ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: CV-06-1070-SR
DATE: 2012-12-06

B E T W E E N:

WALL 2 WALL CONSTRUCTION LTD.

John M. Gray, for the Plaintiff

Plaintiff

• and -

McCONNELL CONTRACT INTERIORS LTD., DOUGLAS ARTHUR McCONNELL, ADAM MARSHALL and JASON JOHN SKINNER

Q. Ryan Hanna, for the Defendant, Adam Marshall

Defendants

HEARD: December 5, 2012, at Brampton, Ontario

Price J.

Reasons For Order

NATURE OF MOTION

[1] The personal defendants, John Marshall, Douglas McConnell, and Jason Skinner, were, according to the Statement of Claim, officers, director, and persons who had effective control of the corporate defendant, McConnell Contract Interiors Ltd. (“MCIL”), when it entered into a series of contracts which required the plaintiff, Wall 2 Wall Construction Ltd. (“Wall 2 Wall”), to provide interior renovations services to MCIL, and required MCIL to pay Wall 2 Wall’s invoices when rendered. When Wall 2 Wall completed several projects for MCIL and MCIL failed to pay its invoices, Wall 2 Wall began the present action by a Statement of Claim which it served on MCIL and on Mr. McConnell and Mr. Skinner personally, but which it was unable to serve personally on Mr. Marshall.

[2] The action was defended by Jennifer A. Leitch and her law firm, Goodmans LLP, on behalf of all of the defendants. Following an exchange of pleadings and a pre-trial conference on February 14, 2008, which all of the defendants attended, and at which a trial date of June 15, 2009, was scheduled, Goodmans LLP was removed from the record as the defendants’ solicitors. When Mr. Marshall and the other defendants did not attend at the trial, Bielby J. struck their statement of defence and counterclaim, found, based on the allegations in the Claim, that there had been a breach of trust, and granted judgment to Wall 2 Wall for $38,594.00 plus prejudgment interest from October 1, 2005, and costs of $12,000.00. Wall 2 Wall later obtained a judgment for personal liability against Mr. Marshall on July 29, 2010, and a Writ of Seizure and Sale pursuant to the judgment.

[3] Mr. Marshall has now moved to set aside the judgment obtained against him. He filed affidavits of his own, sworn July 19 and August 22, 2012, and an affidavit of Mr. McConnell, sworn July 19, 2012, in support of his motion. He argues that he was never an Officer, Director, or person in control of MCIL and is therefore not personally liable for the amount owed to Wall 2 Wall pursuant to the Construction Lien Act.

[4] Wall 2 Wall’s lawyer, John M. Gray, cross-examined Mr. Marshall and Mr. McConnell on their affidavits on August 30, 2012. Mr. Marshall and Mr. McConnell undertook to answer certain questions, refused to answer others, and took others under advisement. Wall 2 Wall now moves, pursuant to Rule 34.15 of the Rules of Civil Procedure, for an Order requiring Mr. Marshall and Mr. McConnell to re-attend at their own expense to answer the questions that remain unanswered.

[5] Mr. Marshall’s motion to set aside the default judgment against him is currently scheduled to be heard on January 2, 2013. A motion by Wall 2 Wall to require Mr. Marshall to produce a Mortgage Discharge Statement on his property at 168 Timpson Drive in Aurora, which the Sheriff requires before selling the property, is scheduled to be heard on the same date.

ISSUES

[6] Wall 2 Wall’s motion for an Order requiring Mr. Marshall and Mr. McConnell to re-attend requires the court to determine whether the questions which Mr. Marshall and Mr. McConnell have not answered are relevant to the issues raised by Mr. Marshall’s motion to set aside the judgment against him, namely, whether Mr. Marshall has a reasonable explanation for his failure to attend at the trial, and of whether his defence has merit.

PARTIES’ POSITIONS

[7] As noted above, Mr. Marshall argues that he was never an Officer, Director, or person in control of MCIL and is therefore not personally liable for the amount of Wall 2 Wall’s judgment, even if there was a breach of trust by MCIL. He further argues that, although he made a general denial of MCIL’s breach of trust in his Statement of Defence, this is not the main basis for his defence, and so he should not be required at this point in the proceeding to answer questions about it. Rather, he says, Wall 2 Wall should be confined, in its cross-examination of him and Mr. McConnell, to asking questions to determine whether he was an Officer, Director, or person in control of MCIL.

[8] Wall 2 Wall argues that because Mr. Marshall has denied that a breach of trust occurred, and Wall 2 Wall’s judgment was based on a finding that such a breach occurred, and that Mr. Marshall was in control of MCIL and acquiesced in the breach, it is entitled to cross-examine him on the motion in order to establish that there is no merit to his defence. It further argues that he is entitled to cross-examine Mr. Marshall and Mr. McConnell on the dealings they have had in another company, MCI, which they incorporated less than a week after the pre-trial conference, after MCIL ceased to operate, on the ground that the transformation of their business was simply a strategy to avoid their liability to Wall 2 Wall, and their continued association is relevant to whether Mr. Marshall’s explanation for not attending at the trial, which he attributes to a falling out between him and Mr. McConnell, is reasonable.

ANALYSIS AND EVIDENCE

a) Questions relating to MCIL

[9] Mr. Marshall’s argument that because his motion to set aside the default judgment against him is based principally on his position that he was not an officer, director, or person in charge of MCIL, questions relating to MCIL’s breach of trust are not relevant to his motion to set aside the default judgment against him cannot prevail for the following two reasons:

(i) Mr. Marshall denied in his Statement of Defence that there was a breach of trust by MCI. His personal liability in the action depends on findings that:

(a) He was a person in charge of MCIL;

(b) There was a breach of trust by MCIL; and

(c) He caused or acquiesced in the breach.

In Mr. Marshall’s motion to set aside the default judgment against him, the onus rests on him to show, among other things, that there is merit in his defence. This includes his denial that there was a breach of trust by MCIL, even though he may not consider this to be the principal basis of his defence. Wall 2 Wall is entitled to answers to its questions, and the production of documents, that may prove the likelihood that there was a breach of trust by MCIL.

(ii) The issue of Mr. Marshall’s personal liability has to do, in part, with whether he was a person in charge of MCIL and acquiesced in payments that amounted to a breach of trust. To the extent that the answers to the questions he and Mr. McConnell were asked, and the documents they were asked to produce, support a finding that Mr. Marshall received benefits consistent with the role of a person in charge rather than one who was, as he maintains, simply a part-time employee, are relevant. Depending on the size of the benefits, whether they were derived from payments made by owners of property for work that Wall 2 Wall performed, and the way the benefits are characterized in MCIL’s books and records, they may also be evidence of a breach of trust and of the fact that Mr. Marshall must have known of and acquiesced in the breach.

b) Questions relating to MCI and the income Mr. Marshall has derived from it

[10] Mr. Marshall’s argument that he should not be required to produce his income tax return for 2008, or that he and Mr. McConnell should not be required to answer questions about MCI or produce documents relating to it, because MCI is not a party to the action, was not incorporated until 2008, after the events giving rise to this action, cannot prevail for the following reasons:

(i) Mr. Marshall’s tax return for 2008, besides disclosing the income he derived from MCI, may also disclose income he derived from MCIL, which did not cease operations until February 2008.

(ii) The information about MCI may disprove Mr. Marshall’s assertion that his failure to attend at the trial of Wall 2 Wall’s action against him resulted from Mr. McConnell’s failure to keep him up-dated as to the status of the action, and that his relationship with Mr. McConnell had become strained and the communication between them had ceased after the pre-trial conference on February 14, 2008. MCI was incorporated on February 22, 2008, less than a week after the pre-trial conference. It is not disputed that Mr. McConnell, with whom Mr. Marshall says he ceased communicating after the pre-trial conference, was associated with both MCIL and MCI. Indeed, the names of both companies are acronyms which incorporate the name McConnell. Wall 2 Wall asserts that Mr. Marshall and Mr. McConnell worked together in MCIL, and have continued to work together in MCI. This assertion is supported by the fact that on July 27, 2012, Wall 2 Wall’s Manager, Mark Lukacko, attended at Unit 32, 225 Industrial Parkway South, in Aurora, where, according to an internet search, MCI carries on business, (incorrectly referred to in paragraph 37 of Mr. Lukacko’s affidavit as Bowes Road, where MCIL had operated at Unit 9, which Wall 2 Wall’s counsel states, and I accept, was a clerical error), and took photographs at 5:30 p.m., showing Mr. McConnell leaving the rear of Unit 32, and re-entering after speaking with Mr. Lukacko, and of Mr. Marshall, who appeared in his truck shortly after Mr. McConnell had re-entered the premises, and blocked Mr. Lukacko’s vehicle with his truck.

c) Individual Questions

Question 130 to Mr. Marshall

(To produce the incorporation records of MCI)

[11] Mr. Marshall submits that after initially refusing, at his cross-examination, he produced the documents requested. Wall 2 Wall concedes that Mr. Marshall has produced the documents, but says that when it asked that him to re-attend to answer questions about the documents, he refused.

[12] I find, for the reasons stated in paragraph 10, above, that the MCI documents are relevant and that Mr. Marshall must re-attend to answer questions about them.

Question 171 to Mr. Marshall

(To produce MCIL’s lease application to Enable Capital Inc.)

[13] Mr. Marshall has recently agreed to ask Enable Capital Inc. for a copy of MCIL’s lease application to that company and, if it is available, to produce it to Wall 2 Wall.

Question 206 to Mr. Marshall

(To produce his tax returns and T4 slips for 2005 to 2008)

[14] Mr. Marshall has produced his personal income tax returns and T4 slips for the years 2005, 2006 and 2007, but has refused to produce them for 2008. He argues that the latter documents are not relevant because MCIL ceased its operations in February 2008 and that any income he derived from the newly formed MCI is not relevant. I find, for the reasons stated in paragraph 10 (i), above, that the 2008 tax return and T4 slip are relevant and must be produced.

Question 212 to Mr. McConnell

(To produce MCIL Financial Statements, 2005-2008)

[15] Stefanie Patterson, Mr. Marshall’s lawyer’s law clerk, states that after Mr. McConnell refused to answer this question on the basis that it was not relevant to the issues on the motion to set aside the judgment, Mr. Marshall’s lawyer asked Mr. McConnell “to review the records for information that related specifically to Mr. Marshall and to provide that information.” She continues: “Mr. McConnell, in response, advised that the records in question either did not exist or have been lost since the company ceased to operate in 2008.” Mr. Marshall has refused to have Mr. McConnell re-attend to answer questions arising from this answer.

[16] Mr. McConnell, when asked at Q. 211, whether MCIL had financial statements prepared between 2005 and 2008, replied that it did. When asked at Q. 212 whether he had them, he replied: “I think I can get them for you.” Mr. Hanna then objected, and Mr. Marshall now takes the position, without further explanation, that the documents are not available.

[17] Most of the documents requested are likely to be available from non-parties. MCIL’s financial statements and computerized accounting records should be available from the accountant or bookkeeper who prepared them. MCIL’s bank statements should be available from the banks where it maintained its accounts. MCIL’s contracts and invoices should be available from its customers. The chart of undertakings and refusals are not sworn evidence and Mr. McConnell has not disclosed in his affidavit what efforts he has made to secure the requested documents.

[18] MCIL’s financial records are relevant for the following reasons:

(a) Both Mr. McConnell and Mr. Marshall have asserted in their affidavits that Mr. Marshall loaned $135,000.00 to MCIL or its principals, Mr. Skinner and Mr. McConnell. Mr. Marshall states that they agreed to keep him up-dated as to how the business of MCIL was progressing and when they would be able to repay his loan. He also states that they agreed to allow him to review their financial position and assist them with their management and, in return, receive a salary that would go toward repaying his loan to them.

(b) Mr. Marshall and Mr. McConnell refer to the $135,000.00 as both a “loan” and an “investment.” Mr. Marshall, at Questions 163 and 257 of his cross-examination, denied that he was a shareholder of MCIL. MCIL’s financial statements may disclose whether MCIL treated his payment as an investment and, if so, whether it was structured in such a way as to confer voting rights on Mr. Marshall. This is relevant to whether he was a person in control of MCIL, on which his liability depends, and therefore to whether there is merit to his defence.

(c) Mr. Marshall says he was only a part-time employee of MCIL, spending only 2 days per week working there. The financial statements may disclose whether these assertions are accurate, or whether the amount that he was paid are more consistent with a role that gave him more control over the company.

Questions 288 to Mr. McConnell

(Whether there were trades, other than Wall 2 Wall, that supplied services to MCIL and, if so, production of the contracts with these other sub-trades)

Question 290 to Mr. McConnell

(To produce a record and back-up documentation of expenses incurred on the jobs outlined in the letter dated October 6, 2005)

Question 292 to Mr. McConnell

(Whether MCIL invoiced the owners for the work done by Wall 2 Wall)

Question 293 to Mr. McConnell

(Whether MCIL was paid by owners for work done by Wall 2 Wall)

Question 294 to Mr. McConnell

(To produce MCIL’s accounts receivable, to show whether MCIL was entitled to receive funds from owners for Wall 2 Wall’s jobs, MCIL’s accounts payable, to show money owing on jobs, MCIL’s banking records, including bank statements and cancelled cheques, to show money received from owners for jobs, and money paid for expenses and to Mr. Marshall, and MCIL’s computer accounting records, including bank reconciliations, to show the sources of funds received by MCIL and funds it paid for expenses)

[19] The records requested in Questions 288 to 294, above, are relevant for the following reasons:

(a) Pursuant to section 8 of the Construction Lien Act, all amounts received on account of the contract price of an improvement constitute a trust fund for the benefit of sub-contractors such as Wall 2 Wall.

(b) A General Contractor, such as MCIL, is liable to any sub-contractor to the extent to which it appropriates or converts any part of the fund to its own use or to any use inconsistent with the trust.

(c) Pursuant to section 13 of the Construction Lien Act, officers, directors and persons in effective control of a corporation are liable for breach of trust if they assent to or acquiesce in conduct that they know or reasonably ought to know amounts to breach of trust by the corporation.

(d) Wall 2 Wall had the onus, in the action, to prove the existence of a trust under section 8 of the Construction Lien Act. In order to discharge that onus, it needs to show the following:

(i) MCIL received money on account of its contract price for a particular project. Mr. Gray asked for production of MCIL’s invoices for the work done by Wall 2 Wall prior to October 6, 2005, and Mr. McConnell refused, at his cross-examination, to provide them. Mr. Gray asked Mr. McConnell if MCIL was paid for the work done by the owners on those jobs and he refused to answer this question.

(ii) Wall 2 Wall supplied labour or materials on that project and that MCIL owes money to it for that labour and materials.

(e) If the above elements are proved, the trust provisions of section 8 of the Construction Lien Act are engaged. The onus then shifts to MCIL, as the General Contractor, to show that it complied with its obligations as trustee of the money by establishing that any payments made out of the trust funds were to Wall 2 Wall or other sub-contractors, as beneficiaries of the trust, in accordance with section 10, or were within the exceptions provided for in the Construction Lien Act, such as sections 11(1) and (2).

(f) If MCIL paid out trust funds to others, contrary to its trust obligations, then it, at least, committed a breach of trust. Mr. Gray asked Mr. McConnell if there were any other trades working on the same jobs as Wall 2 Wall, as they would also be beneficiaries of the trust. Mr. McConnell refused to answer this question.

(g) Intermingling of trust funds and paying expenses on other jobs and overhead before paying the Wall 2 Wall and other beneficiaries of the trust would constitute a breach of trust. An examination of MCIL’s banking and accounting records would reveal wither MCIL was paid in full by the owners on its contracts, and whether it used the trust funds received on Wall 2 Wall’s jobs for other purposes, in breach of trust. Mr. McConnell testified that MCIL had only one bank account. Mr. Gray asked Mr. McConnell for the records of this account and Mr. McConnell refused to produce them. Mr. Gray also asked for the record of expenses that MCIL incurred on the Wall 2 Wall jobs and back up documentation, which would show whether MCIL used the trust funds received on Wall 2 Wall’s jobs for purposes other than to pay Wall 2 Wall and, whether Mr. Marshall received funds from MCIL before Wall 2 Wall was paid, in breach of trust. McConnell also refused to produce these records.

[20] Mr. Marshall argues that if Wall 2 Wall was ready at trial to prove the facts in support of its claim, it does not require the documents which it has asked Mr. Marshall and Mr. McConnell to produce. However, at the pre-trial conference on February 14, 2012, Corbett J. ordered the parties to exchange Scott Schedules, which was not complied with, so Wall 2 Wall did not have the documents it required and would have had to ask the Court to draw an adverse inference from the defendants’ failure to produce them.

[21] Mr. Marshall asserts that he should be permitted to produce only the documents that relate specifically to him. This would not comply fully with the requirement that the Rule imposes on him. He must produce all documents relevant to the issues, including those relevant to MCIL’s breach of trust. Wall 2 Wall is entitled to review the documents itself and make its own determination as to which it wishes to rely on in response to Mr. Marshall’s motion.

[22] Counsel are agreed that there is insufficient time between now and January 2, 2013, to accomplish what remains to be done before the court hears Mr. Marshall’s motion to set aside default judgment against him and Wall 2 Wall’s motion to compel production of Mr. Marshall’s Discharge Statement. Accordingly, on the consent of the parties, the January 2, 2013, date will be vacated and those motions will be adjourned directly to June 5, 2013, at 10 a.m. for an estimated two hours.

CONCLUSION AND ORDER

[23] Based on the foregoing, it is ordered that:

1. Mr. Marshall shall re-attend at his own expense to answer questions concerning the documents he has produced in response to Question 130 of his cross-examination on August 30, 2012, and questions reasonably arising from his answers.

2. Mr. Marshall shall forthwith make a request to Enable Capital Inc., as required by Question 171 of his cross-examination, for a copy of MCIL’s lease application to that company. If it is available, he shall produce the application to Wall 2 Wall and, in any event, he shall forthwith notify Wall 2 Wall of the response he receives to his request.

3. Mr. Marshall shall produce his income tax return and T4 slip for 2008, as required by Question 206 of his cross-examination, and shall answer questions reasonably arising concerning them.

4. Mr. McConnell shall re-attend at Mr. Marshall’s expense to answer Questions 212, 288, 289, 290, and 292 to 294, asked at his cross-examination on August 30, 2012, and questions reasonably arising from his answers.

5. Mr. Marshall shall forthwith pay Wall 2 Wall’s costs of this motion, on a substantial indemnity scale, in the amount of $ 6,549.92, based on Wall 2 Wall’s Costs Outline, filed.

6. The June 2, 2013, date for the outstanding motions in this proceeding is vacated, and Mr. Marshall’s motion to set aside the default judgment against him, and Wall 2 Wall’s motion to require Mr. Marshall to produce a Discharge Statement are adjourned directly to June 5, 2013, at 10 a.m. for an estimated two hours.

Price J.

Released: December 6, 2012

COURT FILE NO.: CV-06-1070-SR
DATE: 2012-12-06

ONTARIO SUPERIOR COURT OF JUSTICE B E T W E E N: WALL 2 WALL CONSTRUCTION LTD. Plaintiff - and - McCONNELL CONTRACT INTERIORS LTD., DOUGLAS ARTHUR McCONNELL, ADAM MARSHALL and JASON JOHN SKINNER Defendants REASONS FOR ORDER Price J.

Released: December 6, 2012