SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: Antonio Carbone, Applicant

AND:

Andrew Michael Pajak, Respondent

BEFORE: D. M. Brown J.

COUNSEL:
J. Groia and J. Tan, for the Applicant

R. Flom and R. Trifts, for the Respondent

E. Block and S. Sugar, for Michael DeGroote, plaintiff in the DeGroote Proceeding (watching brief only)

HEARD: October 21, 2013

REASONS FOR DECISION

I. Motion for interim injunctive relief in a shareholders’ dispute

[1]

I. Motion for interim injunctive relief in a shareholders’ dispute

In this shareholders’ dispute, the applicant, Antonio Carbone, the beneficial owner of 42.5% of the issued and outstanding shares of Dream Corporation Inc., on behalf of himself and his brother, Francesco Carbone, who beneficially owns another 42.5% of the company’s shares, seeks an order pursuant to the Trustee Act, R.S.O. 1990, c. T.23, requiring the respondent, Andrew Pajak, who is the registered owner of those shares as bare trustee for the Carbones, to transfer the shares (the “Trust Shares”) into the names of the Carbones. Pajak beneficially owns 15 % of Dream’s shares in his own right.

2The application will be heard by Newbould J. on November 15, 2013. The applicant moves, on an urgent basis, for interim injunctive relief. As will be described below, at the hearing the issues in dispute were narrowed.

II. Summary of the dispute

[3]

II. Summary of the dispute

Dream operates gambling casinos in the Dominican Republic. Incorporated under the laws of St. Lucia, Dream’s administrative office is located in the Dominican Republic. Its three beneficial shareholders, however, reside in Ontario.

4All issued shares are registered in Pajak’s name. Pursuant to a Trust Agreement dated April 27, 2011, Pajak, as trustee, holds the shares beneficially owned by the Carbone brothers in trust for them “as bare trustee only”. Section 5 of the Trust Agreement provides that “[T]he Trustee agrees to vote the Shares on behalf of the Beneficial Owners and only in such manner as the Beneficial Owners shall request.”

5On August 1, 2011, Pajak and the Carbones entered into a Shareholders’ Agreement which recognized that Pajak held shares in trust for the Carbones. While Pajak was appointed the initial director of Dream under the SHA, section 3.1 provided that each of the three beneficial owners of shares was entitled to appoint their own representative as a director of Dream. Section 3.6 stipulated that, if an Event of Default occurred, the Defaulting Shareholder would not be entitled to vote his shares, but where a vote of shareholders was required, the Non-Defaulting Shareholder(s) would be deemed to own all of the shares of Dream. The SHA defined an “Event of Default” as a default by a shareholder “in the performance of its obligations pursuant to this Agreement or pursuant to any agreement entered into between such person and the Corporation and such default shall not have been cured within five (5) days after receipt by such Shareholder or its Principal…of a notice from the Board or any other Shareholder asking such Shareholder or its Principal to cure such default…”

6On September 5, 2013, Antonio and Francesco Carbone delivered notices to Pajak to transfer the shares held in trust for them into their own names. Pajak has refused to do so. He has given several reasons for his refusal:

(i) he is concerned that if the Trust Shares are transferred to their beneficial owners, the Carbones will remove him as the sole officer and director of Dream;

(ii) he alleges that the Carbones have not accounted for “millions of dollars” of Dream’s funds;

(iii) he alleges that the Carbones have failed to provide him with requested financial information about Dream and are in default of their obligations under SHA s. 4.1 which provides that “each of the Shareholders shall at all times furnish to the others correct information, accounts and statements of and concerning all transactions pertaining to the Corporation without any concealment or suppression”. Pajak deposed that “There is no question that the Carbones are in default of the obligations created in Article 4.1 of the Shareholders’ Agreement”, which led him to assert that the Carbones thereby became “defaulting shareholders”, with the result that they were precluded, by the terms of the SHA, from becoming directors of Dream or voting their shares in Dream.

7Antonio initiated this application on September 24, 2013.

8It is not in dispute that on September 30, 2013, Pajak passed a resolution concerning Dreams Casino, a wholly-owned subsidiary of Dreams, which transferred signing authority to, and granted power of attorney to, Mr. Pavle Kolic, a person who supports Pajak in this dispute. Antonio alleged that in mid-October Pajak represented to the owner of a resort where Dream is scheduled to open a casino that he owned the shares of Dream. It is not disputed that on October 17 and 18, 2013, Pajak delivered notices to the CFO of Dream Casinos and the manager of an affiliate that they could not issue any payments in respect of the corporations without the approval of Pajak or Ed Kremblewski, the CFO of Dream, nor could they provide any financial information to any person other than Pajak or Kremblewski.

9This motion was heard on an urgent basis. Both parties filed affidavits. The applicant also filed an affidavit from Boghos Alexanian. Both parties made very serious allegations of misconduct against the other. I cannot assess credibility on the limited record before me; in the result, I conclude it is not necessary to do so in order to dispose of this motion.

III. Analysis

[10]

III. Analysis

RJR-MacDonald Inc. v. Canada (A.G.), 1994 117 (SCC), [1994] 1 S.C.R. 311 governs.

11The applicant has demonstrated a serious question to be tried. Pajak does not dispute the beneficial ownership of the majority of Dream’s shares by the Carbones. Pajak holds the shares beneficially owned by the Carbones as bare trustee. As trustee, Pajak owes fiduciary obligations to the Carbones. In refusing to transfer the Trust Shares to the Carbones, Pajak asserts his personal rights as a shareholder. On their face, Pajak’s duties as trustee conflict with his asserted personal rights as a shareholder. The evidence suggests that Pajak has taken it upon himself, as a shareholder, to decide that the Carbones are “Defaulting Shareholders”, and he has unilaterally relieved himself from performing his duties as trustee and decided that his rights as a shareholder trumped his duties as a trustee. Given that quite apparent conflict of interest, one reasonably would have expected Pajak to seek directions from the Court before purporting to exercise any powers associated with the shares beneficially owned by the Carbones. He did not do so, although he drafted, but did not issue, a notice of application seeking a declaration that the Carbones were in default under the SHA. A serious question to be tried therefore exists as to whether Pajak had discharged properly his duties as trustee.

12Further, Pajak resists transferring the Trust Shares to their beneficial owners largely on the basis that the Carbones are “Defaulting Shareholders” by reason of their breach of the records section of the SHA (s. 4.1), thereby disentitling them from becoming directors and voting their shares until the Event of Default is remedied. However, section 1.1(g) of the SHA, defining “Event of Default”, stipulates that any default in the performance of obligations under the SHA does not rise to the level of an “Event of Default” unless the Board or any other shareholder has sent a notice “asking such Shareholder or its Principal to cure such default”.

13I have reviewed the records in the main application and the records for this motion. The record does not contain any notice from Pajak expressly specifying a default by the Carbones of their obligations under SHA s. 4.1 and calling upon them to remedy the default, failing which Pajak would invoke SHA ss. 3.5 and 3.6. Pajak’s email of October 8, 2013 certainly calls upon the Carbones to provide financial information, but no mention was made of the breach of any specific provision of the SHA.

14As I said, the record before me was limited due to the urgent nature of the motion; with more time perhaps a more comprehensive record will be prepared for the consideration of Newbould J. However, based on the evidence adduced before me, the applicant has established serious questions to be tried.

15Certainly the conduct of Pajak risks causing irreparable harm to the Carbones, since he has purported to act as if they enjoyed no rights as beneficial owners of the majority of Dream’s shares. The balance of convenience also favours the applicant. The merits of the application will be argued in less than three weeks before Newbould J. In the meantime, Pajak cannot act as if a finding had been made that the Carbones were Defaulting Shareholders under the SHA. The applicant gave an undertaking as to damages.

16An interim order should issue; the question is its scope.

17Paragraph 1 of the Notice of Motion seeks an expedited date for the hearing of the application. The application is set to be heard on November 15 before Newbould J. The two previous days he will be hearing argument in the motion in the DeGroote Proceeding. The factual matrix of the two proceedings is related. In light of the interim orders I plan to grant, I see no need to expedite the hearing of the application.

18Paragraph 2 of the Notice of Motion seeks, in effect, final relief. That relief more properly should be requested from Newbould J. on November 15.

19As to the injunctive relief sought, during the course of the hearing, counsel for the applicant advised that his client was not pursuing the relief described in paragraph 3(ii) – the holding of a director’s meeting. Counsel for the respondent advised that his client would consent to the relief sought in paragraph 3(iv) – the revocation of the September 30, 2013 resolution and the October 17 and 18 notices. I therefore grant the relief sought in paragraph 3(iv).

20That leaves three discrete areas. First, paragraph 3(v) of the Notice of Motion seeks an order requiring Pajak to require Dream and its related companies to deliver all the company’s books and records to the applicant. Earlier this year Wilton-Siegel J. made an order in the DeGroote Proceeding requiring the defendants, which included Dream and its three shareholders, to produce certain documents and information. I gather that those defendants have not yet done so and that the defendants have offered to make books and records available to the plaintiff in the DeGrotte Proceeding on October 28, 2013. In this proceeding both the applicant and the respondent expressed concern that the actions of the other would prevent them from complying with their production obligations under the order of Wilton-Siegel J. and would jeopardize the promised production to the plaintiff on October 28, 2013, thereby prejudicing the position of the defendants in the DeGroote Proceeding.

21Obviously, a commonality of interest exists between the applicant and respondent on this issue. Consequently, I order Antonio Carbone, his brother Francesco – who, although not a party, clearly is using Antonio as his authorized proxy in this proceeding – and Andrew Pajak, (i) to deliver up to the other side, on or before October 24, 2013, all documents of any sort, whether maintained in hard copy or electronically, in their possession, power or control concerning, in any way, the affairs of Dream and (ii) each to cause, and to provide sufficient instructions to, the employees and agents of Dream to deliver up to counsel for both parties, on or before October 24, 2013, all documents, records and information pertaining to Dream including, but not limited to, those documents specified in the order of Wilton-Siegel J.

22The second area concerns the relief requested in paragraph 3(i) of the Notice of Motion – dealings with the Trust Shares. I order that pending further order of this Court, Pajak shall refrain from having any dealings in respect of the Trust Shares, including refraining from exercising any of the rights attaching to the Trust Shares beneficially owned by the Carbones or purporting to exercise any rights as a Non-Defaulting Shareholder under the SHA, including the rights specified in SHA ss. 3.5 and 3.6.

23Finally, in paragraph 3(iii) of his Notice of Motion the applicant seeks an injunction restraining Pajak from “directly or indirectly taking any steps to control, operate or otherwise deal with the business or affairs of Dream and its related and operating companies”. Little evidence was placed before me about the current operations of Dream and its related and operating companies; the paucity of such evidence makes it difficult for a court to tailor detailed injunctive relief. Also, Pajak submitted that it would be unfair simply to return the operations of Dream back to the “status quo” which prevailed before the Carbones delivered their notices to transfer shares because, Pajak contended, prior to that date the Carbones had operated the company to his detriment. Again, I lack the evidence to make even a tentative determination of that assertion.

24This application will be heard in three weeks’ time. What needs to happen between now and then is that Dream and its related and operating companies continue to operate in the ordinary course, including meeting their obligations in the ordinary course. The day-to-day operations of Dream take place outside of Canada; this is not a case in which, as a practical matter, an Ontario court could appoint a short-term monitor, or some other independent person, to supervise the operations of Dream pending the hearing of this application – it would simply take such a person too long to ramp up its supervisory functions. The practical short-term remedy is to give directions to the three shareholders who reside in Ontario. Consequently:

(i) I order Dream’s three shareholders, Antonio Carbone, Francesco Carbone and Andrew Pajak, to co-operate, each with the other, to ensure that any directions which they give in respect of the management and operation of Dream, and its related and operating companies, shall be limited to ensuring the continued ordinary course operations of those companies; and,

(ii) I further order those three shareholders to refrain from dealing in any way with, or giving any directions regarding, the business, affairs, assets or undertaking of Dream, and its related and operating companies, out of the ordinary course of business, except with the consent of all three shareholders or the further order of this Court.

25The costs of this motion are reserved to the judge hearing the application.

D. M. Brown J.