COURT FILE NO.: CV-15-11145-00CL

DATE: 20151209

SUPERIOR COURT OF JUSTICE - ONTARIO

(COMMERCIAL LIST)

RE: DENSITY GROUP LIMITED, Plaintiff

AND:

HK HOTELS LLC and HENRY KALLAN, Defendants

BEFORE: MESBUR J.

COUNSEL:
Paul J. Pape and David S. Steinberg for the Plaintiff

Martin Henderson for the Defendant

HEARD: November 24, 2015

ENDORSEMENT

The motions:

[1] The plaintiff seeks to amend its claim by adding two new defendants, Princess Gates Hotel Limited Partnership and Princess Gates G.P. Inc. (collectively “Princess Gates”) and pleading a new cause of action. Not only does the defendant vigorously oppose the motion to amend and add parties, it moves for an order for security for costs against the plaintiff.

Background to the litigation.

[2] The plaintiff’s claim arises out of a business transaction involving it and the defendant HK Hotels LLC relating to the development of a hotel complex on the grounds of the Canadian National Exhibition in Toronto.

[3] The plaintiff began its lawsuit in 2009 on the civil list in Toronto. Originally, the plaintiff’s claim was made against both the defendant HK Hotels LLC and its principal, Henry Kallan. The claim against Mr. Kallan was framed as a breach of trust claim. The defendants moved successfully before J. Wilson J in mid-2007 to strike the claim against Mr. Kallan. The plaintiff appealed to the Court of Appeal. The appeal was dismissed in August of 2014.

[4] In a nutshell, the plaintiff’s claim depends on the interpretation and effect of a number of agreements between it and HK Hotels. The plaintiff asserts it and HK Hotels were joint venturers, and the plaintiff should share in the benefits of the hotel complex, which is now under construction. The plaintiff says the Letter of Intent (LOI)[^1] giving rise to the deal is an asset it should share in.

[5] Initially, the plaintiff framed its claims against both HK Hotels and Mr. Kallan as breach of trust claims. On the summary judgment motion, the court held the LOI was not a trust asset, and went on to find Mr. Kallan had not acted dishonestly when he caused HK Hotels to remove the plaintiff’s name from the LOI.

[6] Now the plaintiff wants to amend its claim to add the two new Princess Gate parties and assert a fraudulent conveyances claim against them and HK Hotels. The plaintiff asserts HK Hotels transferred benefits under the LOI to Princess Gate for no consideration or inadequate consideration. The plaintiff characterizes the transaction as a fraudulent conveyance as defined by the Fraudulent Conveyances Act.[^2]

Plaintiff’s position:

[7] The plaintiff’s position is simple regarding its request to amend and add parties. It points to the mandatory nature of rule 26.01. The rule requires the court to grant any amendment to a pleading unless the amendment would result in prejudice that cannot be compensated by either costs or an adjournment.

[8] The plaintiff acknowledges that leave will not be granted if its claim is untenable at law, but asserts that is not the case here.

[9] As for the defendant’s motion for security for costs, the plaintiff takes the position the defendant has not met its onus to support an order for security being made.

Defendant’s position:

[10] The defendant resists the proposed amendments on the basis they are an abuse of process, seeking to re-litigate matters which are res judicata and relies on the doctrine of issue estoppel. It points to findings made on its summary judgment motion before J. Wilson, J to support its position[^3]. It also relies on the Court of Appeal’s decision[^4] which ultimately affirmed the summary judgment decision. As for its motion for security for costs, the defendant says the plaintiff is a shell corporation with few liquid assets. Its sole shareholder is Sean Majerovic, who operates the business out of his home. Although the plaintiff shows significant accounts receivable on its financial statement, the defendant points out many have been outstanding for more than 90 days, and most, if not all, are owed by corporations owned or controlled by Mr. Majerovic’s father.

[11] The defendant argues these facts support its position that there is good reason to believe the plaintiff has insufficient asset in Ontario to pay the defendant’s costs.

Discussion:

The motion to amend

[12] Rule 26.01 is mandatory, and requires the court to grant an amendment request unless the amendment would result in non-compensable prejudice, or the amendment is for a claim that is untenable at law. There is no real suggestion of prejudice to the plaintiff if the amendment were permitted. The focus of this motion has been on the amendments being an abuse of process or untenable at law. The defendant bears the onus of showing this.

[13] The analysis of whether a claim is untenable at law or an abuse of process is essentially the same as the analysis under rule 21.1. That rule permits the court to strike out a pleading on the ground it discloses no reasonable cause of action, or that it is frivolous, vexatious or an abuse of process. Limitation periods can also be raised as a basis to refuse an amendment, since a claim that is clearly time barred will effectively be a claim that cannot succeed.

[14] On a motion under rule 21, the facts as stated in the claim are presumed to be true. The test is whether, assuming the facts as pleaded have been proved, it is “plain and obvious” that the claim must fail. The claim should not be struck simply because it is novel.[^5] The court must look at the pleading generously, as a whole. The fact that a pleading reveals an arguable, difficult or important point of law cannot justify striking the claim. Only if the action is certain to fail because it contains a radical defect should the relevant portions of a statement of claim be struck out.

[15] The defendant bears the onus to show it is plain and obvious the claim cannot succeed. I will therefore address the defendant’s arguments in support of its burden.

Res Judicata, Issue Estoppel

[16] The principles of res judicata and issue estoppel are closely related. Essentially, they prohibit a party from re-litigating an issue that was finally decided in a prior judicial proceeding with the same parties.

[17] The essence of the defendant’s argument[^6] is that the proposed amendments are premised on allegations that:

a) The Second LOI is trust property in which Density has an interest; and

b) When Kallan as HK’s representative caused Density’s name to be removed from the Second LOI, he did so fraudulently or dishonestly so as to misappropriate a trust asset.

[18] The defendant reasons that since Wilson J determined the LOI was not a trust asset, the issue has been finally determined. The defendant therefore argues that the amendments cannot stand. If the LOI is not a trust asset, any claim to it as trust property must fail.

[19] The defendant also argues that since Wilson J held at paragraph 191 of her reasons:

There are no facts before me of fraud or dishonesty by HK Hotels in seeking to have Density’s name removed from the Second LOI … The actions by HK Hotels cannot be held to be fraudulent or dishonest…

the fraudulent conveyance issue has been decided, the plaintiff’s proposed amendment is res judicata and it must be estopped from asserting it again.

[20] If that were the nature of the proposed amendments, I would agree with the defendant’s position. However, that is not what the amended claim asserts. I disagree with the defendant’s analysis because it misconstrues the proposed amendments.

[21] On the summary judgment motion, the plaintiff vigorously argued the parties were joint venturers, with equal rights to share in the ultimate fruits of the joint venture, including the LOI. The defendant argued as vigorously that the plaintiff was no more or less than its agent, and their agreement was no more or less than a simple agency agreement. Justice Wilson expressly reserved to the trial judge the question of the nature of the business relationship between the plaintiff and defendant. Those fundamental questions will be answered at trial.

[22] As for the situation now, the plaintiff argues the current claim asserts the letter of intent was property of the joint venture, and the defendant improperly assigned rights under the letter of intent to the proposed defendants. It says those defendants (who are controlled, as is HK Hotels by Henry Kallan) knew or ought to have known about its rights as a joint venturer, and acquired those rights without adequate consideration. The plaintiff asserts the “transfer”, as it characterizes it, was make for no consideration, with intent to defeat, hinder and delay its rights. It therefore attacks the transfer as a fraudulent conveyance, within the meaning of the Fraudulent Conveyances Act.[^7]

[23] Among the proposed amendments[^8] to the claim are the following:

a) Paragraph 9: … under the letter agreement, they agreed that they would each have a fifty per-cent ownership interest in the Development … Under the Joint Venture Agreement, the parties intended to establish a partnership through which they would pursue and complete the Development;

b) Paragraph 11: Section 11 of the Joint Venture Agreement further provided that the parties would pursue the Development in good faith.

c) Paragraph 19: The LOI expressly provided, inter alia, that the terms contained therein formed “the basic business terms of the lease and ancillary agreements with the Board and the City of Toronto”;

d) Paragraph 20: The LOI was at all material times a Joint Venture asset.

e) Paragraph 21: According to the terms of the Joint Venture Agreement and the reasonable expectations of the parties, the Co-Venturers’ interests in the LOI could not be assigned or otherwise transferred to any third party without the prior written approval of the other partner.

f) Paragraph 32: On or about September 15, 2010, Kallan caused GP [one of the proposed defendants] to be incorporated.

g) Paragraph 33: On or about September 22, 2010, GP under Kallan’s direction, registered Princess Gates as an Ontario limited liability partnership.

h) Paragraph 34: HK also under Kallan’s direction, then transferred the LOI and all related rights and interest in connection with the Development to Princess Gates (“the Fraudulent Conveyance”).

i) Paragraph 35: The Fraudulent Conveyance was effected without Density’s knowledge or consent, contrary to the terms of the Joint Venture Agreement and the parties’ reasonable expectations as co-venturers and/or partners.

j) Paragraph 36: The purpose of the Fraudulent Conveyance was to defeat, hinder and/or delay Density’s claims in respect of the Joint venture including those asserted in the within act5ion which had been previously commenced, in April 2009.

k) Paragraph 37: The LOI and all related rights and interests owned by the Joint Venture were thus wrongfully transferred by HK to Princess Gates. Princess Gates took the LOI with knowledge of Density’s claims and for no or inadequate consideration.

[24] I am required to read the claim “generously, as a whole”. When I do so, I accept the plaintiff’s position that the new claim is not one that was finally adjudicated on the summary judgment motion and subsequent appeal. I say this for the following reasons.

[25] On the summary judgment motion, the principal finding was that the letter of intent was not a trust asset. On appeal, Density argued the motion judge had erred because “she failed to make an important finding – whether Density had an ‘interest in the Second LOI’ as co-owner.” The Court of Appeal noted that in its factum on the summary judgment motion it was “clear that Density characterized its interest in the Second LOI as a trust asset”. The Court of Appeal said at paragraph 159:

… the motion judge understood and responded to the arguments put to her. It was argued that Density had an interest in the Second LOI and the nature of that interest was a trust asset. As discussed above, the motion judge addressed the question whether the Second LOI was a trust asset at length, and concluded it was not.

[26] From this statement I infer that the question of whether Density had an interest in the Second LOI as a co-owner is an issue that has yet to be adjudicated. As I understand Density’s proposed pleading, the thrust of its claim is that the joint venture owns the rights to the hotel project through the second LOI, Density is a 50% participant in the joint venture, and therefore the rights under the LOI belong equally to Density.

[27] It is also noteworthy the motions judge on the summary judgment motion commented at paragraph 104 of her reasons:

Further, the LOI required HK Hotels to incorporate a Canadian corporation to conduct the business of the Hotel Project, which could be added as a party if the Hotel Project matures and proceeds with HK Hotels.

[28] While this statement is obiter, it supports the plaintiff’s request to add those very parties.

[29] The amended claim clearly asserts the LOI is an asset owned by the joint venture. The amended claim clearly sets out the basic requirements for a finding of a fraudulent conveyance within the strict meaning of the Fraudulent Conveyances Act. I read Wilson J’s findings regarding fraud or dishonesty as dealing only with removing Density’s name from the Second LOI. Her findings do not extend to the fraudulent conveyance claim, which is asserted against Princes Gates.

[30] While it might be argued the plaintiff simply recasting the claim I do not see that as a sufficient reason to deny the amendment. The underlying policy of the rules is to allow amendments at any stage of the proceeding, unless the amendment would cause non-compensable prejudice, or the claim is clearly untenable.

[31] I am satisfied of neither.

[32] This leads to the final question of whether the claim is untenable or creates prejudice because it is statute barred.

The limitation period argument

[33] The defendant takes the position the plaintiff knew or ought to have known of its potential claim against the proposed added parties by at least 2013. It says this motion to add them was not properly launched until more than two years following this date, and is thus time barred. I disagree.

[34] For the purpose of this motion, I must accept the plaintiff’s position that it did not learn of the “conveyance” to Princess Gates until 2013, although the actual conveyance apparently occurred in 2010.

[35] On June 30, 2014 the plaintiff’s then counsel wrote to the defendant’s counsel enclosing a motion record, returnable July 14. The motion record was a motion to add the Princess Gates parties and amend the claim.

[36] Defendant’s counsel responded saying the agreed upon date for the motion was not the date in the notice of motion, and the document lacked the proper Commercial List action number.[^9] The letter characterized the motion as a “draft” notice of motion. As a result, the defendant now says the motion record was merely a “draft”, and insufficient notice of the claim to stop the limitation clock from running. It therefore argues the claim to amend was not advanced until the current motion was delivered in 2015, more than two years after the plaintiff learned of the conveyance.

[37] I disagree. The covering letter accompanying the initial motion record in 2014 clearly says: “this is service of our motion record re amend to add Princess Gates.” Also, when defendant’s counsel raised the issue of the motion being a draft only, plaintiff’s then counsel responded “it was not a draft notice of motion – we do not have a commercial list court file number. I apologize for the error on the return date. We will set a date for the end of the month.” [^10] The affidavit of Brad Teplitsky, plaintiff’s former counsel, filed on this motion clearly confirms actual service of the notice of motion.

[38] As I see it, the absence of a correct action number is nothing more than an irregularity that does not go to the heart of the documents. It is sadly a routine occurrence in the court for a document to bear an incorrect action number. I was referred to no case that supports the proposition that this error is sufficient to make the notice of motion either a nullity or simply a “draft” of no consequence. I am sure that is because there is no case law to support this proposition.

[39] I therefore reject the limitation period argument. It is abundantly clear the plaintiff asserted the new claims against the proposed added parties within two years of learning of the conveyance.

The motion for security for costs:

[40] Rule 56.01 sets out the circumstances in which a defendant can seek an order for security for costs. In this case, the relevant provisions of r.56.01 are those set out in subsections 56.01(1)(d) and (e). They provide:

56.01(1)(d): the plaintiff or applicant is a corporation or a nominal plaintiff or applicant, and there is good reason to believe that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent;

56.01(1)(e): there is good reason to believe that the action or application is frivolous and vexatious and that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent.

[41] Again, the defendant bears the evidentiary burden of satisfying the conditions of the rule.

[42] The crux of the defendant’s position is simple. It says the plaintiff is a shell corporation, solely owned and controlled by Mr. Sean Majerovic. The defendant suggests the fact the plaintiff operates its business out of Mr. Majerovic’s home supports its position the plaintiff is impecunious. It also points to the following factors, which it says support a finding of impecuniosity:[^11]

a) It owns no real property[^12]

b) It receives payments from corporations owned by Mr. Majerovic’s father, or in which he has a “substantial” ownership interest;

c) 90% of its accounts receivable have been outstanding for more than 90 days;

d) There are no fixed payment terms for the accounts receivable;

e) The plaintiff has not demanded repayment;

f) The plaintiff had lower income in prior years;

g) The plaintiff did not pay the outstanding costs order against it for about a year;

h) The plaintiff has “a history of being untrustworthy in the operation of bank accounts over which it has authority”.

[43] I am not persuaded.

[44] Whether the business is operated out of its principal’s home office or basement is of no moment. What is important is the financial evidence before the court.

[45] The plaintiff has produced copies of its most recent financial statement for the fiscal year ended July 31, 2014, its 2014 corporate income tax return, an aged summary of its accounts receivable and its Royal Bank of Canada business account statement. Sean Majerovic is the principal and sole shareholder of the plaintiff. The defendant cross-examined him extensively on his affidavit in response to the motion for security, as well as on these documents he produced.

[46] Rather than confirm the defendant’s position that the plaintiff is a shell company and impecunious, the evidence discloses the opposite. I say this for a number of reasons.

[47] The corporation shows gross revenues (consulting fees) of over $636,000 for the year. This is a significant increase over the previous year. Net earnings (after a provision for income tax) were over $446,000. The corporation paid its corporate income tax of just over $89,000 on time.[^13]

[48] The corporation’s gross assets have increased by more than $400,000 from the previous year. Mr. Majerovic testified that this increase was because “business is growing” in the sense of the corporation having more consulting contracts.

[49] Mr. Majerovic was also cross-examined on the issue of the corporation’s accounts receivable and why many were more than 90 days overdue. He explained that this was in accord with the payment terms. He said he had made no demand for these over-90 day accounts receivable because “there is no question that those funds will be paid … And we have never had a problem in the past and don’t expect one in the future.”[^14] He went on to say the plaintiff has never had to write off an account receivable from any of the companies listed on the accounts receivable list. This suggests even the older accounts receivable remain fully collectible and thus a valuable asset.

[50] The plaintiff paid the outstanding costs orders of about $85,000 against it from the summary judgment motion and appeal out of its own bank account.[^15]

[51] These facts alone suggest to me that Density is not a shell company. It provides consulting services to various corporations and is paid for those services. While one of the companies is entirely controlled by Mr. Majerovic’s father, the father has only a 25% interest in the others. There is no evidence the father controls those companies. Any suggestion Density’s income is somehow entirely dependent on Mr. Majerovic’s father is without foundation on the record before me.

[52] Also, the fact the plaintiff paid a significant costs award (albeit late) negates, rather than supports, the notion that the plaintiff should post security for costs.

[53] While Wilson J made negative findings about Mr. Majerovic’s handling of certain bank accounts during his relationship with HK Hotels, these findings are insufficient to meet the defendant’s burden in light of the other factors I have reviewed above.

[54] The motion for security for costs is denied.

Disposition:

[55] The motion to amend is granted. The plaintiff will deliver its Amended Amended Statement of Claim within 10 days. The defendants will deliver their Statement of Defence within 30 days of service of the Amended Amended Claim. The plaintiff will deliver its Reply within 15 days of service of the Statement of Defence.

[56] The motion for security for costs is dismissed.

[57] The parties agreed the appropriate costs award for this motion would be $7,500, all inclusive. The plaintiff will therefore have its costs, fixed at $7,500 all inclusive.

MESBUR J.

Released: 20151209

[^1]: Throughout the history of this litigation and the decisions in this court and the Court of Appeal, the relevant letter of intent has been referred to as both the letter of intent and the Second Letter of Intent. I will refer to it simply as the letter of intent, or the LOI.

[^2]: R.S.O.1990 c. F-39

[^3]: Density Group Limited v HK Hotels LLC, 2012 ONSC 3294

[^4]: Density Group Limited v HK Hotels LLC, 2014 ONCA 605

[^5]: Hunt v. Carey Canada Inc. (1990) 1990 90 (SCC), 74 D.L.R. (4th) 321 (S.C.C.)

[^6]: See HK Hotels’ factum at paragraphs 2 and 3

[^7]: Section 1 of the Fraudulent Conveyances Act defines “conveyance” as “‘conveyance’ includes gift, grant, alienation, bargain, charge, encumbrance, limitation of use or uses of, in, to or out of real property or personal property by writing or otherwise”; and section 2 defines a fraudulent conveyance as: “Every conveyance of real property or personal property and every bond, suit, judgment and execution heretofore or hereafter made with intent to defeat, hinder, delay or defraud creditors or others of their just and lawful actions, suits, debts, accounts, damages, penalties or forfeitures are void as against such persons and their assigns.”

[^8]: The proposed amendments are designated by double underlining

[^9]: Although the record before me is voluminous, it is not entirely complete. It appears that when the summary judgment motion was argued before J. Wilson J, the case was on the civil list, with a civil list number of CV-09-003766550000. Clearly at some point, the case was transferred to the Commercial List and assigned its current number CV-15-11145-00CL. I have no idea when this occurred. I infer, however, that since it is a 2015 court file number, the transfer to the Commercial List must have occurred sometime in 2015, or after the date the motion to amend was served and was initially to have been argued.

[^10]: Email from Brad Teplitsky to Martin Henderson sent July 8, 2014

[^11]: See defendant’s “Factum of the Moving Parties/Respondents to the Plaintiff’s Motion for Leave to Amend its Amended Statement of Claim (Security for Costs Motion Against the Plaintiff).

[^12]: It is somewhat ironic that the defendant advances this argument, and the plaintiff defends against it. On the summary judgment motion, the plaintiff made the same argument about the defendant, suggesting it is a sham corporation because it holds no real estate. The plaintiff argued this was a reason to pierce the corporate veil and impose liability personally on Mr. Kallan. The motions judge rejected that argument there and I reject it here.

[^13]: Although it did incur interest charges for late payment of quarterly instalments.

[^14]: Q’s 132 and 133 of cross-examination of Mr. Majerovic taken 6 November 2015

[^15]: Ibid, Q 249