Court File and Parties
Court File No.: CV-18-609771 Date: 20190222 Superior Court of Justice - Ontario
Re: SHAWN LESTAGE, GORDON COCHRAN and JONATHAN COCHRAN, Applicants – AND – DEVINDER GREWAL and FP EDUCATION ADVISORS, INC., Respondents
Before: E.M. Morgan J.
Counsel: Michael Byers, for the Applicants Wojek Jaskiewicz, for the Respondents
Heard: February 15, 2019
Reasons for Judgment
[1] This Application asks whether a setoff can be applied to monies owing a secured creditor under a share purchase agreement.
[2] The background to the present dispute is procedurally complicated insofar as the matter in dispute involves a settlement agreement that concluded prior litigation between the parties. For present purposes, however, that background is largely irrelevant. The issue before me is the enforcement by the Applicants of a Share Purchase Agreement that closed on November 17, 2016, in which the Respondent, FP Education Advisors, Inc. (“FP”), purchased what had been the Applicants’ 55% ownership of FP. The Share Purchase Agreement is accompanied by a General Security Agreement (“GSA”) pursuant to which the Applicants have a charge over all of FP’s chattels, receivables, books, documents, inventory and equipment (“Charged Property”), as well as two Promissory Notes from FP to the Applicants (collectively the Share Purchase Agreement, GSA, and Promissory Notes are referred to here as the “Agreement”).
[3] The Respondent, Devinder Grewal (“Grewal”), executed a Guarantee in favour of the Applicants in which he personally guaranteed FP’s performance under the Agreement. Grewal also executed a Pledge Agreement in which he pledged all of FP’s issued and outstanding shares as collateral security for his obligations under the Guarantee. Upon default, FP’s debt to the Applicants becomes Grewal’s personal debt as well.
[4] FP paid the first tranche of the $358,000 purchase price for the shares of FP at closing on November 17, 2016. The second tranche of the purchase price was paid by FP on February 28, 2017. The final tranche of the purchase price in the amount of $89,400 became due on February 28, 2018. It was secured by, inter alia, the second of the two Promissory Notes and carries interest at 7% per annum on all unpaid amounts. The Respondents have not paid any of that amount and are in default under the Agreement and the Guarantee.
[5] On default by FP, the GSA provides security over the Charged Property and also gives the Applicants the right to inspect the Charged Property, to take possession of any or all of the Charged Property with power to exclude the Respondents and their agents, to sell, lease, or retain the Charged Property in satisfaction of all or part of the debt, to appoint a receiver over FP, to demand, sue for and receive any accounts receivable and/or to compromise any accounts receivable belonging to FP. The Agreement provides that upon default by FP and enforcement by the Applicants, all monies collected or received by FP are to be received in trust for the Applicants as secured creditors, and all income dividends or distributions received by Grewal are to be held by Grewal in trust for the Applicants. The Agreement provides that the Applicants are entitled to be indemnified for the full costs of enforcement of the debt.
[6] The Applicants gave written notice to the Respondents that they would be exercising their contractual rights to enforce on their security and recover the debt that was owing due to FP’s default. Instead of facilitating the Applicants’ collection of the debt owed to them and their realization on their security, Grewal has taken active steps in frustrating the Applicants’ rights under the Agreement as well as under his Guarantee and Pledge Agreement. He has not provided the Applicants with FP’s relevant financial information and has failed to deliver his shares in FP on demand by the Applicants.
[7] In correspondence with the Applicant, Shawn Lestage (“Lestage”), Grewal indicated that he was withholding payment of the final tranche owed to the Applicants under the Agreement as a setoff against certain debts he claimed that Lestage owed to FP. These setoff claims amount to the value of an old cell phone that Grewal alleges Lestage failed to return to FP and Lestage’s failure to account for the full use of a $15,000 loan from Grewal’s family to FP. It apparently also includes losses which Grewal claims that FP has incurred as a result of the Applicants’ attempts to enforce their rights under the Agreement, as well as an allegation that the Applicants have breached a non-competition clause in the Agreement.
[8] With all due respect, there is no substance to Grewal’s setoff arguments. They are either de minimis or specious.
[9] Grewal seems to concede that he is aware of how over $7,000 of the $15,000 loan used for FP’s business expenses, but is not sure about the balance. Of course, it is Grewal who has control of the financial records of FP, and he has made no specific claim for a precise amount owing to FP. He simply wants an accounting of the balance of the $15,000, and states that he is using the set off claim as “leverage”.
[10] As for the claim relating to Lestage’s cell phone, Lestage responds that the phone was his personal phone and did not belong to FP. Regardless of any of that, the complaint is with respect to a several years old cell phone. I need no expert evidence to know that a number of years, a cell phone’s monetary value is close to zero.
[11] Grewal also contends that the Applicants caused FP to lose money by contacting FP’s customers. He alleges that this has caused those customers to cease doing business with FP, and that the value of this lost business should be set off against the amount owed to the Applicants by FP. However, the Agreement makes it clear that upon default the Applicants are entitled to collect FP’s accounts receivable. There is no way to do that without contacting those who owe money to FP – i.e. its customers.
[12] The Applicants concede that they contacted FP’s customers with a view to collecting the monies those customers owed to FP, up to the amount of the debt owed to the Applicants. Lestage states that he at first asked the customers to merely freeze payments to FP until the accounts between them could be sorted out, as he did not want the customers to think that he was asking them to divert their funds away from the corporate party with whom they contracted. When the situation stabilized he planned to then collect the funds owing to FP and, in turn, to himself and the other Applicants.
[13] Art. 13(b) of GSA provides that the secured party shall not be liable for failure to seize or collect any particular property of the debtor. It was entirely within the Applicants’ rights to collect monies owing to FP by its customers, and to ask them to freeze payments until such time as the Applicants could exercise their other rights to ensure that any payments made to FP would come to them. They cannot be held liable, and there can be no setoff, based on their rightful efforts to collect the debt owing to them.
[14] As for the allegation by Grewal that the Applicants breached the non-competition clause in the Agreement, there is no evidence of any such breach. Grewal states that at some point Lestage created a new website entitled Enrolled.com, and that this appeared to be an educational consultant company similar to FP. He alleges that this constitutes improper competition with FP.
[15] Lestage states that this was not a competing business but rather was designed for a different purpose altogether. I need not decide that here. All parties acknowledge that the Enrolled.com website never became active and that Enrolled.com never went into business or operated in any way. It has never had a customer of its own nor made any money. The entire allegation amounts to nothing; neither Enrolled.com nor any other venture engaged in by the Applicants has been shown to have actually breached the non-competition portion of the Agreement.
[16] For a legal setoff claim to be valid, both obligations must be liquidated amounts. A vague and unparticularized claim like that made by Grewal with respect to some portion of the $15,000 loan cannot form the basis of legal setoff.
[17] As for equitable setoff, it is not “available to a party in order to obtain an advantage which accrues to that party arising exclusively from his own default, in this case, the knowingly wrongful withholding of money due and owing to the plaintiff”: Outset Media Corp. v. Stewart House Publishing Inc., 2002 CarswellOnt 4556, at para 46 (SCJ), rev’d on other grounds [2003] OJ No 2558 (Ont CA). Here, Grewal is using the Applicants’ response to FP’s own default as a bargaining chip, or a form of leverage, in order to avoid paying the debt owed by FP and guaranteed by him to the Applicants. This cannot form the basis of equitable setoff.
[18] In any case, none of the Respondents’ setoff claims amount to anything demonstrated in the record as owing. They are little more than empty arguments that catalogue no losses to the Respondents.
[19] The Applicants are entitled to their remedies under the Agreement as well as the Guarantee and the Pledge Agreement. This includes full indemnity costs, which are called for in the Agreement. This contractual obligation by the Respondents is presumptively valid in the absence of any evidence suggesting that it should not be enforced: Antorisa Investments Ltd v. 172965 Canada Limited, [2007] OJ No 195 (SCJ).
[20] The Applicants shall have: (a) judgment against both Respondents, on a joint and severable basis, in the amount of $89,400; (b) an Order vesting in them FP’s right title and interest in all Charged Property under the GSA; (c) an Order permitting them to demand, sue for and collect FP’s accounts receivable; (d) an Order that Grewal transfer his shares in FP to them; (e) a Declaration that FP has held all monies collected or received by it after February 28, 2018 in trust for them; (f) a Declaration that Grewal holds any income, dividends or payments received in respect of or in relation to his shares in FP after February 28, 2018 in trust for them; (g) an Order requiring the Respondents to provide them with copies of and access to FP’s business and financial records; (h) an Order requiring the Respondents to execute such documents or do such things as are necessary to give effect to the Orders of this Court; (i) pre-judgment interest at 7% per annum commencing on November 17, 2016; (j) post-judgment interest at 7% per annum.
[21] The Applicants are in principle entitled to full indemnity costs, although I reserve my discretion under section 131 of the Courts of Justice Act to fix the precise amount. The parties are invited to make written submissions on the quantum of those costs, as follows.
[22] I would ask that within two weeks of today’s date the Applicants provide Respondents’ counsel with a Bill of Costs, that within two weeks thereafter the Respondents provide the Applicants with submissions in response to the Applicants’ Bill of Costs (2 pages maximum), and that within two weeks thereafter the Applicants provide the Respondents with their Reply (also 2 pages maximum). At that point, the two sets of 2-page submissions, together with the Bill of Costs, may be emailed to my assistant by one or the other of the parties’ counsel.