COURT FILE NO.: CV-11-438831

DATE: 20120704

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Flexity Solutions Inc., Plaintiff

AND:

Toula Sotirakos, Defendant

BEFORE: Carole J. Brown J.

COUNSEL: K. Friedman, for the Plaintiff

M. Emery, for the Defendant

HEARD: April 20, 2012

ENDORSEMENT

[1] The plaintiff, Flexity Solutions Inc. ("the plaintiff"), seeks an order striking out numerous allegations contained in the Statement of Defence and Counterclaim of the defendant, Toula Sotirakos ("the defendant"), as set forth at Schedule A of the plaintiff’s Notice of Motion. The plaintiff argues that the paragraphs which it seeks to strike are frivolous and vexatious, irrelevant, or unnecessary, as they do not support any claim for damages. It further seeks to strike certain allegations as failing to establish any reasonable cause of action.

[2] In its factum, the plaintiff referred to Schedule A and categorized the allegations which it seeks to strike into five topic areas as follows:

(a) shareholder loans of Ron and Peter;

(b) salaries of Ron and Peter;

(c) pre-contractual negotiations;

(d) instructions given by Peter in respect of which no damages are sought; and

(e) comments made by corporate legal counsel.

[3] The parties have both used these topic areas in their submissions, and I will use the same five categorizations in my Endorsement.

[4] In the main action, the plaintiff seeks to rescind an Option Agreement, executed between the parties on September 19, 2008, for want of consideration to the plaintiff or the return of shares acquired by the defendant thereunder, the return of all consideration received by the defendant regarding those shares which she held under the Option Agreement, and relieving her of her seat on the Board of Directors of the plaintiff Corporation. In the event that the plaintiff is successful in its action, the defendant will continue as a beneficial shareholder of 554,348 Class A Common Shares, but will relinquish ownership of 332,608 Class A Common Shares provided pursuant to the Option Agreement. This will result in her combined beneficial holdings dropping below 5%, which would require her to vacate her director's seat.

The Background Facts

[5] The parties entered into an Option Agreement on September 19, 2008, pursuant to which the defendant acquired 332,608 Class A Common Shares in the plaintiff Corporation. The consideration which the plaintiff Corporation understood that the defendant was providing for the benefit of the Option Agreement was foregoing payment for the value of past services to the plaintiff, namely services which the defendant claimed had been rendered to the plaintiff since 2004 for which she had not been paid. In addition to the Option Agreement, the defendant executed an Employment Agreement, pursuant to which the defendant became Chief Financial Officer of the plaintiff, a release in favor of the plaintiff in respect of past services, a Unanimous Shareholders' Agreement and other closing documentation.

[6] The defendant was terminated without cause on November 16, 2010. The Employment Agreement dated September 19, 2008, provided for termination without cause. The termination triggered a revocable option under the Unanimous Shareholders' Agreement in favour of the other Class A shareholders or, at their option, the plaintiff, to purchase all the shares held beneficially by the defendant. The evidence indicates that arbitration is pending in which the defendant’s shareholdings will be valued and purchased.

[7] The defendant seeks dismissal of the claim for rescission of the Option Agreement, and counterclaims for relief, including the following:

(a) declarations regarding the defendant's claim that she was oppressed pursuant to the Canada Business Corporations Act;

(b) production of financial statements and records of the plaintiff;

(c) injunctive relief restraining the plaintiff from dealing with its assets;

(d) orders requiring payment to be made to the defendant regarding bonuses, dividends and profit-sharing;

(e) an order requiring the directors of the plaintiff to purchase her shareholdings in the plaintiff and fixing the price for her holdings;

(f) an order requiring the plaintiff to pay for a shareholder loan.

[8] The defendant makes no claim for damages arising from dismissal from employment.

The Law

[9] The parties agree that the general rule with respect to form of pleadings is found at Rule 25.06 (1). The defendant further relies on Rules 25.06 (2), (3), (7) and (8), and 25.07 (3) and (4).

Pursuant to Rule 25.11, the court may strike or expunge all or part of a pleading, with or without leave to amend, on the ground that the pleading may prejudice or delay the fair trial of the action; is scandalous, frivolous or vexatious; or is an abuse of process of the court.

[10] Unnecessary paragraphs should be struck to ensure that pleadings are focused and refined and allow parties to focus their efforts on issues that will have an effect on the outcome of the litigation; Caras v IBM, 2004 CarswellOnt 2897 (Ont. Master); Canadian National Railway v Brant, 2009 CanLII 32911 (ON SC), 96 O.R. (3d) 734.

[11] The importance of complying with the purpose of pleadings was succinctly summarized by Low J. in Lysko v. Braley, as follows:

The purpose of pleadings is to define the issues for the parties and for the Court. The pleadings govern the trial and the interlocutory proceedings. A case properly pleaded permits an efficient use of judicial resources and the parties' resources. Bad pleadings do the opposite and more. They are instruments of potential mischief in the litigation process. One of the functions of pleadings is to govern discovery. If a matter is pleaded, it may be discovered upon. Where a pleading is replete with evidence or irrelevant material, for example paragraphs 94 to 98 of this pleading, it is calculated to open the door to prolonged and potentially abusive discoveries which do not address the real issues between the parties. For that reason, offensive portions of the pleading tend to prejudice or delay the fair trial of the action and are thus an abuse of process. Bad pleadings do no mischief only if all the parties clearly agree that the offensive portions will be ignored for all litigation purposes and that the pleading will be made regular prior to trial. There are circumstances where, for reasons of economy, good counsel will agree to act cooperatively in this fashion to minimize costs. There is no such agreement here however, and, to the contrary, the plaintiff argued that the entirety of the pleading was proper and necessary.

Lysko v Braley, 2004 CanLII 40666 (ON SC), [2004] O.J. No. 4727 (Ont. S.C.J.), affirmed (2006), 2006 CanLII 11846 (ON CA), 79 O. R. (3d) 721 (Ont. C.A.) at paragraph 64.

[12] Where allegations are marginally relevant, if the probative value of facts pleaded is outweighed by their prejudicial effect, the court has the jurisdiction to strike those pleadings: Brant, supra at paragraph 30; Quizno's Canada Restaurant Corp.v Kileel Developments Ltd.., 2008 ONCA 644 at paragraph 15.

[13] I also note subrules 25.06 (2), (3), (7), and (8), as well as subrules 25.07 (3) and (4), which are relied upon by the defendant.

[14] The Court of Appeal has recognized that the plaintiff cannot be prejudiced when the defendant's allegations are directly responsive to allegations made in the Statement of Claim and the pleading cannot be scandalous if it is relevant: Quiznos, supra., paragraphs 29 and 14.

Analysis

[15] In determining the issues in this motion, I will follow the table set forth at Appendix A to the moving party’s factum, and will categorize the allegations sought to be struck as the plaintiff has done in its factum. Further, where I order impugned paragraphs or portions thereof struck, I refer to those paragraphs or the portions thereof referenced in Appendix A of the plaintiff’s factum.

Shareholder Loans of Ron and Peter

[16] The Statement of Defence sets forth the amounts of shareholder loans advanced to Flexity by Peter, Ron and Toula. Further, it sets forth the amount of interest paid by the company on each of those shareholder loans and the loan repayment date. These allegations are set forth at paragraphs 9, 10 and 22 of this Statement of Defence.

[17] The plaintiff argues that the shareholders loans of Peter and Ron are not relevant to any defence or counterclaim. They further argue that the time and effort involved in addressing the history of Peter’s and Ron's shareholder loans in the examinations for discovery would unduly prolong the discovery process and seriously interfere with a fair and focused trial of the issues.

[18] The defendant argues that the shareholders loans are made relevant by the allegations in the Statement of Claim that Ron invested personal funds to start the company in 2004 and that funds were "injected" by Peter into the company in the summer of 2005. Further, it argues that the Statement of Claim contrasts this description of financial contributions from Peter and Ron with the allegation that despite Toula’s lack of financial investment in the company, she would variously insist that she was entitled to voting shares. The defendant argues that the issue of how each of the three defendants made contributions to Flexity and what actual investments each made before receipt of their shares are material to the issues and will provide the trial judge with a full appreciation of the relationships and how they relate to the plaintiff’s claims against the defendant.

[19] I do not find the allegations with respect to the shareholders loans of Peter and Ron to be relevant or necessary to the pleadings. Nor are they necessary to give a full appreciation of the relationships of the parties. The issue relates to Toula, her shareholdings in the company and whether the Option Agreement was executed without any consideration on her part. I order that the allegations set forth at paragraphs 9, 10 and 22 of the Statement of Defence and Counterclaim as they relate to shareholder loans of Peter and Ron be struck.

Salaries of Peter and Ron

[20] The defendant pleads the amounts of the salaries paid to Ron and Peter in various years at paragraphs 23 and 24. The plaintiff argues that their salaries are not relevant to any of the claims made. In the event that the amounts of their salaries are inserted to juxtapose the defendant’s salary, this is not relevant, nor is the defendant's own salary, as this is not an action for wrongful dismissal or an employment-related claim to which salary may be relevant. The defendant argues that, because the Statement of Claim alleges that neither Peter nor Ron drew salaries from the company in the early years, and were focused on its sustainability and growth as shareholders and principals of the company, this makes the salaries that they would ultimately receive relevant, as well as any representations made by them to the defendant regarding her remuneration as CFO after March of 2006.

[21] I do not find the allegations set forth at paragraphs 23 and 24 related to the salaries of Peter and Ron to be relevant or necessary to the pleadings, and order that they be struck.

Pre-contractual Negotiations

[22] The plaintiff argues that the defendant makes allegations with respect to pre-contractual negotiations at paragraphs 15, 17, 18, 25 and 30 which are not material or relevant to the issues in paragraphs 19 and 33 of this action. The plaintiffs point out that these allegations regarding pre-contractual negotiations are inconsistent with the Statement of Defence and Counterclaim, the relevant portions of which state as follows:

19. No draft Agreements were finalized, let alone executed in 2006 or 2007.

20. The intention of the respective parties to the 2008 Employment Agreement, Option Agreement and USA [Unanimous Shareholders Agreement] are expressed by the language of those Agreements.

[23] The defendant argues that the history of negotiations prior to executing the agreements set forth at paragraph 5, above, is relevant to determining the reasonable expectations of a party as shareholder.

[24] I find that the allegations set forth at paragraphs 19 and 33, which allege the intentions of the respective parties to all of the relevant, formal agreements executed between the defendant and plaintiff, are clearly relevant to the issues involved in this action. However, I do not find that the pre-contractual negotiations as set forth at paragraphs 15, 17, 18, and the subject portions of paragraphs 25 ("… for the base salary she would otherwise have received under the Employment Agreement she had discussed with Peter in March 2006") and 30 ("… even though she had been promised a full 8% of the total Class A shares in Flexity when only 10,650,000 Class A Common Shares were issued and outstanding in December 2006”) to be relevant. While they may add context and colour to the pleadings, I do not find the context to be relevant to the issues to be determined. I find the paragraphs will serve to simply prolong and potentially abuse the discovery process with evidence and/or irrelevant material. Paragraph 15, 17 and 18 are to be struck in their entirety, and those portions of paragraphs 25 and 30, set forth above, are to be struck.

Instructions given by Peter in respect of which no damages are sought

[25] The plaintiff moves to have paragraphs 20, 21, 36, 37 and 61 struck. In these paragraphs, the defendant makes allegations regarding Peter's conduct and instructions given by him to the defendant for which no damages are sought. These all relate to transfers or disbursements of monies which Peter allegedly instructed the defendant to withdraw from the plaintiff to be transferred to his shareholder account or Ron's shareholder account in repayment for their loans or to record transfers of monies to shareholder accounts as receivables from Peter. Based on the pleadings, there is no claim being made by Toula with respect to any of those instructions which were allegedly received by her from Peter. As such, the plaintiff argues that these allegations are not only unnecessary, but are scandalous and should be struck.

[26] The defendant argues that the allegations made describe a course of conduct based on Peter's instructions to the defendant as CFO which are relevant to her Defence and Counterclaim. The defendant argues that these allegations are made in support of her defence that Peter would instruct or direct her to make payments on his own behalf in a manner consistent with giving her permission or authority to pay herself those payments described in paragraph 31 of the Statement of Claim. The defendants argue that if a pleaded fact is relevant, it cannot be scandalous.

[27] I find that the details of instructions allegedly given by Peter to the defendant regarding payments to himself, are not relevant to the issue of whether she made payments to herself. I find that they are more in the nature of evidence, are not relevant to the allegations made against the defendant, nor do they directly respond to such allegations. Moreover, there is no claim for damages as related to the allegations made. I find that paragraphs 20, 21, 36, 37 and 61 are to be struck.

Comments made by Corporate Legal Counsel

[28] The defendant makes allegations at paragraphs 30 and 67 regarding the plaintiff's legal counsel, Ted Maduri and Davies LLP, which it argues are not relevant. The plaintiff argues that references to the specific lawyers for the plaintiffs are not relevant to the issues in this action, are added only to embarrass and are not material facts. The plaintiff argues that the allegations are irrelevant and extraneous and have will have no effect on the outcome of the issues in this action.

[29] The defendant argues that the reference to the law firm are material facts and set forth her reasonable expectations with respect to the agreement she was entering into. However, I note that this is inconsistent with her statements of material fact set forth in paragraph 33, which state “The intention of the respective parties to the 2008 Employment Agreement, Option Agreement and USA are expressed by the language of those agreements.” She further argues that the fact that there were buyers interested in acquiring the plaintiff Corporation, as set forth at paragraph 67 is relevant to the defendants’ claim under the Economic Benefits Agreement.

[30] I do not find reference to the plaintiff’s counsel or law firm to have any relevance to the Claim. While the defendant counterclaims that the plaintiff offered additional incentives under the Economic Benefits Agreement tantamount to granting her part of Peter's shareholdings and claims an express, resulting or constructive trust against Peter, I do not find issues regarding prospective buyers having shown an interest in acquiring the plaintiff to be relevant to the future participation rate under the Economic Benefits Agreement, but only an actual sale of all or substantially all of the assets of the corporation. Accordingly, I order that the last sentence of paragraph 30 and the entirety of paragraph 67 be struck.

Allegations of Oppression

[31] The plaintiff seeks to strike paragraphs 56, 57 and 58 of the Counterclaim which allege that the defendant was oppressed within the meaning of the Canada Business Corporations Act ("CBCA"), section 241, on the ground that the defendant has not pleaded the necessary elements of the oppression remedy in her Statement Defence and Counterclaim. It argues that the jurisprudence clearly requires that an oppression claimant must establish a two-part test with respect to the statutory claim of oppression, namely:

(a) whether the reasonable expectations of the claimant have been breached;

(b) and whether the breach was oppressive, unfairly prejudicial, or unfairly disregarded the interest of the claimant.

[32] The reasonable expectation requirement is an objective standard. With respect to the second component of the oppression remedy test, the claimant must show that the failure to meet reasonable expectations caused oppressive results: B.C.E. Inc. v 1976 Debentureholders, 2008 S.C.C. 69 at paragraph 68.

[33] The plaintiff argues that, given the Employment Agreement, which contemplated termination without cause, it is untenable that the defendant held or could have held a reasonable expectation that she would not be terminated without cause. Further, the plaintiff argues that the defendant has not pleaded that she suffered any compensable injury by virtue of her termination.

[34] The defendant argues that it is not plain and obvious that her pleading discloses no reasonable cause of action, that, on a motion to strike a pleading on the basis that it does not establish a reasonable cause of action, pleadings are to be read generously and that the threshold for sustaining a pleading is not high. She argues that the matter should not be struck at this juncture, but should be left to the trial judge.

[35] I agree with the plaintiff that the defendant has failed to plead the necessary elements of the oppression remedy. I order that paragraphs 56, 57 and 58 of the Statement of Defence and Counterclaim be struck, with leave to amend to plead the material facts required to establish the oppression remedy, having regard to the requisite two-pronged test, as set forth at paragraph 31, above.

Costs

[36] I would urge the parties to agree upon costs, failing which I would invite the parties to provide any costs submissions in writing, to be limited to three pages, including the costs outline. The submissions may be forwarded to my attention, through Judges’ Administration at 361 University Avenue, within thirty days of the release of this Endorsement.

Carole J. Brown J.

Date: July 4, 2012