Superior Court of Justice – Ontario

COURT FILE NO.: CV-14-10519-00CL

DATE: 20150811

COMMERCIAL LIST

RE: ABRAHAM REICHMANN, Plaintiff

AND:

RALPH REICHMANN, personally and in his capacity as Estate Trustee of the Abraham Reichmann Family Trust, ADA REICHMANN, personally and in her capacity as Estate Trustee of the Abraham Reichmann Family Trust, JARWICK DEVELOPMENTS INC., RADA HOLDINGS INC., OLYMPIA TILE INTERNATIONAL INC., RFRE HOLDINGS INC., R.R.F. CORP., R. INVESTMENT CORP., DECORAMIC INTERNATIONAL INC., 932357 ONTARIO INC., and BARRY ARBUS in his capacity as Trustee of the Abraham Reichmann Family Trust, THE CHILDREN'S LAWYER, Defendants

BEFORE: Newbould J.

COUNSEL: Kenneth Prehogan and Caroline Abela, for the plaintiff Luis Sarabia and Nathaniel Read-Ellis, for the defendants other than Barry Arbus

HEARD: August 7, 2015

ENDORSEMENT

[1] Abraham Reichmann has sued his parents Ralph and Ada Reichmann and corporations in which he has direct or indirect interests. What exactly caused the unfortunate family rift is not at all clear from the record. What is known is that until 2014, his parents were very generous to him as well as to other of their children. His parents by any standard are very wealthy. His parents say that the payments to Abraham were gifts. In 2014 payments to Abraham stopped for the reason, as acknowledged by Ralph, that he did not want to continue making payments that would be used to fund the litigation against him.

[2] The action has not progressed beyond the pleading stage. Abraham now brings a motion for interim relief under the oppression provisions of section 248 of the OBCA.

Jarwick Developments Inc.

[3] Ada is the sole shareholder of Jarwick which had a 25% interest in a partnership that held land in New Jersey. Jarwick and Ada have been in litigation in New Jersey since 1992 when the 50% partner, the Wilf family, purported to expel Jarwick from the partnership. Ada and Jarwick lost at trial, but in December, 2006 the Appellate Division of the New Jersey Superior Court declared that Jarwick owned a 25% interest in the partnership and remanded the case to the lower court for a formal accounting of Jarwick’s interest in the partnership. A trial was held from May, 2011 to May 2013. In December 2013, a judgment was rendered granting compensatory damages of approximately US$43million and punitive damages of approximately US$20 million to Jarwick and Ada[^1] and ordering the partnership property to be sold.

[4] The partnership property was sold for US$136 million. Of these proceeds, after various adjustments, Jarwick was credited with net proceeds of US$29,316,623.65. After holdbacks in respect of a bulk sale escrow and for payment of US taxes, Jarwick's share of the proceeds was US$23,746,465.15. A further US$7.25 million has been placed in escrow pending a dispute with previous US attorneys. In the result, Jarwick and/or Ada have received and are in possession of net proceeds of approximately US$16 million from the sale of the Jarwick property. After various deductions of legal and expert fees for the New Jersey litigation and other money paid, the money on hand from the US Litigation is approximately US$8.4 million.

[5] In 2007 Ralph and Ada asked Abraham to take over management of the Jarwick litigation by dealing with the litigation lawyers in New Jersey. At that time, Ada and Abraham signed an option agreement dated June 2008 under which Abraham has the option to acquire 50% of the shares of Jarwick for $1 dollar. Under section 2 of the option agreement, the option is exercisable “at any time upon the settlement or completion of litigation”. The litigation is not completed because an appeal has been taken by the Wilf family to the Appellate Division of the New Jersey Superior Court and Jarwick and Ada have cross-appealed to increase their damages. The payment of damages has been stayed pending the appeal.

[6] Abraham purported to exercise his option in April, 2014, which would appear to be premature under the terms of the option agreement. It can hardly be disputed however that Abraham has some equitable right to 50% of Jarwick and the proceeds of the New Jersey litigation.

[7] Ralph and Ada accept that at the conclusion of the New Jersey litigation, Abraham will be entitled to 50% of the net proceeds. The parties agree that proper legal costs in pursuing the New Jersey litigation are expenses that must be deducted in order to arrive at the net proceeds. There are other expenses, however, claimed by Ada that are in dispute.

[8] Abraham asserts that even if the disputed expenses are deducted from the US$8.4 million on hand, there will be at least Cdn$3 million available for distribution and up to Cdn$8.1 million if Ada’s claimed expenses are disallowed. He requests an interim order under section 248 of the OBCA of half of what he is entitled to. I decline to make such an order.

[9] There is no certainty at all how much money, if any, will ultimately be available from the Jarwick litigation. The damage awards have been appealed and the Wilfs are seeking to have a new trial to reassess the compensatory damages. They seek to overturn the punitive damage claim. They seek to overturn the decision requiring the partnership assets to be sold and seek a repayment of an undetermined portion of the net proceeds that Jarwick received from the sale.

[10] In addition to the potential reduction in damages due to Ada and Jarwick, and a repayment of amounts received by Jarwick from the sale of the partnership asset, a remand to the trial court would entail substantial additional legal and expert fees for Ada and Jarwick. Ada and Jarwick filed documents in the New Jersey litigation that estimated that the cost of the appeal alone could total $3 million. A new trial would inevitably result in even more substantial fees. The second trial resulted in legal and expert fees of more than $12 million. Further, the first lawyers for Ada and Jarwick in the New Jersey litigation are claiming 25% of all proceeds received in the New Jersey litigation. There is a tolling agreement at the moment on this claim, but the evidence indicates that litigation of this claim is likely and that the costs will be very substantial.

[11] In these circumstances, even if Abraham had a right to now be paid something from the Jarwick litigation, there is not sufficient certainty that anything will ultimately be available to permit some payment now.

[12] In any event, the option agreement does not contemplate the option being exercised before the completion of the litigation or payment for Abraham’s interest to be paid before then. Also, on this record at this stage, I see no oppressive conduct in Ada not paying out anything to Abraham in light of the contingent nature of the existence of funds to be available and the need for funds to pay legal fees. It might be a different matter if Ada saw fit to pay herself something from the funds on hand.[^2] That will not occur.

[13] There is a need to make sure that the funds received from the sale of the partnership property be properly maintained. Although the partner was Jarwick, the funds have not been held by Jarwick. They are being held in a segregated account, although as indicated, Ada paid some of her legal fees in this litigation from those funds but repaid them after an order was made to disclose particulars of the fund. An order is required that will protect the funds. I order that no money may be paid from the segregated funds except for legal fees in the New Jersey litigation and that notice of the amounts claimed for legal fees and to be paid thereon is to be given to Abraham forthwith upon receipt of the claim for these amounts and payment being made.

[14] Abraham was managing the Jarwick litigation from 2007 until February, 2014 when Ralph instructed Jarwick's lawyers in the New Jersey litigation to stop taking instructions from Abraham and to start taking instructions from him, and not to let Abraham know any of the ongoing steps in the litigation.

[15] Abraham requests an order that he be provided with information regarding any settlement discussions. The defendants have now agreed to provide the following information to Abraham:

(a) if Ada and Jarwick engage in settlement discussions in the New Jersey litigation or in respect of the dispute with the former lawyers for Jarwick, the existence, but not the content, of those discussions, and if a settlement is ultimately reached, the terms of the settlement;

(b) any new actions against Jarwick; and

(c) the date of the hearing of the appeal in the New Jersey litigation, once it is scheduled.

[16] Abraham has an equitable interest in Jarwick and in my view is entitled to information regarding settlement discussions, including offers made by the opposing parties and intended offers from Ada and Jarwick. Abraham should be entitled, either directly or through his lawyers, to give comments to Ada and Ralph before any offers are made by them. There can be no prejudice to Ada or Ralph so long as Abraham does not engage in the negotiations himself. I order (i) that Ada and Ralph disclose to Abraham any offers to settle received from the opposing parties, including any offer from the previous attorneys for Jarwick, forthwith after receipt and that they disclose to Abraham any intended offer to be made on behalf of Ada and Jarwick no later than 48 hours prior to any such offer being made, and (ii) that Abraham is not to engage in any settlement discussions with the opposing parties without the consent of Ada or Ralph.

Rada Holdings Inc.

[17] Abraham seeks an interim order that he be paid $42,500 per month from Rada, of which he is a 7.3% shareholder. Rada is a shareholder of Olympia Tile International Inc. and RFRE Holdings Inc.

[18] Olympia Tile is a multi-million dollar business. Over 20 years ago, it was valued at $160 million. Olympia Tile makes substantial profits every year and in 2014 had retained earnings of $126.7 million. RFRE holds the real estate assets that Olympia Tile and its affiliates use for their operations. During a butterfly reorganization in 2006 when Abraham's shares of Olympia Tile were exchanged for shares in Rada, RFRE's shares were valued at $66,873,748.

[19] Ralph is one of three brothers, Paul, Ralph and Albert Reichmann, who attained great wealth primarily as property developers in Canada and internationally. Ralph is a majority shareholder, president and director of Rada, the company that is a shareholder of Olympia Tile and RFRE. Ralph is also a director, president and secretary of Olympia Tile and RFRE.

[20] Rada is one of three family holding companies that were created as part of the butterfly reorganization to hold the shares of Olympia Tile. Rada's directors and officers are Ralph and Ada. Its shareholders are Ralph, Ada and their children and grandchildren, including Abraham.

[21] The two other family holding companies (Beled Holdings Inc. and LRT Tile Holdings Inc.) are controlled by the families of Ralph's brothers. The major assets of these holding companies, including Rada, are Olympia Tile, a tile wholesaler and retailer, and RFRE, a real estate holding company. As part of the butterfly reorganization, Olympia Tile's real estate assets were spun out into a new corporation, RFRE, and the shareholders of Olympia Tile exchanged their shares for an equivalent number of shares in one of the new family holding companies. RFRE now leases its real estate assets to Olympia Tile and its affiliates for use in their operations.

[22] Abraham is an ordained Rabbi, although at different times he has worked in the commercial world, including working at Olympia Tile and working with Ralph’s brothers on various business ventures, including the development of the Chase Tower in Chicago, and a $1 billion sports entertainment complex for which Abraham was the President and Chief Operating Officer. Abraham has a wife, ten children, four daughters-in-law, and four grandchildren that are said to be dependent on Abraham for living expenses and all living in the family home.

[23] Abraham received relatively small amounts by way of dividends from Olympia Tile from 1994 to 2001 and substantial dividends and a substantial cash advance from Rada from 2011 to 2013. For about 30 years, Abraham received substantial amounts of money from his parents. All payments from Rada and from his parents ceased in 2014. Abraham claimed on this motion that he requires the payments to continue to support his family expenses. He lives in a large home in Toronto. He liquidated two properties after payments from Rada and his parents ceased and has $2.5 to $3 million remaining, which due to his large family is being spent at a great rate.

[24] It is not clear exactly how much Abraham received over the years. From 2003 to 2012, he received $26,000 per month from his parents which he admits were gifts from them written on their personal chequing accounts. From October 1996 to April 2012 Abraham received regular monthly payments, typically in the amount of $14,000, drawn on Olympia Tile cheques. For a relatively short period of time, from 1996 to 2001, a small amount of those monthly payments (typically $890.75) were made up of dividends that Abraham received in his capacity as a Class C shareholder of Olympia Tile. The rest of the monthly payments received by Abraham on Olympia Tile cheques came from his parents, either from their own dividends in the period from 1996 to 2001, or debited from their personal accounts with the company.

[25] Abraham received a distribution of $2.1 million from Rada in early 2012 in respect of his shareholding in Rada, $219,333 in dividends in 2012 and advances of $254,367 in 2013. In 2014 a dividend was declared to him for $146,200 and was applied against his advance account created in 2013. This left dividend tax payable by him for the tax year 2014.

[26] Abraham’s position is that payments made to him from Olympia Tile and latterly Rada were stopped and that Ralph, who controls Rada, has stopped payments to him because he sued Ralph and Ada. He says that Ralph controls payments from Rada and has stopped making payments to Abraham from Rada because of this law suit, which he says is oppressive.

[27] Ralph and Ada’s position is that the $14,000 annual payments made from Olympia Tile were personal gifts from them made from their dividend or personal accounts at Olympia Tile, as were the annual payments of $26,000 made from their personal bank accounts. Their position is that they stopped these payments in 2012 when Abraham received a distribution of $2.1 million from Rada as he no longer needed the payments, and that there is no legal reason why they should be compelled to make further gifts to Abraham. Ralph and Ada’s position is that when dividends have been declared by Rada, Abraham has received his percentage share of the dividends.

[28] Section 248(2) of the OBCA provides that if a court is satisfied that there has been oppressive conduct, the court may make an order to rectify the conduct. Section 248(3) provides that a court may make an interim order that it thinks fit. This language permits a wide discretion. Some authorities have said that the RJR test should be satisfied on an application under section 248(3) for interim relief that is in the nature of an injunction, although there may be some circumstances where interim relief pursuant to section 248(3) is merited absent all of the traditional considerations associated with an interlocutory injunction. See Le Maitre Ltd. v. Segeren (2007), 2007 CanLII 18735 (ON SC), 33 B.L.R. (4th) 224, involving an application for an interim injunction preventing a transaction from taking place. For an interim mandatory injunction, which the Abraham seeks, the test of a serious issue to be tried often gives way to the need to establish a strong prima facie case. See Robert J. Sharpe, Injunctions and Specific Performance (Canada Law Book, looseleaf edition 2014) at ¶ 2.250. See also Alizadeh v. Akhavan 2004CarswellOnt 3410.

[29] Relief for oppression under section 248 of the OBCA can only be made to protect the interests of a shareholder qua shareholder. It is only a shareholder’s interest as a shareholder that can be protected and not a shareholder’s other personal interests. Naneff v. Con-Crete Holdings Ltd. (1995), 1995 CanLII 959 (ON CA), 23 O.R. (3d) 481 (C.A.) at paras. 24-26.

[30] I see no basis at this stage of the action to order that monthly payments of the kind made by Ralph and Ada to Abraham from their bank accounts or accounts at Olympia Tile continue. Abraham admits that the $26,000 monthly payments from his parents were gifts without any obligation to make them “out of the generosity of their hearts as parents”. I see no basis on this record to hold that his interests as a shareholder of Olympia Tile and then Rada were in any way involved in these payments being made or terminated.

[31] Regarding the monthly $14,000 payments made to Abraham, they were made from either the dividend accounts of Ralph and Ada at Olympia Tile or from their personal accounts at Olympia Tile. There is no cogent evidence before me that they were anything but personal gifts from Ralph and Ada to Abraham. Abraham says that his father told him that the payments from Olympia Tile were dividends, and although he did not say in his affidavit whether they were dividends for him or for his parents, it can perhaps be inferred that he meant to say that his father said the payments were dividend payments owing to Abraham. However, no T5 slips were ever issued to Abraham for these payments and there is no evidence that he declared them as dividend income in his income tax returns. There is also no evidence at this stage that the payments to Ralph and Ada from Olympia Tile on their dividend and personal accounts were in any way improper.

[32] On the evidence in the record at this stage, it is very difficult indeed to make out a case that these payments from Olympia Tile were dividend payments from Olympia Tile to Abraham and that they should be ordered on an interim basis to continue to be paid out to him by Rada. I decline to make such an order.

[33] The record of payments from Rada to shareholders other than Abraham, and particularly to Ralph, gives rise to some concerns.

[34] Ralph’s accountant prepared a list of payments from Rada to Rada shareholders from 2011 to the end of 2014 (to April 30, 2015 in the case of Rochelle Reichmann, a sister of Abraham). In 2013 and 2014 there were a very large number of advances to Ralph. In 2013, there were advances totalling $2,664,999.09 to Ralph’s account, Ralph Reichmann Financial Corp. There were no dividends declared. In 2014, there were advances to his account totalling $5,355,090.29 and a deduction of $847,400 representing a declared dividend of $847,400. Net of this dividend, Ralph received advances in 2014 of $4,507,690.29.

[35] It is apparent that Ralph has used advances from Rada to provide others in the family with money. In 2014, advances of $30,000 per month totalling $360,000 were made by Rada to Rochelle Reichmann, a sister of Abraham’s who holds the same number of shares of Rada as Abraham. A dividend of $146,200 was declared, so that net of the dividend, Rochelle received advances from Rada in 2014 of $213,800. Advances of $30,000 per month to Rochelle have been made up to April 30, 2015, and it is likely that they continue.

[36] Abraham received advances totalling $254,366.58 from Rada in 2013. He also received in January 2013 a dividend of $99,332.72 to pay a dividend in that amount declared on December 31, 2012. In December 2014 a dividend of $146,200 was declared. No cash advances were made to him in 2014 which meant that his tax bill that year for the declared dividend was not funded by any money from Rada. Ralph and Ada say that the amount in dividends declared in 2014 was offset against his prior year’s advances. While legally this may have been permissible, although that is contested, it was different treatment accorded to Abraham than was the case with all other shareholders who each year received cash advances to pay any declared dividends. One can only infer that the reason for the different treatment of Abraham was because of his lawsuit against his parents. It was mean spirited to say the least.

[37] Shareholders of a corporation have a right to expect to be treated equally so far as dividends are concerned. It is by way of dividends that shareholders are to receive income from the corporation. In Ralph’s case, he is the President of Rada and is paid $1million annually. It is not clear whether any of the advances in 2013 or 2014 were for his salary or whether he received a salary in a different account. It is clear however that he has been paying himself advances over and above his salary. It is also clear that he has been paying cash advances to other shareholders according to his desires.

[38] Based on the record before me, it would appear that there is a very strong case that the payment of cash advances by Rada at the direction of Ralph to himself and persons of his choosing are oppressive and unfairly disregard the interests of Abraham as a shareholder of Rada. Directing cash advances without a declaration of a dividend may be a way to provide funds to shareholders but it can be a way to oppress or disregard the interests of other shareholders. In my view, that is what appears to be the case in the way in which Ralph has directed the affairs of Rada.

[39] An order to rectify the situation on an interim basis is required. The appropriate order, which I make on an interim basis until the trial of this action or further order, is as follows:

(i) There are to be no cash payments made by Rada to shareholders of Rada that are not declared by way of a dividend.

(ii) All shareholders are to receive at the same time their pro rata share of such cash payments in accordance with their shareholding in Rada.

(iii) Abraham is to be paid forthwith the greater of (i) his pro rata share of the net advances made to Ralph is 2014, based upon their relative shareholdings in Rada or (ii) the amounts advanced to Rochelle in 2014. The same is to occur with respect to advances to Ralph or Rochelle in 2015 to date.

[40] Abraham has achieved substantial success and he is entitled to his costs. If costs cannot be agreed, brief written submissions along with a proper cost outline may be made within 10 days and brief written submissions in reply may be made within a further 10 days.

[41] This case cries out for settlement. Counsel are to attend before me at a 9:30 a.m. conference sometime this month arranged through the Commercial List office to discuss a mediation process.

Newbould J.

Date: August 11, 2015

[^1]: Ada takes the position that Jarwick held the partnership interest as a bare trustee for her. [^2]: Ada used $278,000 of the proceeds to fund her expenses in this litigation in Ontario. Shortly after the information regarding the proceeds was ordered to be produced to Abraham, Ada repaid the money.