Houle v. Sostarich, 2017 ONSC 6025

CITATION: Houle v. Sostarich, 2017 ONSC 6025 COURT FILE NO.: CV-15-519292 DATE: 2017-11-01

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Conrad Houle, Sheila Houle, CS Houle Holdings Inc. and KKP Investments Inc. AND: Andrew Sostarich, Alesia Sostarich, Tracks & Wheels Equipment Brokers Inc., Michael Gougeon, Sostarich Ross Wright Cecutti LLP, Arseneau Poulson and Workers Auto Services Ltd.

BEFORE: Madam Justice J.T. Akbarali

COUNSEL: Milton A. Davis and Ian P. Katchin for the Plaintiffs Orlando M. Rosa for the Defendants Tracks & Wheels Equipment Brokers Inc., Michael Gougeon and Workers Auto Services Ltd. James P. Thomson and Julia L. Lefebvre for the Defendant Andrew Sostarich

HEARD: October 3, 2017

ENDORSEMENT

Introduction

[1] There are three motions before me. Each seeks different relief with respect to the disposition of $500,000.00 currently held in escrow by the defendant, Andrew Sostarich.

[2] The funds came to be held in escrow when the plaintiffs, Conrad Houle, Sheila Houle and CS Houle Holdings Inc., entered into a share purchase agreement to sell all the issued and outstanding shares of the defendant Tracks & Wheels Equipment Brokers Inc. to the defendant Workers Auto Services Ltd. The defendant Michael Gougeon is the sole shareholder and director of Workers Auto.

[3] The transaction included an escrow agreement under which Mr. Sostarich agreed to be the escrow agent for the $500,000.00 deposited in escrow (the “escrow funds”). Mr. Sostarich was also the plaintiffs’ accountant, including on the transaction. He is also Tracks & Wheels Equipment Brokers Inc.’s accountant and Mr. Gougeon’s accountant.

[4] This litigation arises out of the transaction. There are disagreements between the parties to the transaction about adjustments to the purchase price and options over certain parcels of land. There are allegations of professional negligence, breach of contract and breach of fiduciary duty made against Mr. Sostarich and his accounting firm, Sostarich Ross Wright Cecutti LLP. There are allegations of professional negligence, breach of contract and breach of fiduciary duty made against Alesia Sostarich, Mr. Sostarich’s sister and the lawyer for the plaintiffs on the transaction, and her firm, Arseneau Poulson.

[5] The action has been set down for trial. By order of Gordon R.S.J., the trial will be heard in Sudbury, Ontario, though no date has yet been set.

[6] The motions before me, in the order in which they were brought, are:

a. Mr. Sostarich’s motion for an order directing him and his firm to pay the escrow funds into court;

b. the plaintiffs’ motion, for which they need leave, for partial summary judgment for payment of all of the escrow funds to them; and

c. a motion brought by Tracks & Wheels, Mr. Gougeon and Workers Auto (collectively, the “Gougeon defendants”) for partial summary judgment directing the escrow funds to be distributed by paying $239,357.34 plus interest to Workers Auto, and the remainder to the plaintiffs.

[7] The plaintiffs argue that under the terms of the escrow agreement, they are entitled to the funds held in escrow. They base this claim on what they argue is the lack of compliance with the notice provisions in the escrow agreement.

[8] The Gougeon defendants argue that they are entitled to $239,357.34 from the escrow funds as an adjustment to the share purchase price based on uncollectible accounts receivable.

[9] Mr. Sostarich argues that he does not want to be responsible for pre-judgment interest on the escrow funds, he has no interest in the escrow funds, and he wants to pay them into court.

[10] Notably, the issues about the adjustments to the purchase price are bigger than those engaged by the plaintiffs’ and Gougeon defendants’ arguments on these motions. Whatever happens to the escrow funds, the parties to the transaction will continue to litigate about adjustments to the purchase price. In effect, the escrow funds are security for obligations that may be determined to be owing under the share purchase agreement. The question before me is what should happen to that security pending trial.

[11] The Gougeon defendants’ claim to $239,357.32 is based on a reconciliation completed by Mr. Sostarich in September 2016, more than two years after the transaction closed. The plaintiffs dispute a number of items on the reconciliation. At the hearing of the motions, counsel for the Gougeon defendants conceded that there were issues with the reconciliation. He stated that no one knows the exact amount to which the Gougeon defendants may properly claim entitlement. He stated that a better result on these motions would be to grant Mr. Sostarich’s interpleader motion. The Gougeon defendants did not formally abandon their motion for partial summary judgment, however, in view of counsel’s concession and the obvious concerns with the reconciliation calculation, as described in the plaintiffs’ argument, the Gougeon defendants have not proven their entitlement to this, or any, amount from the escrow funds. I need not address the Gougeon defendants’ motion further. Indeed, it is desirable that I not do so as the reconciliation will be a matter for the trial judge to resolve. The Gougeon defendants’ motion is dismissed.

[12] As a result, I am left with the plaintiffs’ motion for partial summary judgment and Mr. Sostarich’s interpleader motion. If the plaintiffs’ motion is granted, it will be unnecessary to deal with the interpleader motion. As a result, I begin with an analysis of the plaintiffs’ motion for partial summary judgment.

Issues

[13] The plaintiffs’ motion requires me to determine the following issues:

a. Should leave be granted under r. 48.04(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, to allow the plaintiffs to bring their motion notwithstanding that they have set the action down for trial?

b. If leave is granted, is this an appropriate case for partial summary judgment?

c. If this is an appropriate case for partial summary judgment, have the plaintiffs proven that under the terms of the escrow agreement, they are entitled to all the escrow funds? This requires me to consider whether the notice requirements under the escrow agreements were met.

Should leave be granted?

[14] Because the plaintiffs have set the action down for trial, they require leave to bring their summary judgment motion under r. 48.04(1) of the Rules of Civil Procedure.

[15] The Gougeon defendants argue that for leave to be granted, one of two conditions must be met: (i) there has been a substantial or unexpected change in circumstances such that a refusal to grant leave would be manifestly unjust; or (ii) the interlocutory step is necessary in the interests of justice: Cromb v. Bouwmeester, 2014 ONSC 5318, [2014] O.J. No. 4298, at paras. 33-37.[^1]

[16] The defendants argue that the funds have been in escrow for years, such that there can be no substantial or unexpected change, and that it is not necessary for the motion to be brought.

[17] The plaintiffs rely on Fruitland Juices Inc. v. Custom Farm Service Inc., 2012 ONSC 4902, 112 O.R. (3d) 453, at para. 28, where the court found that the “substantial or unexpected change” criterion is not helpful or logical when the motion for which leave is sought seeks summary judgment. Rather, if a summary judgment motion is less costly and time-consuming than the trial and will not unduly delay the start of the trial, the court found there was no need for the moving party to explain her choice of timing.

[18] The plaintiffs argue that their motion for partial summary judgment was an appropriate response to the unexpected interpleader motion brought by Mr. Sostarich. That motion was brought very shortly after the matter was set down for trial. They argue that the interpleader motion is a tactical motion and their cross-motion is necessary as a result.

[19] The plaintiffs also argue that it was appropriate for them to set the action down for trial, and that bringing the motion will not delay the trial, a date for which is not yet set.

[20] I find that the plaintiffs’ motion was brought in response to the interpleader motion, which was unexpected. I note that the interpleader motion could also have been brought very early on in these proceedings, but was only brought once the action was set down for trial.

[21] I do not think that to grant leave in this case I must find that it would be manifestly unjust not to do so. The fact that the motion is for partial summary judgment is important. I accept the court’s conclusion in Fruitland that if a summary judgment motion is an efficient step, leave ought to be granted where the motion will not occasion any delay in the trial. In my view, there is no prejudice or delay occasioned by dealing with the plaintiffs’ motion at this time. Moreover, the plaintiffs’ defence to the interpleader motion overlaps significantly with their summary judgment motion, making the hearing of the summary judgment motion efficient. The motion has the potential to shorten the trial. As a result, I grant leave to the plaintiffs to bring their motion.

Is this an appropriate case in which to grant partial summary judgment?

[22] Summary judgment is appropriate where there is no genuine issue requiring a trial. This will be the case where the summary judgment process provides me with the evidence required to fairly and justly adjudicate the dispute, by allowing me to make the necessary findings of fact and to apply the law to the facts, and where summary judgment is a timely, affordable and proportionate procedure: see Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, at paras 49-50 and 66.

[23] A motion for partial summary judgment presents particular challenges. Partial summary judgment should not be granted where there is a real risk of duplicative or inconsistent findings at trial: Canadian Imperial Bank of Commerce v. Deloitte & Touche, 2016 ONCA 922, [2016] O.J. No. 6319.

[24] A staged summary judgment process can create problems in an action where credibility is important. In Baywood Homes Partnership v. Haditaghi, 2014 ONCA 450, 120 O.R. (3d) 438, at para. 44, the Court of Appeal cautioned that a court hearing a summary judgment motion must guard against the dangers of decontextualized affidavit and transcript evidence becoming the means by which substantive unfairness enters into the summary judgment process in a way that would likely not occur in a trial.

[25] These dangers were recently reiterated by the Court of Appeal in Butera v. Chown, Cairns LLP, 2017 ONCA 783, at paras. 23-35. There, the court held that partial summary judgment should only be granted in the clearest of cases. It warned that motions for partial summary judgment can cause delay, increase costs, be an inefficient use of judicial resources, and increase the risk of inconsistent findings. Partial summary judgment must be considered in the context of the litigation as a whole.

[26] In this case, the defendants argue that partial summary judgment is not appropriate because there is a risk of inconsistent or duplicative findings at trial.

[27] First, they argue that at trial, factual determinations of the conduct and motivations of the parties during the negotiations of the share purchase agreement and escrow agreement, throughout the closing period and thereafter, will be required. That may be, but I see no need to make any findings on these matters in order to deal with the plaintiffs’ motion.

[28] They argue that there is a risk of inconsistent findings of fact and credibility disputes about the parties’ negotiation of, and compliance with, the escrow agreement. While there are some matters of disagreement among the parties, it is not necessary for me to resolve factual disagreements on these issues to deal with this motion.

[29] The resolution of this motion does not require me to enquire into whether Mr. Sostarich breached his fiduciary duties or was professionally negligent. It does not require me to make any enquiries into the role Ms. Sostarich or her firm played in these events. It does not require me to make any findings about the validity of the claims for adjustments to the purchase price or the options on the land that are at issue in this proceeding.

[30] In my view, the plaintiffs’ summary judgment motion can be decided on the basis of a very few facts that are agreed as between the parties, and on the interpretation of the escrow agreement. Dealing with this motion will dispose of a discrete issue that would otherwise form part of the trial: the escrow funds. I can do so on the basis of uncontested facts. As a result, I do not see how my determining the motion will in any way restrict the trial judge from making her findings of fact or run the risk of inconsistent findings or duplicative proceedings. To the extent that contested evidence about the escrow agreement is relevant to determining other issues in the trial, some evidence may be duplicative, but the issue I address on this summary judgment motion will no longer be live.

[31] I note that there is some potential for inconsistent findings between my conclusions in this motion and a separate action that has been commenced against Mr. Sostarich by the Gougeon defendants, in which the Gougeon defendants claim against Mr. Sostarich for, among other things, failing to deliver the requisite notice under the escrow agreement. However, the risk of inconsistent findings is no greater than it would be at the trial of this action. I do not consider the separate action to be a reason to find that partial summary judgment is not appropriate in this case.

[32] As a result, I conclude that this is an appropriate case to determine the motion for partial summary judgment.

Are the plaintiffs entitled to the escrow funds pursuant to the terms of the escrow agreement?

[33] The plaintiffs claim entitlement to the entirety of the escrow funds based on the lack of notice they received of the Gougeon defendants’ claim to an adjustment to the purchase price based on uncollectible accounts receivable.

[34] The escrow agreement provides, in s. 6, that:

Subject to s. 7 hereof, the Escrow Amount shall be released by the Escrow Agent as follows:

(b) in accordance with Section 7 hereof, or

(c) on the Escrow Period Termination Date for any Remaining Escrow Amount.

[35] It is common ground that the Escrow Period Termination Date is defined as 90 days following closing. The transaction closed on July 21, 2014. The Escrow Period Termination Date is thus October 19, 2014.

[36] Section 7(a) of the escrow agreement provides that if the purchaser reasonably determines that it has a “Claim”—a term defined in the escrow agreement with reference to the share purchase agreement—it “shall give written notice of such determination to the Escrow Agent and to the Vendors, setting out the reasons for the dispute as well as the amount under dispute and reasonable details of the calculation of such amount”. This notice is defined as a “Loss Notice”.

[37] There is no dispute that the purchaser’s right to adjust the purchase price because of uncollectible accounts receivable is a Claim.

[38] Section 7(a) also requires the escrow agent, on receiving a Loss Notice, to “promptly notify the Vendors in writing that it has received a Loss Notice, including a copy thereof” and provides that the escrow agent “shall set aside from the Escrow Amount the amount claimed in the Loss Notice.” It then provides guidance as to how the escrow agent shall deal with the funds he is holding, directing that the escrow agent “shall hold the [amount claimed] until (i) it disburses such amount in accordance with Section 7(b)…”

[39] Section 7(b) of the escrow agreement provides the vendors with the right to dispute the purchaser’s Claim under the Loss Notice by sending a signed written notice concurrently to the escrow agent and purchaser within twenty days “stating such dispute and summarizing the basis for such dispute”. “Dispute” is not a defined term in the agreement, but the notice under s. 7(b) is defined as the “Dispute Notice”. If the escrow agent receives a Dispute Notice “within the requisite time, it shall take no further action pursuant to such Loss Notice…” until it receives a final and binding determination from a court or arbitration panel, or receipt of written instructions signed by the purchasers and the vendor.

[40] If no Dispute Notice is received within the requisite twenty days, the escrow agent “shall disburse the amount set aside pursuant to section 7(a) and pay forthwith to the Purchaser the amount” in the Loss Notice.

[41] There is no dispute that the plaintiffs never received written notice of any Claim within the 90 day period.

[42] On September 29, 2014, within the 90 days before the Escrow Period Termination Date, Mr. Gougeon emailed Mr. Sostarich. His email contained only one sentence: “This is worse than I thought”. The email attached a document entitled “Tracks & Wheels Equipment Brokers Inc. Remaining Aged A/R from March 31, 2014”. The document purports to be a list of uncollectible accounts receivable[^2].

[43] Mr. Gougeon states that this is a Loss Notice. I make no finding about whether it is or isn’t. However, if it was a Loss Notice, it was not sent to the plaintiffs as the escrow agreement required Mr. Gougeon to do.

[44] If it was a Loss Notice, it was sent to Mr. Sostarich within the 90 day period. Mr. Sostarich argues that he delivered it to the plaintiffs on November 1, 2014, and that this was the prompt delivery required by the agreement in view of some personal matters, including his wife’s illness, to which he had to attend during the month of October 2014. The plaintiffs deny receiving this purported Loss Notice on November 1, 2014. It is not necessary for me to resolve the question of whether they received the email at that time.

[45] By s. 6 of the Escrow agreement, Mr. Sostarich was required to release the escrow amount on the Escrow Period Termination Date or in accordance with s. 7. Assuming, without finding, that the email was a Loss Notice, Mr. Sostarich could not hold the escrow funds beyond the Escrow Period Termination Date unless he did so pursuant to s. 7. Section 7 sets forth a procedure to deal with Claims and disputes. The procedure is time sensitive.

[46] Section 7 requires Mr. Sostarich to have delivered written notice, including a copy of the Loss Notice, to the vendors promptly. In my view, on the uncontested facts, Mr. Sostarich did not comply with this provision. He neither delivered written notice nor a copy of the Loss Notice, if indeed that is what the email was, promptly. Rather, he took over a month to do so, even assuming that he delivered the email and attached chart to Mr. Houle on November 1, 2014.

[47] I accept that Mr. Sostarich’s wife’s illness was a serious personal matter to which he had to attend. His evidence explains why he could not deal with Mr. Gougeon’s email on September 29, 2014 – his wife was in surgery. However, there is no evidence before me as to why he could not deal with the matter at any point during the month of October. His obligation to provide written notice and a copy of the Loss Notice, if that’s what the email was, was not onerous or time-consuming. If his wife’s illness prevented him from taking even that step, he should have made arrangements in advance to delegate the task, as it was during this time period that the Escrow Period Termination Date was set to expire.

[48] Mr. Sostarich also relies on s. 10 of the escrow agreement which provides that, “should any dispute arise with respect to the delivery, ownership, right of possession and/or disposition of the Escrow Amount, or should any claim be made upon the Escrow Agent or the Escrow Amount by a third party,” the escrow agent can retain the funds.

[49] In my view, s. 10 must be read in the context of the escrow agreement as a whole. It is significant that s. 7 contemplates that the purchaser asserts a “Claim” in a “Loss Notice” and the vendors “dispute” the purchaser’s Claim in a “Dispute Notice”. In my view, a proper reading of s. 10 of the escrow agreement requires that the “dispute” that allows the escrow agent to retain the funds is the dispute that arises on the delivery of a Dispute Notice, not on the delivery of a Loss Notice. The section does not use the word “Claim”, except in the lower case (thus suggesting it does not bear the defined meaning of “Claim” in the agreement). Moreover, s. 10 uses the word “claim” to refer only to third party claims. Thus, I find that s. 10 is only a basis for the escrow agent to hold the funds after a Dispute Notice is delivered.

[50] The defendants argue that Mr. Houle acknowledged learning in August 2014 that there were some issues with uncollectible accounts receivable. I do not need to address whether this evidence is credible. At best, any notice was verbal, and thus not contemplated by the escrow agreement. In any case, this alleged notice pre-dates Mr. Gougeon’s September 29, 2014 email which is the only Loss Notice alleged to have been delivered. Moreover, Mr. Sostarich does not depose that he told Mr. Houle about the uncollectible accounts receivable in August 2014. In these circumstances, I find that no Loss Notice was delivered in August 2014.

[51] Thus, the plaintiffs did not receive the notice to which they were entitled under the escrow agreement. They were denied the opportunity to file a Dispute Notice. By the terms of the escrow agreement, they were entitled to the return of the funds on the Escrow Period Termination Date. Mr. Sostarich was not entitled to hold funds in escrow after that date. The Gougeon defendants have lost their entitlement to security. They are left to proceed with their Claim, unsecured, under the terms of the share purchase agreement.[^3]

[52] In my view, there is nothing unjust about this result. In their motion the Gougeon defendants advanced a claim to $239,357.32 before admitting the reconciliation on which they rely to advance this claim is not presently verifiable. In these circumstances, I see no reason to continue to deprive the plaintiffs of $500,000.00 when they did not get proper notice under the escrow agreement nor an opportunity to deliver a Dispute Notice.

[53] Under s. 4 of the escrow agreement, escrow funds are to be deposited in one or more interest-bearing trust accounts. The plaintiffs claim return of the escrow funds plus any accrued interest. I see no reason why they should not also receive the interest, and no argument to that effect was made before me.

[54] The plaintiffs are thus entitled to the relief they seek in para. (b) of their Notice of Motion, that is, return of the escrow funds, plus all accrued interest.

Mr. Sostarich’s Interpleader Motion

[55] Given my conclusion on the plaintiffs’ partial summary judgment motion, it is not necessary to address Mr. Sostarich’s interpleader motion. The motion is dismissed.

Costs

[56] If the parties cannot agree on costs of these motions, the plaintiffs shall deliver submissions not to exceed three pages within two weeks of these reasons. Mr. Sostarich and the Gougeon defendants shall deliver costs submissions not to exceed three pages within a week thereafter. The plaintiffs may deliver reply costs submissions, not to exceed two pages, within five business days thereafter. Submissions may be delivered to my attention at Judges’ Administration, 361 University Avenue.

Conclusion

[57] The Gougeon defendants’ motion and Mr. Sostarich’s motion are dismissed. The plaintiffs’ motion for partial summary judgment is granted.

J. T. Akbarali J.

Date: November 01, 2017

[^1]: Mr. Sostarich’s submissions focused only on the first of these two criteria. [^2]: Whether the items on the list are indeed uncollectible accounts receivable remains an issue in the litigation. I make no finding in that regard. [^3]: The action raises many issues around the viability of the Gougeon defendants’ Claim but none that are relevant to the motion before me.