ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: CV-12-0717-00
DATE: 20121115
B E T W E E N:
Glasscell Isofab Inc.
Inga B. Andriessen, for the Applicant
Applicant
- and -
Bonnie Marie Thompson, David Thompson, 1833086 Ontario Ltd. c.o.b. Thermo Systems Insulation and Thermo Systems Insulation Ltd.
Ian J. Cantor, for the Respondents
Respondents
HEARD: October 17, 2012
REASONS FOR ENDORSEMENT
Justice Thomas A. Bielby
[ 1 ] The applicant seeks an oppression remedy order against the respondents pursuant to section 248 of the Ontario Business Corporations Act .
OVERVIEW
[ 2 ] The respondent Thermo Systems Insulation Ltd. (TSL) was incorporated in 1994 and carried on the business of installing insulation.
[ 3 ] The respondent David Thompson (DT) is the sole officer, shareholder and director of TSL and the husband of the respondent Bonnie Thompson (BT).
[ 4 ] BT was employed by TSL as the bookkeeper and was not a shareholder, officer or director of TSL.
[ 5 ] The plaintiff supplied insulation product to TSL and, by February, 2011, TSL was heavily indebted to the plaintiff. The plaintiff commenced an action and, on January 17, 2011, service of the statement of claim was affected.
[ 6 ] On February 24, 2011, the applicant was awarded default judgment against TSL in the amount of $160,454.47. On March 9, 2011, the applicant garnished the bank account of TSL and obtained, as a result of the garnishment, $15,566.66.
[ 7 ] TSL has never attempted to set aside the default judgment.
[ 8 ] On March 10, 2011, the respondent numbered company (1833) was incorporated by BT and appears to carry on, in part, the business of installing insulation. BT was the sole shareholder, officer and director of 1833.
[ 9 ] TSL ceased business operations.
[ 10 ] BT, on March 11, 2011, registered the business name Thermo Systems Insulation. No consideration was paid to TSL for the right to register the name.
[ 11 ] The assets of TSL are used in the business of 1833.
[ 12 ] Some of the customers of TSL are also customers of 1833.
[ 13 ] BT and DT have two sons who were employed by TSL and are now employed by 1833.
[ 14 ] DT alleges that, after he was served with the statement of claim on behalf of TSL, he and the applicant agreed to “standstill” arrangement by which TSL would pay to the applicant to be applied to the debt monthly payments of $2,500.00 until business improved.
[ 15 ] DT, on January 18, 2011 provided to the applicant a cheque for $2,500.00 which the applicant cashed. In mid-February, another cheque was provided to the applicant but was never cashed.
[ 16 ] The respondents allege that the applicant proceeded to obtain default judgment without any notice to TSL and that respondents did not become aware of the judgment until TSL’s bank account was garnished.
POSITION OF THE PARTIES
Applicant
[ 17 ] The applicant submits that actions of the respondents by carrying on the same business through a new corporate entity were an attempt by the respondents to avoid their financial obligation to the applicant.
[ 18 ] The applicant submits that the steps taken by the respondents are oppressive and unfairly prejudice the interests of the applicant, a creditor, and asks this court to make a ruling which the court sees fit in the circumstances.
[ 19 ] It is submitted by the applicant that the respondents engaged in conduct that hindered the satisfaction of its judgment and that carrying on business under the new corporate umbrella is contrary to the reasonable expectations of the applicant.
[ 20 ] It is alleged that both DT and BT benefitted from the actions taken and are liable. The income that was being earned by TSL is now diverted to 1833 and the companies are so intermingled, as are the roles of both DT and BT, that all should be found liable.
[ 21 ] The applicant submits that such action unfairly prejudiced the applicant and/or unfairly showed a disregard for the rights of the applicant.
Respondents
[ 22 ] The respondents argued that TSL was insolvent in February 2011 and that a legitimate business decision was made to have TSL cease business. The steps taken were not unfair to the plaintiff.
[ 23 ] It is alleged by the respondents that since TSL did not have any material assets, the applicant was not prejudiced by the actions of the respondents.
[ 24 ] The respondents submit that their actions and the circumstances surrounding their actions do not meet the test to establish the right to the oppression remedy.
[ 25 ] The respondents concede that the applicant, as a creditor, can be a complainant under section 248 and acknowledge that an applicant may apply to the court for relief from acts or omissions of the corporation or its “affiliates or the directors of the corporation or any of its affiliates”.
[ 26 ] Counsel for the respondents submits that there are no common shareholders of the two companies involved and that the companies are not controlled by the same party. It is submitted, therefore, that 1833, by definition, is not affiliated with TSL. The respondents submit, therefore, that the applicant cannot complain about BT and 1833.
[ 27 ] The respondents further submit that oppression is an equitable remedy and that a party seeking relief must come to court with clean hands. The respondents argue that the default judgment was sought in violation of the standstill arrangement and that the subsequent steps to obtain judgment were taken without notice. It is submitted that the applicant, as a result thereof, does not come to court with clean hands.
[ 28 ] The respondents further submit that the applicant’s claim as a creditor was statute barred as the action was commenced after the second anniversary of the day on which the claim was discovered.
ANALYSIS
[ 29 ] While the evidence is circumstantial, I am entitled to draw inference therefrom.
[ 30 ] For the purposes of this application, I find that the actions by the respondents subsequent to the garnishment were for the sole purpose of avoiding the claim of the applicant. The actions to incorporate the new company, 1833, were commenced the day after the garnishment.
[ 31 ] Business continued to be operated under the same name by 1833 and, with respect to the customers of TSL, there would be no noticeable difference.
[ 32 ] I infer that the decision to take these steps was made by DT and BT together and that DT intentionally was not made an officer, director, or shareholder of 1833.
[ 33 ] As to the insolvency of TSL in its last year of operation, it paid management salaries of $108,000.00 and showed a net income of $12,700.00. It had an ability to earn income and likely would have continued in that regard but for the default judgment and garnishment.
[ 34 ] Personal credit cards of DT were used to pay bills for TSL. Motor vehicles were leased by TSL and used by both DT and BT.
[ 35 ] With respect to the claim of the “standstill” arrangement, no effort was made by TSL to set aside the default judgment. The debt was not challenged. Had there been an agreement between the parties, it could have been pleaded as part of a statement of defence.
[ 36 ] The judgment was issued and remains in full force and effect and I will not look behind it in my considerations of this application. I do not consider the steps taken by the applicant bar them from seeking an equitable remedy. It cannot be said that the applicant comes before this court “without clean hands”.
[ 37 ] With respect to the respondents’ Limitations Act argument, pursuant to section 13, a payment on account in respect of a liquidated claim starts the clock again on the running of a limitation period. A payment was, in fact, made. Further, if there were a valid Limitation Act argument it could have been used as a ground to set aside the default judgment, again, a step not taken by the respondents.
CASE LAW
[ 38 ] Both counsel rely on the Supreme Court of Canada decision in BCE Inc. v. 1976 Debentureholders 2008 SCC 69 , [2008] 3 S.C.R. 560. At paragraph 56 therein, the Court stated:
In our view, the best approach to the interpretation of section 241(2) is one that combines the two approaches developed in the cases. One should look first to the principles underlying the oppression remedy, and in particular the concept of reasonable expectations. If a breach of a reasonable expectation is established, one must go on to consider whether the conduct complained of amounts to “oppression, “unfair prejudice” or unfair disregard” as set out in s. 241(2) of the C.B.C.A.”.
[ 39 ] At paragraph 72, the Court describes factors which are useful in determining whether a reasonable expectation exists. The Court referred to general commercial practice; the nature of the corporation; the relationship between the parties; past practice; steps the claimant could have taken to protect itself; representations and agreements; and the fair resolution of conflicting interests between corporate stakeholders.
[ 40 ] The Court then went on to consider what conduct is oppressive, is unfairly prejudicial or unfairly disregards the claimants relevant interests. From paragraph 93 I quote:
Unfair prejudice is generally seen as involving conduct less offensive than oppression.”
It is stated at paragraph 94:
Unfair disregard is viewed as the least serious of the three injuries or wrongs, mentioned in s. 241.
[ 41 ] The applicant relies on Levy-Russell Limited et al. v. Shieldings Inc. [1998] O.J. No. 54 , a decision of Justice Pitt of the then Ontario Court (General Division). With respect to reasonable expectations, from page 7 I quote:
In the circumstances of this case it would be a reasonable expectation of the plaintiff who subsequently becomes a judgement creditor that the defendant would not engage in conduct during and after the trial that would reasonably be expected to hinder even partial satisfaction of the judgment if the action were successful.
[ 42 ] At paragraph 21 in Piller Sausages and Delicatessens Ltd. v. Cobb 2003 35795 (ON SC) , [2003] O.J. No. 2647, Justice Glithero states:
An applicant need not show mala fides on the part of the respondents, as it is the effect of their actions, rather than their intent which is material.
[ 43 ] Pitney Bowes of Canada Ltd. v. Belmonte [2011] O.J. No. 2751 is a decision of Justice Murray of the Ontario Superior Court of Justice and which was affirmed on appeal to the Divisional Court in March 2012 ( 2012 ONSC 2216 ).
[ 44 ] In this case, the applicant leased a photocopier to 1140311 Ontario Inc. The sole director and controlling mind of this company was Aldo Belmonte, the husband of Lisa Belmonte. The company defaulted on its obligations under the lease. The applicant obtained judgment against the company. The judgment debtor company abandoned operations and assigned its business operations to another of the respondents’ companies.
[ 45 ] There were two other numbered companies that, in concert, operated to produce the products sold as mini sticks. One of these companies (160189) was registered to Lisa Belmonte. The third company (173485) was incorporated by Aldo Belmonte once it became necessary to abandon the first company because of the default judgment.
[ 46 ] The evidence established that significant business revenue that would normally have been available to the debtor corporation went directly to the bank accounts of the Belmontes.
[ 47 ] At paragraph 22, Justice Murray ruled that the Aldo abandoned the debtor company and moved the operations to a new company owned by him for the specific purpose of escaping its obligations to its creditors, particularly the applicant. The learned judge determined this to be oppressive. The earnings of the debtor company were no longer available to the applicant to satisfy the judgment.
[ 48 ] From paragraph 25, I quote:
The evidence supports a conclusion that the judgment debtor and Mr. and Mrs. Belmonte have acted in a manner which is oppressive or unfairly prejudicial to or that unfairly disregards the interests of the applicant creditor and that the applicant creditor has been oppressed within the meaning of section 248 of the OBCA.
[ 49 ] Justice Murray then considered the liability of the directors and at paragraph 26 states:
Given the interrelationship between the three corporate respondents and the entanglements of their affairs, it is appropriate to grant relief against the three companies, all of which are controlled by Mr. and Mrs. Belmonte.
Justice Murray, at paragraph 31, concluded that the directors of the three corporate respondents, Aldo and Lisa Belmonte, were jointly and severally liable to pay the judgment obtained by the applicant.”
[ 50 ] On appeal, Justice Pepall, writing for the Court, noted, at paragraph 20, that the application judge made a finding of fact that the corporate entities were interrelated, their affairs entangled and that the earnings were sheltered for the use of Mr. and Mrs. Belmonte. She also noted that the trial judge found it was appropriate to grant the relief she did. Justice Pepall determined that “There was no palpable or overriding error in this regard.
FINDINGS & CONCLUSION
[ 51 ] Under section 248 of the OBCA oppression relief is available to the applicant against the debtor corporation, TSL, and its directors and against an affiliate body corporate and it directors.
[ 52 ] I find that it was the reasonable expectations of the applicant that it would be paid and that TSL would honour its financial commitments. It was a reasonable expectation of the applicant that TSL would not engage in conduct to hinder satisfaction of the judgment.
[ 53 ] The manner in which the business operations of TSL were transferred to 1833 was oppressive or unfairly prejudicial to or unfairly disregarded the interests of the applicant. The purpose was to protect future earnings from the claim of the applicant.
[ 54 ] The debtor company TSL and its director DT are liable for these actions.
[ 55 ] With respect to BT and 1833, I also find them liable. Given the facts of this case, I find that BT and DT acted together in the incorporation of 1833 and the registration of the name of the debtor corporation by 1833. Their business continued and, from their customer’s point of view, the transfer was seamless. BT and DT each benefited financially from the actions of the other and the two corporations.
[ 56 ] Section 1(4) of the OBCA defines an ‘affiliated body corporate’ as follows:
For the purposes of this Act, one body corporate shall be deemed to be affiliated with another body corporate if, but only if, one of them is the subsidiary of the other or both are subsidiaries of the same body corporate or each of them is controlled by the same person.
[ 57 ] It cannot be said that either TSL or 1833 are a subsidiary of the other as defined in section 1(2) of the OBCA.
[ 58 ] Section 1(1) defines a person as:
…an individual, sole proprietorship, partnership, unincorporated syndicate, unincorporated organization, trust, body corporate, and a natural person in his or her capacity as trustee, executor, administrator, or other legal representative.
[ 59 ] I conclude that DT and BT acted as a “partnership” operating what, in effect, was a family business. The actions required the consent and co-operations of both DT and BT. In acting as a partnership, they are a “person” as defined and the two corporate entities, TSL and 1833, are, in reality, controlled by the same “person”.
[ 60 ] Therefore, within the definition set out in section 1(4) of the OBCA, 1833 is an affiliated body corporate of the debtor company, TSL.
[ 61 ] The actions of all the respondents were oppressive and unfair, and the intent was to prevent the applicant from realizing any more monies on its judgment.
[ 62 ] Further, as determined by Justice Murray in the Pitney Bowes case and affirmed on appeal, that, given the interrelationship between the bodies corporate and their directors, the personal financial gain of both DT and BT and the entanglements of their business affairs, it is appropriate to grant relief against all the respondents.
[ 63 ] Accordingly, an order shall issue that Bonnie Marie Thompson, David Thompson, and 1833086 Ontario Ltd. are liable jointly and severely to pay the judgment of this court, dated February 24, 2011, in favour of the applicant, against Thermo Systems Ltd.
[ 64 ] With respect to costs, I will accept written submissions from both parties, of no more than three pages, to be received within 20 days of the release of this endorsement.
Justice Thomas A. Bielby
Released: November 15, 2012
COURT FILE NO.: CV-12-0717-00
DATE: 20121115
ONTARIO SUPERIOR COURT OF JUSTICE
B E T W E E N: Glasscell Isofab Inc. Applicant
- and –
Bonnie Marie Thompson, David Thompson, 1833086 Ontario Ltd. c.o.b. Thermo Systems Insulation and Thermo Systems Insulation Ltd. Respondents
REASONS FOR JUDGMENT
Justice Thomas A. Bielby
Released: November 15, 2012