SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-10-4663-00
DATE: 20130314

RE: COFFEE CULTURE SYSTEMS INC. VS. HENRY E. KRUKOWSKI

BEFORE: Skarica J.

COUNSEL:
M.G. Tweedie, for the Plaintiff
R. Fisher, for the Defendant

E N D O R S E M E N T

INTRODUCTION

[1] Henry Krukowski is the owner of a commercial building at 402 Wilson Street East in Ancaster, Ontario. Coffee Culture Systems Inc. (“Systems”) entered into an Agreement to Lease with Mr. Krukowski on May 6, 2008. Systems subleased the Ancaster property to a numbered company (“217”) on May 29, 2008. On July 2010, 217 abandoned the Ancaster location.

[2] Systems, on December 16, 2010, sued Henry Krukowski alleging that Mr. Krukowski breached the commercial lease. The original Statement of Claim is quite vague about the exact breaches alleged but indicates that “it was an express or implied term of the Lease that the Property would at all material times be fit for occupancy…and this included the Defendant’s provision and maintenance of a common and public means of access to the Property and parking for the patrons’ vehicles, without which the Business would foreseeably falter and underperform”.

[3] The franchisee, the numbered company, 217, did falter and underperform and as indicated went out of business in July 2010. 217, as a result, abandoned the Ancaster property. It is clear from the numerous filed documents that the business failure of 217 is being blamed, by the plaintiff, on the alleged failure of Mr. Krukowski to pave the parking lot adjacent to the building of the Ancaster property.

[4] On July 14, 2011, the plaintiff filed an amended Statement of Claim. The claim for damages ($1.74 million) is essentially the same list as the original Statement of Claim, except the rental loss (presumably of the sublease) was listed at $8,000 per month for 24 months for a total of $192,000. The plaintiff was liable to pay Mr. Krukowski, on the original lease, $4300 per month. The main amendment, in the amended Statement of Claim, specifically details the harm being caused to the plaintiff by the need for the paving of the property. The amended Statement of Claim also asks for injunctive relief mandating the defendant to re-pave the parking lot.

[5] On September 16, 2011, Systems brought an injunction application to compel the defendant to pave the parking lot. The injunction application was adjourned. Cross-examination on the various affiants on documents filed in the motions/applications was conducted in December, 2011. Systems brought a rent injunction on September 14, 2012 which was adjourned to March 13, 2013.

[6] It was agreed between counsel that neither injunction application would be heard before me. It was requested that I deal with two other motions: (1) a motion brought by the defendant under Rule 51 and (2) a motion brought by the plaintiff to add other parties under Rule 5.04(2).

[7] It was indicated to me that no rent has been paid to the defendant since February, 2010. Mr. Krukowski, states in his affidavit dated September 28, 2012, at paragraph 16, that in October, 2011, the parking lot was paved. Photographs, attached to his affidavit, clearly prove that the paving job was first class and very professionally done. Despite the obvious and significant expense that must have been incurred by the defendant in paving the parking lot, the evidence and submissions establish that no rent was paid to the defendant in 2012 and this situation continues to the current date.

[8] On October 5, 2012, Mr. Krukowski brought a Rule 51 motion. In his factum, the defendant is seeking a dismissal of the injunctions, certain determinations and/or the dismissal of all or part of this action. In response, on October 30, 2012, Systems brought a motion to add parties and file an amended, amended Statement of Claim, pursuant to Rule 5.04(2) and Rule 26.02.

ISSUES

[9] The issues to be determined on these two motions are: (a) What remedies are available to the defendant under Rule 51? and (b) Should the plaintiff be permitted to file an amended Statement of Claim adding parties to this action more than two years after the claim involving the initial plaintiff arose?

CORPORATE STRUCTURE OF THE PROPOSED PLAINTIFFS

[10] The corporate structure, of the plaintiff and the proposed new parties, is complicated and adds significantly to the difficulty of any decision to be made.

[11] The corporate structure of the proposed new parties has evolved over the period of this Lease and subsequent litigation.

[12] As indicated, on May 6, 2008, Coffee Culture Systems Inc. (“Systems”) entered into a lease agreement with Mr. Krukowski.

[13] On May 29, 2008, Systems, as sub landlord, subleased the Ancaster property to a numbered company, 2172508 (“217”).

[14] Also, in May of 2008, Coffee Culture Canada Inc. (“Canada”), as the then franchisor of Coffee Culture, entered into a franchise agreement with 217 as franchisee. As well, Canada owned Systems.

[15] On September 1, 2008, the original plaintiff, Systems, amalgamated with Co. Culture Inc. (Co-Culture) and continued to operate under the name of Co. Culture Inc. Co-Culture is the successor to Systems, the existing plaintiff, by articles of amalgamation and is the leasing arm of Coffee Culture, entering into commercial leases with landlords and subletting to franchises. It alleges to have suffered damages through 217 (the franchisee) being unable to pay rent to Systems.

[16] Hospitality Capital Group (“Hospitality”) was, for an unspecified period of time, the successor to Canada and the franchisor of Coffee Culture. 217 was required to pay Canada certain royalty and marketing fees pursuant to the franchise agreement which it failed to do.

[17] Obsidian Group Inc. (“Obsidian”) is, pursuant to an assignment of franchise rights, dated Feb. 1, 2010, the assignee of all rights of Canada and the current franchisor of all Coffee Cultures, including the Ancaster location. Obsidian purchased Canada in February of 2010.

[18] After the franchisee 217 abandoned the Ancaster location in July of 2010, because of the serious financial hardship experienced due to the defendant’s alleged breach of the Lease, the franchise was terminated by Obsidian and according to Obsidian, they enforced their security interest granted by a security agreement executed by 217 and accordingly were free to exercise 217’s claim against the landlord, who is the defendant Mr. Krukowski.

[19] C.C. Marketing Inc. (“Marketing”) is the marketing arm of Coffee Culture responsible for collecting marketing fees from Coffee Culture franchisees and administering regional and national promotion and marketing. Marketing says that it has damages arising from unpaid advertising fees caused by the franchisee’s failure and inability to pay.

[20] In the cross-examinations conducted in December, 2011, Gus Karamountzos confirmed the corporate structure as outlined above and confirmed that he is the president of the plaintiff Systems and the president of “everything”. In his affidavit, dated October 30, 2012, Gus Karamountzos confirms that he is the president of the proposed plaintiffs Co. Culture Inc., Hospitality Capital Group, Obsidian Group Inc. and C.C. Marketing Group Inc.

DEFENDANT’S MOTION

[21] The defendant seeks to rely on Rule 51.06 which states:

51.06(1) Where an admission of the truth of a fact or the authenticity of a document is made,

(a) in an affidavit filed by a party;

(b) in the examination for discovery of a party or a person examined for discovery on behalf of a party; or

(c) by a party on any other examination under oath or affirmation in or out of court,

any party may make a motion to a judge in the same or another proceeding for such order as the party may be entitled to on the admission without waiting for the determination of any other question between the parties, and the judge may make such order as is just.

[22] In his factum, the defendant seeks an order (a) that Systems was not the correct party to bring the action as outlined in the Statement of Claim and alternatively, the Agreement to Lease does not include rental of the parking lot (b) dismissal of the plaintiff’s motion for an injunction, (c) dismissal of all or part of the plaintiff’s action.

[23] On consent of both parties, the two motions for injunction were not argued before me and accordingly, I will not deal with the request, for the dismissal of the plaintiff’s motion for injunction, under Rule 51.

[24] In Politsky vs. C.I. Mutual Funds Inc. and Fundex Investments, 2007 36633 (On SC), Justice Mesbur outlined the criteria for a successful motion under Rule 51.06(1):

3 The test on a motion under rule 51.06(1) is a stringent one. The admission must meet the following criteria in order for the motion to succeed:

(a) the admission must be clear and definite;
(b) the admission must be of such facts as to show that the party is clearly entitled to the order asked for;
(c) the rule does not apply where there is any serious question of law to be argued;
(d) the rule does not apply where there is a serious question of fact outstanding;
(e) the motion must be based on admissions, and proof of facts is not permitted;
(f) the motion should be granted only in a clear case and much care must be taken not to take away the right of trial on oral evidence.

[25] The evidence of Gus Karamountzos is that Joe Disavano signed the Agreement to Lease on behalf of Systems as the tenant for the Ancaster property. The evidence is clear that Systems then subleased the Ancaster property to 217. 217 alleges a breach of the Lease due to non-paving of the parking lot. Whether the Lease in fact requires that the entire paving lot be paved is unclear from a reading of Schedule A to the lease. The schedule states: “The landlord shall Pave and landscape the area in the back of the Development and where applicable the front of the Development.” The proper interpretation of the schedule is a matter for trial after a trial judge hears all the facts surrounding the parties’ expectations, discussions and conduct regarding paving the parking lot.

[26] Further, the defendant argues that the plaintiff was the wrong party to bring the action for damages as outlined in the Statement of Claim. From my review of the Statement of Claim, Systems is the sub landlord who alleges they suffered damages due to the subtenant being unable to pay. The subtenant – 217 – says that it went out of business due to the defendant’s breach of the Lease regarding non provision and maintenance of the parking lot.

[27] Paragraph 12 of the Statement of Claim outlines the plaintiff’s losses. Relevant claims, assuming that the plaintiff is successful in establishing a contract breach, would include rent at $8,000 for 24 months, loss of goodwill claimed at $750,000 and completion of the landlord’s works claimed at $75,000. I agree that most of the other listed losses would belong to the proposed other plaintiffs. However, the three items that I have referred to clearly are losses that would be claimable by Systems as tenant and sub landlord by the alleged contract breach. In my opinion, the defendant has failed to establish that “the admission must be of such facts as to show that the party is clearly entitled to the order asked for.”

[28] Accordingly, the defendant’s application for an order pursuant to Rule 51 is dismissed.

PLAINTIFF’S MOTION

[29] The plaintiff seeks to add numerous corporate parties to the litigation. The amended, amended Statement of Claim lists the plaintiffs as Co. Culture Inc., Hospitality Capital Group Inc., Obsidian Group Inc. and C.C. Marketing Inc. The plaintiff Co. Culture Inc. is the amalgamated entity, described in paragraph 15 above. Co-Culture, accordingly, is not an added new plaintiff to these proceedings.

[30] The other plaintiffs however were not part of the original or amended Statement of Claim and would be new, added parties.

[31] The plaintiff’s counsel seeks to add these new parties in the amended, amended Statement of Claim through the operation of two Rules:

Rule 5.04(2) is of a discretionary nature and provides as follows:

(2) At any stage of a proceeding the court may by order add, delete or substitute a party or correct the name of a party incorrectly named, on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.

Rule 26.01 is of a mandatory nature and provides as follows;

26.01 On motion at any stage of an action the court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.

[32] In the amended, amended Statement of Claim, the proposed plaintiffs Hospitality Capital Group Inc. (“Hospitality”) and Obsidian Group Inc. (“Obsidian”) are referred to as the franchisors of Coffee Culture. Co-Culture is the leasing arm of Coffee Culture and the proposed plaintiff C.C. Marketing is the marketing arm of Coffee Culture responsible for marketing and collection of marketing fees from franchisees.

[33] Paragraph 15 of the amended, amended Statement of Claim, has the same column of listed losses, as in the two previous Statement of Claims, except there is no claim for legal fees ($100,000) as there is in the other two prior Statement of Claims. Somehow, the total claim in the amended, amended Statement of Claim ($1,832,000) is still higher than in the two prior Statement of Claims ($1,740,000).

[34] It is clear that many of the losses listed in paragraph 15 of the amended, amended Statement of Claim are losses attributable to the proposed new plaintiffs, i.e. franchisor’s losses, franchisee losses, marketing expense. These losses have clearly not been sustained by Systems and accordingly that is why the amended, amended Statement of Claim seeks to add these new plaintiffs.

[35] From the discussion outlined in paragraphs 17-19 above, it is clear that the proposed new plaintiffs would have incurred these losses before and certainly by July 2010 when 217 abandoned the Ancaster property. Further, they would have certainly been aware by July 2010 that 217 had failed to meet its financial obligations to them due to an alleged breach of the Agreement to Lease by the defendant.

[36] On October 30, 2012, the plaintiff brought a motion, returnable November 13, 2012 seeking to add the proposed new plaintiffs to the amended, amended Statement of Claim. This proposed amendment is more than two years after the proposed new plaintiffs would have been aware of their right to bring an action against the defendant.

[37] The Limitations Act, 2002 SO 2002, c 24, Sch B indicates:

Basic Limitation Period

4. Unless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.

Adding Party

21(1) If a limitation period in respect of a claim against a person has expired, a claim shall not be pursued by adding the person as a party to any existing proceedings

Misdescription

21(2) Subsection (1) does not prevent the correction of a misnaming or misdescription of a party

[38] Accordingly, the adding of the proposed new plaintiffs would occur beyond the two year limitation period for commencing a claim. This is not a case of misnomer or misdescription. The proposed plaintiffs are all affiliated and have chosen to divide up their business and allocate different portions of the business to different corporations. The fact of dividing up the business, for many years, according to leasing, franchising and marketing “arms” of Coffee Culture’s business is clearly set out in the amended, amended Statement of Claim.

[39] The plaintiff has provided me with a number of cases that indicate that the new proposed plaintiffs should be added as the expiry of a limitation period is not sufficient prejudice to defeat an amendment to add a new plaintiff, i.e. Mazzuca v. Silvercreek Pharmacy Ltd., 2001 8620 (ON CA) at paragraph 75. However, many of the cases submitted to me, were, decided when the “old” doctrine of special circumstances permitted the addition of plaintiffs based on special circumstances.

[40] I note that the amended, amended Statement of Claim, in addition to adding proposed plaintiffs and increasing the total damages, also adds material facts to support the parent/affiliated corporations’ claims. For example, paragraphs 19-22 have been added to indicate that any partial paving was not good enough and that the delays in paving the “entire” area, under which the defendant was obligated to pave under the lease, would cause the plaintiffs (presumably all of them) to continue to suffer irreparable harm and damage.

[41] The Ontario Court of Appeal’s recent decision in Streamline Foods Ltd. and Jantz Canada Corporation, 2012 ONCA 174 appears to be on all fours with the situation before me. The Court of Appeal’s endorsement reads as follows:

1 THE COURT (orally):-- Following the expiry of the relevant limitation period, Streamline Foods Ltd. moved to amend its statement of claim by adding its parent corporation as a plaintiff and by adding assertions that it was the parent corporation that was entitled to some of the damages claimed. Streamline relied on misnomer as the basis for its proposed amendments and conceded that the amendments were otherwise barred by the operation of the Limitations Act, 2002.

2 Master Muir dismissed the motion, holding that "this is not a case of misnomer but rather an attempt to add an additional plaintiff."

3 Herman J. dismissed the appellants' appeal from the Master's decision.

4 On appeal to this court, the appellants argue that the courts below erred in holding that this was not a case of misnomer and further erred in failing to find that s. 21(1) of the Limitations Act, 2002 does not apply to plaintiffs and that the doctrine of special circumstances continues to permit the addition of plaintiffs based on special circumstances.

5 We agree with the courts below that this is not a case of misnomer. The appellants sought to add the parent corporation of the original plaintiff as a party to the action because it was the parent corporation who incurred certain losses, not the original plaintiff. However, in order to advance a claim on behalf of the parent corporation, it was necessary to add the parent corporation as an additional party and also to plead additional material facts to support the parent corporation's claims.

6 This, in our view, is not misnomer or misdescription. The appellants were not seeking to correct the name of a party; rather, they were seeking to add a party and to pursue that party's claims.

7 On these facts, the special circumstances doctrine, even if it survived the enactment of the Limitations Act, 2002, would not assist the appellants.

8 In any event, in our view, Joseph v. Paramount Canada's Wonderland 2008 ONCA 469 stands for the proposition that the special circumstances doctrine did not survive the enactment of the Limitations Act, 2002, as the appellants seek to argue. A challenge to that determination would require consideration by a five-person panel of this court.

[42] All the same factors as appear in Streamline, supra, are present in the motion before me: the adding of new affiliated corporate parties beyond the limitation period, the adding of material facts to support the affiliated corporations’ claims, adding the affiliated corporate plaintiffs because the losses alleged belong to parties not originally named in the original Statement of Claim. Further, the adding of plaintiffs in this case cannot be fairly described as arising as a result of misnomers or misdescriptions. Further, the amended, amended Statement of Claim raises the amount of damages claimed notwithstanding what must have been a considerable expenditure by the defendant to pave the parking lot in October of 2011.

[43] I find that the plaintiff seeks to add new, additional parties to the litigation in violation of the Limitations Act. To permit the plaintiff to add parties at this stage of the litigation, would result in prejudice to the defendant which could not be compensated for by costs or an adjournment.

[44] The plaintiff argued that the Real Property Limitations Act (RPLA) applied to actions alleging the breach of a commercial lease relating to real property. Section 4 of the RPLA outlines a ten year limitation period for an “action to recover any land or rent.” The plaintiff’s claim is for business losses for the failure of a franchisee due to an alleged breach of a commercial lease. No authority was presented to me that would support the plaintiff’s argument. I find that the plaintiff’s claim is not for the recovery of land or rent. Accordingly, I find that the RPLA does not apply to the litigation before me.

[45] Finally, the plaintiff made arguments regarding choses in action and the PPSA. Counsel for the defendant pointed out that there was no evidence of any notices given under the PPSA, no evidence of any assignments, and no evidence that the franchisee took any proceedings against Systems (or anyone else). Ultimately, no facts or arguments were presented to me which would materially distinguish this case from the similar situation that was presented in the Streamline case which is binding on me.

[46] Accordingly, I conclude that adding the corporate plaintiffs as proposed by the plaintiff, is an attempt to add parties in violation of the Limitations Act and the principles as outlined by the Ontario Court of Appeal in Streamline, supra. The plaintiff’s application, for leave to amend the Statement of Claim by adding Hospitality Capital Group Inc., Obsidian Group Inc. and C.C. Marketing Inc. as Plaintiffs, is denied and the plaintiff’s motion, for adding parties, is dismissed.

COSTS

[47] Given that motions, brought by the defendant and the plaintiff, are both dismissed, I make no order, at present as to costs. Should the parties wish to make submissions as to costs, I would be prepared to receive written submissions, no longer than five pages in length, served on each party, regarding same by no later than 30 days from the release of this endorsement.

Skarica J.

DATE: March 14, 2013