Court File and Parties

CITATION: Fountain Asset Corp. v. First Global Data, 2017 ONSC 4780 COURT FILE NO.: CV-17-569015 DATE: 20170824

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Fountain Asset Corp., Applicant AND: First Global Data Limited, Respondent

BEFORE: Madam Justice Kristjanson

COUNSEL: Geoff Moysa, for the Applicant Robert P. Hine, for the Respondent

HEARD: August 3, 2017

ENDORSEMENT

[1] Fountain Asset Corp. brought this application to enforce contractual rights to share options and warrants issued to it by the respondent, First Global Data Limited. First Global Data has defended primarily on the basis that the options and warrants are void and unenforceable since they were granted as part of a financing transaction bearing a criminal rate of interest – in excess of 1000% - in breach of s. 347 of the Criminal Code. First Global Data also asserts that the interest rate associated with the loan is in breach of the Interest Act, R.S.O. 1990, c. I-15.

[2] On the return date of the application First Global Data brought a motion to convert the application to an action, and to consolidate the action with another action (the “2017 Action”) recently commenced by First Global Data against Fountain Asset and a number of other parties. Although broader than the application, the 2017 Action directly impugns the loan transaction and the validity of the options and warrants which Fountain Asset seeks to enforce in this application.

[3] There are two issues on this motion:

(1) Should the Fountain Asset application be converted to an action? and

(2) Should the Fountain Asset action be consolidated or heard together with the 2017 Action commenced by First Global Data against Fountain Asset and other parties?

[4] I direct that the Fountain Asset application should be converted to an action, and the claims raised in this application should be advanced as a counterclaim in the 2017 Action.

Background Facts

The LTP Acquisition and Financing

[5] In January 2015, First Global Data agreed to purchase all of the issued and outstanding shares of 2297970 Ontario Inc. (“LTP”), in exchange for the issuance of 26,000,000 common shares of First Global Data. LTP’s principals and directing minds were Paul Haber, Paul Van Benthem and Yoel Altman. First Global Data asserts that Van Benthem, Altman and Haber had agreed to assist First Global Data in raising between $3 and $8 million in convertible debenture financing, which led the companies to enter a share exchange agreement conditional on the completion of the minimum financing.

[6] Pending the closing of the LTP acquisition, First Global Data required interim financing. In May, 2015, the applicant Fountain Asset entered into a credit agreement with First Global Data by which it provided a short-term bridge loan in the amount of $812,000, pending the LTP acquisition. On the same day, Fountain Asset and First Global Data entered into a Fiscal Advisor Agreement pursuant to which Fountain Asset was to provide certain services on an “as needed” basis, and First Global Data was to provide Fountain Asset with 1,625,000 options exercisable for common shares of First Global Data. First Global Data submits that at the time they were granted, the original options had a fair market value of $230,000. First Global Data also argues that the Fiscal Advisor Agreement is a “sham”, designed to camouflage the cost of borrowing, and the cost/expense of the options form part of the cost of borrowing and thus the rate of interest.

[7] The original loan went into default on August 14, 2015. Following negotiations, on August 29, 2015 Fountain Asset and First Global Data agreed on terms set out in a forbearance term sheet setting out the conditions on which Fountain Asset would refinance or otherwise extend the terms of the original loan. These included: (a) a schedule for repayment of principal, interest, and fees; (b) a structuring fee, (c) the issuance of 3,500,000 warrants each exercisable for one common share of First Global Data at a strike price of 10 cents, subsequently changed to 11 cents, (the “Warrants”); (d) the transfer of 26,000,000 common shares of First Global Data to Haber, Van Benthem and Altman; (e) amendments to the Fiscal Advisor Agreement to increase the number of options granted to the applicant to 3,375,000, reduce the strike price to 10 cents (“New Options”), and include a cash fee of $28,000.

[8] The evidence of First Global Data is that the Warrants had a first fair market value of $274,528 when granted, and the New Options had a fair market value of $269,085.

2017 Action and Other Proceedings

[9] First Global Data commenced an action in July, 2017 against Fountain Asset, its principal Jason Ewart, LTP, and the three individuals Altman, Haber and Van Benthem, among others in Court File No. CV-17-57784. The 2017 Action has been served on some, but not all, of the defendants. A central issue is the status of the 26,000,000 common shares of First Global Data which were transferred to Altman, Haber and Van Benthem pursuant to the forbearance term sheet and forbearance agreement with Fountain Asset. The 2017 Action seeks a number of declarations and orders as against Fountain Asset and its principal, including:

• the compensation provisions of the forbearance agreement and Fiscal Advisor Agreements, pursuant to which the contested Warrants and New Options were issued, are void,

• that the effective interest rate under the credit and forbearance agreements constitute a criminal rate of interest in accordance with s. 347 of the Criminal Code,

• First Global Data is entitled to have the shares returned, as part of the criminal interest proceeding,

• Ewart and Fountain Asset have conspired with the defendants Altman, Haber and Van Benthem,

• Ewart and Fountain Asset should be directed to purchase 26,000,000 shares and return them to First Global Data to be redeemed for cancellation, and

• that the credit agreement contravenes the Interest Act,

[10] Other defendants are named with respect to receipt of the 26,000,000 shares which were initially conveyed pursuant to the forbearance agreement.

[11] I will not review the rest of the pleadings, but it is clear that the financing which is an issue in the application is also central to the action.

[12] As importantly, the interests of third parties, including Altman, Haber and Van Benthem in relation to the 26,000,000 shares conveyed pursuant to the forbearance agreement, would be affected by any declaration issued on the application, although they are not parties to the application.

[13] The 2017 Action has been issued and served on some but not all of the defendants. Counsel for First Global indicated that there may be amendments to be made with respect to claims against Fountain Asset.

Legal Issues – Motions to Convert and to Consolidate

[14] Where a motion to convert to an action is brought together with a motion for consolidation or hearing together, then factors relevant to consolidation should be considered together with factors relevant to conversion to an action. Section 138 of the Courts of Justice Act discourages a multiplicity of proceedings. Part of the policy behind that provision is to avoid litigating the same issues in different courtrooms, to prevent unfairness and the risk of inconsistent verdicts, to maximize the efficient use of scarce judicial resources, and to save the parties time and money by realizing efficiencies and avoiding unfairness. Many of the factors to be considered on each issue – conversion and consolidation – overlap.

[15] The following general principles should be considered in determining whether to convert an application into an action (Przysuskiv v. City Optical Holdings Inc., 2013 ONSC 5709 (SCJ) per Firestone J. at paras. 5-8):

(a) An application should be used when there is no matter in dispute and when the issues to be determined do not go beyond the interpretation of a document;

(b) A good reason to convert an application into an action is when the judge will hear the matter cannot make a proper determination of the issues on the application record;

(c) When issues of credibility are involved the matter should proceed by way of action;

(d) Whether material facts are in dispute;

(e) The presence of complex issues that require expert evidence and/or weighing of evidence;

(f) Whether there is a need for pleadings and discoveries; and

(g) The importance and impact of the application and of the relief sought.

[16] Where there are two proceedings pending in the same court and they appear to have a question of law or fact in common, or the relief claimed in each arises out of the same transaction or occurrence, the court may order that proceedings be consolidated, heard at the same time or one immediately after the other, pursuant to Rule 6.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. I also consider the principles set out by Master Dash in 1014864 Ontario Ltd. v. 1721789 Ontario Inc., 2010 CarswellOnt 4183, 2010 ONSC 3306 at para. 18:

(a) the extent to which the issues in each action are interwoven;

(b) whether the same damages are sought in both actions, in whole or in part;

(c) whether damages overlap and whether a global assessment of damages is required;

(d) whether there is expected to be a significant overlap of evidence or of witnesses among the various actions;

(e) whether the parties the same;

(f) whether the lawyers are the same;

(g) whether there is a risk of inconsistent findings or judgment if the actions are not joined;

(h) whether the issues in one action are relatively straight forward compared to the complexity of the other actions;

(i) whether a decision in one action, if kept separate and tried first would likely put an end to the other actions or significantly narrow the issues for the other actions or significantly increase the likelihood of settlement;

(j) the litigation status of each action;

(k) whether there is a jury notice in one or more but not all of the actions;

(l) whether, if the actions are combined, certain interlocutory steps not yet taken in some of the actions, such as examinations for discovery, may be avoided by relying on transcripts from the more advanced action;

(m) the timing of the motion and the possibility of delay;

(n) whether any of the parties will save costs or alternatively have their costs increased if the actions are tried together;

(o) any advantage or prejudice the parties are likely to experience if the actions are kept separate or if they are to be tried together;

(p) whether trial together of all of the actions would result in undue procedural complexities that cannot easily be dealt with by the trial judge;

(q) whether the motion is brought on consent or over the objection of one or more parties.

[17] Applying these principles, I exercise my discretion to convert this application to an action, and to consolidate the proceedings.

[18] Overlapping Proceedings Involving Same Facts, Issues and Parties: The 2017 Action and the application both involve Fountain Asset Corp. and First Global Data. Fountain Asset’s affiant in the application, Jason Ewart, is named as a defendant in the Action. Both proceedings relate to the failed acquisition of LTP, the financing extended by Fountain Asset to First Global Data, and the relationship among Haber, Van Benthem and Altman and the principal of Fountain Asset, Mr. Ewart.

[19] The contractual documents which resulted in the transfer of the 26,000,000 shares to third parties would be the subject of consideration on the application. There is potential prejudice to the rights of Van Benthem, Haber and Altman, since on the application it is alleged that the transfer of the shares to the third parties was part of a sham transaction to hide a criminal interest rate. As a result, I have concluded that the interest of third parties who are not parties to this application is of concern, and a factor which leads me to find that the matters in this application must be heard in a forum which the third parties whose interests may be affected have the right to participate.

[20] In the 2017 Action, First Global Data seeks relief against Fountain Asset including declarations that the credit agreement, the forbearance agreement, and the Fiscal Advisor Agreement are essentially part of one contract, which bears a criminal rate of interest contrary to the Criminal Code. The same defence on the same basis is raised to this application. Both require a determination as to whether or not the Fiscal Advisor Agreement is, to use the words of defendant’s counsel, a “sham” contract which is void and unenforceable.

[21] These are overlapping proceedings involving the same factual matrix, common legal and factual issues, and many common parties. The relief sought by Fountain Asset – the Warrants and New Options – is squarely in issue in the 2017 Action. There is a significant risk of inconsistent verdicts if the application proceeds.

[22] Expert Evidence Required: On this motion, First Global Data sought leave to deliver an affidavit of a financial valuator respecting the estimated fair market value of various options and warrants, notwithstanding that it had been delivered after cross-examinations on the application. In the circumstances of this case, having now reviewed all of the contracts and all of the affidavit evidence, I am of the view that expert evidence is required to respond to the issues on the application. Fountain Asset Corp. indicated that if there is a risk that the Fiscal Advisor Agreement and forbearance agreements are to be considered part of the cost of borrowing and thus a charge or expense, then it too wished to tender expert evidence. In the course of oral argument, it became obvious that financial valuator and actuarial evidence would likely need to be tendered with respect to the value of options and warrants, on the criminal interest rate argument.

[23] There is also an argument which requires expert evidence relating to whether or not the loan contravened the Interest Act. There was a disagreement between the parties as to whether a loan expressed to be payable at 3% per month, where the documents did not refer to compounding or otherwise provide a formula for determining when interest was to be compounded, was a provision which may offend the Interest Act.

[24] The parties both agreed that the question of whether warrants and options can constitute a cost or expense to the corporation instead of merely to its shareholders is an issue on which there is very little jurisprudence and some reason to doubt the one case that both parties cited. Expert evidence will also be required to establish whether warrants and options, as well as the share transfer, constitute a cost or expense to the corporation. This is an issue common to both proceedings.

[25] Thus, the hearing of this application would require contested expert evidence, best heard in an action. The same issues arise in the 2017 Action, and the same expert evidence would be required.

[26] Factual Matrix – Facts in Dispute and Credibility Issues: There is a credibility dispute between Mr. Itwaru and Mr. Ewart as to whether the Fiscal Advisor Agreement was a sham, or was a valid services agreement. Undertakings delivered on July 14 following the cross-examination of Mr. Ewart raise questions about the Fiscal Advisor Agreement, including whether or not services were performed or expected to be performed, or whether it was part of the cost of borrowing. The factual matrix which led to the terms of the initial granting of credit, the Fiscal Advisor Agreement and the terms of forbearance will be the subject of conflicting evidence between the principals of Fountain Asset and First Global Data in both the application and the 2017 Action, as is obvious from the affidavits filed before me and the cross-examinations on those affidavits. This is best done in an action, and the evidence is common to both proceedings.

[27] Other: The action has just recently been commenced, and pleadings are not yet closed. The application would require adjournment for the purposes of completing expert evidence. Fountain Asset is a defendant in the 2017 Action, and will be required to participate in the trial regarding issues in addition to the contested contracts, New Options and Warrants. Fountain Asset wishes to proceed expeditiously to compel the issuance of the New Options and Warrants. However, given the issues dismissed above and the commonality of issues in the two proceedings, this cannot be disposed of in an application.

[28] In applying the principles applicable to both conversion and consolidation, I find that:

(a) There are significant number of material facts in dispute, including a credibility issue between the principals of Fountain Asset and First Global Data on the factual matrix surrounding the contracts, and in particular on the Fiscal Advisor Agreement and the cost of borrowing;

(b) Expert evidence is required on a number of issues;

(c) There are overlapping factual and legal issues, and many common parties. Given the overlap in facts, issues and parties, there is a significant risk of inconsistent verdicts if the application proceeds;

(d) This is a matter of both factual and legal complexity;

(e) There is also a risk that a determination on the application could affect the interests of third parties who are not parties to the application but are already parties to the action;

(f) I am of the view that the judge hearing the application cannot make a proper determination of the issues on the written application record alone; and

(g) The financial impact of the decision is relatively large to either First Global or Fountain Asset Corp.

[29] The interests of justice and procedural fairness require that the application be converted into an action.

[30] The claims in the application should be heard together with the 2017 Action, and the matters should proceed together, and be prosecuted promptly. Given the stage of the proceedings, the most fair and efficient means of proceeding is by directing that Fountain Asset Corp. raise its claim as a counterclaim in the 2017 Action.

[31] The 2017 Action has not yet been served on Fountain Asset Corp. or its principal Mr. Ewart. First Global Data has 20 days from the date of this decision within which to amend its action with respect to Fountain Asset Corp. and Mr. Ewart, and to serve that on Fountain Asset Corp. and Mr. Ewart. The applicant Fountain Asset Corp. is to raise the same issues as raised in the present application by way of counterclaim in the 2017 Action.

[32] Cross-examinations conducted to date are to form part of the examinations for discovery in both the 2017 Action and Counterclaim.

[33] If the parties are unable to agree on costs, then First Global Data is to provide written costs submissions of no more than three pages, together with costs outline, within 10 days; Fountain Asset submissions, with costs outline, in a further 6 days. Motion to convert granted, order directing that the claims made in the application be raised by way of counterclaim in the 2017 Action.

Kristjanson J.

Date: August 24, 2017