Court File and Parties

COURT FILE NO.: CV-15-528272 DATE: 20170707 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

FLIRTY GIRL FITNESS INC. Plaintiff – and – HOTTIE BODY BOUTIQUE INC., GARDINER ROBERTS LLP, DAVID EPSTEIN, MICHELLE EPSTEIN and KRISTA KNEE Defendants

COUNSEL: Christopher Stienburg for the Plaintiff Sean Dewart and Rebecca Glass for the Defendants David Epstein and Gardiner Roberts LLP Aaron Franks for the Defendants Michelle Epstein and Hottie Body Boutique Inc. Michael Kril-Mascarin for the Defendant Krista Knee

HEARD: June 13, 2017

PERELL, J.

REASONS FOR DECISION

A. Introduction

[1] Two sisters, Krista and Kerry Knee, incorporated Flirty Girl Fitness, a women’s fitness studio in Toronto. Kerry is now the sole director, and she has directed Flirty Girl Fitness to sue her sister for breach of fiduciary duty, conspiracy, and conversion. Flirty Girl Fitness also sues, David Epstein and Gardiner Roberts LLP, its former corporate lawyers, Michelle Epstein, who is Mr. Epstein’s spouse, and Hottie Body Boutique Inc., Michelle Epstein’s corporation, which took over Flirty Girl Fitness’s Toronto studio operation in 2013.

[2] Flirty Girl Fitness sues all of the Defendants for conspiracy to dispossess it of all its assets and convert them to their own use. It sues Krista, Mr. Epstein, and Gardiner Roberts LLP for breach of their respective fiduciary duties. It sues Mr. Epstein and his law firm for professional negligence. Flirty Girl Fitness claims damages or compensation of $180,440.15 plus punitive damages.

[3] Flirty Girl Fitness brings a summary judgment motion for liability to be followed by an assessment of damages. Without bringing cross-motions for summary judgment, the Defendants seek a summary judgment dismissing all of Flirty Girl Fitness’s claims.

[4] For the reasons that follow, I dismiss the action against all of the Defendants.

B. Evidentiary Record

[5] The evidentiary record for the summary judgment motion was comprised of the following:

a. An affidavit sworn by David Epstein dated September 13, 2016. He was cross-examined. b. An affidavit sworn by Michelle Epstein dated September 15, 2016. She was cross-examined. c. Affidavits sworn by Kerry Knee dated August 5, 2016 and October 4, 2016. She was cross-examined. d. An affidavit sworn by Krista Knee dated September 26, 2016. She was cross-examined.

C. Factual and Procedural Background

[6] In 2005, two sisters, Krista and Kerry Knee, incorporated Flirty Girl Fitness to operate as a fitness studio in downtown Toronto. Each came to own a 25.5% interest, and there were several passive shareholders that invested in the business.

[7] David Epstein, a lawyer and partner at Gardiner Roberts LLP, became the corporate lawyer for Flirty Girl Fitness, and he and his wife Michelle, became friends with the Knee sisters.

[8] Flirty Girl Fitness operated out of premises at 462 Wellington Street in Toronto. Beginning in 2006, Mrs. Epstein worked from time to time as a fitness instructor for the studio.

[9] In 2006, Kerry moved to Chicago to start Flirty Girl Fitness USA, LLC, which operated two fitness studios in Chicago. Krista stayed in Toronto, and she managed the Toronto studio. Kerry authorized Krista to make the decisions about the Toronto operation and to give instructions to Mr. Epstein. From time to time, Mrs. Epstein acted as studio manager and assisted Krista in managing the business.

[10] Between 2005 and 2012, Flirty Girl Fitness’s business grew, and it was a modest success for some time.

[11] Flirty Girl Fitness’s lease at the Wellington Street premises was set to expire on December 14, 2012, and although the business had lost $11,338 in 2011 and would lose $67,802 in 2012, Krista was confident she could turn the business around and make it prosper. She wanted to renew the lease. Kerry’s view was that this was a mistake, and she felt they should move the studio to better premises, but the decision was made to press forward with lease negotiations with the Wellington Street landlord.

[12] Around this time, Kerry’s personal and business affairs in Chicago were in a mess. One of the two studios in Chicago was in the throes of bankruptcy, the other studio was under construction, and there were major cash-flow issues. Kerry was involved in a custody dispute for her son, and her immigration status in the United States was uncertain. These unfortunate stressful circumstances were to continue for some time and indeed got worse.

[13] With Mr. Epstein’s assistance, Krista began negotiations with the landlord at Wellington Street to renew the existing lease and it was extended for two months to allow for negotiations.

[14] However, by February 2013, it became apparent that the lease would not be renewed. The landlord decided that it did not wish a fitness facility in its building because of complaints from other tenants about noise during the fitness routines.

[15] Flirty Girl Fitness now found itself in perilous circumstances. Its prospects for locating alternate space were bleak because it needed premises in downtown Toronto that could be outfitted with a change room, showers, a large high ceiling open space, and soundproofing, because loud music was played during its fitness classes. Despite these challenges, Krista was able to find suitable premises at 580 King Street West.

[16] Later in February 2013, Krista signed an agreement to lease. The agreement was conditional on approval by the parties’ lawyers. Flirty Girl Fitness paid a $30,000 security deposit. The money was lent by Mr. Epstein personally because Flirty Girl Fitness had no cash. There was no security for Mr. Epstein’s loan, which was simply recorded in the accounts of the business.

[17] Krista estimated that it would cost between $200,000 and $250,000 to fit up the new premises, pay for leasehold improvements, purchase new equipment, and to have adequate working capital. Thus, Flirty Girl Fitness needed financing of between $300,000 and $400,000 to continue in business. Krista hired Cranson Capital to search for a source of financing.

[18] Despite Kerry’s assertions to the contrary, I find as a fact that Krista kept Kerry advised about all these developments.

[19] In late February 2013, Krista applied for a $300,000 small business loan from the Royal Bank, but the application was rejected. Applications to two other banks were also rejected. Krista turned again to Mr. Epstein and asked whether he would guarantee the loan in exchange for a 40% interest in the corporation, and he agreed. Kerry agreed to this plan, but the Royal Bank again declined to make the loan.

[20] Other efforts to secure adequate financing were unsuccessful. Meanwhile, the landlord at Wellington Street was grudgingly agreeing to extensions of the existing lease while Flirty Girl Fitness was attempting to obtain financing for a new studio.

[21] Krista prepared a spreadsheet for prospective lenders. She projected earnings before income taxes, depreciation and amortization for the March 2014 year-end would be $178,140 on an assumed income of $1.3 million, which was 54% more than the income for the March 2012 year-end, and 70% more than the income for the March 2013 year-end.

[22] On May 13, 2013, Business Development Bank of Canada (“BDC”) offered to lend $100,000 to Flirty Girl Fitness, but it was unable to find another financier, and Cranson Capital advised that to salvage the business, Krista and Kerry should incorporate a new company with a clean balance sheet.

[23] Since Flirty Girl Fitness did not qualify for any financing other than the BDC loan, Krista and Mr. Epstein discussed the options of closing the business and liquidating the assets, finding a third-party investor with at least $200,000 to invest, or incorporating a new corporation with Mr. Epstein as an investor to apply for financing for the business which would carry on under the banner of Flirty Girl Fitness.

[24] The decision was made to move forward with a new corporation, and on May 17, 2013, Hottie Body Boutique Inc. was incorporated with Mr. Epstein as the incorporating director. Mr. Epstein personally guaranteed the $100,000 BDC loan to Hottie Body Boutique and Cranson Capital continued efforts to find more financing.

[25] On May 28, 2013, Mr. Cranson of Cranson Capital told Krista and the Epsteins that the Toronto Dominion Bank had approved a loan application by Hottie Body Boutique and had agreed to loan $195,075 to fund 75% of the anticipated costs for leasehold improvements and to provide a $10,000 operating line. The TD Bank required a cash infusion of approximately $150,000 and required that the Epsteins personally guarantee the loan.

[26] Around this time, an agreement was reached between Krista and Mr. Epstein that he and his wife would purchase some of Flirty Girl Fitness’s business assets. Mr. Epstein explained to Krista that he could no longer act for the corporation or for her. He did not, however, until later, insist that the sisters obtain independent legal advice.

[27] Mr. Epstein went ahead and negotiated an agreement with Krista who, in turn, kept Kerry advised. I find as a fact that Kerry knew about and approved of this plan.

[28] The agreement between Krista and Mr. Epstein was that after Hottie Body Boutique had approved financing: (a) Flirty Girl Fitness would assign its lease of the King Street premises to Hottie Body Boutique; (b) Hottie Body Boutique would assume Flirty Girl Fitness’s liability for all prepaid customer contracts; (c) Hottie Body Boutique would assume Flirty Girl Fitness’s indebtedness on its existing $100,000 BDC loan and Mr. Epstein’s $30,000 loan; (d) Hottie Body Boutique would reimburse Flirty Girl Fitness for any amounts paid to outfit the King Street location; (e) Hottie Body Boutique would offer employment to the Flirty Girl Fitness employees obviating the need for the old business to make severance payments; (f) Flirty Girl Fitness would transfer ownership of its equipment and office furniture; (g) Hottie Body Boutique would assume the car lease; (h) Flirty Girl Fitness would grant Hottie Body Boutique a licence to use the name Flirty Girl and to use its trademarks and website; (i) Flirty Girl Fitness would transfer its customer contract information to Hottie Body Boutique; and (j) Hottie Body Boutique would pay $60,000 in monthly installments of $4,000 in royalty payments.

[29] Krista insisted that the $60,000 be paid because she wished to use the money to remove her exposure as a guarantor of a business loan to Flirty Girl Fitness.

[30] Mr. Epstein told Krista that it was important for Hottie Body Boutique to pay fair market value for the assets being transferred so that creditors could not complain of a fraudulent conveyance. He explained that there was no prospect of the shareholders in Flirty Girl Fitness saving their investment in the company but the company would obtain royalties and its brand would be preserved for future expansion. At that time, Krista told Kerry that Flirty Girl Fitness had liabilities of $246,083.64, including $195,470 for prepaid services, and it had assets of $58,432.46.

[31] Mr. Epstein went ahead to implement the arrangement. He made his wife, Michelle, the sole shareholder of Hottie Body Boutique with the intention to issue shares to Krista and Kerry later when the corporation was operational and the parties’ contributions were clarified.

[32] The idea at the time, as revealed in an email message between Krista and Kerry on August 7, 2013, was that Hottie Body Boutique’s sunk costs would be repaid and then Krista and Kerry - but not the other Flirty Girl Fitness investors - would “switch over” to having an ownership interest in Hottie Body Boutique.

[33] On August 7, 2013, Krista emailed the draft of an email letter to Kerry that she proposed to send to Flirty Girl Fitness’s other shareholders indicating that the business was closing and that they would receive nothing from their investment in Flirty Girl Fitness, at least in the short term. The letter was sent by email to the shareholders on August 9, 2013, and copied to Kerry. The letter stated:

To all shareholders of Flirty Girl Fitness Inc.

After 8 years at the Wellington Street location, our lease will expire next month and the location will be closing. We had numerous meetings and discussions with the Wellington Street landlord, but in the end, we were not able to work out reasonable renewal terms. The landlord did not really want us to renew as the landlord thinks the building is really better suited for office space and a fitness facility is not the best use of the space.

We had some leads on alternate space, but Flirty Girl does not have sufficient cash on hand to be able to build out new space. In order to obtain cash for a build out of new space, we discussed new investment with parties who previously expressed an interest in Flirty Girl but were unable to conclude any new deals. As you are aware, the Wellington Street location never achieved significant profitability. With the current financial numbers, it was very difficult to attract new investment. We also applied for bank financing but were rejected.

There is some good news in that Flirty Girl Fitness Inc. was able to reach an agreement with a new fitness company where it will license the rights to the Flirty Girl name for a fee. They will run as a Flirty Girl using the Flirty Girl name and website in exchange for a royalty. The royalty will be moderate to start until the new facility proves it can be successful, but it is our hope that this model works and that many new facilities could be opened under this model. If this is successful, then Flirty Girl Fitness Inc. could receive significant royalties with little effort. Should any of you have any questions with respect to this email then please call me anytime.

[34] It should be noted that the email message does not indicate that the ultimate intention was that Krista and Kerry would have a shareholding in the new fitness company once the dust had settled.

[35] In an email exchange between the sisters, Kerry predicted that the other shareholders would sue, which prediction turned out to be incorrect.

[36] The plan went ahead, and Hottie Body Boutique assumed Flirty Girl Fitness’s liabilities for its bank loan and for $195,470 in prepaid services owed to members. The equipment and client information was transferred and preparations were made to open the new studio. In implementing the transaction, Flirty Girl Fitness did not pass any director’s or shareholder’s resolutions.

[37] On August 17, 2013, Hottie Body Boutique opened for business at the King Street premises. Krista was offered a position as manager. Kerry travelled to Toronto for the opening.

[38] Kerry then returned to Chicago, where her personal and business affairs continued to suffer. She was being evicted from her apartment. One of the investors in the United States accused her of running a Ponzi scheme, and the FBI were investigating. And, as I will detail below, in the fall of 2013, there was a falling out between the sisters. Krista, concerned about the threat of lawsuits in the United States, wished to have her interest bought out in exchange for Kerry’s interest in Flirty Girl Fitness in Canada. The proposal angered Kerry, who believed that she was being squeezed out of the business in Canada and that her sister was being greedy and disloyal.

[39] On October 17, 2013, Kerry and Mr. Epstein spent approximately an hour on the telephone discussing the Hottie Body Boutique transaction. Kerry incorrectly claimed that she had never been told that the lease for the Wellington Street property could not be renewed, or that Flirty Girl Fitness had been unable to obtain a loan to build out the new studio. It was a bitter and angry conversation.

[40] On October 18, 2013, Mr. Epstein sent the following email to Kerry:

I’m really surprised at that call yesterday. You know the incredible effort and dedication it takes to set up a studio. That Krista was able to pull it off and find somewhere for FGF to go instead of permanently losing Flirty Girl in Canada was nothing short of amazing. … I am just as shocked you could be angry with me. I have invested my own money and taken all of the financial risk. I have taken on considerable debt and while I hope this investment works out for me in the long run, the immediate benefits to FGF should be obvious. …. I thought you had been informed that Wellington had to close its doors and that FGF was unable to get a loan for a new studio. I’m surprised to hear you suggest that you did not know what was going on. I asked Krista about it and she said that you had been informed as [sic] these facts. I get that you only had the basics of the deal and not the full terms but those terms have yet to be settled. …. I had assumed that you were generally on board with everything and you were leaving [it] to Krista to complete the project. ….

[41] On October 21, 2013, the email exchange between Kerry and Mr. Epstein continued. Kerry complained again that she did not know what was going on and that she had not been fully informed by her sister. Her email message stated:

Yes, David I am very upset about the whole thing. Krista put herself in her own mess in Toronto. I told her last year that the lease was terrible and that she had to get out and find a new space. She ignored me and left everything to the last minute and had no choice but to scramble. My plate was too full to take on her responsibilities too. …. As our attorney for FGF, I expected you to represent FGF and us both equally. But when we spoke you were a very different David. You had no interest in discussion [sic] anything remotely FGF related and were clearly the lawyer for HBB and Krista. I am upset that you never spoke to me about this and I wasn’t copied on even a single email about this. I founded FGF, yet major decisions were made about the company without my involvement whatsoever. All Krista told me [was] that the loan did not go through but you were going to sign for a loan and we would keep our original equity and that royalties would be going to FGF Inc. She neglected to mention that our equity was going to drop from 25.5 each to 25 thereby taking away our control. She neglected to mention that you own HBB 100% and that some point into the future you would give us shares. She completely left out the high salary she had negotiated for herself and that Michelle would be coming back at her original payroll too thereby eliminating profits. …. She neglected to tell me that HBB was to pay a mere $10K in royalties, a fraction of the industry standard. I still do not have a proper understanding of this deal. I know that I signed a loan for $100,000. I am shocked that Krista gave away everything we have, our members, our database, our brand, our assets with not even a single deal sheet in place and has left us to negotiate the royalties after the fact when we have nothing left to negotiate. And if I don’t agree with your minimal royalty terms, you plan to take everything I have created and will stick a new name on your brand and will do it all on your own. You also told me that you plan to create a new entity that would be sublicensing the brand and would be the one to collect the real royalties and the whole plan is to make sure that FGF get the minimum amount possible. I am supposed to thank you for this?

[42] Mr. Epstein responded by email that Kerry’s summary was completely inaccurate.

[43] In her affidavit, Kerry also deposed that she had not been aware that Hottie Body Boutique was controlled by the Epsteins, not Krista and herself, and that the Epsteins were holding shares in trust for Krista. I find as a fact that she did in fact know these facts.

[44] The next day, Mr. Epstein emailed Kerry saying that he was surprised by her hostility and by the assertions that she did not know that the lease could not be renewed or that Flirty Girl Fitness could not obtain financing. He offered to unwind the transaction by ceasing to use the Flirty Girl Fitness name and by returning the tangible assets that had been transferred. Nothing came of this proposal.

[45] Around this time, the sisters were squabbling about Kerry signing off on the transaction for a royalty agreement with Hottie Body Boutique and about Krista’s proposal that she no longer have an interest in the U.S. corporation in exchange for Kerry not having an interest in the Canadian Flirty Girl Fitness corporation. Heated email messages and text messages were exchanged.

[46] Mr. Epstein moved forward nonetheless, and on November 7, 2013, he provided Kerry and Krista with draft documentation to formalize the transaction. Both were advised to obtain independent legal advice. In light of the threat of litigation, Mr. Epstein indicated that if the transaction proceeded, he would look for an exchange of releases.

[47] The draft transaction documents included: (a) an assignment of the King Street lease for $14,000 (the amount spent on renovations); (b) an assignment and transfer of Flirty Girl Fitness’s liabilities and customer contracts; and (c) an agreement to pay $60,000, in 15 monthly installments of $4,000, for the licensing of the name "Flirty Girl" and for the use of the website.

[48] Kerry did not respond, and Mr. Epstein followed up on December 3, 2013. On December 9, 2013, Kerry wrote that she was not opposed to a trademark licensing deal with Hottie Body Boutique, but she was seeking legal advice about her concerns.

[49] Ultimately, Kerry refused to sign the documents, and no new offer was made by Mr. Epstein, and Hottie Body Boutique continued to operate using Flirty Girl Fitness’s name. It did not make the installment payments to Flirty Girl Fitness.

[50] The matter went quiet for a few months, until March 2014, when Wendy Greenspoon-Soer, a lawyer contacted Mr. Epstein to say that she had been retained by Kerry and Flirty Girl Fitness. They discussed Mr. Epstein’s desire to complete the transaction, but nothing came of this conversation and the matter went quiet again for a few more months.

[51] In May 2014, Krista filed an assignment in bankruptcy, leaving Kerry as the sole director of Flirty Girl Fitness.

[52] Another six or seven months passed, and in early 2015, the Epsteins and Krista discussed changing the name of Hottie Body Boutique’s business to remove the Flirty Girl Fitness brand.

[53] These conversations came to Kerry’s attention, and on April 17, 2015, she sent an email outlining her demands for Hottie Body Boutique’s use of Flirty Girl Fitness’s name and brand. She demanded $150,000 plus 5% of Hottie Body Boutique’s gross revenues on an on-going basis. On May 11, 2015, these demands were reiterated in a letter from Flirty Girl Fitness’s lawyer.

[54] On May 14, 2015, Flirty Girl Fitness sued. In its Statement of Claim, it alleges that the Defendants conspired to dispossess it of all its assets and convert them to their own use. It alleges that Krista, Mr. Epstein, and Gardiner Roberts LLP breached their respective fiduciary duties. It sues Mr. Epstein and his law firm for professional negligence. It claims damages or compensation for an alleged loss of $180,440.15 of assets or property allegedly taken from Flirty Girl Fitness plus punitive damages.

[55] On August 6, 2015, Hottie Body Boutique and Michelle Epstein delivered their Statement of Defence.

[56] On September 8, 2015, David Epstein and Gardiner Roberts LLP delivered their Statement of Defence.

[57] With respect to the alleged loss of $180,440.15, in her affidavit for the summary judgment motion, Krista has accounted for all but an $800 cheque payable to the Canada’s Bridal Show, for which she has provided an explanation.

[58] In June 2015, the Defendants changed the name of Hottie Body Boutique’s business to "Elle", the name of the Epsteins’ newborn daughter.

[59] Hottie Body Boutique Inc. experienced losses of $32,825 in 2014 and $8,577 in 2015. Its gross revenue for both years was less than $750,000.

D. Discussion and Analysis

1. The Test for Summary Judgment

[60] Rule 20.04(2)(a) of the Rules of Civil Procedure provides that the court shall grant summary judgment if: “the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence.” With amendments to Rule 20 introduced in 2010, the powers of the court to grant summary judgment have been enhanced. Rule 20.04(2.1) states:

20.04 (2.1) In determining under clause (2)(a) whether there is a genuine issue requiring a trial, the court shall consider the evidence submitted by the parties and, if the determination is being made by a judge, the judge may exercise any of the following powers for the purpose, unless it is in the interest of justice for such powers to be exercised only at a trial:

1. Weighing the evidence.
2. Evaluating the credibility of a deponent.
3. Drawing any reasonable inference from the evidence.

[61] In Hryniak v. Mauldin, 2014 SCC 7 and Bruno Appliance and Furniture, Inc. v. Hryniak, 2014 SCC 8, the Supreme Court of Canada held that on a motion for summary judgment under Rule 20, the court should first determine if there is a genuine issue requiring trial based only on the evidence in the motion record, without using the fact-finding powers introduced when Rule 20 was amended in 2010. The analysis of whether there is a genuine issue requiring a trial should be done by reviewing the factual record and granting a summary judgment if there is sufficient evidence to fairly and justly adjudicate the dispute and a summary judgment would be a timely, affordable and proportionate procedure.

[62] If, however, there appears to be a genuine issue requiring a trial, then the court should determine if the need for a trial can be avoided by using the powers under rules 20.04(2.1) and (2.2). As a matter of discretion, the motions judge may use those powers, provided that their use is not against the interest of justice. Their use will not be against the interest of justice if their use will lead to a fair and just result and will serve the goals of timeliness, affordability and proportionality in light of the litigation as a whole.

[63] At para. 22 of her judgment in the companion case of Bruno Appliance and Furniture, Inc. v. Hryniak, supra, Justice Karakatsanis summarized the approach to determining when a summary judgment may or may not be granted; she stated:

Summary judgment may not be granted under Rule 20 where there is a genuine issue requiring a trial. As outlined in the companion Mauldin appeal, the motion judge should ask whether the matter can be resolved in a fair and just manner on a summary judgment motion. This will be the case when the process (1) allows the judge to make the necessary findings of fact, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result. If there appears to be a genuine issue requiring a trial, based only on the record before her, the judge should then ask if the need for a trial can be avoided by using the new powers provided under Rules 20.04(2.1) and (2.2). She may, at her discretion, use those powers, provided that their use is not against the interest of justice.

[64] Hryniak v. Mauldin does not alter the principle that the court will assume that the parties have placed before it, in some form, all of the evidence that will be available for trial. The court is entitled to assume that the parties have respectively advanced their best case and that the record contains all the evidence that the parties will respectively present at trial: Dawson v. Rexcraft Storage & Warehouse Inc., [1998] OJ No. 3240 (CA); Bluestone v. Enroute Restaurants Inc. (1994), 18 OR (3d) 481 (CA); Canada (Attorney General) v. Lameman, 2008 SCC 14, [2008] 1 SCR 372 at para. 11. The onus is on the moving party to show that there is no genuine issue requiring a trial, but the responding party must present its best case or risk losing: Pizza Pizza Ltd. v. Gillespie (1990), 75 OR (2d) 255 (Gen. Div.); Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 28 OR (3d) 423 (Gen. Div.), aff’d [1997] OJ No. 3754 (CA).

[65] To grant summary judgment, on a review of the record, the motions judge must be of the view that sufficient evidence has been presented on all relevant points to allow him or her to draw the inferences necessary to make dispositive findings: Ghaeinizadeh (Litigation guardian of) v. Garfinkle Biderman LLP, 2014 ONSC 4994, leave to appeal to Div. Ct. refused, 2015 ONSC 1953 (Div. Ct.); Lavergne v. Dominion Citrus Ltd., 2014 ONSC 1836 at para. 38; George Weston Ltd. v. Domtar Inc., 2012 ONSC 5001.

[66] In considering whether to allow the summary judgment motion to go ahead or how it should go forward, the court should consider factors such as: (a) the nature and complexity of the issues; (b) the extent of the anticipated record; (c) the comparative prospects that the record will be sufficient to satisfy the test for a summary judgment with or without examinations for discovery; (d) whether the responding party has had production and oral discovery similar to that available in the normal course; and (e) whether more efficient means could be developed to ensure the just, most expeditious and least expensive determination of the case on its merits: George Weston Ltd. v. Domtar Inc., supra, at paras. 53-55.

[67] The court does not require a cross-motion for summary judgment when it can decide the issue that is the subject matter of the motion for summary judgment: King Lofts Toronto I Ltd. v. Emmons, 2014 ONCA 215, aff'g 2013 ONSC 6113. On a summary judgment motion, a successful respondent cannot choose to have a trial; where a motion for a summary judgment leads to the conclusion there is no genuine issue for trial, the adverse party should be granted judgment: MacDonald v. Chicago Title Insurance Company of Canada, 2014 ONSC 7457; Kassburg v. Sun Life Assurance Company of Canada, 2014 ONCA 922, at paras. 50-52.

2. Flirty Girl Fitness’s Conversion Claim

[68] This summary judgment motion is essentially a matter of fact finding. Both sides were in accord that there was adequate evidence before the court to determine the matter summarily and without a trial. Many, if not most, of the facts were incontestable, and what the parties were thinking or believed or understood was to a large extent disclosed or confirmed by emails and text messages. The prime actors delivered affidavits and were cross-examined.

[69] Once the facts are determined, there is no difficulty applying the law to those facts. I conclude that I can fairly decide this matter without the forensic machinery of a trial.

[70] I find as a fact that while tending to her tumultuous business and personal affairs in Chicago, Kerry left Krista in charge of managing the affairs of Flirty Girl Fitness in Toronto. At all relevant times, Krista kept Kerry informed of the situation in Toronto, and Kerry’s professed ignorance is an ignorance of hindsight arising from the sisters’ animosity and distrust of one another.

[71] I find as a fact that Krista was attempting to act in the best interests of all of Flirty Girl Fitness, her sister, and, herself, to salvage as much as possible from Flirty Girl Fitness’s precarious financial circumstances, some of which were of her own making by not moving sooner to find new premises for Flirty Girl Fitness.

[72] Although perhaps not properly authorized from a corporate governance perspective, the agreement with Hottie Body Boutique was a favourable transaction for the corporation. The terms were sufficiently certain and settled to be enforced, and Kerry agreed with the substantial elements of the agreement, and Krista, who was authorized to do so, settled the details.

[73] Krista hard-bargained and the consideration paid by Hottie Body Boutique was an overpayment for the consideration it received from entering into the agreement.

[74] Kerry mischaracterizes the sale of Flirty Girl Fitness’s goodwill and assets, including its trade name and brand, as an improvident sale for $60,000 in installment payments. The reality is that although Flirty Girl Fitness never did receive the $60,000 because payments stopped when Kerry refused to allow the agreement to be implemented, it received a substantial amount of consideration.

[75] Flirty Girl Fitness’s loan debts were assumed, and the loans have been or are being paid and are up to date. Flirty Girl Fitness avoided being sued by its employees whose employment contracts were transferred to Hottie Body Boutique, and it avoided being sued by its studio members who had prepaid $189,000 for services that Flirty Girl Fitness was unable to perform. Flirty Girl Fitness’s brand reputation was preserved. Before the transfer of its assets, Flirty Girl Fitness was not making a profit and it was suffering its second year of losses. It had no prospects of renewing its lease, and it could not get financing to outfit new premises and for working capital. It could not afford to pay the security deposit for the new lease.

[76] I find that Krista was authorized to negotiate an agreement with Hottie Body Boutique and that an agreement was reached between Flirty Girl Fitness and Hottie Body Boutique. I find that both Krista and Kerry approved of the transaction and that they had bound Flirty Girl Fitness to complete the agreement. If corporate authorizations in the form of resolutions or by-laws were required, then the sisters ought to have taken the appropriate steps to complete the agreement they had made for the corporation in which they were the majority shareholders.

[77] However, in this regard, in my opinion, it was not necessary for the sisters to obtain shareholder approval for the sale of assets to Hottie Body Boutique. Section 184 of the Ontario Business Corporations Act, RSO 1990, c. B.16 requires shareholder approval for a sale “of all or substantially all” of a corporation's property.

[78] The meaning of "all or substantially all" is context-dependent, and does not lend itself to simple arithmetic calculations: Canadian Broadcasting Corp. Pension Plan v. BF Realty Holdings Ltd., [2002] OJ No. 2125 at para. 48 (CA).

[79] In determining whether a corporation is selling all or substantially all of its assets, a court will consider both the quantitative and qualitative nature of the transaction and test whether the consequence of sale would be the effective termination of the corporation's business: Canadian Broadcasting Corp. Pension Plan v. BF Realty Holdings Ltd., supra; Amaranth UC v. Counsel Corp. (2007), 84 OR (3d) 361 (SCJ).

[80] I find that s. 184 of the Ontario Business Corporations Act did not apply in the circumstances of the asset sale to Hottie Body Boutique. Flirty Girl Fitness continues to be in business, and it has preserved its trade name, its brand, and its reputation. The purpose of the transaction with Hottie Body Boutique was not to terminate the business but rather to allow Flirty Girl Fitness’s brand to survive and for the business to expand or to transform itself into something akin to a franchisor of its brand. The alternative to making a deal with Hottie Body Boutique was to go out of business.

[81] In the case at bar, there was no conversation of assets. There was an enforceable agreement that was partially, but not fully, implemented and it would appear that both parties breached the agreement and, practically speaking, abandoned their unperformed promises without disturbing the performed part of the bargain.

[82] If Krista breached her fiduciary duties to Flirty Girl Fitness, her breach was prospective and fiduciary duties owed the corporation were as much breached by Kerry as they were by Krista, who together comprised the majority of shareholders in the corporation.

[83] There was, in any event, no breach of fiduciary duty by either sister in negotiating the agreement with Hottie Body Boutique, which was fully disclosed to the shareholders of Flirty Girl Fitness and beneficial to the corporation. The breaches of fiduciary duty were to the fellow shareholders who were not told of the sisters’ plans for a “switch” in ownership once Hottie Body Boutique’s sunk costs were repaid. At the time at which Kerry commenced this action, the switch had not occurred, and it appears that it was the prospect of it not occurring that prompted Kerry to launch this action. She was upset because Hottie Body Boutique was rebranding itself as “Elle.”

[84] I do find that Krista (and Kerry too) breached her fiduciary duty by attempting to obtain a personal benefit from the transaction, but there was no consequent damage to Flirty Girl Fitness or for that matter to its shareholders.

[85] A director's fiduciary duties include an obligation to act in good faith and in the best interests of the corporation. A director has a specific obligation to scrupulously avoid conflicts of interest with the corporation and not to abuse their position for personal gain, and disclosure of the conflict does not relieve a director of the obligation to act honestly and in the best interests of the corporation: Unique Broadband Systems, Inc. (Re), 2014 ONCA 538. In the case at bar, Krista disclosed all but her and her sister’s future potential interest in Hottie Body Boutique to the passive investors in the business, but Flirty Girl Fitness was not harmed by the breach of fiduciary duty and proceeding with the sale of assets to Hottie Body Boutique was in its bests interests.

[86] Turning to Mr. Epstein, I find as a fact that while Mr. Epstein had a fiduciary relationship with Flirty Girl Fitness, he did not breach his fiduciary duties and he did not take advantage of his position or profit at the expense of Flirty Girl Fitness. The sale of assets to Hottie Body Boutique was fair one and better than could be achieved by an agreement with a third-party.

[87] A fiduciary’s duty of loyalty strictly regulates but does not absolutely forbid the fiduciary from transacting business with the beneficiary. More particularly, to uphold a transaction with a beneficiary, the fiduciary must be able to show that he or she made full disclosure and that the transaction was a righteous and fair one, which is to say that the transaction would be the equivalent to what the beneficiary could have achieved with a third party: Molchan v. Omega Oil & Gas Ltd. (1988), 47 DLR (4th) 481 (SCC), application for rehearing denied (1988), 49 DLR (4th) vii (SCC); Crighton v. Roman, [1960] SCR 858; Denman v. Clover Bar Coal Co. (1913), 48 SCR 318; Gregoric v. Gregoric (No. 1) (1990), 4 OR (3d) 588 (Gen. Div.); Calandra v. B.A. Cleaners Ltd. (1990), 73 OR (2d) 449 (Dist. Ct.); Schmolinski v. Tolentino (1989), 5 RPR (2d) 47 (Ont. Dist. Ct.); Wood v. St. Jules (1976), 12 OR (2d) 529 (CA); D’Atri v. Chilcott (1975), 7 OR (2d) 249 (HCJ); Charles Baker Ltd. v. Baker and Baker, [1954] OR 418 (CA); Brown v. Premier Trust Co., [1947] OR 50 (HCJ); Demerara Bauxite Company Limited v. Hubbard, [1923] AC 673 (PC); Ex parte Lacey (1902), 6 Vesey 625; Gibson v. Jeyes (1801), 6 Ves. Jun 266.

[88] In any event, Flirty Girl Fitness did not prove any conversion by the Defendants. It also did not prove any professional negligence by Mr. Epstein. All that Flirty Girl Fitness proved were the old adages that no good deed goes unpunished, that a cobbler’s children have no shoes, and go slow and you’ll get there faster. Out of friendship, and apparently to please his wife, Mr. Epstein allowed the situation to get out of his control and he, his law firm, and his wife found themselves in the middle of the sisters’ animosity and they have paid the penalty of having to defend this action and their own reputations.

[89] I find all of the Defendants successful in defending the action and Flirty Girl Fitness’s summary judgment motion and its action should be dismissed.

E. Conclusion

[90] For the above reasons, I dismiss Flirty Girl Fitness’s action in its entirety.

[91] If the parties cannot agree about the matter of costs, they may make submissions in writing beginning with the Defendants’ submissions within 20 days of the release of these Reasons for Decision followed by Flirty Girl Fitness’s submissions within a further 20 days. I alert the parties that my present inclination is to make no order as to costs because, before the commencement of the litigation, neither the successful parties nor the unsuccessful party were blameless of at least some foolish, miserable, or mean conduct.

Perell, J.

Released: July 7, 2017

COURT FILE NO.: CV-15-528272 DATE: 20170707 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: FLIRTY GIRL FITNESS INC. Plaintiff – and – HOTTIE BODY BOUTIQUE INC., GARDINER ROBERTS LLP, DAVID EPSTEIN, MICHELLE EPSTEIN and KRISTA KNEE Defendants REASONS FOR DECISION PERELL J. Released: July 7, 2017