ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: 11-53152
BETWEEN:
HERB BREAU
Applicant
– and –
IMVESCOR RESTAURANT GROUP INC.
Respondent
K. Scott McLean, James M. Wishart, for the Applicant
Nicholas McHaffie, Mel Hogg, for the Respondent
HEARD: March 11th, 2013
REASONS FOR DECISION
McNAMARA J.
Overview
[1] This is an application by the Applicant Herb Breau for an Order that the Respondent Corporation is required to pay legal costs incurred or to be incurred, pursuant to an Indemnity Agreement between the parties.
Background facts
[2] The Respondent, Imvescor Restaurant Group Inc., is a publically held corporation and is a franchisor of restaurants and restaurant brands in several Canadian provinces. The Applicant is a business man residing in the City of Ottawa. Bernard Imbeault founded the Respondent. At all material times, Mr. Imbeault was a non-voting member of the Respondent’s Board of Directors and remains the largest shareholder of the Respondent through his company General Financial Corporation Ltd.
[3] It is alleged in the materials that in and around February of 2010 the Respondent’s management and board were caught up in serious conflict as to the direction and management of the Respondent. The materials also suggest that in and around this same time Mr. Imbeault and his spouse Monique Imbeault, (another shareholder of the Respondent), approached the Applicant for assistance in respect of their interests in the Respondent. Mr. Imbeault and the Applicant had a long time business relationship. The Imbeaults requested the Applicant run for a position on the Respondent’s Board of Directors in order to attempt to improve the management of the Respondent. The Applicant agreed and was elected to the Board at the Respondent’s annual general meeting on March 24th, 2010. The Applicant alleges that at the meeting he disclosed his long standing business relationship with the Imbeaults. At no time during the annual general meeting was it indicated by Mr. Imbeault that there was any indebtedness between himself and the Applicant.
[4] On April 9th, 2010 an Indemnity Agreement was entered into between the Applicant and the Respondent. The materials suggest that this agreement is a standard, non-negotiated indemnity drafted by the Respondent, and provided to all Directors. The agreement provides indemnity that is broad in scope. Article 1(a) of the agreement provides as follows:
- Indemnification
(a) To the full extent allowed by law, the Corporation and Corporation Affiliate jointly and severally agree to indemnify and save harmless the Indemnified Party, the Indemnified Party’s estate, executors, administrators, legal representatives and lawful heirs, from and against any and all costs, charges or expenses (including, but not limited to, an amount paid to settle any action or to satisfy any judgment, legal fees on a solicitor and client basis, other professional fees, out-of-pocket expenses for attending proceedings including discoveries, trials, hearings and meetings, and any amount for which he is liable by reason of any statutory provision whether civil, criminal or otherwise) (hereinafter referred to as “Costs, Charges and Expenses”), suffered or incurred by the Indemnified Party, the Indemnified Party’s estate, executors, administrators, legal representatives and lawful heirs, directly or indirectly, as a result of by reason of the Indemnified Party being or having been a director or officer of the Corporation or Corporation Affiliate or by reason of any action taken by the Indemnified Party in the Indemnified Party’s capacity as a director or officer of the Corporation or Corporation Affiliate, provided that such costs, charges or expenses were not suffered or incurred as a result of the Indemnified Party’s own fraud, dishonesty, willful neglect, gross negligence or wilful default.
[5] Article 2 of the agreement provides:
- Prepaid Expenses
All Costs, Charges and Expenses reasonably incurred by the Indemnified Party and covered hereunder shall, if requested by the Indemnified Party, be paid by the Corporation immediately, with the understanding and agreement being herein made that, in the event it is ultimately determined as provided hereunder that the Indemnified Party was not entitled to be so indemnified, or was not entitled to be fully so indemnified, the Indemnified Party shall indemnify and hold harmless the Corporation, and pay to the Corporation forthwith after such ultimate determination, such amount or the appropriate portion thereof, so paid. In the event of dispute, the Corporation or Indemnified Party, as the Corporation’s expense, shall make application to the Court to approve the indemnity.
[6] On July 13th, 2010 the Applicant was elected Chair of the Board of Directors.
[7] The materials allege that over the next number of months issues between the Imbeaults and the Respondent’s Board of Directors, (now including the Applicant), continued and increased. It is also alleged that issues between the Applicant and the Imbeaults arose due to the Applicant’s unwillingness to comply with their wishes. In consequence, it is alleged, the Imbeaults decided to force the Applicant to resign.
[8] It is further alleged that to that end the Imbeaults spread misinformation about certain indebtedness between Mr. Imbeault and the Applicant so as to discredit the Applicant and put him in a position of conflict. On December 19th, 2010 Imbeault wrote to the Applicant making demand on certain purported promissory notes. On December 29th, 2010 counsel to Mr. Imbeault wrote to the Board to demand the Applicant’s resignation because of, in part, a conflict arising from the alleged indebtedness.
[9] On January 10th, 2011 the Applicant in fact resigned as Chair of the Board, and after certain negotiations with the Respondent that culminated in the payment of $30,000.00, he resigned from the Board of Directors.
[10] A Statement of Claim was issued on May 27th, 2011 alleging non-payment of the promissory notes and non-payment of an alleged debt associated with a line of credit.
[11] The Statement of Defence filed by the Applicant in answer to the Imbeault‘s claims pleads, amongst other things, that the alleged notes were manufactured and contrived by the Imbeaults in bad faith and for the sole improper purpose of exerting pressure on the Applicant in his position as Chair of the Board, initially to persuade the Applicant to bend to the will of the Imbeault’s, and subsequently to coerce him to step down from his position. It is further pled that the alleged notes were not in fact records of debts and it was the intention of the parties that they would never be called upon for repayment. It is also pled that some or all of the claims are statute barred.
[12] The above action is being litigated, and it is the legal expenses associated with that process for which the Applicant seeks prepayment pursuant to the terms of the Indemnity Agreement.
Analysis
[13] The issues on this application can be succinctly stated as follows:
(a) Is the Respondent potentially liable under the Indemnity Agreement for the Applicant’s costs associated in defending the Imbeault action, and to prepayment of those expenses;
(b) If so, has that claim for indemnity or any part of it already been settled and released.
(A) Applicability of the Agreement
[14] The Applicant’s position is, put simply, the intent of the Agreement read as a whole is to provide a broad scope of indemnification, and that that is necessary in order to provide assurance to those prepared to become corporate directors that they will be recompensed for their well- intentioned actions on the corporation’s behalf. They argue further that the demand on the alleged notes and the follow-up statement of claim were further to the threats made during the course of the corporate infighting at the Respondent because the Applicant refused to do the bidding of Mr. Imbeault, the largest shareholder. They argue that the evidence will show the notes were used by Imbeault and others to discredit the Applicant and to compel him to resign.
[15] It is further their position that there is no allegation of bad faith against the Applicant, and in that circumstance, if the facts alleged in their pleading fall within the plain and ordinary meaning of the words used in the Indemnity Agreement, indemnity must be provided.
[16] The Respondent argues that the indemnity provided to the Applicant under the agreement cannot be so broadly read that it requires the responded to fund the Applicant’s defence of claims based on business transactions unrelated to the Respondent, and entered into years before he became a director. The ultimate issue they argue, in the Imbeault action, is whether the notes and line of credit are legitimate, and not the purpose or motivation for making demand on that debt.
[17] There seems to be little dispute that if expenses are being incurred by a party by reason of his or her being or having been a director or by reason of any action taken in their capacity as a director, indemnification is appropriate as long as there is no mala fides. There is no bad faith suggested on the part of the applicant, so the issue here is whether the expenses being incurred by the Applicant are as a result of or by reason of his having been a director of the Respondent. If that be established then it would appear under article 2 that expenses reasonably incurred shall, if requested, be paid by the corporation immediately, with the understanding that if it is ultimately determined that the indemnified party was not so entitled, the indemnified party shall repay the corporation after that ultimate determination.
[18] Counsel for the Applicant submits the appropriate approach for the court to determine this issue is to look at the plain and ordinary meaning of the words used by the parties in the Agreement, and then examine the claimant’s pleadings which should be presumed to be true for the purposes of the application. In other words an approach akin to a rule 21.01 motion. He submits if that is done here, the Applicant’s claim clearly falls within the indemnity and pre-payment provisions. The Respondent reiterates his position that looking at that plain and ordinary meaning, it cannot be stretched to cover a situation relating to a relationship from years prior that had nothing to do with the Respondent’s business. He also submits that because the Applicant is making allegations of bad faith, the standard that is required to be made out by him is not a rule 21.01 standard, but rather a “likely to succeed” standard, and he submits that what is before the court comes nowhere near that.
[19] In this case the Applicant’s pleadings allege, amongst other things, that the notes are not enforceable as markers of debt and that the Plaintiff’s sole purpose in delivering the demand was to exert improper influence on the Applicant in relation to matters within the purview of the Respondent’s board and when that did not succeed, to coerce him to step down as Chair. Putting the matter simplistically, it is their position that but for the fact the Applicant as Chair of the Board of Directors would not “play ball” with the Imbeaults, there would have been no action with relation to the alleged notes and line of credit.
[20] Looking at the agreement and giving a plain and ordinary meaning to the words used in it, it is my view that if the allegations are true, the costs, charges and expenses being incurred by the Applicant in defending the Imbeault claim are being incurred as a result or by reason of the Applicant being or having been a Director or Officer of the Corporation. In the context of the factual matrix set forth in the materials, it cannot be said that the allegations are without any merit or incapable of proof. I am not persuaded on the materials that there is no air of reality to the allegations that improper tactics were used, in a corporate setting, to achieve a particular goal, in this case the removal of the Chair of the Board of Directors with whom Mr. Imbeault, the largest shareholder of the Respondent, had significant differences. Whether or not that can be proven by the evidence cannot be determined on this application, but will require a full evidentiary hearing as part of the issues to be determined within the Imbeault claim.
[21] Having determined that indemnification is possible in the circumstances, it follows that prepayment of reasonably incurred expenses is appropriate. The matter was well put by L.A. Pattillo J. of this court in Cytrynbaum v. Look Communications Inc., 2012 ONSC 4578 (OSCJ) at paras. 81 and 82 the court states as follows:
III. Can the Issue of Entitlement to Interim Advancement be Determined in these Proceedings?
[81] Advancement, by its very nature, is separate and distinct from indemnification. It occurs well before the final determination of indemnification. Even though the Applicants have proceeded by way of Applications, given the motions seeking interim advancement and the request for interim advancement in the Applications, the Proceedings are in essence interlocutory as opposed to final.
[82] A final determination of whether a director or officer is entitled to indemnification may or may not require a trial depending on the nature of the evidence put forward by the parties. In this case, entitlement to indemnification is an issue in the Action and accordingly will be dealt with at the trial.
[22] I do not accept the Respondent’s submission that because the Applicant makes allegation of bad faith against Mr. Imbeault he is required to meet a likely to succeed standard in order to obtain the relief he seeks. In support of that submission, counsel relied heavily on the same Cytrynbaum case and specifically para. 87 of that decision.
[87] Look submits that the court can deny advancement if it is satisfied, based on the evidence before it, that it cannot conclude the Applicants have acted in good faith with a view to Look’s best interests. Look’s test, in my view, ignores the presumption of good faith that applies to the Applicant directors and officers. Having regard to both the interim nature of the proceedings and the presumption in favour of the Applicant directors and officers set out in Blair, it is my view that, in order for the court to deny advancement in the face of the By-Law and the Indemnity Agreement permitting the same, Look must establish a strong prima facie case that the Applicants acted mala fides towards the corporation. That is, it must establish on the evidence that it is likely to succeed at trial.
[23] In the case before me there is no such presumption of good faith in favour of Mr. Imbeault as there was in favour of the Applicant Directors in the Cytrynbaum case. In my view in that case it was because of the allegations of mala fides in the face of the presumption in favour of the Applicant Directors, that the court determined the corporation had to establish on the evidence that their position was likely to succeed at trial. I accept the submission of counsel for the Applicant that imposing such a standard in the reverse situation would seem contrary to the purpose of the agreement and the wording of article 2. I also accept the argument that it would be inconsistent with the reimbursement mechanism in article 2 which expressly contemplates repayment of advances following the ultimate determination of entitlement based on an evidentiary hearing.
(B) Has the Applicant settled his claim for indemnity?
[24] As indicated earlier in these Reasons the Applicant resigned from the Board in January 2011. There were, of course, negotiations over his resignation. During the course of the negotiations there were a series of e-mails exchanged between the Applicant and the representative of the Respondent. It was the Applicant’s position in an e-mail dated January 24th, 2011 that, amongst other things, he claimed the right to be indemnified in defending against the Imbeault claim if it was pursued as against him. In responding that same day the Respondent’s representative, Mr. Malas, amongst other things indicated that the Respondent would not indemnify him in connection with that dispute. In the end, relevant to this issue, it was agreed that the Respondent acknowledged and agreed that nothing in the resignation agreement “shall be deemed or interpreted to modify or otherwise affect your indemnification rights against IRG (and IRG’s indemnification obligations) under applicable law, IRG’s bylaws or under any indemnification agreement or applicable insurance policy which arise from your having acted as a Director of IRG”. On January 25th, 2011 an agreement was struck and amongst its terms was that there would be no claim for legal fees “to date”.
[25] It is the submission of the Respondent that somehow that exchange dealt not only with the resolution of legal fees to the date of settlement, but beyond. I strongly disagree. In my view what the parties agreed to was to disagree on whether or not indemnity was available vis-à-vis the Imbeault dispute, leaving that to be determined “under applicable law, IRG’s bylaws or under any indemnification agreement or applicable insurance policy which arise from your having acted as a Director of IRG.”
[26] In the result there will be an order that the Respondent prepay all costs, charges and expenses reasonably incurred by the Applicant and covered under the Indemnity Agreement with the understanding that, in the event it is ultimately determined that the Applicant was not entitled to be so indemnified, the Applicant shall pay to the Respondent, after ultimate determination, such amount or the appropriate portion thereof so paid.
[27] This order applies to all expenses incurred subsequent to the date of resignation.
[28] As to the costs of this application they are to be paid by the Respondent and in view of the fact the Applicant was successful on this application, that’s in any event of the cause.
McNamara J
Released: ** April 9th, 2013**
COURT FILE NO.: 11-53152
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
HERB BREAU
Applicant
– and –
IMVESCOR RESTAURANT GROUP INC.
Respondent
REASONS FOR DECISION
McNamara J.
Released: April 9th, 2013