SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-12-9799-00CL
DATE: 20140820

RE: Elio Monaco and 854338 Ontario Limited, Applicants

AND:

The Templar Hotel Corporation, The Templar Development Ltd., Del Terrelonge and John Wee Tom, Respondents

BEFORE: Penny J.

COUNSEL:
Nathaniel-Erskine Smith for the Applicants

Elee Scarlett for the Respondents

HEARD: August 12, 2014

ENDORSEMENT

Overview

[1] In this application Monaco and 854388 Ontario Limited seek judgment enforcing the March 27, 2014 final arbitration award of The Honourable Mr. Jack Ground (the Award). Mr. Ground ordered the respondents to purchase 854’s shares in The Templar Hotel Corporation and The Templar Development Ltd. for $1.15 million, whereupon Monaco would cease to be a director and the unanimous shareholders agreement entered into between the parties would terminate.

[2] The respondents initially sought leave to appeal the Award. They have since abandoned that application.

[3] The main issue before me is whether the respondents should be granted a limited period of time in which to come up with the money to acquire 854’s interest or whether 854 should be allowed to enforce the Award immediately.

[4] Because the respondents are seeking ‘time to pay’ as a term of the exercise of the court’s power to enforce the Award, there is also a subsidiary issue of whether Monaco is entitled to remain, or exercise his powers as, a director of Development Corp. (or Hotel Corp.) pending the acquisition of 854’s shares.

[5] Finally, the respondents have raised an issue about the relationship between 854’s entitlement to be bought out, as ordered by Mr. Ground in the Award, and its mortgage on the hotel property. The respondents ask me to decide whether, if 854’s shares are acquired at fair value, as ordered by Mr. Ground, the mortgage in favor of 854 remains in place or should be discharged.

Background

[6] The basic facts are reviewed succinctly in Mr. Ground’s Award. Hotel Corp. holds title to property at 348 Adelaide St. W., Toronto on which The Templar Hotel is located. Development Corp. was incorporated to carry out the construction, operation and management of the hotel. 854 is owned and controlled by Monaco and holds 26.875% of the shares of Development Corp. (and possibly Hotel Corp.). The balance of the shares are owned by Terralonge and Tom.

[7] The property is subject to a first mortgage held by Romspen Investment Corporation and a second mortgage held by 854.

[8] Monaco, Terralonge and Tom are directors of Development Corp. The business and affairs of Development Corp. are governed by a unanimous shareholders agreement which provides, among other things, that during the construction of the hotel, a majority of the board must include Monaco.

[9] From 2003 to 2008, the parties worked together satisfactorily on the construction of the hotel. As a result of tensions between the parties with respect financing and management, in 2009 the parties attempted to negotiate a resolution of their differences which involved a sale by 854 of its shares in the hotel project. However, ultimately, the parties were unable to agree on the crucial “value” question and that settlement came off the table in July 2012. There were additional, unsuccessful, efforts to finance a buy-out of 854’s shares.

[10] During the course of the arbitration proceedings, Mr. Ground made several interim orders, culminating in an arbitration heard on November 25-29, 2013 and on January 28, 2014. The Award, of some 19 pages, was released on March 27, 2014.

[11] Mr. Ground found that the respondents had conducted the affairs of the hotel corporations in a matter that was oppressive to the minority shareholder, 854. The remedy ordered was a divorce – the respondents were required to buy-out the applicants’ interest for $1.15 million.

[12] As noted in an earlier endorsement of D. Brown J., Mr. Ground made specific findings of fact about oppressive conduct and gave extensive reasons for how he valued the shares which, both parties acknowledged, the respondents would have to purchase.

Enforcement of the Award

[13] Section 50 of the Arbitration Act, R.S.O. 1991, c.17 provides:

A person who is entitled to enforcement of an award made in Ontario or elsewhere in Canada may make an application to the court to that effect.

[14] Given that the Award does not provide any date by which the purchase of 854’s shares is to occur, the respondents seek preservation of the status quo (without enforcement) for a reasonable period of time to enable them to arrange financing for the buy-out ordered by Mr. Ground. This request is opposed by the applicants, who argue that the respondents have already had five months to arrange financing. They say, to quote D. Brown J.’s June 27, 2014 Endorsement, “the respondents should pull out their cheque-book and buy Monaco’s shares.”

[15] The respondents discharged their counsel shortly after the Award was released. Acting on their own, they asked for clarification from Mr. Ground on the timing question. His response was that, “there were no submissions made as to the timing of the purchase of Mr. Monaco’s shares or as to terms of payment of the purchase price.”

[16] Ordinarily, a question of this kind should be referred back to the arbitrator by way of formal application. It is not clear to me that any request was ever made to Mr. Ground to resolve this issue. All that appears to have been sought by the respondents was a clarification as to whether that issue had been addressed in the Award.

[17] Nevertheless, given the amount of time that has now gone by and the extent of the litigious quarreling that has intervened since the release of the Award, it seems to me to be in the interests of justice to resolve this question now, in the context of my jurisdiction to enforce the Award.

[18] The hotel is close to final completion and a certificate of occupancy. The respondents’ evidence documents efforts to find potential investors who would finance the acquisition of 854’s shares. Mr. Terralonge asserts in his affidavit that, “until the final inspection is completed and we have an unrestricted occupancy, a buyout of 854’s shares is commercially unrealistic for us to complete notwithstanding my personal desire to be able to affect a buy-out” as soon as possible.

[19] At the return of the motion, I was provided with a term sheet for equity financing that would enable the respondents to complete the purchase of 854’s shares. The closing date for the financing is October 3, 2014. The respondents therefore seek time to pay until after that date.

[20] The applicants point to prior judicial authorities in which the court, in oppression proceedings, has granted as little as seven days for the completion of a buy-out. The applicants point to the amount time that has already gone by since the Award was released. The applicants also express scepticism about the bona fides of the term sheet, given that the potential investor is a person who was involved in prior, aborted financing proposals.

[21] In the Award, Mr. Ground found that “the hotel business and operations would be more professionally managed by” the respondents. This formed the basis of his remedy requiring the buy-out of 854, rather than the other way around.

[22] There is no question that the applicants have made life difficult for the respondents. As D. Brown J. observed in his endorsement of July 22, 2014:

a party cannot use terms of an adjournment as a springboard to engage in his own oppressive conduct. That is precisely what Monaco has done. It is crystal clear that he wants to interfere to the maximum degree possible in the operations of the hotel in order to inflict the maximum amount of pain on the respondents with a view to compelling them to comply with the Final Award.

It is precisely because of this behavior that I find Terrelonge’s evidence about his difficulties in completing the buy-out credible. I have absolutely no doubt that the respondents dearly want the applicants out of their hair. If the buy-out were easy, it would have been done by now.

[23] While it is true that the respondents have already had several months to comply with the Award, the proposed closing of the pending financing is no later than October 3, 2014, less than six weeks away. Given that these parties’ difficulties have been ongoing since 2009, and given that it has always been glaringly obvious to both sides that a buyout of 854 was the only solution, I do not think it is unreasonable to permit the respondents another six weeks to conclude the purchase of 854’s shares. If they do not, enforcement shall swiftly ensue.

[24] I do not find Monaco’s evidence about alleged mal-administration of the hotel by the respondents at all persuasive. Mr. Ground has already found that the respondents are the more professional managers. They have a much larger financial stake in the hotel’s success than Monaco. Their incentives are all for the hotel to succeed. In addition, there is the evidence of Monaco’s own past misbehavior dealt with in D. Brown J.’s endorsement. In all of the circumstances, I am unable to find any material prejudice to the applicants that will change in the space of six weeks.

[25] I therefore grant the applicant’s request for an order enforcing the Award in the Superior Court of Justice but it shall be a term of that order that the enforcement is stayed until October 4, 2014.

Operational Status Pending Buy-Out

[26] The respondents asked me to find that Monaco’s entitlement to veto decisions of the board has terminated. The shareholders agreement provides that until construction is complete, a majority of the board must include Monaco. The respondents rely on a June 2, 2014 letter from the architect attesting to substantial completion under the Construction Lien Act as evidence that the project has been completed.

[27] The applicants point to evidence from a City building inspection of August 8, 2014 outlining a number of items which still have to be completed before a permit for full occupancy can be issued.

[28] I also note that this was an issue raised before Mr. Ground and which is dealt with in his Award. Even if I were to agree that I have jurisdiction to adjudicate on this issue (which I do not), I do not think the evidence supports the conclusion that the respondents seek. It is not at all clear that substantial completion for purposes of the Construction Lien Act qualifies as completion for the purposes of the shareholders agreement. There is also conflicting evidence on the point which can not be resolved on a motion of this kind.

[29] The respondents’ request in this regard is therefore dismissed.

[30] In a similar vein, the applicants asked me to reinstate Monaco with full rights on the board pending the buy-out of his shares. The shareholders agreement gives him this right and, they argus, the court ought not to take it away from him.

[31] The scope of Monaco’s involvement in the operations of the hotel was also an issue before Mr. Ground. An interim award restricted Monaco’s rights, essentially on the basis that the respondents, not Monaco, were financing ongoing operations. The issue also came before D. Brown J. during interlocutory proceedings leading up to the hearing of this motion. In his endorsement of July 22, 2014, D. Brown J. ordered the parties to negotiate a sensible solution to the status quo problems pending the hearing of the motion. The parties did so and their agreement is incorporated in a further endorsement of D. Brown J. dated July 29, 2014.

[32] The order of D. Brown J. dated July 29, 2014 shall continue with any necessary modifications until October 4, 2014 with two provisos: (i) in paragraph 7 of the Consent Endorsement (which varied paragraph 6 of the June 27, 2014 order), “August 12, 2014” shall be replaced with “October 4, 2014”; and (ii) any obligations which attract directors’ liability must be paid in priority to any other payments.

Status of 854 Mortgage

[33] The respondents advanced an argument that 854’s mortgage was intended to secure the purchase of its shares and that, if 854 received both fair value for its shares and the proceeds of its mortgage, it would be double-compensated. I was therefore asked to make some kind of declaratory order to this effect.

[34] I fail to see how that issue could possibly fall within the jurisdiction of the Superior Court given the requirement to arbitrate contained in the parties’ agreement.

[35] I also note that Mr. Ground’s determination of the value to be paid to 854 for its shares involved a lengthy analysis. Throughout Mr. Ground’s analysis there is repeated reference to 854’s mortgage. Whether or not the specific request being made of me was advanced before Mr. Ground, it is clear that it could (and perhaps ought) to have been raised during the arbitration.

[36] For these reasons, I decline to make any order or disposition relating to this matter.

Costs

[37] Both parties shall make their submissions as to costs in no more than two typed, doubled spaced pages, together with a Bill of Costs and any supporting documents, delivered to my attention within two weeks. Any party wishing to respond to a request for costs shall do so in a written submission of no more than one typed, double spaced page within a further one week.

Penny J.

Date: August 20, 2014