SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: Vera Wallerstein, Plaintiff

AND:

2161375 Ontario Inc., Studio Cycle Group Inc., Walter Heilman aka Vladimir Heilman, Jagoda Heilman, Beco Motor International Inc. and Business Development Bank of Canada, Defendants

BEFORE: D. M. Brown J.

COUNSEL:
B. Frydenberg, for the Moving Party Defendant, Business Development Bank of Canada

N. Epstein, for the Plaintiff

G. Jones, for the defendants, 2161375 Ontario Inc., Studio Cycle Group Inc., Walter Heilman aka Vladimir Heilman and Beco Motor International Inc.

HEARD: February 11, 2013

REASONS FOR DECISION

I. Nature of this motion for summary judgment

[1] The plaintiff, Vera Wallerstein, is a shareholder in the defendant, 2161375 Ontario Inc. On September 14, 2012, she commenced this action against her fellow shareholders asserting oppression and other causes of action. Wallerstein also sued the defendant, the Business Development Bank of Canada, which had loaned money to 216 and other defendants. She sought a declaration setting aside any loan liability of 216 to the Bank on the basis that such liability “was not authorized by the Plaintiff”, as well as a declaration that the co-defendants, Walter Heilman, Jagoda Heilman and Beco Motor International Inc., were solely responsible for the liability to the Bank.

[2] The Bank has moved for summary judgment under Rule 20 of the Rules of Civil Procedure for an order dismissing the action against it.

[3] For the reasons set out below, I grant the order sought by the Bank and dismiss the action as against it.

II. Procedural history of this summary judgment motion

[4] By endorsement made November 6, 2012, I established a timetable for the Bank’s summary judgment motion under which the plaintiff was to file any responding materials by November 23, 2012 and any cross-examinations were to be completed by January 18, 2013.

[5] In the result Wallerstein filed no responding materials, nor did she cross-examine the Bank on its materials. Wallerstein did not file a factum.

[6] Amendments to Rule 20 in 2010 did not change the basic principle that on a summary judgment motion a responding party cannot simply rely on allegations made in her pleading. To counter a summary judgment motion, a responding party must file evidence of some sort and put its best foot forward. Wallerstein has not done so in this case. Accordingly, I will proceed to consider the Bank’s motion based on the uncontested evidence it filed.

III. The evidence and findings of fact

[7] It appears from admissions made in the pleadings by the non-Bank defendants that 216 was incorporated to own a commercial building located at 2923 Dundas Street West, Toronto. Wallerstein and her late husband, Thomas Wallerstein, were to be equal shareholders together with Walter Heilman and Jagoda Heilman. A shareholders’ agreement amongst the four of them was signed on January 29, 2008 (the “2008 Shareholders Agreement”). The Dundas Street West premises would be used for the business of Studio Cycle Group Inc., a retailer of Kymco motor scooters and other products. Beco Motor International Inc. is an importer/distributor of Kymco products which it sells to Studio Cycle Group and others.

[8] Thomas Wallerstein died, although the precise date was not stated in the pleadings. In September, 2011, following her husband’s death, the plaintiff sold 25% of her shares to the Heilmans, which I assume meant 25% of the 50% she owned following her husband’s death. (The pleadings submitted by the plaintiff and the Heilmans were not well drafted.)

[9] Pursuant to two letters of offer dated August 14, 2009, the Bank loaned $75,000, on a joint and several basis, to 216, Studio Cycle Group and Beco Motor. The Loans were secured by general security agreements dated September 3, 2009 which provided the Bank with security over all of the assets, property and undertaking of those corporate defendants. The loans were fully advanced on September 23, 2009. They loans remain outstanding; loan payments are current.

[10] Wallerstein did not dispute that in connection with the loans 216 executed and delivered to the Bank Directors’ Resolutions dated September 3, 2009 confirming that 216 was authorized to enter into the Loans and that “any director or officer” of 216 was authorized to execute the Loan Agreements. Jagoda Heilman signed the Resolutions as a director of 216.

[11] Nor did Wallerstein dispute that in connection with the Loans that Jagoda Heliman, as President of 216, executed an Officer’s Certificate dated September 3, 2009 which stated:

The Corporation has all necessary power, authority and capacity to obtain the loan and to grant the Security…nor is there any provision in any unanimous shareholders agreement which has the effect of restricting the powers of the Directors of the Corporation with respect to borrowing and the granting of security. (emphasis added)

[12] It is not in dispute that Jagoda Heilman signed the Loan Agreements and 216 GSA on behalf of 216.

[13] Jasmin Ganie-Hobbs and Don Kelly, the two Bank employees who were responsible for placing the Loans, both deposed that the Bank was never provided with a copy of the 2008 Shareholders Agreement. Wallerstein filed no evidence to the contrary. Consequently, I find, as a fact, that at the time the Bank advanced the Loans to 216, the Bank had not been given a copy of the 2008 Shareholders Agreement and, further, I accept the evidence of Ganie-Hobbs and Kelly that the Bank relied on the Officer’s Certificate that no provision in any unanimous shareholders agreement restricted the powers of 216’s directors with respect to borrowing.

IV. Analysis

[14] On a motion for summary judgment the governing test is that articulated by the Court of Appeal in Combined Air Mechanical Services Inc. v. Flesch.[^1] The Bank has demonstrated, for three reasons, that no genuine issue requiring a trial in respect of Wallerstein’s claim against it.

[15] First, Wallerstein pleaded that at no time did 216 borrow money from the Bank (Statement of Claim, para. 43). That assertion was wrong; the Bank proved its advances to 216.

[16] Second, Wallerstein alleged that 216’s indebtedness to the Bank was not valid and should be set aside (Statement of Claim, paras. 3(a) and 50). Wallerstein brings this action in her personal capacity. She is not a debtor of the Bank. 216 is the debtor in respect of the claim advanced by Wallerstein against the Bank for she seeks to absolve 216 of any liability to the Bank. Wallerstein has not sought or obtained leave to commence a derivative action on behalf of 216 pursuant to section 246 of the Ontario Business Corporations Act nor does her claim fall within the “wrong done to a shareholder qua individual” exception to the rule in Foss v. Harbottle.[^2] Accordingly, she has no standing to assert her claim against the Bank.

[17] Finally, section 19 of the OBCA, dealing with the indoor management rule, provides, in part:

19. A corporation or a guarantor of an obligation of a corporation may not assert against a person dealing with the corporation or with any person who has acquired rights from the corporation that,

(d) a person held out by a corporation as a director, an officer or an agent of the corporation has not been duly appointed or does not have authority to exercise the powers and perform the duties that are customary in the business of the corporation or usual for such director, officer or agent;

(e) a document issued by any director, officer or agent of a corporation with actual or usual authority to issue the document is not valid or not genuine;

except where the person has or ought to have, by virtue of the person’s position with or relationship to the corporation, knowledge to that effect.

[18] In Royal Bank v. Savin[^3] Rutherford J. dealt with the application of the indoor management rule in the context of loans made by a bank:

The bank's answer to Mr. Savin's argument is fairly straightforward. The bank contended that the cumulative effect of the documentation provided to the bank by Cookslane was that the bank had authority to deal with either Mr. Kroul or Mr. Savin concerning Cookslane's financial arrangements. On the strength of the documents the bank was entitled to advance funds to Cookslane on application by its officers and directors. The bank relied on the "indoor management rule" set out in Sheppard v. Bonanza Nickel Mine (1894), 25 O.R. 305 at p. 309 (Ch. Div.), where it is stated:

The rule established by authority is, that where the proposed dealing is not inconsistent with the constitution of the company, the party contracting need not enquire into the regularity of the internal proceeding. It is to be assumed that all is being done in due course, and the disclosure that such was not the case, will not avail to displace or nullify a completed instrument or transaction.

The bank argued that it had no actual or constructive knowledge of any impropriety on the part of Mr. Kroul, nor of any limit on his authority, and was entitled to rely on the communications and acts of Mr. Kroul as the person responsible for the affairs of Cookslane: see Merit Investments Corp. v. Mogil (March 23, 1989, Ont. H.C.J., Anderson J., at p. 87) [summarized 14 A.C.W.S. (3d) 378].

I find that the bank was justified in relying on the documentation and in believing that Mr. Kroul was acting within his authority as a director and officer of Cookslane. The bank had no indication of any improper conduct on the part of Kroul and only advanced funds to Cookslane on the basis of Kroul's request.

[19] So, too, in the present case the Bank was justified in relying on the 216 Directors’ Resolutions and Officer’s Certificate in thinking that Jagoda Heilman was authorized to sign the Loan Agreement on behalf of 216, as well as the 216 GSA. The Bank had no indication of any improper conduct on the part of Jagoda Heilman. No basis therefore exists to set aside 216’s liability for the loans made by the Bank.

V. Summary and Costs

[20] For the reasons set out above, I conclude that the Bank has demonstrated that no genuine issue requiring a trial exists with respect to Wallerstein’s claim against it, and I grant an order dismissing the action against the Bank.

[21] I would encourage the parties to try to settle the costs of this motion. If they cannot, the Bank may serve and file with my office written cost submissions, together with a Bill of Costs, by February 20, 2013. Wallerstein may serve and file with my office responding written cost submissions by March 1, 2013. The costs submissions shall not exceed three pages in length, excluding the Bill of Costs.

D. M. Brown J.

Date: February 13, 2013

[^1]: 2011 ONCA 764.

[^2]: Hercules Managements Ltd. v. Ernst & Young, 1997 345 (SCC), [1997] 2 S.C.R. 165, paras. 59 and 62.

[^3]: (1990), 1990 6872 (ON SC), 71 O.R. (2d) 622 (S.C.), paras. 37, 38 and 40; affirmed [1994] O.J. No. 4518 (C.A.)