ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: CV-12-17337
DATE: 20150721

BETWEEN:

J.I.V. Enterprises Inc.

Plaintiff

– and –

Victor Vaseleniuck, Maura Vaseleniuck, Bazaar Bingo (Windsor) Inc. and Pegasus Plastics Inc.

Defendants

Adam A. Paglione, for the Plaintiff

Kimberley J. Wolfe, for the Defendants Victor Vaseleniuck, Maura Vaseleniuck and Bazaar Bingo (Windsor) Inc.

HEARD: June 18, 2015

Thomas J.:

The Motion

[1] This action is brought by the plaintiff J.I.V. Enterprises Inc. (“J.I.V.”) to collect monies it advanced to the defendant Pegasus Plastics Inc. (“Pegasus”).

[2] The defendants, Victor Vaseleniuck (“Victor”), Maura Vaseleniuck (“Maura”) and Bazaar Bingo (Windsor) Inc. (“Bazaar”), have brought a motion for summary dismissal of this action as against them.

[3] The motion and factum suggest numerous grounds. A dispute arose at the commencement of the argument as to the state of the pleadings and whether, in fact, these defendants were pressing grounds that had not found their way into the statement of defence and had not been the subject of the examination of the plaintiff’s representative.

[4] While both counsel (both relatively new to this file) believe that both the statement of defence and the statement of claim have been amended, neither could produce a copy of the pleadings nor have they ever found their way into the court file.

[5] As a result, counsel for the moving defendants agreed to limit her argument to three grounds for dismissal and the plaintiff’s counsel was content to move forward in that fashion.

[6] The defendants argue that this action be dismissed for the following reasons:

1. J.I.V. accepted the shares of Bazaar pledged as security for the loan, in satisfaction of the debt and, therefore, no monies are owing;

2. J.I.V. materially altered the loan transaction in the detriment of the guarantors, Victor, Maura and Bazaar, and, therefore, the guarantors should be discharged from any obligation they might have;

3. Any cause of action against these defendants crystalized either when Bazaar defaulted in 2005 or the promissory note came to term in 2008 and, therefore, it is extinguished by operation of the Limitations Act, 2002, S.O. 2002, c. 24, Sch. B.

Background

[7] Victor is president of Pegasus and Bazaar. His brother, Ivan Vaseleniuck (Ivan), is a director and directing mind of J.I.V.

[8] On February 11, 2003, J.I.V. loaned Pegasus $550,000 U.S.D. Ten months later, a mortgage for $300,000 with interest at 13 percent was registered against the Pegasus property. Victor postponed his mortgage which was already on title.

[9] Bazaar was the owner and operator of a bingo hall in Windsor. Bazaar was the owner of 100,000 common shares of CBC Bingo Inc. (CBC), the general partner of CBC Bingo Limited Partnership. Bazaar was also the owner of 25,000 common shares of Classic Bingo Country Inc. (Classic Bingo), one of the limited partners of the CBC Bingo Limited Partnership.

[10] Victor executed a Promissory Note and a Share Pledge Agreement dated December 19, 2003, pledging Bazaar’s shares in CBC and Classic Bingo to J.I.V.

[11] At the time that the mortgage, Promissory Note and Share Pledge Agreements were executed, the loan was in good standing.

[12] The pledged shares in each corporation were subject to Unanimous Shareholders Agreements (hereinafter “USA”), which fact was known to J.I.V. at the time that the Pledge Agreement was executed. The primary component of the USAs was the right of first refusal with respect to any proposed sale of the shares.

[13] J.I.V. acknowledges in para. 2(c) of the agreement with other shareholders that “any proposed retention of such pledged shares by J.I.V. in satisfaction of the debt … is subject to the various buy-sell provisions as contained in the U.S.A. …”.

[14] Paragraph 2(b) of those agreements required J.I.V. to give the other shareholders right of first refusal before it could retain the shares “in satisfaction of the debt”.

[15] Paragraph 5 of the Pledge Agreement considers “Defaults and Remedies”. For my purposes, the significant portions are set out below:

5.1(a) effect the registration of, and obtain from the Corporation a certificate or certificates for any of the Pledged Shares in the name of the Pledgee or its nominee(s), ….

(b) vote any or all of the Pledged Shares (whether or not transferred into the name of the Pledgee) and exercise all other rights (including without limitation any conversion, exchange or subscription rights) and powers and perform all acts of ownership in respect thereof as the registered holder or the Pledgor might do;

(c) proceed to realize upon the Pledged Collateral or any of it by sale at public or private sale or otherwise realize upon any of the Pledged Collateral for such price and money or other consideration and upon such terms and conditions as it deems best, the whole without advertisement or notice to the Pledgor or other persons (except as may be required by the Act and other applicable law), so long as every aspect of the disposition is commercially reasonable, ….

(d) enjoy and exercise all of the rights and remedies of a secured party under the PPSA;

5.4 Liability for Deficiency: If the proceeds of realization received by or on behalf of the Pledgee from the disposition of the Pledged Collateral are not sufficient to satisfy the Obligations in full, the Pledgor shall be liable to pay such deficiency to the Pledgee forthwith on demand.

[16] On December 17, 2003, the other shareholders of both CBC and Classic Bingo executed waivers, consents and resolutions to the pledge of shares by Bazaar to J.I.V.

[17] On December 15, 2004, Ivan required that the loan documents be revised to show Bazaar as the debtor (despite no new advance). A General Security Agreement was created together with a corporate guarantee on behalf of Pegasus, a new Promissory Note from Bazaar for $496,292.48 U.S.D. due on December 15, 2008, and personal guarantees from Victor and his wife Maura.

[18] On January 16, 2005, Pegasus defaulted on the J.I.V. loan.

[19] A meeting was held on or about August 10, 2005, between Bazaar and another shareholder, Windsor Poirier Inc. (“WPI”) and J.I.V., together with counsel, to discuss the default and how the shares were to be dealt with as a result of the impending bankruptcy of Pegasus Plastics Inc. During that meeting, WPI offered to purchase the pledged shares from J.I.V. for $425,000.

[20] It seems to not be disputed that Victor urged Ivan to accept the offer suggesting the Bingo industry in Windsor was in decline as a result of the effects of 9/11 on cross-border traffic. Ivan demanded $652,000 which he now says was the sum owing once converted to U.S. funds.

[21] On August 25, 2005, J.I.V. provided a notice to all shareholders of its intention to retain the pledged shares unless they exercised their right to purchase them for $652,000 which it described as the outstanding debt. The notice referred to s. 2(b) of J.I.V.’s agreement with them, that section reciting retention in “satisfaction of the debt”.

[22] On August 29, 2005, Pegasus made an assignment into bankruptcy. J.I.V. did not file a proof of claim. It appears from the evidence that it was relying upon its seizure of the Bazaar shares.

[23] CBC Bingo Inc. sent out a Notice of Triggering Event pursuant to the USA as a result of the notice of J.I.V. WPI formally accepted the offer to sell as a result of the triggering event.

[24] J.I.V. took the position that it was entitled to retain the shares in satisfaction of the debt secured by the Pledge Agreement, as none of the shareholders had agreed to pay the amount demanded by it of $652,000. It suggested there had been no “triggering event”.

[25] A dispute arose between J.I.V. and WPI as to the provisions and effect of the USA on the purchase price of the shares. J.I.V. maintained the position that, in order for the Pledged Shares to be purchased by WPI pursuant to the USAs, WPI would have to pay the full amount of the debt owed by Bazaar to J.I.V. or $652,000.

[26] Despite the fact that the USA required any dispute to be submitted to arbitration, two court applications were issued. WPI applied for an order declaring Bazaar bankrupt and declaring the fact of a “triggering event” and that an appraisal of the shares was required by s. 6.1 of the USA.

[27] In response, J.I.V. commenced an application for a declaration of no “triggering event” and a declaration that Classic Bingo and the general partner had contravened the Business Corporations Act, R.S.O. 1990, c. B.16 by failing to register J.I.V. as the shareholder of the pledged shares.

[28] Neither Victor nor Maura were parties to the application. It was at this time that Victor attended the office of J.I.V.’s counsel and signed his shares over to his brother’s corporation. Victor’s position is that he believed he and his wife were free of any further obligations when J.I.V. chose to retain its shares. In fact, J.I.V.’s counsel filed an affidavit in support which says, in part, that J.I.V.’s intention was to retain the pledged shares in satisfaction of the debt secured by the pledge.

[29] The first mortgagee, the Bank of Nova Scotia, sold the Pegasus property for $200,000 more than its debt. I have no reliable evidence of what became of the surplus considering J.I.V. was in second position.

[30] I have no information regarding the progress of the two applications other than copies of orders of dismissal of Rogin J. dated July 2006 and April 2008 dismissing both.

[31] Strangely, I have been provided with the reasons of 2011 of the Honourable John H. Brockenshire, Q.C., acting as a single arbitrator. The reasons recite that he held the arbitration as a result of the order Rogin J. from 2006, despite, it seems, the subsequent dismissal of the application. The reasons describe evidence and submissions from appraisers for J.I.V. and WPI and their respective counsel. His finding was that the Bazaar shares were worthless.

[32] Victor was served with the statement of claim in this matter on January 18, 2012, seeking to enforce his guarantee. Service was effected seven years after the default. In that time, Maura had died and Bazaar had gone bankrupt. There was an order to continue against Maura’s estate granted on December 2, 2014.

[33] There was no demand beyond the statement of claim.

Analysis

[34] It is my intention to deal with each of the grounds of dismissal argued by the moving defendants in the order as set out above. In doing so, I am mindful that it is the plaintiff’s position that a trial is necessary and that I do not possess the information to dispose of the issues on this motion. In addition, it argues that findings of credibility are necessary.

[35] I am mindful throughout this analysis that I must grant summary judgment only if there is no genuine issue requiring a trial and I am able to reach a fair and just determination on the merits. I must, on any issue, be able to make the necessary findings of fact, apply the law to them resulting in a proportionate, expeditious and relatively inexpensive resolution: see rule 20.04; Hrynick v. Maudlin (2014), 2014 SCC 7, 366 D.L.R. (4th) 641 (S.C.C.).

1. Retention of Shares in Satisfaction

[36] It is the position of the moving defendants that all the evidence points to J.I.V. seizing and retaining the pledged shares in satisfaction of the debt.

[37] The defendants point to the language used by J.I.V. in the agreements with the other shareholders regarding the pledging of the Bazaar shares; the content of the correspondence from its counsel after the delivery of the notice of “triggering event”; the application brought by J.I.V. to rectify the share registry; and the affidavits from its lawyer and Ivan himself in support.

[38] The defendants argue it was clear that J.I.V. sought to retain the shares “in satisfaction of the debt” and did not intend to sell. Set out below is para. 27 of the affidavit of Dimitry Beluli, counsel for J.I.V., sworn January 20, 2006 and filed in support of the application:

In August, 2005, my firm received instructions from JIV of its intention to retain the Pledged Shares in satisfaction of the debt secured by the pledge and to take such steps as were required in that regard to have it registered as a shareholder of Classic Bingo and the General Partner.

[39] Counsel for the defendants suggest that as a result of this stated intention, the signing over of shares and the lack of notice, the guarantors were content that the obligation had been satisfied.

[40] Counsel for the plaintiff maintains that despite what might be seen as the stated intention of J.I.V., it was always the intention to sell the shares to recoup the money loaned. Ivan did not accept the offer of WPI not because he did not want to sell, but rather because he refused to take a loss.

[41] Plaintiff’s counsel reminds me of the content of para. 5.4 of the Pledge Agreement which allows J.I.V. to pursue the pledgee for any deficiency arising from realization (and as a result pursue the guarantors).

[42] The moving defendants suggest paragraph 5.4 has no application since J.I.V. never intended to realize on the security but always sought to retain the shares.

[43] As mentioned above, on October 14, 2005, Mr. Sasso, counsel for J.I.V., directed correspondence to counsel for Classic Bingo:

We have been retained by JIV to respond to your letters and notices of acceptance of offers by Windsor Poirier Inc. (“Poirier”) dated October 6, 2005. The correspondence and notices concern 25,000 Common Shares of Classic Bingo Country Inc. (“Classic”) and 100,000 Common Shares of CBC Bingo Inc. (“CBC”) (the “Pledged Shares”) that were pledged by Bazaar Bingo (Windsor) Inc. (“Bazaar”) to JIV under the terms of a Pledge Agreement dated December 19, 2003.

As stated by JIV’s corporate solicitor, Stephen M. Cheifetz, in his letter dated September 16, 2005, there has not been a “Triggering Event” within the meaning of the Classic Unanimous Shareholders’ Agreement (“USA”). Accordingly, Classic and CBC do not have the right to sell and Poirier does not have the right to buy the Pledged Shares.

We ask for your written acknowledgement that Poirier is withdrawing or rescinding its notices of acceptance. We have copied this letter to counsel for Classic and CBC and request that they: (i) withdraw the notices of Triggering Event and offers to sell dated September 15, 2005, and (ii) take all steps required to register JIV as shareholder of the Pledged Shares.

In the absence of your cooperation in this regard, we are instructed to take such legal proceedings as may be required to record the transfer of the Pledged Shares to JIV in the corporate records of CBC and Classic and to enforce all rights of JIV as registered holder and beneficial owner of the Pledged Shares.

[44] It may be that the above position taken by J.I.V. was tactical. It may be that the subsequent application was an attempt to “squeeze” as much money as possible out of the sale of the shares. Perhaps that is why once it was clear the bingo industry was in decline, J.I.V. participated in the arbitration/valuation process culminating in the Brockenshire reasons of 2011.

[45] In my view, however, J.I.V. clearly chose to retain the shares in “satisfaction” of the debt. I make that finding of fact. “Satisfaction” is defined in the Concise Oxford English Dictionary, Tenth Edition, as “the payment of a debt or fulfillment of an obligation or claim”. I agree that para. 5.4 of the Pledge Agreement does not assist the plaintiff. There was no disposition of the Pledged Collateral. The creditor (J.I.V.) chose to retain it.

[46] As a result, I find the moving defendants (guarantors) were by 2006 entitled to treat the debt as satisfied releasing them from their guarantees. As of the date of these reasons, this means more to Victor and Maura’s estate than it does to the bankrupt Bazaar.

[47] I intend to go on and deal with the balance of the arguments.

2. Discharge by Conduct

[48] The moving defendants argue that upon default by Pegasus, actions were taken by J.I.V. to their detriment and without notice or consultation with them and, as such, the guarantors should be discharged at that point.

[49] In Turfpro Investments Inc. v. Heinrichs, 2014 ONCA 502, at paras. 14 and 15 the court commented on this historic rule:

This court recently addressed the material alteration test in GMAC Leaseco Corporation v. Jaroszynski, 2013 ONCA 765, 118 O.R. (3d) 264, at paras. 76 - 77:

In Manulife at para. 10, Cory J. approves of Lord Westbury’s formulation in Blest v. Brown (1862), 4 De G.F. & J. 367, at p. 376: apart from any express stipulation to the contrary, a surety will be discharged where the contract has been changed, without his or her consent, unless the change is in respect of a matter that cannot “plainly be seen without inquiry to be unsubstantial or necessarily beneficial to the surety”.

The basis for the rule relating to material alterations arises from the guarantor’s agreement to guarantee the risk arising from the contract between the creditor and the principal debtor. Fairness dictates that this risk not be altered unilaterally by the parties to that contract. Accordingly, a guarantor will be relieved from liability unless an exception applies.

[50] In this instance, the Share Pledge Agreement was a collateral agreement entered into between J.I.V. and Bazaar Bingo a year before the Guarantee was executed. This agreement provided pursuant to s. 4.2 that its enforceability was subject to the application of general equity principles. More importantly, s. 5.1 provided that J.I.V. had the option of inter alia acquiring the pledged shares for its own use and benefit, or alternatively realizing on the shares through their sale with the caveat that the realization of the shares be commercially reasonable. However, at all material times, time was to be of the essence with respect to any decision made by J.I.V. pursuant to s. 6.13.

[51] During a meeting held on August 10, 2005, following the default by Pegasus in payment under its loan, J.I.V. was notified of WPI’s desire to purchase the pledge shares for $425,000. Victor urged his brother Ivan, on behalf of J.I.V., to accept the amount being offered, however, Ivan refused.

[52] On or about August 25, 2005, J.I.V. delivered its Notice that as a result of the demand that had been made upon Bazaar under the Promissory Note, it intended to realize upon Bazaar’s shares. The notice provided that “J.I.V. intends to take possession of and retain the Pledged Shares pursuant to the terms of the Pledge Agreement.” The notice further provided that the Acquisition Amount for the shares pursuant to the shareholders right of first refusal was $652,000.

[53] The events that ensued following the delivery of this Notice included various representations throughout by J.I.V. that it intended to retain the shares in satisfaction of the debt, not just take possession of them.

[54] J.I.V. disputed any right on the part of WPI to purchase shares on the basis that pursuant to s. 2(b) of the separate agreements entered into between J.I.V. and the shareholders of CBC and Classic, upon the denial of J.I.V.’s offer to sell the shares for the stated Acquisition Amount, J.I.V. was entitled to retain the shares for its own use and benefit with “full rights of ownership”.

[55] In the correspondence outlining J.I.V.’s position, Mr. Sasso on behalf of J.I.V. indicated that “[i]n the absence of [the shareholders’] agreement in this regard, [they] were instructed to take such legal proceedings as may be required to record the transfer of the Pledged Shares to J.I.V. in the corporate records of CBC and Classic and to enforce all rights of J.I.V. as registered holder and beneficial owner of the Pledged Shares.” As a result of J.I.V.’s purported retention of the shares, WPI filed a notice of application seeking a declaration that Bazaar was now Bankrupt.

[56] Victor and Maura were never joined by J.I.V. as necessary parties to the applications.

[57] In or around the time that J.I.V. asserted its right to retain the shares in satisfaction of the debt, Victor was required by J.I.V. to attend at the offices of its lawyer for the purposes of signing the shares over to J.I.V.

[58] The terms of the USA to which J.I.V. agreed to be bound provided that in the event of a dispute, such as the one that arose in this case, the parties were obligated to submit their dispute to arbitration within 30 days of the dispute arising. Rather than pursuing a commercially reasonable sale, or submitting the dispute with WPI to arbitration in accordance with the terms of the USA, J.I.V. instead commenced its application for a declaration that it was in fact the owner of the shares.

[59] Time passed. Both applications were dismissed. J.I.V. and WPI embarked on an arbitration which ended in 2011. Victor and Maura were not part of any of that process. Almost seven years after default this claim was issued which became the demand on their guarantees. Pegasus was bankrupt. Bazaar was bankrupt. Maura was dead. Victor’s position was significantly prejudiced.

[60] The actions of J.I.V. were neither commercially reasonable nor equitable in my view. Time was clearly not seen as “of the essence”. Further, the risk was materially altered when Ivan (J.I.V.) chose to hold onto the shares in a declining market and in the face of a viable offer to purchase.

[61] Should I be seen to be in error in deciding that J.I.V.’s retention of the shares satisfied the debt, I find that the above-noted actions of J.I.V. discharged the guarantors of their obligations.

3. Limitation Period

[62] The moving defendants argue, as a result that the terms of the guarantee, the guarantors should be seen as principal debtors. Therefore, the limitation period for claims against them, upon default, commenced when default occurred in 2005 or at least when the Promissory Note came to terms in 2008. As a result, the cause was extinguished no later than 2010. They rely upon the decision of the Supreme Court of Canada in Manulife Bank of Canada v. Conlin, 1996 182 (SCC), [1996] 3 S.C.R. 415, at para. 19, “a principal debtor clause converts a guarantor into a full-fledged principal debtor.” They argue that para. 2 of the Guarantee, set out below, is a principal debtor clause:

The Guarantor unconditionally guarantees performance by the Borrower of all promises under the Obligations and payment by the Borrower of the Principal Sum, interest and other amounts the Borrower has promised to pay under the Obligations (the foregoing amounts collectively are called the “Outstanding Balance”).

[63] This argument cannot succeed.

[64] There is no doubt that this is a demand guarantee. The Limitation Act, 2002, was amended on November 27, 2008, to add s. 5(3) and (4):

5(3) For the purpose of subclause (1)(a)(i), the day on which injury, loss or damage occurs in relation to a demand obligation is the first day on which there is a failure to perform the obligation, once a demand for the performance is made.

(4) Subsection (3) applies in respect of every demand obligation created on or after January 1, 2004.

[65] The guarantees in this matter were signed on December 15, 2004.

[66] Perell J. in Skuy v. Greennough Harbour Corporation, 2012 ONSC 6998, at para. 35 summarized the effect:

The effect of the amendment to the Limitations Act is that all demand obligations are treated the same way, and the limitation period for a demand obligation begins to run only from when a demand is made.

[67] The decision in Skuy is consistent with the decision of the Court of Appeal in Bank of Nova Scotia v. Williamson, 2009 ONCA 754.

[68] I find then that despite the delays occasioned by the actions of J.I.V., the limitation period did not start to run until the demand was made by issuing the statement of claim in January 2012. This argument of the moving defendants must therefore fail.

Conclusion

[69] The guarantors Victor and Maura (represented by her estate) are released from their obligations to J.I.V. pursuant to a Guarantee dated December 15, 2004, for the reasons set out above.

[70] I am obviously content that there are no genuine issues for trial that should delay this matter further. I believe I have a full appreciation of the three issues argued on the basis of the material filed and the argument presented.

[71] With respect to costs, I will receive the written submissions of counsel for the moving defendants within 30 days of the release of these reasons (limited to five (5) typed pages).

Counsel for J.I.V. will have 15 days thereafter to respond (five (5) typed pages) and any reply 10 days after that (two (2) typed pages).

Original signed by “Justice Bruce Thomas”

Bruce Thomas
Justice

Released: July 21, 2015

COURT FILE NO.: CV-12-17337
DATE: 20150721

ONTARIO
SUPERIOR COURT OF JUSTICE

BETWEEN:

J.I.V. Enterprises Inc.
Plaintiff

– and –

Victor Vaseleniuck, Maura Vaseleniuck, Bazaar Bingo (Windsor) Inc. and Pegasus Plastics Inc.
Defendants

REASONS FOR JUDGMENT

Thomas J.

Released: July 21, 2015