SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: William Levy, The Charles Hill Consulting Group LLC, Zachary Zeldin, Kontar Consulting Group LLC and Ryan Tenbusch, Plaintiffs

AND:

John K. Fitzgerald, John Fielding, Dark Bay International Ltd., William Fielding, Verite International Holdings Ltd., Barry Alter, Speculum Corporation, Philip Gurian, Windward Asset Management Inc., Andre Edelbrock, 2080344 Ontario Inc., Patrick O’Hanlon, Sherry-Lee O’Hanlon, Dagmar O’Hanlon, Michelle Lasso and Darryl Green, Defendants

BEFORE: D. M. Brown J.

HEARD: March 13, 2012

REASONS FOR DECISION

I. Motion to continue a Rule 45.01 order preserving certain shares in a start-up internet gaming company

[ 1 ] On December 22, 2011, the plaintiffs sought and obtained an ex parte order under Rule 45.01 preventing the defendants, Michelle Lasso and Windward Asset Management Inc. (the “Lasso Defendants”), from dealing with about half of the shares (2,419,011 shares) they owned in WG Limited (the “Frozen Shares”). Two weeks later Newbould J. continued the preservation order, on consent, until March 13, 2011.

[ 2 ] The Plaintiffs seek to continue the preservation order until trial. The Lasso Defendants contend that the order should be set aside either on the basis that the moving party plaintiffs failed to make full and frank disclosure on the initial ex parte motion, or because the evidence now before the court does not support the continuation of the preservation order.

[ 3 ] The plaintiffs had attempted to give short notice of their motion to the defendants. Counsel for some defendants appeared before Newbould J. on the initial return of the motion on December 22. The Lasso Defendants were not present or represented by counsel. Newbould J. made the following endorsement in granting the preservation order:

Mr. Levy and Mr. Cobb act for defendants who do not take any position on this motion. I am advised that the solicitors for WG Limited also take no position.

I am satisfied that the order sought is appropriate, and necessary. I have cleared the return date in light of the holiday season.

[ 4 ] For the reasons set forth below I will not continue the interim order. I dissolve the order of December 22, 2011 made by Newbould J. by reason of the failure of the plaintiffs to make full and frank disclosure of material facts on an ex parte motion.

II. Failure to make full and frank disclosure

A. Two preliminary procedural arguments advanced by the plaintiffs

[ 5 ] The plaintiffs submitted that in the absence of a cross-motion by the Lasso Defendants it was not open to them to raise, on the plaintiffs’ continuation motion, the issue of lack of full and frank disclosure. I disagree. It is open to a responding party which is subject to an injunction-style ex parte order to raise such an issue on a motion to continue because the moving party always labored under the obligation to make full and frank disclosure of material facts on the ex parte motion. The lack of a cross-motion by the respondent does not remove that obligation.

[ 6 ] The plaintiffs also submitted that in light of the consent by the Lasso Defendants to the January 10, 2012 continuation of the order, they could not contest its further continuation. I disagree. The January 10 endorsement of Newbould J. was brief:

Order extended to March 13, 2012. Hearing set for March 13, 2012 for 3 hours.

That endorsement, made immediately after the end of the holiday season, clearly was designed to afford the Lasso Defendants an opportunity to file materials to contest any continuation of the preservation order on the merits. It could not be construed as a consent by the Lasso Defendants to the merits of the preservation order.

B. The plaintiffs’ case as put before the ex parte motions judge

B.1 The allegations relating to the substantive claim against the Lasso Defendants in Levy’s Initial Affidavit and the Statement of Claim

[ 7 ] William Levy, Zachary Zeldin and Ryan Tenbusch were college students who came up with the idea of creating a video game platform which allowed players to compete online against each other in various games and place wagers on the outcome of the games (the “Platform”). Like many start-up ventures, having exhausted their personal resources, the plaintiffs looked for investors to fund the software for the Platform.

[ 8 ] According to Levy’s Initial Affidavit sworn December 21, 2011, in January, 2007, the plaintiffs’ lawyer, the defendant John FitzGerald, introduced them to three of the defendants who had expressed an interest in investing in the Platform – William Fielding, Barry Alter and Phil Gurian. Levy described these three gentlemen as the “Initial Investors”. Levy contended that a deal was struck which would see the Initial Investors put in $3 million and, based on a $6 million valuation of the enterprise, receive 50% of the shares; the plaintiffs would retain the other 50%. This understanding was reached prior to the incorporation of WG Limited (“WGL”).

[ 9 ] However, according to Levy, when WGL was incorporated, “the Defendants caused shares of WGL to be issued to themselves and their nominees and assigns, which they had not paid for and which belong to the Plaintiffs.” [1] Levy went on to depose that the plaintiffs transferred the Platform to WGL, but the defendants did not put up the promised $3 million, only $2.15 million. For that the defendants were issued 84.5% of WGL’s shares, with the plaintiffs only receiving 15.5%.

[ 10 ] Dealing specifically with a group he called the “Gurian Defendants” – Gurian, Windward and Lasso – Levy deposed that they had contributed $438,200 to WGL and received 4,940,873 shares registered to Windward, at Gurian’s direction. Levy alleged that Windward and Lasso were Gurian’s nominees.

[ 11 ] Levy deposed that using the initially-agreed upon valuation of $6 million, the Lasso Defendants should only have received 2,521,861 shares, meaning that they had received 2,419,011 shares (the “Disputed Shares”) for which they had not paid (4,940,873 – 2,521,861).

The Statement of Claim

[ 12 ] Levy attached the July 7, 2011 Statement of Claim to his Initial Affidavit. As against Gurian and the Lasso Defendants, the plaintiffs seek “a declaration that 2,419,011 of the shares of WGL held by and registered in the records of WGL in the name of Windward Asset Management Inc. and beneficially in the name of Michelle Lasso as nominees of Gurian are owned by the Plaintiffs”, as well as declarations that those shares were obtained by breach of agreement, breach of fiduciary duty, fraudulent misrepresentation and conversion.

[ 13 ] The Statement of Claim contained a more detailed version of events than in the Initial Affidavit, stating that the plaintiffs had agreed to transfer “42% of their equity” in WGL to the Initial Investors for $2.5 million with a shot-gun option right to purchase an additional 8% for $500,000. Further, the plaintiffs alleged that FitzGerald told them that due to banking difficulties, the Initial Investors could not deposit their subscription amounts so, instead, would pay WGL’s expenses as they fell due until banking arrangements were finalized.

[ 14 ] The plaintiffs pleaded that in June, 2007 Fitzgerald told them the Initial Investors were exercising their shotgun option to purchase a further 8% of the equity for $500,000. The plaintiffs contended that only in February, 2011 did they learn that the $500,000 had not been paid.

[ 15 ] The plaintiffs pleaded that they “were never provided with copies of or access to the corporate, banking or accounting records maintained by FitzGerald” and they had not been told that the Initial Investors had failed to pay their initial $2.5 million or subsequent $500,000. [2] They alleged that FitzGerald and the Initial Investors “were responsible for the allocation of the shares of WGL”. [3]

[ 16 ] According to the plaintiffs’ claim, they only discovered the true state of affairs in February, 2011:

In February 2011, the Plaintiffs discovered that the Defendants FitzGerald and the Initial Investors had not invested $3 million as agreed but had only invested a total of $1,598,270 million and had loaned $549,398 to the company. Nevertheless, they allocated 84.5% of WGL’s shares to themselves and the other Defendants, in March 2007, leaving the Plaintiffs with the remaining 16.5% of the shares. In doing so, the said Defendants breached their contractual and fiduciary duties to the Plaintiffs and unlawfully converted the Plaintiffs’ interest in the Platform and in WGL to themselves and the other Defendants. Having paid and loaned a total of $2,147,688 million rather than the $3 million investment due pursuant to the Agreement and shotgun option, the Defendants were entitled to receive at most 36.5% of WGL shares rather than 84.5% of the shares. The Defendants have been unjustly enriched by receiving 58% of the equity shares of March 2007 rightfully owned by the Plaintiffs. [4]

[ 17 ] The plaintiffs plead that as a result of their conduct the defendants “now hold 16,580,416 WGL shares which belong to the Plaintiffs”. [5] Although new shares of WGL were issued to bona fide third party investors after March, 2007, “the plaintiffs claims against the Defendants do not alter or affect in any way the third party investors shareholdings in WGL”. [6]

... (continues exactly as in the source decision)

Date : April 4, 2012

D. M. Brown J.