CITATION: Philpott et al. v. 338200-1 Canada Inc. et al., 2015 ONSC 575
COURT FILE NO.: CV-13-4212-00
DATE: 20150127
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: KEVIN PHILPOTT and 2305006 ONTARIO LIMITED
and
338200-1 CANADA INC, 1641897 ONTARIO INC., 1009734 ONTARIO INC, DORIS WADDELL and DWAYNE WADDELL
BEFORE: Justice William M. LeMay
COUNSEL: Romesh Hettiarachchi, for the Plaintiffs
Tyler McLean, for the Defendants
E N D O R S E M E N T
[1] This decision concerns a series of motions that were heard before me on January 21, 2015. The motions involved requests by both sides for determinations of various issues in advance of trial. For the reasons that follow, all of the motions brought by both sides before me are dismissed in their entirety.
Background
[2] The motions that I am addressing flow from claims filed as a result of a transaction that took place in September of 2011. The Defendants in this action (hereinafter “the Waddell parties”) sold their interests in a logistics company to the Plaintiff in this action, Mr. Kevin Philpott, or to a company to be named later (hereinafter “the Philpott parties”). I am referring to the various parties as the Waddell and Philpott parties throughout this decision because of the fact that Mr. Waddell and Mr. Philpott are both personally involved in this transaction, and they both have various companies that they control or controlled that are involved in this transaction.
[3] The sale resulted from the fact that Mr. Dwayne Waddell, one of the defendants in this action, and apparently the directing mind of a logistics company called Fastrek Express Inc., had been diagnosed with lung cancer that was believed to be terminal.
[4] In order to protect the interests of his family, Mr. Waddell sold the business to his landlord (and then either friend or close acquaintance - they were clearly friendly with each other at the time of the transaction), Mr. Philpott, or a company to be named later, through an Agreement of Purchase and Sale (hereinafter “the APS”). This agreement was dated September 30, 2011 and the transaction closed the same day. Neither party had the assistance of counsel in completing this transaction. The APS resulted in the sale of various assets owned by the companies controlled by Mr. Waddell, in exchange for a series of payments to be paid by Mr. Philpott or a company to be named later.
[5] As agreed by counsel for the Waddell parties in argument, both the companies controlled by Mr. Waddell and Mr. Waddell in his personal capacity had responsibilities under the APS. In particular, Mr. Waddell had signed a non-compete agreement as part of this APS.
[6] Approximately eight weeks later, Mr. Philpott incorporated the plaintiff 2305006 Ontario Limited (hereinafter “the 230 Corporation”), purportedly in order to assume all of the responsibilities for the APS under section 21 of the Ontario Business Corporations Act. It is unclear from the record whether Mr. Waddell was aware that this company had come into existence in order to assume the responsibilities for the APS.
[7] It is clear from the record that Mr. Philpott and/or the 230 Corporation made some payments on account of the APS. However, sometime shortly after the transaction closed, the payments from the plaintiffs in this action ceased. The plaintiffs in this action (“the Philpott parties”) assert, inter alia, that Mr. Waddell and the Waddell companies misrepresented the revenue stream flowing to Fastrek Logistics.
[8] Further, the 230 Corporation was placed into bankruptcy, and a trustee in bankruptcy was appointed. Shortly after this assignment into bankruptcy, counsel for Philpott commenced a claim against the Waddell parties. This claim alleged that the Waddell parties had misled the Philpott parties about the value of the business under the APS. On the record before me, it is clear that counsel for the Philpott parties should have been aware that the 230 Corporation had been placed into bankruptcy.
[9] Upon being advised of this claim, counsel for the Waddell parties pointed out to counsel for the Philpott parties that the claim on behalf of the 230 Corporation was brought without capacity because the 230 Corporation was in bankruptcy. The response from counsel for the Philpott parties was to demand service of a Statement of Defence from the Waddell parties within two days, failing which the Waddell parties were advised that they would be noted in default.
[10] Based on these circumstances, counsel for the Waddell parties brought a motion to dismiss this claim. The motion was premised on the basis that Mr. Philpott had assigned his interests in this transaction to the 230 Corporation, and that the 230 Corporation had declared bankruptcy. Further, since the 230 Corporation’s Trustee in Bankruptcy had not authorized the claim on behalf of the 230 Corporation to proceed, counsel for the Waddell parties took the position that the claim was brought without capacity and should be dismissed.
[11] In the meantime, counsel for the Waddell parties commenced a claim on behalf of a series of numbered companies that I understand are controlled by Mr. Waddell against Mr. Philpott in his personal capacity. These claims are, inter alia, claims for damages flowing from the alleged failure of Mr. Philpott to pay the purchase price promised under the APS.
[12] In essence, then, the case that presents itself from the Philpott parties is a claim that Mr. Waddell misrepresented the value of his business, and that he (and/or the companies controlled by him) should not be paid the amounts set out under the APS. Conversely, the case that presents itself from the Waddell parties is a claim that the Philpott parties have not paid for the assets that they have received, and that those assets disappeared in the course of the bankruptcy of the 230 Corporation.
[13] Unfortunately, the action is complicated by the fact that each party has brought a separate claim, in a separate Court file, against each other. The case before me is the case where the Philpott parties are the plaintiffs. I will refer to it throughout as “this action”. However, there is a close relationship between this action and the claim brought by the Waddell parties against Mr. Philpott. I understand from counsel that they are to be tried together, and that the evidence and discoveries can be obtained and used in both actions. In my review of the file for this action, I did not see an Order to that effect, however.
[14] The action is further complicated by the procedural history relating to this motion, and the relief sought by each party. I now turn to the positions of the parties on the motions before the Court.
[15] Each party referred me to case law in their argument. I have reviewed all of the cases that I was referred to in reaching my decision.
The Positions of the Parties
a) The Waddell Parties
[16] The Waddell parties have brought a motion in this case alleging that Mr. Philpott in his personal capacity has assigned the rights and obligations under the Agreement of Purchase and Sale to the 230 Corporation and, as a result, does not have the legal capacity to continue his action against the Waddell parties. The Waddell parties sought to have Mr. Philpott struck as a party.
[17] The Waddell parties also, in their original notice of motion, brought a claim that the 230 Corporation did not have the consent of the Trustee in Bankruptcy to commence or continue this action and, as a result, this action on behalf of the 230 Corporation should be dismissed as well.
[18] The parties acknowledged that the issues relating to the 230 Corporation’s capacity to continue this action were addressed by other proceedings before the Court and that the capacity issues were purged. Specifically, this was addressed by the Order of Justice Barnes dated August 28th, 2014. It is worth noting that the steps necessary to achieve this purging were not taken by counsel for the Philpott parties for some considerable time after this motion was originally brought in 2013.
[19] Counsel for the Waddell parties acknowledged the existence of the action brought by the Waddell parties in Court File No. CV-13-2970. This is a claim by the Waddell parties against Mr. Philpott personally. The position of counsel for the Waddell parties, as I understand it, was that this action (Court File No. CV-13-4212) should be dismissed as Mr. Philpott had alleged that he had assigned the rights to the Agreement of Purchase and Sale to the 230 Corporation.
[20] However, counsel for the Waddell parties also stated that the Waddell parties should be entitled to continue with their lawsuit against Mr. Philpott personally as a result of his failure to make the payments under the APS.
b) The Philpott Parties
[21] The Philpott parties took the position that the motion brought by the Waddell parties should be struck out. The arguments relating to that motion will be dealt with below.
[22] In addition, the Philpott parties also brought a cross-motion requesting that the Court make various declarations that would result in a finding that Mr. Philpott had assigned his rights and obligations under the APS to the 230 Company for all purposes, in both actions.
[23] The Philpott parties also sought an order fixing the obligations between the various parties under the Ontario Business Corporations Act.
The Motion to Strike
[24] I dismissed the Philpott parties’ motion to strike from the bench without calling upon counsel for the Waddell parties. In my brief oral comments, I promised the parties more detailed reasons. These reasons follow.
[25] The Waddell parties moved under Rule 21 for a determination of a question of law. In the alternative, they moved under Rule 20 for summary judgment. Counsel for Philpott advised me that his problem with the motion brought by the Waddell parties was that the tests for relief under each section were different, and that he did not know the test he had to meet. As a result, he asked for the motion to be dismissed. I refused that request.
[26] Rule 21 allows parties to move for a determination of a question of law before a trial. That rule states, in part:
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.
21.01 (3) A defendant may move before a judge to have an action stayed or dismissed on the ground that,
(a) Jurisdiction – the court has no jurisdiction over the subject matter of the action;
(b) Capacity – the plaintiff is without legal capacity to commence or continue the action or the defendant does not have the legal capacity to be sued;
(c) Another Proceeding Pending – another proceeding is pending in Ontario or another jurisdiction between the same parties in respect of the same subject matter; or
(d) Action Frivolous, Vexatious or Abuse of Process – the action I frivolous or vexatious or is otherwise an abuse of the process of the court, and the judge may make an order or grant judgment accordingly.
[27] When the words of the Rule are considered, it is clear that (in most circumstances) the motions judge hearing the matter will be limited to considering the pleadings and the law in reaching a decision under Rule 21. It is generally not open to the motions judge to consider underlying facts when making a decision. In this case, counsel for the Waddell parties was alleging that, as a matter of law, Mr. Philpott did not have the capacity to commence or continue this claim. In considering the motion of counsel for the Waddell parties under Rule 21, all I could take into account were the pleadings and the decision in Guido v. Swail ([1987] O.J. No. 63), among other cases. It was, in short, a legal interpretation.
[28] However, counsel for the Waddell parties also claimed, in the alternative, that this matter should be decided under Rule 20. That rule allows the motions judge to consider a broad range of factors, as set out in the Hyrniak decision (Hyrniak v. Mauldin 2014 SCC 7, [2014] 1 S.C.R. 87). It is clear from the motion materials filed by the Waddell parties that they intended these positions to be argued in the alternative.
[29] In other words, counsel for the Waddell parties was arguing that the claim should be dismissed under Rule 21 as a matter of law on the basis of capacity. If that argument was not successful, he was arguing in the alternative that the matter of the standing of Mr. Philpott to bring an action personally should be determined as a summary judgment motion under Rule 201 as the facts established that an assignment had been made under the Ontario Business Corporations Act, and Mr. Philpott allegedly had no ability to continue his claim.
[30] Counsel for the Philpott parties asserted that the Waddell parties should not be allowed to request relief under Rule 20 and Rule 21 in the same motion. He provided a number of arguments to support this proposition. First, he argued that this was an abuse of process. I disagree. Counsel for the Waddell parties was, in my view, acting responsibly by seeking to address both Rule 20 and Rule 21 in the same motion. Both the pleadings and the underlying legal issues are the same in both types of motions. This is true even though, as noted in the decision of Greatrek Trust S.A/Inc. v. Aurelian Resources Inc. 2009 6095 (ON SC), [2009] O.J. No. 611 at paragraph 19, “Rule 21 motions are not even close cousins to motions for summary judgment.” Justice D.M. Brown (as he then was) made this comment in the context of expressing concern with the overuse of Rule 21 motions in Toronto.
[31] While the Rule 20 and 21 motions may not be close cousins, it would be a waste of scarce judicial resources to have a party bring a motion under Rule 21 and, if unsuccessful, then return to court sometime later with a Rule 20 motion on the same claim. The underpinnings of each motion (the pleadings and the law) are the same in both cases.
[32] Related to his argument on abuse of process was a claim by Mr. Hettiarachchi that the Waddell parties were taking inconsistent positions and, as a result, their motion should be struck. As noted below, I agree that the Waddell parties were taking inconsistent positions, but that is a basis for dismissing their motion (which I have done), and not striking it at the outset.
[33] Counsel for the Philpott companies also argued that it was not clear to him what test he had to meet in responding to the motion brought by the Waddell parties. This is not a sustainable position. It was clear, from the materials, that the Philpott companies did not have the onus on the Waddell motion. It was also clear that the Waddell parties were claiming (as noted above) that Mr. Philpott’s personal claim should be dismissed as a matter of law and, in the alternative, should be determined as a summary judgment matter in accordance with the principles in Hyrniak.
[34] Counsel for the Philpott parties also argued that Rule 11 of the Rules of Civil Procedure was also, somehow, relevant to this matter. Given that counsel for the Waddell parties clearly stated on the record that he was not relying on Rule 11, I give no effect to this argument.
[35] However, this argument leads to another point made by counsel for the Philpott parties. He argues that it was appropriate for him to continue his motion because he brought it at a time when the arguments and facts were unclear. I will have more to say about this issue when I address costs below. However, it is worth noting that, merely because a motion might be reasonable when it is originally brought, is no reason for a party to continue it even in the face of changed circumstances.
[36] In the end, the argument for counsel for the Philpott parties fails on this point because the process he proposed for dealing with these issues would be more cumbersome, there is no basis for his claim that he did not understand the argument he had to meet, and there is nothing inappropriate about a party seeking relief under two rules in the same motion.
The Motions for Summary Judgment
[37] I find that neither of these motions should have been brought, neither of them should have been continued once the facts became clearer, and that both of them should be dismissed.
[38] My reasons for this conclusion start with a consideration of the Hyrniak decision, which states:
49 There will be no genuine issue requiring a trial when the judge is able to reach a fair and just determination on the merits on a motion for summary judgment. This will be the case when the process (1) allows the judge to make the necessary findings of fact, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result.
50 These principles are interconnected and all speak to whether summary judgment will provide a fair and just adjudication. When a summary judgment motion allows the judge to find the necessary facts and resolve the dispute, proceeding to trial would generally not be proportionate, timely or cost effective. Similarly, a process that does not give a judge confidence in her conclusions can never be the proportionate way to resolve a dispute. It bears reiterating that the standard for fairness is not whether the procedure is an exhaustive as a trial, but whether it gives the judge confidence that she can find the necessary facts and apply the relevant legal principles so as to resolve the dispute.
[39] First, and foremost, the purpose of a summary judgment motion is to resolve issues between the parties where possible without the necessity for a trial. Hyrniak instructs us that summary judgment is a broad remedy, but it is not without its limits.
[40] This case illustrates some of those limits, starting with the claim brought by the Waddell companies. They allege that Mr. Philpott has conceded that he has assigned his rights under the Agreement of Purchase and Sale to the 230 company, and, as a result, he does not have the capacity to sue the Waddell companies for the benefits that they promised to provide under the APS. However, the Waddell companies also allege that they are entitled to continue their action against Mr. Philpott personally, and are entitled to enforce the obligations of the APS against Mr. Philpott
[41] This argument cannot be given effect for many reasons, starting with the specific wording of section 21(4) of the Ontario Business Corporations Act, which states:
Contract prior to corporate existence
- (1) Except as provided in this section, a person who enters into an oral or written contract in the name of or on behalf of a corporation before it comes into existence is personally bound by the contract and is entitled to the benefits thereof. R.S.O. 1990, c. B.16, s. 21 (1).
Adoption of contract by corporation
(2) A corporation may, within a reasonable time after it comes into existence, by any action or conduct signifying its intention to be bound thereby, adopt an oral or written contract made before it came into existence in its name or on its behalf, and upon such adoption,
(a) the corporation is bound by the contract and is entitled to the benefits thereof as if the corporation had been in existence at the date of the contract and had been a party thereto; and
(b) a person who purported to act in the name of or on behalf of the corporation ceases, except as provided in subsection (3), to be bound by or entitled to the benefits of the contract. R.S.O. 1990, c. B.16, s. 21 (2).
Note: On a day to be named by proclamation of the Lieutenant Governor, section 21 is amended by adding the following subsection:
Assignment, etc., of contract before adoption
(2.1) Until a corporation adopts an oral or written contract made before it came into existence, the person who entered into the contract in the name of or on behalf of the corporation may assign, amend or terminate the contract subject to the terms of the contract. 2011, c. 1, Sched. 2, s. 1 (5).
See: 2011, c. 1, Sched. 2, ss. 1 (5), 9 (2).
Non-adoption of contract
(3) Except as provided in subsection (4), whether or not an oral or written contract made before the coming into existence of a corporation is adopted by the corporation, a party to the contract may apply to a court for an order fixing obligations under the contract as joint or joint and several or apportioning liability between the corporation and the person who purported to act in the name of or on behalf of the corporation, and, upon such application, the court may make any order it thinks fit. R.S.O. 1990, c. B.16, s. 21 (3).
Exception to subs. (1)
(4) If expressly so provided in the oral or written contract referred to in subsection (1), a person who purported to act in the name of or on behalf of the corporation before it came into existence is not in any event bound by the contract or entitled to the benefits thereof. R.S.O. 1990, c. B.16, s. 21 (4).
[42] If Mr. Philpott has assigned the agreement to the 230 Corporation, then he has assigned it for all purposes. On the plain reading of this statute, it is not open to the Waddell parties to say that Mr. Philpott has assigned his rights under the APS away, but still has his responsibilities. The interpretation of a statute must be reasonable, and effect to the interpretation urged upon me by counsel for the Waddell companies would not be reasonable.
[43] In particular, I note the wording of section 21(1), which states that the person is “personally bound by the contract AND is entitled to the benefits thereof.” (emphasis added) The word “and” in the middle of the clause clearly shows that the drafters intended to have the benefits and the obligations travel together. In other words, in applying this provision, a party cannot be held liable for the obligations if they are not entitled to enforce the benefits.
[44] I acknowledge the statements by Mr. Philpott regarding his intentions in paragraphs 5 and 8 of his Affidavit of January 5, 2015. In those statements, Mr. Philpott states that he did not intend to be bound to the agreement. However, those statements suggest that he did not intend to be bound to either the benefits or the obligations.
[45] I am fortified in this conclusion by the arguments made by Mr. McLean about Mr. Philpott’s claim. Specifically, Mr. McLean argued that Mr. Philpott could not take contradictory positions in the different actions. However, Mr. McLean wishes to take contradictory positions in the different actions. Specifically, he wishes to enforce the obligations under the APS against Mr. Philpott personally, while depriving Mr. Philpott personally of any of the rights under the APS.
[46] In support of his position Mr. McLean relies, inter alia, on the decision in Guido v. Swail, supra, and specifically paragraph 8 of that case. However, the Court’s conclusions in paragraph 9 are equally applicable to this case. The Court stated:
If I were to accede to the Plaintiffs’ argument they would have the best of two worlds. They would have all of the rights benefits and privileges of the bargain but none of its obligations. Subsection 21(4) to which the plaintiffs resorted specifically prevents such an anomalous result.
[47] The same reasoning applies in this case, and prevents the Waddell parties from obtaining the relief that they seek.
[48] In dismissing the motion of the Waddell parties, I would also note three additional points.
[49] First, Mr. McLean argued that the reason that Mr. Philpott cannot take contradictory positions is that he has not specifically pled them in the alternative. However, Mr. McLean conceded in argument that, if the Statement of Claim in this action was amended, then Mr. Philpott could take contradictory positions, as long as they were pled in the alternative. Mr. McLean also conceded that this amendment could be made as of right under Rule 25, and that he would not oppose it. Given that concession, the motion for summary judgment would not seem to have any prospect of shortening the trial of this matter.
[50] In any event, I have reviewed the Statement of Claim in this action, and I note that the claims are brought on behalf of both Mr. Philpott and the 230 Corporation. In light of this fact, it should be clear to the parties that Mr. Philpott is claiming relief in the alternative if a court finds that the agreement is not assigned to the 230 Corporation.
[51] Second, in his argument, I asked Mr. McLean how granting his summary judgment motion would shorten these proceedings. He stated, in part, that the parties would know how the APS was being assigned. The problem with this argument is that, on the position of the Waddell parties, the assignment of the APS remains a live issue. As a result, granting this motion would have no discernable effect on the length of the trial.
[52] Third, part of the test for summary judgment is that the motions judge has confidence that he can find the necessary facts and apply the relevant legal principles to resolve the dispute. For the reasons outlined in my dismissal of the Philpott motion below, I have no confidence that I can do either of these things in this case.
[53] However, in order to ensure that the alternative pleadings of the Philpott parties are clear, I direct counsel for the Philpott companies to amend the Statement of Claim to reflect more clearly this alternative pleading within thirty (30) days of this decision. In the event that there are any issues relating to consent about this amendment, counsel may make arrangements through the trial office to make written submissions to me on any issues relating to any amendments respecting my directions.
[54] I then turn from this argument to the argument advanced by the Philpott companies. Their argument is that the contract was assigned to the 230 companies for all purposes and that Mr. Philpott cannot have any liabilities under the contract.
[55] While it is possible that, at trial, a judge will be able to definitively determine this question, I am unable to make that determination on the materials before me for, inter alia, the following reasons.
[56] First, there is no evidence from the Trustee in Bankruptcy, or elsewhere, that the 230 Corporation accepted the obligations for the APS under the Agreement of Purchase and Sale. I would have expected to receive, at a minimum, a corporate minute or other form of written communication from either the Trustee or from 230 Corporation itself. While I appreciate Mr. Hettiarachchi’s statement that he acts for the 230 Corporation, more is necessary on this point.
[57] Second, there is evidence before me that payments were made to the Waddell companies from both Mr. Philpott personally and from the 230 Corporation. These payments can only be explored in oral evidence.
[58] Third, the Waddell companies have alleged that assets that were transferred from the Waddell companies on closing of the APS were not found in the 230 Corporation at the time of the bankruptcy. This is potentially significant because it raises the question of whether these assets were transferred to Mr. Philpott and then not transferred to the 230 Corporation. If that were proven, then it would be difficult to establish the assignment that the Philpott parties claim under section 21 of the Business Corporations Act.
[59] As a result, this matter is not the proper subject of a summary judgment motion. Instead, this is a matter that should be addressed through a regular trial.
[60] In the result, the motions of both parties are dismissed.
Costs and Next Steps
[61] In an endorsement dated July 15, 2014, Justice Trimble stated:
This motion is consuming resources far out of proportion to its worth. I encourage counsel to contact RSJ Van Melle and have this motion either case managed or a judge appointed to hear motions under R. 37.15.
Counsel for the Def. was more successful than the Pl. However, the inability of the parties to discuss this action short of a motion is striking and has frustrated the orderly movement of the action, and cannot be rewarded.
[62] I commend these observations to the parties for their serious consideration. The desire of both parties to continue with these motions in the face of changed circumstances is troubling. It has taken the focus away from preparing this matter for a resolution, either through a trial or through other means. These motions have been pending for more than a year at this point. Further, these motions have not advanced the disposition of this matter in any significant way.
[63] In terms of the costs to be addressed in these submissions, I would note that the costs of the motion before Justice Barnes on August 28, 2014 were also reserved to me. Counsel should address that motion as well in making their costs submissions.
[64] In the course of oral argument, I asked both counsel whether they had asked RSJ Van Melle to appoint a Judge under Rule 37.15. They advised me that they had not made this request, although they were both prepared to agree to it. I urge them to make this request promptly, but I am not directing them to make it.
[65] In terms of costs, success has been divided. In addition, I have made a number of comments above about the conduct of this litigation and of these motions. I will receive submissions from each party no later than fourteen (14) days from the date of the release of this decision. I trust that both parties will have regard for the reasons set out above, and particularly the comments of Justice Trimble, in making their costs submissions. These submissions are not to exceed five (5) double spaced pages, exclusive of bills of cost.
[66] There shall be no reply submissions on costs without leave of the Court.
[67] In the result, the motions of all parties are dismissed.
LeMay J.
DATE: January 27, 2015
CITATION: Philpott et al. v. 338200-1 Canada Inc. et al., 2015 ONSC 575
COURT FILE NO.: CV-13-4212-00
DATE: 20150127
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: KEVIN PHILPOTT and 2305006 ONTARIO LIMITED
and
338200-1 CANADA INC, 1641897 ONTARIO INC., 1009734 ONTARIO INC, DORIS WADDELL and DWAYNE WADDELL
BEFORE: Justice Wm. LeMay
COUNSEL: Romesh Hettiarachchi, for the Plaintiffs
Tyler McLean, for the Defendants
ENDORSEMENT
LeMay J.
DATE: January 27, 2015