CITATION: Demeke v. Bekele, 2015 ONSC 395
COURT FILE NO.: CV-12-462175
DATE: 20150120
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
MESERAT DEMEKE
Plaintiff and defendant to the counterclaim
– and –
KIFLE BEKELE
Defendant and plaintiff by counterclaim
Meserat Demeke, acting in person
Andrew Lewis, for the Defendant and plaintiff by counterclaim
HEARD at Toronto: January 16, 2015
REASONS FOR JUDGMENT
Stinson J.
[1] This case involves a claim by the plaintiff to collect on two promissory notes. The notes were provided in respect of the balance of the purchase price payable in connection with a transaction for the sale and purchase of a restaurant business. The defendant denies personal liability and asserts that the transaction was and was understood to be carried out by a corporation as the purchaser. He counterclaims for misrepresentations allegedly made to induce him to enter into the transaction. For the reasons that follow, I dismiss both the action and the counterclaim.
Factual Background
[2] Prior to December 2011 the plaintiff operated a restaurant known as The Kebob [sic] House on Lakeshore Boulevard West in Toronto. More precisely, the business of the restaurant was operated by a corporation owned by the plaintiff, known as The Kabob House Inc. As confirmed by the tax filings of The Kabob House Inc., that is the entity that actually operated the business.
[3] The plaintiff had acquired the business approximately 1½ years earlier from the prior operator of the restaurant. The business was operated out of leased premises, and thus what was purchased and operated by The Kabob House Inc. was the business enterprise itself, including inventory, goodwill, and chattels.
[4] The plaintiff purchased the business with the idea of having her sister work there, while the plaintiff continued in her own full-time occupation. As it turned out, the business consumed a great deal of time of not only the sister, but the plaintiff herself, and their mother. Eventually, the sister decided she no longer wished to work in the business and the plaintiff decided to sell.
[5] For purposes of the sale, the plaintiff retained a real estate agent who listed the business for sale at a listing price of $55,000.
[6] There is some controversy between plaintiff and defendant as to how the ultimate transaction of purchase and sale that gave rise to this dispute came about. It is common ground, however, that the plaintiff is a long-time friend of a cousin of the defendant who lives in the United States, an individual named Hirhut. They were introduced through that connection. From the defendant’s perspective, his plan was to acquire the business so that Hirhut could come to Canada and work in it, and this is indeed what came to pass. The defendant had a full-time job and therefore he was not planning to operate the restaurant personally.
[7] From the plaintiff’s perspective, she claims that the defendant approached her about purchasing the business, but that she tried to discourage him from doing so. They discussed, among other things, how much the business brought in. The two sides agree that the plaintiff told the defendant that the business took in approximately $6,000 per month. There is a dispute whether this was intended to reflect the gross revenue or the net profit. The plaintiff says this was merely gross revenue; the defendant says it was represented to him as the net profit and that a gross revenue of only $200 a day would be insufficient for the business to be self-sustaining, taking into account food, other supplies, rent and other expenses, and salaries for workers.
[8] The plaintiff says that the parties reached an oral agreement with respect to the transaction and that the defendant agreed to pay $50,000. She says that the transaction was to be between the two individuals, with the defendant being personally liable to pay. Although the plaintiff concedes that she told the defendant about the desirability of incorporating a company to avoid personal liability, she says her intention in doing so was merely to alert the defendant to the need to protect himself against potential claims arising from the operation of the business, not in relation to the actual purchase transaction. For his part, the defendant says he never intended to undertake personal liability.
[9] On January 19, 2012, both parties put their signatures to a formal agreement of purchase and sale that had been prepared by the plaintiff’s real estate agent. That document describes the buyer as “Kifle Bekele (To be Incorporated)” and the seller as “The Kebob [sic] House Inc.” This document provides for the purchase of all of the assets of the business known as The Kebob [sic] House for a purchase price of $50,000. It further provides for a payment of a deposit of $2,500, a further down payment of $7,500 on completion, and payment of the balance of $40,000 by way of a promissory note payable on the anniversary of the closing.
[10] Both sides were represented by lawyers in connection with the transaction. Formal documents were prepared by the lawyers to complete the deal. On January 30, 2012, the defendant incorporated 2314998 Ontario Inc. for that purpose.
[11] Subsequently, a series of further documents were prepared by the parties’ lawyers in order to carry the transaction forward. These included a Direction re Title signed by the defendant personally in favor of 2314998 Ontario Inc.; an assignment of trade name signed by The Kabob House Inc. in favor of 2314998 Ontario Inc.; a bill of sale signed by The Kabob House Inc. in favor of 2314998 Ontario Inc.; and a special resolution of the Board of Directors of The Kabob House Inc. approving the sale to 2314998 Ontario Inc. All these documents were signed by the plaintiff as the sole director of the vendor corporation. The resolution approving the sale was approved personally by the plaintiff as the sole shareholder of The Kabob House Inc.
[12] In the run-up to the completion of the sale transaction, the lawyers for the two parties exchanged correspondence via email. On February 14, 2012, the plaintiff’s lawyer submitted draft documents to the lawyer representing the defendant, including a form of personal guarantee for the defendant to sign. On February 15, the defendant’s lawyer responded saying that the defendant would not give his personal guarantee. Later the same day, plaintiff’s lawyer advised that his client had said she did not require the personal guarantee. The parties also agreed to divide the remaining $40,000 payment due on account of the $50,000 purchase price after applying the $10,000 down payment, into two $20,000 payments, due on the first and second anniversary of closing.
[13] The transaction formally closed – on paper at least – on February 15, 2012. Two promissory notes, each for $20,000, where executed by the defendant on behalf of 2314998 Ontario Inc. in favor of The Kabob House Inc. As well, 2314998 Ontario Inc. signed a formal lease with the owner of the building.
[14] There is some dispute between the parties as to the precise date on which the business began to be operated by the defendant, but in my view nothing turns on this. According to the plaintiff, the lawyer for the defendant delayed the required paperwork. Be that as it may, there is no question that by mid-February 2012, the defendant, or at least 2314998 Ontario Inc., had begun to operate the business.
[15] Unhappily for all concerned, the business soon fell on hard times. Once again, there is a dispute between the parties as to the cause. The plaintiff says that the defendant failed to take the necessary steps to run it appropriately; he closed for renovations and alienated the customer base; he did not work hard enough at making it a success. For his part, the defendant asserts that the customer base was far below that which the plaintiff had represented and that the income generated simply made it an unsustainable operation. He says that the plaintiff’s sister had already alienated the customers. Although Hirhut came from the United States and worked 14 hours a day in the business, assisted at times by the defendant, it lost more and more money. Rental payments could not be kept current. By mid-April the rental was in arrears. Although the defendant tried to persuade the landlord to refrain from doing so, the landlord took possession of the premises. The defendant was unable to persuade the landlord to allow the business to resume and as a result it failed.
[16] In light of the demise of the restaurant business, the promissory notes for the two payments of $20,000 were never paid. Plaintiff commenced this lawsuit, naming both the defendant Mr. Bekele personally, as well as the landlord. The lawsuit against the landlord has resolved and only the claim against Mr. Bekele personally came to trial.
[17] For his part, Mr. Bekele has advanced a counterclaim for misrepresentation as against the plaintiff, arising from allegedly false statements made by her regarding the profitability of the restaurant in order to induce him to enter into the transaction in the first place.
Positions of the parties
[18] The plaintiff claims that Mr. Bekele is personally liable for the balance of the purchase price. She submits that she and he reached an oral agreement by which he undertook personally to pay the full purchase price. Had he not done so, she asserts, she would not have transferred the business to him. She therefore seeks to enforce her claim for payment of the balance of the purchase price against him personally. In the alternative, she submits that the defendant entered into the transaction using a corporate purchaser with the fraudulent intent of never paying the balance of the purchase price. As a result, she argues, the corporate veil should be pierced and the defendant held personally liable.
[19] The position of the defendant is that he never agreed to assume personal liability. The transaction was carried out in good faith, through a corporation, and he expressly declined to give a personal guarantee. He did his best to make the business succeed, but it failed because it lacked sufficient revenue at the time he purchased it. The defendant advances a counterclaim for the losses he suffered, on the theory that the plaintiff knowingly misrepresented the profitability of the restaurant, with a view to inducing him to purchase it. In response to the counterclaim, the plaintiff denies any misrepresentation, and asserts that she told the defendant about the gross revenues of the business, not the net profit.
Analysis
Personal liability
[20] The first question to answer is whether I am persuaded on the evidence that the defendant agreed to assume personal responsibility for payment of the balance of the purchase price. The plaintiff says that he did, a fact denied by the defendant. On balance, I am unable to accept the plaintiff’s evidence on this point, for several reasons.
[21] Firstly, the plaintiff’s assertion that there was a parallel, oral agreement between the plaintiff and the defendant relating to the transaction, is contrary to the terms of the written agreement of purchase and sale that was prepared by the plaintiff’s own real estate agent and signed by both parties. It names the buyer as “Kifle Bekele (To be Incorporated)” thus indicating the intention of the parties that the purchaser was to be a limited company, not the defendant personally. It says nothing about a personal guarantee or any obligation on the part of Mr. Bekele in his personal capacity.
[22] Importantly, Paragraph 16 of that document expressly states that “[t]here is no representation, warranty, collateral agreement or condition affecting this agreement other than as expressed herein.” To accept the plaintiff’s evidence and find in her favor on this point, would be to contradict and vary the express terms of the signed contract. To rely on oral evidence to contradict and vary a written agreement would be contrary to established principles of contract law. “The parol evidence rule precludes admission of evidence outside the words of the written contract that would add to, subtract from, vary, or contradict a contract that has been wholly reduced to writing.” Sattva Capital Corp. v. Creston Moly Corp. 2014 SCC 53, [2014] S.C.J. No. 53, at para. 59.
[23] Secondly, if – as the plaintiff asserts – the defendant had agreed to personally guarantee payment of the deferred portion of the purchase price, then it would have made sense for her lawyer to insist on obtaining a side personal guarantee from the defendant. In the period leading up to the completion of the sale transaction, her lawyer prepared such a document and submitted it to the defendant’s lawyer, who responded by saying that the defendant was not prepared to sign a personal guarantee. Subsequently, plaintiff’s lawyer reported that his client had said she did not require the personal guarantee. That statement by the plaintiff is contrary to the position she is now advancing.
[24] Even if I were to accept the plaintiff’s evidence that the transaction as originally contemplated was between the two individuals, certainly by the time it came to be documented in the agreement of purchase and sale and the further materials prepared by the parties’ lawyers, the concept of personal liability on the part of the defendant was no longer part of the arrangement.
[25] Finally, by her own admission, the plaintiff suggested to the defendant that he incorporate a company to operate the business, in order to avoid personal liability. That is precisely what the defendant did. Against the backdrop of the formal documentation prepared by her real estate agent and her lawyer and signed by her, I am unable to accept the plaintiff’s evidence that it was never intended that the defendant’s protection against personal liability would extend to payment of the remainder of the purchase price. To the contrary, I accept the evidence of the defendant that he never intended to assume personal liability for payment of the purchase price or the other debts of the business, which is why he carried out the transaction through a corporation and why he further declined to sign a personal guarantee.
[26] For the foregoing reasons, I reject the plaintiff’s theory that there was an underlying agreement between the parties that the defendant would be personally liable to pay the remainder of the purchase price, in the event the corporate purchaser was unable to do so.
Piercing the corporate veil
[27] The second issue to resolve is whether there is any proper basis for piercing the corporate veil. The plaintiff argues that the defendant entered into the transaction with fraudulent intent, never intending to cause the purchaser company to pay its indebtedness to her. She further argues that the defendant misconducted himself by failing to pay sufficient attention to the business, with the result that it failed and was unable to pay the remainder of the purchase price. The plaintiff relies on such authorities as 642947 Ontario Ltd. v. Fleischer (2001), 2001 CanLII 8623 (ON CA), 56 OR (3d) 417 (C.A.) at paragraph 68.
[28] The case law authority relied upon by the plaintiff supports the proposition that the courts will disregard the separate legal personality of a corporate entity where it is dominated and controlled and being used as a shield for fraudulent or improper conduct. A recent example is found in Shoppers Drug Mart Inc. v. 6470360 Canada Inc., 2014 ONCA 85. In that case, the Court of Appeal held that there had been wrongful misappropriation of funds belonging to the plaintiff, at the express direction of the individual who controlled the corporate defendant. Having expressly directed and caused the wrongful act and having transferred the plaintiff’s funds into an account in his own name, the personal defendant was unjustly enriched. These circumstances were held to warrant the piercing of the corporate veil to impose personal liability on the individual defendant, despite the fact that the plaintiff had contracted with a corporate party.
[29] In my view, this principle does not apply to the facts of our case. The evidence in our case establishes that the individual defendant used his own resources to pay not only the $10,000 deposit, but as well more than $3,000 worth of additional expenses in order to acquire and attempt to operate the business. He worked long and hard to try to make it succeed. This is not a situation where he converted corporate assets to his personal use. Rather, unfortunately, despite his efforts, the business enterprise into which he had invested his money and time failed.
[30] I expressly reject the suggestion that the defendant structured the purchase transaction through a corporation with fraudulent intent. Logically, it makes no sense that he would go to the trouble that he did of paying the down payment money, incorporating a company and taking over the operation of the restaurant, all with the goal of depriving the plaintiff of payment of the balance of the purchase price. It simply does not make sense that he would expend his own funds to create a scenario that would deprive the plaintiff of the remainder of the purchase price. The only sensible explanation is that the defendant entered into the transaction in good faith, and in the hope and expectation that the business would succeed; in turn he would, through profits generated from the business, be in a position for the corporate purchaser to pay the two promissory notes when they became due.
[31] I therefore find as a fact that the defendant had no fraudulent intent, that he derived no personal benefit and that he was not guilty of any misconduct relating to the failure of the restaurant or the failure of the corporation incorporated by him to pay the promissory notes to the plaintiff.
Conclusion on the plaintiff’s claim
[32] In light of the foregoing findings, the plaintiff’s action must fail. I further note that to the extent there were any promissory notes in this action, they were given by 2314998 Ontario Inc. in favor of The Kabob House Inc. Neither of those entities is a party to this lawsuit. Even assuming the proceedings were amended to name The Kabob House Inc. as plaintiff, the proper defendant for any claim for non-payment of the promissory notes would be 2314998 Ontario Inc., and not the personal defendant. Based on the evidence heard, I infer that 2314998 Ontario Inc. was a sole purpose corporation, incorporated to purchase and operate the restaurant. It has no other operations or assets. Because the purchasing corporation has no assets to pay any judgment, even if the lawsuit were amended to name as plaintiff and defendant the two corporations that carried out the transaction of purchase and sale, there would be no recovery in favor of the seller.
The Counterclaim
[33] The counterclaim of the defendant is founded on the allegation that the plaintiff intentionally misrepresented to him the profitability of the restaurant. He asserts that she told him that the business took in approximately $6,000 per month of profit. The plaintiff admits making such a statement, but denies that she was referring to profit, but instead to gross receipts.
[34] While it is common ground that there was a discussion about $6,000 per month, in my view, the plaintiff and the defendant miscommunicated and did not understand one another. Although the defendant may have understood that the reference was to net profit, I am satisfied that the plaintiff intended to refer to gross receipts. I am not prepared to find that the plaintiff intentionally misrepresented the profitability of the business. Indeed, had it been generating profit of $6,000 per month or $72,000 a year, I very much expect the purchase price would have been far higher. Although the defendant may have misperceived the effect of what the plaintiff told him, I attribute no fraudulent intent to her.
[35] I therefore reject the premise upon which the counterclaim is based, namely fraudulent inducement by the plaintiff to the defendant to carry forward with the purchase transaction.
[36] In the result, I would dismiss the counterclaim.
Damages
[37] Despite my findings that there is no proper basis for imposing liability in respect of either the claim or the counterclaim, I am required to assess damages, even though I am awarding none to either party.
[38] In relation to the claim of the plaintiff, her loss is $40,000, representing the balance of the purchase price. I do note, however, that were I prepared to make such an award, it would be in favor of The Kabob House Inc., the owner of the restaurant business that was sold. In other words, one way or another, the individual plaintiff is not entitled to personal recovery. As noted previously, on the facts as I have found them, neither the individual plaintiff nor The Kabob House Inc. is entitled to any recovery in this action.
[39] In relation to the counterclaim, if the defendant had succeeded in persuading me that the transaction was induced by misrepresentation, I would have calculated his losses as follows. First of all, I note that the actual purchaser was 2314998 Ontario Inc. The counterclaim would have the court rescind the agreement and place the parties in the position they were had the misrepresentation not be made. This would result in a refund of the down payment of $10,000, plus losses of $19,371 as set out on its income statement. This would result in a damage assessment in favor of 2314998 Ontario Inc. of $29,371. Once again, however, on the facts as I have found them, I see no proper basis for making such an award in favor of either the defendant or 2314998 Ontario Inc.
Conclusion and disposition
[40] For the foregoing reasons, the action and the counterclaim are dismissed. In the event either party claims costs, and they are unable to agree on costs, they may make brief written submissions as follows:
(a) The defendant shall serve his bill of costs on the plaintiff, accompanied by written submissions within fifteen days of the release of these reasons.
(b) The plaintiff shall serve her response on the defendant within fifteen days thereafter.
(c) The defendant shall serve his reply, if any, within ten days thereafter.
(d) In all cases, the written submissions shall be limited to three pages, double- spaced plus bills of costs.
(e) I direct counsel for the defendant to collect copies of all parties' submissions and arrange to have that package delivered to me in care of Judges' Administration, Room 170 at 361 University as soon as the final exchange of materials has been completed. To be clear, no materials should be filed individually: rather, counsel for the defendant will assemble a single package for delivery as described above.
___________________________ Stinson J.
Released: January 20, 2015
CITATION: Demeke v. Bekele, 2015 ONSC 395
COURT FILE NO.: CV-12-462175
DATE: 20150120
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
MESERAT DEMEKE
Plaintiff and defendant to the counterclaim
– and –
KIFLE BEKELE
Defendant and plaintiff by counterclaim
REASONS FOR JUDGMENT
Stinson J.
Released: January 20, 2015