ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: CV-09-4292-00
DATE: 20140220
B E T W E E N:
JOHN SAWAH
Ethan M. Rogers, for the Plaintiff
Plaintiff
- and -
STRATEGY INSURANCE LIMITED, STEPHEN STONHILL, ET AL
Andrew Parley, for the Defendants
Defendants
HEARD: January 29, 2014
REASONS FOR ORDER
Justice Thomas A. Bielby
INTRODUCTION
[1] The plaintiff wishes to amend the Statement of Claim (the “Claim”) herein by adding the following:
The Plaintiff pleads that SIL and SICL were a sham and were incorporated for the purpose of perpetrating the type of fraud as has been perpetrated as against the Plaintiff. The Plaintiff pleads that this is a proper case for the corporate veil to be lifted and for liability to fall on the corporate entities and Stonhill and Forrest.
[2] The motion is opposed by the defendants, Stephen Stonhill (“Stonhill”) and Andrea Rinaldo, the spouse of Stonhill. The other defendants have either consented to or are not opposed to the relief sought.
[3] The plaintiff seeks an additional amendment to the Statement of Claim which is not opposed by any of the defendants. The plaintiff asks that paragraph 61 of the Claim be amended by changing the number ‘57’ in the first sentence to ‘59’, alleging a typographical error and an order is to issue allowing this amendment.
BACKGROUND
[4] The plaintiff, in the spring of 2007, loaned $300,000.00 to the defendant 1486345 Ontario Limited (“148645”) which, as a term of the loan, agreed to repay the plaintiff $350,000.00 within six months. The loan was guaranteed by the defendant SIL.
[5] The loan went into default and neither 1486345 nor SIL have repaid any of the debt.
[6] The plaintiff commenced an action to collect the debt, and on November 16, 2007, obtained judgment against 1486345 and SIL for $350,000.00.
[7] On September 21, 2009, the plaintiff issued the Claim in this action, which was first amended on November 4, 2009.
[8] The amendment in issue was first proposed by the plaintiff’s counsel to the defendants by letter dated October 16, 2012, to which was attached the proposed draft amended Statement of Claim (motion record, tab A).
STATEMENT OF CLAIM
[9] Paragraph 3 of the current Claim, claims against SIL, SICL, 1486345, Stonhill, Forrest and Leon Lekhtman, $350,000.00 in general damages for fraud, deceit and conversion.
[10] Paragraph 13 of the Claim describes Stonhill as an officer, director and a controlling mind of SIL and SICL and paragraph 14 describes Forrest as the Chief Underwriting Officer of SIL and SICL.
[11] The Claim, at paragraph 17, sets out the history of the interrelationships between the parties to this action.
[12] At paragraph 59 and thereafter is set out the basis of the claims against SIL, SICL, Stonhill and Forrest. It is alleged that certain representations were made which were knowingly false. The alleged misrepresentations were particularized out as follows:
a. that SIL and SICL were insurance companies operating in Ontario;
b. that SIL and/or SICL were authorized to sell insurance products in Ontario;
c. that SIL and/or SICL were operating an insurance business at 200 Yorkland Boulevard, Suite 200, Toronto, Ontario;
d. that the financial statements provided to the plaintiff prior to him entering into the agreement (to loan) were financial statements which were accurate and which truthfully represented the financial state of SIL and/or SICL;
e. SIL and/or SICL failed or refused to advise the plaintiff that their parent company Strategy International Insurance Group had been prohibited from doing business due to its failure to pay taxes in its home state of Texas, USA;
f. SIL and/or SICL represented that they sold various insurance products;
g. SIL and/or SICL represented that they were companies with substantial assets and that they had significant reserve funds in order to satisfy and insurance claim, and
h. SIL and/or SICL represented that they were willing and able to pay the $350,000.00 that was represented by the Financial Guaranty in the event that 1486345 failed or refused to pay the funds to the plaintiff, on September 22, 2007 when the loan came due.
[13] Paragraph 60 of the Claim reads as follows:
The plaintiff pleads that the foregoing representations by SIL and/or SICL were each false representations, relied upon by him when he entered into the Agreement. The plaintiff pleads that he has suffered damages as a consequence of the representations made by SIL and/or SICL.
[14] Paragraph 61 of the statement of claim reads:
The plaintiff pleads that Stonhill and/or Forrest made representations as referred to in paragraph 57 (now paragraph 59) above on behalf of SIL/SICL. The plaintiff pleads that Stonhill and Forrest made these representations knowing that they were false, intending that they would entice the plaintiff to enter into the Agreement and the plaintiff pleads that the representations did entice him to enter into the Agreement and that he has suffered damages as a consequence.
[15] I think that paragraph 68 should also be noted and it states:
Sawah pleads that SIL, SICL, Stonhill and Forrest conspired with Lekhtman to entice Sawah to enter into the Agreement. Sawah pleads all parties knew from the outset that neither Lekhtman, 1486345 or SIL had any intention of paying the amounts loaned or guaranteed pursuant to the financial guarantee. Sawah plead that the noted defendants conspired for the purpose of having him enter into the Agreement and divided the proceeds of the loan amongst themselves for their personal benefit.
ADDITONAL FACTS IN ISSUE
[16] In July of 2008, the plaintiff conducted an examination in aid of execution of Stonhill, representing SIL. As a result of this examination, the plaintiff learned that SIL was a Bahamian Company which did not conduct insurance business or no longer conducted insurance business in Canada and that it was not regulated. It was the evidence of Stonhill that SIL operated globally and that it could execute guarantees.
[17] Counsel for the plaintiff submits to the Court that it was at that point - July, 2008 - that he suspected fraud, believing SIL must have known that it would not be able to honour the guarantee and wondered to some extent, if SIL was a legitimate company.
[18] The plaintiff submits that at the time the original Claim was issued, in November, 2009, that such was the extent of his knowledge on these issues.
[19] On October 20, 2011, Stonhill was examined for discovery within the framework of this action. As a result of this examination and/or in the subsequent answers to undertakings, the following information was obtained:
a. SIL never sold any products and specifically never sold insurance anywhere;
b. SIL is not licensed in Ontario nor is any affiliated company;
c. there were no employees at the New York office and that the office existed for marketing purposes;
d. the company server was broken and could not be repaired and therefore no data could be recovered;
e. SIL has never filed an income tax return in Canada;
f. there were no policies written or underwritten in Ontario;
g. there were not sales in the USA nor were any income tax returns filed in the USA;
h. there were no sales or tax returns filed in the United Kingdom; and
i. the purpose of the Toronto office was administrative and marketing.
SUBMISSIONS
Plaintiff
[20] Counsel for the plaintiff submits that, as a result of the information obtained on the examination of discovery, it became clear that SIL and/or SICL were incorporated for illegal purposes; that is, to assist in facilitating a fraud.
[21] It is submitted by the plaintiff that further to Rule 26 of the Rules of Civil Procedure, on a motion at any stage of an action, the court shall grant leave to amend the pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.
[22] It is submitted that the proposed amendment of paragraph 60, is based on the material facts already pleaded in the Claim and that the court has an inherent jurisdiction to pierce the corporate veil, based on those facts.
[23] It is submitted that the proposed amendment does not make additional factual allegations, but merely seeks to provide an additional remedy and is not subject to a limitation period restriction.
[24] In the alternative it is submitted by the plaintiff that, if the proposed amendment pleads a new cause of action, that, pursuant to the discoverability rule, the limitation period commenced running on October 20, 2011, when Stonhill was examined for discovery and the additional facts discovered.
[25] It is submitted that where the motions judge is not in a position to resolve the motion on the facts before the court, the amendment ought to be granted without prejudice to the defendants to plead the limitation period expiry as a defence.
Defendants
[26] Counsel for Stonhill submitted that the amendment sought represents a new cause of action, based on new material facts being the incorporation of the companies in issue for the purpose of facilitating a fraud.
[27] It is submitted that the new claim was discoverable at the time Stonhill was examined in aid of execution wherein sufficient information was available to the plaintiff to raise a reasonable concern as to the legitimacy of SIL and SICL which commenced the running of the two year limitation period. Accordingly, the motion to amend was brought outside the limitation period and as a result, there is an absolute bar to the amendment sought.
[28] It was also submitted by defence counsel that the piercing of the corporate veil only allows a personal claim to be brought against the owner or shareholder of a company and there is no evidence as to whether or not Stonhill is an owner or shareholder.
[29] It was submitted that the Claim lacks sufficient material facts to substantiate the amendment requested.
ANALYSIS
[30] Both counsel provided authorities to support their respective positions.
[31] 642947 Ontario Limited v Fleischer, [2001] O.J. No. 477, is a decision of the Ontario Court of Appeal. From paragraph 68 I quote, “Typically, the corporate veil is pierced when the company is incorporated for an illegal, fraudulent or improper purpose. But it can also be pierced if those in control expressly direct a wrongful thing to be done.”
[32] At the same paragraph the Court of Appeal referenced Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996) 1996 7979 (ON SC), 28 O.R. (3d) 423, at paragraphs 433-34 (Gen. Div.), affd [1997 O.J. No. 3754 (On CA) wherein it is stated, “The court will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct.”
[33] I accept and rely on the principles expressed in the above referenced case.
[34] I also note that the case references those “in control” of the company and not “shareholders”. In Burke Estate v. Royal and Sun Life Alliance Insurance Co. of Canada, [2011] N.B. J. No. 334, the New Brunswick Court of Appeal, at paragraph 61, refers to A-C-H International v. Royal Bank of Canada, 2005 17769 (ON CA), [2005] O.J. No. 2048 (ONCA) for the proposition that,
The question of whether the appellant as an officer and director of the ACPI and ACL could be found to be personally responsible for the tort committed by the corporations… had this question been raised on the pleadings...would require evidence to support a finding that the appellant exercised clear domination and control over the corporations in directing the wrongful things to be done, and that the conduct he engaged in was akin to fraud, deceit, dishonest or want of authority and constituted a tort in itself.
[35] From Poulin v Manitoba (WCB), [2003] M.J. No. 122 (CA), at paragraph 31, I quote, “Ordinarily, piercing the corporate veil is employed in order to protect against a fraud. It is usually invoked by a party seeking to reach behind the corporate structure to hold a director accountable for the sins of a corporation which he may control.”
[36] I find that Stonhill and Forrest controlled and/or were directors and/or officers of SIL and SICL, facts that were not disputed by counsel for the defendants. I reject the argument that it is only shareholders who are at risk when the corporate veil is lifted and find that persons who control a corporation, including officers and directors, are at risk of personal liability if the corporate veil is pierced.
[37] One of the authorities provided by defense counsel is Miquelanti Ltd. v FLSmith and Co., [2011] O.J. No. 2490, a decision of Perell J. of the Ontario Superior Court of Justice. At paragraph 18 the learned justice wrote,
The separate legal personality of the corporation, however, is not lightly disregarded and a shareholder is liable for the wrongs of a corporation in very limited circumstances.” While the quote references shareholders it does eliminate officer, directors or others who may control the corporation, from potential personal liability.
[38] I find that the court does not have an inherent jurisdiction to lift the corporate veil and that for such a remedy to be available to the court, it must be pleaded. In that regard I rely on the Burke Estate case, paragraph 48.
[39] Timbers Estate v. Bank of Nova Scotia, 2011 ONSC 3639, [2011] O.J. No. 2696 is a decision of R.D. Gordon J. of the Ontario Superior Court of Justice. The learned justice relies on Joseph v. Paramount Canada’s Wonderland, 2008 ONCA 469, [2008] O.J. No. 2339 (OnCA), for the principle that under the Limitations Act, 2002, the expiry of a limitation period is an absolute bar to an amendment that would create a new cause of action.
[40] From paragraph 13 I quote,
A cause of action is defined as a factual situation the existence of which entitles one person to obtain from the court a remedy against another person. When a proposed amendment relates to material facts that were not substantially pleaded in the original claim or are essential to support the claim being advanced, the amendment raises a new cause of action.
[41] At paragraph 14 the learned judge referred to Thompson v Zeldin, [2008] O.J. No. 3591 (SCJ) in which the court determined that a proposed amendment will not constitute a new cause of action if it:
a. simply pleads an alternative claim for relief arising from the same facts previously pleaded and no new facts are relied upon;
b. simply amounts to a different set of legal conclusions drawn from the same set of facts;
c. simply provides particulars of an allegation already plead; or
d. simply provides additional facts upon which the original right of actions is based.
e. In short, the proposed amendment must rely on facts which have been substantially pleaded in the original statement of claim.
[42] Dee Ferraro Ltd. v. Pellizzari, 2012 ONCA 55, [2012] O.J. No. 355 is a decision of the Ontario Court of Appeal, on the appeal of an order dismissing a motion to amend because the trial judge ruled that the appellant was attempting to plead new facts and new causes of action after the expiry of the limitation period.
[43] In Dee Ferraro, the plaintiffs had sued their lawyer for breach of contract, trust and fiduciary duty and for fraud and negligence. The plaintiffs sought to amend their pleadings to add claims for conversion, to require the defendant to deliver shares, and to add the remedies of constructive trust and rectification.
[44] The Court of Appeal ruled that the trial judge had erred and found the amendment did not create a new cause of action. At paragraph 4, the Appeal Court stated, “The original pleading, while far from elegant and orderly, contains all the facts necessary to support the amendments. The amendments simply claim additional forms of relief, or clarify the relief sought, based on the same facts as originally pleaded.”
[45] At paragraph 7, the Appeal Court noted that the original statement of claim contained broad allegations including breach of duty, conversion, fraud and negligence. At paragraph 9 the Court concluded,
In my view, apart from tidying up the claim for relief, and extending the relief sought, the proposed amendments do not add any material facts to those already pleaded. In some cases, the claims sought to be added are already found in the existing pleading. In other cases, the claims are simply alternative forms of relief based on the facts already pleaded.
[46] Finally, at paragraph 14, the Appeal Court noted,
This is not a case in which new and unrelated causes of action are being asserted base on new facts. The claims flow directly from the facts previously pleaded. I therefore conclude that the claims were not statute-barred and the amendments should have been permitted, in the absence of evidence of non-compensable prejudice.
[47] As noted previously, in the Claim in the matter before me, the plaintiff claims damages against SIL, SICL, Stonhill and Forrest for misrepresentation, fraud, deceit and conversion. Paragraph 59 lists the alleged false representations of SIL and SICL. Paragraph 61 refers to Paragraph 59 (per the unopposed amendment) and states that Stonhill and Forrest made those representations on behalf of SIL and SICL knowing that they were false.
[48] It is alleged that the purpose of these representations was to entice the plaintiff to advance the monies and that there was no intention on the part of the guarantors to repay the loan. Further it is pleaded that the monies advanced were used for the personal benefit of those who controlled the companies.
[49] Accordingly, I find that the amendment sought does not plead a new cause of action and in reaching this conclusion, I rely on the Dee Ferraro decision. I find that the amendment sought, to a large extent, alleges a different legal conclusion from the same facts.
[50] I find that the facts as pleaded are sufficient enough to support the new relief sought in the proposed amendment, that is, to pierce the corporate veil.
[51] As noted in 642947 Ontario Limited V. Fleischer referenced above, the corporate veil can be lifted not only if a company is incorporated for an illegal purpose but also if those in control expressly direct a wrong to be done and that a corporation cannot be used as a shield for fraudulent conduct.
[52] As in Dee Ferraro, the pleadings in this case are broad and general and while they do not state specifically that SIL and/or SICL were incorporated for an illegal purpose, are materially sufficient, if proven to be true, to conclude that those in control, that is Stonhill and Forrest, at the very least, directed a wrong to be done.
[53] I find that the Claim contains all the material facts necessary to support the amendment in regards to the status and purpose of SIL/SICL and that the amendment sought simply claims additional relief and seeks a different or alternative conclusion of the facts alleged.
[54] Alternatively, if the proposed amendment does plead a new cause of action, I do not believe the limitation period expired prior to the filing of this motion.
[55] Pepper v. Zellers Inc., 2006 42355 (ON CA), [2006] O.J. No. 5042 (ONCA) paragraph 16 , describes discoverability as, “A principle that provides that a limitation period commences when the plaintiff discovers the underlying material facts or alternatively, when the plaintiff ought to have discovered those facts by the exercise of reasonable diligence.”
[56] Counsel for the plaintiff argued that based on the principle of discoverability, it was not until the examinations for discovery were held that the limitation period should start. It was then that counsel formed the opinion that SIL and/or SICL were incorporated for an illegal means, that is, to perpetrate a fraud.
[57] Counsel for the plaintiff stated that it was not until then that he formed such an opinion with sufficient certainty.
[58] Counsel for the opposing defendants argues that ‘certainty’ is not necessary. It is submitted that at the examination in aid of execution, sufficient facts were disclosed such that a reasonable person would realize there was a possible claim. Therefore the limitation period commenced at that point in time and had expired when this motion was brought.
[59] In that regard the defendants relied on the authority, Incondo Building Corp. v. Steeles-Jane Properties, [2001] O.J. No. 3316, in which Justice Nordheimer stated at paragraph 14, “It does not require a final determination that the plaintiff is entitled to such recourse to start the limitation clock ticking for any claim…” A conclusive finding is not required.
[60] As noted at paragraph 26 of Coutanche v. Napoleon Delicatessen, 2004 10091 (ON CA), [2004] O.J. No. 2746, a decision of the Ontario Court of Appeal, that, “Perfect certainty is not required.”
[61] On this issue, it is my opinion that in regards to the principle of discoverability, the limitation period did not start to run until the examination of discovery of Stonhill, on October 20, 2011.
[62] The examination in aid of execution has a different purpose than an examination for discovery. The former is conducted to determine the means the judgment debtor has to satisfy the debt. Stonhill was examined as a representative of SIL and not as a defendant.
[63] The scope of the questions asked at an examination in aid of execution is limited by the Rules (Rule 60.18(2)).
[64] While at the examination in aid of execution, counsel for the plaintiff obtained some evidence in regards to SIL and the business it did or did not do in Canada or elsewhere. At that stage I do not believe a reasonable person would form the opinion that SIL may have been incorporated to perpetrate an illegal act or was used in a wrongful manner to the extent that the corporate veil ought to be pierced. I find that the information obtained on the initial examination at best may have stirred a suspicion, but that it was not until the examination for discoveries that sufficient information was gleaned to give rise to the reasonable possibility of such a claim. While absolute certainty is not required to start the running of a limitation period, I think more than a mere suspicion is required.
[65] At the examination for discovery it was learned that SIL did not conduct any real business in North American or the United Kingdom. The Toronto and New York offices were not used for any business purposes, but rather for marketing reasons, which I find were meant to perpetuate an image. It was at this date a reasonable person would have sufficient knowledge to conclude there was a possible claim.
FINAL RULING
[66] For the reasons above, I will allow the amendments to the Claim, as set out in the plaintiff’s motion record, at tab A.
[67] With respect to costs, if the parties cannot agree on costs, I will accept written submissions within 21 days of the release of this ruling.
Justice Thomas A. Bielby
Released: February 20, 2014
COURT FILE NO.: CV-09-4292-00
DATE: 20140220
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
JOHN SAWAH
Plaintiff
- and –
STRATEGY INSURANCE LIMITED, STEPHEN STONHILL, ET AL
Defendants
REASONS FOR JUDGMENT
Bielby, J.
Released: February 20, 2014