COURT FILE NO.: CV-604634-00CL
DATE: 20181210
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Huachangda Canada Holdings Inc., Plaintiffs
AND:
Solcz Group Inc., Defendant and Plaintiff by Counterclaim
AND:
Huachangda Canada Holdings Inc., Shanghai Xianxing Intelligent Technology LLP and Tony Sauro, Defendants to the Counterclaim
BEFORE: Penny J.
COUNSEL: David Foulds and Yuxi (Wendy) Sun for the Plaintiffs
Alan Merskey and Stephen Taylor for the Defendant
Mark Gelowitz and Aislinn Reid for Tony Sauro
HEARD: December 5, 2018
ENDORSEMENT
[1] There are two motions before me. Both motions seek to strike out portions of the statement of defence and counterclaim. Although the action is complex and the pleadings lengthy, the motions are focused on very specific elements of the statement of defence and counterclaim and can, therefore, be dealt with quite succinctly.
Background
[2] The plaintiff, HCH, as a British Columbia corporation which operates as a holding company as described below. The defendant, SGI, is an Ontario corporation which also operates as a holding company. SGI is in the auto parts manufacturing business.
[3] In a 2016 share purchase agreement, HCH acquired a significant European auto parts manufacturing business owned (through subsidiaries Valiant and Winvalco) by SGI. Valiant and Winvalco, in turn, owned a number of other subsidiaries, including the plaintiff Turnkey.
[4] The transaction closed in March 2017. The value of the transaction was $410 million.
[5] The statement of claim is largely devoted to identifying particular representations made by SGI in the share purchase agreement and pleading how those representations were breached (by failure to disclose, or actively concealing, certain liabilities and other business and financial problems of Valiant and Turnkey). The claim goes on to plead that these breaches of representations caused massive losses to Valiant. It is further alleged that the breaches of representations also created a liquidity crisis at Valiant and Turnkey, placing Turnkey on the brink of bankruptcy and causing significant damages to HCH and Valiant.
[6] The statement of defence responds by alleging that the defendant breached no representations and, in any event, that losses suffered by the plaintiffs, if any, were not caused by the defendant but by the plaintiffs’ own mismanagement and financial problems. Specifically, the statement of defence alleges that if the plaintiffs suffered a liquidity crisis, it was not as a result of any breaches of representations by the defendant but as a result of capital constraints on and cash diversions from the Valiant and Turnkey businesses which were orchestrated by HCH and its principal shareholder, Huachangda Intelligent Equipment Group Inc., because HIEG needed money.
[7] It is these pleadings in the statement of defence that give rise to the plaintiffs’ issues on this motion.
[8] The counterclaim against HCH proceeds from the premise that if the defendant is not liable for any breaches of representations, it is entitled to payment of certain funds held in escrow since the closing of the transaction; the escrow funds have not been paid on account of plaintiffs’ claims this action.
[9] The counterclaim against Mr. Sauro (which is styled in the pleading as a “Claim for Contribution and Indemnity”) by contrast, proceeds from the premise that if the defendant is liable to the plaintiffs for breaches of representations, any misrepresentations were the responsibility of and caused by Mr. Sauro as a result of breaches of fiduciary duty and duties of care allegedly owed to SGI in his capacity as chief financial officer of the Valiant group of companies, including Turnkey. The defendant therefore seeks contribution and indemnity from Mr. Sauro for any damages for which the defendant may be found liable in the main action.
[10] It is the form of this counterclaim against Mr. Sauro that gives rise to his motion to strike the counterclaim as it has been made against him.
Plaintiffs’ motion to strike paragraphs of the statement of defence
[11] As characterized by the plaintiffs, the problem with the pleadings around liquidity and financial problems at HCH (and its shareholder) starts with para. 8 from the overview section of the statement of defence. The impugned portion pleads:
Ultimately, the claims advanced by the Plaintiffs in this proceeding are not an effort to recoup genuine damages for genuine wrongs, but rather an effort to seek an after the fact reduction to the agreed upon purchase price established under the SPA for the benefit of itself and its direct or indirect shareholders, and in response to financial and liquidity issues recently and currently experience by HCH and these shareholders.
[12] The plaintiffs move to strike this portion of para. 8 on the basis that it is a pleading of motive, which is not a constituent element of any of the causes of action alleged and is therefore irrelevant and must be struck out as frivolous, vexatious or an abuse of process. The plaintiffs argue that portions of paras. 15 and 18, all of paras. 36, 37 and 38, and para. 138 (d) are all tainted by this pleading of motive in para 8. The plaintiffs take this position because, in each case, there are references in those paragraphs to the plaintiffs’ financial troubles, foreign currency control problems of its PRC shareholder or various management, regulatory, financial or liquidity problems at HCH and/or its shareholder.
[13] I agree with the plaintiffs that the impugned portion of para. 8 is improper. It pleads ulterior motive, which is irrelevant to the causes of action asserted in the statement of claim. The challenged sentences are, therefore, frivolous and vexatious within the meaning of rule 25.11 and are struck, without leave to amend, from the statement of defence.
[14] I am unable to agree, however, that the same concern extends to the substance of the impugned pleadings in all but one of the remaining paragraphs.
[15] A distinction needs to be made between pleading motive for making the claim and pleading that the damages allegedly suffered by the plaintiffs were caused, not by any breaches of duty of the defendant, but by the plaintiffs’ own financial problems and mismanagement. In my view, the substance of the remaining challenged paragraphs (other than para. 37) fall into the latter, rather than the former category. These paragraphs respond to a claim made by the plaintiffs that the plaintiffs’ alleged losses were caused by the defendant. The defendant’s pleading in response alleges that any losses suffered by the plaintiffs, and the alleged liquidity crisis, were caused by the plaintiffs’ mismanagement and/or the financial and other demands of the plaintiffs’ shareholder.
[16] Paragraph 37, however, can only be read, again, as a pleading of motive underlying the plaintiffs’ issuance of the statement of claim. Para. 37 is not, on its face, a pleading that relates to causation of the damages or the alleged liquidity problems suffered by Valiant and Turnkey. Paragraph 37, therefore, is also struck without leave to amend.
[17] The balance of the Plaintiffs’ motion is dismissed.
Mr. Sauro’s motion to strike the counterclaim as against him
[18] Counterclaims are governed by rule 27.01. Rule 27.01(1) provides that a claim against a plaintiff may be asserted by the defendant by counterclaim. Rule 27.01(2) goes on to provide that a defendant who counterclaims against a plaintiff may join as a defendant to the counterclaim any other person, whether a party to the main action or not, who is a necessary or proper party to the counterclaim.
[19] By contrast, rule 29.01 provides that a defendant may commence a third-party claim against any person who is not a party to the action and who is or may be liable to the defendant for all or part of the plaintiff’s claim. Third-party proceedings are available where, for example, the defendant seeks to shift the responsibility in whole or in part for the plaintiff’s losses unto others and seeks to make those others contribute or indemnify the defendant for what he or she may have to pay to the plaintiff, Mid-Range Technical Services Inc. v. Sentia Solutions Inc. 2010 ONSC 5182.
[20] Thus, on a plain reading of rules 27.01 and 29.01, only a perpetrator of the wrongdoing alleged in a counterclaim can be joined as a necessary or proper party to that counterclaim; anyone not falling in that category must be considered under the third party rule.
[21] The defendant’s counterclaim against the plaintiffs is premised on the defendant having no liability to the plaintiffs for the plaintiffs’ claims. It is on this basis that the defendant asserts against the plaintiffs an entitlement to payment of the remainder of the purchase price which has been held in escrow since the closing of the transaction.
[22] The purported counterclaim against Mr. Sauro, by contrast, is premised on the defendant’s liability to the plaintiffs for breaches of the representations which the plaintiffs allege in the main action. Mr. Sauro is not implicated in the alleged wrongful retention of the escrow funds. This portion of the counterclaim is, pure and simple, a claim over for contribution and indemnity if the defendants are found liable in the main action for plaintiffs’ claims. Mr. Sauro is, therefore, based on these pleadings not a necessary or proper party to the defendant’s counterclaim, Mid-Range Technical Services, supra, in particular paras. 8 and 12 and 37 to 42.
[23] The defendants attempt to justify the Sauro counterclaim on the basis that, because they have initiated a counterclaim against Mr. Sauro, he is a necessary and proper party to that counterclaim. This argument is entirely tautological. It also ignores the requirement under rule 27.01(2) that the new party to the counterclaim must be a necessary and proper party to the rule 27.01(1) counterclaim against the plaintiffs.
[24] The defendant also argues that the counterclaim against the plaintiffs does engage the question of liability of the defendant to the plaintiffs, in so far as it assumes the defendant is not liable. This argument makes a mockery of language and stands the purpose and intent of rule 27.01 on its head. Mr. Sauro is not alleged to be a party to the SPA or to have anything whatsoever to do with the counterclaim against the plaintiff for payment of the escrow funds. He is only alleged to be responsible for contribution and indemnity if the defendants are found liable to the plaintiffs for breaches of the SPA. The claim over against Mr. Sauro is a claim, therefore, which is completely at odds with the counterclaim the defendants assert against the plaintiffs as the basis for payment of the escrow fund, being premised entirely on the defendant having no liability to the plaintiffs under the breach of representations claim. In these circumstances, Mr. Sauro cannot be a necessary and proper party to the defendant’s counterclaim against the plaintiffs.
[25] Not being a necessary and proper party, the counterclaim against Mr. Sauro is improper and is struck out without leave to amend the counterclaim.
[26] Mr. Gelowitz advanced an alternative basis for concluding that the counterclaim is improper. I agree with Mr. Gelowitz, however, that my conclusion on his first argument is dispositive of this motion. The alternative argument involves an interpretation of the indemnity provisions of the SPA and whether Mr. Sauro is a beneficiary of those provisions. This may become a live issue in the future if, for example, the defendant seeks to assert a third-party claim against Mr. Sauro. As a result, despite of the interesting arguments advanced by counsel on the interpretation question, I decline to make any ruling on this issue as it is not presently before the court.
Costs
[27] Counsel agreed that the winner of each motion would be entitled to $15,000. As there was divided success on the plaintiffs’ motion, I make no order as to costs. As Mr. Sauro was successful, I award costs against the defendant in favour of Mr. Sauro in the amount of $15,000, inclusive of fees disbursements and taxes, payable forthwith.
Penny J.
Date: December 10, 2018