COURT FILE NO.: CV-14-10559-00CL

DATE: 20140903

SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: Kim Goodman, Harvey Finkelstein and Mitchell Finkelstein, Applicants

AND:

230 Major Mack Holdings Inc., Tread Finance Corp., Titan 230 Major Mack Inc., Lance Kotton, Titan Equity Group Ltd., Executive Leasing Inc. and Executive Leasing Capital Corp., Respondents

BEFORE: Justice W. Matheson

COUNSEL:
Gordon Capern and Denise Cooney, for the Applicants

Nancy Tourgis, Melvyn Solmon and Ryan McKeen, for the Respondents

HEARD: August 14, 2014, and written submissions thereafter

ENDORSEMENT

W. Matheson J.

[1] In this oppression application the applicants primarily seek the appointment of an inspector under section 161 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”), to investigate the financial dealings of the respondents regarding the monies raised for use in specified real estate projects. Other relief is also sought.

[2] A myriad of issues have been raised by the applicants, but the gravamen of the complaints relates to the commingling of investors’ funds outside the expected corporate structure and the absence of financial disclosure that could allay concerns about the use being made of those funds. There is no question that there is now considerable animus between the main applicant, Mitchell Finkelstein, and the sole personal respondent, Lance Kotton. This is reflected in some of the arguments made before me. Others are based upon undisputed facts, such as the continued unavailability of audited financial statements, the singling out of one shareholder and withholding of her dividend and the failure to make timely redemptions upon the retraction of preferred shares.

Brief background

[3] Four of the corporate respondents – 230 Major Mack Holdings Inc., Tread Finance Corp., Titan 230 Major Mack Inc. and Titan Equity Group Ltd. – are a group of companies known in these proceedings as “Titan.” Titan is generally in the business of real estate development and describes itself in its factum as using “single purpose” “corporate vehicles” to develop its real estate projects.

[4] Titan currently has three real estate projects:

(a) Kotton Cachet – a residential real estate development project in Richmond Hill;

(b) Oxford on Bathurst – another residential real estate development project in Richmond Hill; and

(c) Villa Del Sol – a seniors home located in Woodbridge.

[5] The first two projects are the primary focus of this application. Each of these projects has two companies directly associated with it – an operating company and a holding company – as follows:

(a) Kotton Cachet is owned by the respondent Titan 230 Major Mack Inc., which is a wholly-owned subsidiary of the respondent 230 Major Mack Holdings Inc.; and

(b) Oxford on Bathurst is owned by Titan 10703 Bathurst Inc., which is a wholly-owned subsidiary of Titan 10703 Bathurst Holdings Inc.

[6] It is now apparent that project-specific investment funds for the above projects were on-lent to the respondent Executive Leasing Capital Corp., which, according to the respondents, is used as “the administrative vehicle to hold and disburse the funds.” The funds were therefore commingled, not kept separate. This is a major focus of this dispute.

[7] Lance Kotton is the sole shareholder of the respondent Titan Equity Group Ltd., which owns, directly or indirectly, all of the corporate respondents. He is also the president of those companies, as well as the sole officer and director of some of them.

[8] With one exception, all of the corporate respondents are OBCA companies. The respondent Tread Finance Corp. is an Alberta company.

[9] Mitchell Finkelstein is a lawyer, and for a relatively short period of time before joining Titan in September of 2013, he was one of its external counsel. When Finkelstein initially joined Titan, he continued to provide legal services. In November 2013, he became Executive Vice-President of Titan Equity Group Ltd. It is alleged by the respondents that in addition to his then executive responsibilities, he continued to provide legal advice from time to time, presumably in addition to Titan’s General Counsel and its external counsel.

[10] Finkelstein was also an investor in Titan. The other two applicants are family members who were also investors, specifically his wife Kim and his father Harvey.

Titan investment vehicles

[11] In order to raise capital for any given project, Titan offers three types of investment vehicles:

(i) pooled mortgage investments (“PMIs”) – registered second mortgages that rank ahead of the other two investment vehicles;

(ii) preferred shares; and,

(iii) TREAD Notes – debentures issued by the respondent Tread Finance Corp. that are linked to the specific corporation that owns the property for that project.

[12] Both Harvey Finkelstein and Kim Goodman made investments in the Kotton Cachet project, in an amount totalling $600,000, for preferred shares. Mitchell and Harvey Finkelstein acquired TREAD Notes in relation to the Oxford on Bathurst project, investing a total of $180,000 between them.

Events giving rise to application

[13] Mitchell Finkelstein had some information about Titan before he became an employee and senior officer. Among other things, he was directly involved in the preparation of certain legal documents that are relevant here. In his evidence, Mitchell Finkelstein attests that once he assumed his position as a senior officer in November 2013, he attempted to familiarize himself with Titan’s operations, including its finances. In the course of doing so, he became increasingly concerned that all was not as he believed it should be. Matters escalated, culminating in a lengthy letter from him to Kotton dated February 25, 2014, describing in detail many matters of concern to him. The next day he was fired.

[14] It is undisputed that Mitchell Finkelstein’s personal demeanour could be difficult – his counsel frankly admitted that he may have been impolite and indelicate during his short tenure at Titan, but submitted that his demeanour was not inconsistent with the substantive issues that were advanced by him.

[15] The concerns raised by the applicants fall into these general categories:

(i) alleged misrepresentations to investors suggesting, wrongly, that each project and its assets are kept separate from one another, among other things;

(ii) the absence of 2013 audited financial statements, related concerns about late filing of tax returns and other inadequate financial disclosure;

(iii) the circumstances surrounding the payment of a declared dividend to preferred shareholders, including the failure to pay the dividend to only one of the preferred shareholders entitled to a dividend – specifically, the applicant Kim Goodman;

(iv) the failure to deal with the retraction of preferred shares in a timely way; and

(v) other allegations that relate directly or indirectly to the above.

Alleged misrepresentations

[16] The applicants’ main complaint is that Titan misrepresented its investment vehicles to investors on the basis that each real estate project and its assets, including investors’ funds, was kept separate from the others. An investor’s risk would therefore be limited to the project in which the investment was made. For example, a presentation document from earlier this year includes the following statement:

Each project is independently held in a single purpose vehicle to insulate from risks associated with other projects.

[17] Further examples are provided by Mitchell Finkelstein, who was, himself, making presentations to investors during his brief tenure. The respondents do not allege that he misspoke, but submit that the various representations relied upon do not give rise to the alleged restrictions on the use of funds.

[18] The respondents agree that there must be separate accounting in order to meet the commitments made to investors regarding the use of their funds; however, they dispute the suggestion that the funds ought to be in segregated accounts. The terms that attach to the preferred shares as set out in the articles of incorporation and subscription agreements do not expressly require the segregation of funds. Similarly, the terms of the TREAD Notes do not expressly require the segregation of funds. They therefore submit that commingling the funds in a separate company is acceptable.

[19] Representations were also made suggesting that the operations were transparent, using the phrase “trust, transparency and tenacity,” for example. The applicants rely on these representations to give rise to an entitlement to financial disclosure for the TREAD Note holders. The respondents agree that the preferred shareholders are entitled to some financial disclosure but dispute any entitlement to financial disclosure for the TREAD Note holders.

Financial disclosure

[20] There is no question that the 2013 audited financial statements have not yet been delivered. On the eve of the hearing of this application, “notice to reader” statements were delivered for the holding companies only. There are no audited statements, despite the respondents’ evidence that they were working on them and intended to have them for the end of August. I do not accept the respondents’ attempt to place some responsibility for the delay on either Mitchell Finkelstein or his former law firm. Given the timelines here, that suggestion simply does not make sense. There has not been an adequate explanation for the failure to deliver audited financial statements.

[21] Many requests for other financial information were made in this application. I accept the applicants’ characterization of the financial disclosure actually made as deficient from the standpoint of an adequate response to the concerns raised here. The financial disclosure comprises a small group of documents, some of which are out-of-date budgets, some of which are draft only and some of which are “notice to reader” only.

[22] There are also concerning entries in the financial information that has been produced, especially with respect to management fees. The draft financial summaries that Titan has produced for 2013 include inadequately explained management fees totalling more than $1.1 million as compared to $72,000 in 2012.

Unpaid dividend

[23] On December 31, 2013, a dividend was declared to preferred shareholders in the Kotton Cachet and Oxford on Bathurst projects, which was payable on January 30, 2014. In this application, the respondents attempted to place responsibility for the dividend declaration on Mitchell Finkelstein. This belies common sense since a director’s resolution was required and Mitchell Finkelstein was not a director. Indeed, there is no question that the directors (including Kotton) signed the required resolutions.

[24] It is not disputed that the dividends were not paid on time or all at the same time. In addition, it is not disputed that the dividends were not paid from funds already in hand – Kotton made a personal loan to fund the dividend payments.

[25] Further, Kotton singled out Mitchell Finkelstein’s wife out for special treatment, completely contrary to her shareholder rights. The dividend was not paid to her at all. Kotton claimed that he was entitled to set her dividend off against a personal loan he made to her husband. Kotton defends this position on the basis of discussions between him and Mitchell Finkelstein regarding the possibility of such a setoff. Thankfully, our legal system does not permit a company to fail to make a payment to a wife because of some ongoing discussion with her husband about his debts. Kim Goodman’s direct involvement and express agreement (likely with independent legal advice) would be minimum requirements before Kotton ought to have caused the company to fail to meet this basic corporate obligation to a shareholder. I note that Mitchell Finkelstein did not purport to consummate an agreement for the setoff in any event.

Preferred share redemption

[26] After the commencement of this application, Harvey Finkelstein and Kim Goodman gave notice to retract their preferred shares. While there was an issue between the parties about the effective date of the retraction, all parties agreed at the hearing of this application that the shares were required to be redeemed on or before August 22, 2014. This did not occur. Instead, only cheques post-dated to September 5, 2014, were provided on that date.

Other allegations

[27] A number of other allegations of misconduct have been raised by the applicants. In the interest of brevity, I will not recite all of the other allegations that each side makes against the other. I will deal with only one issue that is necessary for my order – the request to produce a shareholder list. By letter dated March 13, 2014, the applicant Kim Goodman requested a list of the registered holders of Class A preferred shares issued by 230 Major Mack Holdings Inc. With her letter, she enclosed the required statutory declaration under s. 146(6) of the OBCA. No list was forthcoming.

Discussion

[28] This application proceeds under both s. 161 and s. 248 of the OBCA. While the remedy of a Part XIII investigation is available under s. 248, I will first address the direct route under s. 161.

[29] The applicants have applied for an investigation under s. 161 on the following grounds:

(2) Where,…, it appears to the court that,

(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted, or the powers of the directors are or have been exercised, in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards, the interests of a security holder;…

(d) persons concerned with the formation, business or affairs of the corporation or any of its affiliates have in connection therewith acted fraudulently or dishonestly,

the court may order an investigation to be made of the corporation or any of its affiliates.

[30] The court is entitled to make an order for an investigation if it appears on the face of the material submitted to the court that there is good reason to think the conduct complained of may have taken place: Re Royal Trust (No. 3), [1981] O.J. No. 252, 14 B.L.R. 307 (H.C.J.) at para. 18; Catalyst Fund General Partner I Inc. v. Hollinger Inc., 2004 66299 (ON SC), [2004] O.J. No. 3886, 48 B.L.R. (3d) 194 (S.C.J.) at para. 39.

[31] In disposing of this application, I find it sufficient to focus on the conduct complained of under s. 161(2)(b), i.e., oppression, and therefore do not address the alleged dishonesty under s. 161(2)(d).

[32] Oppressive conduct is conduct that defeats the reasonable expectations of, in this case, security holders: Naneff v. Con-Crete Holdings Ltd. (1995), 1995 959 (ON CA), 23 O.R. (3d) 481, 85 O.A.C. 29 at paras. 28‑29, citing 820099 Ontario Inc. v. Harold E. Ballard Ltd. (1991), 3 B.L.R. (2d) 113 at 123 (Ont. Gen. Div.), aff’d (1991), 3 B.L.R. (2d) 113 (Ont. Div. Ct.).

[33] There must be at the very least an index of suspicion or appearance that the reasonable security holder expectations have not been met. It is then appropriate to test that prima facie case with an inspection to determine whether further relief is warranted: Catalyst Fund General Partner I Inc. v. Hollinger Inc. at para. 39.

[34] Beginning with the applicants who are preferred shareholders investing in the Kotton Cachet project, some aspects of reasonable security holder expectations cannot be disputed. They certainly include compliance with express share conditions and statutory obligations regarding the payment of dividends and redemptions. In these areas, it is clear that reasonable security holder expectations have not been met. In respect of the applicant Kim Goodman, a dividend has failed to be paid, unfairly disregarding her interests as a shareholder. Similarly, in respect of both applicants holding preferred shares, timely financial disclosure and redemptions have not been made. In addition, I find that the evidence of representations made to investors is sufficient to conclude that there is a prima facie case that reasonable security holder expectations regarding the use of funds and financial disclosure have not been met.

[35] There is considerable evidence before me to raise an index of suspicion with respect to both the use of funds and the adequacy of financial disclosure. It is especially concerning that at this late date there are still no audited financial statements. This also raises a legitimate concern that these companies have not been filing tax returns in a timely way. There is also undisputed evidence before me that the companies have not had, in hand, funds needed to meet dividend and shareholder obligations. I find that the minimal financial disclosure given in response to this application is insufficient to dispel the prima facie case that the transfer of funds from the specific-purpose corporations to Executive Leasing Capital Corp., the commingling of the funds, and use of the funds there has compromised security holder reasonable expectations.

[36] I therefore conclude that a court-appointed inspector is needed to investigate and report on the use of the funds raised for the Kotton Cachet project.

[37] I note that I would have been prepared to order this relief under s. 248 as well. I make this observation because the respondents argued that as of the date for redemption of the preferred shares, which has now passed, Harvey Finkelstein and Kim Goodman would no longer be security holders and therefore could not proceed under s. 161. As it happens, due to the failure to make timely redemption payments, those individuals are still security holders. But even if they ceased to be, they would still be entitled to proceed as complainants under s. 248, under which I am satisfied that an investigation is needed to rectify the oppressive conduct.

[38] Other relief sought by these shareholders must be dealt with under s. 248, specifically the order sought regarding the payment of the dividend to Kim Goodman, the redemption of the preferred shares of Harvey Finkelstein and Kim Goodman, and the request for a shareholders list. It is appropriate to remedy the oppressive conduct denying those rights by an order under s. 248 requiring prompt payment of those outstanding amounts and requiring provision of the requested shareholder list.

[39] With respect to the Oxford on Bathurst project, two of the applicants hold TREAD Notes. Those Notes fall within the definition of “security” in s. 1(1) of the OBCA, which includes not only shares but also debt obligations. Because Tread Finance Corp. is an affiliate of the respondent OBCA companies, I am satisfied that the requested relief can be sought by those applicants as complainants, as defined in s. 245 of the OBCA, and they therefore may proceed under s. 248 of the OBCA. For the reasons given above regarding both the use of funds and the inadequacy of financial disclosure, I conclude that an investigation should also be ordered in regard to the use of the funds raised for the Oxford on Bathurst project.

Issues regarding evidence

[40] Counsel for each side has made submissions as to the unreliability of some of the evidence tendered by the opposite parties. I therefore considered whether a trial of an issue is required and conclude that it is not: Tsui-Wong v. Xiao (2000), 2000 22792 (ON SC), 11 B.L.R. (3d) 305, 101 A.C.W.S. (3d) 68 (Ont. S.C.J.) at paras. 37, 39.

[41] Not surprisingly, attacks have been made by Kotton against Mitchell Finkelstein, and vice versa. I have reached my decision without the need to make findings with respect to these personal attacks. Conflict, personal antagonisms and acrimony ought not govern this type of application – the focus must be the business practices and the relationship and expectations of the parties: 820099 Ontario Inc. v. Harold E. Ballard Ltd. at para. 155.

[42] I note that the respondents submit that the conduct of Mitchell Finkelstein ought to disentitle him to any remedy. However, this defence does not apply where, as is the case here, the alleged misconduct is not the direct cause of the oppression: Greenlight Capital Inc. v. Stronach, 2006 36620 (ON SC), [2006] O.J. No. 4353 (Ont. S.C.J.) at paras. 117‑119, aff’d 2008 34359 (ON SCDC), [2008] O.J. No. 2749 (Div. Ct.). Mitchell Finkelstein did not control the purse strings, did not cause the movement of funds between companies and commingling, did not cause the companies’ inadequate financial disclosure in response to this application and, generally, is not responsible for the core circumstances that I rely upon to make these orders.

[43] The evidence of other witnesses has been the subject of attack. Two witnesses have been the subject of special focus: Rose Yu and Alexandra Pagels.

[44] The applicants provided an affidavit of Rose Yu, who is also now a former employee of Titan. The respondents have attacked her evidence through her cross-examination, in which she cast significant doubt on her evidence. Yet, the respondents want to rely on her statement that Mitchell Finkelstein said that he would “take down” Titan especially when his texts and emails were not answered. Given the respondents’ position regarding this witness, I do not accept the suggestion that they can selectively ask for some of her evidence to be accepted. For the purposes of this decision I have disregarded her affidavit evidence except where it sets out facts that are accepted by both sides.

[45] I have also received a letter from the witness Alexandra Pagels, a current Titan employee, indicating that she wishes to withdraw her affidavit altogether. Her affidavit was put forward by the respondents to address some late-filed evidence of the applicants raising questions about the third type of Titan investment, called PMIs. This affidavit is especially problematic because Ms. Pagels has indicated that some of her affidavit is untrue. Counsel to the respondents promptly brought this issue to my attention and have been attempting, unsuccessfully, to get Ms. Pagels to identify the specific parts of the affidavit that give rise to her concern. After considering the submissions of the parties not only on this narrow issue but also on the disputed relevance of the PMIs, I have decided to give no weight to any of the evidence on the issue, including the original affidavit filed by the applicants on the date of the hearing.

[46] I conclude that while there are some issues of credibility reflected in the evidence, they need not be decided to determine this application. Based upon the other material before me, I find that a case of oppressive conduct has been made to the extent necessary for the relief I have ordered.

[47] Lastly, I note that the respondents included in their evidence a legal opinion on certain issues of domestic law. As I indicated at the hearing, I have disregarded that opinion entirely.

Order

[48] In summary, I order as follows:

(i) that there be an investigation into the corporate respondents to report on the use of investors’ funds regarding the Kotton Cachet and Oxford on Bathurst projects;

(ii) that 230 Major Mack Holdings Inc. pay the outstanding dividend to Kim Goodman forthwith;

(iii) that 230 Major Mack Holdings Inc. pay the redemption amounts to Harvey Finkelstein and Kim Goodman forthwith; and,

(iv) that 230 Major Mack Holdings Inc. provide a list of the registered holders of Class A preferred shares to Kim Goodman forthwith.

[49] There was considerable dispute before me about what the actual terms of an order should be, both depending on the outcome and because the respondents had not had an adequate opportunity to consider the individual proposed to be the inspector. There is no doubt that the proposed order is, at least, overbroad. In the circumstances, I direct that the applicants provide a fresh draft order for my consideration after attempting to agree upon it with the respondents.

[50] If agreement between the parties cannot be reached by September 8, 2014, applicants’ counsel may provide its proposed order together with brief written submissions and respondents’ counsel may give their position in brief written responding submissions. These materials should also address the question of costs and all be delivered no later than September 12, 2014.

Justice W. Matheson

Date: September 3, 2014