DATE: 20120731

COURT FILE NO.: CV-11-9537-00CL

SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: Liquid Rubber Industries Inc. and CA Russlar Holdings Ltd., Plaintiffs

AND:

John Bilbija, Doug Bilbija, The John Bilbija Family Trust, The Doug Bilbija Family Trust, Charlotte Janssen, David Shainhouse, Arthur March and Liquid Rubber Engineered Coatings Ltd. Defendants

BEFORE: L. A. Pattillo J.

COUNSEL: John T. Porter and Kim G. Ferreira, for the Defendants/Moving Parties

A. L. Schein and M. Maurer, for the Plaintiffs/Respondents

HEARD: July 13, 2012

ENDORSEMENT

Introduction

[1] In August 2009, the plaintiff CA Russlar Holdings Ltd. (“Russlar”) purchased, among other things, all of the shares of the plaintiff Liquid Rubber Industries Inc. (“LRI”) from all of the defendants except Liquid Rubber Engineered Coatings Ltd. (“LREC”) for a total purchase price of $3,500,000.

[2] The purchase agreement provided that a portion of the purchase price was payable on or before closing and the balance after closing, in installments. Russlar paid $1,250,000 towards the purchase price but defaulted on the remaining payments.

[3] In September 2010, the plaintiffs commenced this action (the “Action”) claiming, among other things, damages for misrepresentation and breach of contract. The defendants, except LREC, denied any misrepresentation or breach of contract and counterclaimed for, among other things, the balance of the purchase price owing. The plaintiffs raised the allegations in their claim in defence of the counterclaim.

[4] Prior to production and discovery in the Action, the defendants moved for summary judgment allowing their counterclaim in the amount of $2,250,000 plus interest and dismissing the Action in its entirety.

[5] Following completion of the cross-examinations on affidavits filed on the motion, the plaintiffs amended their claim to plead fraudulent misrepresentation and rescission.

[6] For the reasons that follow, I am of the view that the motion must be dismissed. Given the evidence and the issues raised, it is my view that a “full appreciation” of the issues in the Action can only be achieved from having a full trial. In light of this conclusion, I intend to refer to the evidence only in so far as it relates to the issues on the motion.

Background

[7] LRI was incorporated in 2001 by the defendants Doug Bilbija (“Doug”) and John Bilbija (“John”). It carried on the business of developing and manufacturing a range of liquid rubber products for use in commercial, industrial and residential markets for roof and concrete structure protection.

[8] In 2008, Russlar, whose principal is Jacob Karam (“Karam”), entered into a licence agreement with LRI to distribute its products in Cyprus and subsequently entered into a further licence and distribution agreement to manufacture and distribute LRI’s products in Russia.

[9] In late April 2009, John contacted Karam and inquired whether Russlar might be interested in acquiring LRI for $3,500,000. Karam agreed to consider the transaction subject to reasonable due diligence.

[10] In May, 2009, Karam received LRI’s interim financial statements for the third quarter ending March 31, 2009 which showed a net income to date of $187,779.63. Karam also received a forecast projection prepared by LRI’s business consultant projecting net income of about $277,000 up to LRI’s year end on June 30, 2009.

[11] Based on this information, Karam arrived at a purchase price for LRI of $3 million. In addition, the transaction was to include licensing rights to two waterproofing products owned by another company owned by John which Karam valued at $500,000.

[12] In July 2009, the preliminary year-end financial statements were prepared by LRI’s director of administration. They showed a loss for the year of $206,289.37. They were given to Karam on July 24, 2009.

[13] When Karam learned of the significant discrepancy in LRI’s financial position between the March interim statements and the year-end statements, he immediately spoke to John who told him that much of the anticipated revenue expected by LRI in the fourth quarter had not been received and was delayed into the following fiscal year. No specifics were asked for or provided.

[14] On August 7, 2009, Russlar entered into a share purchase agreement (the “Purchase Agreement”) with all of the defendants except LREC for the acquisition of all the shares of LRI. The Purchase Agreement, which was very detailed, provided for aggregate purchase price of $3,500,000, payable $500,000 on or before closing and a promissory note for $3,000,000 payable in six quarterly installments of $500,000 commencing September 30, 2009 and ending December 31, 2010. Among other things, the Purchase Agreement provided for various warranties from the vendor defendants including with respect to financial information provided, which warranties survived the closing as well as an entire agreement clause.

[15] The purchase transaction was completed on August 7, 2009, the same day the Purchase Agreement was executed. Karam’s evidence is that but for the representation by John at the end of July concerning the anticipated revenue, he would never have entered into the Purchase Agreement.

[16] After the closing, Russlar restructured LRI’s operations by moving its international business to Liquid Rubber Worldwide Inc., a newly formed Barbados company (“LRW”). LRI continued to manufacture and distribute its products in North America.

[17] In the fall of 2009, Russlar negotiated an amendment to the purchase price payment terms to extend the time for payment and reduce some of the payments. By August 2010, Russlar had paid a total of $1,250,000 towards the purchase price but has refused to pay anymore.

[18] In early January 2010, and as provided by the Purchase Agreement, Karam and John agreed on a Working Capital Adjustment (“WCA”) in respect of all outstanding issues regarding any dispute arising from LRI’s accounts receivable and accounts payable as at closing. The WCA was in the form of a credit to Russlar against the purchase price.

[19] Karam’s evidence is that he became aware of the fraud in August, 2010 as a result of a combination of things but particularly when he obtained a copy of a different interim financial statement for LRI for the period ended March 31, 2009 than the one he’d been provided in May 2009. When he compared the different interim statement to the one he’d been given, he noted discrepancies in payables, general expenses, payroll, and contract revenue.

[20] The plaintiffs initially claimed damages for breach of contract and misrepresentation and in the alternative sought a set off of the monies owing under the Purchase Agreement. In May 2012, after the defendants had commenced this motion and cross-examinations had been held, the plaintiffs amended their claim to plead fraudulent misrepresentation and in the further alternative, rescission of the Purchase Agreement.

Analysis

[21] Rule 20 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, gives the court power to grant summary judgment in an action where the motion judge determines there is no genuine issue requiring a trial. In Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764, 108 O.R. (3d) 1 (C.A.), the court identified three types of cases where summary judgment may be granted under Rule 20, as recently amended: first where the parties have agreed to submit their dispute to resolution by summary judgment; second where the claim or defence has no chance of success; and third where the motion judge is satisfied that the issues in the action can be fairly and justly resolved utilizing the powers under Rule 20 to determine credibility and draw inferences from the evidence. In deciding whether to exercise these powers, the court stated that the motion judge must assess whether he or she can achieve a full appreciation of the evidence and the issues required to make dispositive findings or whether a trial is required. Combined Air, paras. 72 to 74.

[22] There is no issue between the parties in respect of the essential elements of the moving defendants’ counterclaim for the balance owing under the Purchase Agreement. The purchase price was $3,500,000. Russlar has paid $1,250,000 and has failed to pay the balance of $2,250,000. The issue for determination on this motion is whether the plaintiffs’ claims in the Action, which are the sole defences to the moving defendants’ counterclaim, raise a genuine issue or issues requiring at trial.

[23] The plaintiff’s principal claims are for fraudulent misrepresentation and rescission.

(a) Fraudulent Misrepresentation

[24] The defendants submit that Russlar has failed to establish on the evidence the essential elements of fraudulent misrepresentation.

[25] The essential elements of fraudulent misrepresentation are not in dispute. They are: (1) that the defendant made a false representation of fact; (2) that the defendant knew that the statement was false or was reckless as to its truth; (3) that the defendant made the representation with the intention that it would be acted upon by the plaintiff; (4) that the plaintiff relied upon the statement; and (5) that the plaintiff suffered damage as a result: Parna v. G&S Properties Limited, 1970 CanLII 25 (SCC), [1971] S.C.R. 306 (S.C.C.) at paras. 22-26; Mariana v. Lemstra, (2004) D.L.R. (4th) 489 (Ont. C.A.) at para. 12.

[26] While the defendants accept Karam’s evidence of John’s oral representation prior to the Purchase Agreement being entered into for the purposes of this motion only, they submit that there is no evidence that the representation was false; that John knew it was false; that Russlar relied on it or that Russlar suffered any damage as a result of it.

[27] The oral representation by John must be considered in the context of the earlier LRI financial information which was provided to Karam. The evidence indicates the forecast and the interim financial statements for LRI upon which it was based and which showed a profit at the end of the 3rd quarter of $277,000 were based on wrong information which was provided by John.

[28] The defendants submit that because LRI was reorganized after closing, the plaintiffs cannot establish that the representation concerning anticipated revenue was false. Further, the plaintiffs have produced no financial information to establish it was false.

[29] As part of its response to the motion, Russlar has filed the affidavit of Paul Mauchline (“Mauchline”), LRI’s director of administration who prepared LRI’s financial information and prepared the financial information provided to Karam. Mauchline states, among other things, that in 2009, LRI was in “serious financial trouble” and likely would have been bankrupt within a year if not for the sale to Russlar. He further states that at the time of the closing, LRI had nothing going on in terms of contracts or prospects in the pipeline. He further states that when he learned that the contracts John had insisted be included in the interim financial statement had not been completed and in one case, was not even a real transaction, he prepared a “revised” interim statement for the 3rd quarter ended March 31, 2009 showing net income of $65,000 which he gave to John. Karam’s evidence is that revised statement was never given to him. Mauchline further said that the information in the preliminary yearend financial statements was wrong too. In my view, the plaintiffs have adduced evidence from which the inference can be drawn that the alleged representation was false and John knew that it was false when it was made.

[30] Karam’s evidence is that he relied on John’s misrepresentation of the financial position of LRI to enter into the Purchase Agreement and close the transaction. The defendants take issue with Karam’s evidence. The defendants submit, based on the financial information disclosed, that Karam’s statement that he relied on the representation is not credible. In my view, the issue of credibility of Karam’s reliance is not one which should be decided on the paper record before me.

[31] Russlar submits that its damages are the difference between what it paid and what LRI was really worth at the time of purchase. While damages may be difficult to prove, there is some evidence that, at least for the first six months following closing, revenue was well below forecast. While it is well known that the responding party must “lead trump” or risk losing, I agree with the plaintiffs that they should not be required to have to deliver an expert damage report in defence of the motion when production and discovery have not been completed. In my view the plaintiffs have adduced sufficient evidence to establish that, if the representation was false, Russlar suffered damage.

(b) Rescission

[32] If the plaintiffs are successful in establishing a fraudulent misrepresentation, the Purchase Agreement is voidable, not void, at the election of Russlar after notice of the fraud: Brown & Root Services Corp. v. Aerotech Herman Nelson Inc. (2003), 2004 MBCA 63, 238 D.L.R. (4th) 594 (Man. C.A.) at para. 45.

[33] The defendants submit that rescission is not available in law to Russlar given that it affirmed the Purchase Agreement by, among other things, settling the WCA in early January 2010. The defendants further submit that the remedy is also not available given Russlar’s reorganization of LRI after the closing.

[34] Whether Russlar has affirmed the Purchase Agreement such that rescission is not available is a question of fact. Affirmation will not be inferred from conduct in circumstances where the representee is not fully aware of all the facts: Brown & Root, paras. 54 to 56. At issue, therefore is Karam’s credibility as to when he became aware of the alleged fraud.

[35] Further, notwithstanding Russlar’s reorganization of LRI after the closing, rescission is still available in law. Rescission is an equitable remedy which is discretionary and when applied must be molded to the particular circumstances of the case. See Brown & Root, paras. 59 to 64. Whether rescission is available to the plaintiffs must be determined having regard to all the facts.

[36] In support of their position on this motion, the moving defendants rely on the decision of Strathy J. in 1721789 Ontario Inc. v. 985091 Ontario Ltd., 2009 CarswellOnt, 4267 (S.C.J.), aff’d by the Court of Appeal, 2010 ONCA 14, which granted summary judgment on the defendant’s counterclaim for the balance owing on a purchase of a business notwithstanding the plaintiff’s claim for fraudulent misrepresentation. It is trite that each case turns on its own facts, particularly in summary judgment motions. In my view, the facts of that case are very different from the facts on this motion. In 1721789, Strathy J. concluded, among other things, that the plaintiff, on the evidence, failed to establish the requisite elements of fraudulent misrepresentation. As I have noted, that is not the facts of this case.

Conclusion

[37] As a result, therefore, based on the evidence on the motion, it is my view that while the plaintiffs’ claim may be difficult to prove, it cannot be said that they have no chance of success in the Action.

[38] Allegations of fraud are very serious. While they must be proved very strictly, where there is some evidence to support such a claim, as in this case, it is not appropriate in the interests of justice to grant summary judgment. In my view the determination of the allegations in the Action can only be done at a trial where the trial judge will have the opportunity to hear and see the witnesses and assess the testimony having regard to the documentation.

[39] The defendants’ summary judgment motion is therefore dismissed. In the event that the parties are unable to agree on costs, the plaintiffs shall submit a Costs Outline and brief written submissions of no more than 3 pages within 20 days of these reasons. The defendants shall have ten days to respond, again in no more than 3 pages.

[40] Given the Action was commenced in September 2010 and production and discovery have not been completed, it is appropriate, particularly in light of the voluminous material generated for this motion, to establish a timetable in order to advance the Action to trial. Accordingly, each party shall serve an affidavit of documents as required by Rule 30.03 within 30 days of these reasons. The affidavits and cross-examination transcripts on the motion shall serve as the discoveries. Further examinations for discovery, if required, shall be limited to half-day for each side and shall be completed by October 31, 2012. In the event that there are any issues that arise from these directions, I may be spoken to. In any event, counsel shall attend before me at a 9:30 am appointment sometime in the first two weeks of November convenient to counsel to provide a status report and, if appropriate, to set a trial date for the Action.

L. A. Pattillo J.

Released: July 31, 2012