknowledge that there is merit in CEF’s submissions to the contrary, but on balance, I am not persuaded. I am unable to conclude on the basis of the conflicting evidence before me that Graham is obliged to return the $85,000 in dividends. In short, CEF’s submissions about the dividend payments do not succeed.

Conclusion

[ 16 ] ITEC owes CEF $99,763.56 . Mr. Graham is indebted to ITEC in the amount of $118,000. CEF is therefore entitled to garnishment and judgment in the amount of $99,763.56.

[ 17 ] A recent execution search of ITEC creditors completed by CEF showed no creditors other than CEF. Therefore there is no reason to require that payment be made to the Sheriff as suggested by counsel for Mr. Graham. In the circumstances of this case, it is just and reasonable to allow and require Graham to pay CEF directly. [^4]

Disposition

[ 18 ] The motion for judgment is granted.

[ 19 ] Order to go that Terry Graham pay Cutting Edge Films $99,763.56, of which $64,389.18 bears interest at 5% per annum pursuant to the order of Justice Perell of June 5, 2008, and the remainder bears interest at 6% per annum pursuant to the order of Justice Pollak of August 8, 2008.

Costs award

[ 20 ] I have reviewed the parties’ costs submissions.

[ 21 ] CEF asks for $72,000 in costs. In a normal proceeding, a costs award of this magnitude given that the judgment obtained was just under $100,000 would violate the principle of proportionality. Even a costs award of $50,000 could be legitimately critiqued on this basis as well. However, this was not a normal proceeding for at least two reasons. One, the garnishee was determined to do whatever he could to obfuscate and delay, adding numerous steps to the collection process: see the discussion above. [^5] Two, the respondents turned down two settlement offers, each of which was more favourable to them than the judgment herein. I also note that almost 80% of CEF counsels’ time was incurred after the first settlement offer. Because this significant post-offer portion is payable on a substantial indemnity scale (i.e. 1.5 times partial indemnity) the resulting costs award will be larger than normal.

[ 22 ] Having reviewed the factors as set out in Rule 57.01(1) and having applied the substantial indemnity measure for the post-offer time period, I find it fair and reasonable to fix the fees at $50,000 and disbursements at $8000 for a total costs award of $58,000 all-inclusive – payable by ITEC and Graham within 30 days.

[ 23 ] Order to go accordingly.

Belobaba J.
Date: April 5, 2012

[^1]: At his cross-examination of February 21, 2012, Fried testified about the disposition of ITEC's $154,707.36. He explained and demonstrated that about $32,000 was ITEC-related, leaving about $118,000 unaccounted for. The $32,000 amount consisted of $18,000 to finish repaying Graham's loan to ITEC in F/Y 2007; $5,000 to repay the amount Graham lent ITEC in F/Y 2008; $4,000 to reimburse Graham for personally paying ITEC's creditor, Brad Oldham; and $5,000 to reimburse Graham for ITEC's office occupancy costs in Graham's house . Fried stated that these were rounded numbers, that he was making a rough calculation and was probably out about $7,000. In other words, the total amount unaccounted for could well be $125,000. Counsel for CEF advised that because both amounts, $118,000 and $125,000, are more than the amount that ITEC owes CEF, it was content with either tabulation.

[^2]: 2010 ONCA 490 () at para. 10 .

[^3]: R.S.O. 1190, c. B-16.

[^4]: This court has on occasion required that payment be made directly to the judgment creditor: see, for example, Royal Bank of Canada v Sadia Security Solutions, 2011 ONSC 6992 . In any event, in my view under Rule 60.08(17), CEF would be entitled on the facts herein “to an order against the garnishee for payment of the amount that the court finds is payable to the debtor by the garnishee.” There is little purpose in adding unnecessary complexity to the process by requiring payment first to the Sheriff. Indeed, counsel for ITEC, when pressed, could offer no good reason why he was insisting on this method of payment.

[^5]: Supra , para. 3.