Donald v. Barnet, 2017 ONSC 4665

CITATION: Donald v. Barnet, 2017 ONSC 4665

COURT FILE NO.: CV-13-494312

DATE: 20170801

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

EATON DONALD and EDUCATIONAL SOLUTIONS WORLDWIDE INC.

Plaintiffs

– and –

RAAD WILLIAM BARNET and SENDES GEORGE AFRAM

Defendants

Clarke Tedesco, for the Plaintiffs

John Mullen and Mark Fahmy for the Defendants

HEARD: May 30, 2017

cavanagh J.

REASONS FOR JUDGMENT

Introduction

1The plaintiff Eaton Donald (“Donald”) and the defendant Raad Barnet (“Barnet”) were business partners in a business to commercialize a technology for a machine that could generate cheap and portable energy, using magnets, with no carbon emissions (the “Generator”). A corporation, Honeycomb Power Systems Corp. (“Honeycomb”), was incorporated as the vehicle through which the Generator would be commercialized.

2Advances of money were made by Donald and his company, Educational Solutions Worldwide Inc. (“ESWI”), to Barnet and, in respect of one advance, to Barnet’s wife, Sendes George Afram (“Afram”). The central issue in this action is whether these advances were (i) personal loans made by Donald and ESWI to Barnet and Afram, or (ii) payments by Donald and ESWI on behalf of Honeycomb as its interim bridge financiers on account of indebtedness owing by Honeycomb to Barnet.

3Donald and ESWI move for summary judgment in the amount of $617,154 (the total advances of $792,154 less a $175,000 payment by Barnet). Barnet and Afram move by way of cross-motion for summary judgment dismissing the plaintiffs’ claims. On each motion, the moving parties submit that there is no genuine issue requiring a trial.

4For the following reasons, I have concluded that the moving parties on each motion have not satisfied their onus of showing that there is no genuine issue requiring a trial with respect to the plaintiffs’ claim or the defendants’ defence. Even though the parties agree to have the issues raised in this action determined by summary judgment, I am not satisfied that it is appropriate to grant summary judgment.

5The plaintiffs’ motion for summary judgment and the defendants’ cross-motion for summary judgment are dismissed.

Factual Background

6To provide factual context, I set out facts taken from the evidentiary record that I consider to be supported by the record. By setting out these facts, I am not making an order specifying what material facts are not in dispute under rule 20.05(1), and these facts are not deemed to be established at the trial under rule 20.05(3).

7Donald and Burnet met in the summer of 2011. Barnet was the inventor of the Generator and Donald was an entrepreneur with extensive experience in commercializing developing technologies.

8Donald and Burnet agreed to incorporate a company to develop the Generator. Barnet wanted to be reimbursed for expenses that he had incurred in developing the Generator that, initially, were estimated at $630,000 which amount was, later, revised to $689,000. The company to be incorporated to develop the Generator was initially to be called Surgeneration Inc. (“Surgeneration”) and a promissory note dated November 2, 2011 was executed on behalf of Surgeneration as borrower and by Barnet as lender providing for a promise by Surgeneration to pay to Barnet the sum of $660,000 together with interest. Surgeneration was never incorporated.

9Honeycomb was incorporated on December 12, 2011 as the corporate vehicle for the commercialization of the Generator. A Share Consideration Agreement (between Honeycomb and Barnet) and a Shareholders’ Agreement (between Honeycomb and three shareholders) were executed at the time that Honeycomb was incorporated. These agreements superseded the Surgeneration promissory note.

10Upon the incorporation of Honeycomb on December 12, 2011, Barnet assigned to Honeycomb all of his right, title and interest in the technology associated with the Generator. In consideration for this assignment, Honeycomb agreed to issue common shares to Barnet. Honeycomb also agreed to reimburse Barnet for a portion of the expenses incurred relating to the purchase of materials that were required to develop the Generator totalling not more than $689,000.

11From January 2012 until the end of June 2012 Barnet was working at the offices of one of Donald’s companies on a full-time basis building prototype generators. During this period of time, Donald was engaged in raising capital for Honeycomb from outside investors. Donald was providing interim funding for Honeycomb during this period of time.

12Between November 2011 and June 2012 Donald and a company that he owned, ESWI, made eleven advances of money to Barnet and one to Afram in amounts totalling $792,154.

13A major funding of Honeycomb of approximately $6,800,000 by third-party investors was completed in June 2012. After this funding, on June 25, 2012, Honeycomb and Barnet entered into an agreement with respect to the $689,000 loan referred to in the Share Consideration Agreement that provided for payment by Honeycomb of $250,000 for agreeing to enter into the agreement and payment of the remaining balance of $439,000 upon the closing of any external financing round raising a minimum of $8.5 million. This agreement provided for a privilege of prepayment by Honeycomb.

14On or about July 6, 2012, after receiving the $250,000 from Honeycomb and upon request from Donald, Barnet repaid $175,000 to Donald.

15Donald received testing results and concluded that the Generator would not succeed commercially. Barnet proposed a transaction involving a purchase of Honeycomb by Kuwaiti investors, and the parties retained counsel to deal with this proposed transaction. Communications were exchanged by the parties through their legal representatives, including a draft loan agreement and a draft assignment of debt agreement. The Kuwaiti transaction was not completed and the draft commercial agreements were not executed.

16After the failure of the Kuwaiti deal, on February 28, 2013, Donald and other parties brought an application to, among other things, wind up Honeycomb and seek the return of capital for the preferred investors (the “Application”).

17On or about October 29, 2013, the parties to the Application entered into a Mutual Full and Final Release (the “Release”). Donald, Barnet and Honeycomb are among the parties to the Release. The parties release each other from all claims related to the issues raised in the Application with two exclusions. One of these exclusions is for:

Claims for any amounts loaned by Donald or Educational Solutions Worldwide Inc. to Barnet or B&P that are not reflected on Honeycomb’s financial statements. The terms of this Mutual Full and Final Release will not bar the Respondents from raising any defence to this action, should it be commenced.

Donald and ESWI rely upon this exclusion to bring this action.

Analysis

18As noted, the central issue in this action is whether the advances totalling $792,154 by Donald and ESWI to Barnet and to Afram were (i) personal loans made by Donald and ESWI to Barnet and Afram, or (ii) payments by Donald and ESWI on behalf of Honeycomb as its interim bridge financiers on account of indebtedness owing by Honeycomb to Barnet.

19According to Donald’s evidence and submissions on these motions:

a. These advances were personal loans made to Barnet and to Afram and, at the time the advances were made and in the following months, Barnet repeatedly acknowledged that the advances were loans.

b. These advances were made prior to the major financing that Honeycomb was expecting to complete in June 2012 so that Barnet could purchase materials for building Generators and to reimburse him for expenses that he claimed he had incurred in developing the Generator.

c. Donald and ESWI also advanced funds to Barnet and Afram for the purpose of keeping Barnet “motivated” so these he would continue to develop the Generator and make it suitable for commercialization.

d. Donald and ESWI did not make the advances on behalf of Honeycomb, they were not recorded in Honeycomb’s books and they were not made with the approval of Honeycomb’s Board of Directors. Other payments to Barnet were made from loans made by Donald to Honeycomb, in respect of which Donald makes no claim.

e. Donald and ESWI have no recourse to Honeycomb for repayment of these advances.

f. On July 6, 2012, Barnet repaid Donald $175,000 which, according to Donald, shows that Barnet understood that the advances were personal loans by Donald and ESWI.

g. During the process involving the Kuwaiti deal, there were communications involving legal counsel for the parties and draft agreements were exchanged which, according to Donald, show that Barnet understood and acknowledged that the advances were loans.

h. Burnett’s explanation that the payments made by Donald were on behalf of Honeycomb is inconsistent with Barnet’s actions at the time, his actions surrounding the sale of Honeycomb and his actions in this litigation.

i. Barnet’s signing of the June 25, 2012 agreement showing indebtedness by Honeycomb to Barnet of $689,000 is inconsistent with Barnet’s position that some of the advances were made towards satisfaction of the $689,000 indebtedness.

j. During the negotiations concerning the Kuwaiti deal, Barnet continued to assert that he was owed money under the June 25, 2012 agreement with Honeycomb. Donald relies on a meeting on or about January 7, 2013 that Barnet attended with the CFO and the bookkeeper for Honeycomb in which, according to Donald, Barnet agreed that Donald and ESWI were owed $1,200,002.71 of which $1,054,254 was owed by Barnet (or his business).

k. Barnet’s agreement made at the January 7, 2013 meeting was, according to Donald, confirmed in several emails from Barnet’s lawyer as well as in the draft “Debt Assignment Agreement” that was prepared in connection with the Kuwaiti deal. Barnet did not contradict this agreement or otherwise assert that the allocation of sale proceeds was somehow improperly stated.

l. Barnet has, according to Donald, made inconsistent statements concerning whether the advances were loans, and his numbers do not add up. Donald rejects Barnet’s explanation for the repayment by Barnet of $175,000.

m. Barnet’s explanation for the payment to Afram does not stand up to scrutiny, and Afram did not provide evidence in response to the summary judgment motion.

n. Barnet’s explanation for receipt on December 23, 2011 of a payment of $55,000 was made for the first time in response to the motion for judgment and Donald specifically denied that the payment was in consideration for shares. Donald submits that Barnet’s assertion with respect to this payment is contradicted by his prior actions when the Kuwaiti sale was being contemplated and when this issue arose in the Application.

o. Invoices produced by Barnet in his May 20, 2016 affidavit were not presented to Honeycomb and they are not contained in Honeycomb’s records. Donald submits that there are major inconsistencies in the invoices and that the electronic files were all modified in April 2016, just prior to production of the May 20 affidavit. Donald relies on the fact that invoice numbers for the invoices produced as part of Barnet’s affidavit are all out of order with the invoices that were actually produced to Honeycomb.

p. Barnet counterclaimed for payment of the amounts that were paid to him by Donald and ESWI.

20According to Barnet’s evidence and submissions on these motions:

a. He did not borrow any funds from Donald at any time during 2011 and 2012, nor did his wife.

b. Donald was providing bridge financing to Honeycomb during the first six months of 2012, and the advances were made in this capacity.

c. Donald has acknowledged that the amounts advanced to Barnet and to Afram were “undeniably” related to the work that Barnet was doing for Honeycomb. Donald has acknowledged that the advances were made so that Barnet could purchase materials for building Generators and to reimburse him for expenses that he claimed he had incurred in developing the Generator. Donald advanced funds to Barnet and Afram for the purpose of keeping Barnet “motivated” so that he would continue to develop the generator and make it suitable for commercialization.

d. During this period of time, Barnet was a creditor of Honeycomb because (i) he was employed by Honeycomb and providing labour and materials for the development of the Generator, and (ii) he was owed $689,000 by Honeycomb pursuant to the Share Consideration Agreement.

e. The advances were amounts that Donald, the directing mind of Honeycomb and its bridge financier, was making on behalf of Honeycomb for the preservation and improvement of Honeycomb’s assets and amounts in payment for services and materials that Barnet provided to Honeycomb, as well as payments towards the $689,000 indebtedness owed by Honeycomb to Barnet.

f. There is no paperwork supporting Donald’s position that the advances were loans to Barnet and Afram. Had Donald, an experienced businessman, intended that these advances were loans, he would have taken steps to memorialize in writing the advances as loans.

g. Donald’s business associate, David Ceolin (“Ceolin”), Honeycomb’s CEO, had opposed Barnet receiving payment for the technology and for his ongoing time in continuing to develop it, and was not aware of the monies that Donald had paid to Barnet. Barnet submits that Donald did not record the advances in the records of Honeycomb because he knew that Ceolin would oppose Honeycomb paying these amounts to Barnet.

h. The ESWI general ledger report listing the ESWI payments to Barnet is under a ledger item entitled “Due to/from Honeycomb”. ESWI had no general ledger entitled “Due to/from Barnet”, or “Due to/from Afram”.

i. Donald’s own records of payments when he was bridge financier to Honeycomb, including payments to Barnet, are all under the heading “EATON DONALD ADVANCE TO HONEYCOMB POWER”. Barnet relies upon cheque stubs, the ledger sheet and statements during 2012 in support of his position that the payments were at different times characterized as being shareholder advances to Honeycomb.

j. In November 2012, Donald had not yet settled on the classification of the payments as being loans to Barnet and his staff was still trying to work out how he would be getting his advances repaid.

k. Barnet submits that six of the twelve payments went towards paying down the $689,000 loan, one payment was for the building of two prototypes, four advances are in payment of invoices from Barnet and one is for an increase in the shareholdings of Donald in Honeycomb.

l. Honeycomb’s bookkeeper gave evidence of requesting invoices to support cheques that had been issued and that many were backdated. Although she said that she would not have approved payment for one invoice because the GST number was wrong, the same number is on other invoices that were paid by ESWI, some of which bear the stamp “Advance to Honeycomb”. Barnet’s inability to produce back up documents for some payments is not significant, especially because his computer was seized during in or about 2013.

m. The advance of $143,500 to Afram was made at Barnet’s direction towards the $689,000 indebtedness. Barnet received a payment of $143,500 from Afram. Afram was, according to Barnet, a mere conduit of such funds to Barnet, and she received no benefit from this advance.

n. Barnet made the $175,000 repayment because with the $250,000 payment received from Honeycomb, the $689,000 debt had been overpaid, and the repayment of $175,000 reduced the net amount received by Barnet to $693,500, which is approximately the amount of the loan. Barnet went along with Donald about these arrangements in order to keep the information from Ceolin, who would have withdrawn from the arrangement if he knew what arrangements Donald had made with Barnet for payment.

o. The communications and documents in relation to the Kuwaiti deal were made approximately 8 to 14 months after the advances were made and the arrangements were structured on legal fictions ultimately designed to allow Donald to get repaid $1,035,506.50 from Honeycomb. The deal did not proceed, and no papers were signed.

p. Barnet submits that a copy of an ESWI bank draft for $25,000 that Donald annexed to his affidavit did not show the bookkeeper’s handwriting “Advance to Honeycomb” when Mr. Barnet’s copy did. Barnet asserts that this shows that Donald altered his records to hide the fact that this was a “Honeycomb Advance”.

21The items listed above upon which the plaintiffs and the defendants rely in support of their submissions on their respective motions for summary judgment or in response to the submissions of the opposing parties are not intended to be exhaustive, and both sets of moving parties made other submissions as well.

22In order for me to grant summary judgment in favour of either the plaintiffs or the defendants on their respective motions, I must be satisfied that I am able to reach a fair and just determination on the merits of the motion. This will be the case when the process allows me to make the necessary findings of fact, allows me to apply the law to the facts, and is a proportionate and more expeditious and less expensive means to achieving a just result.

23On a summary judgment motion, the evidence need not be equivalent to that at trial, but must be such that the judge is confident that he or she can fairly resolve the dispute. A documentary record, particularly when supplemented by the new fact-finding tools, including oral testimony where appropriate, is often sufficient to resolve material issues fairly and justly. On a motion for summary judgment, the judge should first determine if there is a genuine issue requiring a trial based only on the evidence before him or her, without using the new fact-finding powers. If there appears to be a genuine issue requiring a trial, the judge should then determine if the need for a trial can be avoided by using the new fact-finding powers: Hyrniak v. Maudlin, 2014 SCC 7, 2014 CarswellOnt 640, at paras. 49, 57.

24The moving parties on each motion submit that I should decide the summary judgment motions (in their favour) without recourse to the fact-finding powers in rule 20.04(2.1).

25I have carefully reviewed the evidence tendered by the parties and the submissions made on their behalves. I have concluded that on the evidentiary record before me I am unable to fairly and justly resolve the issues in dispute on these motions for summary judgment. The moving parties on each motion have introduced evidence and made submissions on many underlying facts, some of which involve issues of credibility. For example, Donald has given evidence that Barnet acknowledged that the advances were loans when they were made. Barnet denies that the advances were loans. This fundamental issue is one involving credibility that I cannot fairly and justly resolve on the record before me. Further, the inferences from documents relied upon by both sets of moving parties cannot, in my view, be fairly and justly drawn on this evidentiary record. In addition to Donald and Barnet, Ceolin and Honeycomb’s bookkeeper, Simi Gandhi, were examined as witnesses under rule 39, but their evidence introduces additional factual complexity that reinforces my conclusion that the issues raised by these motions are unsuitable for summary adjudication.

26I am mindful of the fact that rule 20.04(2)(b) provides that the court shall grant summary judgment if the parties agree to have all or part of the claim determined by summary judgment and the court is satisfied that it is appropriate to grant summary judgment. Although the parties have so agreed, I am not satisfied that it is appropriate to decide the issues raised in this action on a motion for summary judgment. To the contrary, I have concluded that it is necessary for the parties to proceed to trial to have the issues raised in this action adjudicated. Neither of the sets of moving parties has satisfied their onus of showing that there is no genuine issue for trial on the question of whether the advances by Donald and ESWI to Barnet and Afram were or were not personal loans in respect of which Barnet and Afram are liable for repayment.

27In Hryniak, the Supreme Court of Canada wrote that, where a motion judge dismisses a motion for summary judgment, in the absence of compelling reasons to the contrary, he or she should also remain seized of the matter as the trial judge.

28In this case, I will remain seized of this action. There has already been considerable effort expended to develop the evidentiary record for these motions. I suggest to counsel that they confer and try to reach agreement on ways to effectively use the work that has already been done to make the trial as efficient as possible. This could involve (i) use of affidavits as evidence in chief, (ii) use of transcripts of cross-examinations in lieu of examinations for discovery, and (iii) an agreed statement of facts for all non-contentious facts.

Disposition

29The plaintiffs’ motion for summary judgment is dismissed. The defendants’ cross-motion for summary judgment is dismissed.

30I do not consider it to be appropriate to award costs of these motions until the trial decision has been made. I therefore order that costs of both motions for summary judgment be reserved to be decided by me as the trial judge.