CITATION: Houle et al v. Sostarich et al, 2016 ONSC 6558

COURT FILE NO.: CV-15-519292

MOTION HEARD: 20161019

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: CONRAD HOULE, SHEILA HOULE, CS HOULE HOLDINGS INC. and KKP INVESTMENTS INC., Plaintiffs

AND

ANDREW SOSTARICH, ALISIA SOSTARICH, TRACKS & WHEELS EQUIPMENT BROKERS INC., MICHAEL GOUGEON, SOSTARICH ROSS WRIGHT CECUTTI LLP, ARSENEAU POULSON and WORKERS AUTO SERVICES LTD., Defendants

BEFORE: Master Lou Ann M. Pope

COUNSEL: Counsel for plaintiffs: Milton A. Davis, Fogler, Rubinoff LLP

Fax: 416-941-8852

Counsel for defendants, Andrew Sostarich and Sostarich Ross Wright Cecutti LLP:

James P. Thomson, Bersenas Jacobsen Chouest Thomson Blackburn LLP

Fax: 416-982-3801

REASONS FOR ENDORSEMENT

[1] The plaintiffs brought this motion for various relief, but primarily for an order requiring the defendants to fulfil their undertakings and answer questions refused at their examinations for discovery. Many of the motion issues were resolved prior to the hearing, including the defendant, Andrew Sostarich (“Andrew”) and Sostarich Ross Wright Cecutti LLP (“Sostarich LLP”), fulfilling their undertakings and answering the questions refused. Of the questions refused, these defendants subsequently agreed to produce numerous documents, which, by the date of this hearing, had not been produced.

[2] During the hearing, counsel consented to an order that required the defendants, Andrew Sostarich and Sostarich LLP, to produce the documents they agreed to produce by November 1, 2016, as set out in the Undertakings, Under Advisement and Refusals Chart, at Exhibit 7 to the Affidavit of Catherine Garbig, sworn October 11, 2016, contained in the plaintiffs’ supplemental motion record. Therefore, an order shall be so issued.

[3] The only remaining issue on this motion is the relief at paragraph 6 of the amended notice of motion, for an order requiring Andrew to produce his working papers for the 2014 Tracks and Wheels Financial Statement and Reconciliation delivered to plaintiffs’ counsel on September 27, 2016, and any correspondence, notes, memoranda, or draft reports or statements relating to, or in any way connected to the documents referred to above.

Background

[4] The plaintiffs, Conrad and Sheila Houle (the “Houles”), who are husband wife, were the sole directors and shareholders of the defendant, Tracks & Wheels Equipment Brokers Inc. (“Tracks”). Tracks carried on business in Sudbury, Ontario. The Houles, on behalf of Tracks, entered into a Share Purchase Agreement with the defendant, Workers Auto Services Ltd., to sell Tracks. The defendant, Michael Gougeon (“Gougeon”), was President of Workers Auto Services Ltd. and he signed the said Agreement on behalf of the company. The Agreement is dated April 3, 2014. The transaction closed on or about July 21, 2014.

[5] The defendant, Andrew Sostarich, is a chartered public accountant and he is a partner in the defendant chartered accounting firm of Sostarich LLP. At the relevant times, Andrew and Sostarich LLP were Conrad and Sheila’s personal and corporate accountants. It is undisputed that Andrew and Sostarich LLP were also Gougeon’s accountants at the same relevant times.

[6] One of the most pertinent documents for the purpose of this endorsement is the Share Purchase Agreement (“Purchase Agreement”). The terms include the purchase price of $13 million for the shares of Tracks, which was subject to adjustments as set out in section 2.6 therein. The purchase price was agreed to be comprised of $11 million representing the net worth of Tracks, plus $2 million for goodwill. As an aside, the plaintiffs received $11.5 million on closing rather than $11 million, which has not been explained. I will accept that it is likely not relevant to this motion. Section 2.6 is entitled “Adjustment to Purchase Price”. To paraphrase, that section provides a mechanism whereby the purchase price could be reduced or increased based on the net worth of the company as set out on the financial statements. Financial statements is defined in section 1.1 as the review engagement financial statement of Tracks for the period ended March 31, 2014, consisting of a balance sheet and the statements of income, retained earnings, statement of cash flows and all notes thereto as reported upon by Sostarich LLP. That section states further that a copy of the financial statement is annexed as Schedule “A” to the agreement. As those financial statements were not completed when the agreement was executed, they were not appended thereto, nor were they appended at any time thereafter. We know now that the defendants only produced the said financial statement a few weeks prior to this motion hearing.

[7] Another relevant document is the Escrow Agreement executed by the parties to the sale and Andrew as escrow agent, presumably, contemporaneously with the Purchase Agreement. The Escrow Agreement references a term of the Purchase Agreement whereby it contemplated that $500,000 be deposited in escrow with the escrow agent to be held and distributed by the escrow agent on the terms and conditions set forth therein. Section 7 entitled “Loss Notice; Dispute Notice,” provides that Gougeon, as purchaser, had the right to claim, or dispute, all or part of the escrow funds upon written notice to the escrow agent and the vendors. The facts are undisputed that Gougeon never provided written notice of a dispute. As such, the plaintiffs claimed entitlement to the full $500,000 escrow funds. Apparently, it will be Gougeon’s evidence that he told the plaintiffs verbally that he had a claim to $250,000 for bad receivables.

[8] After the closing of the sale, the plaintiffs say they learned that they gave an option to purchase the real property as a term of the sale which they did not intend to give because the purchase price was based solely on the value of the business and goodwill. They claim that Andrew was in a conflict of interest as he represented both the purchasers and vendors of the business and that he breached his fiduciary duty to the plaintiffs by preferring Gougeon’s interest over the plaintiffs. The plaintiffs further claim that Andrew lead them to give the option to purchase which was not in their best interests. As such, they claim damages for breach of fiduciary duty or professional negligence and breach of contract, among other relief.

[9] The Financial Statements of Tracks for the period ended March 31, 2014 are in evidence. They appear to have been prepared on or about August 18, 2016, being the date of the attached Review Engagement Report of Sostarich LLP. Also contained in the evidence is the Tracks Purchase Price Reconciliation (“Reconciliation”), prepared by Andrew, which was produced to the plaintiffs on September 27, 2016. I will note several entries of interest on the Reconciliation. The opening entry on the Reconciliation shows the purchase price per the Purchase Agreement as $11,567,977.74. The evidence is that the purchase price was $11 million plus $2 million for goodwill for a total of $13 million. However, as stated above, the plaintiffs were paid $11.5 million on closing. Thus, the amount of the purchase price as set out in the Reconciliation is not consistent with the evidence. The second entry is the “Book Equity March 2014 statements” of $9,274,284. This is a figure carried over from the March 2014 Financial Statements representing the shareholders equity value. After adjustments for “additional receivables collected to March 31, 2015 of some $106,825.83 and other amounts, the net owing to Gougeon is shown as $239,357.34. As such, Gougeon claims to be entitled to almost half of the $500,000 escrow funds.

[10] The remaining facts are as set out in the motion material and for the purpose of this endorsement, I do not intend to set them out.

[11] Examinations for discovery of Andrew and Sostarich LLP were held on October 15 and 16, 2015.

[12] There is no evidence of a discovery plan in this action such that there was no agreed-to timeline for satisfy undertakings.

[13] Mediation is scheduled for early November 2016.

Relief Sought for Production of Defendants’ Working Papers

[14] It is the plaintiffs’ position that the defendants’ working papers are relevant to the issues in this action and production of same are supported by recent case law. They say the working papers are relevant to the Purchase Agreement, in particular, the sections referred to above regarding adjustments to the purchase price and the allegations of negligence against Andrew in allowing the deal to close without the March 2014 Financial Statements being prepared. It is also submitted that the working papers are relevant to the claims against Alesia Sostarich in solicitor’s negligence for allowing the sale to close without the relevant financial statements. Alesia Sostarich is Andrew’s sister and she was legal counsel for the plaintiffs on the sale.

[15] The plaintiffs rely on the decision of Master Short in Oakdale Kitchens Inc. v. Williams & Partners, Chartered Accountants LLP, [2011] O.J. No. 2464. In that action, the plaintiff sued its chartered accountant seeking to recover losses suffered as a result of the alleged failure to detect the fraud in the course of annual reviews of the financial records of the plaintiffs. It was said that that the plaintiffs former employees defrauded the plaintiff of a substantial sum of money. The parties had attempted unsuccessfully to agree to a discovery plan including a scope of documentary production. The plaintiff proposed that the defendant’s productions include its working papers. This was the subject of the motion before Master Short. Master Short found that the working papers were relevant and ordered the accountant to produce all documents created by them in the course of its retainer with the plaintiff, including working papers, notes, internal and external correspondence, reports and memoranda. The production, however, was limited to the period of time when the fraud of the former employees was alleged to have taken place.

[16] In Network Forest Products Ltd. (Trustee of) v. Kraft, Berger, Grill, Schwartz, Cohen & March LLP, [2002] O.J. No. 5731, it was ordered that the defendant, auditors of the bankrupt, produce its working papers pursuant to applicable provisions of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”). The court considered the purpose of the BIA and found that there was no privilege attached to the documents being sought. This decision is not of assistance herein given the provisions of the BIA relating to production of documents and the broad discretion of the court to order production of documents pertaining to a bankrupt that are the property of a third party.

[17] The defendants rely on Tersigni v. Circosta, 1997 CarswellOnt 1725, [1997] O.J. No. 1860 (O.C.J. Gen. Div.), where the court, on a rule 30.10 motion, dismissed the motion that sought production of the non-party, chartered accountants’, working papers. This was an oppression action brought by the plaintiff/shareholder against corporate defendants. The plaintiffs retained chartered accountants to conduct a forensic accounting investigation. Those accountants unsuccessfully requested access to the working papers of the corporate defendants’ chartered accountants. Mr. Justice McIsaac held that the working papers were not producible, relying primarily on English authorities, which held that the working papers were the property of the accountant that were prepared for the accountant’s own assistance in carrying out his expert work and are “for their eyes only.” This case can be distinguished from the case herein on the basis that the working papers in Tersigni were sought from a non-party; however, I am not dismissing the reasons in this decision regarding the nature of accountant’s working papers as will be noted below.

[18] The plaintiffs submit that despite the decision of Tersigni in 1997 which relied on English law, more recently, Ontario cases have ordered production of accountant’s working papers as in the Oakdale and Network decisions.

[19] I accept the proposition that accountant’s working papers are the property of the accountant or accounting firm that were prepared for the accountant’s own assistance in carrying out his expert work, similarly as a lawyer’s file belongs to the lawyer or the law firm. However, the test for documentary discovery is relevance. If the subject documents are relevant to any matter in issue in the action, it must be disclosed, as provided in rule 30.02(1), subject to privilege.

[20] The defendants contend that the working papers are not relevant to any matter in issue in this action as the plaintiffs do not dispute the purchase price. This was admitted by Conrad Houle on his examination for discovery.

[21] In my view, the working papers are the private working papers of Andrew and Sostarich LLP which may contain notes, internal and external correspondence and memoranda that were not made by them with a view that they could be made public.

[22] I am not satisfied that the working papers are relevant to any matter in issue in this action. I find that the relief sought for the working papers is too broad and too drastic given the nature and likely content of the working papers. Further, if the working papers were produced, they may not answer the plaintiffs’ enquiries regarding the calculations on the Financial Statements and Reconciliation. In my view, what the plaintiffs really want is to know how the calculations were made and what were they based on in order to determine whether the calculations are proper and done in accordance with proper accounting principles. In fact, it is conceivable that the plaintiffs will retain an independent accountant to review the 2014 Financial Statements and Reconciliation for accuracy.

[23] However, I have concluded that the plaintiffs are entitled to further examination for discovery of the defendants in order to examine on the values shown on the 2014 Financial Statements and the Reconciliation and how they were determined given their recent production.

[24] Moreover, when Andrew prepared those documents in August 2016, he was acting on behalf of Tracks, which was not owned by the plaintiffs at that time. Therefore, although the March 2014 Financial Statements cover the period when Tracks was owned by the plaintiffs, the plaintiffs do not have an automatic right to production of their accountant’s working papers, given my finding above that the working papers are the property of the accountant.

[25] Referring to the basic rules of discovery, the defendants produced only recently relevant documents that were not produced in their affidavit of documents nor prior to examinations for discovery of the defendants. Had the defendants produced those documents prior to discovery, the plaintiff would have been entitled to examine the defendants on those documents. As such, given the late production, the plaintiffs have established entitlement to further discovery of the defendants on those documents. (Rule 31.03(1)) I note that the plaintiffs sought alternative relief in the notice of motion for an order that the defendants re-attend for examinations for discovery to answer resulting questions.

[26] Therefore, for the reasons above, I dismiss the plaintiff’s motion for production of the defendants’ working papers. However, I grant the plaintiffs leave to conduct a further examination of Andrew in his personal capacity and on behalf of Sostarich LLP with the scope of that examination to be limited to questions regarding the 2014 Financial Statements and the Purchase Price Reconciliation. In the meantime and considering the proportionality principles, I encourage the parties to attempt to resolve this issue without the need for more discoveries.

Costs

[27] The plaintiffs were successful with respect to the original relief sought for an order to compel the defendants to answer their undertakings and refusals. The motion also sought relief against the defendant, Alesia Sostarich. The plaintiffs and the defendants, Andrew and Sostarich LLP, reached an agreement on the undertakings and refusals issues during the hearing of this motion whereby the defendants would comply by November 1, 2016. I find that this motion was necessary, at least with respect to the undertakings and refusals, as it was a year since the discoveries were held by the time this motion was heard and the defendants agreed to produce numerous documents, that were both undertakings and refusals, yet they had not done so. Further, the mediation is scheduled for November 8, 2016, which presumably was a mutually agreeable date. As such, the defendants ought to have satisfied their undertakings and answered the refused questions they agreed to answer in advance of the mediation without the necessity of a motion.

[28] On the other hand, the plaintiffs were not successful on the relief for production of the working papers; however, they succeeded on alternative relief sought. The material filed and the oral submissions focussed solely on production of the working papers. Further, there is no evidence that the plaintiffs requested discovery of the defendants with respect to the March 2014 Financial Statements and the Reconciliation, however, even if they had, it is uncertain whether the defendants would have consented to same.

[29] In my view, the plaintiffs are entitled to their costs of the motion with respect to the undertakings and refusals; however, in fixing the amount of costs I have considered that they were not successful on the relief for the working papers which was the only issue argued. Therefore, the plaintiffs’ costs are fixed in the amount of $2,500 inclusive, payable within 30 days.

Master Lou Ann M. Pope

Released: October 20, 2016