COURT FILE NO.: 16-0813-SR
DATE: 20180307
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
1802248 Ontario Ltd. c.o.b. as Anytime Fitness, Ryan Johnson and Tatiana Johnson
Plaintiffs
– and –
2487048 Ontario Limited, Mike Allen, Clark Kent and Orion Fitness Inc.
Defendants
Joshua A. Valler for the Plaintiffs
Edward G. Spong for the Defendants
HEARD: Supplemental Submissions on March 6, 2018
supplemental Ruling on summary judgment motion
Boswell j.
introduction
[1] On November 2, 2017 the court heard the plaintiffs’ motion for summary judgment on the claims raised in the Statement of Claim.
[2] On November 27, 2017 the court released a ruling on the motion. In summary, the plaintiffs were granted summary judgment against the numbered company defendant (“248”) in the sum of $85,637.97. It was determined that an issue regarding liability for rent during the period November 2015 to January 2016 required a mini trial to resolve. A procedure was established for that mini trial to proceed. Finally, the issue of the liability of the individual defendants was adjourned to the mini trial.
[3] The reasons for the court’s initial ruling on the plaintiff’s summary judgment motion are reported at 2017 ONSC 7041. They include a section that dealt specifically with the personal liability of the individual defendants. I have reproduced that section of the prior ruling – paragraphs 83 to 90 – at Appendix “A” to this ruling for ease of reference. Essentially, I signalled that I may have been prepared to find the individual defendants liable to the plaintiff but for the fact that the Statement of Claim did not set out the basis upon which personal liability was asserted.
[4] The plaintiffs’ counsel wrote to the court subsequent to the release of the initial ruling. He advised that there is an Amended Statement of Claim that inadvertently did not make its way into the motion materials that were previously before the court. The Amended Claim in fact provides detailed allegations against the individual defendants and, the plaintiffs contend, provides the jurisdiction for the court to make an order against them.
[5] A supplemental hearing was scheduled and additional submissions were received from counsel.
[6] The following reasons explain why I find the individual defendants liable to the plaintiffs.
The Amended Claim
[7] In the Amended Statement of Claim, the plaintiffs seek damages in the amount of $61,537.67 against the individual defendants for negligent and fraudulent misrepresentation, conversion and deceit.
[8] Paragraphs 22-23 of the Amended Statement of Claim provide as follows:
In addition to or in the alternative, the Plaintiffs plead that the defendants, Allen and Kent, as the sole officers and directors of 248, are personally liable for their damages in the amount pleaded in paragraph 1(b) of this Statement of Claim for conversion and deceit.
The Plaintiffs have provided the Defendants with the assets of the Business, being the equipment and leasehold improvements free of any encumbrances on the understanding that they would be paid the Purchase Price pursuant to the terms of the APA. By taking the Business and its assets in a manner that was inconsistent with the purpose of the APA, the Defendant 248 committed the tort of conversion. The individual defendants, Allen and Kent, as sole directors and officers of 248 are also liable for 248’s conversion of the Plaintiffs’ assets.
The Tort of Conversion
[9] The elements of the tort of conversion were succinctly stated by Iacobucci J. in Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, 1996 CanLII 149 (SCC), [1996] 3 S.C.R. 727, at para. 31, as follows:
The tort of conversion involves a wrongful interference with the goods of another, such as taking, using or destroying these goods in a manner inconsistent with the owner's right of possession. The tort is one of strict liability, and accordingly, it is no defence that the wrongful act was committed in all innocence.
Good Faith Dealing in Contracts
[10] In its recent decision in Bhasin v. Hrynew, 2014 SCC 71, the Supreme Court explicitly addressed the following question: Does Canadian common law impose a duty on parties to perform their contractual obligations honestly? The answer was an unequivocal yes.
[11] There is no doubt that the common law has long recognized and supported private ordering in the field of contracts law. Parties are free to – indeed expected to – act in their own self-interest. At the same time, Cromwell J., writing for a unanimous court in Bhasin, observed that “commercial parties reasonably expect a basic level of honesty and good faith in contractual dealings…misleading or deceitful conduct will fly in the face of the expectations of the parties”. (Para. 60).
[12] In an effort to bring certainty and coherence to contracts law in a way consistent with reasonable commercial expectations, the court recognized an organizing principle of good faith that threads through various specific doctrines governing contractual performance. The principle is this: parties must generally perform their contractual duties honestly and reasonably and not capriciously or arbitrarily. (Para. 63). As Cromwell J. described, at para. 73:
This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.
Piercing the Corporate Veil
[13] As I noted in the original ruling on the plaintiff’s summary judgment motion, exceptional circumstances may at times warrant a departure from the usual rule that insulates the officers and directors of a corporation from liability for the corporation’s wrongdoing.
[14] Sometimes it would be flagrantly unjust to permit officers and directors to shield themselves behind the doors of the corporation. As Justice Sharpe held in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 1996 CanLII 7979 (ON SC), 28 O.R. (3d) 423 (Ont. Gen. Div.), at 433-434, affirmed [1997] O.J. No. 3754 (Ont. C.A.):
[C]ourts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct.
[15] Two questions must therefore be asked. First, do the individual defendants control the relevant corporation? Second, has that control been exercised for a fraudulent or improper purpose? See Terra Farm Ltd. v. Stud Farm Inc. 2010 ONCA 422 at para. 34.
Discussion
[16] I am satisfied that the two individual defendants are the controlling minds of 248.
[17] As I signalled in my earlier ruling, I am also satisfied that they have used 248 to engage in improper and dishonest conduct.
[18] The individual defendants, through 248, have effectively deprived the plaintiffs of their business. They have possession of the business premises, together with its leasehold improvements. They have all of the equipment of the fitness club, fully paid for by the plaintiffs. They have the customer list and goodwill of the business. They paid for nothing.
[19] The defendants’ counsel conceded in November 2017 that part of the plaintiffs’ claim was not disputed. Yet the individual defendants have not caused 248 to pay anything towards the amounts rightfully – and admittedly – owed to the plaintiffs.
[20] I noted previously that Mr. Kent provided a cheque to Ms. Johnson in the amount of $14,941.04 in accordance with a statement of adjustments that the plaintiffs had prepared. Subsequently a stop payment was placed on that cheque. The only explanation offered by Mr. Kent was that he had received advice from his lawyer that the adjustments were not justified. No explanation as to what parts of the adjustments were disputed was given. No amendments were suggested. Just a full stop on payment.
[21] I find that the defendants never intended to make any payment to the plaintiffs. They dealt with the plaintiffs in an entirely dishonest manner and have simply converted the plaintiffs’ assets to themselves. Their actions have been high-handed and deceitful. They fly in the face of the organizing principle of good faith dealing recognized by the Supreme Court in Bhasin.
[22] It would be flagrantly unjust, in my view, to permit the individual defendants to shield themselves and their conduct behind 248.
[23] Mr. Spong argued that if the corporate veil were pierced on this occasion, it would effectively mean that there is no corporate veil. I disagree. The principles from Salomon v. Salomon & Co. Ltd., [1897] A.C. 22 (H.L.) remain good and binding authority. It is well-settled that officers, directors and shareholders of a corporation are generally insulated from personal liability for the malfeasance of the corporation. A corporation, in law, has its own separate identity.
[24] But it is also well-settled that the principles from Salomon are not inviolable. Officers and directors of corporations are subject to personal liability for their independent tortious conduct. Moreover, individuals who control closely-held corporations will be held to account personally where they attempt to use a corporate identity to commit dishonest or improper acts.
[25] This is not a case of a corporation simply not paying its debts. This is a case of two individuals who effectively cheated the plaintiffs out of the assets of a business. To permit them to shield behind 248 would be, in my view, entirely unjust.
[26] For these reasons, I am satisfied that there is no genuine issue for trial with respect to the personal liability of the individual defendants. I am prepared to grant judgment against them.
[27] The plaintiffs seek $61,537.67 against the individual defendants. It was not made clear to me how that number is arrived at. The amount paid by the plaintiffs to retire the leasehold improvements loan and the equipment loan was $58,697.06. The corporate defendant was to have paid this amount and did not. For the foregoing reasons, I find the individual defendants liable for that amount, together with pre-judgment and post-judgment interest from and after January 1, 2016.
[28] The issue of costs of the motion remains outstanding. If the parties are unable to agree on the calculation of pre-judgment interest and costs, they may make written submissions, not to exceed three pages in length (excluding Cost Outlines) on a fourteen day turnaround. The plaintiffs shall serve and file their submissions by March 21, 2018 and the defendants shall serve and file their submissions by April 4, 2018. All submissions should be filed electronically with my assistant, Diane Massey, by email to diane.massey@ontario.ca.
Boswell J.
Released: March 7, 2018
Appendix “A”
Excerpt from Ruling on Summary Judgment Motion
Question Three: Do the personal defendants have any liability for any part of the plaintiffs’ claims?
[83] 248 is a closely-held corporation, dominated by the two personal defendants. Through the use of that corporation, they have gone into possession of the Bradford Anytime Fitness location. They paid no rent for three months, leaving the vendors in a precarious financial position. More importantly, they have paid nothing on account of the purchase price. They have, it would appear, taken the position that they have a natural entitlement to take someone else’s business for free: the equipment, the leasehold improvements, the memberships and the goodwill, all theirs for the taking.
[84] They provided a cheque for the closing adjustments, which they promptly stopped payment on, without any meaningful explanation. They claim that their lawyer advised them that the adjustments were not justified, but they have not identified that lawyer, nor indicated what adjustments were not justified or why. They have not proposed a revised statement of adjustments.
[85] During oral argument, their lawyer conceded that, based on what he called the plain reading of the APA, 248 clearly owed the plaintiffs the balance of the equipment loan. He offered no explanation for why a liability that is without doubt has not been paid.
[86] The law of contracts respects private ordering. It respects the right of parties to act in their own self-interest. It respects the art of the deal and supports the notion that parties are entitled to secure the best deal that they can for themselves. But, as Bhasin makes clear, it does not respect dishonesty or capricious dealings. As Cromwell J. described it, “deceitful conduct flies in the face of the expectations of the parties”. (Bhasin, para. 60).
[87] The plaintiffs’ counsel characterized the conduct of the personal defendants as amounting to the tort of conversion. Tortious conduct on the part of the directors or officers of a corporation is another route to personal liability.
[88] The difficulty I have with this aspect of the plaintiffs’ claim relates to the inadequacy of their pleadings. Nowhere in the pleadings is the tort of conversion mentioned. Nowhere is there an assertion of a breach of the duty of honest dealing. In fact, the claim is silent in terms of any alleged conduct on the part of the individual defendants that would support a finding of personal liability.
[89] As a matter of procedural fairness, parties are entitled to insist that cases be disposed of on the basis of issues raised in the pleadings. As the Court of Appeal held in 460635 Ontario Ltd. v. 1002953 Ontario Inc., 1999 CanLII 789 (ON CA), 1999 CarswellOnt 3428 at para. 9, “A finding of liability and resulting damages against a defendant on a basis that was not pleaded in the statement of claim cannot stand. It deprives the defendant of an opportunity to address that issue in the evidence at trial.”
[90] In the absence of a pleaded allegation of misconduct on the part of the principals of 248, I am unable to grant judgment against them. This part of the motion fails. The plaintiffs may, of course, elect to amend their pleadings and, should they do so, they may reassert this issue at the time that the mini trial is conducted in accordance with the process I described in paragraph 78 above.