NEWMARKET COURT FILE NO.: CV-18-137139-00
DATE: 20190812
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Rick Legate
Plaintiff
– and –
Cube Packaging Solutions Inc. and Souren Agemian Jr.
Respondents
George Limberis, for the Applicant
Patricia Virc, for the Respondents
Heard: May 31, 2019
REASONS FOR DECISION
DE SA J.:
Overview
[1] Rick Legate, the Applicant, (“Legate” or the “Applicant”) commenced an application seeking enforcement of certain terms of a contract with his former employer, Cube Packaging Solutions Inc. (“Cube” or the “Respondent”). The main issue between Cube and Legate is the amount of money owed to Legate in relation to shares of Cube that were promised to Legate during the course of his employment.
[2] Legate has now brought a motion seeking to have counsel for Cube, Steinberg Title Hope & Israel LLP (“STHI Law”), removed as counsel of record. According to Legate, counsel at STHI Law are likely to be witnesses in the context of the events leading to his dismissal. STHI Law also formerly acted for Legate in his capacity as an executive of Cube. As such, Legate argues that STHI Law should be removed as counsel.
[3] I disagree. In the context of the dispute here, I see no reason that counsel for STHI Law should be witnesses in the proceeding. Moreover, I do not agree that STHI Law’s role as counsel for Cube and/or Souren Agemian, Jr. (“JR”) breaches any duty of loyalty owed to Legate, or creates any risk of misuse of confidential information.
[4] The motion is dismissed.
[5] The reasons for my decision are outlined below.
Summary of Facts
The Employment Contract and Termination
[6] On June 5, 2015, Rick Legate (“Legate” or “Applicant”) and Cube Packaging Solutions Inc. (“Cube”) entered into an employment agreement effective August 28, 2015 (the “Contract”). Under the Contract, Legate was hired as the Chief Executive Officer of Cube. The Contract also provided that Legate was entitled to shares of Cube, which shares were to be issued to him each year on the anniversary of his employment.
[7] Between May and June of 2017, there was a disagreement between Cube and Legate regarding Legate’s bonus structure. Cube wanted to renegotiate Legate’s compensation and Legate refused.
[8] On June 18, 2017, Legate was terminated without cause.
[9] The Contract provided for severance payments in the event of termination without cause (“Severance Package”): base salary for 12 months ($250,000), a bonus payment ($1,043,614), vacation pay and health benefits for 12 months.
[10] Legate received the Severance Package.
The Share Options and Trust Structure
[11] Shares were initially to be issued to Legate on the first anniversary of his employment. This did not occur because Legate agreed to take options instead of shares and to set up a Trust Structure to hold them. The purpose of the Trust Structure was to reduce taxes payable by Legate. This same type of structure had been developed previously and was already in use by other Cube executives. Cube offered to pay the cost of setting up the Trust Structure for Legate. Mr. Leibowitz (“Leibowitz”) is a tax lawyer at STHI Law. He set up the Trust Structure for Legate.
[12] Shortly after the Trust Structure was put in place, Cube terminated Legate. The Trust Structure had not been used. No options or shares had been issued to Legate.
[13] By letter dated October 3, 2017, Cube advised Legate: “Your Equity entitlement shall be purchased within 12 months of June 18, 2018 as set out in s. 5 of your Employment Contract.”
[14] On January 19, 2018, after Legate’s termination, when it appeared that the parties might resolve the amount that Cube would pay Legate for his Share Value Entitlement, Cube offered to have its lawyers collapse the Trust Structure for Legate as part of the resolution.
[15] When the matter was not resolved, Legate ultimately collapsed the Trust Structure himself at a cost of $25.
The Outstanding Dispute
[16] The Contract provides that if Legate was terminated without cause, Cube was to purchase his shares within 12 months at fair value as determined by BDO or MNP or some other mutually agreeable valuator.
[17] The main issue which remains between Cube and Legate is the amount owed to Legate in relation to the shares. When JR and Legate were unable to agree on value, they disagreed over who was responsible for obtaining and paying for an appraisal. The negotiations fell apart and Legate issued the Application.
[18] Cube has never denied that Legate is entitled to be paid his Share Value Entitlement. The parties also agree that the valuation is Legate’s date of termination. The only issue remaining between the parties is arranging for an appraisal.
The Alleged Conflict of Interest
[19] Legate takes the position that both Mr. Steinberg (“Steinberg”) and Leibowitz, both Counsel at STHI Law, are potential witnesses in the hearing of the Application.
[20] Legate argues that Cube’s actions were “oppressive” towards him as a prospective shareholder/stakeholder in Cube. Legate intends to establish Cube’s oppressive conduct at the hearing of the application. Accordingly, Legate argues that Steinberg (a director of Cube and counsel at STHI Law) will necessarily be a witness in respect of the following events:
Steinberg’s knowledge that Legate was entitled to shares and that those shares had not been issued;
Cube’s board of directors reviewed potential changes to Legate’s compensation, including his bonus and considered the question of termination of Legate’s employment;
Cube’s board of directors felt Legate’s compensation structure was excessive and in particular his bonus; and
The lucrative nature of the Contract and Legate’s refusal to renegotiate his bonus resulted in his termination.
[21] Further, it would be Legate’s intention to call Leibowitz to give evidence concerning JR’s role in interfering with Legate’s retainer of Leibowitz and STHI Law regarding the Trust Structure. Apparently, JR told Leibowitz to hold off on closing up the Trust Structure because of the dispute regarding who would pay for it.
[22] Given that both Leibowitz and Steinberg are both contemplated to be witnesses in the proceeding, Legate argues that it is impossible for STHI Law to continue acting as counsel for Cube. See Urquhart v. Allen Estate, 1999 CarswellOnt 4126 (SCJ), at paras. 11-12, 27-28, leave to appeal motion quashed, [2000] O.J. No. 313 (SCJ):
[23] Legate also takes the position that the duty of loyalty requires that the STHI Law be removed as counsel of record. STHI Law acted as counsel for Legate in relation to the Trust Structure. According to Legate, there is also a risk that STHI Law may use information obtained from Legate against him: Brookville Carriers Flatbed GP Inc. v. Blackjack Transport Ltd., 2008 NSCA 22 at para. 51.; See also Consulate Ventures Inc. v. Amico Contracting & Engineering (1992) Inc., 2010 ONCA 788.
[24] Finally, Legate argues that STHI Law also has obligations to him (Legate) as an ongoing stakeholder in the corporation. STHI Law cannot act for JR (a principal in Cube) at the detriment of Legate (a stakeholder). Corporate counsel must act for the corporation as a whole, not for factions of it. See Andersson v. Aquino, 2018 ONSC 852 at paras. 26-28.
Analysis
[25] Much of Legate’s argument for removal of STHI Law is premised on a desire to establish that JR, a majority shareholder in Cube, acted against the interests of Legate, a prospective shareholder and stakeholder in the corporation. I expect that Legate seeks to establish that JR’s conduct amounted to “oppression” in the hopes of obtaining relief under 248(3) of the Business Corporations Act, R.S.O. 1990, c B. 16.
[26] However, Legate is not a shareholder of Cube. He never was. Even if he was still a shareholder, the oppression remedy would have nothing to do with the dispute here. The question for Legate is a question of valuation. At this point, Legate is simply a creditor. Nothing more.
[27] Legate is seeking to be paid out for any amounts owed to him under the terms of the Contract. Other than that, he has no ongoing interest in the affairs of the corporation. As such, the directors have no ongoing duty to Legate as a stakeholder/shareholder in the corporation. As the Supreme Court explained in BCE Inc. v. 1976 Debentureholders, [2008] 3 SCR 560, 2008 SCC 69 at para. 66:
…[T]he directors owe a fiduciary duty to the corporation, and only to the corporation. People sometimes speak in terms of directors owing a duty to both the corporation and to stakeholders. Usually this is harmless, since the reasonable expectations of the stakeholder in a particular outcome often coincide with what is in the best interests of the corporation. However, cases (such as these appeals) may arise where these interests do not coincide. In such cases, it is important to be clear that the directors owe their duty to the corporation, not to stakeholders, and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation. [Emphasis added]
[28] No doubt, if there was a risk that Cube’s directors intended to dissipate the assets of Cube to escape its obligations to Legate, Legate would be entitled to raise the issue of oppression. However, there is no evidence to support such a claim here.
[29] Moreover, the evidentiary record here suggests that STHI Law was always acting for Cube. The assistance they rendered to Legate was incidental to their role as counsel for Cube. I do not see them as counsel for Legate in a manner which engages the duty of loyalty.
[30] I also do not agree that the issues that arise in the application/litigation would give rise to Steinberg and Leibowitz (counsel for STHI Law) becoming witnesses in this proceeding.
[31] The only issue in dispute is the value of the shares at the date of termination. The allegations of “oppressive” conduct on the part of JR and Cube raised by the Applicant have no apparent relevance to any of the issues that remain in dispute.
[32] I disagree with the Applicant that I must view the issues, including the claim of “oppression”, as framed in the pleadings. I am obliged to make some assessment of the merits of the claim if I am going to grant the motion and remove the Respondent’s counsel of choice. The onus is on the Applicant to satisfy me that the removal of counsel is appropriate in the circumstances. He has failed to do so.
[33] Indeed, here it almost seems that the claim of “oppression” has been raised for the sole purpose of having the firm of STHI Law removed.
[34] No doubt, if a true conflict materializes at some later stage in the proceeding, the issue can be raised then. However, at this point, I am not prepared to grant the relief sought.
Disposition
[35] On the basis of the reasons outlined above, the motion seeking to have STHI Law removed is dismissed.
[36] The main issue remaining between Cube and Legate is the amount owed to Legate in relation to the shares. Cube has never denied that Legate is entitled to be paid his Share Value Entitlement. The parties agree that the valuation is Legate’s date of termination.
[37] Accordingly, it appears that the only issue remaining between the parties is who is to pay for the appraisal. In the circumstances, I would be prepared to order an appraisal and order that the costs of the appraisal be shared between the parties. If such an Order is sought, I am prepared to grant it.
[38] I will entertain costs submissions by the Respondents within three weeks of the release of this decision. The moving party Legate will have one week thereafter to respond.
Justice C.F. de Sa
Released: August 12, 2019