Court File and Parties
COURT FILE NOs.: 20/16 and 39/16 DATE: 05 30 2017
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: KATHRYN ALEXANDRA ARMSTRONG v. ROBERT BRYAN HICKS
BEFORE: LEMAY J.
COUNSEL: J. Byrne, Counsel for the Applicant E. Cohen, Counsel for the Respondent
HEARD: May 26th, 2017
ENDORSEMENT
[1] Dr. Bryan Hicks is a veterinarian specializing in the care of large animals. Dr. Kathryn Armstrong is a veterinarian specializing in the care of small animals. They were in a common-law relationship for a period of 22 years, but were never married.
[2] They ran a number of veterinary businesses, and were also involved in a fitness business. However, their relationship ended in the early summer of 2015. Since that time, there have been ongoing corporate and family law proceedings, including a failed attempt at collaborative mediation in the fall of 2015.
[3] Ultimately, a mediated settlement was reached on May 27th, 2016 and outlined in a consent Order. This agreement required Dr. Hicks to obtain financing to buy out the interests of Dr. Armstrong in the businesses and properties. Dr. Hicks has spent the last year working on obtaining financing, and I understand that he has obtained it and that the transaction will close once this decision is released.
[4] There are two issues that have arisen between the parties since the agreement was signed in 2016. First, Dr. Hicks alleges that Dr. Armstrong did not disclose to him all of the debts of the businesses that she incurred prior to the agreement being reached. As a result, Dr. Hicks is seeking a reduction in the amounts he is to pay Dr. Armstrong on the basis of this non-disclosure. Second, Dr. Armstrong is alleging that Dr. Hicks should have obtained financing earlier. As a result, she is claiming that interest, damages and costs should be added to the amounts owing to her by Dr. Hicks.
[5] For the reasons that follow, I would not make any of the adjustments sought by either Dr. Hicks or Dr. Armstrong, except that Dr. Armstrong is to be paid interest on the amounts owing to her in accordance with the terms of the consent Order.
Background
a) The Businesses
[6] Dr. Hicks is a large animal veterinarian. Dr. Armstrong is a small animal veterinarian. During the course of their relationship, each focused on providing clients with services relating to their own specialties.
[7] The parties ran two main veterinary clinics, the Arthur Veterinary Clinic and the North Wellington Animal Hospital. Both clinics were run by professional corporations, and there was a third company, the Arthur Veterinary Clinic Incorporated, that owned some of the parties’ real estate. In addition, the parties owned some real estate personally.
[8] In the last few years of the parties’ relationship, Dr. Armstrong also ran a gym business. That business, which was owned by both parties, and by a third party, Shawn MacKenzie, lost significant amounts of money. As a result, the parties found themselves in some financial difficulties.
[9] The parties had considerable indebtedness to the Royal Bank of Canada (“RBC”). The parties separated effective July 31st, 2015. They continued to run their businesses together for a period of time.
[10] However, in November of 2015, Dr. Hicks started to run the large animal practice more separately from the small animal practice, and Dr. Armstrong set up a separate bank account for receipts from her portion of the veterinary business. It is not clear to me precisely what happened, but I do not need to resolve these factual issues in order to resolve the questions on this motion.
[11] It is, however, clear that RBC was concerned about its security, and took steps to monitor the affairs of the various companies. RBC also took steps to enforce its security in the spring of 2016. However, RBC has signed various forebearance agreements with the parties, and has not yet brought proceedings to enforce its security. I understand that the refinancing obtained by Dr. Hicks will result in RBC being fully paid.
b) The Procedure and the Settlement
[12] As a result of the financial problems, and the failure to reach an agreement through collaborative mediation, the parties commenced various actions. Dr. Armstrong commenced a family law proceeding, and Dr. Hicks responded by commencing an application under the oppression remedy provisions of the Ontario Business Corporations Act.
[13] These matters originally came before Van Melle J. on March 21st, 2016, who requested that Daley R.S.J. appoint a case management judge. Van Melle J. also issued an interim Order on consent, outlining details of the operation of the veterinary clinics. I was appointed the case management judge for both actions, and conducted a case conference with the parties. This resulted in an interim Order dated April 27th, 2016. I then conducted an all-day settlement conference with the parties on May 27th, 2016. The parties reached final minutes of settlement that day.
[14] Dr. Hicks agreed to buy out Dr. Armstrong’s interests in the businesses, as well as paying monthly spousal support for a period of just over three years. The buyout was scheduled to happen on the earlier of sixty (60) days after May 27th, 2016 or when financing took place. The buyout has not yet happened, but is scheduled to happen when the transaction closes later this week.
c) Events Since the Settlement
[15] Dr. Hicks has spent a great deal of time working on obtaining financing for this transaction. In the meantime, he has continued to make the monthly support payments that were set out as part of the agreement as well as servicing the debt currently owed to RBC.
[16] In December of last year, Dr. Hicks raised the issues of whether certain expenses that he had discovered should be deducted from the amounts owing to Dr. Armstrong. In particular, these expenses were:
a) Unremitted HST in the sum of $47,097.77 b) Invoices for snow clearing services in the sum of $6,102.00 c) Advertising invoices for Booster Magazine in the sum of $3,039.87. d) Bad and/or uncollectable debts from Spoil Me Pets in the amount of $26,989.64.
[17] Dr. Hicks also made a claim for the accounting costs he incurred in sorting out the businesses affairs, as well as for legal fees associated with the delay in completing the transaction.
[18] Given the delay in arranging the financing, and paying out her settlement funds, Dr. Armstrong sought the payment of interest and legal costs. Specifically, Dr. Armstrong seeks interest in the sum of $2,870.98 and unnecessary legal fees in the sum of $10,354.19.
[19] As a result of these issues, counsel asked the Court to interpret the agreement that had been reached and address these outstanding issues. I reminded counsel that I had been the judge at the settlement conferences on both April 27th, 2016 and May 27th, 2016. Both counsel confirmed in writing that they were content to have me address these outstanding issues.
[20] Both counsel also agreed to an expedited process to resolve these issues. As part of that process, each side could file up to two (2) Affidavits from two different witnesses. Reply Affidavits were also permitted. The parties were then permitted fifteen (15) minutes of examination in chief of each affiant to supplement their affidavits, and the other side was permitted an hour cross-examination of each affiant.
[21] I received an Affidavit and a reply Affidavit from each of the principals. In addition, Dr. Hicks relied on two previous Affidavits that he had filed with the Court, an Affidavit from Trevor Seip. Mr. Seip was the bookkeeper who was brought in by Dr. Hicks after April of 2016 in order to put the records of the various corporations in order.
[22] In addition, at the hearing on May 26th, 2017, I had both of the parties confirm on the record that they were content to have me address the outstanding legal issues in a decision in spite of the fact that I had been the settlement conference judge. They both also confirmed that they obtained legal advice on this issue although that advice was, of course, not disclosed.
[23] Finally, counsel advised me that financing is now in place, and that this transaction can close. It is, in fact, scheduled to close later this week. Counsel also advised me that, for technical reasons relating to the structuring of the transaction, a decision outlining the precise amount that Dr. Hicks owes Dr. Armstrong is required before the transaction can be completed, which is why this decision is being issued so quickly. I will now turn to resolving the issues that present themselves.
Issues
[24] The claims that Dr. Hicks and Dr. Armstrong have made in this motion reveal two issues:
a) Did Dr. Armstrong breach the parties agreement by not disclosing various debts? b) Should Dr. Armstrong be entitled to damages for breach of contract as a result of the failure of Dr. Hicks to obtain financing, and pay the monies owing?
Issue #1- Did Dr. Armstrong Breach the Agreement By Not Disclosing Various Debts?
[25] The interpretation of a Court Order should be approached in a contextual manner, which a view to achieving the Order’s objective (see Boily v. Carleton Condominium Corporation 2014 ONCA 574). Each word must be given meaning, and the document must be read as a whole.
[26] Dr. Hicks asserts that none of the debts described in paragraph 16, above, were disclosed to him by Dr. Armstrong. Dr. Hicks argues that this non-disclosure on the part of Dr. Armstrong triggers paragraph 18 of the minutes of settlement, and results in Dr. Armstrong being liable for these non-disclosed debts.
[27] Determining whether Dr. Armstrong is liable to pay these debts requires consideration of the precise wording of three provisions in the May 27th, 2016 Consent Order. Paragraphs 10, 11, 12 and 18 of that Order read as follows:
The Respondent Robert Bryan Hicks shall assume full responsibility for all accounts payable for any of Arthur Veterinary Clinic Inc. (“AVCI”), Arthur Veterinary Professional Corporation (“AVCProCO”), North Wellington Animal Hospital (“NWAH”), and 2233840 Ontario Inc, (“223”), which accounts include but are not limited to: (a) any Veterinary Purchasing invoices, including the account opened by the Applicant Kathryn Alexandra Armstrong when she operated the business; (b) any amounts owing to Ward and Uptigrove; or (c) any wages, benefits, or vacation pay owed to any employee.
For greater certainty, if any accounts are in the name of the Applicant Kathryn Alexandra Armstrong, but were for business related items for AVCI, AVCProCO, NWAH, and 223, the Respondent Robert Bryan Hicks shall be responsible for these as well.
The Respondent Robert Bryan Hicks shall provide to the Applicant Kathryn Alexandra Armstrong a complete release or indemnity in relation to any monies owed by AVCI, AVCIProCo, NWAH, and 223, save and except any lease obligations entered into by the Applicant Kathryn Alexandra Armstrong on a personal capacity with respect to 223, in a form approved by counsel, including any debts associated with: (a) corporate taxes owing; (b) property taxes owing; or (c) HST or source deductions owing.
To be clear, This Order is meant to be a comprehensive resolution of all outstanding issues between the Respondent Robert Bryan Hicks and the Applicant Kathryn Alexandra Armstrong, and neither will have any course of action as against the other in relation to these matters If it is discovered after these Minutes are signed that a further non-disclosed liability attaches to the Applicant Kathryn Alexandra Armstrong, which is related to the AVCI, AVCProCo, NWAH, or 223, it is understood that the Respondent Robert Bryan Hicks is not to assume responsibility for same, subject to paragraphs 10 and 11 herein.
[28] In my view, a review of those paragraphs demonstrates a number of points. First, I note that paragraph 12 makes specific mention of HST. As a result, it is clear from the parties’ agreement that they were both aware that there would be some HST outstanding at the time the transaction closed.
[29] Second, I note that Dr. Hicks had been in control of the businesses for approximately a month at the time that the May 27th, 2016 Order was agreed to. In testimony, Mr. Seip confirmed that a review of the records that were in the control of Dr. Hicks would have shown whether HST had been paid from those accounts or not. As a result, it would have been open for Dr. Hicks to ascertain that there was a significant amount of HST that had been unpaid.
[30] Third, paragraph 18 states that Dr. Hicks is not to assume responsibility for any non-disclosed liabilities that attach personally to Dr. Armstrong. Dr. Hicks argues that this paragraph clearly indicates that, since the specific amount of HST owing was not disclosed, this clause permits him to claim indemnity for that HST from Dr. Armstrong. I disagree because the words “non-disclosed liability” do not speak to the amount of a liability. Instead, these words speak to types of liabilities. The fact that HST was owing was clearly within the contemplation of Dr. Hicks when he agreed to the May 27th, 2016 Order, and it was a type of liability that had been disclosed to him prior to the minutes of settlement being executed. This provision does not allow him to seek indemnity for these amounts. Dr. Hicks’s claim for HST is dismissed.
[31] The claims for snowplowing and for advertising can be dealt with together. Paragraph 10 of the consent Order clearly states that Dr. Hicks will become responsible for all of the accounts payable for all of the businesses. There is no limitation on Dr. Hicks’s responsibilities in regards to accounts payable for the businesses.
[32] The proper, contextual, way to read paragraphs 10, 12 and 18 of the Order is to read them as addressing different types of debts and obligations. Paragraph 10 addresses the accounts payable of the businesses. Paragraph 18 addresses any undisclosed obligations that may attract personal liability. The accounts payable for snowplowing and for advertising do not attract personal liability and are covered by paragraph 10 of the agreement. As a result, Dr. Hicks is not entitled to a deduction for these amounts even if they were not disclosed, as they are simply accounts payable of the businesses.
[33] I am supported in this conclusion by the fact that paragraph 18 clearly states that the ability of Dr. Hicks to avoid responsibility for personal debts accruing to Dr. Armstrong is subject to paragraphs 10 and 11. This suggests that any conflict between the two provisions should be resolved by giving precedence to paragraph 10. This appears to fit the context of the transaction, which is that Dr. Hicks was obtaining both the benefits and the liabilities of the businesses. It would require clear wording for Dr. Hicks to be able to avoid one the businesses’ liabilities, and such wording is not contained in paragraph 18.
[34] This brings me to the question of the bad/uncollectable debt from Spoil Me Pets, which was a business owned by Dr. Armstrong’s sister. I also understand that Dr. Armstrong had some involvement in this business. This is not an account payable or a debt, so it is not covered by any of the provisions set out above. Indeed, the agreement is silent about what happens to uncollectable accounts receivable.
[35] When the order is considered as a whole, however, the answer is clear. The purpose behind this Order was to transfer the businesses to Dr. Hicks so that he could attempt to make a going concern of them. All of the profit that may come from that transfer from May 27th, 2016 is his to keep. Conversely, Dr. Hicks bears the responsibility for the losses unless the agreement between the parties specifically modifies that intention. Since the agreement is silent, it must be presumed that Dr. Hicks will bear the responsibility for this bad debt if he has no legal way to enforce payment of it outside of these proceedings.
[36] I also note that paragraph 18 speaks to undisclosed liabilities. This was not a liability. It is, potentially, an asset of the business if it can be realized upon.
[37] This brings me to Dr. Hicks’s claim for damages as a result of accounting fees that he has spent in bringing the corporations books and accounts into good standing. This is a claim that is directly related to Dr. Armstrong’s claim, so I will address it in the next section.
Issue #2- Is Dr. Armstrong Entitled to Damages because the Agreement has not yet Closed?
[38] Dr. Armstrong is seeking compensation for legal costs incurred as a result of the delay in paying out the sums owing to her under the agreement, as well as other expenses and interest. Dr. Hicks has a corresponding claim based on the problems with the accounting records that he had to resolve when he took the businesses over.
[39] In my view Dr. Armstrong is not entitled to any of these costs. My analysis starts with the issue of financing. While the agreement between the parties clearly states that $350,000.00 is to be paid to Dr. Armstrong by the earlier of 60 days after the transaction closed or when financing was completed. It is clear that Dr. Hicks has not complied with this provision. That failure is the basis of Dr. Armstrong’s claim for costs.
[40] However, Dr. Hicks has made his best efforts to obtain financing in this case. This was a very complicated transaction involving nearly $3 million in debt, seven properties and four businesses. It is clear from the materials that have been filed that the lenders would want to complete due diligence on this transaction. Given the very significant debtload in this transaction, and the fact that RBC had entered into forebearance agreements, it is clear that lenders would have wanted complete financial statements before agreeing to finance this transaction.
[41] This brings me to the evidence about the bookkeeping practices at the various businesses. It is clear that, as of July 31st, 2015, the businesses lost their longstanding bookkeeper, Melissa Thomas. The parties were also separating their interests at that time, and attempting collaborative family mediation.
[42] The failure of the collaborative family mediation, and decisions that both parties made, resulted in financial records for the fiscal year ending July 31st, 2016 that required some significant work to straighten out. Dr. Armstrong contributed to this problem by running a significant portion of the revenue for all of the businesses through a new bank account. This required time to unwind. Dr. Hicks contributed to this problem by unilaterally separating the large animal business from the rest of the business. This delay is the responsibility of both parties and should not result in compensation in costs for one party.
[43] As a result of these recordkeeping and accounting problems, Dr. Hicks was unable to complete the transaction until the accounting issues were resolved and financing was obtained. This left Dr. Armstrong with two alternatives. First, she could have repudiated the transaction and sought to unwind the agreement. The result of that would have likely been foreclosure on the part of RBC, and a loss to both parties. Dr. Armstrong’s second choice was to attempt to complete the transaction. That is the choice she has made, but it was her choice. I do not see that choice resulting in damages payable to Dr. Armstrong, unless she can prove those damages.
[44] Second, the interest that Dr. Armstrong is seeking would amount to less than $3,000.00. This amount is less than the interest that Dr. Armstrong is entitled to under paragraph 28 of the Consent Order. As a result, Dr. Armstrong has not suffered any loss in respect of interest.
[45] Then there are the legal costs. The legal fees incurred since the settlement was signed were incurred for a number of reasons, including to protect Dr. Armstrong’s position as the transaction was processed. There is nothing in the agreement itself that would entitle Dr. Armstrong to recoup costs because of the late completion of the agreement.
[46] Counsel for Dr. Armstrong argues that Dr. Hicks’ failure to complete the transaction in a timely way is a breach of contract. While I accept that, I noted above that Dr. Armstrong had the option to decide whether to treat this contract at an end or to attempt to have it fulfilled. She chose to have it fulfilled, which ensures that she receives the payments that she was entitled to under the contract. The interest provision in the agreement is designed to compensate her for the delays in receiving her money. Absent express language in the contract, I am not prepared to compensate Dr. Armstrong for legal costs incurred as both sides made good faith efforts to complete the terms of their agreement.
[47] As a result, Dr. Armstrong’s claim for additional compensation for costs and expenses is dismissed except that she is entitled to interest on the amount owing under the agreement at 2%, which is the interest rate set out in paragraph 28 of the agreement between the parties.
[48] I note that Dr. Hicks was also seeking compensation for all of the money that he spent on accounting advice, legal assistance and other help. I am dismissing his claim for the same reasons that I have dismissed Dr. Armstrong’s claim in this respect. However, there is one further reason for dismissing Dr. Hicks’ claim. All of these professional costs were costs that he would have had to absorb in order to complete the transaction in any event, and these costs were foreseeable on May 27th, 2016 when Dr. Hicks signed the agreement. If he had wished for Dr. Armstrong to make a contribution to those costs, he could have negotiated that as part of the agreement. He did not do so, and should not be entitled to obtain indemnity for those costs at this late date.
Conclusion
[49] For the foregoing reasons, I make no changes to the Order of May 27th, 2016.
[50] Success on this motion appears to me to be divided. As a result, if either party wishes to make costs submissions, they are to do so by no later than June 13th, 2017. Those submissions are to be no more than two (2) double-spaced pages in length, exclusive of bills of cost and caselaw.
[51] Reply submissions from either party are due by June 20th, 2017 and are to be no more than one (1) double-spaced page.
[52] Finally, as I have noted, this was a very complex transaction. I would be remiss if I did not observe in writing, as I did in open court, that I am grateful to both counsel for the good humour, good faith and goodwill that they demonstrated throughout these proceedings.