Court File and Parties

COURT FILE NO.: CV-17-570057 DATE: 20170515 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Ginter Baca and Lease Administration Corporation, Plaintiffs AND: Vasili Tatarinov, Vitalii Godonooga, Ontario Consumer Home Services Inc. and Viva Financial Inc., Defendants

BEFORE: Carole J. Brown, J.

COUNSEL: Michael Simaan, for the Plaintiffs Pradeep Chand, for the Defendants

HEARD: May 12, 2017

Endorsement

[1] The moving party plaintiffs, Ginter Baca and Lease Administration Corporation, bring this motion for an order pursuant to Rule 44 of the Rules of Civil Procedure and section 104 of the Courts of Justice Act for the interim recovery of possession of personal property.

[2] The defendants bring a cross-motion for a stay of the action on the ground that the plaintiffs are in default of a requirement of the Corporations Information Act, RSO 1990, cC 39 (“CIA”) and the Ontario Business Corporations Act, R.S.O. 1990, c B.16 (“BCA”). Both motion and cross-motion were argued before me on May 12.

[3] I will first deal with the cross-motion and thereafter with the main motion.

The Defendants Cross-Motion For A Stay Of The Action

[4] The defendants submit that the plaintiff is in breach of sections 18(1) of the CIA and 115(2)(a) of the BCA, in that, at the time of the bringing of this application and the motion, no director was named in the Corporation Profile Report. They further submit that, despite the fact that they brought this to the attention of the plaintiffs, nothing was done to correct this. As a result, the action should be stayed.

[5] The CIA, section 18 states as follows:

(1) A corporation that is in default of a requirement under this Act to file a return or notice or that has unpaid fees or penalties is not capable of maintaining a proceeding in a court in Ontario in respect of the business carried on by the Corporation except with leave of the court.

(2) The court shall grant leave if the court is satisfied that

(a) the failure to file the return or notice or pay the fees or penalties was inadvertent;

(b) there is no evidence that the public has been deceived or misled; and

(c) at the time of the application to the court, the Corporation has filed all returns and notices required by this Act and has no unpaid fees or penalties.

[6] Subsection 115(2) of the BCA states:

(2) A corporation shall have a board of directors which shall consist of,

(a) in the case of a corporation that is not an offering corporation, at least one individual; and

(b) in the case of a corporation that is an offering corporation, not fewer than three individuals.

[7] It is the submission of the plaintiffs that the filing was corrected shortly after the omission to name a director was brought to their attention. They stated that the issue was brought to their attention in April 2016 and, once their counsel returned from out of country, it was attended to and corrected in May 2016. The plaintiff, Ginter Baca, stated in his affidavit and on cross-examination on the affidavit that he had been the Director since 2003 and that the omission was inadvertent and was corrected. Both in the motion record and at the return of the motion on May 12, evidence was adduced of the correction of the filings, which indicated that Mr. Baca was director of LAC and had held that position since 2003.

[8] Pursuant to the Courts of Justice Act (CJA), section 106, a court, on its own initiative or on motion by any person, whether or not a party, may stay any proceeding in the court on such terms as are considered just. Pursuant to section 18(2) of the CIA, the court shall grant leave if the court is satisfied that the tests set forth therein have been satisfied.

[9] I am satisfied based on the evidence before me that the failure to name a director was inadvertent and was corrected within a reasonable time after it was brought to the plaintiffs’ attention. There is no evidence to indicate that the public was deceived or misled by the inadvertence. The error in the Corporate Profile Report was corrected following its being brought to the plaintiffs’ attention. I am satisfied, based on the searches done on December 19, 2016 and May 12, 2017, and the Corporation Profile Reports produced at the times of those searches, contained in the evidence before this Court, that the inadvertent breach was rectified well prior to the hearing of this motion.

[10] Accordingly, I grant leave to permit the plaintiff to proceed with its motion pursuant to Rule 44 of the Rules of Civil Procedure. While the defendant argued that the plaintiff had not sought leave from this court, on the basis of section 106 of the CJA, I am satisfied that, just as this Court may, on its own initiative or on a motion by any other party, stay any proceeding in the court it may, rather than staying the preceding, grant leave to continue the proceeding.

The Motion Pursuant to Rule 44 of the Rules of Civil Procedure

[11] Lease Administration Corporation (“LAC”) is the licensee under a License Agreement with Decision Systems Inc. This License Agreement entitles LAC to the non-exclusive use of an equipment, vehicle and personal property lease portfolio management software system known as “Infolease” together with its integral operating platform by Unidata. The License Agreement specifically prohibits LAC from transferring, assigning, sublicensing or permitting the use of the system by any other party. Any contravention of these restrictions could void the license. The license remains active to this date.

[12] The Infolease software operated by LAC is, according to the plaintiff, a unique assembly of hardware and software products that cannot be purchased or replicated in its current form. LAC maintains that it has spent 25 years and hundreds of thousands of dollars building and developing programs that surround this application to customize it and allow it to produce product for the marketplace.

[13] LAC generates its primary income through the provision of contract administration and management services to financial institutions, lenders, vendors and other companies involved in the leasing and finance industry. In order to provide the services, LAC is entirely reliant on the Infolease system and other applications developed by it and at its expense that integrate with Infolease.

[14] In November 2013, LAC began providing the services to Ontario Consumer Home Services Inc. (“OCHS”) pursuant to an Administration Agreement concluded between the parties.

[15] In January 2014, the individual defendants, Vasili Tatarinov and Vitalii Godonooga (“the individual defendants”), the controlling minds of OCHS, proposed to the individual plaintiff, Ginter Baca (“the individual plaintiff” or “Baca”) that LAC combine its resources and operation with OCHS and the defendant, Viva Financial Inc. (“Viva”), which was not, at that time incorporated.

[16] The proposal was accepted and LAC moved its offices and the LAC property into OCHS premises in March 2014.

[17] Negotiations ensued regarding the structuring of the new agreement, but the parties were unable to reach a final agreement and the three entities, LAC, OCHS and Viva continued as separate legal entities.

[18] LAC billed OCHS for administration services rendered by LAC regarding the Infolease system, pursuant to the Administration Agreement from October 2013 through April 2015.

[19] In April 2015, there were discussions regarding sale of LAC stock to the individual defendants and, in contemplation of reaching a final agreement, Viva assumed responsibility for payment of the salaries, benefits and other amounts to become due to LAC employees, and also certain of LAC’s operating expenses. Further, Baca was hired as Viva’s president. In May 2015, with the benefit of the LAC property and related services supplied by LAC, Viva began billing OCHS monthly for the contract administration services previously billed by LAC for its own benefit. Viva continues to bill OCHS to this date.

[20] However, in January 2016, due to a financing issue with Sun Life, Baca was terminated as president of Viva, without cause or notice and was prevented from accessing the premises from which OCHS, Viva and LAC operated and which is also where the LAC property (software and hardware) is located.

[21] Attempts were made unsuccessfully to negotiate a satisfactory exit package for Baca, coupled with a purchase of the LAC property. In September, 2016, as no agreement was reached, LAC forwarded a revised administration agreement to the defendants which set forth the cost of LAC continuing provision of services to OCHS. No response was received. Nevertheless, LAC began invoicing OCHS and Viva for services. To date, no invoices have been paid for administration services or the continued use of the LAC property, which remains with the defendants. As a result, the statement of claim in this matter was issued on February 21, 2017, which includes a request for an interim order under Rule 44.

[22] In order to continue operating and generating profit, LAC has entered into negotiations to execute new administration agreements with clients. However, these administration agreements are contingent on LAC’s continued ability to use Infolease and the other LAC property for the benefit of these new clients and to continue to provide contract administration and management services. Accordingly, it seeks, on an urgent basis, the return of the LAC property, given the time sensitive nature of the administrative agreements into which it is proposing to enter.

[23] In response to this application, the defendants maintain that without the Infolease system, Viva would lose access to the data stored on the system for 37,000 customers, including billing and collection information for its customers, and, as a result, would lose those customers, suffer a significant financial loss and be exposed to claims from its financial partners, customers and third parties that rely on the Infolease system. However, the plaintiffs are amenable to having the defendants print or download the records contained in the Infolease system at any time prior to return of the LAC property to LAC.

[24] Further, the defendants submit that, if the LAC property is returned to LAC, they will be unable to complete the administration services going forward. However, LAC has undertaken to continue to provide administration services to Viva through use of the LAC property on the same basis that it provided services to them prior to the attempts to merge, and on the condition that Viva enter into an administration agreement with LAC for said administrative services, in the same way the services were provided to OHCS prior to the attempted merger with LAC. This proposal would permit the defendants to continue using the LAC property, but provide LAC with control of its property and the ability to use it for the benefit of other clients as well. While the defendants maintain that the amounts sought for payment for services are well beyond market prices today, they have not provided any evidence to support this contention.

[25] It is the position of the defendants that LAC has unfettered access to the Infolease system through VPN, which allows it to perform contract administration and management services for clients. It concedes, in its materials, that the VPN is not exclusive or private. The defendants further submit that the plaintiffs are, as a result, able to fully carry on business with their clients. Indeed, the defendants maintain that the plaintiffs are currently using the Infolease system. There is no evidence before this Court to that effect. The plaintiffs maintain that the VPN does not provide them with exclusive access to their new clients’ information, which could also be accessed by the defendants. As a result, they cannot guarantee their new clients confidentiality of information as regards their systems.

[26] As regards the hardware sought to be returned, it remains in the OCHS premises. The plaintiff maintains that there is no issue as to the ownership by LAC of the hardware, that no issue was raised in the statement of defence and there was no evidence from the defendants before this Court that raised an issue regarding ownership. At this motion, the defendant took the position that in cross-examination, Ginter Baca was unable to produce receipts or invoices regarding purchase by LAC of the hardware in question, such that there is no evidence that it was, in fact, owned by the plaintiffs.

The Law

[27] The test for an Order pursuant to section 104 of the Courts of Justice Act and Rule 44.01(1) of the Rules is as follows:

1. There are substantial grounds for the plaintiff’s assertion that it is the legal owner or entitled to possession of the property;
2. There are substantial grounds for its claim that the property is being unlawfully detained by the defendants; and
3. The balance of convenience favours the plaintiff.

[Clark Door of Canada Ltd. v Inline Fiberglass Ltd. (1996), 45 C.P.C. (3d) 244 at paras 11, 17 and 18]; Knew Order Co. Ltd. v 2291955 Ontario Inc., cob Tai Groupss Inc. and Chia Yang Shen (2012) ONSC 3991

[28] In order to establish entitlement to an Order pursuant to Rule 44.01, the moving party must establish the following:

1. A description of the property sufficient to make it readily identifiable;
2. The value of the property;
3. That the plaintiff is the owner or lawfully entitled to possession of the property;
4. That the property was unlawfully taken from the possession of the plaintiff or is unlawfully detained by the plaintiff; and
5. The facts and circumstances giving rise to the unlawful taking or detention.

Analysis

[29] Based on all of the evidence before me, I am satisfied that the moving party plaintiffs have established the tests, as set forth at paragraph 28 above, and the requisite elements of their motion as set forth above at paragraph 29, above.

[30] Pursuant to paragraph 29, above, the plaintiffs have provided a detailed description of the property such that it is readily identifiable, at Schedule A of the motion record and Schedule C of the factum. The plaintiffs maintain that the property is unique, such that it is difficult to determine a value for it. They have, nevertheless, accepted the defendants’ value of $750,000 as the cost of replacement of the Infolease system. The plaintiffs maintain that, in any event, the value of property would only be relevant if a security payment pursuant to Rule 44 were found to be appropriate. I am satisfied that there are sufficient grounds to found its assertion that it is the legal owner of the property and that the property has been unlawfully retained, as set forth below.

[31] I am satisfied that there are substantial grounds for the plaintiffs’ assertion that LAC is the rightful owner of or entitled to the possession of the LAC property. The LAC property comprises the LAC Infolease license and surrounding systems. The defendants do not dispute that the LAC property belongs to LAC, nor have they claimed ownership over any part of that property. Indeed, the defendants attempted to purchase the LAC property, but negotiations proved unsuccessful. Had LAC not been the rightful owners/licensees of the property, there would have been no need for negotiations concerning a purchase from LAC by the defendants of the said property. I note that LAC’s licensing agreement contains restrictions against assigning, sublicensing or permitting the use of Infolease by third parties, as set forth in paragraph 12, above. Thus, a majority of LAC’s shares would have to be purchased by the defendants in order to exercise effective control over LAC’s assets. No such purchase was ever effected between the parties.

[32] While the defendant submitted that on cross-examination on the affidavit of Mr. Baca, he was unable to produce any bills, receipts or other documentation proving ownership of the hardware, there was equally no evidence to suggest that it was not the plaintiffs’ property or that it was owned by the defendants. I do not accept the defendants’ submissions in this regard.

[33] I am further satisfied that there are substantial grounds for the claim that the property is being unlawfully detained by the defendants. The evidence before this Court indicates that the defendants have had possession and control of the LAC property to the exclusion of LAC since approximately January of 2016 and have failed to pay LAC for the use of the Infolease system since September 2016. There is no dispute before this Court that the defendants are in possession of the LAC property. While the plaintiffs have requested the return of the LAC property on numerous occasions, the defendants have refused to do so. Based on the evidence before me, I do not accept the defendants’ submissions that no request was ever made to them to return the property.

[34] I am satisfied that the balance of convenience in this case favours the return of the LAC property by the defendants to LAC. Without return of its property, LAC cannot operate its business nor generate income. It has contracts under negotiation with new clients but is unable to realize on them until it has possession and control of the LAC property. LAC has proposed options to respond to the concerns raised by the defendants as regards return of the property to LAC, as set forth at paragraphs 24-25, above. These include permitting the defendants to download all their client information or returning to the relationship of the parties prior to LAC moving into the OHCS premises, when the relationship was simply that of provision by LAC of the Infolease services to OHCS for payment of said services pursuant to the Administration Agreement. Based on the foregoing, I find that LAC will suffer serious harm if the property is not returned, such that the balance of convenience favours LAC in the return of the property to it.

[35] It would seem most appropriate pending trial and until the defendants are able to find a replacement system if they so desire, which they stated in their materials may take six months or so, that the parties resume the relationship they had prior to LAC moving into the OHCS premises, with LAC providing its administrative services and the defendants paying for same. Any issue that the defendants may have regarding the amount of said payments to be made to LAC is an issue to be determined at trial and any adjustments in that regard would be made at trial.

[36] As regards the posting of security, this was not vigorously argued by either side. The responding party defendants acknowledged that pursuant to Rule 44.03, the court may, but is not required to, order security, and simply submitted that it should be ordered in this case consistent with Rule 44 and CJA section 104. The moving party plaintiffs submitted that security is generally ordered where there is a dispute over ownership, which does not exist here where there is no real dispute over ownership.

[37] I have considered the case law relied upon by the parties, including Clark Door, supra and Knew Order Co., supra. I do not find in the circumstances of this case that security needs to be posted. There is no serious argument as regards ownership of the property and no serious or irreversible consequences which need be protected or indemnified against, particularly given the proposals of LAC, as set forth at paragraphs 24 and 25, above. As a result, no security is required or posted by the plaintiff.

[38] Order to go as sought by LAC granting an interim interlocutory order requiring the defendants to deliver up to the plaintiffs the LAC property, as defined in Schedule A of the supporting affidavit to the motion record, forthwith and, at latest, within 10 days of the date of this decision, and until further court order or determination of the issues raised in the action.

Costs

[39] The plaintiffs, as the successful parties, are entitled to costs, which they seek on a partial indemnity basis in the total amount of $14,403.59. This is slightly less than the amount sought by the defendants in their Bill of Costs and is reasonable and proportionate in all of the circumstances. I grant the plaintiffs their costs in the amount of $14,403.59, all inclusive, payable forthwith.

Carole J. Brown, J.

Date: May 15, 2017