SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: 09-CV-379475

MOTION HEARD: February 5, 2014

Re: VTF Holdings Ltd.

Plaintiff

v.

2151874 Ontario Inc., Universal Music
Canada Inc. and Stephen Granovsky

Defendants

BEFORE: Master Thomas Hawkins

COUNSEL:
Eli Pullan for moving and responding plaintiff
F (416) 977-1241

Elliot Birnboim for moving and responding
Defendants 2151874 Ontario Inc.
and Stephen Granovsky
F (416) 368-0300

No one for defendant Universal Music Canada Inc.

REASONS FOR DECISION

Nature of Motion

[1] I have several motions before me. At the conclusion of argument on February 5, 2014 I adjourned the motion of the defendant 2151874 Ontario Inc. (“2151874”) for judgment under Rule 21 dismissing this action as against the defendant Stephen Granovsky (“Granovsky”) to be heard by a judge. (The exact nature of and basis for the Rule 21 motion is not clear to me. The moving defendants’ notice of motion is very terse.) I granted in part the motion by Granovsky for judgment dismissing this action as against Granovsky because, in my view, the existing statement of claim does not allege that Granovsky committed any civil wrong. That being so, I concluded that the existing statement of claim does not raise any genuine issue requiring a trial as against Granovsky. However, I declined to dismiss this action as against Granovsky before I have dealt with the motion by the plaintiff VTF Holdings Ltd. (“VTF”) for leave to amend the statement of claim. My disposition of that motion by VTF is dealt with below at paragraphs [4] to [17].

[2] Finally, there is a motion by 2151874 for security for costs from VTF. At the conclusion of argument on February 5, 2014 I made an order that within 60 days VTF post security for the costs of 2151874 through to the end of the pre-trial of this action in the sum of $25,000 with reasons to follow. My reasons disposing of that motion by 2151874 are set out below at paragraphs [18] to [25].

[3] A status hearing of this action took place on May 24, 2013. At that time, as the presiding master, I directed that VTF set this action down for trial by February 27, 2014. On February 5, 2014 it was abundantly clear that VTF would not be able to meet this deadline. I therefore extended the deadline by which VTF must set this action down for trial to July 30, 2014. That deadline may have to be adjusted again, particularly if anyone appeals from this decision.

VTF Motion to Amend Statement of Claim

[4] I will deal first with the motion by VTF for leave to amend the statement of claim in terms of the draft amended statement of claim found at tab 1A of VTF’s motion record, which I marked as volume 1.

[5] Motions for leave to amend pleadings are governed by rule 26.01. Rule 26.01 provides as follows.

On motion at any stage of an action the court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.

[6] The proposed amendments to paragraphs 5, 9, and 12 of the draft amended statement of claim are proper. These amendments do not allege that Granovsky committed any civil wrong. Leave to make these amendments is granted.

[7] The controversial amendments are found in paragraphs 17 and 17a of the draft amended statement of claim. There VTF proposes to allege the following.

17. The defendants have, in breach of contract, and wrongfully, refused to remit the Principal to VFT.

17a. The plaintiff pleads that following the DEP sale, Granovsky, for his economic benefit, improperly directed 2151874 not to pay VFT $200,000.00, or any portion thereof, that 2151874 owed VFT for its 52% interest in 2151874 and corresponding interest in PRSL and DEP, and further pleads that Granovsky deceitfully and dishonestly failed to honour the promissory note that 2151874 signed to secure the Share Sale that Granovsky negotiated.

[8] Adding the words “and wrongfully” to paragraph 17 does not by itself allege any cause of action. The wrongful acts and/or omissions must be set out. Here they are not set out.

[9] Here the issue is whether the allegations in paragraph 17a are sufficient to render Granovsky personally liable for the failure of 2151874 to pay the promissory note which 2151874 gave to VTF.

[10] The allegation towards the end of paragraph 17a that Granovsky deceitfully and dishonestly failed to honour the promissory note in question is by itself not sufficient to render Granovsky personally liable. Granovsky is not a party to that promissory note. The only parties to that promissory note are 2151874 as promisor and VTF as promisee.

[11] In Normart Management Ltd. v. West Hill Redevelopment Co., 1998 2447 (ON CA), [1998] O.J. No. 391, 37 O.R. (3d) 97 the Court of Appeal for Ontario considered the circumstances in which directors or officers of a corporation will be held personally liable for the acts or omissions of that corporation.

[12] Finlayson J.A., who delivered the judgment of the court, expressed himself as follows (at pages 9 and 10)

It is well established that the directing minds of corporations cannot be held civilly liable for the actions of the corporations they control and direct unless there is some conduct on the part of those directing minds that is either tortious in itself or exhibits a separate identity or interest from that of the corporations such as to make the acts or conduct complained of those of the directing minds: see ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. (1995), 1995 1301 (ON CA), 26 O.R. (3d) 481 at p. 491, 129 D.L.R. (4th) 711 (C.A.). In the statement of claim in appeal, there is no factual underpinning to support an allegation that the personal defendants were at any time acting outside their capacity as directors and officers of the corporations of which they were the directing minds. There is nothing in the pleadings which suggests that in making the alleged arrangements, Kohn and the Lebovics were acting other than on behalf of and in the interests of the corporations that they controlled. Rather, the impugned transactions were completed in the name of the corporate respondents and for the benefit of the corporate respondents. In the absence of further facts, liability does not attach to the individual respondents merely by virtue of the fact that the individual respondents stood to gain from the completion of the impugned transaction as a result of their financial positions within the respondent corporations. The following words of ScotiaMcLeod, supra, at p. 491 are applicable:

A corporation may be liable for contracts that its directors or officers have caused it to sign, or for representations those officers or directors have made in its name, but this is because a corporation can only operate through human agency, that is, through its so-called “directing mind”. Considering that a corporation is an inanimate piece of legal machinery incapable of thought or action, the court can only determine its legal liability by assessing the conduct of those who caused the company to act in the way that it did. This does not mean, however, that if the actions of the directing minds are found wanting, that personal liability will flow through the corporation to those who caused it to act as it did. To hold the directors of Peoples personally liable, there must be some activity on their part that takes them out of the role of directing minds of the corporation.

[13] To allege that Granovsky acted wrongfully and for his own economic benefit and that he acted improperly, deceitfully and dishonestly as VTF alleges in the proposed amendments to the statement of claim is not sufficient to render Granovsky personally liable for the failure of 2151874 to pay the promissory note.

[14] This is clear from the judgment of Finlayson J.A. which I have quoted above. The last sentence from that quotation (which is actually from the judgment of the same court in ScotiaMcLeod Inc. v. Peoples Jewellers Ltd.) is particularly pertinent. That sentence provides as follows.

To hold the directors of Peoples personally liable, there must be some activity on their part that takes them out of the role of directing minds of the corporation.

[15] Here there is no allegation that Granovsky was acting in some capacity other than that of the directing mind of 2151874. The proposed amendments in paragraphs 17 and 17a of the draft amended statement of claim are not sufficient to render Granovsky personally liable for the failure of 2151874 to pay the subject promissory note. That being so, these proposed amendments in paragraphs 17 and 17a are an untenable plea. Leave to amend to raise an untenable claim or defence should not be granted.

[16] In these circumstances I find it unnecessary to deal with the defence argument that the proposed amendments in paragraphs 17 and 17a are statute barred.

[17] Since I have concluded that the original statement of claim did not allege that Granovsky committed any civil wrong and that the proposed amendments to the statement of claim either do not allege that Granovsky committed any civil wrong or amount to an untenable plea, I grant the motion by Granovsky for judgment dismissing this action as against Granovsky on the ground that neither the original statement of claim nor the proposed amended statement of claim raise any genuine issue requiring a trial as against Granovsky.

Security for Costs

[18] The following are my reasons for my decision that VTF should post $25,000 as security for the costs of 2151874 through to the end of the pre-trial of this action.

[19] The motion by 2151874 for security for costs was brought on the basis of subrule 56.01(1)(d). That subrule provides as follows.

The court, on motion by the defendant or respondent in a proceeding, may make such order for security for costs as is just where it appears that, …

(d) the plaintiff or applicant is a corporation or a nominal plaintiff or applicant, and there is good reason to believe that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent;

[20] VTF, the plaintiff, is a corporation.

[21] Before bringing this motion, counsel for 2151874 wrote to counsel for VTF advising of his intention to bring the present motion “unless you can provide some reasonable and satisfactory evidence that VTF has the ability to pay costs.” Counsel for VTF did not respond to this request for evidence of VTF’s ability to pay costs.

[22] In 737071 Ontario Inc. v. Min-A-Mart Ltd., [1996] O.J. No. 1173 (O.C.J. (G.D.)) the same thing happened. The plaintiff did not respond to a defence request for information as to the plaintiff’s assets in Ontario available to satisfy an award of costs. Philp J. said (at paragraph (11) that this lack of a response, coupled with delay in the prosecution of this action, meant that there was good reason to believe that the plaintiff had insufficient assets in Ontario to pay the costs of the defendant.

[23] There has been delay in the prosecution of this action. The action is almost five years old. It is still at the pleadings stage.

[24] In these circumstances I am satisfied that there is good reason to believe that VTF has insufficient assets in Ontario to pay the costs of 2151874. An order for security for costs is just in this situation.

[25] I ordered security be posted in the amount of $25,000 because this action has to go through both production of documents and examinations for discovery before the parties get to the pre-trial.

Costs

[26] The moving defendants have been successful on these motions heard by me and are entitled to costs. I fix those costs of the motions argued before me on February 5, 2014 at $6,000 and order VTF to pay such costs to the moving defendants within 30 days.

(original signed)_

Date: June 16_, 2014
Master Thomas Hawkins