Lash v. Lash Point Association Corp.

CITATION: Lash v. Lash Point Association Corp., 2016 ONSC 6563

COURT FILE NO.: CV-15-10956-00CL

DATE: 20161031

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

John Edward Antony Lash

Applicant

– and –

Lash Point Association Corp.

Respondent

E. Patrick Shea and Christopher Stanek, for the Applicant

Not Present

AND BETWEEN:

Timothy John Francis Lash

Applicant

– and –

Lash Point Association Corp., Lash Avalon Holdings Limited, Penelope Lash Lorimer, Elizabeth Gaye Harden, Donalda Secor, Timothy Charles Stevenson Lorimer, John Roger Miller Lash, Wendy Tanis Lash, Jennifer Lash, Catherine Penelope Lash, Anthony Baldwin Lash, Peter Charles Baldwin Lash, John Edward Antony Lash, David Marshall Casey Lash, Nancy Tanis Lash Robinson, Tanis Elizabeth Robinson, Seanna Mackenzie Robinson and Airlie Lash Robinson

Respondents

COURT FILE NO.: CV-14-10727-00CL

John D. Campbell, for the Applicant

Danielle Joel for Penelope Lash Lorimer and Timothy Charles Stevenson Lorimer, and Gillian Fournie and Justin De Vries for Elizabeth Gaye Harden, Donalda Secor, and Nancy Tanis Lash Robinson, Tanis Elizabeth Robinson, Seanna MacKenzie Robinson and Airlie Lash Robinson, and E. Patrick Shea and Christopher Stanek for Peter Charles Baldwin Lash and John Edward Antony Lash

HEARD: September 21, 2016

Penny J.

Overview

[1] The Lash family owns about 30 acres of cottage property on Lake Rousseau known as Lash Point (or the Property). It has been in the family for over 100 years. There are five family groups or “clans” involved in the ownership structure, representing 25 or more adults. In 1996, all the various family members transferred their ownership interest in Lash Point to a nonprofit corporation, Lash Point Association Corporation (LPAC). Disagreements have arisen over the management and future of Lash Point and LPAC.

[2] In essence, some family members want out (the leave camp); they want to realize on the fair market value of their interest in Lash Point.

[3] Other family members want LPAC to continue so that they and future generations can continue to enjoy Lash Point (the remain camp).

[4] Both sides in this disagreement recognize that they cannot muster a two thirds majority of voting members necessary to effect fundamental change in the corporation. The parties have concluded that a court supervised solution is required.

[5] There are two competing applications before the court. In October 2014, Tim Lash brought an application to wind up LPAC, sell Lash Point and distribute the proceeds to “founding” members.

[6] In May 2015, Anthony Lash brought an application for approval of a plan of arrangement or, alternatively, a court-ordered buyout of members who want to leave. Under the buyout option, the corporation would continue and retain a specific parcel of the Property (the Retained Parcel) and portions of Lash Point would be sold off (the Severed Parcels) to finance the purchase of the interest of those who want to leave.

[7] Anthony Lash died in 2015. His son John has continued with the application. By the time of oral argument, the remain camp had abandoned the plan of arrangement application and now adopts a court ordered buyout as their desired solution.

[8] The parties’ positions have evolved over the course of the litigation. Everyone, however, now accepts at a conceptual level that those who want to leave should be able to do so in a manner that enables them to monetize the fair market value of their interest in LPAC. The means of doing so, however, is the source of very intense disagreement between the two sides.

[9] A dissolution is unacceptable to the remain camp. A sale of the entire Property will thwart the purpose of LPAC – to hold Lash Point for the enjoyment of family members and future generations. A sale will also trigger capital gains tax and result in the loss of the use of this unique property. The remain camp say they cannot afford to buy the portion of Lash Point which they prize (the Retained Parcel) if they have to pay capital gains tax and fair market value.

[10] A buyout by the remain camp is unacceptable to the leave camp. They believe that only a sale of the entire property will result in maximum value. They think a buyout will take too long and add expense. They also believe a partial sale to finance the buyout could attract adverse tax consequences.

[11] Either approach, windup or buyout, will require the appointment of a court officer (liquidator or receiver) and additional court supervised steps which may or may not become controversial as the process unfolds.

[12] The parties, faced with these disagreements, ask the court to decide which of the two proposed methods of resolving this dispute is appropriate in the circumstances and to determine what the next steps shall be.

Other Relevant Background

[13] LPAC was incorporated in 1996. Shortly after incorporation, the owners of Lash Point transferred their interests to LPAC. The object of LPAC, as stated in the letters patent, is “to own and conserve land and its natural features for the enjoyment of its members and guests.”

[14] The enactment of the Canada Not-for-Profit Corporations Act, S.C. 2009, c. 23 (CNPCA) required LPAC to be continued under the new legislation. Any corporation that was not continued by October 17, 2014 faced dissolution; its assets could have been forfeited to the Crown.

[15] The dispute between the clans had been brewing for some time. As a sign of the degree of dysfunction in this family, it took until September 18, 2014 to organize a meeting and to pass a special resolution, including articles of continuance and a new general operating bylaw, continuing LPAC under the CNPCA. The certificate of continuance was issued on October 2, 2014. The purpose of LPAC remained the same: “to own and conserve land and its natural features for the enjoyment of its members and guests.”

[16] Part 9 of LPAC’s Articles of Continuance provides that in the event of dissolution or wind up, all of the corporation’s remaining assets after payment of its liabilities “shall be distributed to the members” in accordance with an attached schedule. The schedule sets out the members who conveyed their interest in Lash Point to the corporation in 1996 (the Founding Members) and each Founding Member’s proportionate interest.

[17] The new bylaw provides, in ss. 3.03 and 3.04, that any sale of real property owned by the corporation, and any return of capital to any member or member’s estate, requires a special resolution of members (meaning a resolution passed by a two thirds majority).[^1]

[18] Of some importance to the arguments of the parties is s. 13.03 of the bylaw which provides that, by October 1, 2015, “a resolution shall be brought forward to the members to dissolve the corporation.” The meaning and intent of this provision is in dispute. In any event, no resolution to dissolve the corporation has been brought forward to the members. Section 220(3) of the CNPCA provides that a corporation with property may be dissolved voluntarily by special resolution of the members.

The Wind Up Proposal

[19] Section 224 of the CNPCA provides that any member may apply to the court for dissolution of the corporation on one of two grounds:

(1) if the court is satisfied that there has been oppression; or

(2) if the court is satisfied that it is just and equitable that the corporation should be dissolved.

On such an application the court may make any order it thinks fit: s. 224(3).

[20] The leading decision on the applicable principles regarding the court’s equitable power to wind up a corporation is that of Lord Wilberforce in Ebrahimi v. Westbourne Galleries Ltd., [1973] A.C. 360. The conceptual basis for the Court’s intervention is expressed in terms of giving effect to rights, expectations and obligations of a personal nature of shareholders inter se that are not necessarily addressed in the corporate structure.

[21] The court will only exercise its discretion to order a just and equitable winding up if the disharmony between members has resulted in a sufficiently serious failure of the reasonable expectations of the parties to warrant such equitable relief. In order to satisfy this test, an applicant must demonstrate that the parties regarded, or would have regarded if they had turned their minds to it at the time of the formation of the association, the particular circumstances resulting from the disharmony as constituting termination or repudiation of the relationship among them. Accordingly, incompatibility itself is significant only in so far as it has resulted in a state of affairs in which the reasonable expectations of the parties are unattainable and from which the court can reasonably infer that the arrangement between the parties has been repudiated or terminated: Animal House Investments Inc. v. Lisgar Development Ltd. (2007), 2007 82794 (ON SC), 87 O.R. (3d) 529 (SCJ).

[22] Four conditions must be satisfied in order to invoke the court’s equitable jurisdiction to make a winding up order:

(1) there must be “rights, expectations and obligations inter se” that are not “submerged” in the corporate structure;

(2) these rights, expectations and obligations must not have been satisfied or discharged;

(3) the resulting circumstances must result in an unfairness or prejudice to one or more of the members; and

(4) such unfairness or prejudice must be sufficiently serious that it can only be rectified by winding up or dissolution:

Animal House Investments Inc. v. Lisgar Development Ltd., supra, at para. 50.

[23] Tim Lash argues that LPAC is not functioning; there has not been a directors’ or members’ meeting since September 18, 2014. The family is incapable of making any agreement for compensation to be paid to departing members. There has been discord and friction within the family. Continuing with the status quo is not a realistic option. In general terms, all parties agree that members who want to leave should receive fair market value for their interest. They cannot agree, however, on how fair market value should be determined and when and how members who decide leave should be paid. Membership is sufficiently divided that neither camp is in a position to obtain the requisite support for a special resolution. There is a deadlock and irreconcilable differences which cannot be resolved. The only solution, therefore, is to order a winding up, sale and distribution. In addition, the leave camp regards the inclusion of s. 13.03 in the 2014 bylaw as a “promise” to dissolve LPAC within a year. They say the remain camp has not honoured that promise.

[24] Tim Lash, and those in the leave camp who support him, argue that the best way to maximize value is to sell the entire Property through a well-designed marketing plan conducted by a court-appointed liquidator and to pay all net proceeds out to Founding Members in accordance with their proportionate interest under LPAC’s 2014 bylaw. Lash Point is unique; it is impossible to determine fair market value without exposing the Property to the open market. Any member who wants to remain can bid for some or all of the Property on the open market or use the proceeds of sale to buy the Retained Parcel or their own cottage property somewhere else.

The Buy Out Proposal

[25] The jurisdiction to order a buyout arises out of ss. 224(3), 216(1)(f) and 253(3)(f) of the CNPCA.

[26] The remain camp argues that Tim Lash has not established entitlement to a winding up order under the four-part test set out in Animal House Investments Inc. v. Lisgar Development Ltd., supra. They say, among other things, that the court has a broad jurisdiction to craft a remedy that will suit the specific circumstances of this case and balance the interests of all stakeholders. The application of a remedy in these kinds of circumstances should be done “with a scalpel not a battle axe:” Collins Barrow Vancouver v. Collins Barrow National Cooperative Incorporated, 2015 BCSC 510 at para 268. Tim Lash, it is argued, must establish that a winding up is the only remedy that will rectify the situation and that is fair to, and balances the interests of, all members.

[27] A winding up is not the only means of getting around the current deadlock. The corporation’s purpose, “to own and conserve land and its natural features for the enjoyment of its members and guests” would be entirely, and unnecessarily, defeated by a winding up in circumstances where a significant number of family (and corporation) members want to continue to own and enjoy Lash Point (or at least a portion of Lash Point). As well, a winding up would force members in the remain camp to pay capital gains tax on a distribution they do not wish to receive.

[28] The remain camp argues that their buyout proposal is an appropriate (and less drastic) alternative to a winding up and therefore must, on the law, be found to be the preferred option. It satisfies the leave camp by offering fair market value for their interest. It satisfies the remain camp by preserving LPAC and the remain camp’s desire to continue to use at least a portion of Lash Point now and into the future, as well as preventing capital gains tax on a distribution they do not want.

[29] A buyout order is a standard remedy; a remedy far more common than a dissolution. Valuations are frequently used in court proceedings to establish fair market value rather than a wind up and sale. Putting the entire Property on the open market “block” is not necessary to establish fair market value and will destroy the corporation.

[30] Further, the remain camp argues that the leave camp’s concerns about the tax implications of a buyout are entirely speculative and unsupported by any credible or, for that matter, admissible evidence.

Analysis

[31] A great deal of time was spent in written and oral argument on the four-part test for the court to invoke the winding up remedy. In the view I take of the matter, it is not necessary to resolve whether Tim Lash has a reasonable expectation of an entitlement to monetize his interest as a member of LPAC, or whether his expectations have been defeated resulting in unfairness or prejudice.

[32] I say this for two reasons. First, the remain camp now concedes that the leave camp should have the opportunity to receive fair market value for their interest in LPAC. Second, winding up is the remedy of last resort and I find, on the material before me, that the buyout option, properly structured, is a viable alternative to the remedy of a winding up. This ground alone, therefore, is sufficient to deny Tim Lash’s application for a dissolution.

[33] I do not accept the submission that Lash Point is so unique that only a sale following exposure of the entire Property to the open market will produce a reliable value. Valuations are conducted all the time in far more challenging assignments than the valuation of a block of land in Muskoka. Highly complex corporations are frequently the subject of valuation exercises where a shareholder “divorce” is required.

[34] I am confident that a combination of valuations of the entire Property and actual sales of the Severed Parcels can produce a reliable basis to determine fair value for the purposes of a buyout of departing Founding Members.

[35] I do not regard section 13.03 of the 2014 bylaw as a promise to dissolve the corporation. All that bylaw requires is that a resolution be brought to members. Given that both camps acknowledge an inability to muster a two thirds majority, it is not surprising that no such resolution has ever been brought forward. It would not have solved the problem.

[36] The leave camp also relies on s. 34(1) of the CNPCA. It provides that no part of the corporation’s profits or property may be distributed directly or indirectly to a member except in furtherance of its activities or as otherwise permitted by the CNPCA. I am not persuaded that this represents a hurdle to the buyout order sought. I say this for two reasons.

[37] First, the buyout order is being made, in part, for the purpose of furthering the activities of the corporation by enabling LPCA to continue to own and conserve land for the enjoyment of members.

[38] Second, I find that the buyout order is “permitted” by the CNPCA by virtue of ss. 224(3), 216(1)(f) and 253(3)(f).

[39] Many of the provisions of the plan of arrangement were objectionable to the leave camp because they were manifestly biased in favour of the remain camp. Most of these objectionable provisions have been, or can be, eliminated from the remain camp’s buyout proposal. The remain camp now accepts, for example, that a valuation of the entire Property, not just the parcels to be sold, must form the basis of the buyout price at fair market value. They also accept that all of the costs of marketing and sale ought not to be borne by the leave camp. The remain camp also now concedes that if a sale of the Severed Parcels will not be or is not sufficient to enable LPAC to buy out the departing Founding Members at fair market value, the Retained Parcel will have to be sold.

[40] Draft terms for the proposed buyout order were attached as a schedule to the Gowlings factum submitted on behalf of John Lash (the Buyout Terms).

[41] In general terms, I endorse the structure and steps proposed in the Buyout Terms.

[42] Grant Thornton shall be appointed Receiver with a charge over the Property to secure its reasonable fees and expenses. The Receiver shall undertake the activities contemplated in the Buyout Terms, as amended.

[43] The appraisals and severance plans shall be provided to all Founding Members. Thus, 7(b) of the Buyout Terms shall be amended to add “and severance plans” after the words “Provide the Appraisal” and to delete the phrase “that are not Departing Members (the “Remaining Founding Members”)” (although the definition of “Remaining Founding Members” may have to be picked up elsewhere).

[44] Paragraph 16 of the Buyout Terms shall be amended to delete the second sentence in its entirety. It is, in my view, premature and unwise to resolve issues of liability for future costs in the abstract.

[45] Paragraph 18 of the Buyout Terms shall be deleted in its entirety. The costs of these proceedings shall be resolved in the context of this judgment.

[46] A term shall be added to the Buyout Terms to permit those Founding Members who elect to leave (the Departing Founding Members) or Remaining Founding Members to retain, at their own expense, their own valuator in order to support a different valuation than that brought forward by the Receiver. Any disputes in this regard shall be resolved by the court on motion.

[47] This case was notable for the lack of expert evidence on at least two matters in issue. Although the question of how best to determine market value was in issue, neither party advanced qualified expert opinion evidence on the point. Although the tax consequences of a buyout were an issue, there was no expert tax opinion provided. An attempt was made by the leave camp to put in some tax evidence, but it was extremely limited in scope. Even if admissible, I found the evidence unhelpful, since it did little more than warn that a sale of some of the Property might attract the attention of the CRA. No foundation was laid for this evidence. Nor do I think it is even relevant. Finally, that ship has sailed. Portions of the original Property have already been severed and sold. It will be for the Receiver, therefore, to obtain whatever real estate marketing or tax advice is required in order to move forward with the buyout proposal.

[48] Because of the manner in which the buyout proposal, and its specific terms, arose in these proceedings (that is, advanced for the first time in Gowlings factum), I am not satisfied that other parties have had adequate opportunity to comment on the specific details of the Buyout Terms.

[49] Accordingly, counsel for the leave camp, Messrs. Campbell and DeVries, shall each have 10 days to put forward any other amendments to the Buyout Terms, consistent with the findings and conclusions in these reasons, which they view as necessary. This shall be done in a black-lined version of the Buyout Terms, incorporating my amendments as well, together with brief written submission (not to exceed four typed double-spaced pages) explaining the reason and need for any further amendments.

[50] Counsel for the remain camp, Mr. Shea and Ms. Joel, may each respond to any proposed amendments with further amendments, also to be reflected in a black lined version, and/or a written submission, subject to the same page limit, within a further seven days.

[51] I will release further directions, as necessary, following receipt of these submissions.

[52] Following resolution of the Buyout Terms, counsel shall arrange a one hour case conference (which shall include the Receiver) to map out the remaining steps and establish a timetable for accomplishing these steps, together with any additional necessary court attendances. This shall take place before me if possible.

Costs

[53] Each party submitted a bill of costs, setting out a partial and a substantial indemnity amount:

Partial Substantial

Campbell $145,678 $235,230

DeVries $175,524 $258,159

Shea $234,714 $320,656

Joel $149,991 $199,040

[54] Mr. Campbell sought partial indemnity costs from the remain camp on behalf of Tim Lash. The others sought substantial indemnity costs from the opposing parties if they were deemed “successful.” No one, in my view, justified their claim for substantial indemnity costs.

[55] Success was, in my view, divided. While I have declined to make an order dissolving LPAC and have found in favour of the buyout proposal, the buyout proposal arose very late in the piece, in Gowlings’ factum. Even then, it was very much an alternative argument about which little was said. Also, I have not accepted that proposal in its entirety.

[56] It was not until Mr. Shea rose to make oral submissions that it became apparent (to me at least) that the plan of arrangement proposal was being abandoned. Most of the submissions in the factums of the leave camp were directed at the flaws in the plan of arrangement proposal and its obvious bias in favour of the remain camp on a number of fronts.

[57] In the end, the difference between the two proposals was a very narrow one. It cannot be said that either camp unambiguously prevailed.

[58] The parties do agree that their collective impasse could only be resolved by court intervention. Each party made a contribution toward the basis for a resolution. Each party has also fuelled the fires of this litigation, however.

[59] In all of the circumstances, it seems to me the appropriate cost award is for each party to receive $125,000 from LPAC on account of their partial indemnity costs. Assuming LPAC does not have this cash readily available, it shall be paid as part of the cost of the buyout, in advance of any distribution to Founding Members. Each party will be liable for their own legal fees over and above that amount. Parties should not assume that their legal fees will be indemnified by LPAC, in whole or in part, going forward.

Penny J.

Released: October 31, 2016

CITATION: Lash v. Lash Point Association Corp., 2016 ONSC 6563

COURT FILE NO.: CV-15-10956-00CL

DATE: 20161031

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

John Edward Antony Lash

Applicant

– and –

Lash Point Association Corp.

Respondent

COURT FILE NO.: CV-14-1072700CL

AND BETWEEN:

Timothy John Francis Lash

Applicant

– and –

Lash Point Association Corp., Lash Avalon Holdings Limited, Penelope Lash Lorimer, Elizabeth Gaye Harden, Donalda Secor, Timothy Charles Stevenson Lorimer, John Roger Miller Lash, Wendy Tanis Lash, Jennifer Lash, Catherine Penelope Lash, Anthony Baldwin Lash, Peter Charles Baldwin Lash, John Edward Antony Lash, David Marshall Casey Lash, Nancy Tanis Lash Robinson, Tanis Elizabeth Robinson, Seanna Mackenzie Robinson and Airlie Lash Robinson

Respondents

REASONS FOR JUDGMENT

Penny J.

Released: October 31, 2016

[^1]: This mirrors s. 214 of the CNCA which requires a resolution to sell property to be passed by a two thirds majority.