Kaptor Financial Inc. et al v. SF Partnership, LLP et al

CITATION: Kaptor Financial Inc. et al v. SF Partnership, LLP et al, 2016 ONSC 5459

COURT FILE NO.: CV-12-463214

DATE: 20160830

SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

B E T W E E N:

KAPTOR FINANCIAL INC., 2025610 ONTARIO LIMITED and INSIGNIA TRADING INC.

Plaintiffs

and

SF PARTNERSHIP, LLP, SHORE NEWMAN & ROSE LLP, ERIC INSPEKTOR, LYNETTE INSPEKTOR, RICK ARNONE, JACK BARKIN, ALAN BIRNBAUM, MOMIR DEJANOVIC, HARVEY GOLDBERG, KLARA ROMM, BARBARA SHUSTER, DARREN INSPEKTOR and RUSSEL INSPEKTOR

Defendants

BEFORE: Newbould J.

COUNSEL: Jeffery Larry, for the Plaintiffs

Alex MacFarlane, for Crowe Soberman Inc., Trustee in Bankruptcy and Receiver of 2025610 Ontario Ltd., Kaptor Financial Inc. and Insignia Trading Inc.

Eric Inspektor, for himself

HEARD: August 29, 2016

ENDORSEMENT

[1] The plaintiffs move to have a claim by Trendi Dezign Incorporated (“Trendi”) filed in the bankruptcy of the Kaptor Group declared to be barred as it has been released in a Settlement Agreement and Release made under the Settlement Agreement. The defendant Eric Inspektor moves by way of a cross-motion for an order that Crowe Soberman Inc., the receiver of 2025610 Ontario Ltd., Kaptor Financial Inc. and Insignia Trading Inc. be examined by him.

[2] For the brief reasons that follow, the motion is granted and the cross-motion is dismissed.

[3] Kaptor Financial Inc., 2025610 Ontario Limited, and Insignia Trading Inc. (the “Kaptor Group”) are related entities, each of which was previously controlled by Mr. Inspektor. Upon the application of several creditors, these companies were put into receivership in June 2012 and then adjudged bankrupt on August 19, 2014. Crowe Soberman Inc. (“Crowe Soberman”) was appointed the Receiver and later the Trustee in Bankruptcy of the Kaptor Group.

[4] Mr. Inspektor is married to Lynette Inspektor (“Lynette”). They have three adult children: Darren Inspektor (“Darren”), Russel Inspektor (“Russel”), and Lisa Inspektor (“Lisa”).

[5] On September 11, 2012, the applicant creditors obtained leave to commence a derivative action on behalf of the Kaptor Group against its officers and directors (including Mr. Inspektor, Darren, and Russel), Lynette, and certain of its auditors. On August 19, 2014 on the day of the bankruptcy order against the Kaptor Group, an order was made under Section 38 of the BIA pursuant to which the Trustee assigned its interest in the derivative action to those creditors who wished to fund the derivative action. A litigation committee was formed pursuant to the order to pursue the derivative action. One hundred and three creditors opted to participate in the action.

[6] After lengthy and difficult negotiations including a multi-day mediation, on April 14, 2015 the plaintiffs entered into a Settlement Agreement with Mr. Inspektor, Lynette, Darren, and Russel (as well as the officers and directors) (the “Settling Defendants”). The Settlement Agreement resolved the claims against the Settling Defendants. Under the Settlement Agreement, a payment of $4.5 million was made for the benefit of the participating creditors.

[7] The Settlement Agreement required the Kaptor Group and the Settling Defendants to execute and exchange comprehensive mutual full and final releases. Mr. Inspektor, Lynette, Darren and Russel also agreed as a term of the Settlement Agreement not to bring any new claims in the derivative action, the bankruptcy proceedings, and certain other proceedings.

[8] The Release was very broad and covered all conceivable claims by the releasors and any of their related or affiliated corporations. Section 10 of the Release provided:

Subject to the terms of the [Settlement] Agreement , the Plaintiffs and the Settling Defendants agree to remise, Release and forever discharge each other from all liability, directly or indirectly, arising out of and from, or in connection with all “Claims”, where Claims includes any and all actions, causes of action, debts, demands, due, bonds, accounts, covenants, contracts, claims and counterclaims whatsoever, including all remedies, whether provided by statute, equity or common law, and whether based in tort, contract, fiduciary duty, or fraud, which the Plaintiffs (or any of them) or the Settling Defendants (or any of them) did raise or could have raised in:

a) the Action;

b) the Derivative Application;

c) the actions under Court File No. 31-OR-208029-T, 31-OR-208030-T, and 31-OR-208031-T (collectively, the “Bankruptcy Proceeding”); and

d) Court File No. CV 12-9732-00LC (the “Receivership Proceeding”).

[9] Section 13 of the Release provided:

The parties agree that this Release shall enure to the benefit of and be binding upon them, their heirs, executors, administrators, beneficiaries, trustees, agents, employees, officers, directors, shareholders, related and affiliated companies and successors and assigns.

[10] Thus, any company related to Mr. Inspektor, Lynette, Darren and Russel was bound by the Release including its term that no action could be taken in the Bankruptcy Proceedings of the Kaptor Group. The Release was signed by Mr. Inspektor and Lynette, Darren and Russel between August 17 and 19, 2015.

[11] On August 18, 2011, the Toronto-Dominion Bank (“TD”) froze more than 30 accounts belonging to the Kaptor Group, as well as various other companies controlled by Mr. Inspektor including CarCap Inc. The accounts were frozen after $18 million of cheques and wire transfers were circled around and through the Kaptor Group accounts that day. Once the flow of funds stopped, TD discovered immediately that the Kaptor Group and CarCap accounts were overdrawn by nearly $7 million (the “TD Debt”). The next day Mr. Inspektor agreed that the Kaptor Group would provide TD with security in respect of the TD Debt (as TD was not a lender to the Kaptor Group, it did not have any security at the time). TD took a collateral mortgage on a residence owned in the name of Lynette at 319 Brooke Ave, Toronto, Ontario.

[12] On August 11, 2015 prior to signing the Release, Lynette sold the property on Brooke Ave. In connection with the sale, $600,000 was paid to TD on account of the Collateral Mortgage and the Collateral Mortgage was discharged. On August 11, 2011, the day the sale closed, TD entered into an assignment agreement with Trendi under which TD assigned to Trendi all of its claims and security interests it held against the Kaptor Group. The assignment agreement recited (i) that TD and Mr. Inspektor, Russel, Lynette and Corporate Parties had entered into a settlement agreement[^1] made by TD with Mr. Inspektor, Russel, Lynette and Corporate Parties under which Mr. Inspektor agreed to pay TD $600,000 in exchange for certain assignments and Releases, and (ii) pursuant to that settlement agreement TD and Mr. Inspektor had agreed to execute an assignment of all claims that TD holds against the Kaptor Group.

[13] On September 8, 2015, Trendi filed a Form 31 Proof of Claim in the Bankruptcy Proceedings claiming the sum of $1,372,423.35 against the Kaptor Group pursuant to the Assignment Agreement.

[14] It is this claim that the plaintiffs say has been released by the Release and the Settlement Agreement made between the plaintiffs and the Kaptor Group. It is obvious that the plaintiffs are right.

[15] The Release bound the signatories and their related and affiliated companies. The Release provided no definition of related or affiliated companies. However, on a commercially reasonable interpretation of the Release, Trendi must be a related company.

[16] Under the BIA, related persons are defined as follows:

4(2) Definition of "related persons"

For the purposes of this Act, persons are related to each other and are "related persons" if they are

(a) individuals connected by blood relationship, marriage, common-law partnership or adoption;

(b) an entity and

(i) a person who controls the entity, if it is controlled by one person,

(ii) a person who is a member of a related group that controls the entity, or

(iii) any person connected in the manner set out in paragraph (a) to a person described in subparagraph (i) or (ii); or

(c) two entities…

[17] Lynette, Mr. Inspektor’s wife, was the original shareholder and director of Trendi. At some point she purportedly transferred her interests to her children. Lisa is currently Trendi’s president and sole director. Each of Russel, Darren and Lisa are one-third shareholders of Trendi. They control Trendi. Under s. 4(2)(b)(ii) of the BIA, Trendi is an entity that is related to both Darren and Russel since each is a member of a related group that controls Trendi. Mr. Inspektor and Lynette are both related to Trendi under s. 4(2)(b)(iii) of the BIA because their children Darren and Russel are members of a related group that controls Trendi. As Mr. Inspektor, Lynette, Darren and Russel signed the Release, Trendi is bound to the Release under the BIA definition of a related party.

[18] Each of the Kaptor Group companies that is a party to the Release, as well as Trendi, is incorporated under the Ontario Business Corporations Act which defines a related person as follows:

s.1(1) “related person”, where used to indicate a relationship with any person, means,

(a) any spouse, son or daughter of that person,

(b) any relative of the person or of the person’s spouse, other than an individual referred to in clause (a), who has the same home as the person, or

(c) any body corporate of which the person and any of the persons referred to in clause (a) or (b) or the partner or employer of the person, or any combination, beneficially own, directly or indirectly, voting securities carrying more than 50 per cent of the voting rights attached to all voting securities of the body corporate for the time being outstanding.

[19] As Mr. Inspektor, Lynette, Darren and Russel signed the Release, Trendi is bound to the Release under the OBCA definition of a related person.

[20] Apart from the two applicable statutes, the Merriam-Webster dictionary defines “related” as “connected in some way” or “in the same family” or “belonging to the same group because of shared characteristics, qualities, etc.” Under this definition each of the Releasors is clearly “connected in some way” to Trendi.

[21] The Release bound the releasors and their assigns. The Trendi claim in the Bankruptcy Proceedings is based on the assignment from TD to Trendi dated August 11, 2015 after the TD was paid to release its collateral security on the Brooke property registered in the name of Lynette. If she were the owner of the property, she would be entitled to take an assignment of the TD security and pursue it against the Kaptor Group that owed the TD. She could not do that however as she had previously agreed in the Settlement Agreement on April 14, 2015 to release her claims. Thus the assignment of the TD claims was directed to be made to Trendi, a company which had no prior relationship to TD and which paid nothing to TD for the assignment. The assignment agreement recited that it was Mr. Inspektor who paid the TD bank and who directed the TD to assign the TD security to Trendi. Whether it was Mr. Inspektor or his wife Lynette who arranged for the assignment to Trendi makes no difference as each were releasors under the Release. The assignment to Trendi was made in the name of TD, but was clearly directed by Mr. Inspektor to happen. I hold that the assignment was the assignment of either Mr. Inspektor or his wife Lynette, and as it was made prior to the Release. On that ground as well Trendi is bound by the Release.

[22] The factual circumstances surrounding the formation of the Release are well-documented. The entire purpose of the Settlement Agreement and Release was to end litigation with the Inspektor Family and prevent the releasors from bringing claims, whether personally or via their related companies. The Settlement Agreement that was to be a complete and final stop to any additional claims by the releasors. The purpose of the Settlement Agreement and Release was to put an end to protracted and costly litigation, while at the same time maximizing recovery for the participants. It was extremely important to all participants that the releasors release all claims that could have been raised by them to the date of the Release. The Settlement Agreement was designed to preserve as much remaining money as possible for distribution to the participants in the derivative action. It would be entirely contrary to the purpose of the Release to permit an end-run by Trendi around the clear terms negotiated to protect the participants from this very situation.

[23] I hold that the claim made by Trendi in the Bankruptcy Proceeding is barred by the Release.

[24] Mr. Inspektor wishes an order permitting him to examine a representative of Crowe Soberman in its capacity as receiver. He has filed a factum in which it is difficult to discern exactly what he is after. However, it is evident that he wants the examination, and admitted by him at the hearing of this motion, in order to assist his wife Lynette in pursuing her claim in the Bankruptcy Proceedings. He says her claim has been improperly denied. It also appears that he has some argument or grudge with the litigation committee and that he wants the examination of the receiver to assist him in that endeavour.

[25] In February 2015, Lynette filed a secured claim in the Bankruptcy Proceeding. As part of the Settlement Agreement, Lynette agreed to give up her secured claim. Instead, paragraph 9 of the Settlement Agreement contemplated that Lynette would share pari passu with the Participants in respect of any claim that she may prove in the section 38 process. In order for Lynette to advance her claim, the Settlement Agreement required Lynette to contribute her pro rata amount to the costs of the derivative action (determined to be $43,664.73) within 5 calendar days of the issuance of the order giving effect to the settlement. Lynette agreed that her claims were to be forfeited if she did not pay this amount in full and on time. The settlement order was issued and entered on August 6, 2015. However, Lynette did not pay the required amount by August 11, 2015 and thereby lost her right to make a section 38 claim.

[26] Mr. Inspektor asserts that the litigation committee negotiated the settlement in bad faith. There is no evidence to substantiate the allegation but in any event, it is irrelevant. Neither he nor his wife Lynette nor anyone else has sought to set the Settlement Agreement aside. Mr. Inspektor says that an examination of the receiver will show that the plaintiffs were not negotiating in good faith and that they intended on using the receiver’s reports to stop Lynette from succeeding on her section 38 claim. There is nothing in this on the record and it appears to be a fishing expedition. The plaintiffs and litigation committee had nothing to do with Lynette failing to pay her pro rata portion of the costs. They agreed to the provision in the Settlement Agreement permitting Lynette to make a section 38 claim because they believed she had no valid claim and that in any event, it would be open to the Trustee to assert a counter-claim or offset for money alleged to be owing by Lynette to the Kaptor Group. There was nothing wrong in their holding this belief.

[27] Pursuant to section 163(2) of the BIA, a court may order the examination of a trustee in bankruptcy for the purpose of investigating the administration of a bankrupt estate. Evidence must be produced of something being amiss in the administration of an estate. The examination is to be for the general benefit of creditors and not for a creditor to pursue a private remedy. The evidence must disclose something more than a desire to go on a fishing expedition. See Re Boozary Estate, (2005), 2005 47740 (ON SC), 18 C.B.R. (5th) 205 at para. 4 and the authorities referred to; NsC Diesel Power Inc., Re 1998 2241 (NS CA), 1998 NSCA 114, 6 C.B.R. (4th) 96, at para. 44; Thomson Kernaghan & Co. (Re), (2003), 2003 31166 (ON SC), 50 C.B.R. (4th) 287 at para. 9.

[28] Mr. Inspektor is not seeking the examination of Crowe Soberman for the general benefit of creditors, which is what an examination of a trustee in bankruptcy must be in order for an order to be made. I realize that Mr. Inspektor says he wants to examine Crowe Soberman in its role as receiver, but in my view the same principles apply in order to obtain an order to examine a receiver who is a court officer. A fishing expedition not for the benefit of the creditors as a whole but to pursue private issues is not sufficient. See Big Sky Living Inc. (Re) 2007 ABQB 249, 32 C.B.R. (5th) 74 at para 4; Edmonton Region Community Board (Plaintiff) and Aboriginal Partners & Youth Society (Defendant). 2004 ABQB 423, [2004] A.J. No. 710 at paras 24-25; Turbo Logistics Canada Inc. v. HSBC Bank Canada (2009), 81 C.B.R. (5th) 169 (Ont. S.C.J. [Commercial List]) at para. 18.

[29] In my view, there are no grounds that would enable Mr. Inspektor to examine Crowe Soberman. The cross-motion of Mr. Inspektor is dismissed.

[30] The plaintiffs and Crowe Soberman are entitled to their costs of these motions. They may make brief written submission within 10 days along with proper cost outlines. Mr. Inspektor shall have 10 further days to make brief written submissions in response.

Newbould J.

Date: August 30, 2016

[^1]: Mr. Inspektor has refused to produce the settlement agreement made with TD.