COURT FILE NO.: CV-13-10280-00CL

DATE: 2013-10-07

SUPERIOR COURT OF JUSTICE – ONTARIO
COMMERCIAL LIST

BETWEEN:

DBDC SPADINA LTD. and THOSE CORPORATIONS

LISTED ON SCHEDULE A HERETO,

Applicants

AND:

NORMA WALTON, RONAULD WALTON, THE ROSE & THISTLE GROUP LTD. and EGLINTON CASTLE INC,

Respondents

AND

THOSE CORPORATIONS LISTED ON SCHEDULE B HERETO, TO BE BOUND BY THE RESULT

AND BETWEEN

NORMA WALTON, RONAULD WALTON AND THOSE CORPORATIONS

LISTED ON SCHEDULE A HERETO

Applicants

AND:

DBDC SPADINA LTD. AND THOSE CORPORATIONS LISTED ON SCHEDULE B HERETO

Respondents

BEFORE: Newbould J.

COUNSEL: Peter H. Griffin and Shara N. Roy, for the Applicants/Respondents

Guillermo Schible, for the Respondents/Applicants

HEARD: October 4, 2013

ENDORSEMENT

[1] There are cross-motions arising from competing applications regarding investments in 31 real estate projects by Dr. Bernstein and Norma and Ronauld Walton. Dr. Bernstein has invested through corporations set up by him for each project, each of which corporation is an applicant. The Waltons invested either through their company The Rose & Thistle Group Ltd (“Rose & Thistle”) or through other corporations of which they are the beneficial owners.

[2] Dr. Bernstein through his corporations has applied for an order restraining the Waltons and their corporations from breaching the agreements made between the parties and the appointment of Schonfeld Inc. as inspector under section 161(2) of the OBCA. The Waltons have applied for an order staying the application by Dr. Bernstein’s corporations and directing the appointment of an arbitrator to determine “all necessary and appropriate issues” between the parties under a mediation/arbitration provision in each of the agreements covering the 31 projects.

[3] At the conclusion of the argument, I dismissed the Walton application and I granted the relief sought by Dr. Bernstein, for reasons to follow. These are my reasons.

Summary of facts

[4] Dr. Bernstein is the founder of very successful diet and health clinics. Norma Walton is a lawyer and co-founder with her husband Ronauld Walton of Rose & Thistle. She is a principal of Walton Advocates, an in-house law firm providing legal services to the Rose & Thistle group of companies. She has unfortunately faced two disciplinary hearings before the LSUC related to her financial dealings with clients. Ronauld Walton is also a lawyer and co-founder of Rose & Thistle and a principal of Walton Advocates

[5] Beginning in 2008, Dr. Bernstein acted as the lender/mortgagee of several commercial real estate properties owned by the Waltons either through Rose & Thistle or through other corporations of which they are the beneficial owners.

[6] Following several financings, Dr. Bernstein and the Waltons agreed to invest jointly in various commercial real estate projects. To date, Dr. Bernstein has invested approximately $110,000,000 into 31 projects. The Waltons invested a total of $2,500,803. The evidence before me however indicates that their equity investment has generally been recaptured by the Waltons by intercompany invoicing such that only $351,400 of the capital investment remains in the projects.

[7] Dr. Bernstein and the Waltons entered into separate agreements which provided as follows:

a. A new company would be incorporated for each project (the “Owner Company”);

b. Dr. Bernstein (through a company incorporated for this purpose) would hold 50% of the shares of the Owner Company;

c. The Waltons (either directly or through a company incorporated for this purpose) would hold the other 50% of the shares of the Owner Company;

d. Each of Dr. Bernstein and the Waltons would contribute an equal amount of equity to each project;

e. The Waltons would manage, supervise and complete each project for an additional fee through Rose & Thistle. Rose & Thistle is not a party to the agreements;

f. The Waltons also agreed to be responsible for the finances, bookkeeping, accounting and filing of tax returns, among other things, of the Owner Company;

g. Each Owner Company was to have a separate bank account;

h. Dr. Bernstein would not be required to play an active role in completing each project, but his approval would be required for:

i. Any decisions concerning the selling or refinancing of each property;

ii. Any decisions concerning the increase in the total amount of equity required to complete each project; and

iii. Any cheque or transfer over $50,000.

i. The Waltons agreed to provide Dr. Bernstein with:

i. Ongoing reports on at least a monthly basis detailing all items related to each property;

ii. Copies of invoices for work completed each project monthly;

iii. Bank statements monthly; and

iv. Listing of all cheques monthly;

j. Upon sale of a property, Dr. Bernstein and the Waltons would receive back their capital contribution plus a division of profits; and

k. The agreements generally provided that Dr. Bernstein and Norma Walton were to be the sole directors of the Owner Company.

[8] A review by James Reitan, director of accounting and finance at Dr. Bernstein Diet and Health Clinics, in the early summer of 2013 and into early September 2013 revealed that:

a. The Waltons were not making their portion of the equity investments into the properties;

b. The Waltons appeared to be taking on third party investors in the projects;

c. The Waltons were engaged in significant related party transactions in respect of the projects through and using Rose & Thistle;

d. Dr. Bernstein’s approval was not being sought for any of the matters set out in subparagraph 7(h) above;

e. Dr. Bernstein was not receiving any of the required reporting, set out in subparagraph 7(i) above;

f. The mortgage payment for August 2013 for 1450 Don Mills did not go to the mortgagee, Trez Capital, but to Rose & Thistle. No documentation has been provided to confirm that the payment was made from Rose & Thistle to Trez Capital. There is no legitimate purpose for the payment going through Rose & Thistle;

g. Additional mortgages of $3 million each were placed on 1450 Don Mills Road and 1500 Don Mills Road on July 31, 2013 and August 1, 2013 respectively, of which Dr. Bernstein had no knowledge and which he did not approve;

h. It appears that there has been extensive co-mingling of the Owner Companies’ funds with and into the bank accounts of Rose & Thistle;

i. Rose & Thistle has removed funds from the Owner Companies, which have been recorded as intercompany amounts owing from Rose & Thistle to the Owner Companies;

j. Rose & Thistle has rendered invoices to the Owner Companies, which in some cases have the effect only of reducing the intercompany amount owed by Rose & Thistle, for work and services that have yet to be performed;

k. The Waltons have entered into a series of transactions which have the result of reversing equity contributions made by them and immediately removing equity contributions by the Applicants; and

l. The Owner Companies have incurred significant interest and penalty charges for late penalties of utilities, without explanation.

[9] On September 20, 2013, Dr. Bernstein appointed Schonfeld Inc. on behalf of the applicants to gather information related to the Owner Companies, the projects and the properties. Schonfeld Inc. has not been granted complete access to the documents (including bank statements, invoices and other documentation) related to 22 of 31 projects. Ms. Walton has indicated that she requires a further matter of weeks to make available the documents for the remainder of the projects.

Arbitration provision

[10] The arbitration clause is a mediation/arbitration clause that is substantially similar in all the agreements. It provides:

If the parties disagree on how to manage, supervise and complete the Project in accordance with Exhibit "A" and cannot reach agreement amongst themselves, each of them undertakes to attend a minimum of four hours of mediation in pursuit of reaching an agreement. After mediation, if there are any remaining issues to be determined, those issues in dispute shall be determined by a single arbitrator in as cost-effective a manner as-possible; with no right of appeal. (underlining added)

[11] The agreements provide that the Waltons will manage and supervise the project and ensure it is completed according to the proposal attached as Exhibit “A” to the agreement. Exhibit A to the agreement is essentially a project plan. It provides that the Waltons will do such things as engage architects and engineers, apply for building permits, arrange for quotes from trades, roll out construction, advertise for lease, refinance and pay out capital and profits to theinvestors.

[12] Mr. Schible contends that what is in dispute is covered by the arbitration clause. That is, there is a disagreement on how the projects are to be managed supervised and completed. Mr. Griffin contends that the dispute is quite different and involves breaches of the agreements. He points to the various provisions in the agreement which he says have been breached. They are set out in paragraph 7 above.

[13] In my view, Mr. Griffin is right. If something has been expressly agreed in the agreement, there can be no disagreement about that. As well, the provisions claimed to be have been breached are not provisions provided for in Exhibit A to the agreements but rather are provisions contained in the body of the agreements themselves. As examples, the agreements provide that any decisions requiring refinancing will require Dr. Bernstein’s approval and any cheque or transfer over $50,000 will require his signature. If these provisions were not followed, the issue would be breach of contract and not a disagreement “on how to manage, supervise and complete the Project”.

[14] The arbitration clause is narrowly written. It does not provide, as many arbitration agreements provide, that it is to cover any claims or disputes arising out of the agreement. It only covers a disagreement on things not agreed relating to the managing, supervision and completion of the project according to the proposal contained in Exhibit A.

[15] Mr. Schible relies on section 17(1) of the Arbitration Act, 1991 which provides that an arbitral tribunal may rule on its own jurisdiction to conduct the arbitration. This is a reflection of the competence-competence principle in arbitration that arbitrators are competent to rule on their own jurisdiction. However, I do not think that this section is of assistance to the Waltons.

[16] The general rule is that it is not for the court on an application for a stay of proceedings to reach any final determination as to the scope of the arbitration agreement. That is a matter within the jurisdiction of the arbitral tribunal. However, where it is clear that the dispute is outside the terms of the arbitration agreement, the court may and should reach such a final determination on an application for a stay of proceedings. See Dalimpex Ltd. v. Janicki (2003), 2003 34234 (ON CA), 64 O.R. (3d) 737 (C.A.) para. 21.

[17] In my view, it is very clear that the claims of Dr. Bernstein for breach of contract and for relief under the OBCA resulting from breach of contract are claims that are outside the terms of the arbitration agreement. Thus I decline to stay the claims of Dr. Bernstein in this court.

Request for an inspector

[18] The claims of Dr. Bernstein contained in the affidavit material filed on his behalf contain evidence of breaches of agreement. The affidavit of Ms. Walton filed in response contains much invective against Dr. Bernstein but little in the way of answering the specific points raised in the evidence filed on behalf of Dr. Bernstein.

[19] I need not refer to all of the evidence, but a reference to some of the evidence is telling.

[20] The agreements required the Waltons to provide equity to the projects. Mr. Reitan’s affidavit discloses that of $2,500,803 in equity contributions made by the Waltons, $2,150,000 of these contributions have been reversed, as disclosed in journal entries attached to his affidavit. No answer to this has been provided by Ms. Walton, the only person to provide any evidence on behalf of the Waltons.

[21] The agreements also provided that the only shares to be issued were to Dr. Bernstein’s corporations or to the Walton’s corporations and neither could transfer shares to another party without the consent of the other party. However, the evidence discloses that the Waltons have taken on new equity investors in at least one project, without the agreement of Dr. Bernstein.

[22] The agreements provided that any refinancing had to be approved by Dr. Bernstein. However, as a result of a title search on all properties obtained by Mr. Reitan, it was learned that mortgages of $3 million each were placed on 1450 Don Mills Road and 1500 Don Mills Road on July 31, 2013 and August 1, 2013. Dr. Bernstein had no knowledge of them and did not approve them.

[23] At a meeting on September 27, 2013, Ms. Walton informed Mr. Reitan and Mr. Schonfeld that the Waltons are in control of the $6 million of mortgage proceeds (rather than the monies being in the control of the respective the Owner Companies), but refused to provide evidence of the existence of the $6 million. Ms. Walton has also failed to date to provide the reporting letter from the lawyers involved. Ms. Walton stated that she would only provide further information regarding the two mortgages in a without prejudice mediation process.

[24] This evidence is particularly troubling and indicates a less than honest and open approach to Dr. Bernstein, who never approved the mortgage loans in the first place as he was contractually entitled to do. The responding affidavit of Ms. Walton is also troubling for what it does not disclose. In her affidavit, Ms. Walton stated that she has made arrangements to discharge the mortgage on 1500 Don Mills Road and to transfer the money obtained from the mortgage on 1450 Don Mills Road into the account of the owner company (Global Mills Inc.). She does not provide any information of where the money currently is, why the money was not deposited and held in the owner companies’ accounts when obtained or why she requires a further number of weeks to effect the transfer.

[25] Mr. Reitan’s affidavit also discloses that mortgage payments are being made to Rose & Thistle by the owner companies rather than the named mortgagee, and there is no confirmation that the mortgage payments have been made to the mortgagee by Rose & Thistle. Mr. Reitan’s supplementary affidavit discloses that shortly after Dr. Bernstein made equity contributions on four properties, Rose & Thistle transferred substantial amounts to its own account. Under the agreements, the money was to go into an equity account.

[26] The grounds to order an investigation are contained in section 161(1) and (2) of the OBCA. On this motion, Dr. Bernstein relies on section 162(2)(b). The relevant provisions are:

161. (1) A registered holder or a beneficial owner of a security … may apply, without notice or on such notice as the court may require, to the court for an order directing an investigation to be made of the corporation or any of its affiliates.

Idem

(2) Where, upon an application under subsection (1), it appears to the court that,

(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted, or the powers of the directors are or have been exercised, in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards, the interests of a security holder;

the court may order an investigation to be made of the corporation and any of its affiliates.

[27] In my view, on the record before me Dr. Bernstein has met the test required for an investigation to be ordered. To put on two mortgages for $6 million without the required agreement of Dr. Bernstein and then refuse to disclose what happened to the money except in a without prejudice mediation meets the higher test of oppression, let alone the lesser test of unfairly disregarding the interests of Dr. Bernstein. The other examples of the evidence I have referred, as well as the failure to provide monthly reports on the projects to Dr. Bernstein, are clearly instances of the Waltons unfairly being prejudicial to and unfairly disregarding the interests of Dr. Bernstein, a 50% shareholder of each of the owner corporations.

[28] Ms. Walton contends in her affidavit that the appointment of an inspector would likely preclude the respondents from further discharging their accounting and reporting functions. I fail to see how this could be the case, and in any event the evidence is clear that the Waltons have failed to properly provide monthly reports.

[29] Further Ms. Walton says that she and her husband hold legal files in their office and that no material should be provided to the inspector or Dr. Bernstein’s people until some protocol has been established to protect the confidentiality of solicitor-privileged documents. I do not think that it is appropriate to delay the work of the inspector. Any documents in the possession of the Waltons or their companies dealing with the affairs of the owner corporations could not be privileged as against Dr. Bernstein or his corporations, as he through his corporations is a 50% owner of the owner corporations. Any documents that the Waltons or their companies have for corporations other than the owner corporations may be relevant depending on whether they have been used for business of the owner corporations or have received money belonging to the owner corporations. If there are documents in those corporations that are the subject of solicitor-client privilege, that privilege can be asserted.

[30] The order appointing the inspector provides that the inspector shall isolate and protect any privileged documents unrelated to the matters under investigation and that in the event of any claim of solicitor-client privilege directions may be sought from the Court.

[31] The order also provides that all lawyers acting on the purchase and financing of the properties for any of the respondents and the owner corporations are to make available all requested documents to the inspector without the assertion of privilege. This is a reflection of the fact that there could be no privilege asserted against Dr. Bernstein or his corporations.

[32] In the circumstances, Dr. Bernstein’s corporations are entitled to an investigation of the affairs of the owner corporations and the appointment of Schonfeld Inc. as an inspector of those corporations to investigate and report to the Court.

[33] In light of the evidence, Dr. Bernstein’s corporations are also entitled to an order restraining the respondents from (i) causing any dealings with the underlying real estate of the owner corporations except in the ordinary course of business or for amounts not exceeding $50,000 or (ii) encumbering any of the properties without the express consent of the applicants or further order of this court. These are orders simply enforcing contractual terms.

[34] The order signed on October 4, 2013 reflects the comments in this endorsement.

Newbould J.

Date: October 7, 2013