CITATION: Eastside Apartments Limited v. Aird Berlis 2015 ONSC 1379

COURT FILE NO.: CV-13-114693-00

DATE: 20150303

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

EASTSIDE APARTMENTS and GUS MICHALIS

Plaintiffs

– and –

AIRD BERLIS, BARRISTERS & SOLICITORS and BENNETT BEST BURNS, BARRISTERS & SOLICITORS

Defendants

Gus Michalis, in person

Jonathan Schachter, for Bennett Best Burn LLP

HEARD: February 20, 2015

ruling on motion to strike (and other relief)

BOSWELL J.

[1] Gus Michalis is a passionate man. He believes he has been wronged. And he is in search of a proper defendant to bear responsibility and make things right.

[2] The following reasons explain why I conclude that Bennett Best Burn LLP (“BBB LLP”) is not that proper defendant, and why the plaintiffs’ claims must be struck.

I. OVERVIEW

Eastside Apartments

[3] Mr. Michalis met David Elkind in 1998. Mr. Elkind was a successful businessman who owned a number of apartment complexes in Hamilton and Toronto. Over the next several years, Mr. Michalis performed substantial construction work on buildings owned by Mr. Elkind through one or another corporate entity.

[4] Eventually, Mr. Michalis and Mr. Elkind came to be business partners – equal shareholders – in a corporation that ultimately came to be known as Eastside Apartments Limited (“Eastside”). Eastside owned two apartment buildings on King Street in Hamilton which had been purchased in April 2005. The acquisition cost of the buildings was in excess of $2 million. They were heavily encumbered. The limited equity invested in the buildings came from Mr. Elkind, through one or another of his companies. In August 2006 Mr. Elkind transferred half of the shares in Eastside to Mr. Michalis, for reasons best known to Mr. Michalis and Mr. Elkind.

The Sub-Prime Financing

[5] In December 2007, Eastside refinanced its properties, in part, by taking out a mortgage in the amount of $850,000 with Sub-Prime Mortgage Corporation (“Sub-Prime”) blanketed over the two Eastside apartment buildings as well as some other buildings owned by Mr. Elkind through other companies. Mr. Elkind signed all of the necessary documentation on behalf of Eastside to secure and place the new mortgage financing. One document he signed was a certified resolution of Eastside’s board of directors, authorizing the loan transaction. Eastside’s By-Laws required that any financing over $3,000 be approved in writing by both Mr. Elkind and Mr. Michalis. The Sub-Prime financing was not approved in writing by Mr. Michalis and the certified resolution was false.

[6] Mr. Elkind died on October 28, 2008.

[7] Mr. Michalis has consistently maintained that he did not become aware of the Sub-Prime financing until after Mr. Elkind’s death – in particular, on the date of his funeral, when Sub-Prime took steps to attorn rents.

The Sub-Prime Action

[8] On October 28, 2008, Sub-Prime commenced an action against Eastside alleging default in the terms of the mortgage financing. The action was not defended and Sub-Prime obtained a default judgment on December 18, 2008.

[9] Mr. Michalis, on behalf of Eastside, retained Aird & Berlis LLP (“AB LLP”) to set aside the default judgment, file a defence and counterclaim to Sub-Prime’s claim, and to prepare a third party claim against the law firm Sotos LLP. Sotos had acted for Eastside on the mortgage transaction with Sub-Prime. Mr. Michalis submits that Sotos should have known that his written authorization was required for any financing above $3,000 and the Sub-Prime mortgage transaction should never have been completed.

[10] AB LLP determined that they had a conflict and on April 23, 2009, they referred the matter to BBB LLP, specifically Lawrence A. Pick. Mr. Pick deposes in his affidavit sworn May 29, 2014 that BBB LLP was retained to act for Eastside and was never retained to act for Mr. Michalis personally. The record before me contains no evidence to the contrary.

[11] BBB LLP successfully moved to set aside the default judgment against Eastside. On June 3, 2009 Pollock J. set the judgment aside and gave leave to Eastside to file its defence and counterclaim, which BBB LLP did. She also appointed an interim receiver for Eastside, at the request of Sub-Prime.

[12] Mr. Michalis ran into some difficulties after the receiver was put in place. The receiver alleged that he was obstructive. Orders were made against Mr. Michalis that enjoined him from interfering with the receiver or the management of the Eastside buildings generally. He breached the orders and was found in contempt and jailed for 90 days.

[13] Mr. Pick deposes that the relationship between Eastside and BBB LLP deteriorated over the summer of 2009; accounts remained unpaid; and Mr. Michalis ran afoul of orders made in accordance with the receivership, as I observed above. On August 25, 2009, Aston J. signed an order removing BBB LLP as Eastside’s counsel of record in this lawsuit.

The Third Party Claim

[14] Before being removed as counsel of record, Mr. Pick wrote to Mr. Michalis and provided a draft third party claim for his review and instructions. According to Mr. Pick, no instructions were provided with respect to the third party claim. Again, there is no contrary evidence in the record before me.

[15] In early September 2009, Mr. Michalis advised that Eastside had retained new counsel – Mr. Howard Manis. Mr. Pick sent materials to Mr. Manis on September 10, 2009, including a copy of the third party claim. He expressly advised Mr. Manis that the third party claim had not been issued.

[16] Mr. Manis did not formally go on record as counsel for Eastside. Indeed, Eastside never did formally appoint new counsel in the Sub-Prime action and on June 28, 2010, Eastside’s pleadings were struck by Master Dash for failure to appoint counsel. This is significant because even if BBB LLP had issued, served and filed Eastside’s third party claim, it too would have been struck on June 28, 2010. In August 2010 Eastside was, once again, noted in default. Eastside has never taken any steps to set aside that noting in default.

The Action against Sotos LLP

[17] Eventually – though I am not clear on the date – Eastside retained V. William Andrae, also apparently known as V. William Andreou. Eastside never did issue its third party claim against Sotos LLP. Instead, on October 28, 2010, Mr. Andrae, on behalf of Eastside, issued a new Statement of Claim against Sotos LLP and two of its partners, alleging negligence in the Sub-Prime financing transaction.

[18] On January 25, 2013, Morgan J. granted summary judgment against Eastside at the request of Sotos LLP and its partners on the basis that the claim against the Sotos defendants had been commenced out-of-time and was statute-barred by the provisions of sections 4 and 5 of the Limitations Act, 2002, S.O. 2002, c. 24, Sched. B. That act requires that actions be commenced within two years from the date a claim is first discovered.

The Ruling of Morgan J.

[19] The ruling of Morgan J. on the summary judgment motion is of great significance to the motion of BBB LLP because of the factual findings made. Justice Morgan found, amongst other things, that:

(a) Mr. Michalis was fully aware of the Sub-Prime loan at the time the mortgage was executed on December 21, 2007;

(b) By December 21, 2007, Mr. Michalis had given a tour of the Eastside buildings to Sub-Prime’s representative and he had received information about the transaction over the phone from Eastside’s lawyer at Sotos LLP; and,

(c) Subsequent to the closing of the Sub-Prime mortgage, Mr. Michalis confirmed his knowledge of the transaction in a telephone call with counsel from Sotos LLP in February 2008. Futher, in July 2008 he personally picked up correspondence referencing the transaction from an appraiser who had appraised the Eastside properties.

[20] Morgan J. concluded that the two year limitation period applicable to the claim against Sotos LLP and its partners began to run, at the latest, in July 2008. The Sotos claim was not commenced until October 28, 2010, and was, in the result, out of time.

The Claim against AB LLP and BBB LLP

[21] On May 24, 2013, after summary judgment was granted against it in the Sotos LLP action, Eastside – together with Mr. Michalis personally – commenced their claims against AB LLP and BBB LLP.

[22] In this action, Eastside claims $7 million in damages and Mr. Michalis claims $2.5 million. The plaintiffs allege the following:

(a) AB LLP did not advise the plaintiffs that an independent action against Sotos LLP and its partners had to be commenced before October 28, 2010, or that the Limitations Act, 2002 might be an issue;

(b) Had BBB LLP issued the third party claim against Sotos LLP and its partners, the action of Eastside against those defendants would not have been statute-barred;

(c) The defendants knew Mr. Michalis would be affected directly by the outcome of any action by Eastside against Sotos LLP and they therefore owed him a duty of care, which they breached; and,

(d) Particulars of the defendants’ negligence are said to include the failure to advise the plaintiffs about the limitations issue; assuring the plaintiffs (implicitly or explicitly) that the earliest a claim against Sotos LLP and its partners would have to be commenced was October 28, 2010; failing to issue the third party claim; and failing to advise the plaintiffs that the third party claim had not been issued.

[23] On December 23, 2014, Howden J. dismissed the claim against AB LLP on the basis that it was out of time and statute-barred by the provisions of the Limitations Act, 2002.

II. THE ISSUES

[24] BBB LLP now moves for the following relief:

(a) An order striking out Mr. Michalis’ claim on the basis that it discloses no reasonable cause of action;

(b) An order striking out Eastside’s claim on the basis that it is frivolous, vexatious, and/or an abuse of process; and,

(c) In the alternative, an order that the plaintiffs post security for costs in the amount of $120,000.

[25] The relief against Mr. Michalis personally is based on the assertion that his claim offends the rule in Foss v. Harbottle (1843), 2 Hare 461, 67 E.R. 189 which precludes a shareholder from bringing an action for loss or damage to a corporation. I agree with the moving party that Mr. Michalis’ claim must be struck on the basis asserted.

[26] The relief against the corporation is based on the assertion that the claim against BBB LLP has no chance of success (and is therefore frivolous) and that it is an attempt to relitigate issues already determined by Morgan J. Arguably, the defendant’s arguments may have been better framed in a motion for summary judgment which would have resulted in a determination on the merits. But that said, I am satisfied that, in all the circumstances, Eastside’s claim has no chance of success, is frivolous, and is an abuse of process.

[27] Given my expressed views, it is unnecessary for me to address the issue of security for costs. I will address the other relief sought in turn.

III. DISCUSSION

The Claim of Gus Michalis

[28] BBB LLP moves to strike out Mr. Michalis’ claim under R. 21.01 of the Rules of Civil Procedure, as disclosing no reasonable cause of action.

[29] Rule 21.01 provides as follows:

21.01 (1) A party may move before a judge,

(a) for the determination, before trial, of a question of law raised by a pleading in an action where the determination of the question may dispose of all or part of the action, substantially shorten the trial or result in a substantial saving of costs; or

(b) to strike out a pleading on the ground that it discloses no reasonable cause of action or defence,

and the judge may make an order or grant judgment accordingly.

(2) No evidence is admissible on a motion,

(a) under clause (1) (a), except with leave of a judge or on consent of the parties;

(b) under clause (1) (b).

[30] The test to strike a claim for disclosing no reasonable cause of action is well-settled. The court is to assume that the facts set out in the claim are true, then consider whether it is plain and obvious that the claim discloses no reasonable cause of action: Hunt v. Carey Canada Inc., 1990 90 (SCC), [1990] 2 S.C.R. 959.

[31] Mr. Michalis does not claim that AB LLP or BBB LLP were retained to act for him personally. He asserts only that the defendants knew that he would be directly affected by the results of any action by Eastside against Sotos LLP and its partners. He claims that the defendants owed him a duty of care in the circumstances. Though he does not state so explicitly, he clearly means that he would be directly affected in his capacity as a shareholder of Eastside.

[32] The rule in Foss v. Harbottle, as above, is, in my view, a complete answer to the claim of Mr. Michalis.

[33] The rule is simple and based on a clear and long-established principle of corporate law. A corporation is a separate legal entity from its directors, officers and shareholders. It has its own distinct legal existence. This principle means different things in different circumstances. It means, for instance, that shareholders, directors and officers are generally insulated from claims against the corporation. Conversely, it means that a shareholder cannot sue for the losses of the corporation.

[34] The rule in Foss v. Harbottle was discussed by Laskin J.A. in Meditrust Healthcare Inc. v. Shoppers Drug Mart (2002), 2002 41710 (ON CA), 61 O.R. (3d) 786, at para. 11 and following. Laskin J.A. cited the Supreme Court’s decision in Hercules Management Ltd. v. Ernst & Young, 1997 345 (SCC), [1997] 2 S.C.R. 165, 146 D.L.R. (4th) 577, where LaForest J. described the rule as follows:

The rule in Foss v. Harbottle provides that individual shareholders have no cause of action in law for any wrongs done to the corporation and that if an action is to be brought in respect of such losses, it must be brought either by the corporation itself (through management) or by way of a derivative action… (pp. 211-12 S.C.R.)

[35] In this case, Eastside has brought an action in its own name against the defendants. Mr. Michalis does not have a recognized distinct, independent action of his own, whether as a director, officer or shareholder.

[36] It is, in my view, plain and obvious that Mr. Michalis does not have a reasonable cause of action. His claim must be, and is, struck.

The Claim of Eastside Apartments Limited

[37] The relief sought by BBB LLP against Eastside is that its claim be dismissed, stayed or struck out.

[38] One of the grounds advanced by BBB LLP is that a request was made under Rule 15.02 for confirmation from the plaintiffs’ counsel, Mr. Andrae, a.k.a Mr. Andreou, that he had valid authority from Eastside to commence and continue the action. No response was received. In the circumstances, the court has discretion to stay the proceedings.

[39] The Rule 15.02 argument has no traction. Counsel did not seriously pursue it.

[40] Mr. Michalis advised the court that his counsel is no longer practicing. There is no dispute about that. He sought leave, by way of a motion under Rule 15.01(2), to represent the corporation’s interests on the motion as well as his own. Counsel to BBB LLP did not contest that request, even though the materials filed in support of the motion were woefully inadequate. In the absence of any dispute, I gave Mr. Michalis leave to represent the corporation, limited to this motion only.

[41] Mr. Michalis is the sole surviving director, officer and shareholder of Eastside. There is no doubt in my mind, in the circumstances, that he authorized the lawsuit.

[42] The principal thrust of the defendant’s position is that Eastside’s claim is frivolous, vexatious and an abuse of process and should be dismissed. BBB LLP relies on Rule 21.01(3)(d) which provides that a defendant may move to have a claim stayed or dismissed on the basis that the action is frivolous or vexatious or is otherwise an abuse of the process of the court. Defence counsel submitted that the court also has an inherent discretion to stay or dismiss a proceeding as part of its inherent power to prevent the abuse or misuse of its procedures: see Toronto (City) v. C.U.P.E., Local 79, 2003 SCC 63, [2003] 3 S.C.R 77, at para 37.

[43] I will take a moment to briefly examine the substance of each of the terms “frivolous”, “vexatious”, and “abuse of process”.

[44] Dambrot J. considered the meaning of “frivolous” and “vexatious” in 876502 Ontario Inc. v. I.F. Propco Holdings (Ontario) 10 Ltd., 1997 12196 (ON SC), [1997] O.J. No. 4722 (O.C.G.D.). I agree with and adopt his views, which were set out at para. 17 as follows:

Unfortunately, a review of the cases does not readily shed so clear a light on the definitions of frivolousness and vexatiousness. These words are often used compendiously, without any individual definition, and pleadings are said to be frivolous and vexatious for fact specific reasons, without any delineation of a test. A frivolous action has been defined, however, to be one which, on its face, is so unreal that no reasonable or sensible person could bring it. A frivolous and vexatious pleading has been defined as one which is "hopeless factually", and which it is "plain and obvious ... cannot succeed". (Zurich Investments Ltd. v. Excelsior Life Insurance Co. (1988), 1988 ABCA 209, 28 C.P.C. (2d) 264 (Alta. C.A.)).

[45] The concept of “abuse of process” is a broad one, which may capture a number of different categories. Of particular application to this proceeding is the notion that parties ought to be precluded from relitigating claims that have, in essence, already be adjudicated upon.

[46] The Supreme Court considered the broad doctrine of abuse of process in Toronto (City) v. C.U.P.E., Local 79, as above, where Arbour J. explained:

35 Judges have an inherent and residual discretion to prevent an abuse of the court's process. This concept of abuse of process was described at common law as proceedings "unfair to the point that they are contrary to the interest of justice" (R. v. Power, 1994 126 (SCC), [1994] 1 S.C.R. 601, at p. 616), and as "oppressive treatment" (R. v. Conway, 1989 66 (SCC), [1989] 1 S.C.R. 1659, at p. 1667). McLachlin J. (as she then was) expressed it this way in R. v. Scott, 1990 27 (SCC), [1990] 3 S.C.R. 979, at p. 1007:

... abuse of process may be established where: (1) the proceedings are oppressive or vexatious; and, (2) violate the fundamental principles of justice underlying the community's sense of fair play and decency. The concepts of oppressiveness and vexatiousness underline the interest of the accused in a fair trial. But the doctrine evokes as well the public interest in a fair and just trial process and the proper administration of justice.

37 In the context that interests us here, the doctrine of abuse of process engages "the inherent power of the court to prevent the misuse of its procedure, in a way that would ... bring the administration of justice into disrepute" (Canam Enterprises Inc. v. Coles (2000), 2000 8514 (ON CA), 51 O.R. (3d) 481 (C.A.), at para. 55, per Goudge J.A., dissenting (approved [2002] 3 S.C.R. 307, 2002 SCC 63)). Goudge J.A. expanded on that concept in the following terms at paras. 55-56:

The doctrine of abuse of process engages the inherent power of the court to prevent the misuse of its procedure, in a way that would be manifestly unfair to a party to the litigation before it or would in some other way bring the administration of justice into disrepute. It is a flexible doctrine unencumbered by the specific requirements of concepts such as issue estoppel. See House of Spring Gardens Ltd. v. Waite, [1990] 3 W.L.R. 347 at p. 358, [1990] 2 All E.R. 990 (C.A.).

One circumstance in which abuse of process has been applied is where the litigation before the court is found to be in essence an attempt to relitigate a claim which the court has already determined. [Emphasis added.]

As Goudge J.A.'s comments indicate, Canadian courts have applied the doctrine of abuse of process to preclude relitigation in circumstances where the strict requirements of issue estoppel (typically the privity/mutuality requirements) are not met, but where allowing the litigation to proceed would nonetheless violate such principles as judicial economy, consistency, finality and the integrity of the administration of justice. (See, for example, Franco v. White (2001), 2001 24020 (ON CA), 53 O.R. (3d) 391 (C.A.); Bomac Construction Ltd. v. Stevenson, 1986 3573 (SK CA), [1986] 5 W.W.R. 21 (Sask. C.A.); and Bjarnarson v. Government of Manitoba (1987), 1987 993 (MB QB), 38 D.L.R. (4th) 32 (Man. Q.B.), aff'd (1987), 1987 5396 (MB CA), 21 C.P.C. (2d) 302 (Man. C.A.).) …

[47] The facts as disclosed in the record before me do demonstrate that Eastside has no chance of success in this proceeding and that its claim is frivolous, vexatious and an abuse of process. My conclusion is informed by a number of factors which include the following:

(a) Eastside knew or ought to have known of its potential claim against BBB LLP by October 28, 2010, the last day on which a third party claim for contribution and indemnity could be initiated, in view of s. 18 of the Limitations Act, 2002. Yet the claim against BBB LLP was not initiated until May 2013; outside the two year limitation. In my view, the claim is statute-barred for that reason;

(b) Even if the claim is not statute-barred, it is clear and undisputed on the evidentiary record before me that although BBB LLP drafted, or at least revised a draft, third party claim, they did not receive instructions to issue it. Moreover, they sent it to Eastside’s new counsel with the express indication that the claim had not been issued yet. At the time, they had at least 14 months left before the limitation period expired. Eastside would have been under no misapprehension that their third party claim had been issued. In the meantime, Eastside did nothing to officially appoint new counsel; did nothing to set aside the noting in default after their pleadings were struck for failure to appoint counsel; and elected to commence a new, stand-alone claim against Sotos LLP which it issued on October 28, 2010 – the very day on which the limitation period to initiate a third party claim expired. It is, in my view, inconceivable that Eastside will be able to make out negligence on the part of BBB LLP in the circumstances; and,

(c) In addition to the two foregoing points, the factual findings made by Justice Morgan in his ruling on the Sotos LLP motion for summary judgment are devastating to Eastside. Morgan J. found that Mr. Michalis knew of and participated in the negotiation of the Sub-Prime mortgage. Morgan J. made detailed findings of fact in that regard. Those findings completely undermine the claim of Eastside against Sotos LLP and its partners. The claim against BBB LLP is derivative of the claim against Sotos LLP. In other words, in view of the findings of fact of Morgan J., the claim against Sotos LLP had no chance of success. In the result, even if BBB LLP was negligent in some fashion in not issuing the third party claim, there are no damages, because that claim had no chance of success.

[48] I agree with the submission that the action is frivolous and vexatious, in the sense that it has no reasonable, if any, prospect of success. It appears to me that Mr. Michalis is desperately seeking a target to make amends for his losses. BBB LLP is not a viable target.

[49] I also agree with the submission that the proceeding is an abuse of process, in light of the ruling of Morgan J. Even though the parties to this litigation are not identical to the ones before Morgan J., the issue of Sotos LLP’s liability will be a central feature of the claim against BBB LLP. Morgan J. effectively determined that Sotos LLP had no liability because Mr. Michalis knew of the Sub-Prime financing and participated in it. It no longer lies in his mouth to assert otherwise.

IV. CONCLUSION

[50] In the result, the claim of Mr. Michalis is struck for failing to disclose a reasonable cause of action. The claim of Eastside is dismissed as being frivolous and an abuse of process.

[51] If the matter of costs is a live issue and if the parties are unable to agree, they may address the issue by making submissions in writing. Written submissions are not to exceed three pages. BBB LLP will serve and file their submissions by March 16, 2015. Mr. Michalis will serve and file his submissions by March 23, 2015. Submissions should be directed to my assistant in Newmarket, Diane Massey.

Boswell J.

Released: March 3, 2015