COURT FILE NOS.: CV-19-623145-00CL CV-19-620574-00CL
DATE: 20190910
ONTARIO SUPERIOR COURT OF JUSTICE
APPLICATION UNDER section 124(7) of the Canada Business Corporations Act, R. S. C. 1985, c. C-44 and Rules 14.05 of the Rules of Civil Procedure, R.R.O. 1990, Reg 194
APPLICATION UNDER section 124(7) of the Canada Business Corporations Act, R. S. C. 1985, c. C-44 and Rules 14.05 (3)(b) and (h) and Rule 16.04 of the Rules of Civil Procedure, R.R.O. 1990, Reg 194
BETWEEN:
GERARD LEE Applicant
– and –
LALU CANADA INC. Respondent
AND BETWEEN:
DOMENIC DI GIRONIMO Applicant
– and –
LALU CANADA INC. Respondent
Ian C. Matthews, Brendan Wong, Breanna Needham and Teagan Markin, for the Applicant, Gerard Lee
Chris G. Paliare, Kris Borg-Olivier, Tina H. Lie and Hailey Bruckner, for the Respondent
Michael Donsky and Samantha M. Green, for the Applicant
Chris G. Paliare, Kris Borg-Olivier, Tina H. Lie and Hailey Bruckner, for the Respondent
HEARD: July 23 and 24, 2019
L. A. PATTILLO J.:
Introduction
[1] Gerard Lee (“Lee”) and Domenic Di Gironimo (“Di Geronimo”) bring separate Applications, each requiring the Respondent, Lalu Canada Inc. (“Lalu”) to advance moneys for the payment of their legal fees and disbursements incurred by them in defending the action commenced against them by, among others, HZC Capital Inc. (“HZC”) and Lalu (Court File CV-18-00611373-00CL) (the “Action”).
[2] In the Action, which was commenced in December 2018, HZC, Lalu and the rest of the Plaintiffs assert claims of breach of contract, breach of fiduciary duty and statutory duties, as well as conspiracy and fraud against Lee, Di Gironimo and the other Defendants.
[3] On February 14, 2019, the Plaintiffs brought a motion for a Mareva injunction which was heard by me on July 23 and 24, 2019. For reasons released on August 2, 2019 (2019 ONSC 4622), I dismissed the motion (“Reasons”).
[4] The Applications for advanced funding were argued at the end of the Mareva motion and reserved by me pending my determination in the Mareva motion. For the reasons that follow, and based on my conclusions in the Mareva motion, I allow Di Gironimo’s Application for advance funding and dismiss Lee’s Application.
Background
[5] The general background facts are set out in my Reasons and need not be repeated here. In summary, Lalu, is a company incorporated under the Canada Business Corporations Act, RSC, 1985, c. C-44 (“CBCA”), and is engaged in investing in the Canadian Real Estate Development Industry.
[6] In November of 2015, Lee became the Chief Executive Officer of Lalu. Lalu and 2505805 Ontario Inc. (a company owned and controlled by Lee) entered into a Consulting Services Agreement made as of February 16, 2015 concerning Lee’s position as CEO. Lee was terminated as CEO of Lalu on February 26, 2018.
[7] Di Gironimo became Chief Operating Officer of Lalu on April 3, 2017. Later that month, Di Gironimo was also named Lalu’s acting Chief Financial Officer. By Agreement dated June 26, 2017, Lalu and Di Geronimo entered into an Independent Contractor Agreement governing Di Gironimo’s employment as COO of Lalu. Di Gironimo resigned from Lalu on March 12, 2018.
[8] Paragraph 19 of Di Gironimo’s Independent Contractor Agreement sets out an indemnity which provides, in part, that “ … to the extent permitted by applicable law, each Party agrees to indemnify and hold harmless the other Party, and its respective affiliates, officers … against any and all claims, losses, damages, liabilities, penalties, punitive damages, expenses, reasonable legal fees and costs of any kind whatsoever, which result from or arise out of any act or omission of the indemnifying party, its respective affiliates, officers … that occurs in connection with this Agreement.” The indemnity survives the termination of the Agreement.
[9] In the Action, the Plaintiffs claim that they are the victims of a complex commercial fraud perpetrated by the Defendants and particularly Lee and Di Gironimo. The allegations concern six real estate development projects in which the Plaintiffs have an ownership interest. The Plaintiffs submit that the Defendants misappropriated funds from them by way of wrongly receiving illicit payments (kickbacks) in the form of acquisition fees, project management fees and inflating the purchase price of properties.
[10] The Defendants have denied the allegations and both Lee and Di Gironimo have commenced separate actions against Lalu for wrongful termination.
Discussion
[11] Lee and Di Gironimo’s claims for advance funding in respect of the Action are based on both the provisions of Lalu’s Unanimous Shareholders Agreement and s. 124 of the CBCA.
[12] By Agreement dated December 15, 2017, the shareholders of Lalu entered into a Unanimous Shareholders Agreement (“USA”), which was in turn amended and restated in the Amended and Restated Unanimous Shareholders Agreement dated as of June 2017 (“Amended USA”).
[13] Sections 4.12 of the USA and 4.15 of the Amended USA both provide:
To the fullest extent permitted by law, the Corporation will indemnify and save harmless each director and officer and former director or officer of the Corporation … against all costs, charges and expenses … reasonably incurred by the director or officer in respect of any civil, criminal, administrative, investigative proceeding to which the director or officer is made a party by reason of being or having been a director or officer of the Corporation …
[14] Section 124 (1) of the CBCA provides:
A corporation may indemnify a director or officer of the corporation, a former director or officer of the corporation or another individual who acts or acted at the corporation’s request as a director or officer, or an individual acting in a similar capacity, of another entity, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in respect of any civil, criminal, administrative, investigative or other proceeding in which the individual is involved because of that association with the corporation or other entity.
[15] Section 124 (3) provides, in part, that a corporation may not indemnify an individual under ss. (1) unless the individual “acted honestly and in good faith with a view to the best interests of the corporation …” Section 124 (2) provides for advance funding for costs incurred in a proceeding referred to in ss. (1) but states that if the individual receiving the funding does not fulfil the conditions of ss. (3), they “shall” repay the moneys received.
[16] Section 124 (4) provides:
A corporation may with the approval of the court, indemnify an individual referred to in subsection (1), or advance moneys under subsection (2), in respect of an action by or on behalf of the corporation or other entity to procure a judgment in its favour, to which the individual is made a party because of the individual’s association with the corporation or other entity as described in subsection (1) against all costs, charges and expenses reasonably incurred by the individual in connection with such action, if the individual fulfils the conditions set out in subsection (3).
[17] The words in paragraphs 4.12 of the USA and 4.15 of the Amended USA, and in paragraph 19 of Di Gironimo’s Independent Contractor Agreement, “indemnify and save harmless”, extend the obligation beyond indemnity. As pointed out by Brown J. (as he then was) in Stewart Title Guaranty Co. v. Zeppieri (2009), 2009 2329 (ON SC), 94 O.R. (3d) 196 (S.C.J.) at para. 17, the obligation to save harmless is broader than that of indemnification. In my view, the words “save harmless” when considered by themselves and in the context of the entire paragraph in the USA and the Di Gironimo Agreement, include the right to advance payment of all costs by any director or officer in a civil proceeding.
[18] In Cytrynbaum v. Look Communications Inc., 2013 ONCA 455 (C.A.), the court considered the standard to be applied in respect of an application for advance funding pursuant to s. 124 of the CBCA. The court concluded that in order for an applicant to be denied advance funding under s. 124, there must be a finding of a strong prima facie case of bad faith against the applicant.
[19] At para. 56 of Cytrynbaum, Sharpe J.A., on behalf of the court, stated:
In my view, the strong prima facie case test strikes an appropriate balance between those competing considerations [providing adequate protections and incentives to attract strong candidates and encouraging responsible behaviour]. It is a stringent test that gives significant weight to the protection of officers and directors. It ensures that they will ordinarily receive advance funding but leaves open the possibility that advancement will be denied when there is strong evidence of bad faith.
[20] I dismissed the Mareva motion on the basis that the Plaintiffs had not met the test required for a Mareva injunction to issue. In general, in respect of all the responding Defendants, I found that the Plaintiffs had provided no evidence that there was a real risk of their assets being removed from the jurisdiction or otherwise being put out of reach of judgment. Specifically, with respect to Lee, while I concluded that the Plaintiff’s evidence against him established a strong prima facie case of fraud, I was not satisfied on the evidence, including the evidence of fraud, that I could draw an inference of dissipation of assets on Lee’s part.
[21] With respect to Di Gironimo, I found on the evidence that the Plaintiffs had not established a strong prima facie case of fraud against him, I stated at paragraph 77 of my Reasons: “In my view, the evidence concerning Di Gironimo and his companies is not sufficient, particularly given Di Gironimo’s responses to Lalu’s allegations, to convince me that the Plaintiffs have a strong prima facie case against them. At best, in my view, it is a prima facie case.”
[22] Based on my findings on the Mareva motion concerning the bona fides of Lee, I am not prepared to grant his Application for advance funding. On the other hand, I am satisfied that Di Gironimo is entitled to advance funding from Lalu pursuant to s. 142 of the CBCA in accordance with the provisions of the USA, the Amended USA and s. 19 of the Independent Contractor Agreement.
[23] During argument, both Lee and Di Gironimo provided me with a form of draft judgment concerning the payment of advanced costs which attached a Protocol providing for the timely resolution of any dispute concerning their reasonable legal fees and expenses in respect of the Action. The Protocol for Di Gironimo is attached as Schedule “A”.
[24] At the end of the argument, counsel for Lalu advised that he had just received the Protocol and wished time to review it and receive instructions. If there were any issues, I would be notified. I have heard nothing since concerning the Protocol.
Conclusion
[25] For the above reasons, therefore, Lee’s Application for advance funding is dismissed without prejudice to Lee raising his Application for funding following the trial of the Action.
[26] Di Gironimo’s Application for advance funding is allowed pursuant to s. 142 of the CBCA. Judgment shall issue in the form of the draft judgment provided, incorporating the Protocol, Schedule “A”. In the event that the parties have agreed on a different Protocol, I may be spoken to.
[27] Costs of the Applications to be dealt with as part of the cost submissions on the Mareva motion.
L. A. Pattillo J.
Released: September 10, 2019
COURT FILE NOS.: CV-19-623145-00CL CV-19-620574-00CL
DATE: 20190910
ONTARIO SUPERIOR COURT OF JUSTICE
APPLICATION UNDER section 124(7) of the Canada Business Corporations Act, R. S. C. 1985, c. C-44 and Rules 14.05 of the Rules of Civil Procedure, R.R.O. 1990, Reg 194
APPLICATION UNDER section 124(7) of the Canada Business Corporations Act, R. S. C. 1985, c. C-44 and Rules 14.05 (3)(b) and (h) and Rule 16.04 of the Rules of Civil Procedure, R.R.O. 1990, Reg 194
BETWEEN:
GERARD LEE Applicant
– and –
LALU CANADA INC. Respondent
AND BETWEEN:
DOMENIC DI GIRONIMO Applicant
– and –
LALU CANADA INC. Respondent
REASONS FOR JUDGMENT
PATTILLO J.
Released: September 10, 2019