COURT FILE NO.: 12-55048

DATE: 2012/04/08

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Tancho-Defyrus (GP) Inc.

Plaintiff/Responding Party

– and –

David Masotti and DFM Consulting Inc.

Defendants/Moving Parties

Counsel: K. Scott McLean, for the Plaintiff/Responding Party Matthew P. Gottlieb/James Renihan, for the Defendants/Moving Parties

HEARD: January 10, 2013

REASONS FOR DECISION

R. SMITH J.

Overview

[1] The defendants, David Masotti and DFM Consulting Inc. (“DFM”) (collectively referred to as “Masotti”) have brought a motion under Rule 21 to strike the plaintiff’s statement of claim in its entirety, or alternatively, striking certain components without leave to amend, on the grounds that it fails to disclose a reasonable cause of action.

[2] Tancho‑Defyrus GP Inc. (“Tancho GP”) is the general partner of a limited partnership called Tancho‑Capital (2) Limited Partnership (“Tancho‑Capital”). Tancho‑Capital holds approximately 60 per cent of the issued and outstanding common shares in Defyrus Inc. (“Defyrus”). Defyrus was organized to develop a vaccine for the treatment of viral infections for a bio‑defence market including United Nation States in the developing countries through organizations such as the World Health Organization. It was referred to as the “Defyrus Project”.

[3] Masotti was a director and the executive chairperson of Defyrus. The timeline for the Defyrus Project was anticipated to be three years. The business plan was to develop the product to be funded mostly by government, to conduct efficacy trials, and following safety studies Defyrus would be sold. Masotti is also a director of the plaintiff, Tancho GP.

[4] The plaintiff claims that Masotti was contractually obligated to resign as executive chairman and cease providing consulting services after six months. The plaintiff further alleges that Masotti knowingly and dishonestly manipulated events to position himself to remain as the permanent chairperson of Defyrus and to continue to draw monthly consulting fees beyond the agreed six month period.

[5] The plaintiff submits that Masotti owed it a fiduciary duty of care as one of its directors and breached this duty. Masotti’s alleged breach of his contract with Defyrus is an element of the pleaded breach of fiduciary duty owed to the plaintiff. The plaintiff further submits that it is not “plain and obvious” that it would be unsuccessful at trial in obtaining (a) a declaration that Masotti breached the terms of its contract with Defyrus Inc., (b) a finding that Masotti breached a fiduciary duty owed to the plaintiff, (c) a remedy that Masotti disgorge remuneration received beyond the six month period, (d) an order directing the sale of his shares in Defyrus and (e) an order that he be removed as a director of the plaintiff company.

[6] The defendants submit that Tancho GP does not have standing:

(a) to assert a breach of contract claim as it was not a party to any contract with either defendant;

(b) to assert a breach of fiduciary duty claim as the duties in question were not owed to the plaintiff;

(c) to claim disgorgement or damages;

(d) to obtain an order divesting Masotti of his shares in the plaintiff company; and

(e) to remove Masotti as a director of the plaintiff company.

[7] The plaintiff further argues that it is permitted to rely on the affidavit of Peter Blaney (“Blaney”) because Masotti brought his motion under Rule 21.01(3)(b), where evidence is admissible. Masotti submits that he made a typographical error in the notice of motion and intended to rely on Rule 21.01(1)(b) where no evidence is admissible.

[8] The plaintiff has filed a cross‑motion seeking to dismiss the defendants’ motion as an abuse of process because the defendants filed a defence and the plaintiff filed a reply. The plaintiff submits that the defendants require leave to proceed with their Rule 21 motion attacking the irregularity of its statement of claim. The plaintiff submits that leave should be denied because the defendants have taken further steps in the proceeding by filing their defence after having knowledge of the alleged irregularity.

[9] The defendants have filed an amended notice of motion seeking leave to bring this motion under Rule 2.02 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, if necessary.

[10] Schedule “A” attached is a schematic diagram of the parties involved.

Issues

[11] The following issues must be decided:

(1) Do the defendants require leave under Rule 2.02 to bring their motion to strike out the plaintiff’s claim? If so, should leave be granted?

(2) Is the plaintiff entitled to rely on affidavit evidence filed on the motion under Rule 21.01(3)(b)?

(3) Should the plaintiff’s statement of claim be struck in its entirety or in part as disclosing no reasonable cause of action?

Issue #1 Do the defendants require leave under Rule 2.02 to bring their motion to strike out the plaintiff’s claim? If so, should leave be granted?

[12] Rule 2.02 reads as follows:

ATTACKING IRREGULARITY

2.02 A motion to attack a proceeding or a step, document or order in a proceeding for irregularity shall not be made, except with leave of the court,

(a) after the expiry of a reasonable time after the moving party knows or ought reasonably to have known of the irregularity; or

(b) if the moving party has taken any further step in the proceeding after obtaining knowledge of the irregularity.

[13] Rule 2.01(1) defines irregularity and states that “[a] failure to comply with these rules is an irregularity and does not render a proceeding or a step, document or order in a proceeding a nullity,…”

[14] In Chimienti v. Windsor (City), 2011 ONCA 16, 105 O.R. (3d) 72, at para. 31, MacPherson J.A. stated as follows:

First, although the unqualified word "irregularity" in rule 2.02 has the potential to apply to statutes other than the Rules of Civil Procedure, both the wording of the rest of Rule 2 and its title suggest otherwise. Rule 2.01(1) provides: “A failure to comply with these rules is an irregularity and does not render a proceeding or a step, document or order in a proceeding a nullity ...” (emphasis added). The title of Rule 2 is “Non-Compliance with the Rules”. This wording and title suggest an internal ambit to the operation of Rule 2.

[15] In Chimienti, at para. 32, he quotes from the authors of Holmested and Watson Ontario Civil Procedure (Garry D. Watson, Q.C. and Lynne Jeffrey, looseleaf (Toronto: Thomson Reuters, 1993), at 2-4 and 2-5 who state as follows:

The provisions of Rule 2 deal with the subject of non-compliance with the Rules and fall into two groups ... Rule 2.02 is concerned with non-compliance with the Rules, in the sense that it requires an attack on a proceeding for irregularity to be made promptly and before a further step is taken by the moving party.

[16] In Lynch v. Westario Power Inc., 2009 CarswellOnt 4057, Daley J. granted leave to the defendant to bring a motion under Rule 21 seeking a dismissal of a plaintiff’s action on the grounds for failing to disclose a reasonable cause of action. At para. 11, the Court granted the defendant leave to proceed with its motion under Rule 21 and stated:

A fresh or further step as contemplated by Rule 2.02 must amount to a waiver of an irregularity so as to disentitle a party from attacking a pleading. It must be determined whether the moving party has impliedly or expressly forgiven the defect or irregularity by taking a further step in the proceeding: Gardener v. Toronto Police Services Board, [2006] O.J. No. 3320 (S.C.J.).

[17] Having reviewed the statement of defence filed by Masotti and DFM, I conclude that there has not been any admission or waiver which would preclude the defendant from bringing a motion under Rule 21. In his statement of defence, Masotti denied that he breached any duties to the plaintiff or acted improperly. At para. 41 of his statement of defence, Masotti stated that the allegations of wrongdoing made against him have no foundation. Masotti’s defence raised the same objections as in this motion namely he denies that there was any breach of contract, and he claims that Tancho GP lacks standing to assert that Masotti breached his contract with Defyrus because it was not a party to the term sheet or the Defyrus’ unanimous shareholder agreement. Masotti denied that he owed or breached any fiduciary duties to the plaintiff, denied any wrongful appropriation of monies, and specifically denied the relief claimed to divest him of his shares in Defyrus and his removal as a director of Tancho GP.

Disposition of Issue #1

[18] Masotti has delivered a statement of defence but has not waived or impliedly or expressly forgiven any defect or irregularity in the plaintiff’s claim. Therefore, I conclude that leave is not required in these circumstances. However, if I am mistaken in this regard, I would grant leave to allow Masotti to bring the motion because his statement of defence has specifically denied and raised the same issues raised in this motion under Rule 21.

Issue #2 Is the plaintiff entitled to rely on affidavit evidence filed on the motion under Rule 21.01(1)(b)?

[19] The defendant initially brought its motion under Rule 21.01(3)(b). Shortly before the motion was heard, Masotti served an amended notice of motion relying on Rule 21.01(1)(b). The plaintiff was entitled to file the affidavit of Mr. Blaney faced with a motion brought under Rule 21.01(3)(b), however given the amendment I will consider the defendant’s motion under Rule 21.01(1)(b). Under this Rule, evidence is not permitted without leave.

Disposition of Issue #2

[20] The plaintiff was permitted to file the affidavit of Peter Blaney however, this evidence will not be considered on the motion under Rule 21.01(1)(b) as evidence is not permitted under this subsection.

Issue #3 Should the plaintiff’s statement of claim be struck in its entirety or partially as disclosing no reasonable cause of action?

[21] The test to be applied on a motion under Rule 21.01(1)(b) was set out in Hunt v. Carey Canada Inc., 1990 CanLII 90 (SCC), [1990] 2 S.C.R. 959 at pp. 971‑980, and was summarized as follows in J.W. Morden and P. Perell, The Law of Civil Procedure in Ontario, 2010, 1st Ed. (at pp. 444-45). These are the well settled legal principles that provide the framework of analysis for the determination of this motion.

(1) According to Rule 20.01(1)(b), “no evidence is admissible” on a motion to strike out a claim for disclosing no reasonable cause of action.

(2) The law is clear that motions to strike can only succeed if the defendants establish that “it is plain and obvious” that the claim discloses no cause of action. In other words, the claim should only be struck if it is “beyond doubt” that the claim will not succeed at trial.

(3) If the claim has some chance of success, it should be permitted to proceed.

(4) For the purposes of determining such motions, the court must accept the facts as alleged by the plaintiff in the claim as proven unless they are patently ridiculous or incapable of proof or if the court must read the statement of claim generously, recognizing that there must be allowances made for drafting deficiencies.

(5) The potential length and complexity of the issues, the legal novelty of the alleged cause of action, and/or the potential for the defendants to mount a strong and persuasive defence are not factors that should prevent the plaintiff from proceeding.

[22] The defendants allege that the business structure was set up in circumstances, where neither Masotti or DFM, his consulting company, were parties to a contract with the plaintiff. Therefore Masotti argues he could not have breached a contract with the plaintiff. The defendant’s further submits that he did not owe a fiduciary duty of care to the plaintiff as a result of his position as a director and executive chairperson of Defyrus.

[23] The plaintiff submits that Masotti has misconstrued its claim as one of breach of contract. The plaintiff submits that its claim is one of breach of fiduciary duty, one element of which is the alleged breach of the terms of the contract between Masotti and Defyrus. The plaintiff submits that it is not plain and obvious that its claim of a breach of fiduciary duty by Masotti of the duty of care owed to it by Masotti as one of its directors. The plaintiff further argues that it is not plain and obvious the remedies sought of disgorgement of remuneration received beyond six months, requiring Masotti to divest of his shares in Tancho GP, and removing Masotti from the board of directors of Tancho GP, could not be granted if the claim is made out. In the event that all or some portions of the statement of claim is struck, the plaintiff seeks leave to amend and submits that no prejudice has been alleged or shown by Masotti.

The plaintiff’s claim for a declaration of breach of contract

[24] Tancho GP (the plaintiff) is the general partner of the limited partnership called Tancho Capital. The President of Tancho GP is Peter Blaney. Masotti, Blaney, James Eaton and others orally agreed that Masotti would served as both as chair and executive chairman of the Defyrus board of directors for an initial six month period (the “oral agreement”). The alleged oral agreement was memorialized in a term sheet, however the term sheet dated June 22, 2008 was between Masotti, DFM (his consulting company) and Tancho Advisors Group Inc. (“TAG”), a company of which Masotti was a director. The term sheet summarized the main terms of a consulting agreement and directorship to be entered to between DFM, Masotti and Defiant Biotechnologies Inc. Both parties assert that the Defiant Biotechnologies Inc. is the same company as Defyrus as it was not yet incorporated at that time.

[25] Masotti was an employee, director and an executive chairman of Defyrus. The limited partnership, Tancho Capital, owns 60 per cent of the common and all of the preferred shares in Defyrus. Masotti is also a director of Tancho GP.

[26] The defendants allege that there is a fundamental and fatal defect in the plaintiff’s claim because it assumes that an alleged wrong done by Masotti to Defyrus is an actionable wrong by the plaintiff, who is the general partner of limited partnership (i.e. Tancho Capital) which is a 60 per cent shareholder in Defyrus.

[27] Masotti is alleged to have tricked Defyrus or TAG, the other party to the term sheet agreement into keeping him on as executive chairman and allowing him to earn remuneration beyond the initial six month term. The term sheet represents at least part of the agreement between Masotti, the company that became Defyrus, and Tancho Advisors Group, which was signed by Blaney on behalf of TAG. Blaney is also the president of Tancho Capital.

[28] In L.R. Hepburn, Limited Partnerships, Volume 1 (Toronto: Carswell, 2012), c. 1, pp. 1‑1, 1‑2, the author stated as follows with regards to general partnerships and limited partnerships:

In a general partnership, any partner may participate in the management of the business, including binding the others with respect to the business of the partnership. Perhaps more important, every partner in a general partnership is fully liable for the obligations of the partnership.

A limited partnership, meanwhile, consists of one or more general partners and one or more limited partners. Only the general partners manage the business. Provided there is compliance with the statutory requirements of the relevant jurisdiction with respect to formation, registration and other matters discussed in this book, the limited partner is only liable to the extent of his capital contribution or, in some jurisdictions, capital agreed to be contributed. (Emphasis added.)

[29] In Kucor Construction & Development v. Canada Life Assurance Co. (1998), 1998 CanLII 4236 (ON CA), 41 O.R. (3d) 577, 114 O.A.C. 201 (Ont. C.A.), at paras. 31‑33, the Ontario Court of Appeal stated as follows:

The second distinction is that in a general partnership any partner can conduct the usual business of the partnership, whereas in a limited partnership the limited partners are passive and the general partner manages and controls the business of the partnership. (My emphasis added.)

It follows, therefore, from the statutory characteristics of a limited partnership that if its management and control are the exclusive responsibility of the general partner, who derives its powers from the Limited Partnerships Act, it is through the general partner that a limited partnership acquires and conveys title to real property.

[30] In Lehndorff General Partner Ltd., Re (1993), 17 C.B.R. (3d) 24, (Ont. Gen. Div. – Commercial List), Farley J. stated as follows:

A general partner has all the rights and powers and is subject to all the restrictions and liabilities of a partner in a partnership. … The general partner has sole control over the property and business of the limited partnership. …

[31] I conclude from the statements in the text and cases cited above that the general partner of a limited partnership, in this case, the plaintiff Tancho GP has sole responsibility for the management of the limited partnership business and has all of the rights, powers, and control over the property and the assets and of the limited partnership, in this case its shares in Defyrus. Therefore Tancho GP, as the general partner of the limited partnership holding the shares in Defyrus could exercise all of the rights of the limited partnership, with regards to its shareholding in Defyrus. In addition, any rights that the limited partnership, Tancho Capital, had in this business arrangement could be exercised by Tancho GP as the general partner. This would include the right to commence a legal action on behalf of the limited partnership, Tancho Capital.

[32] The plaintiff has pleaded, in his statement of claim, that there was an oral agreement entered into between Blaney, Masotti and others which was memorialized, in part, by the Masotti term sheet. The term sheet was made between Masotti and TAG and contemplated certain arrangements and understandings which would go into place upon the incorporation of Defiant which ultimately became Defyrus. The term sheet was signed by Blaney on behalf of TAG and by Masotti.

[33] The defendants argue that Tancho GP has no standing to assert a breach of contract or to seek a declaration of a breach of contract as reflected in the term sheet because Tancho GP was not a party to the agreement and its rights are limited to those of a 60 per cent shareholder of Defyrus. Tancho GP pleads that the term sheet resulted in a contract which was for the benefit of both Defyrus and the plaintiff as general partner of the limited partnership, because it allowed the Defyrus Project to move forward.

[34] At the same time as it entered into the agreement with Masotti, TAG entered into an agreement with Turner setting out the anticipated terms of employment between Turner and Defyrus upon its incorporation. Intellectual property for the project was sourced by Dr. Jeffrey Turner, who was Defyrus’ president and chief executive officer.

[35] The intention of the parties, as expressed in both term sheets, are pleaded by the plaintiff to be that upon incorporation of Defyrus, Masotti would sit on its board of directors and would serve as chair of the Defyrus board and as executive chairman for a period of six months. Following the six month period, Masotti would resign as executive chairman and, if so determined by the Defyrus board, act as chair of the Defyrus board until a new chair could be engaged.

[36] The Masotti term sheet provided that he would provide consulting services through the defendant DFM Consulting Inc. for a period of six months, on an as needed basis.

[37] The Masotti term sheet stated the following with regards to a term limit of the consulting contract:

At the commencement of the sixth month of the consulting arrangement, the parties will meet to discuss any need to extend, amend or terminate the consulting arrangement as may be required by Defiant [Defyrus] at that time.

[38] The general rule is that a contract cannot confer rights or obligations on a third party, unless it is within one of the recognized exceptions to the privity of contract requirement. The three exceptions are as follows:

(a) where one party was contracting as agent for the third party;

(b) where the agreement was intended to create a trust which the third party was a beneficiary; and

(c) the exception outlined in London Drugs Ltd v. Kuehne & Nagel International Ltd., 1992 CanLII 41 (SCC), [1992] 3 S.C.R. 299 at para. 200.

[39] The plaintiff has not pleaded that it relies on any of the three exceptions to the privity requirement or that the parties to the contract intended to extend the benefit in question to the third party seeking to rely on the contractual provisions.

[40] The plaintiff submits that it has not pleaded its case as one of breach of contract but rather argues that the breach of contract alleged is an element and is evidence of a breach of the fiduciary duty Masotti owed to the plaintiff as a director of Tancho GP (the plaintiff).

Disposition of the breach of contract issue

[41] Paragraph 1(a) of the statement of claim seeking a declaration that Masotti is in breach of contract is struck as the alleged breach of contract may be pleaded to support the claim of a breach of fiduciary duty alleged to be owed to the plaintiff. The plaintiff is given leave to amend its claim if required.

The plaintiff’s claim that Masotti breached a fiduciary duty to the plaintiff

[42] At para. 20, the plaintiff states that the agreement between Masotti and TAG referred to previously, including the Masotti term sheet, resulted in a contract for the benefit of Defyrus and the plaintiff as the general partner of a limited partnership, thereby enabling the Defyrus Project. The plaintiff submits that this is a pleading of fact relevant to the various agreements reached by the various parties which is deemed to be proven for purposes of this motion.

[43] At the same time as the Masotti term sheet was entered into, TAG and Turner also entered into a term sheet setting out the anticipated terms of employment between Turner and Defyrus upon its incorporation. Masotti was to sit on the board of directors of Defyrus, and act as chair of the board and as executive chairman for six months. The plaintiff claims that the arrangement was to be re-evaluated by the Defyrus board and that Masotti’s position was intended to be temporary.

[44] The plaintiff states that Turner attempted to establish new terms of a potential ongoing relationship between Masotti and Defyrus. The plaintiff pleads that Masotti conducted himself from the outset, as well as beyond the initial six month term as Turner’s superior and the de facto representative of Tancho GP and Tancho Capital on the Defyrus board. This included misrepresenting to Turner that Tancho GP intended that Defyrus continue to pay Masotti the $150,000 per year without a specific agreement or specifying duties or even setting out minimal time commitments. The plaintiff also states that Masotti misrepresented that Tancho GP intended that Masotti receive cash bonuses for milestones achieved by Defyrus when he knew that the term sheet did not provide for this.

[45] The plaintiff pleads that Turner and Defyrus were misled to understand that Masotti had a contract with Tancho GP, i.e. the plaintiff that defined his ongoing role and responsibilities, the deliverables and time commitments for his work at Defyrus, not knowing that such an arrangement never existed. The plaintiff further alleges that in perpetrating this understanding, Masotti acted to mislead both parties.

[46] The plaintiff claims that between 2008 and 2011, Masotti or DFM was paid $489,306 in the form of remuneration from Defyrus, which includes the initial $75,000 for a six month period, which is admitted to be owing by the plaintiff.

[47] The plaintiff further pleads that Masotti intentionally and dishonestly disrupted a potential opportunity for the sale of Defyrus with Kleiner Perkins, a venture capital firm, without informing Tancho GP of this opportunity. It further claims that Masotti then caused Defyrus to commit to the hiring of an investment bank, Piper Jaffray, to seek out other available purchasers for the shares of Defyrus.

[48] The plaintiff also alleges that Masotti worked against the agreed upon business model and that his interactions with Turner and the Defyrus management team was orchestrated to force Defyrus down a more standard pharmaceutical drug development model. The route followed by Masotti was more ambitious, more time consuming, and more cash hungry than the business model designed for the Defyrus Project and marketed to investors of Tancho Capital. Masotti’s conduct promoted discord with Turner and the Defyrus management team.

[49] The plaintiff asserts that a breach of fiduciary duty is the main basis of its claim against Masotti and that the alleged breach of contract between Masotti and Defyrus is but one element of the breach of fiduciary duty claim. Masotti submits that based on the pleadings he did not owe a duty of care or a fiduciary duty to Tancho GP or Tancho Capital, (the 60 per cent shareholder of Defyrus). Masotti further submits that the relationship between the plaintiff as a shareholder of Defyrus, did not have sufficient proximity to cause Masotti to owe a duty of care to the plaintiff or to Tancho Capital as a shareholder of Defyrus.

[50] Masotti further submits that the plaintiff does not allege a financial interest in the success of Defyrus. Masotti was a director of Defyrus but was also, along with James Eaton, a director of Tancho GP, the plaintiff. Masotti acknowledges that he owed a duty of care to the plaintiff in his role as director of the plaintiff, but submits that the duty of care owed to the plaintiff does not extend to Defyrus.

[51] The plaintiff submits that Masotti was required to work in the best interest of the limited partnership and not against its interests in his role as a director of Tancho GP, the general partner of the limited partnership (which is the majority shareholder of Defyrus). The plaintiff alleges that Masotti’s actions and misrepresentations breached his duty of care to the plaintiff.

[52] In Suzanne Street Properties Ltd. v. Manhold Development Corp. (1998), 1998 CanLII 1886 (ON CA), 106 O.A.C. 311, 37 O.R. (3d) 797, the Ontario Court of Appeal held that a general partner, in this case, Tancho GP had the capacity to sue in its own name for the costs of repairing deficiencies in the construction of an apartment building built for the limited partnership.

[53] I agree with the plaintiff’s submission that Masotti’s admission that it owed a duty of care to the plaintiff in his role as director of the plaintiff, who is also the general partner of the limited partnership, is an admission which makes it far from plain and obvious that the plaintiff’s action against Masotti for breach of fiduciary duty will fail.

[54] Masotti relies on the Supreme Court of Canada of BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 S.C.R. 560 at para. 66 of a company for the principle that directors do not owe a duty of care to the company’s shareholders. Masotti argues that his fiduciary duty as a director of Defyrus was owed to Defyrus and not to its investors, namely the shareholders of Defyrus.

[55] At para. 66 of BCE Inc., ibid, the Supreme Court stated as follows:

However, the directors owe a fiduciary duty to the corporation, and only to the corporation. People sometimes speak in terms of directors owing a duty to both the corporation and to stakeholders. Usually this is harmless, since the reasonable expectations of the stakeholder in a particular outcome often coincide with what is in the best interests of the corporation. However, cases (such as these appeals) may arise where these interests do not coincide. In such cases, it is important to be clear that the directors owe their duty to the corporation, not to stakeholders, and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation. (Emphasis added.)

[56] The plaintiff submits that its claim against Masotti is based on an alleged breach of his duties as a director which are owed to the plaintiff, Tancho GP. I agree that this link is clear and unchallenged and following the BCE Inc. decision, Masotti owes a fiduciary duty to the plaintiff as a director.

[57] The plaintiff highlights the last part of the above quote from the BCE Inc., ibid, decision which states that the reasonable expectation of stakeholders is simply that directors act in the best interest of the corporation. In this case, the reasonable expectation of Tancho GP was that Masotti would act in its best interest as well as in Defyrus’ best interest as Masotti was director of both companies.

[58] I find that it is not plain and obvious that the plaintiff would be unsuccessful in its claim for damages of breach of fiduciary duty against Masotti, in his role as a director of Tancho GP, where Masotti was a director of both Defyrus and Tancho GP, and in a context where the parties agreed to enter into a business arrangement together to develop a viral vaccine called the Defyrus Project. I further find that it is not plain and obvious that the plaintiff’s claim for breach of fiduciary duty would be unsuccessful as the plaintiff has pleaded that Masotti acted in bad faith and against the interest of Tancho GP and Defyrus. The defendants’ motion to strike the plaintiff’s claim for damages for breach of fiduciary duty is dismissed.

Remedies of disgorgement or damages?

[59] The plaintiff seeks an order requiring Masotti to disgorge the sum of $489,306 less the $75,000 which it acknowledges was owed which he received as remuneration from Defyrus. In Huntonville Acres Limited (c.o.b. Forest Homes) v. Archer (2009), 89 C.L.R. (3d) 221 (Ont. S.C.), aff’d 96 C.L.R. (3d) 172 (Ont. C.A.) at para. 18, the Court of Appeal stated that disgorgement is a possible remedy “…where compensation cannot be measured by reference to identifiable financial loss…”. At para. 32, the Court of Appeal agreed with and quoted from Community Credit Union Ltd. v. Ast, [2007] A.J. No. 1255: “In anything less than exceptional circumstances, the Court should refrain from awarding disgorgement of profits as a remedy.”

[60] In Strother v. 3464920 Canada Inc., 2007 SCC 24, 2007 SCC 224, [2007] 2 S.C.R. 177, at paras. 75‑79, the Supreme Court of Canada held that disgorgement is a possible remedy for breach of fiduciary duty. Such awards serve to restore the beneficiary profits misappropriated by the fiduciary and/or to prevent a fiduciary from profiting by acting in a conflict of interest.

[61] Following the above cases, I find that is not plain and obvious that the plaintiff’s claim for breach of fiduciary duty will fail as the remedy of disgorgement is possible in breach of fiduciary cases. As a result, I find that it is not plain and obvious that a disgorgement remedy could not be awarded. The defendants’ motion to strike the plaintiff’s claim for a disgorgement remedy is dismissed.

General Damages

[62] Masotti seeks to strike out the amount of general damages claimed as a result of Masotti’s alleged wrongdoing.

[63] The issue of damages suffered by the plaintiff as the general partner of the limited partnership as a result of the wrongful actions of Masotti for alleged breaches of fiduciary duty are not a matter that can be determined without hearing evidence at trial. The defendants’ motion to strike out the plaintiff’s claim for the remedy of general damages is dismissed as it is not plain and obvious that such a remedy would not be granted after a trial.

Divesting Masotti of his shares in Tancho GP

[64] The plaintiff seeks an order divesting Masotti of his shares in Tancho GP. Masotti seeks to strike the plaintiff’s claim for an order divesting him of his shares in the plaintiff company for an amount of 0.0001 dollar per share. Masotti submits that there is no basis in law for such an order and that the only way to obtain such an order would be under an oppression remedy available under Rule 248(3)(f) of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”). Under this section, if a corporation was operated in an oppressive manner, the court may make an order directing a corporation or any person to purchase securities of a security holder.

[65] The plaintiff has not pleaded the provisions of the OBCA or alleged oppressive conduct by the defendant. The plaintiff refers to the decision of Gillese J. in Stapleton v. Fleming Feed Mill Ltd. (2001), 2001 CanLII 28389 (ON SC), 18 B.L.R. (3d) 280 (Ont. S.C.). which involved an application against a corporation and directors alleging oppressive conduct. The applicant sought an order requiring the respondent to purchase all of his shares. This case is not authority for the court’s power to order the sale of shares without an application under the OBCA.

[66] At para. 99 of Stapleton, supra, Gillese J. stated as follows:

The court ought not to intervene in the affairs of a corporation lightly and when it does, surgery is to be by way of a scalpel, not a battle-axe. It should make orders to address the specific complaints before resorting to more drastic measures.

[67] Masotti has a strong argument that the plaintiff cannot obtain remedies under s. 248(3) of the OBCA when they have not been pleaded. Secondly, the Ontario Court of Appeal in Naneff v. Con-Crete Holdings Limited et al. (1995), 1995 CanLII 959 (ON CA), 23 O.R. (3d) 481 (C.A.) at p.488, stated that the above sought remedies are only employed for the specific purpose of rectifying oppression and they are not to be used to punish misconduct.

[68] Masotti further argues that ownership of shares in a corporation is a property right. The rights of shareholders in privately held corporations are usually governed by the terms of shareholders’ agreements, which have not been pleaded or referred to in this statement of claim. The plaintiff has not pleaded or sought an oppression remedy under the provisions of the OBCA which gives the court a broad discretion with regard to remedies in the event of a finding of oppressive conduct against a minority shareholder.

Disposition of divesting Masotti of his shares

[69] I find that it is plain and obvious and that the plaintiff’s claim that Masotti be divested of his shares in Tancho GP for 0.0001 dollar per share based on a breach of fiduciary duty to the plaintiff corporation, cannot succeed in this case, because it has not pleaded oppressive conduct, is not relying on the provisions of the OBCA, and is not relying on evidence of a contractual arrangement set out in a shareholders’ agreement. In addition, the plaintiff has not provided any authority or basis for the court to order a shareholder to sell his shares in a corporation for a nominal value, even if his conduct amounts to a breach of fiduciary duty to the corporation. This claim is struck with leave to amend.

Removal of Masotti from the board of directors of Tancho GP

[70] Masotti submits that the court does not have authority to order that he be removed as a member of the plaintiff’s board of directors. The removal of a director of an Ontario company is governed by s. 122 of the OBCA which states that the decision to remove a director may be made by the shareholders through an ordinary resolution at a meeting called, absent other provisions in a unanimous shareholders’ agreement.

[71] In Stelco Inc. (Re) (2005), 2005 CanLII 8671 (ON CA), 75 O.R. (3d) 5, 196 O.A.C. 142 (C.A.), an order was made by the application judge removing two directors from the Stelco board of directors. This order was overturned on appeal and at para. 46, the Court of Appeal stated as follows:

I start with the proposition that at common law directors could not be removed from office during the term for which they were elected or appointed: London Finance Corporation Limited v. Banking Service Corporation Limited (1923), 1922 CanLII 530 (ON SC), 23 O.W.N. 138 (Ont. H.C.); Stephenson v. Vokes (1896), 27 O.R. 691 (Ont. H.C.). The authority to remove must therefore be found in statute law.

[72] Further at p. 51, the court stated:

Court removal of directors is an exceptional remedy, and one that is rarely exercised in corporate law. This reluctance is rooted in the historical unwillingness of courts to interfere with the internal management of corporate affairs and in the court’s well-established deference to decisions made by directors and officers in the exercise of their business judgment when managing the business and affairs of the corporation. These factors also bolster the view that where the CCAA [Companies’ Creditors Arrangement Act] is silent on the issue, the court should not read into the s. 11 discretion an extraordinary power - which the courts are disinclined to exercise in any event - except to the extent that that power may be introduced through the application of other legislation, and on the same principles that apply to the application of the provisions of the other legislation.

[73] In Stelco Inc., supra, the Court of Appeal decided against reading in a discretionary power to remove directors under the CCAA. The plaintiff has not referred me to any statute or case law under which the court is given authority to order that Masotti be removed as a director of the plaintiff company and I decline to read in such a right. The directors will be elected at the next general meeting of shareholders or this issue may be decided by ordinary resolution at a meeting of shareholders. I therefore grant the motion to strike the request for an order removing Masotti as a director of the plaintiff corporation with leave to the plaintiff to amend his pleading.

Costs

[74] The plaintiff shall have fifteen (15) days to make brief written submissions on costs. The defendant Masotti shall have fifteen (15) days to make brief responding submissions. The plaintiff shall have seven (7) days to reply.

Mr. Justice Robert J. Smith

Released: April 8, 2013

COURT FILE NO.: 12-55048

DATE: 2012/04/08

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Tancho-Defyrus (GP) Inc.

Plaintiff/Responding Party

– and –

David Masotti and DFM Consulting Inc.

Defendants/Moving Parties

REASONS FOR DECISION

R. Smith J.

Released: April 8, 2013

Schedule “A”