SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: 13-56663
DATE: 2013/02/06

RE: COLLEEN MOORE, BARRY DOUCETTE, RONALD X. AYOUB, KIM KRUK, DALE HEIN, PAMELA STONE, CAROLINE LEWANDOWSKY, ANNE LEFIER, GARRY McGINN, DAVID HAMILTON, JAMES MILLER, HELENE LAMADELEINE, MARY LOU FISHER, ALLAN BRETT, DONALD HUTCHINSON, GLORIA HUTCHINSON, RICHARD MELCER, STEPHEN CALDWELL, MICHELLE VEZEAU, DAVID KORNELSEN, KEVIN HARSH, COLLEEN MALTAIS, LUC MALTAIS, BOB MECH, A.A.N.T. SOFTWARE CORPORATION, TERRENCE FINNIGAN and JAMES JOSS

Applicants

AND

THOMAS G. ASSALY, ASSALY INVESTMENT PROGRAM CORPORATION, ASSALY FINANCIAL CORPORATION, ACT 1 CORP., ASSALY CREDIT & TRADE CORP., ASSALY ASSET MANAGEMENT CORPORATION, MILLENNIUM SPRINGS DEVELOPMENT & CONSTRUCTION CORP. (aka MILLENNIUM SPRINGS PROPERTIES LTD.) and MILLENNIUM EDUCATIONAL & RESEARCH CHARITABLE FOUNDATION (formerly the THOMAS C. ASSALY CHARITABLE FOUNDATION)

Respondents

BEFORE: Mr. Justice Paul Kane

COUNSEL: Justin R. Fogarty, for the Applicants

HEARD: January 30, 2013

Amended ENDORSEMENT

(see amendments in bold)

[1] This proceeding is commenced by way of Notice of Application. The applicants appeared today ex parte seeking the appointment of an Inspector pursuant to Section 161 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”) and Section 229 of the Business Corporations Act, R.S.C. 1985 c. C-44 (“CBCA”).

[2] It is proposed that Doyle Salewski Inc. be the Inspector with independent counsel, namely David Migicovsky and Chris Morris.

[3] It is proposed that until the return of this application, the Inspector would seek documentation from individuals or corporations not part of the Assaly Group of Companies, conduct examination or hearing of those individuals and prepare an interim report for the return of this application on February 20, 2013.

[4] The respondents, other than Mr. Assaly, are all corporations incorporated under the OBCA, other than one which is incorporated under the CBCA. The evidence filed indicates that Mr. Assaly is the President and sole Director of all respondent corporations other than Thomas C. Assaly Charitable Foundation (“Foundation”). The evidence indicates that Mr. Assaly is the Chairman of the Board of Directors of the Foundation.

[5] On the evidence filed, it appears that Ms. Assaly through various corporations, undertook several developments. Those developments consist of:

a) A 56-acre parcel of land in North Grenville, Ontario on which is located a residence of some 7,000 square feet where Mr. Assaly and his family used to reside (“Nature’s Walk”). That home also contained the office of Mr. Assaly. Nature’s Walk is now owned by Millennium Springs Development & Construction Corp. (“Millennium”);

b) A 100-acre parcel of land which abuts the Nature’s Walk property (“Back Lot”) owned by the respondent Assaly Investment Program Corporation (“Investment”);

c) A retirement home in Smiths Falls, Ontario (“Villa Montague”) owned by Act 1 Corp.; and

d) A large residence located in the State of Florida, USA (“the Florida Property”) owned by the Foundation.

[6] Raising capital for the development and renovations of the above properties were carried out between 2009 and 2012. The applicants are all individuals who made investments in one or more of the above development projects. During the course thereof, Mr. Assaly and his family have either moved to and reside in the Florida Property or reside there as much as immigration or income tax laws permit.

[7] Section 161 of the OBCA and section 229 of the CBCA permit a registered holder of a security to apply ex parte for an order directing an investigation to be made of a corporation or any of its affiliated corporations.

[8] Security is defined under the OBCA as a share of any class or a debt obligation of a body corporate. The definition of security under the CBCA is similar to the OBCA but provides it includes a certificate evidencing a debt obligation.

[9] Debt obligation is defined under the OBCA to include a bond debenture note or similar obligation or guarantee of such an obligation of a body corporate, whether secured or unsecured. Under the CBCA, debt obligation includes evidence of indebtedness or guarantee whether secured or unsecured.

[10] The following applicants C. Moore, B. Doucette, R. X. Ayoub, C. Lewandowsky, A. Lefier, S. Caldwell, C. Maltais, L. Maltais, B. Mech, A.A.N.T. Software Corporation and T. Finnigan are Preferred A shareholders of Millennium (“Shareholders”).

[11] The remaining applicants (“Remaining Applicants”) are holders of debt obligation as defined under the OBCA or CBCA.

Anton Pillar and Preservation Order

[12] The Remaining Applicants, independent of their status as holders of debt obligation, seek an order of preservation of property; specifically, documentation of the respondents pursuant to the principles of an Anton Pillar injunction, Section 101 of the Courts of Justice Act, R.S.O. 1990, c. C. 43 and Rule 45 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.

[13] The Court, on the material filed, is not prepared to grant an interim junction or a preservation order under Rule 45.

[14] A requirement to obtain an Anton Pillar order requires evidence that the respondents, based on past conduct, will destroy or secret property that is the subject matter of the order if given notice of the moving party’s intention. The evidence in support must persuade the court that there is a real prospect that such property will be destroyed or hidden so as to frustrate the court’s ability to deal with the issues see: Robert Half Canada Inc. v. Jeewan (2004), 2004 1532 (ON SC), 71 O.R. (3d) 650 (S.C.J.) at para. 36.

[15] An Anton Pillar type order is an extraordinary remedy to be used with caution and only when certain elements are present including:

a) An undertaking by the plaintiffs to indemnify the defendants for damages caused by such an order;

b) Strong evidence that the respondents have pirated materials belonging to the plaintiffs; and

c) A serious risk that evidence will be destroyed if not maintained for the purposes of the subject action see: Bardeau Ltd. v. Crown Food Service Equipment (1982), 1982 1793 (ON SC), 36 O.R. (2d) 355 (H.C.)

[16] The requirement of evidence to establish the likelihood that the respondents will destroy or secret documentation has not been led. In addition, no undertaking as to damages has been filed by the Remaining Applicants. An interim injunction is denied.

[17] An order under Rule 45.01 resembles a civil search warrant. It is subject to a higher threshold test than an ordinary ex parte injunction under Section 101 of the Courts of Justice Act see: Schuster v. Royal & Sun Alliance Insurance Co. of Canada, [2009] O.J. No. 4518 (S.C.J.).

[18] Based upon the principles enunciated in Schuster and given this Court’s unwillingness to grant the injunction requested, no order will be made under Rule 45.

Control of Respondent Corporations

[19] The evidence establishes that:

(a) Mr. Assaly internally intermingled money owned by and amongst the respondent corporations in disregarding such corporate entities and accounting principles to such an extent that the controller of a number of the respondents resigned in frustration in February, 2011.

(b) There was a constant turnover of bookkeepers employed by Mr. Assaly to record the finances of the corporate respondents.

(c) Mr. Assaly used money of the Foundation for his own personal expenses.

(d) By the fall of 2011 the respondent corporations had defaulted in payment obligations to numerous applicants. By this time, Mr. Assaly transferred some or all of the bank account balances of the respondent corporations to the Foundation.

(e) The respondent corporations are each controlled directly by Mr. Assaly.

Background to Request for Appointment of Inspector

[20] As to Nature’s Walk, an Offering Memorandum was issued in March of 2009 in the name of “The Assaly Group of Companies”. The Memorandum solicited investors for a tax shelter investment by investment for the development of a gated community. It was proposed that 56 acre Nature’s Walk property and the 100 acre Back Lot would be developed as a condominium and golf community.

[21] Potential investors were told that they would become unit owners as first mortgagees and would receive an annual income with a minimum average of 10%.

[22] The Shareholders advanced money pursuant to this Offering Memorandum. They were directed to deliver their investment via cheque payable to Assaly and that the Assaly Group of Companies would determine which respondent corporation would be payee whereupon the payee would complete its corporate name on the cheque.

[23] Shortly after the Shareholders paid their investment, Mr. Thomas Assaly directed that such investment was restructured with investors to become shareholders. The Shareholders thereupon became Preferred A shareholders of Millennium on September 16, 2009. The Shareholders were to receive monthly dividends which occurred until approximately February of 2011 when dividend payments stopped. Millennium is a corporation under s. 161 of the OBCA or s. 229 of the CBCA.

[24] On September 16, 2009, Mr. Assaly sold the 56 acre Nature’s Walk property to Millennium for $1.00. The evidence indicates that in fact he received consideration from Millennium for the transfer of the Nature’s Walk property in the amount of $1,050,000.

[25] The total amount of money so raised by Millennium in relation to Nature’s Walk is approximately $1,500,000.

[26] Shareholders’ cheques were completed by one or more of the respondents and resulted in payment of the investment funds to Investment, Assaly Financial Corporation (“Financial”) and the Foundation.

[27] In early 2010, the Foundation began and carried out extensive renovations of the Florida Property until approximately May of 2011. The evidence established that part of the investment funds raised by Millennium to develop Nature’s Walk in fact were loaned or paid to the Foundation to conduct the renovations of the Florida Property. The Foundation owns a controlling interest in Millennium. Foundation accordingly controls Millennium. Foundation and Millennium are affiliated. Foundation is a corporation under s. 161 of the OBCA or s. 229 of the CBCA.

[28] The development of Nature’s Walk and the Back Lot in the form of construction of 20 condominiums has not proceeded. Monthly dividends to the Shareholders of Millennium ceased in February of 2011.

[29] Millennium listed the Nature’s Walk property for sale in the spring of 2012 for $799,000. That asking price was subsequently reduced to $650,000, well below the investment by the Shareholders in such development.

BACK LOT

[30] The Shareholders invested cash in Nature’s Walk. Other applicants invested via their RRSP’s and received an interest in a syndicated first mortgage from Financial which owns Back Lot. The syndicated mortgage is registered in the name of B 2 B Trust and is in default.

[31] Financial is a corporation under s. 161 of the OBCA or s. 229 of the CBCA.

VILLA MONTAGUE

[32] In relation to the Villa Montague, Mr. Assaly and Act 1 Corp. solicited and obtained monies from investors for redevelopment of this property. Four applicants contributed in total some $245,000. Their investment/loan was to be secured by way of an instrument registered on title to that property. No such registration was made by the owner, Act 1 Corp.

[33] Several of the Remaining Applicants invested in a real estate investment pool (REIP) marketed by Financial.

[34] The purchaser of a unit in the REIP was to be in the position of a lender to Financial, and was to receive regular payment of income earned via the pool on their “loan” with a guarantee by Assaly Credit & Trade Inc. (“Credit”) to buy back units purchased by investors in the REIP in the year 2020.

[35] Management of the REIP was to be performed by Assaly Asset Management Corp. (“Asset”).

[36] The Remaining Applicants who invested in the REIP paid such investment money to Investment, Credit, Asset or Act 1 Corp.

[37] Millennium in the fall of 2010 told the Shareholders it had purchased a 20% interest in Villa Montague. Millennium has no ownership interest in Villa Montague.

[38] Act 1 Corp. and Credit are corporations under s. 161 of the OBCA or s. 229 of the CBCA.

Requirements for Appointment of Inspector

[39] The security applicants rely upon the grounds set forth in Section 229(2)(a)(b) and (d) of the CBCA and Section 161(2)(a)(b) and (d) of the OBCA.

[40] The moving party seeking the appointment of an inspector must demonstrate at least an index of suspicion or appearance that reasonable shareholder expectations have not been met in regards to the actions or non actions of management and directors. With such evidence, it is appropriate to test the prima facie case with an inspection to determine whether further relief is warranted see: Catalyst Fund General Partner I Inc. v. Hollinger Inc., (2004) CarswellOnt 3782 (S.C.J.) at para. 39.

[41] The purpose of a s. 229 or s. 161 investigation is to find relevant facts including what payments were made to which related companies, in what capacity funds were received and whether they were properly authorized and with appropriate disclosure of any conflict see: Hollinger Inc., supra, at para. 43.

[42] A mere suspicion of impropriety is insufficient to justify the appointment of an inspector see: Henew v. Village Contracters Ltd., (2003) 2003 7697 (ON SCDC), 170 O.A.C. 68 (Ont. Div. Ct.).

[43] The broadest ground justifying an order appointing an inspector is where the business or affairs of the corporation have been carried on or conducted in a manner that is oppressive or unfairly prejudicial to or that unfairly disregard the interests of a security holder see: Hollinger Inc., supra, at para. 52.

[44] This Court concludes the evidence presented is sufficient to establish a prima facie case that the money invested or lent by the applicants, including the Shareholders in Millennium, the guaranteed purchasers of loan units in Villa Montague and the syndicated mortgagees of Back Lot, have shown that such monies were diverted to other corporations controlled by T. Assaly including Investment, Financial, the Foundation, Credit, Asset and Act 1 Corp. and not used for the developments invested in.

[45] The moving parties have further established a prima facie case that investment money paid to develop Nature’s Walk was not used for that purpose but instead was lent by Millennium to the Foundation for the reconstruction of the Florida Property.

Conclusion

[46] For the above reasons, Doyle Salewski Inc. is hereby appointed as an Inspector pursuant to Sections 161 and 229 of the OBCA and CBCA respectively on the basis that a prima facie case has been presented that the business of Millennium, Financial, Credit, Act 1 Corp. and the Foundation have been carried on or conducted with an intent to defraud the applicants, in a manner that is oppressive or unfairly prejudicial or disregards their interests as security holders and debt holders and that Mr. Assaly and those identified corporations have acted dishonestly.

[47] Evidence has not been presented to establish that the other respondent corporations are affiliated to Millennium, Foundation, Financial, Credit or Act 1 Corp. Accordingly, there will be no interim appointment of an Inspector of those other corporations.

[48] The above appointment of the Inspector is on an interlocutory basis until the return of this application on February 20, 2013.

NOTICE

[49] The Notice of Application together with the three supporting affidavits shall be served together with this endorsement as amended and any issued order upon the respondents no later than February 7, 2013. To the extent necessary, an order for service outside of Ontario is hereby granted on the respondents.

SEALING

[50] The Notice of Application, this endorsement as amended and any issued order shall be sealed until February 7, 2013, namely until service of these documents upon the respondents. Thereafter, such sealing order shall expire.

Draft Order

[51] The moving parties presented a draft interim order which requires the following amendments:

1. The appointment of the Inspector is of Millennium, Financial, Credit, Act 1 Corp. and the Foundation;

2. This application is returnable February 20, 2013 at 10:00 a.m.;

3. The last line of paragraph 4 is deleted;

4. Paragraph 5 is to be amended in light of the above provisions as to February 7, 2013;

5. The subject order is to indicate that it is an interim order;

6. The last line of paragraph 9 is deleted;

7. The scope of paragraph 11 is to include the Florida Property;

8. Paragraph 13(b) is to be deleted;

9. Paragraphs 24(a),(c),(d), and (g) are to be deleted;

10. Any privileged documents are not to be reviewed by or shown to the Inspector but are rather to be placed in sealed envelopes and delivered in that manner to counsel for the Inspector and not opened or reviewed until further order of this Court;

11. The administrative charge under paragraph 40 of this interim order shall be limited to $200,000 to cover the costs of the Inspector and its counsel.

12. The moving parties have been successful in obtaining interim relief and accordingly, they shall be entitled to their costs of this application to date, which costs shall be assessed by this Court;

13. Paragraph 43 is to be deleted subject to further order of the Court; and

14. All further changes to the draft order in light of the above determinations should be incorporated therein.

Kane J.

Date: February 6, 2013

ONTARIO

SUPERIOR COURT OF JUSTICE

RE: COLLEEN MOORE, BARRY DOUCETTE, RONALD X. AYOUB, KIM KRUK, DALE HEIN, PAMELA STONE, CAROLINE LEWANDOWSKY, ANNE LEFIER, GARRY McGINN, DAVID HAMILTON, JAMES MILLER, HELENE LAMADELEINE, MARY LOU FISHER, ALLAN BRETT, DONALD HUTCHINSON, GLORIA HUTCHINSON, RICHARD MELCER, STEPHEN CALDWELL, MICHELLE VEZEAU, DAVID KORNELSEN, KEVIN HARSH, COLLEEN MALTAIS, LUC MALTAIS, BOB MECH, A.A.N.T. SOFTWARE CORPORATION, TERRENCE FINNIGAN and JAMES JOSS

Applicants

AND

THOMAS G. ASSALY, ASSALY INVESTMENT PROGRAM CORPORATION, ASSALY FINANCIAL CORPORATION, ACT 1 CORP., ASSALY CREDIT & TRADE CORP., ASSALY ASSET MANAGEMENT CORPORATION, MILLENNIUM SPRINGS DEVELOPMENT & CONSTRUCTION CORP. (aka MILLENNIUM SPRINGS PROPERTIES LTD.) and MILLENNIUM EDUCATIONAL & RESEARCH CHARITABLE FOUNDATION (formerly the THOMAS C. ASSALY CHARITIBLE FOUNDATION)

Respondents

AMENDED ENDORSEMENT

Kane J.

Released: February 6, 2013