2249492 Ontario Inc. v Donato, 2017 ONSC 7594

CITATION: 2249492 Ontario Inc. v Donato, 2017 ONSC 7594 COURT FILE NO.: CV-17-578440-00CL DATE: 2017-12-19

ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST)

B E T W E E N:

2249492 Ontario Inc., Applicant

-and-

Paul Donato, Andrea Donato et al., Respondents

BEFORE: F.L. Myers J.

COUNSEL: Gerald L.R. Ranking and Zohar R. Levy, counsel for the respondents Ted Frankel, counsel for the Applicant Sanjeev P.R. Mitra, counsel for Grant Thornton Limited, the Monitor

HEARD: December 13, 2017

ENDORSEMENT

[1] By order dated August 29, 2017, the court expanded the powers of the Monitor at the expense of the respondents. The purpose of the expansion was twofold. First, was to ensure that the Monitor had sufficient powers to preserve and protect the business assets from continued and threatened defalcations by the respondents pending the implementation of a mandatory buyout of minority shares by the respondents ordered in a recent arbitration. The second reason was to equip the Monitor with powers to collect credible, detailed business information for the business valuator appointed to value the business for the purposes of the buyout.

[2] It was clearly recognized at the outset that the appointment was going to be expensive. Many independent eyes and ears were required to monitor the business of a large, busy restaurant/bar. Technology was required too. In making the respondents bear the cost of the appointment, the court relied upon the reasons of the arbitrator which were very critical of the respondents and the evidence of the applicant that expressed somewhat breathlessly fears of very substantial ongoing defalcations by the respondents.

[3] In essence, the arbitrator found that the respondents had excluded the minority shareholders from the business and then improperly used the business as their own personal piggybank. The evidence of the applicant drew on some of the evidence from the arbitration to suggest that very substantial losses remained likely pending the buyout absent an independent third party monitor. Moreover and regardless of the historic wrongdoing, there was also a need to obtain accurate information for the buyout valuation and I ruled that there was no basis to expect the parties to agree on protocols to rehabilitate the books and records that had been so assiduously mis-kept by the majority and management to date.

[4] Two months later, by endorsement dated October 30, 2017, I accepted a settlement between the parties in which the Monitor’s enhanced powers were reduced back to where they had been set prior to the arbitration. By that time, the Monitor had compiled substantial operating information for the valuation. Moreover, the Monitor’s initial reports suggested that the degree of risk to the ongoing operations, while remaining significant, were much reduced from what had been feared.

[5] While the parties agreed on the outcome, they asked me to resolve costs of the motion to end the Monitor’s enhanced powers. Mr. Ranking argued that they respondents obtained the relief that they sought (ending the enhanced role of the Monitor) and therefore claimed costs. I declined to order costs principally on the basis of the reasoning in Waterloo Condominium Corp. No. 161 v. Redmond, 2017 ONSC 1304. That case stands for the proposition that no costs should normally be awarded where parties settle on all issues other than costs. See Muskala v Sitarski, 2017 ONSC 2842.

[6] I noted in my reasons on October 30, 2017 that the order expanding the Monitor’s powers was no longer open for review. I found that the reduced yet substantial risks found by the Monitor did not undermine the reasonableness of the appointment in any event. Plus, I expressly left open the respondents’ motion to have the applicant share in the costs of the enhanced monitoring in proportion to the parties’ respective shareholding interests.

[7] Since that time, the Monitor has published a further report that supersedes the report that was before the court on October 30, 2017. The report before me now provides new evidence that I did not have before. It provides the final results of the Monitor’s enhanced review. The final results show clearly and plainly that there were no issues of ongoing defalcation. Income did not increase as one would expect if the respondents were stealing from the business before the Monitor’s powers were enhanced. Inventory variance did not decrease as one would expect if inventory was being stolen or sold without revenue being reported. Any remaining, undisclosed information was immaterial.

[8] The respondents were completely vindicated from the applicant’s highly inflammatory claims suggesting that the respondents were committing ongoing breaches of orders leading to up to $200,000 per month in lost cash.

[9] In all, I agree that one of the two purposes of the enhancement of the Monitor’s powers, in retrospect, was inappropriate. Moreover, the order was obtained at least in part by inappropriately using a short notice process that enhanced the appearance of urgency. However, the second purpose of the appointment – to collect good evidence for the valuator – remains. I agree that the need for data was caused by the respondents’ inapt bookkeeping. But they have already been held to account for their bookkeeping as part of the arbitration outcome. They have been ordered to buyout the minority shareholders.

[10] I agree with Mr. Ranking that it is manifestly unfair for the entire cost of the enhanced monitoring process to be thrust on the respondents now. If the business pays for the enhanced monitoring then, as the majority shareholders, the respondents will still bear the lion’s share of the funding cost. But the applicant and other minority shareholders will be bearing their proportionate share as is appropriate when the expenditure is for a corporate purpose.

[11] To be clear, I am not altering my decisions to decline to award costs on either prior motion. Rather, I am looking at para. 7 of the order dated August 29, 2017. In that paragraph, I ordered that the respondents be required to indemnify the applicant in the buyout for applicant’s share of the monitor’s fees and disbursements including those of its counsel paid by the business. Mr. Ranking argues that I should remove that indemnity and just leave the business bearing the Monitor’s fees and disbursements.

[12] Mr. Ranking relies upon Rule 59.06 (2)(a) that authorizes the court to vary an order on the ground of facts arising or discovered after it was made. In this case the key facts did arise after the order was made. There is no second guessing the appointment as I already found it to have been based on reasonable grounds irrespective of the assessment of the allegations against the respondents.

[13] The bulk of the arguments made by the applicant in response relate to historic wrongdoing by the respondents. It points to the findings of the arbitrator. It points to a finding of contempt of court made by Newbould J. It points to operational issues that arose during the enhanced monitorship that they try to characterize as breaches of the August 29, 2017 order. In my view these were just clumsy efforts by the business to avoid some of the inconvenience imposed upon it. The applicant points to untimely interventions by the respondents’ counsel during cross-examination that do undermine the witness’s credibility. Chitel v Rothbart (1983), 1982 1956 (ON CA), 39 OR (2d) 513 (CA).

[14] On balance, with the respondents being so totally vindicated in their post-arbitration conduct, in my view, it would be unfair to hold them one hundred percent liable for the enhanced monitoring costs. I therefore vary the order dated August 29, 2017 by deleting the last three sentences of para. 7 of that order.

[15] Moreover, as the respondents have now brought their appeal from the arbitration, an order enforcing payment of the general damages awarded by the arbitrator ought properly to await the outcome of that process. I therefore decline to enforce the award at this time.

[16] Order accordingly. The respondents may deliver up to three pages of submissions on costs by January 5, 2018. The applicant may deliver up to three pages of submissions on costs by January 19, 2018. Both sides shall deliver Costs Outlines with their submissions. Any further offers to settle relied upon for costs purposes may also be delivered by the submission deadlines. All submissions shall be sent to me as searchable PDF attachments to an email to my Assistant. Submissions shall not include any case law or legislation. References to case law or legislation, if any, shall be made as hyperlinks embedded in the submissions.

F.L. Myers J.

Date: December 19, 2017