Solar Harvest Company v. Dominion Citrus Limited, 2015 ONSC 1315

COURT FILE NO.: CV-14-10725-CL

DATE: 20150227

SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: Solar Harvest Company Ltd. and Robert Fortune,

Applicants

AND:

Dominion Citrus Limited and Dominion Citrus Income Fund,

Respondents

BEFORE: Newbould J.

COUNSEL: Orie Niedzviecki, for the applicants

Patricia McLean, for the respondent Dominion Citrus Limited

Darryl T. Mann and Aleksandar Jovanovic, for the respondent Dominion Citrus Income Fund

HEARD: February 25, 2015

ENDORSEMENT

[1] The applicant Solar Harvest Company Ltd. (“Solar”) owns 482,500 preference shares of the respondent Dominion Citrus Limited (“Dominium”). The applicant Robert Fortune owns 45,000 preference shares of Dominion. He is the president and sole shareholder of Solar. Together they seek oppression relief as a result of a Plan of Arrangement involving Dominion that converted its business into an income trust in late 2005 and as a result of a later change in 2009.

[2] Dominion and the fund set up under the Plan of Arrangement, the respondent Dominion Citrus Income Fund (“Dominion Fund”), raise a preliminary objection that the claims are statute barred under the Limitations Act, 2002.

Conversion of Dominion to an income trust

[3] Dominion is in the business of food trading. It is an OBCA corporation. Dominion has 20,475,845 common shares issued and outstanding, which prior to the Arrangement were listed on the TSX, and 1,021,150 Series A preference shares listed on the TSX.

[4] The preference shares of Dominion have a stated capital of $2.25 per share and entitle the holder to a cumulative cash dividend payable semi-annually. The preference shares are retractable at a redemption price of $2.25 per share at the option of the holders thereof effective April 1, 2013. Prior to the Arrangement if notice was given by a preference shareholder, Dominion had the option of satisfying the redemption price for any shares being retracted in cash or common shares of Dominion, with the determination of the number of common shares to be issued to satisfy the redemption price to be calculated in accordance with the market price on the TSX of the common shares of Dominion. After the conversion of the business to an income trust, the common shares of Dominion were no longer traded on the TSX, so that on a retraction, the only way that the price could be paid was from cash of Dominion. As will be seen, this has caused a problem.

[5] A central aspect of the Arrangement was that:

(a) Common shareholders of Dominion would become unitholders of Dominion Fund;

(b) Dominion Fund would hold all of the issued and outstanding common shares of Dominion;

(c) Dominion would issue participating notes to Dominion Fund, which were unsecured, subordinate, debt instruments; and

(d) Following the implementation of the Arrangement, Dominion would pay interest on the participating notes, which is tax deductible and would reduce Dominion’s income, resulting in a benefit to Dominion Fund and its unitholders by receiving stable distributions from the Fund.

[6] The Arrangement was approved by court order on December 29, 2005. It was a two stage process but in simple terms, the common shareholders of Dominion transferred their shares to the Dominion Fund and received one unit of the Dominion Fund for each Dominion common share that they had held. Dominion issued to Dominion Fund new common shares in exchange for the old common shares, and also issued to Dominion Fund unsecured participating notes in the amount of $19,258,000.

[7] The units in Dominion Fund were listed on the TSX. Dominion Fund is now a publicly traded, open-ended, limited purpose income trust.

[8] The new common shares issued by Dominion to the Dominion Fund had a value of 5% of the old common shares and the participating notes issued by Dominion to the Dominion Fund had a value of 95% of the value of the old common shares of Dominion. The management information circular for the Arrangement stated that the board of Dominion would adopt a policy of paying out to Dominion Fund substantially all of its distributable cash by way of interest on the notes, with some exceptions, including paying interest on the preference shares and complying with contractual obligations.

[9] The Arrangement by its terms did not change any of the rights, privileges, restrictions or conditions of the preference shares as set out in Dominion’s articles. In particular, it did not effect the sale, lease or exchange of Dominion’s undertaking or a substantial part thereof nor did it create a class of shares ranking in priority to the preference shares. Accordingly, Dominion took the position that only common shareholders had the right to vote on whether the Arrangement would be adopted.

[10] However, the preference shareholders of Dominion were affected by the Arrangement. Prior to it, Dominion had had the option on the retraction of the preference shares to pay for them in common shares of Dominion or in cash, and if Dominion chose to pay for them in cash, there was no debt in priority to the preference shares and thus no concern that cash could not be paid. After the Arrangement, because there was no ability of Dominion to pay with its common shares on a retraction of the preference shares, whether Dominion had the cash to pay for the preference shares depended on whether Dominion had available cash after paying interest on the participating notes. For this reason, the applicants say they were oppressed.

[11] As will be seen, when the time for retraction arrived in April, 2013, Dominion could not pay for the preference shares put to it by the applicants because it would put Dominion offside of the solvency requirements in the OBCA because of the outstanding debt obligations on the participating notes.

[12] The meeting of shareholders to approve the Arrangement was held on December 22, 2005 at which time the Arrangement was approved. On the same date a special meeting of the preference shareholders was held to vote on a resolution which would allow the conversion of their preference shares into units of Dominion Fund. That resolution did not pass. As a result, the preference shares continued to have the same attributes after the Arrangement as before.

[13] On December 15, 2009 Dominion and Dominion Fund agreed to restructure the participating notes. The interest rate was reduced from 13% to 5%, an interest free holiday was granted for 2010 and the notes became secured. The applicants say that this restructuring was oppressive because the notes became secured. I need not decide on the limitations point the validity of this argument, but would note that there were no other unsecured creditors at the time of the April, 2013 retraction request that prevented the retraction of the preference shares from taking place, so that it is questionable that the the notes becoming secured had any effect on the applicants.

[14] On April 1, 2013, the applicant Solar gave notice to Dominion that it was exercising its right of retraction of its 482,500 preference shares of Dominion and it delivered its share certificate with its notice. On August 20, 2013 Solar received a letter from Dominion advising that it may not be permitted under applicable corporate legislation to make the necessary retraction payments in cash and that the retraction payments in common shares of Dominion were no longer operable as the shares were no longer traded. Dominion returned the share certificate that had been delivered by Solar.

[15] Dominion takes the position that it could not redeem Solar’s preference shares on April 1, 2013 as it would have been contrary to the solvency requirements in section 32 of the OBCA which prevent a corporation from making a payment to redeem shares if there are reasonable grounds for believing that the corporation, after the payment, would be unable to pay its liabilities as they become due.

Analysis of limitation issue

[16] The Limitations Act, 2002 provides:

4. Unless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.

5. (1) A claim is discovered on the earlier of,

(a) the day on which the person with the claim first knew,

(i) that the injury, loss or damage had occurred,

(ii) that the injury, loss or damage was caused by or contributed to by an act or omission,

(iii) that the act or omission was that of the person against whom the claim is made, and

(iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it; and

(b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a).

(2) A person with a claim shall be presumed to have known of the matters referred to in clause (1) (a) on the day the act or omission on which the claim is based took place, unless the contrary is proved.

[17] The applicants say that they did not suffer any damage until they received the letter of August 20, 2013 from Dominion refusing to redeem the preference shares and that the limitation period only runs from that date. As this application was commenced on October 6, 2014, it was commenced within the two year limitation period.

[18] The respondents say that the applicants knew of the material facts that underlie the application well before the two year limitation period and knew, or ought to have known, that the preference shares could not be redeemed for cash long before then.

[19] A cause of action arises for the purposes of a limitation period when the material facts on which it is based have been discovered, or ought to have been discovered, by the plaintiff by the exercise of reasonable diligence. Discoverability is a fact-based analysis. See Lawless v. Anderson, 2011 ONCA 102, a negligence case, in which Rouleau J.A. stated:

22. The principle of discoverability provides that "a cause of action arises for the purposes of a limitation period when the material facts on which it is based have been discovered, or ought to have been discovered, by the plaintiff by the exercise of reasonable diligence. This principle conforms with the generally accepted definition of the term 'cause of action' - the fact or facts which give a person a right to judicial redress or relief against another": Aguonie v. Galion Solid Waste Material Inc. (1998), 1998 954 (ON CA), 38 O.R. (3d) 161 (C.A.), at p. 170.

23. Determining whether a person has discovered a claim is a fact-based analysis. The question to be posed is whether the prospective plaintiff knows enough facts on which to base an allegation of negligence against the defendant. If the plaintiff does, then the claim has been "discovered", and the limitation begins to run: see Soper v. Southcott (1998), 1998 5359 (ON CA), 39 O.R. (3d) 737 (C.A.) and McSween v. Louis (2000), 2000 5744 (ON CA), 132 O.A.C. 304 (C.A.).

[20] In D’Addario v. EnGlobe Corp., 2012 ONSC 1918, Brown J. (as he then was) applied this statement to an oppression claim.

[21] In many cases, knowledge of when injury, loss or damage occurred is not an issue, as in Lawless v. Anderson involving negligent breast surgery. In other cases, such as oppression cases, it can be an issue, as in D’Addario v. EnGlobe Corp. It is an issue in this case.

[22] There is one case of assistance that is somewhat the same as this case, but also different. It is Hamilton (City) v. Metcalfe & Mansfield Capital Corp., 2012 ONCA 156. In that case, the City of Hamilton purchased asset backed commercial paper notes from Metcalfe & Mansfield. It thought it was buying conventional commercial paper secured by conventional credit assets whereas it later learned that the notes were secured by credit default swaps. It sued in tort for alleged misrepresentation by Metcalfe & Mansfield of what was being sold, claiming that it would not have purchased the notes had the misrepresentation not been made. The maturity date for the notes was September 26, 2007. Before the notes matured, the Canadian market for them collapsed. On August 23, 2007, the City, as well as many other investors, entered into the Montreal Accord. This agreement bound signatories to a 60-day standstill period, which was extended until January 10, 2008, when the Accord collapsed.

[23] The City commenced its action on September 25, 2009, just less than two years before the maturity date of the notes but more than two years after it had signed the Montreal accord. It claimed that the limitation period commenced on the date of the maturity date of the notes. It was held that the civil wrong was complete when the City purchased the notes and that the limitation period began to run when the City discovered that it had allegedly been misled about the notes, sometime before it signed the Montreal Accord on August 23, 2007. The City incurred a loss sufficient to give rise to its causes of action in tort and equity when it entered into the transaction to purchase the notes, and not later when the notes became payable.

[24] In the Court of Appeal, LaForme J.A. stated that generally speaking, the character of the damage required for a cause of action to accrue depends on the nature of the claim and that broadly described, damage is any measurable detriment, liability or loss. Applying that test to the oppression claim of Solar, the character of the damage as pleaded is the detrimental effect of the 2005 Arrangement on the ability of the applicants to have their preference shares redeemed and the effect of the 2009 change to the participating notes to make them secured.

[25] In dealing with the claim for misrepresentation, LaForme J.A. stated:

32….for the purpose of negligent misrepresentation claims, damage is the condition of being worse off than if the defendant had not made the misrepresentation. In cases where a plaintiff is induced to enter into a transaction in reliance on a misrepresentation and fails to get what he was entitled to (the context relevant to the City's case), the plaintiff suffers damage sufficient to complete the cause of action when he enters into the transaction, not when the loss is monetized into a specific amount.

42. …Damage occurs as soon as the plaintiff's actual position is worse than its position had it not entered into the transaction, provided that at least some of that loss is attributable to the defendant's misrepresentation.

[26] The applicants’ case is not based on misrepresentation, but rather on oppression. However the notion that damage is the condition of being worse off than if the defendant had not made the misrepresentation can be applied to an oppression situation to say that damage is the condition of being worse off than if the oppressive activity had not occurred and at least some of the loss is attributable to that oppressive activity.

[27] LaForme J.A. also noted the distinction between “damage’, the word used in section 5 of the Limitations Act, and “damages”. He stated:

54. The City's position that damage occurred when the Devonshire notes matured also fails to appreciate the distinction between damage and damages. Damage is the loss needed to make out the cause of action. Insofar as it relates to a transaction induced by wrongful conduct, as I have explained, damage is the condition of being worse off than before entering into the transaction. Damages, on the other hand, is the monetary measure of the extent of that loss. All that the City had to discover to start the limitation period was damage.

[28] In my view, in this case the damage occurred when the alleged oppressive acts took place in 2005 and 2009. The issue is when the material facts on which the claim is based were discovered, or ought to have been discovered, by the plaintiff by the exercise of reasonable diligence. I have come to the conclusion that those material facts were well known long before two years prior to the commencement of this application and that the application must be dismissed as statute barred.

[29] Prior to the meetings of the shareholders and of the preference shareholders held on December 22, 2005, the preference shareholders were sent an information circular for their special meeting that included the entire information circular for the proposed Arrangement sent to the shareholders. Mr. Fortune, a chartered accountant, received this material. He was made aware that the participating notes would be issued by Dominion to Dominion Fund and was aware from the audited financial statements that the amount of the notes issued on January 1, 2006 was $19,258,000. The interest owing on that liability each year spelled doom for Dominion ever having enough cash to redeem the preference shares without being offside the OBCA solvency requirements.

[30] As well, whereas before the Arrangement, Dominion had experienced earnings for the past four years of between $2.6 million and $1.3 million, after the Arrangement, Dominion had earnings losses each year, beginning with a loss of $2.4 million in 2006, $399,000 in 2007, $3.978 million in 2008, $2.364 million in 2009, $1.278 million in 2010, $4.152 million in 2011, $249,000 in 2012 and $357,000 in 2013. These were reported in the audited financial statements and known to Mr. Fortune. Mr. Fortune had to know that with these liabilities and losses occurring each year that the ability of Dominion to redeem the preference shares was remote.

[31] Also known to Mr. Fortune from the audited financial statements was the amount of interest paid by Dominion to Dominion Fund each year. $2.5 to $2.7 million was paid out each year to 2009 when the rate on the notes was 13% and $881,000 was paid out 1n 2011 after the rate was reduced to 5%. In December, 2011 the participating notes were again changed to provide for another interest free holiday to the end of 2013.

[32] In 2008 Dominion stopped paying interest on the preference shares. Mr. Fortune acknowledged on cross-examination that at that time he realized that there was something going on “that was not quite right”. Taken he was a chartered accountant, that is not a surprising statement.

[33] In June, 2012, more than two years before this application was commenced, Mr. Fortune said that he opened negotiations with Dominion regarding the upcoming retraction date for the preference shares. He said he was told at that time that there was an issue with the participating notes taking priority over the preference shares. It would be surprising indeed if Mr. Fortune did not realize that before in light of all of the information that he had had since the Arrangement in 2005 and the change to the terms of the participating notes in 2009 that he knew about. If he didn’t know of this issue before, he ought to have, taking all of the information he had been given, but in any event, he knew of it by June 2012. He acknowledged that by that time he felt that his interests and rights or privileges as a preference shareholder had been disregarded, and that they had been disregarded by the restructuring of the notes in 2009.

[34] Taking all of the evidence into account, I cannot help but find that Mr. Fortune well knew the material facts on which this claim is based before October 6, 2012, two years before he commenced this application. In the circumstances the application must be dismissed as being statute barred.

Conclusion

[35] The application is dismissed. The respondents are entitled to their costs. If costs cannot be agreed, brief written submissions may be made within 10 days, along with a proper cost outline, and brief written reply submissions may be made within a further 10 days.

Newbould J.

Date: February 27, 2015