ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: CV-12-453362
DATE: 20140423
B E T W E E N :
STEVE BIANCANIELLO, NICK ROMANO, PRINOVA TECHNOLOGIES INC., PRINOVA SOFTWARE INC.
Plaintiffs/Respondents
– and –
DMCT LLP, COLLINS BARROW and COLLINS BARROW TORONTO LLP
Defendants/Applicants
Adam Pantel
for the Plaintiffs (Respondents)
Thomas D. Galligan
for the Defendants (Applicants)
HEARD: April 16, 2014
CHAPNIK J.:
[1] The defendants move for summary judgment dismissing the plaintiffs’ action for damages against them. According to the defendants this is a simple matter of enforcing a settlement in a previous action which included a broadly-worded Mutual Release signed by the parties. Thus, they say, this action against them is “res judicata”. Moreover, the case is “document driven with few witnesses and factual issues”, making it amenable to a summary determination.
[2] I disagree. First, in my view, the plaintiffs’ action is not barred by reason of the previous matter and the release effected in that action; and therefore, there is no issue of “res judicata” in the particular factual circumstances before me. Second, there are serious triable issues raised by the plaintiffs which require a trial for their disposition.
the facts
[3] The underlying facts can be briefly summarized as follows:
The defendant DMCT LLP (DMCT), a firm of accountants, was engaged by the plaintiffs from 2004 until May 2007 to provide them with accounting services, including the preparation of financial statements, corporate income tax returns and the provision of income tax advice.
Prinova Technologies Inc. (PTI) was incorporated in 1998 as a consulting business to provide services to the public related to document automation. Subsequently, a software business was developed and in late 2006 the individual plaintiffs decided to divide the two businesses; and as a result, they incorporated Prinova Software Inc. (PSI) with a view to moving the software business to that entity. The individual plaintiffs, Steve Biancaniello and Nick Romano were 50% partners and officers, directors and shareholders of the corporate entities.
In late 2006, they approached DMCT for advice as to how to best achieve their objective. Consequently, by way of memorandum dated January 30, 2007, Enzo Testa (Testa), a partner of the defendant advised the plaintiffs that one way to transfer the software business, its assets and intellectual property to the new company on a tax deferred basis would be to transfer shares to the new company in a process known as a “butterfly transaction”. In pursuance thereof, Testa prepared a further memorandum on April 19, 2007, outlining the steps to be taken by PTI to effect the transaction on a tax deferred basis. The proposed steps were completed in May 2007; however, the transaction was not reflected in the accounting records or books of the corporate companies.
From December 15, 2006 to November 16, 2007 PTI owed a total of $66,632.45 to the defendant for unpaid services in respect of three separate matters, one being the fees rendered for the advice on the aforesaid butterfly transaction. Accordingly, DMCT commenced an action against the companies for the outstanding fees. The parties subsequently entered into Minutes of Settlement in which the claimed fees were reduced to $35,000 and the action was dismissed without costs.
As part of the settlement, the parties executed a Mutual Release on March 31, 2008. It is this release that forms the subject matter of the within motion and which the defendant claims constitutes a bar to the within action for damages against DMCT.
Subsequently, in late 2011 the plaintiffs discovered that the representations made by DMCT that the transactions could be structured on a tax free basis, were misrepresented to the plaintiffs. On the contrary, the plaintiffs were independently advised that the transactions as structured on Testa’s advice could be subject to a tax liability of approximately $1,240,000 before interest, penalties and taxes.
Accordingly, the plaintiffs retained a tax lawyer to bring an application to rescind the transactions and Price Waterhouse Coopers prepared a report dated May 23, 2012 in support of the applications for rescission. More importantly, Testa of DMCT swore an affidavit on June 1, 2012 in support of the rescission application acknowledging that the transactions as designed by DMCT did not comply with the provisions of s.52(2) of the Income Tax Act, and the result was therefore, contrary to the plaintiffs’ intentions.
The plaintiffs are seeking damages in this action for the legal and accounting fees in excess of $250,000 paid by them to successfully rescind the transactions proposed by DMCT. They found their action on a claim for damages for breach of contract, professional negligence and misrepresentation. They also seek an order setting aside the release signed in the other matter on March 31, 2008.
issues
[4] The issues raised before me are:
Is the plaintiffs’ action barred by the release in the 2007/2008 action for fees commenced by the defendants and settled between the parties? In other words, does the doctrine of “res judicata” apply in this case?
If not, has the plaintiff raised triable issues that require a trial for their resolution?
discussion
(a) Issue No. 1 – The Release
[5] The Mutual Release executed by the parties in the fees action on March 31, 2008 contained the following:
KNOW ALL MEN BY THESE PRESENTS that DMCT LLP (“DMCT”), and PRINOVA TECHNOLOGIES INC. and PRINOVA SOFTWARE INC. (hereinafter collectively referred to as “Prinova”), (including their officers, directors, employees, representatives, associates and assigns) in consideration of the sum of THIRTY-FIVE THOUSAND DOLLARS ($35,000.00) and other good and valuable consideration, receipt and sufficiency of which is hereby acknowledged, do hereby remise, release, and forever discharge each other of and from all manner of actions, causes of actions, suits, debts, duties, accounts, bonds, covenants, contracts, claims and demands which against each other they had, now have or hereafter may, can or shall have for or by reason of any cause, manner of thing whatsoever existing to the present time with respect to any and all claims arising from any and all services provided by DMCT to Prinova through to and including December 31, 2007 and, without limiting the generality of the foregoing, with respect to any and all claims, counterclaims or defences that were pleaded or could have been pleaded in the action commenced in the Ontario Superior Court of Justice, as court file no. 08-CV-349246 PD3.
[6] As noted above, I do not accept the defendants’ argument that this release constitutes a bar to the within action or that this action is “res judicata” due to the settlement in the fees dispute. I make this determination based on the following:
The wording of the release refers particularly to claims “existing to the present time”. That was in 2008 whereas the plaintiff only learned of the defendants’ admitted negligence in 2011. Indeed, the evidence demonstrates that the defendant never made the proper records or tax filings that would have evidenced the transaction and possibly brought the problem to light. There would therefore have been no basis for the plaintiffs to have asserted a claim, counterclaim or defence in the fees action at the relevant time.
I accept the plaintiffs’ statement that the underlying basis for the fees dispute as it pertained to the butterfly transaction was the excessive fees it alleged were charged for this advice. There was no complaint regarding the quality of service and hence, “res judicata” would not apply. There never was any adjudication on the merits of the within action for damages.
All of the cases relied on by the defendant regarding the importance and purpose of “settlement” do not apply to this particular circumstance and can easily be distinguished on their facts. For example, in Murray v. Marcoux, [2009] O.J. No. 4610 (S.C.), a motor vehicle accident case was settled and the plaintiff tried to rescind the settlement on the basis that her condition worsened subsequently. That situation is not in any way reflective of the facts in this case.
Similarly, the line of cases where certain factual assumptions made by a plaintiff in entering the settlement prove incorrect and the court refuses to set aside the consent judgment on that basis is equally distinguishable from the facts here. See for example, Amyotte v. Wawanesa Mutual Insurance Company, [2002] O.J. No. 1458.
As noted, the fees action covered outstanding fees from December 15, 2006 to November 16, 2007; and the release pursuant to the parties’ settlement on quantum was executed in March 2008. It was only in late 2011 that the misrepresentations were discovered by the plaintiffs.
Finally, the Mutual Release is a standard, boilerplate form of release that did not and was not realistically intended by its wording to apply to an unrelated matter that arose five years subsequently and was not contemplated by the parties. As noted by Testa in his affidavit of June 15, 2012 filed in the rescission application, the result of non-compliance with s.52(2) of the Income Tax Act was “contrary to the intentions” of both parties. The standard release in the fees action cannot, in my view, be read broadly to cover this circumstance. This is not a situation such as occurred in J. Nunes Diamonds Ltd. v. Dominion Electric Protection Co., 1972 12 (SCC), [1972] S.C.R. 769 (S.C.C.) relied on by the defendant in which a contract had been specifically limited to claims of $50 in liquidated damages, the subsequent claim lacked credibility and the release precluded any other warranties or conditions.
In summary, in my view, the within action constitutes a separate and distinct cause of action unknown at the time of the release and unrelated to the issue of the disputed fees claimed by the defendants. There is simply no applicable nexus that ties one matter to the other, substantively, qualitatively or temporally. Thus, to answer issue no. 1, the plaintiff’s action is not barred by the terms of the Mutual Release; and the doctrine of res judicata does not apply in the particular circumstances before me.
(b) Issue No. 2 – Triable Issues
[7] A number of triable issues were raised by the plaintiffs which, in my view, require a trial for their resolution, some of which are as follows:
How and when did Testa come to know that his advice was in error?
Based on Testa’s advice, did the plaintiffs incur a potential tax liability of approximately $1.2 million; (and will the parties require expert opinion evidence in that regard?)
Did the defendant ever file the necessary records or materials, either with the proper authorities or otherwise, to document the butterfly transaction; and if not, why not?
Do the causes of action claimed in the pleadings for damages for breach of contract, professional negligence and misrepresentation apply in these factual circumstances? Does the tort of unsconscionability apply?
conclusion
[8] In the case of Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764, [2011] O.J. No. 5431 (C.A.) at p.50 the court held that motions for summary judgment are appropriate when the parties agree to this procedure, the claims or defences are without merit or the judge can fully appreciate all of the evidence and issues required to make a dispositive finding without a trial and given additional considerations.
[9] I am satisfied that the claim of the plaintiff has merit and that there are material facts in issue that require a trial for their resolution. I find that the prior settlement and release pertaining to the fees dispute in no way constitutes a bar to this action. In my view, this case ought to proceed to trial. A court hearing the case would be better positioned to assess credibility, weigh the evidence, fully appreciate the underlying facts and issues and if necessary, assess damages.
[10] This motion for summary judgment is dismissed. The defendants submitted a costs outline seeking a total of $36,775.83 for fees and disbursements on a partial indemnity basis. The plaintiffs seek a total of $6,905.35 or $11,508.92 for costs on a partial or substantial indemnity scale, respectively.
I see no reason to grant substantial indemnity costs. The amount claimed by the plaintiffs is fair, reasonable and clearly within the reasonable expectation of the parties. Given that, and the factors set out in rule 57.01 and the prevailing case law, I fix the costs of the motion in favour of the plaintiffs in the all inclusive sum of $6,905.35.
CHAPNIK J.
RELEASED: April 23, 2014
COURT FILE NO.: CV-12-453362
DATE: 20140423
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W EE N :
STEVE BIANCANIELLO, NICK ROMANO, PRINOVA TECHNOLOGIES INC., PRINOVA SOFTWARE INC.
Plaintiffs/Respondents
– and –
DMCT LLP, COLLINS BARROW and COLLINS BARROW TORONTO LLP
Defendants/Respondents
REASONS FOR JUDGMENT
CHAPNIK J.
RELEASED: April 23, 2014