ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: 11-26451 and CV-14-45847
DATE: 2015-07-15
B E T W E E N:
ERIK HAMALAINEN, TREVOR LUTZ and CAROLYN LUTZ
Richard D. Simmons, for the Plaintiffs
Plaintiffs
- and -
KEN KAVANAGH and RON SHAW
M. Gosia Bawolska
Defendants
AND
ITS ELEARNING INC.
M. Gosia Bawolska
Plaintiff
- and -
ERIK HAMALAINEN, TREVOR LUTZ and CAROLYN LUTZ, FOSTER MANAGEMENT and TARA FOSTER
Richard D. Simmons, for the Defendants
Defendants
HEARD: September 9, 10, 11, 12, 15, 16, 17, 18, 19, 22, 23, 24 and 25, 2014
Corrected Decision: The text of the original judgment was corrected on August 20, 2015.
The year indicated in the date heard section (above) was corrected from 2015 to 2014.
REASONS FOR JUDGMENT
PARAYESKI J.
[1] Eric Hamalainen (“Hamalainen”), Trevor Lutz, and Carolyn Lutz claim partnership interests in Innovative Training Solutions and ITS eLearning Inc. (ITS) and ITS, in turn claims against them as well as Foster Management and Tara Foster on the basis of alleged intentional interference with economic relationships and defamation.
[2] Notwithstanding the best efforts of counsel on both sides to obfuscate, leading to a 13 day trial that should have taken no more than five days, the issue of whether or not there was a partnership in first instance turns upon credibility.
[3] No written partnership agreement exists, or ever existed. While a partnership, of course, can exist without a written agreement, one wonders why someone like Hamalainen, who holds himself out to be a most sophisticated businessman, would not have insisted upon “papering” the alleged terms of any such agreement in great detail from the outset.
[4] In 2009, the Ontario government started to grant tax credits to employers for hiring and training new employees. Those new employees themselves could receive a tax credit for attending training sessions. Those sessions were delivered through online courses at local colleges.
[5] Also 2009, a U.S. entity called Sutherland Global Services (Sutherland) carried on business in the United States and had an office in Ontario. It decided to take advantage of the tax credits scheme described above. Hamalainen worked for Sutherland. In 2009, and in that capacity, he approached Ken Kavanagh (“Kavanagh”) to provide consulting services. A written consulting agreement was signed by Sutherland and a sole proprietorship called Ken Kavanagh Consulting. Kavanagh was to source Ontario companies. If those companies hired Sutherland to set up a “contact centre,” new employees at such a centre would enroll in the government programs, and Sutherland would receive the tax credit or credits involved through Ken Kavanagh Consulting. It appears that government programs such as this one attract middle men at a great rate. Kavanagh, through his sole proprietorship, was to receive 25 percent of the profits he generated for Sutherland, plus defined expenses to be paid by Sutherland. The agreement was in place until September of 2010, after one extension.
[6] In April of 2009, Hamalainen signed a contract with St. Clair College as a “Director” of Sutherland in respect of eLearning courses. In July of 2009, he signed a similar contract with Sault College, this time on behalf of something called “Innovative Training Solutions, a Division of Sutherland Canada ULC,” whatever that may be. No cogent explanation was ever provided.
[7] Hamalainen gave evidence that Sutherland was somehow content to allow a spin-off of business to Innovative Training Solutions (in some incarnation) and to provide funding for it.
[8] According to Hamalainen, he and the Lutzes agreed with Kavanagh that they would be partners in Innovative Training Solutions, with Kavanagh and Hamalainen each taking 40 percent of the profits and the Lutzes each taking 10 percent. These sparse terms were reached, according to Hamalainen and the Lutzes, in the fall and winter of 2009. At that time, Hamalainen was an employee of Sutherland U.S..
[9] For his part, Kavanagh does not deny discussing the possibility of creating a partnership between himself, Hamalainen, and the Lutzes. What he also says, however, and what I accept, is that no final accord was ever reached. It is very telling that Hamalainen and the Lutzes did not describe, presumably because they could not do so, the terms of the alleged partnership agreement beyond saying, to quote from their counsel’s written submissions, “with Ken (Kavanagh) at 40 percent, Erik (Hamalainen) at 40 percent, Carolyn (Lutz) at 10 percent and Trevor (Lutz) at 10 percent.” Silence on things such as capital contributions and dedication of time and effort to partnership activities tells me that such crucial elements of a partnership agreement were never agreed upon in 2009, or ever.
[10] At the beginning of 2010, curriculum changes required new courseware. Sutherland outsourced this work to Innovative Training Solutions and to ITS eLearning Inc. Sutherland agreed to pay for the courseware and for expenses, including office space and equipment, and staff salaries. In May of 2010, Trevor Lutz became a contract employee of Innovative Training Solutions. He had been a contractor with Sutherland. Effective July 1, 2010, he and his then wife Carolyn Lutz entered into normal employment contracts with ITS eLearning Inc. She was also a former Sutherland worker. The employment contracts contained nothing about profit sharing or ownership of the business. Trevor Lutz was fired within a few weeks. Carolyn was fired in March of 2011.
[11] The parties interpret various factors or events in evidence as supporting their respective positions. This is hardly surprising. Neither “side” is entirely rational or forthcoming on these points. Nonetheless, I must, at the end of the day, make my ruling based upon a balancing of those explanations and the evidence.
[12] On December 18, 2009, Kavanagh wrote an email to Hamalainen. Under “things to do,” the former included “create a partnership agreement for ITS” and “define the future heads, assuming we move from SUTH (sic.).” Hamalainen and the Lutzes interpret the need to create a partnership agreement as proof that the terms of such an agreement had been agreed upon and that all that remained was to reduce them to writing. Kavanagh testified, as well, that he was referring to agreements between ITS and its college clients. Given that there already existed contracts with at least two colleges, and that another task to be done on the list was “to develop legal client documents for ITS use in North America,” this explanation is less than satisfactory. However, the task of creating a partnership agreement may also be interpreted as reflective of the fact that ongoing negotiations need to be finalized, i.e. that there was not yet an agreement in place. The same email refers to movement of data offsite “to ensure that we have total control.” Hamalainen and the Lutzes choose to interpret the word “we” written to Hamalainen as reference to control by a four person partnership. I observe, however, that this is a great deal to be read into a single word, especially one that many people use when referring to themselves and their businesses.
[13] When Ken incorporated ITS eLearning Inc., through Toronto counsel, he invoiced Sutherland. He advised Hamalainen that he was going to do so “to cover our impending legal bill…” Neither side explained why Sutherland should have paid for the incorporation. On paper that corporation was owned and controlled by Kavanagh only. On the other hand, if the corporation was really to be a partnership asset, as is argued by Hamalainen and the Lutzes, then they should have been paying for their alleged 60 percent. They did not do so.
[14] In or around May of 2010, Innovative Training Solutions split up the sum of $44,879.20 as follows: 40 percent to Kavanagh, 40 percent to Hamalainen, and 10 percent to each of the Lutzes. How the $44,879.20 was determined is in dispute. However, that is of marginal, if any, relevance. Hamalainen and the Lutzes point to this payout as proof that a partnership agreement had been agreed upon and that they were simply getting their appropriate shares paid out to them. According to Kavanagh, this one-time payment was for exceptional consulting work provided by Hamalainen and the Lutzes in respect of a project involving KPMG. Either version is at least plausible.
[15] On May 25, 2010, a series of messages was exchanged between Carolyn Lutz and Kavanagh. In that exchange, Ms. Lutz states, “when we talked last September in Rochester the deal was you, me and Eric as partners” and “we were going to be a team.” Kavanagh answered, in part, “for the purpose of profit-sharing only.” This communication took place shortly after Trevor Lutz had been fired. Predictably Hamalainen and the Lutzes ask me to interpret the exchange as an admission by Kavanagh that all four were in partnership by then. I note that Carolyn Lutz makes no reference to the fourth alleged partner, Trevor Lutz. I do not know what “for the purpose of profit-sharing only” means. No cogent explanation was provided or argued.
[16] Kavanagh acknowledges that he paid Hamalainen (or as directed by him) 40 percent of the profits earned on the initial consulting contract between Sutherland and Ken Kavanagh Consulting. Hamalainen argues that this is proof that Kavanagh had agreed that Hamalainen was entitled to 40 percent of all profits, as per the alleged partnership agreement. Kavanagh says that these payments were “kick-backs” demanded by Hamalainen as someone with influence at Sutherland. The payments stopped at or near the time that the extended consulting agreement ended. Hamalainen provided several reasons why he directed the payments be made to his wife, rather than to himself. I agree with the submission that all such reasons are at least improbable. They include: a) that he wanted to hide income from his employer Sutherland; b) that he did not have a Canadian bank account, while his wife did; and c) that this was “income splitting” with his wife. Certainly Hamalainen did not provide proof that he declared these payments as partnership income, nor that this wife did. This makes it more likely than not that these payments were indeed “kick-backs” from the initial consulting profits, and not partnership income or draws. Accordingly, I find as a fact that these payments were indeed “kick-backs.”
[17] On balance, I accept more of Kavanagh’s interpretations than those put forth by Hamalainen and the Lutzes.
[18] Hamalainen’s position vis-à-vis Sutherland is interesting. While it is clear that Sutherland did pay a great deal of expenses for the various incarnations of ITS, it appears that Hamalainen somehow wishes to be treated as though the money involved was his, rather than that of his now former employer. Hamalainen was fired by Sutherland and it demanded that he repay it $1.3 million. That figure apparently represents most of the expenses covered by Sutherland. There is no evidence that Hamalainen ever paid Sutherland in response to the demand. He does not stand in Sutherland’s shoes. Sutherland makes no claim against Kavanagh or ITS (again in any of its incarnations). One would think that it might be doing so, if, as Hamalainen and the Lutzes assert, Kavanagh had effectively stolen a lucrative business. No one was called from Sutherland as a witness to explain the convoluted machinations that make up the business scenario before me.
[19] Trevor Lutz was a contractor with, and then an employee of, ITS eLearning Inc. Carolyn Lutz was an employee of that corporation. They were both paid wages and benefits accordingly. Their contracts did not grant partnership rights or address any kind of ownership. They were both fired. I see no compelling reason why they should be entitled to partnership on this basis only.
[20] It is to be noted that there is no evidence whatsoever that Hamalainen personally or either of the Lutzes contributed anything to ITS in terms of capital.
[21] While none of the Hamalainen’s, the Lutzes or Kavanagh and Shaw were particularly good witnesses, I prefer the evidence of the latter two to that of the former three. Hamalainen’s answers were, for the most part, evasive, incomplete, and inconsistent. Neither of the Lutzes was forthcoming. Frankly, it sounded and appeared that they were simply “along for the ride” and hoping that they might recover something from an employer that had fired both of them. I repeat my observations that Hamalainen and the Lutzes could not provide any details of the alleged partnership agreement beyond “40-40-10-10.”
[22] I reject the constructive trust and unjust enrichment claims of the Hamalainen and the Lutzes. They are based on the same discredited evidence. Moreover, Hamalainen, at least, does not come to this court with the notional “clean hands” expected of persons who seek equitable remedies. His “kick-back scheme,” which I have found to have existed as a fact, is sufficient to disentitle him.
[23] ITS eLearning Inc.’s claims in action number CV-14-45847 were heard together with the claims described above. In essence, ITS eLearning alleges that Hamalainen, both Lutzes, as well as something called Foster Management and its registered sole proprietor Tara Foster caused damage by contacting various college clients. ITS eLearning Inc. bases its claim upon interference with economic relations and/or defamation. Foster management was a competitor of ITS eLearning Inc. and a place where Hamalainen had found employment and/or some kind of executive position after leaving Sutherland.
[24] I shall start my analysis of these issues with wording from one such complained of communication. It is representative of all of them:
This letter is formal notification of a structural change with your vendor – ITS eLearning Inc., and Innovative Training Solutions. We are informing you that the partners that founded the companies mentioned above have come into dispute. You are familiar with the four partners – Carolyn Lutz, Ken Kavanagh, Trevor Lutz and Erik Hamalainen. We are asking St. Clair College to place “in trust” any monies owed to the above-named companies until such time as the partners or the courts advise you of a remedy to this dispute.
This notification will be followed by a letter from our legal representation named above and a court order if required.
We will continue to provide uninterrupted service to students attending online courses and have full intentions of resolving this dispute internally and continue with business as usual.
[25] I disagree with the interpretation ITS eLearning Inc. puts on this communication. It says that the writers suggest the company was no longer operating or that it was subject to litigation and was therefore an unstable business partner. ITS also states the communication requested that all payments due to ITS eLearning Inc. be placed in trust. In all of this ITS eLearning Inc. sees defamation. I see formal but literally accurate statements. There was a dispute amongst the four named people. Whether or not there was a partnership between them has not been resolved until this very ruling. There is nothing wrong with asking that disputed monies be placed into trust. There is nothing in this representative communication which suggests a cessation of services. Rather, the opposite is conveyed. All of this was not defamatory. The communication was not false. I do not find that it would tend to harm the reputation of ITS eLearning Inc. in the eyes of a reasonable person. The witness from St. Clair College, itself a recipient of this communication, testified that it did not change the college’s perception of ITS eLearning in the slightest.
[26] I am not satisfied that there has been proof on the balance of probabilities that the writers intended to harm ITS eLearning Inc. by these communications. While no doubt some pressure was intended for Kavanagh, that does not equate to harm to ITS eLearning Inc. Given the claim to partnership interests, harm to that corporation would have been counterproductive.
CONCLUSIONS
[27] I find that Hamalainen and the Lutzes have failed to prove on the balance of probabilities that a partnership agreement was ever reached in respect of ITS eLearning Inc. or any of its incarnations. In light of that, I am not prepared to assess damages, especially based upon the incomplete evidence called in that regard.
[28] I similarly find that ITS eLearning Inc. has failed to prove either improper interference with economic relations or defamation.
[29] Both actions are therefore dismissed.
[30] If the parties cannot agree upon the issue of costs in respect of both actions, they may make brief written submissions to me in these regards. By brief, I mean no more than three typed pages, not including costs outlines. I remind counsel that success has been divided. If submissions are necessary, they may be sent to my attention at the John Sopinka Court House.
ITS shall have until August 14, 2015 to do so. Hamalainen and the Lutzes shall have until August 28, 2015 to file their submissions.
Parayeski J.
Released: July 15, 2015
COURT FILE NO.: 11-26451 and CV-14-45847
DATE: 2015-07-15
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
ERIK HAMALAINEN, TREVOR LUTZ and CAROLYN LUTZ
Plaintiffs
- and -
KEN KAVANAGH and RON SHAW
Defendants
AND
ITS ELEARNING INC.
Plaintiff
- and -
ERIK HAMALAINEN, TREVOR LUTZ and CAROLYN LUTZ, FOSTER MANAGEMENT and TARA FOSTER
Defendants
REASONS FOR JUDGMENT
MDP:mw
Released: July 15, 2015