ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: 12-32479
DATE: 2012-09-21
B E T W E E N:
HARRY POHL
Marc Munro, for the Plaintiff
Plaintiff
- and -
WALTER PALISCA, PALCAM TECHNOLOGIES LTD., KARIN PALISCA, 1401763 ONTARIO INC., and PALCAM SOLUTIONS INC.
Hedy L. Epstein, for the Defendants
Defendants
HEARD: June 11, 2012
WHITTEN J.
RULING RE MOTION TO STRIKE
PURSUANT TO RULES 21.01(1) (b), 21.01 (3) (d), 25.11(b)
Or ALTERNATIVELY AN ORDER FOR PARTICULARS
[ 1 ] The defendants have moved to strike from the Statement of Claim particular references a) to the defendant Karin Palisca, b) Palcam Technologies (“Palcam”) and 1401763 Ontario Inc., c) the particulars of a scheme/conspiracy and relationships between the defendants, and d) certain aspects of the history of the relationships between the parties up until a revised agreement between the parties August 19, 2010 on the basis of such references being scandalous, frivolous and/or vexatious. Alternatively, the defendants sought to strike out or obtain particulars with respect to alleged intentional interference with economic relations and/or contractual relations, on the basis of there being no cause of action or the pleading was prejudicial or scandalous, etc.
[ 2 ] The defendants also seek to strike out the claim for punitive damages.
[ 3 ] Additionally the defendants move to set aside the noting in default against them. That aspect of the motion was agreed to upon by the return of the motion, June 11, 2012. The court ordered that relief.
[ 4 ] The factum of the defendant required pursuant to Rule 21.03, reduced the scope of the relief claimed above to that of striking out the allegations as against; Karin Palisca and b) Palcam and 140173 Ontario (#140) on the basis that to do so would pierce the corporate veil. Furthermore, it is argued that allegations of; a scheme of conspiracy and intentional interference with contractual relations are deficient in that the essential elements of these torts are not pled. The defendants claim also that the “history” between the parties is irrelevant. This reduction as it were, would inferentially mean that the remaining causes of action are sufficient; namely, (i) breach of contract, (ii) breach of fiduciary duty, (iii) unjust enrichment, (iv) fraud, (v) intentional interference with economic relations, (vi) relief pursuant to s. 131 of the Business Corporations Act . R.S.O. 1990 c.B.16 and, (vii) relief pursuant to s. 248 of the Business Corporations Act . R.S.O. 1990 c.B.16.
[ 5 ] One also notes that the defendants appear to treat Palcam Solutions and 1401763 Ontario Inc. as indicated by the Corporate Profile Report for these corporations, as one and the same.
APPLICABLE LAW
[ 6 ] Rule 25.06 states “Every pleading shall contain a concise of the material facts on which a party relies for the claim…but not the evidence by which the facts are to be proved”.
[ 7 ] This is the starting point for any assessment of the sufficiency of pleadings.
[ 8 ] Pursuant to Rule 21.01(b) a judge may strike out a pleading on the ground that it discloses “no reasonable cause of action”.
[ 9 ] Rule 25.11 provides that a judge may strike out or expunge all or part of a pleading…with or without leave to amend, on the ground that the pleading… a) may prejudice or delay the fair trial of the action, b) is scandalous, frivolous or vexatious, c) is an abuse of process”.
[ 10 ] Rule 21.01(3) (d) allows a party to move to have an action stayed or dismissed as the “action is frivolous or vexatious, or otherwise an abuse of process”.
[ 11 ] Therefore it would appear that Rules 21.01(b) and 25.11 provide for the possible excision from a pleading, while 21.01(3) allows for the possibility of the entire action to be struck. As the defendants in their factum are essentially looking for excision versus the eradication of the entire action, Rule 21.01(3) appears inapplicable.
Rule 21.01(1)
[ 12 ] Rule 21.01(1)(b) allows a party to move “to strike out a pleading on the ground it discloses no reasonable cause of action. (Emphasis mine). As Borins, J.A. stated in Dawson v. Rexcraft Storage and Warehouse Inc. 1998 4831 (ON CA) , [1998] O.J. No. 3240 (O.C.A.) “The essence of the defendant’s motion is that the wrong described in the Statement of Claim is not recognized as a violation of the plaintiff’s legal rights, with the result that the court would be unable to grant a remedy, even if the plaintiff proved all the facts alleged. Thus to permit the plaintiff to litigate the claim through discovery and trial would be a waste of both the parties and court’s time. (Ref. Para 8).
[ 13 ] Therefore, according to His Honour, the motions judge considers whether a claim is “legally sufficient” or “substantially adequate”. In this exercise the Judge; assumes the allegations as proven unless they are patently ridiculous or incapable of proof. Takes a generous approach to the Statement of Claim as a whole, construing in the most favourable fashion for the plaintiff, and determines whether it is “plain and obvious” that the plaintiff will not be successful. It should be noted that the threshold for sustaining a pleading is not high. (Ibid, para. 9) Ref. Williams v. Canada (A. G.) 2009 ONCA 378 , [2009] O.J. No. 1819 , Hunt v. Carey Inc . 1990 90 (SCC) , [1990] 2 S.C.R. 959 . MacKinnon v. Ontario Municipal Employees Retirement Board 2007 ONCA 874 , [2007] O.J. No. 4860 (Gillese J.A.)
[ 14 ] In Hunt v. Carey , Justice Wilson explained how the “plain and obvious test” would not exclude novel or complex factual or legal scenarios. Her Honour spoke of the certainty of an action failing “because it contains a radical defect.” (ref. para 27)
[ 15 ] A radical defect would be the absence of a necessary element of a recognized cause of action. This is a lacking that will not be remedied by allegations based on assumptions and speculation. Ref. Deep v. Ontario [2004] O.J. No. 2734 (S.C.J. affirmed [2005] O.J. No. 1294 (O.C.A.) .
Rule 25.11
[ 16 ] The application of this rule is somewhat similar to what has been described above in para [13]. Basically the pleadings are taken as proven. The jurist takes a generous approach to the Claim as a whole. The threshold for sustaining a pleading is not high.
[ 17 ] If a pleading is relevant, that finding would trump an assertion that it is “scandalous”. The applicant would have to demonstrate that the prejudicial value of the pleading clearly outweighs whatever marginal probative value there is. Having said that, this is a jurisdiction which has to be exercised with considerable caution. Pleadings are not the occasion to engage in determining admissibility, which is essentially a trial function. Ref. Quizno’s Canada Restaurant Corp. v. Kileel Developments Ltd. (2008) 2008 ONCA 644 , 92 O.R. (3d) 347 , paras. 15 and 16 .”
The Tort of Civil Conspiracy
[ 18 ] Justice Estey in Canada Cement LaFarge Ltd. v. B.C. Lightweight Aggregate Total 1983 23 (SCC) , [1983] 1 S.C.R. 452 defined the two means by which this tort could be committed.
(1) Whether the means used by the defendants are lawful or unlawful, the predominant purpose of the defendant’s conduct is to cause injury to the plaintiff, or
(2) Where the conduct of the defendants is unlawful, the conduct is directed towards the plaintiff (alone or together with other) and the defendants should know in the circumstances that injury to the plaintiff is likely to and does result.
[ 19 ] Justice Estey proceeded to note that in situation (2) “It is not necessary that the predominant purpose be to cause injury to the plaintiff but in the prevailing circumstances it must be a constructive intent derived from the fact that the defendants should have known that injury to the plaintiff would ensue. In both situations, however, there must be actual damages suffered by the plaintiff.” (Ref. p. 174)
[ 20 ] A rephrasing of the elements of the second means (oft referred to as the unlawful conduct conspiracy) was made by Goudge J.A. in Agribrands Purina Canada Inc. v. Kasamekas [2011] ONCA 460. Justice Goudge enumerated the following as essential elements:
“(a) they act in combination, that is, in concert by arrangement or with a common design;
(b) the conduct is unlawful;
(c) the conduct is directed towards the respondents,
(d) the appellant should know that in the circumstances injury to the respondents is likely to result and
(e) their conduct causes injury to the respondents.”
[ 21 ] Having established the necessary elements; how does that translate out into an actual pleading? In Robinson v. Medtronic Inc . 2009 56746 (ON SC) , [2009] O.J. No. 4366 Perell, J. of the Superior Court surveyed the case law in which the pleadings were attacked.
[ 22 ] With the predominant purpose conspiracy,
(1) the conspirators have to be identified;
(2) the nature of the predominant purpose is set out;
(3) the acts in furtherance of the agreement are described; and
(4) the fact of the injury to the plaintiff is established.
[ 23 ] Similarly, with the unlawful conduct conspiracy,
(1) the conspirators are identified,
(2) the unlawful acts are described
(3) the knowledge or imputed knowledge as to the likelihood of injury to the plaintiff is set out; and
(4) the result of the conspirator’s acting in accordance with their unlawful act, being harm to the plaintiff, is stated.
[ 24 ] Obviously, not every commercial transaction which somehow injures a party would constitute a form of civil conspiracy. Parties are entitled to advance their own economic interests. Ref. Moldaver, J. A. (as he then was) in Harris v. Glaxo Smith Kline Inc. 2010 ONCA 872 , [2010] O.J. No. 5546 .
[ 25 ] What may appear suspicious, and have a particular odour, may not necessarily be proof of either form of a conspiracy.
Intentional Interference with Contractual Relations
[ 26 ] The elements of this tort are: (1) an enforceable contract; (2) knowledge by the defendant of the plaintiff’s contract (obviously this could be imputed if the defendant is a signatory); (3) an intentional act on the part of the defendant to cause a breach of the contract and an actual breach (again this is something which could be imputed if the defendant acts contrary to the express terms), and (4) consequential damages as a result of the breach. (ref: Ontario Store Fixtures Inc. v. Mmuffins Inc., (1989) 70. O.R. (2d) at p. 47, Drouillard v. Cogeco Cable Inc. (2007) 223 O.H.C. 350 at para. 26).
Piercing the Corporate Veil
[ 27 ] Piercing the corporate veil by as in this case; namely, making the sole directors personally liable is not necessarily automatically allowed by the courts. There has to be some allegation of personal involvement or personal benefit on the part of a shareholder/director. For example, if the director has personally guaranteed the performance of the contract entered into by the corporation, and then as an individual acted contrary to the spirit of the contract, there would be “personal involvement”.
[ 28 ] Although considerable respect is afforded the existence of the corporation as a legal person, if the corporation is a closely held corporation with possibly one director/shareholder, one would naturally associate the individual with being the “operating mind” of the corporation. That assumption would not necessarily be made with publically traded corporations or a corporation with numerous directors (some of whom may be appointed to enhance the reputation of the corporation or to provide the benefits of diverse experiences). Obviously, there is a range of corporate composition and size.
[ 29 ] Precedent in the interpretation of the “oppression remedies” contemplated by s.248 of Business Corporations Act , R.S.O. 1990 demonstrates that the veil is pierced to determine if it is the directors of a closely held corporation who transfer assets or pay shareholder loans to defeat the interest of creditors. (ref: Pillar Sausage and Delicatessen Ltd. v. Cobb International Corp. (2003) 2003 35795 (ON SC) , Carswell Ontario 2430 , 35 B.L.R. (3d) 193 ).
[ 30 ] Justice Grace in Chan v. City Commercial Realty Corp. (2011) Carswell Ont. 3818 , 2011 ONSC 2854 , noted that “personal liability may be imposed on a person who controls a company and uses it as a shield for fraudulent or wrongful conduct….provided that conduct is the reason for the complaining party’s injury or loss” (at para. 21).
[ 31 ] With a closely held corporation with a single director/shareholder , it would not be surprising that that an action is framed against both corporation and principal in the absence of any other “directing minds”. Whether or not that is an impermissible “piercing of the veil” is essentially a triable issue. This like “relevancy” of a pleading is best left for the trial judge.
Rule 26 Amendments of Pleadings
[ 32 ] This rule sets out the general powers of a court to allow amendments to pleadings. There may be terms imposed to maintain fairness. That power will not be exercised if there would be non-compensateable prejudice to the other side. Equally so, amendments will not be allowed if it is clearly impossible that the claim would succeed. The threshold to be met by the party moving for the right to amend is the absence of prejudice and that costs or an adjournment would adequately compensate the responding party.
FACTS:
[ 33 ] The plaintiff Harry Pohl (“Pohl”) was the principal of Die-Metric Tool Inc. (“Die-Metric”) and 2012636 Ontario Inc. (“201”). Die-Metric operated a milling and production facility located at 10 Brockely Drive in Stoney Creek, Ontario, and 201 was the registered owner of the 10 Brockley Drive premises. The two businesses formed a single enterprise and venture.
[ 34 ] The husband and wife team of Walter Palisca and Karen Palisca own and operate Palcam Technologies Ltd. and 1401763 Ontario Inc. operating as Palcam Solutions Inc. These closely held corporations are both located at 1300 Ringwell Drive in Newmarket Ontario and are in fact a single enterprise and venture.
[ 35 ] On or about March 26, 2010 Pohl and the defendant W. Palisca entered into an agreement whereby Palcam would acquire the shares of Die-Metric and 201 for $1,500,000.00. The purchase price was payable as a percentage of future profits. Prior to entering into the agreement, it is alleged that the defendant W. Palisca represented to Mr. Pohl that he would pay $300,000 to $500,000 immediately upon the completion of the proposed share purchase, with the balance to be paid over the next three (3) years. Those payments did not occur. It is alleged that W. Palisca with the assistance of K. Palisca, initiated a scheme to plunder Die-Metric of its assets under the guise of a legitimate corporate acquisition.
[ 36 ] At the time of the agreement, Die-Metric and 201 were substantially in debt. The borrowing arrangements between Pohl, Die-Metric and 201 and their creditors required the consent of the creditors concerning any sale of the two companies. Failure of the borrower to obtain such consent would result in a default entitling the creditors to demand immediate payment of the outstanding loans. It is alleged therefore that a fundamental term of the agreement between the parties required W. Palisca and Palcam to obtain financing for the outstanding debt.
[ 37 ] Pursuant to the agreement between the parties, W. Palisca assumed the role of President and CEO of both Die-Metric and 201, but Pohl maintained signing authority over the corporate bank accounts.
[ 38 ] Pohl alleges that despite the obligation to obtain financing, the defendant W. Palisca failed to obtain the requisite financing. Pohl pleads that rather than honour their contractual obligations, W. Palisca and Palcam along with K. Palisca and Palcam Solutions implemented a scheme to unlawfully convert the assets and goodwill of Die-Metric and 201 for their own benefit.
[ 39 ] Pohl alleges that towards this end, upon assuming control of Die-Metric and 201, W. Palisca caused Palcam to deliver fraudulent invoices to Die-Metric in the amount of $109,087.13. Then, in breach of his duties as an officer of Die-Metric, W. Palisca caused a withdrawal from the Die-Metric bank account in the sum of $75,000.00 which the defendants used for their own ends resulting in a number of cheques issued by Die-Metric returned for lack of sufficient funds.
[ 40 ] When Pohl learned of this payment, he terminated the sale of shares of Die-Metric and 201to Palcam and resumed control of the corporations. W. Palisca and Palcam then commenced a legal action to enforce the terms of the March 2010 agreement. In the course of that litigation, Pohl and the defendants W. Palisca and Palcam entered into a revised agreement in accordance with a meditation memorandum dated July 29, 2010. This mediation memorandum was succeeded and replaced by the Amended Restated Memorandum dated August 9, 2010 and associated agreements. The rights and obligations of Palcam pursuant to the Amended Restated Memorandum dated August 9, 2010 and associated agreements were then assigned to the Palcam Solutions.
[ 41 ] Pursuant to the Amended Restated Memorandum, W. Palisca was reinstated as President and CEO of Die-Metric in 2001. In accordance with an employment contract, executed pursuant to the Amended Restated Memorandum, Pohl was offered and accepted a two year fixed term employment contract terminating on July 31, 2012, which provided amongst other things $60,000.00 per annum.
[ 42 ] As general and continuing security for the payment of all obligations, indebtedness and liabilities owed to Pohl, Palcam Solutions entered into a General Security Agreement whereby Palcam Solutions guaranteed that in the event that the obligations to Pohl were not honoured all amounts owing to Pohl would become immediately due and payment and the security granted to Pohl would become immediately enforceable. Additionally, in a document dated August 9, 2010, W. Palisca provided a personal guarantee concerning the liabilities owed to Mr. Pohl.
[ 43 ] Between August and November 2010, upon resuming control of Die-Metric and 201, Pohl alleges that the defendant’s caused the companies to cease paying creditors. Furthermore, that the defendants unlawfully converted approximately $600,000 in assets for their own benefit. These allegedly unlawfully converted assets included (1) approximately $450,000 paid to the defendants for no consideration, (ii) the removal of Die-Metric machinery to the premises of the corporate defendants for no consideration, (iii) goods and service purchased on the Die-Metric account for the use of the corporate defendants, and (iv) the redirection of orders from Die-Metric customers to the corporate defendants for no consideration.
[ 44 ] Pohl alleges that in anticipation that the company would soon be insolvent as a consequence of the wrongful acts and omissions of the defendants, W. Palisca offered Die-Metric customers a five (5) percent discount on their debts if their accounts were paid forthwith, which resulted in a loss of $150,000.00 to Die-Metric. Moreover, while stripping Die-Metric and 201 of assets and revenue the defendants also failed or refused to remit source deductions from the company payroll to the appropriate federal and provincial authorities thereby increasing the companies’ liabilities.
[ 45 ] Although Pohl attempted to speak to the defendant W. Palisca about his mismanagement of Die-Metric and 201, W. Palisca failed or refused to meet with Pohl. Then on or about October 7, 2010, W. Palisca terminated Pohl without cause and without notice. As a consequence, Pohl suffered damages in the amount of $110,000.00 with respect to the termination of his employment contract.
[ 46 ] As a consequence of the alleged wrongful acts and omissions of the defendants, as of November 4, 2010, Die-Metric and 201 were not able to meet ongoing obligations to creditors and were forced into bankruptcy. The end result being that the defendants had been unjustly enriched well in excess of $1,000,000.00 while Pohl had been left with nothing.
ANALYSIS:
[ 47 ] From the above recitation of the facts, it would appear necessary that the facts leading up to the Amending Memorandum Agreement (dated July 28, 2010) to the original Memorandum of agreement, be set out to fully understand the relationship between the parties and how they responded to the first round of difficulties in the purchase of Pohl’s companies. In other words, that was the context that prevailed as of the last agreement. That context is clearly relevant. That relevance eclipses any suggestion that the recitation was unnecessary, scandalous or prejudicial.
[ 48 ] The corporate entities of the Paliscas were owned and managed by them solely. At the pleading stage, it appears that their corporations were the “alter ego” of the Paliscas. The Paliscas are husband and wife. The corporate entities that they controlled appear to act in tandem in acquiring the assets and business of Pohl’s corporations. While in control of Pohl’s corporations, the Paliscas and their corporations ostensibly acted contrary to the vitality of the corporations they had purchased. That vitality was necessary to ensure that there was revenue out of which to pay Pohl.
[ 49 ] It is impossible to separate the actions of the individual defendants from their corporate entities. It would have been careless on the part of Pohl’s counsel if he had pled otherwise. The pleadings are consistent with what an objective observer would say as to what had happened. In other words, that observer given the closely held nature of the Palisca corporations, would not differentiate between the Paliscas as individuals and their corporate entities. The overall impression is that of concerted action. As mentioned before, if there is a distinction that could be best decided at trial rather than at the pleadings stage.
[ 50 ] The pleadings have the requisite element to found the tort of civil conspiracy and intentional interference with contractual/economic relations.
[ 51 ] The actions of the Paliscas as set out in the pleadings and accepted as givens for the purpose of assessing the pleadings, clearly demonstrate a) an awareness of a contract between themselves (their corporate alter egos) and b) Pohl. The discounting of accounts owing to the original Pohl corporations, payments out to the Paliscas without satisfying the creditors , the misappropriation of equipment would inevitably suck the vitality out of the Pohl corporations leaving no revenue to satisfy their obligations to Pohl.
[ 52 ] Commercial common sense would corroborate that Pohl would not transfer his corporate interests as weak as they were, with the anticipation of this particular result. It would be nonsensical. On the fact of it, Pohl has given away what he had for no return. The obvious damages being the loss of his compensation for the transfer and his lost income. The causation of those damages does speak of intentional actions, possibly fraudulent to defeat the original agreement.
[ 53 ] For all of the above, the motions to strike are dismissed with costs payable to the plaintiff. The defendants are to deliver their respective statement of defence within 30 days of this judgment.
[ 54 ] If counsel is unable to agree as to the level and quantum of costs, submissions with a bill of costs are to be exchanged within 45 days of this judgment and filed with the court.
WHITTEN J.
Released: September 21, 2012
Released: September 21, 2012