Court File and Parties
COURT FILE NO.: 3597/14 DATE: 20181213
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
Cornerstone Properties Inc. Plaintiff – and – Southside Construction Management Ltd. Defendant
COUNSEL: S. Turton, for the plaintiff D. Decker, for the defendant
HEARD: September 24, 25, 26, 2018
Hockin j.
A. Introduction
[1] In this action, the plaintiff Cornerstone Properties Inc. (“Cornerstone”) sues Southside Construction Management Ltd. (“Southside”) seeking a money judgment in the amount of approximately $53,500, the sum of four costs orders it obtained against 2108790 Ontario Inc. (“2108”) in an earlier commenced action, Carfrae Estates Limited (“Carfrae”) and Cornerstone v. 2108 Ontario Inc., Court File No. 07-CV-084542-00. Southside was not a party to the action but was the beneficial owner of 2108’s shares. 2108 is without assets; the costs orders remain outstanding. The purpose of this action is to pierce through the corporate veil of Southside to reach its assets to satisfy the costs orders.
[2] For the reasons which follow, this action will be dismissed.
B. Overview of the dispute
[3] The material facts are not in dispute.
[4] In 1984, Carfrae owned a vacant 99 acre parcel of land known as the Urlindale lands. Carfare was one of a group of companies owned by Mr. Anthony Graat. In 1984, his banker was CIBC. His indebtedness to CIBC was secured by a debenture. Carfrae’s share was approximately $2,000,000. In 1986, CIBC registered the debenture on the Urlindale lands. At the time, the Urindale lands were part of the Township of London but soon became part of the City of London.
[5] There sat next to the Urlindale lands a 184 acre parcel of land known as the Dickie farm. About 2000, Mr. Vito Frijia, the owner of Southside, began a protracted negotiation with the Dickie family to acquire title to the farm. An agreement was eventually reached in 2006 and title was acquired by a transfer of shares from the Dickie family company to Southside.
[6] Mr. Frijia’s interest in the Dickie farm was not its agricultural use but its development potential. This was enhanced if the Urlindale lands were acquired. Mr. Frijia and his vice-president of development, Mr. Morrison had a general knowledge of Mr. Graat’s interest in the Urlindale lands but retained a solicitor to investigate the Urlindale title. Three matters were discovered: one, title was in the name of Cornerstone; two, CIBC’s interest in the land continued through its debenture; and three, the Township of London and then the City of London had registered against the land notices of intention to sell it for arrears of taxes. In 2002, the arrears were $10,017.09. The notices had been mailed to a number of Graat companies to their registered corporate addresses and in one case to a lawyer, Mr. Anthony Steele.
[7] Southside contacted the City of London and learned that the intention of the City was to proceed with the sale of the Urlindale lands to recover the arrears of tax. Also discovered about this time was that Carfrae was a dissolved company and had been for 18 years.
[8] This state of affairs presented Mr. Frijia the opportunity to bid at the tax sale to acquire the Urindale lands and to acquire the CIBC debenture to ensure this result. With this in mind, he instructed his solicitor to incorporate a “single purpose” numbered company to participate in the City’s auction of the property and he approached the CIBC to negotiate a price for the assignment of its debenture to the company. To this end, 2108 was incorporated on July 24, 2006. Its officers were his solicitor. He was its sole shareholder. Under a trust agreement dated August 4, 2006, Southside was acknowledged to be the beneficial owner of the shares of 2108. An agreement was reached with CIBC; CIBC agreed to accept $50,000 for the debenture. It was assigned by CIBC to 2108 October 31, 2006.
[9] The stage was set for 2108’s effort to acquire the Urlindale lands at a tax sale but as matters turned out the arrears of tax were paid by Cornerstone February 14, 2007. A Tax Arrears Cancellation Certificate was registered March 8, 2007. Next the assignment of the debenture to 2108 was discovered by Cornerstone. Cornerstone asked 2108 to delete the debenture from title but when 2108 refused, Cornerstone and Carfrae commenced an action for a declaration that the debenture was unenforceable. This is the action referred to above.
[10] The action was defended and after a trial before Justice Mulligan July 22, 2011 it was dismissed. The dismissal was appealed and on July 6, 2012, the Court of Appeal allowed the appeal and held that the debenture was out of time under s. 4 of the Limitations Act, R.S.O. 1990, c. L.15. 2108 was ordered to pay the cost of the appeal and action, total, as indicated, approximately $53,500. Costs were demanded of 2108 but it was without assets to pay the costs and on July 4, 2014 this action was commenced against Southside.
C. The issues
- Should the corporate veil of Southside be pierced to make available to Cornerstone the shares and assets of Southside to satisfy a costs order made in an action in which it was not a defendant?
- In this case, may the court make a stand alone costs order against Southside to pay the costs awarded in a separation action?
D. Analysis
1. Piercing the corporate veil
[11] The Court of Appeal in the case of Yaiguaje v. Chevron Corp. (2018), 2018 ONCA 472, 141 O.R. (3d) 1 (O.C.A.) reflected on the significance of corporate separateness and the circumstances when the court may pierce the corporate veil at paras. 64-68, 70 and 71 per Hourigan J.A.:
[64] The appellants alternatively submit that this court has the ability to pierce the corporate veil when the interests of justice demand it. In support of that argument, they rely on Wilson J.’s remarks in Kosmopoulos v. Constitution Insurance Co., 1987 SCC 75, [1987] 1 S.C.R. 2, where she stated at p. 10:
The law on when a court may disregard this principle by “lifting the corporate veil” and regarding the company as a mere “agent” or “puppet” of its controlling shareholder or parent corporation follows no consistent principle. The best that can be said is that the “separate entities” principle is not enforced when it would yield a result “too flagrantly opposed to justice, convenience or the interests of the Revenue”.
[65] Kosmopoulos was decided approximately thirty years ago. Not surprisingly, the law has developed. The starting point is the decision of Sharpe J., as he then was, in Transamerica. Justice Sharpe rejected the notion that the test for piercing a corporate veil is “anything like a just and equitable standard” (p. 433). Relying on Gower: Principles of Modern Company Law, 5th ed. (London: Sweet & Maxwell, 1992), he found, at p. 433, that there are only three circumstances where the court will pierce a corporate veil:
(1) When the court is construing a statute, contract or other document; (2) When the court is satisfied that a company is a “mere facade” concealing the true facts; and (3) When it can be established that the company is an authorized agent of its controllers or its members, corporate or human.
[66] With respect to cases where it is alleged that a subsidiary corporation is a mere facade that protects its parent corporation, in order to ignore the corporate separateness principle, the court must be satisfied that: (i) there is complete control of the subsidiary, such that the subsidiary is the “mere puppet” of the parent corporation; and (ii) the subsidiary was incorporated for a fraudulent or improper purpose or used by the parent as a shell for improper activity: Transamerica, at pp. 433-34.
[67] This court has repeatedly rejected an independent just and equitable ground for piercing the corporate veil in favour of the approach taken in Transamerica: see Boyd v. Wright Environmental Management Inc., 2008 ONCA 779, 243 O.A.C. 185, at paras. 44-45; Parkland Plumbing & Heating Ltd. v. Minaki Lodge Resort 2002 Inc., 2009 ONCA 256, 250 O.A.C. 232, at paras. 50-51; and Indocondo Building Corp v. Sloan, 2015 ONCA 752, 259 A.C.W.S. (3d) 691, at para. 9.
[68] The Supreme Court of Canada has protected the principle of corporate separateness without suggesting a standalone just and equitable exception. In Sun Indalex Finance v. United Steelworkers, 2013 SCC 6, [2013] 1 S.C.R. 271, at para. 238, Cromwell J. rejected the submission that a subsidiary should be liable for a breach of fiduciary duty committed by its parent corporation, holding that “unless there is a legal basis for ignoring the separate corporate personality of separate entities, those separate corporate existences must be respected.” See also Continental Bank Leasing Corp. v. Canada, 1998 SCC 794, [1998] 2 S.C.R. 298, at paras. 108-112.
[70] The Transamerica test is consistent with the principle reflected in the various business corporation statutes in Canada that corporate separateness is the rule. Where the corporate form is being abused to the point that the corporation is not a truly separate corporation and is being used to facilitate fraudulent or improper conduct, the law recognizes an exception to this rule. It is important that courts be rigorous in their application of the Transamerica test because the rule is provided for in statute and stakeholders of corporations have a right to believe that, absent extraordinary circumstances, they may deal with the corporation as a natural person.
[71] The significance of the Transamerica decision should not be underestimated. In a single case, Sharpe J. synthesized the jurisprudence regarding piercing the corporate veil. More importantly, he brought clarity and certainty to our law by providing a framework for determining when it is appropriate to ignore the principle of corporate separateness.
[12] As well, there is this useful restatement of the rule of corporate separateness by Laskin J.A. in Gregorio v. Intrans-Corp. (1994), 18 O.R. (3d) 527 (C.A.) at p. 536:
Paccar’s role in the events in issue may be summarized as follows: it accepted an order from Instrans for the truck which it sent on to its American parent; it provided the warranty to the plaintiff; and it subsequently became involved in attempts to repair the truck. Paccar did not manufacture the truck nor did it have an opportunity to inspect the truck since the vehicle was driven from the United States directly to the dealer. Paccar’s field manager testified at trial that the company was a Canadian distributor of Peterbilt trucks and was responsible for warranting, selling, and servicing these vehicles in Canada. In my view, these facts do not support the trial judge’s finding of liability on a theory of alter ego, which in this case I take to mean it with liability to the respondent in negligence. Generally, a subsidiary, even a wholly owned subsidiary, will not be found to be the alter ego of its parent unless the subsidiary is under the complete control of the parent and is nothing more than a conduit used by the parent to avoid liability. The alter ego principle is applied to prevent conduct akin to fraud that would otherwise unjustly deprive claimants of their rights.
[13] The nub of the plaintiff’s claim is set out at paras. 5-8 and 14 of the Statement of Claim:
In 2006 the defendant determined that it wanted to acquire the Urlindale Lands as it considered such an acquisition would benefit the Dickie Farm lands it now owned and would be to its financial advantage. However rather than forthrightly approaching the principal of the plaintiff (whom Vito Frijia knew) to negotiate a purchase the defendant decided it would acquire the Urlindale Lands for itself through artifice. To the purpose of this artifice the defendant created 2108790 Ontario Inc. It took 6 years of litigation to defeat the defendant’s scheme to obtain the Urlindale Lands and caused the plaintiff to incur substantial legal fees. At the end when the scheme had been defeated and the Court ordered costs in favour of the plaintiff, the defendant shielded behind its sham alter ego 2108790 Ontario Inc., an assetless entity, as the means of avoiding responsibility for what I had put the plaintiff to.
In 2006 the defendant studied title to the Urlindale Lands and found two registrations that it thought could be harnessed to its profit. One was a 1979 debenture in favour of Canadian Imperial Bank of Commerce (“The Lynhurst Debenture”) and the other was a registration by the City of London regarding tax arrears. The defendant confirmed with the City of London that the Urlindale Lands would shortly be put up for tax sale.
The defendant knew that the president of the plaintiff no longer lived in Canada and that the address for service of the plaintiff in the registered instruments was no longer current. The defendant expected that the plaintiff would not learn of the tax sale. The defendant wanted to ensure that it could acquire the Urlindale Lands by paying only the arrears of taxes and yet be able to outbid anyone else at the tax sale. To do this the defendant approached the Canadian Imperial Bank of Commerce (“CIBC”) and purchased The Lynhurst Debenture, which had a face value of $2,000,000.00, for $50,000.00. The Lynhurst Debenture was subject only to tax arrears and thus the defendant could outbid anyone at the tax sale of the Urlindale Lands as whatever it paid in excess of the tax arrears would come right back to the defendant through The Lynhurst Debenture.
To conceal the presence of the defendant in this matter the defendant instructed a London lawyer, Brian Worrad, to incorporate a numbered company. On 24 July 2006 Mr. Worrad incorporated 2108790 Ontario Inc. (“210”) and was the incorporating director. He also showed himself as the president and shareholder of 210. However these appearances were without substance. Mr. Worrad signed a declaration that he was a bare trustee of the shares for the defendant, and the real controlling mind of 210 was Vito Frijia who was also the controlling mind of the defendant.
The company 210 has no assets, no corporate history, and no reason for existence other than facilitating the acquisition by the defendant of the Urlindale Lands. There is no substance to the appearance of a separate identity from the defendant. The separate legal persona of 210 is an illusion and should be ignored.
[14] The plaintiff’s position amounts to this. Mr. Frijia was obliged to tell Mr. Graat his interest in acquiring the Urlindale lands. The incorporation of 2108 and the assignment of the CIBC debenture amounted to artifice, to trickery. Mr. Frijia kept his identity from Mr. Graat by incorporating a numbered company. This must have become apparent to Mr. Graat when the taxes were paid. When 2108 refused to give up the debenture Cornerstone was prompted to commence an action to get rid of the debenture held by 2108. This was accomplished but the costs awarded were not covered because 2108 was without assets. 2108 was a “mere puppet” of Southside and the objective of 2108’s incorporation, to acquire the Urlindale lands, in this manner was fraudulent or improper.
[15] On these facts, I arrive at the following conclusions.
[16] One. Though 2108 was a single purpose, one-man company, there is no basis in this case not to recognize its capacity to act as a “natural person”, a separate entity to acquire the Urlindale lands. This was its purpose and this purpose was lawful. The connection between Frijia, Southside and 2108 does not change this. I am guided by these words of Hourigan, J.A. at para. 77 of the Chevron case:
The fact that on an operational level corporate separateness is more nuanced among a group of related corporations is of no moment. It is the legal reality, as provide for in the relevant business corporation statutes, that counts. The CBCA permits subsidiary corporations but also says that each corporation is a natural person.
If Parliament wished to carve out an exception to the natural person rule for subsidiaries, it would have been very easy to do so.
Section 15 of the Business Corporations Act, R.S.O. 1990, chap. B.16 the same, that “a corporation has the capacity and the rights, powers and privileges of a natural person”.
[17] Two. There was no duty on Mr. Frijia or Southside to disclose to Mr. Graat his or Southside’s interest in the Urlindale lands. There was no contractual duty. There was no duty in tort. There was no relationship of trust which imported the law of equity to impose the duties of a fiduciary.
[18] Three, the notion of artifice or trickery assumes that the trickster had an audience but Mr. Graat was an indolent owner. Carfrae was dissolved and the taxes were in arrears. In any event, the effort of Mr. Frijia to form 2108 was for nought when the taxes were paid. The risk which 2108’s interest in the Urlindale lands presented evaporated at that point. It had not caused any injury to Carfrae or Cornerstone or altered their interest in the land. It is the case that 2108 held the debenture but the presence of the debenture was not a change; it preceded by many years 2108.
[19] Four, the loss claimed in this case is a loss which arises from Cornerstone and Carfrae’s action to declare the debenture unenforceable. The assignment of the debenture to 2108 was reasonable and lawful in the circumstances. There was nothing fraudulent or improper about this. It was part of 2108’s plan to acquire the lands.
[20] Five. There is no evidence in this case that 2108 acted as an agent for Mr. Frijia or Southside. There is plainly no evidence that there were any dealings between 2108 and any person or company associated with Mr. Graat.
[21] Piercing the corporate veil should only prevail as Hourigan J.A. cautioned in Chevron “where the corporation is being abused to the point that the corporation is not truly a separate corporation and is being used to facilitate fraudulent or improper conduct”. It is only in exceptional circumstances that the corporate veil should be lifted. This is not such a case. 2108’s formation was not for a fraudulent or improper purpose; its purpose was to acquire the Urlindale lands which was a lawful purpose.
2. Is there jurisdiction to order Southside, a non-party to the Carfrae Estates v. 2108790 Ontario Inc. action, to pay the costs awarded against 2108 in that action, in this action?
[22] In my view, there is not.
[23] Counsel for the plaintiff relied upon the decision of the Court of Appeal in 1318847 Ontario Limited v. Laval Tool and Mould Ltd., 2017 ONCA 184 but it is a different case and is unhelpful to the plaintiff. The case deals only with the exercise of the court’s costs jurisdiction to look behind a named party to order costs against the real party who instigated the litigation. Strathy C.J.O. set down two sources of jurisdiction to order non-party costs. One under s. 131(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43 where the named plaintiff is a “person of straw” and not the true litigant, where the named plaintiff is put forward to protect the true litigant from liability for costs. Two, there is an inherent jurisdiction in the court to order non-party costs where the non-party has instigated or conducted litigation in such a manner as to amount to an abuse of process. See paras. 60, 61 and 66 of the case. Southside did not, of course, instigate the litigation.
[24] If Carfrae Estates was concerned about the “true” defendant, it should have moved to add Southside as a defendant in the Carfrae Estates action.
[25] Before I leave these reasons, I should say something about the assignment by Carfrae Estates and Cornerstone any costs which might favour them in debenture litigation. The assignment reads as follows:
Carfrae Estates Ltd. and Cornerstone Properties Inc. hereby assign to Ayerswood Development Corp. absolutely all monies by way of costs or otherwise ordered in favour of either one of, or both of, Carfrae Estates Ltd. and Cornerstone Properties in the litigation with 2108790 Ontario Inc. and any proceedings involving the Lynhurst debenture assigned by CIBC to 2108790 Ontario Inc.
[26] In my view, this language does not surrender Carfrae’s and Cornerstone’s claim for costs. The effect of the language is only that any monies recovered by Carfrae and Cornerstone may be passed along to Ayerswood.
[27] For these reasons, this action is dismissed.
[28] Costs. Outline of costs and bill of costs, please, first from Southside by January 2, 2019 and from Cornerstone by January 16, 2019.
“Justice P. B. Hockin” Justice P. B. Hockin Released: December 13, 2018