ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: CV-09-393431
DATE: 20130220

B E T W E E N :

ROXANNE HENDERSON

Plaintiff

(Defendant by Counterclaim)

– and –

VIVIAN RISI and YOUR COMMUNITY REALTY INC.

Defendants

(Plaintiffs by Counterclaim)

Sara J. Erskine & Nastaran Roushan,
for the Plaintiff (Defendant by Counterclaim)

Brian Sherman, for the
Defendants (Plaintiffs by Counterclaim)

HEARD: May 14, 15, 16, 17, 18, 22, 23, 24, 25, October 10, 11 and 12, 2012

LEDERMAN J.:

OVERVIEW

[1] This is an action in connection with the purchase of the plaintiff’s real estate brokerage, Timeless Realty Inc. (“Timeless”) by the Defendants.

[2] The plaintiff (“Henderson”) sold Timeless to Vivian Risi (“Risi”) on August 31, 2008, for $490,000 pursuant to a Share Purchase Agreement (“SPA”). A deposit of $75,000 was paid on closing and the balance of the purchase price was to be paid over the next thirty-six months based on a specific formula. If any balance was owing after the thirty-six months, it became payable on August 31, 2011.

[3] Risi guaranteed the purchase price by way of an unconditional promissory note. In the event any payment was not paid on the due date, the promissory note became due and payable immediately with interest on the unpaid amount.

[4] After the closing of the SPA, Risi made ten monthly payments to Henderson from September 2008 to July 2009. Risi stopped payment on August 15, 2009, leaving a balance of $375,514.34. Henderson then brought this action to enforce the promissory note and for non- payment of the balance of the purchase price.

[5] Henderson also seeks an order for specific performance that Risi and/or the Defendant York Community Realty Inc. (“YCR”) take assignment of Timeless’s equipment leases, pursuant to Article 2(2) of the SPA. Henderson alleges that all of the leases should have been assigned to Risi and/or YCR but were not. As a result of this failure, Henderson claims that she remains liable to the leasing companies for the balance owing on the leasing agreements pursuant to a personal guarantee that she signed.

[6] By way of defence and counterclaim, the defendants allege misrepresentations and a mix of breaches of the SPA. They allege that, following the closing of the purchase and sale transaction, Risi discovered numerous material representations made by the plaintiff in the negotiations and disclosure which took place and led to the execution of the SPA. They submit that these misrepresentations were either intentional or negligent, were material and designed and intended to be relied upon by Risi and to induce her to enter into the agreement.

[7] The defendants acknowledge that the remedy of rescission is no longer possible, but seek essentially the same thing by relying on the indemnity provisions in Article 6(1)(a)(i) of the SPA and the Indemnity Agreement signed by the parties, and claim damages for repayment of all the monies paid on account of the purchase price, and compensation for consequential damages including monies injected into Timeless to cover outstanding obligations, business losses up to December 31, 2011, including, professional costs and the cost of Timeless’ bankruptcy, all totalling $680,477.47.

background facts

[8] Henderson was the owner and broker of record of Timeless, a Royal LePage Real Estate franchise which she acquired in 2005. At that time, Timeless had one office in Keswick, Ontario. In 2006, Henderson opened a second office in Bradford/West Gwillimbury, Ontario.

[9] In April or May, 2008, Henderson decided to sell her interest in Timeless. At that time, she owned 100 common shares and 100 class “A” shares.

[10] Sandy Fry (“Fry”) was an investor in Timeless and she held class “C” shares worth $75,000. Fry had the right to redeem those shares upon giving six months’ written notice prior to the year end of Timeless, i.e. August 31.

[11] Risi was the owner and broker of record of another Royal LePage Real Estate franchise, the defendant, YCR. She had been in the real estate sales business since 1974 and became a broker in 1994.

[12] In 2008, YCR had multiple offices in the Greater Toronto Area, including in Toronto and locations north of Toronto up to the Peterborough area. At the time of trial, YCR had over 800 agents in eleven different offices. YCR has become Canada’s largest independently owned Royal LePage franchise.

[13] Henderson and Risi had previously met each other at various corporate brokers’ meetings. Henderson thought that Risi might be interested in purchasing Timeless and approached her in this regard. Risi was interested in acquiring additional offices and the two of them had a series of meetings in July 2008.

[14] Henderson advised Risi that she wanted $570,000 for Timeless and provided Risi with a binder of information (the “Red Binder”) containing, among other things, current financial and sales information for Timeless. Risi took the Red Binder away for review.

[15] On or about July 30, 2008, another meeting was held at which time Risi advised Henderson that she was prepared to purchase Timeless for $490,000 on the following terms:

(a) a lump sum payment upon closing of $75,000;

(b) the assumption of Fry’s class “C” shares;

(c) the balance of $415,000 would be payable over a six-month period based on a monthly payment calculated on 5% of the gross commissions earned by the agents at Timeless at the time of the sale;

(d) in the event that there was any outstanding balance of the purchase price at the end of thirty-six months, it would be paid by Risi as a balloon payment for the full amount outstanding at the end of the thirty-six months.

[16] Henderson agreed to these terms. Thereafter, a number of meetings were held to discuss the logistics of the transfer, the communication strategy, bank accounts, building leases and equipment leases. Henderson provided Risi and her staff with access to Timeless’ offices, records and personnel.

[17] Henderson’s lawyer, John Hart (“Hart”), and Risi’s lawyer, Stephen Cohen (“Cohen”), entered into discussions for the drafting of the SPA and on August 27, 2008, a meeting was held for the purposes of closing the share transaction and signing the SPA. An escrow closing took place to be effective August 31, 2008.

[18] On September 9, 2008, the formal public announcement of the sale was made and the agents were informed of the transition details.

[19] Later, in December 2008, Timeless was put into bankruptcy by Risi.

[20] Subsequent to the closing and continuing after Timeless’ assignment into bankruptcy, Risi continued to make the monthly payments pursuant to the SPA.

[21] In February 2009, Risi’s external accountants and her lawyer raised with Risi possibilities of breaches of warranties under the SPA.

[22] On or about June 8, 2009, Cohen wrote to Hart advising that “significant discrepancies, undisclosed liabilities and other misrepresentations” had been discovered after closing resulting in Risi being obliged to assign Timeless into bankruptcy. This was the first time Henderson was advised of any problems, but no particulars were given. The monthly payments on account of the purchase price continued, however, through to the month of August 2009.

[23] On or about September 23, 2009, Cohen again sent a letter to Hart stating that Risi “continues to discover incidents of misrepresentations by your client contrary to her representations in the Share Purchase Agreement”. No particularized information was given.

[24] In this action, the Defendants enumerate a broad spectrum of misrepresentations that they allege both induced Risi to enter into the SPA and were conditions and/or warranties of the SPA that were breached by Henderson post-closing. They allege both intentional or fraudulent misrepresentation (without having pleaded any particulars) and negligent misrepresentation.

[25] The alleged misrepresentations and breaches of the SPA are as follows:

(1) Henderson falsely represented that her husband was terminally ill and stated that was the reason she was selling Timeless on an urgent basis. The defendants assert that Henderson thereby intentionally preyed on the sympathies and good nature of Risi in order to persuade her to enter into the agreement with an abbreviated closing period;

(2) During the discussions between Henderson and Risi, Henderson provided a “Red Binder” to Risi containing inaccurate information with respect to the agents working for Timeless, misleading financial information and material misrepresentations of the financial status of Timeless designed to induce Risi to enter into the agreement. The Red Binder contained unaudited financial statements of Timeless for the fiscal years 2006 and 2007 which were inaccurate and misstated the true revenues of Timeless. More particularly, the financial statements of Timeless for the years 2006 and 2007 were misleading and artificially inflated the gross revenue by reason of the way in which the commissions of Henderson (and Barbara Fors, Henderson’s former partner, in 2006) were included in revenue calculations; the method of recording the share of commissions for outside brokers in Timeless’s revenue; and the recording twice of the “split–fee” commission income again misleadingly reflecting a higher gross revenue;

(3) Sometime after the closing of the transaction, Henderson provided Risi with unaudited financial statements of Timeless for the fiscal year ending August 31, 2008. These financial statements were materially different from those for the 2006 and 2007 fiscal years and show a significant operating loss for the 2008 fiscal year and a much higher management fee received by Henderson than in the previous fiscal years. The defendants submit that Henderson never advised Risi that she had taken such a large management fee in the 2008 fiscal year which, in large part, led to the extremely high operating loss for Timeless for that year. The excessive management fee in 2008 fiscal year arises from unusual and non-arms length transactions with Daniel Finn, who was paid a consulting fee which was refunded within a few months and the same day lump sum bonus payment to Henderson of $60,000. Risi states that had she known the true financial affairs of Timeless prior to entering into the agreement, she would never have proceeded with it;

(4) Following closing, it was discovered that Timeless’s bank account and line of credit had been severely mis-stated. There was no disclosure of the arranging of the line of credit for $75,000 in the summer of 2008 and that it had been drawn down in full. This constituted a material change contrary to the agreement;

(5) After closing the transaction, Risi discovered many invoices, some dating as far back as April and May 2008, that were never paid by Timeless and were never brought to her attention. There was a failure by Henderson to disclose this substantial rise in accounts payable;

(6) Risi discovered after closing that Henderson intentionally withheld information from her regarding a voice-over internet protocol (VOIP) telephone system which had been purchased from She-Co Communications (“She-Co”) and which never functioned properly. She-Co owed Timeless approximately $41,000 because of this deficient communication system, but this claim was never pursued by Henderson because of an apparent employment relationship between Henderson’s daughter and She-Co’s principal. Instead, Risi submits that the file was buried on the instruction of Henderson prior to closing and was intentionally withheld from Risi.

(7) Henderson failed to deliver an audited financial statement of Timeless for the fiscal year ending August 31, 2008, within thirty days of the closing of the agreement, which was required by Articles 3(6) and 3(8) of the SPA. This is a breach that has never been cured.

[26] In their counterclaim, the defendants seek damages in the total amount of $680,477.47, which includes:

(a) the deposit money of $75,000 for the Timeless purchase and the monthly payments that Risi made to Henderson totalling $42,485.66;

(b) monies totalling $76,766.77 deposited by Risi into Timeless’s general account to cover outstanding obligations;

(c) legal and professional fees incurred by the defendants as a result of Timeless’s purchase, including the fees for the Trustee in bankruptcy totalling $32,632.15;

(d) business losses at the former Timeless locations and applicable to the former Timeless agents since the closing in the amount of $460,537.44.

[27] The defendants allege that the following Articles of the SPA apply:

(i) Page 7, Article 4(1) preamble of two lines (Purchaser is relying on representations);

(ii) Page 8, Article 4(1) (b) lines 2-3 (the company is able to meet its liabilities as they are due);

(iii) Page 9, Article 4(1) (k) (“the company’s books and records are fully and accurately maintained”);

(iv) Page 10, Article 4(1) (m) (no material changes in final year);

(v) Page 10, Article 4(1) (n) (absence of unusual transactions, pay increases and transactions not in the ordinary course of business in the final year);

(vi) Page 12, Article 4(1) (u) (all equipment leases in good standing);

(vii) Page 13, Article 4 (1) (ac) (all receivables are collectable);

(viii) Page 15, Article 4(1) (am) (all of the foregoing representations are true);

(ix) Page 15, Article 4(1) (ao) (no non-arms length transactions);

(x) Page 19, Article 4(5) lines 1-3 (“All statements contained… under this agreement shall survive closing…”);

(xi) Page 22, Articles 6(1) (a) and 6(1) (a) (i) (indemnity clause… consequences for misrepresentations) and Indemnity Agreement;

(xii) Page 24, Articles 7 (1) preamble and 7 (1) (a) (b) (entire paragraph regarding contract conditions);

(xiii) Page 27, Article 7(3) (consequences for failure to satisfy conditions);

(xiv) Page 27, Article 8(2) (final closing can only occur “upon fulfilment of all of the conditions (includes representations and warranties) under this agreement which have not been waived in writing by the Purchaser”)’;

(xv) Page 4, Article 1(3) lines 6-8 (no amendment or waiver is effective unless in writing);

[...continues exactly as in the source through paragraphs 28–131...]

LEDERMAN J.

RELEASED: 20130220

COURT FILE NO.: CV-09-393431
DATE: 20130220

ONTARIO
SUPERIOR COURT OF JUSTICE

B E T W E E N :

ROXANNE HENDERSON

Plaintiff

(Defendant by Counterclaim)

– and –

VIVIAN RISI and YOUR COMMUNITY REALTY INC.

Defendants

(Plaintiff by Counterclaim)

REASONS FOR JUDGMENT

LEDERMAN J.

RELEASED: 20130220