COURT FILE NO.: CV-15-537606
MOTION HEARD: 20180312
REASONS RELEASED: 201800615
SUPERIOR COURT OF JUSTICE – ONTARIO
BETWEEN:
1876871 ONTARIO INC. Plaintiff
- and -
NOVA ERA BAKERY & PASTRY IV LTD., JOSE DIAS, JULIO SANTOS, NOVA ERA BAKERY SUPPLY INC., CARLOS DIAS and TORCATO FARIA Defendants
BEFORE: MASTER D. E. SHORT
COUNSEL: Philip Holdsworth fax: 416-746-8319 for the Moving Party/Plaintiff
Jeremy Lum-Danson fax: 416-558-8808 for Responding Parties/ Defendants
REASONS RELEASED: June 15, 2018
Reasons for Decision
I. Background
[1] At first blush, this appeared to be a relatively straightforward pleading amendment motion. The plaintiff seeks to add clarifications and other amendments to its original Statement of Claim which was issued (by previous counsel) in 2015.
[2] The plaintiff was the landlord in a commercial tenancy whereby the first named defendant, Nova Era Bakery & Pastry IV Ltd (“Nova Bakery”) leased and operated a bakery, pursuant to a written commercial lease dated May 29, 2007.
[3] In this 2015 action the plaintiff sought an amount in excess of $500,000 with respect to rental arrears including the accrued amount owing prior to the date of abandonment of the leased premises and the amount claimed to be owing for the loss of the benefit of the lease over its unexpired term. There also claims for aggravated damages and other heads of damages outlined in the original claim.
[4] The original claim, seeks a declaration that the acts and omissions of the individual defendants have caused the affairs of Nova Bakery to be conducted in a manner that is oppressive or unfairly prejudicial and that unfairly disregarded the interests of the plaintiff in its capacity as an unsatisfied creditor of the plaintiff.
[5] Also included the original pleading at paragraph 3(a), was a request for :
“A declaration that certain transactions, payments and conveyances conducted or effected by the defendants, or any of them, were intended to defeat, hinder or delay creditors, particularly the plaintiff, of their just and lawful actions, suits, debts, accounts, damages, penalties and forfeitures, or did have the effect of preferring other creditors over the plaintiff, and accordingly contravene the provisions of the Fraudulent Conveyance Act and Assignments and Preferences Act and, as a result, are void”
[6] The original claim was issued on October 1, 2015, and ultimately all the defendants filed a single defence dated June 8, 2017. The plaintiff now moves to amend and add to its Statement of Claim.
[7] The responding defendants have agreed (without admitting the allegations made) to a number of the amendments sought, but challenge other specific amendments as being improper based on the existing record.
[8] I have determined to generally agree with the defendants’ submissions regarding the grounds for refusing the inclusion of three of the challenged paragraphs.
II. Applicable Rule
[9] The plaintiff seeks to rely on Rule 26 as the basis for altering the previously filed pleading.
[10] This is a landlord's claim against a tenant who abandoned before the expiry of a lease. The tenant is a corporation. The landlord's lease was with the corporation only. The defendants assert that the landlord is a sophisticated party that did not obtain any personal guarantees or indemnities on the lease.
[11] Those associated with the former tenant, who are defendants to this action assert that “the Landlord is quite transparently attempting to expand the liability to others using loose claims of "alter ego" and "complete control and domination".”
[12] Specifically, they assert, as well that the allegations, as pleaded, “are entirely devoid of the requisite particulars.”
[13] Against that background I turn to the requirements of the Rules.
[14] Rule 26.01 provides that, on a motion, the court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.
[15] Although there is a presumption in favour of allowing amendments there is no absolute right to amend pleadings. The court retains residual discretion to deny amendments and will do so where the proposed amendments does not disclose a reasonable cause of action or is otherwise not tenable at law.
[16] As well rule 25 addresses the requirements for pleading specific types of claims:
Material Facts 25.06 (1) Every pleading shall contain a concise statement of the material facts on which the party relies for the claim or defence, but not the evidence by which those facts are to be proved.
Nature of Act or Condition of Mind (8) Where fraud, misrepresentation, breach of trust, malice or intent is alleged, the pleading shall contain full particulars, but knowledge may be alleged as a fact without pleading the circumstances from which it is to be inferred.
[17] In Marks v. Ottawa (City), 2011 ONCA 248 the Ontario Court of Appeal held that on a Rule 26.01 motion, the court must be satisfied of the following before allowing an amendment:
(a) The amendment should be allowed unless it would not cause an injustice not compensable in costs. (b) The proposed amendment must be shown to be an issue worthy of trial and prima facie meritorious. (c) No amendment should be allowed, which, if originally pleaded would have been struck. (d) The proposed amendment must contain sufficient particulars.
[18] Courts have held that the analysis with respect to the second and third factors listed above is akin to a motion to strike under Rule 21.
[19] On a Rule 21 motion the court must consider whether it is “plain and obvious” that the claim discloses no reasonable cause of action, assuming all facts as pleaded are true. In addition to full particulars, piercing a “corporate veil” requires exceptional circumstances.
[20] This was emphasized by Justice Laskin in his reasons on the appeal in 642947 Ontario Ltd. v. Fleischer, found at 2001 CanLII 8623 (ON CA), 56 OR (3d) 417:
67….To pierce the corporate veil is to disregard the separate legal personality of a corporation, a fundamental principle of corporate law recognized in Salomon v. Salomon & Co. (1896), [1897] AC. 22 (U.K. H.L.). Only exceptional cases - cases where applying the Salomon principle would be "flagrantly" unjust - warrant going behind the company and imposing personal liability….
68 Typically, the corporate veil is pierced when the company is incorporated for an illegal, fraudulent or improper purpose. But it can also be pierced if, when incorporated, “those in control expressly direct a wrongful thing to be done” ... “the courts 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.”
69 These authorities indicate that the decision to pierce the corporate veil will depend on the context. They also indicate that the separate legal personality of the corporation cannot be lightly set aside ....”
[21] I agree with the defendants’ submission that:
The Court of Appeal's decision does not stand for the proposition that the rules of pleading are met by a plaintiff who simply recites generic statements from the case law and inserts the parties named in the pleading. To hold otherwise would ignore the rules of pleading that require plaintiffs pleading fraud, breach of trust, malice or intent to plead full particulars and all material facts substantiating the claim.
[22] Similarly in Aspitotis v. Coffee Time Donuts Inc. 1995 CarswellOnt 2887, Justice Ground cautioned against the practice of adding officers and directors (and by extension, related corporations) for tactical reasons:
“14 The bringing of this action against Messrs. Michalopoulos and Grammenopoulos personally is in my view symptomatic of a current trend in commercial litigation where individual directors and officers are sued personally for corporate acts whether the actions are framed in contract or in tort. These actions against officers and directors are often, as in this case, totally without foundation and are very often based solely on a pleading that the particular officer or director was "the controlling mind of the corporation". To expose business persons to the considerable inconvenience and expense of being personally involved in litigation, where there is no foundation for an action against them in their personal capacities is in my view an abuse of the process of the courts…..”
[23] I note as well that the Court of Appeal addressed these matters in Tran v. University of Western Ontario, 2015 ONCA 295. There Justice Pepall held that:
[17] [When] a plaintiff purports to sue both a corporation and individuals within that corporation (whether officers, directors or employees) the plaintiff must plead sufficient particulars which disclose a basis for attaching liability to the individuals in their personal capacities.…[my emphasis]
[24] Further, the court in Tran set out that “in a pleading, the suggestion of a separate identity must be more than window dressing” and that “the appellant's attempt to isolate personal acts amounted to little more than window dressing”.
[25] The court considered the requirements of Rule 25 and indicated that the phrase “properly pleaded” as it liability of corporate directors, officers and employees “must be read as 'specifically pleaded', a separate claim must be stated against the individual in his personal capacity.”
[26] In Balanyk v. University of Toronto, 1999 CarswellOnt 1786, Justice Cameron the held that:
28 The full particulars of allegations of fraud, breach of trust or misrepresentation required by Rule 25.06(8) must set out precisely what each allegation of such wrongful act is, and the when, what, by whom and to whom of the relevant circumstances; see Lana International Ltd. V. Menasco Aerospace Ltd., 1996 CanLII 7974 (ON SC), 28 O.R.(3d) 343 .
29 The plaintiff must plead all the material facts on which it relies and all of the facts which it must prove to establish a cause of action which is legally complete. If any fact material to the establishment of a cause of action is omitted, the statement of claim is bad and the remedy is a motion to strike the pleadings, not a motion for particulars. If the plaintiff does not, at the time of pleading, have knowledge of the facts necessary to support the cause of action, then it is inappropriate to make the allegations in the statement of claim. It is improper to allow conclusions to be pleaded baldly and without any supporting facts...
[27] The authorities cited by the resisting parties support my conclusion that a plaintiff must plead the necessary material facts with sufficient clarity and precision so as to give the other party fair notice of the case they are required to meet. Further, where a plaintiff has not pleaded facts that support the claim, the appropriate remedy is to strike the claim rather than order the plaintiff to provide particulars.
[28] Justice Perell has held in EnerWorks Inc. v Glenbami Energy Solutions Inc.,(2012 ONSC 414) that where multiple defendants are named, it must be clear from the statement of claim what each defendant is alleged to have done. It is not enough to assert fraud against multiple defendants as a group. Specifically at para 65 of his reasons he observes that:
“Each individual defendant is entitled to know the alleged material facts of its misconduct.”
[29] Thus I conclude that piercing the corporate veil is an extraordinary remedy. Claims seeking to do so should only be permitted where the rules of pleading are met, namely the provision of full particulars.
III. Evidence in Support of Plaintiff’s Motion
[30] In my view, when seeking these types of amendments to a statement of claim, the plaintiff “must lead trump.” The amendment cannot be supported by generalities, but rather requires as much specificity as possible.
[31] There was only one affidavit filed in support of the requested amendments. It was sworn by a director of 1876871 Ontario Inc. ("187"), who deposed that as such she had knowledge of the matters “hereinafter deposed to”.
[32] The specific evidence bearing upon the issues before me, with my emphasis added, read:
The proposed amendments to the pleadings seek to provide further particulars with respect to material facts already pleaded, and the causes of action grounded in those material facts.
The original Statement of Claim, alleged that Nova Supply enforced an alleged Personal Property Security Act ("PPSA") registered security interest over the inventory, equipment, and other assets of Nova Pastry located at the Premises.
The Amended Statement of Claim seeks to amend the pleading to add an identified new legal consequence of that enforcement. Specifically, that Nova Supply's enforcement of its purported security interest worked to defeat 187' s right of distraint granted by the Commercial Tenancies Act, and that such enforcement is in violation of Section 50 of that Act.
The Statement of Claim also alleged that Nova Supply and Nova Bakery were in fact alter egos of one another. The Amended Statement of Claim seeks to amend the pleading to provide further particulars of the nature of that alter ego relationship between Nova Supply and Nova Pastry to support causes of action already pleaded in the Statement of Claim.
The amendments are required in order for the Court to fully determine the matters in issue in this action.
The proposed amendments do not harm the Defendants' interests in this proceedings
The Defendants have been on notice of the alleged facts that support the existing and expanded legal consequences of those alleged facts, since the original Statement of Claim was served upon them.
The Defendants interests in this proceeding will not harmed if the court permits the proposed amendments to be made because no further steps have been taken in this Action, beyond the close of the pleadings.
[33] In my view there is no specific evidence, identified nor deposed to, supporting a claim against any individual defendant. The purported claims, in my view, are devoid of specificity.
IV. Particular Paragraphs at Issue
[34] The moving defendants’ objections are made to the proposed amendments to paragraphs 5, 6 and 47 as they are "window dressed" claims that lack the requisite particulars. These paragraphs do nothing more than recite the generic circumstances identified by the case law for when a corporate veil can be pierced. It is asserted that “There are no particulars and insufficient material facts provided to identify what each defendant actually did wrong or to substantiate a claim in fraud, malice or intent.” Against this background I turn to the specific amendments that are being challenged.
[35] Paragraph 5, with the proposed amendment, reads:
“5. The defendant Nova Era Bakery & Pastry IV Ltd. ("Nova Pastry") is a company incorporated pursuant to the laws of Ontario, carrying on business as a retail storefront bakery, and is a de facto subsidiary of the defendant Nova Era Bakery Supply Limited.
[36] Opposing counsel’s factum asserts “In the above noted paragraph the Landlord baldly alleges that the Tenant is a de facto subsidiary of Supply Co. without sufficiently particularizing the material facts giving rise to allegations….”
[37] Similarly the proposed amendment version of paragraph 6 reads: :
“6. The defendant Nova Era Bakery Supply Inc. ("Nova Supply") is a company incorporated pursuant to the laws of Ontario, and is the de facto corporate parent of
carrying on business as a supplier forthe Nova Pastry location as well as other bakery locations carrying on business under the name of "Nova Era". Nova Supply provides the capitalization and assets, appoints management. shares directors with Nova Supply, receives the profits from Nova Pastry, and exercises effective executive control over Nova Pastry.”
[38] The resisting defendants argue with respect to this proposed amendment of paragraph 6:
“36. The Landlord alleges that Supply Co. is the de facto corporate parent of the Tenant and that Supply Co. provides capitalization and assets, appoints management, shares directors, and receives the profits of the Tenant and exercises effective control over the Tenant. However, in doing so, the Landlord fails to provide the requisite particulars to identify:
(a) How and when Supply Co. provided the alleged capitalization and assets, what type of capital was provided, by who at Supply Co. and when, and which particular assets were provided. There are no allegations of joint bank accounts and, without particulars, no way to discern what “provides the capitalization and assets” means;
(b) How Supply Co. appointed management, who it appointed and when. These are bald statements that simply drawn from the generic terms in the case law with no particulars;
(c) Which directors are shared and how many directors are shared;
(d) How the profits are allegedly received by Supply Co. from the Tenant and how those funds are diverted away from the Tenant to Supply Co. There are absolutely no particulars to substantiate the allegation that profits were diverted from one to the other, how the alleged diversion took place and when and which personal defendants were responsible and the nature and particulars of their actions;
(e) How Supply Co. exercises effective control over the Tenant. While Landlord makes bald allegations of "effective control" there are no particulars with respect to such control. The generic allegations about "capitalization and assets" do not meet the baseline particulars required to support a plea to pierce the corporate. ”
[39] The foregoing two challenged paragraphs are part of the introduction section of the pleading. Further details are set out in the proposed new paragraph 47 which reads:
- Based on the foregoing, the plaintiff pleads that Nova Pastry and Nova Supply operated as one enterprise, for which Nova Supply is responsible. Accordingly, the corporate veil of Nova Pastry should be pierced, and the defendant Nova Supply should be found liable for the breach of the commercial lease agreement because:
a. Nova Supply had effective executive and financial control over Nova Pastry and directed Nova Pastry to breach its obligations under the commercial lease agreement;
b. Nova Pastry is completely dominated and controlled by Nova Supply. Nova Supply exercised complete control over Nova Pastry's corporate activities, provided the capital and assets for Nova Pastry, and Nova Supply and its shareholders owned all of the shares of Nova Pastry, which owned all of the Nova Pastry assets and goods.
c. Nova Pastry is being used as a shield by Nova Supply for the improper breach of contract by Nova Pastry.
[40] My review of the pleading leads me to agree with counsel for the defendants’ submission:
“The Landlord baldly states a conclusion of law that the Tenant and Supply Co. operated as one enterprise, without the requisite particulars needed to support that legal conclusion. The Landlord baldly concludes that the corporate veil should be pierced and Supply Co. should be liable for the Tenant's breach of contract despite the fact that;
(a) The Landlord's claim that Supply Co. had effective executive control over the Tenant and directed the Tenant to breach its obligations under the lease is mere "window dressing" without particulars. For instance, there are no particulars about the alleged direction, how it was made, when it was made and the intention behind the alleged direction;
(b) The Landlord alleges that the Tenant is being used as a shield by Supply Co. for the improper breach of contract without particularizing how the alleged improper breach rises to the level of fraud, malice or intent or conduct akin to fraud - again the requisite particulars are lacking. Further, there is no specific allegation that Supply Co. or those in control of it "expressly directed a wrongful thing to be done". That is, breach of contract is not in and of itself "wrongful thing" in the context of pricing the corporate veil which requires extraordinary circumstances of fraud or akin to fraud. The fact that the Tenant abandoned and breached a contract is not fraud and the Landlord's attempt to tum a breach of contract case into a far reaching un-particularized claim for fraud is untenable. Corporate law will become a waste land of unpredictability if every breach of lease case turns into claims about piercing the corporate veil as was alluded to in Aspitotis v. Coffee Time Donuts Inc. [1995 CarswellOnt 2887] where the court characterized such pleadings as an abuse of process.
[41] Once again, I am guided by the reasons of Laskin, J.A in 642947 Ontario Ltd. v Fleischer; (2001), 2001 CanLII 8623 (ON CA), 56 OR (3d) 417, at para 69,(supra) where he notes that the separate legal personality of a corporation is a fundamental principle of corporate law and should not be lightly set aside.
[42] The evidence before me supports arguments that note that the plaintiff, a sophisticated party, failed to secure personal guarantees and indemnities on the lease executed by the Tenant. It would seem that the plaintiff is now attempting to remedy its contractual shortcomings by turning a simple case for breach of lease into a far reaching claim for fraud. This is not the kind of case that warrants the extraordinary remedy of piercing the corporate veil. As such, in the present circumstances, I am prepared to exercise the Court’s gate-keeper function and accordingly to deny the proposed amendment.
V. Statutory Claims
[43] The remaining proposed amendment to Paragraph 60 deals with claims under an additional third statute and reads:
- The said transfers constitute fraudulent conveyances and preferences and were made contrary to sections 2, 4 and 5 of the Fraudulent Conveyances Act,
andsections 4 and 5 of the Assignments and Preferences Act, and section 50 of the Commercial Tenancies Act, and ought to be set aside, or alternatively judgment
[44] The section involved reads:
Penalty for fraudulently removing, or assisting to remove, goods
- If a tenant so fraudulently removes, conveys away or carries off the tenant's goods or chattels, or if any person wilfully and knowingly aids or assists the tenant in so doing, or in concealing them, every person so offending shall forfeit and pay to the landlord double the value of such goods or chattels, to be recovered by action in any court of competent jurisdiction.
[45] The defendants argue that this addition to the paragraph is untenable at law. They observe that the plaintiff’s pleading at paragraphs 55-59 makes it “clear that the Landlord is trying to claim against "the defendants" for alleged funds that were purportedly diverted from the Tenant to "the personal use of the individual defendants" and Supply Co. and that somehow those funds ought to be applied to the account of the Landlord.”
[46] The Defendants submit that:
“42. …Aside from being completely devoid of particulars, the said transfers alluded to at paragraph 60 have nothing to do with section 50 of the Commercial Tenancies Act. As such reference to the Act in this paragraph is untenable at law - the amendment ought to be denied.
- Section 50 of the Commercial Tenancies Act deals with tenants abandoning premises and removing the equipment. This allegation is dealt with elsewhere in the Landlord's, but has no place in a section regarding diverting money.”
[47] Counsel for the defendants argues that as a consequence, the reference to the Commercial Tenancies Act in this paragraph is untenable at law and that the amendment ought therefore to be denied.
[48] However, in my view, whether or not a specific claim falls within the purview of the statute should not be determined at this preliminary stage. There may well be cost consequences, if there is ultimately no evidence to support the claim. Inasmuch as this action deals with a commercial tenancy and its termination, irrespective of where it appears in the pleading, I am not prepared to disallow the amendment sought with respect to paragraph 60.
VI. Disposition
[49] On balance, I am satisfied that the plaintiff is entitled to make the amendments to its Statement of Claim other than those sought to be made to Paragraphs 5, 6 and 47.
[50] Success has been divided but the plaintiff is being granted an indulgence with respect the changing of its initial pleading and the Defendant was successful on an important issue for the individual defendants.
[51] I have determined that an appropriate cost award is $1500 plus HST in favour of the Defendants payable within 30 days.
[52] I thank both counsel for their professional advocacy and helpful submissions.
Master D. E. Short
Released: June 15, 2018
DS/ R217