COURT FILE NO.: CV-18-593447
DATE: June 11, 2018
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Sigma Loyalty Group Inc. v. Aimia Proprietary Loyalty Canda Inc., Aimia Proprietary Loyalty Singapore PTE Ltd. and Aimia Proprietary Loyalty Sendirian Berhad;
BEFORE: MASTER C. WIEBE
COUNSEL: Mark S. Shapiro for the plaintiff; Rahool P. Agarwal for the defendants.
HEARD: May 29, 2018.
REASONS FOR DECISION
[1] The plaintiff seeks an order requiring the defendants to pay into court $1,848,000 plus accrued interest from January 29, 2018, or otherwise secure this amount on terms that are just. The defendants oppose this motion.
Background
[2] Based on the evidence presented, I find the following relevant facts.
[3] On June 28, 2016, the plaintiff entered a purchase agreement with the defendants whereby the plaintiff purchased all of the assets of the defendants relating to their enhancement services business. The purchase price was $15,400,000.
[4] On July 29, 2016 the plaintiff, the defendants and Computershare Trust Company of Canada ("CTC") entered into an Escrow Agreement whereby CTC was to hold $1,848,000 from the purchase price paid by the plaintiff in trust for a specified period as an "Indemnity Holdback Amount" (hereafter the "Escrow Fund"). Under this agreement CTC was to hold the Escrow Fund in interest bearing accounts until it was to be released in accordance with the Escrow Agreement.
[5] Sections 6 and 7 of the Escrow Agreement specified inter alia that if the plaintiff had a claim against the defendants pursuant to the purchase, it had to provide written notice of the claim, called a "Loss Notice," to CTC and the defendants "before" January 29, 2018. If such Loss Notice was properly delivered in a timely way, CTC was barred from dealing with the Escrow Fund until an arbitration award, court order or joint instruction of the parties. If the Loss Notice was not delivered "before" January 29, 2018, CTC was obligated to release the Escrow Fund to the defendants "on" January 29, 2108.
[6] The purchase was completed on July 29, 2016, and the Escrow Fund was established.
[7] In the course of the next 2 ½ years, the plaintiff came to the conclusion that it indeed had a substantial claim against the defendants on account of the purchase. It alleged several breaches of contractual representations and warranties. Its claim is $5,771,514.
[8] On January 24, 2018, CTC emailed the defendants' counsel requesting banking information required to effect the transfer of the Escrow Fund. The defendants gave the requested information by return email that day. This correspondence was not copied to the plaintiff.
[9] On January 25, 2018, counsel for the plaintiff delivered a Loss Notice (in the amount of $5,771,514) only to the defendants, not to CTC.
[10] On January 26, 2018, a Friday, plaintiff's counsel arranged for courier delivery of the Loss Notice to CTC. The courier did not deliver the Loss Notice to CTC that day.
[11] On Monday, January 29, 2018, CTC released the Escrow Fund to the defendants at 10:21 a.m. The plaintiff's Loss Notice was delivered to CTC over two hours later, at 12:53 p.m.
[12] In March, 2018, the plaintiff commenced this action against only the defendants, not CTC, claiming damages and an order requiring payment of the Escrow Fund into court. On April 2, 2018, the plaintiff commenced this motion.
Issues to be determined
[13] This motion is pursuant to Rule 45.02, which provides that, "where the right of a party to a specific fund is in question, the court may order the fund to be paid into court or otherwise secured on such terms as are just." The test to be applied is now well established; see Sadie Moranis Realty Corp. v. 1667038 Ontario Inc., 2012 ONCA 475 (Ont. C.A.) at paragraphs 18 and 19. Pursuant to this test the following issues need to be determined:
a) Does the plaintiff claim a right to a specific fund, as opposed to damages?
b) Is the fund readily identifiable?
c) Is there a serious issue to be tried regarding the plaintiff's claim to the fund?
d) Does the balance of convenience favour granting the relief sought?
Analysis
a) Does the plaintiff claim a right to a specific fund, as opposed to damages?
[14] The Statement of Claim in this action, issued electronically on March 7, 2018, curiously names as defendants only the vendors in the purchase agreement, not the escrow agent, CTC. The prayer for relief is twofold: a claim for "damages" for breach of contract, breach of warranty and negligent or innocent misrepresentation in the amount of $5,771,515, namely the amount in the Loss Notice; an order requiring the defendants to pay into court the $1,848,000, namely the Escrow Fund, plus interest since the release date, pursuant to Rule 45.01.
[15] The second claim is particularized in the latter part of the Statement of Claim. In paragraph 49 the plaintiff pleads that the defendants "unilaterally directed" CTC to release the Escrow Fund prior to January 25, 2018, and did not withdraw that direction when the defendants received the Loss Notice. In paragraph 50, the plaintiff pleads that the Escrow Fund was improperly released in the face of a "properly delivered" Loss Notice. In paragraph 53 the plaintiff pleads that the defendants should pay an amount equal to the Escrow Fund into court pending the final disposition of the action. I reiterate that the escrow agent, CTC, has not been sued.
[16] Does this amount to a claim for a specific fund in the hands of the defendants? The pleaded facts would appear to correspond with the facts in the case of News Canada Marketing Inc. v. TD Evergreen, 2000 CarswellOnt 3544 (OSJ). In this case there was a share purchase of a business. An escrow agreement was established whereby part of the purchase price was held by an escrow agent to secure indemnity claims of the purchaser arising from the purchase. The escrow agreement required that the escrow fund be released in three installments over three years unless the escrow agent received prior to any of the release dates an indemnity claim from the purchaser, in which case the escrow agent was to hold back an amount equivalent to the claim. There was no issue with the first installment. With the second installment, the release date fell on a Sunday, and the vendor requested the escrow agent to release the installment on the previous Thursday, which it proceeded to do despite the fact that both the escrow agent and vendor had received an indemnity claim from the purchaser that significantly exceeded the installment.
[17] The purchaser sued the escrow agent, not the vendor, and then brought a motion under Rule 45.02 for an order requiring that the escrow agent pay the last installment in its hands into court, which installment was about half of the indemnity claim, and that the vendor pay into court an amount from the second installment it received that was equivalent to the other half of the indemnity claim. Justice Nordheimer granted the motion. Concerning the vendor, he stated in paragraph 22 that it was "fair and reasonable" that the vendor pay the requested money into court as the vendor had notice of the indemnity claim and nevertheless directed the escrow agent to release the second installment. It appears that the legal right to the specific fund in the vendor's hands in this case was grounded on equitable and restitutionary principles of fairness.
[18] Paragraphs 49, 50 and 53 of the Statement of Claim in the motion before me correspond with the facts that led to Justice Nordheimer's Rule 45.02 order in News Canada Marketing. Therefore, I am driven to the conclusion that the plaintiff has indeed asserted a legal right to a specific fund, namely a claim to a specific fund that the defendants improperly obtained in breach of the Escrow Agreement.
b) Is the fund readily identifiable?
[19] The issue here is that there is no evidence on this motion as to what the defendants have done with the Escrow Fund, namely whether they converted the money or kept it separate and apart from their other funds. Mr. Shapiro referred me to the decision of Justice Lauwers, as he then was, in S.W. Hospitality Inc. v. 1461486 Ontario Inc., 2012 ONSC 4433 at paragraph 12 where His Honour found that funds improperly diverted by an employee into a bank account remained a specific fund. He also referred me to the decision of Justice Belobaba in 3Genius Corp. v. Locationary Inc., 2016 ONSC 4092 where His Honour found in paragraphs 14 and 16 that a specific fund can be found "by a book-keeping entry or line-item description in a financial ledger." Mr. Shapiro then argued that I should draw an adverse inference against the defendants from their failure to present evidence as to what they have done with the Fund, namely an inference that they have indeed kept a separate fund in a bank account or a book-keeping entry in a financial ledger sufficient to identify the Fund.
[20] Mr. Agarwal argued that I should not draw such an adverse inference, as the plaintiff has onus to prove the specific fund. He reminded me that Justice Belobaba in the same 3Genius stated in paragraph 15 that under Ontario jurisprudence "[a] claim to an amount that remains undifferentiated and will simply be paid out of the defendant's or third party's corporate bank account is not a specific find."
[21] I am persuaded by Mr. Shapiro on this point. It is a basic tenet of evidence law that a party in sole possession of relevant evidence that chooses not to produce that evidence should be subject to an adverse inference that the evidence is not favourable to that party. For the purposes of this motion, I fail to see what the plaintiff could have done to present evidence of what the defendants have done with the Escrow Fund. The pleadings are not done, and there has been no production and discovery. I, therefore, draw the requested adverse inference for the purpose of this motion, and find that this part of the test does not stand in the way of the plaintiff's motion.
[22] I note incidentally that there was no issue as to the identifiableness of the specific fund in the vendor's hands in the News Canada Marketing decision, which bolsters my finding on this point.
c) Is there a serious issue to be tried regarding the plaintiff's claim to the fund?
[23] This was, in my view, the core of this motion. Is there a "serious issue" concerning the plaintiff's pleaded claim in equity and restitution, as identified in News Canada Marketing, to the Escrow Fund in the hands of the defendants?
[24] Before I discuss this issue, I will address two preliminary matters. First, in its factum, the plaintiff went on at some length about the merits of its underlying claim in damages as against the defendants, namely the claim that formed the Loss Notice. In argument, Mr. Shapiro referred to the words of Justice Nordheimer in News Canada Marketing at paragraph 19, where he stated that, "it is clear to me that there is a serious issue to be tried regarding this dispute" (emphasis added).
[25] I do not accept this argument. Mr. Agarwal rightfully pointed out in his responding factum that the merits of the damages claim is not the issue on this part of the test. The issue is whether the plaintiff has a serious claim "with respect to the fund"; see Kelowna Flightcraft Air Charter Ltd. v. Kales Group BV, 2016 ONSC 8015 (Ont. Master) at paragraph 9.
[26] As to the News Canada Marketing point, I have reviewed Justice Nordheimer's discussion of the merits of the damages claim and find it distinguishable. The vendor in that case argued that the terms of the escrow agreement did not apply to the type of indemnity claim that was served by the purchaser. His Honour dismissed that interpretation, discussed the nature of the purchaser's claim and went on to make his statement in paragraph 19 in the context of discussing the balance of convenience. It seems clear to me that His Honour presumed throughout that the purchaser had a serious claim to the escrow funds in the vendor's hands by virtue of the unfairness he identified in the vendor's conduct in knowingly directing the escrow agent to breach its obligations.
[27] My second preliminary point is a reminder of the caution that the court must bring to each branch of the test. In Sadie Moranis at paragraph 17 the Court of Appeal quoted from Sharpe J.A in Injunctions and Specific Performance (Aurora: Canada Law Book, 2012) at paragraph 2.760 concerning pre-trial execution such as this: "Attachment of assets or interference with disposition of assets will often constitute a serious interference with the defendant's affairs. That interference may be more readily justified where the plaintiff's right is specifically related to the asset in question. However, where the plaintiff asserts a general claim and looks to the assets only as a means of satisfying a likely or possible monetary judgment against the defendant, interference with the defendant's assets is more difficult to justify." That is the reason the court must determine whether there is a serious issue concerning the plaintiff's claim to the fund in question.
[28] As stated earlier, I have found that the pleaded claim does raise a legal claim to the Escrow Fund in the hands of the vendor by virtue of the decision in News Canada Marketing. Is this a serious claim? Having reviewed the evidence on this motion, I have determined that it is not.
[29] Unlike the vendor in News Canada Marketing and contrary to the pleaded facts, the evidence shows that the defendants did not direct or encourage CTC to release the Escrow Fund prematurely. Mr. Shapiro in argument put emphasis on an email exchange that occurred between CTC and counsel for the defendants on January 24, 2018, correspondence that was not copied to the plaintiff. This email exchange, initiated by CTC, was simply to provide the banking information to facilitate the release of the Escrow Fund on the release date in the Escrow Agreement, namely January 29, 2018. There is nothing in this correspondence that amounts to a direction or even a suggestion that CTC deviate from its obligations. I note as well that the plaintiff's Loss Notice had not been served on either CTC or the defendants by January 24, 2018. I also note that the defendants took no further action in relation to the Escrow Fund until the morning of the release date when they received the Escrow Fund, which no doubt came as a surprise to them as they had by that time received the plaintiff's Loss Notice. I find nothing objectionable in this conduct.
[30] Mr. Shapiro argued that this correspondence of January 24, 2018 was not copied to the plaintiff which was a breach of fiduciary duty on the part of CTC and a breach of the duty of good faith on the part of defendants. I do not agree, and I was given no authority for that proposition. The January 24, 2018 correspondence was just an administrative step to facilitate payment, a step that was implicit in the Escrow Agreement and that the plaintiff should reasonably have expected would be taken by the defendants and CTC as the release day approached and before any Loss Notice was served. At this time, according to the evidence, neither CTC nor the defendants were aware of the Loss Notice and had any reason to doubt that the Escrow Fund would be released on the release date.
[31] Mr. Shapiro argued that the plaintiff would have changed its conduct had it been copied with January 24, 2018 correspondence. There is no evidence to support this point. Furthermore, it is hard to imagine how plaintiff would have changed its conduct, as it had not served its Loss Notice by January 24, 2018. In the affidavit of Antoine Nadra, an officer with the plaintiff, there is also hearsay evidence that counsel for the plaintiff, one James McKeon, admitted that the plaintiff had directed CTC to release the Fund prior to January 25, 2018. There is no evidence to support this dubious and self-serving statement.
[32] What seems clear to me, based on the evidence presented in this motion, is that there was a failure on the part of the plaintiff to serve its Loss Notice on CTC in a timely way, which led to the release of the Escrow Fund on the release date as contemplated by the Escrow Agreement. I note again that CTC has not been sued in this action. I note as well that there was no criticism of CTC in the motion concerning its release of the Escrow Fund on the release date. This is another clear distinction between this case and News Canada Marketing where the escrow agent was made well aware of the purchaser's indemnity claim well in advance the fund release. There was none of that here.
[33] I find as a result, based on the evidence presented, there is no serious issue that the defendants did not direct or even suggest that CTC release the Escrow Fund in violation of the Escrow Agreement. Furthermore, there is no serious issue that the Escrow Fund was released in accordance with the Escrow Agreement. The facts of this case are clearly distinguishable from the facts in News Canada Marketing. I find, therefore, that the plaintiff's pleaded claim to the Escrow Fund in the defendants' hands does not raise a serious issue to be tried.
d) Does the balance of convenience favour granting the relief sought?
[34] Having determined that there is no serious issue to be tried, I need go no further. However, I will make some comments about the test of balance of convenience. This part of the test requires the court to balance the relative inconvenience resulting to the parties from either granting the order or not granting it. In 3Genius Corp. in paragraph 28, Justice Belobaba outlined the following factors to be considered by the court, namely whether the defendants are fleeing the jurisdiction and whether the defendants are dissipating monies in an effort to avoid creditors. The plaintiff presented no evidence on these factors.
[35] As to the solvency of the defendants and their ability to pay a judgment on the plaintiff's claim, the second affidavit of Robin Cardillo sworn May 10, 2018, filed by the defendants, contains audited financial statements of Aimia Inc. for the years 2016 and 2017. Aimia Inc. is the parent company of the defendants. These statements show that Aimia Inc. generated over $1.6 billion in revenue in 2017 and had cash reserves in excess of $489 million at the end of that year. The defendants are operating subsidiaries. There does not appear to be a need to secure the plaintiff's claim.
[36] Mr. Shapiro's primary argument here was that the question of the balance of convenience must be considered in the context of an escrow agreement that was expressly created to secure the plaintiff's claim so that the plaintiff did not have to go to the inconvenience of pursuing recovery for the amount of the escrow fund. That was Justice Nordheimer's point in News Canada Marketing at paragraph 19. Mr. Shapiro added in his factum that, if the defendants are not ordered to pay the Escrow Fund into court, the Escrow Agreement will be "rendered meaningless."
[37] I agree with Justice Nordheimer on this point. The balance of convenience test is different in the context of an escrow agreement. The purpose of the escrow agreement must be considered when weighing whether to inconvenience the plaintiff.
[38] However, I do not agree with Mr. Shapiro. The evidence on the motion made it clear that the Escrow Fund was released in accordance with the Escrow Agreement. The plaintiff just failed to serve its Loss Notice in a timely way. The Escrow Agreement will, therefore, not be rendered meaningless if I dismiss the motion
[39] In the end, I do not find that the plaintiff has satisfied this part of the test.
Conclusion
[40] For the reasons stated above, I dismiss the motion.
[41] As required, the parties filed costs outlines for the motion at the end of the argument. The plaintiff's costs outline shows actual costs of $23,951.44, substantial indemnity costs of $21,698.55 and partial indemnity costs of $14,934.71. The defendants' costs shows actual costs of $32,348.55, substantial indemnity costs of $25,889.88 and partial indemnity costs of $17,422.27.
[42] The defendants are clearly the successful party in this motion, and as a result deserve costs. The parties are encouraged to resolve the costs issue. If they cannot, the defendants may deliver further written submissions on costs of no more than two pages on or before June 21, 2018; the plaintiff may deliver responding written submissions on costs of no more than two pages on or before July 3, 2018; and the defendants may deliver reply submissions of no more than one page on or before July 6, 2018.
DATE: June 11, 2018 __________________________
MASTER C. WIEBE