COURT FILE NO.: CV-18-189(Kingston)
DATE: 20191007
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
PAUL McKERCHER, MARK McKERCHER, McKERCHER BROS. LTD., McKERCHER BROS. (BROCKVILLE) LTD., 956375 ONTARIO LTD., and 1034382 ONTARIO INC.
Plaintiffs
– and –
CHRIS McKERCHER, McKERCHER HOLDINGS LIMITED, McKERCHER BROCKVILLE LIMITED, McKERCHER KINGSTON LIMITED, 2626927 ONTARIO INC., and CBHM LTD.
Defendants
Hari Nesathurai and Graeme Oddy, for the Plaintiffs
R. Steven Baldwin, for the Defendants
Sepideh Nassabi, for Royal Bank of Canada
HEARD: 6 and 7 May 2019, at Kingston
Reasons for decision
MEW J.
[1] The defendants move to set aside ex parte orders made on 14 June 2018 in which I granted leave to register certificates of pending litigation in respect of certain properties and appointed a monitor to monitor the business and financial affairs of Leon’s furniture store franchises located in Kingston and Brockville.
Overview
[2] The individual parties in this litigation are members of the same family. Three brothers, two of whom are plaintiffs, established, owned and operated the Leon’s franchises now in dispute. Earlier in 2018, the plaintiffs sold their shares in McKercher Holdings Limited and, hence, their interests in the franchises and certain real properties, to Chris McKercher. He is the son of Peter McKercher, and the nephew of the individual plaintiffs. Companies controlled by the individual parties were used to facilitate the transactions that are now the subject of this litigation.
[3] In essence, the plaintiffs say that the defendants made a number of misrepresentations which induced them to enter into the transactions. They express concerns that under the management of Chris McKercher, the businesses are in jeopardy. They want the defendants’ ability to dispose of the properties to be limited and, ultimately, seek an unwinding of the transactions.
[4] Based on a record placed before the court by the plaintiffs to support their ex parte motion, I granted the relief which the defendants now seek to set aside.
[5] The defendants say that had the plaintiffs made the requisite degree of full disclosure when they brought their ex parte motion, the 14 June 2018 order would not have been made.
[6] The plaintiffs respond that not only did they make full disclosure, but the evidentiary record now before the court, which includes evidence from the respondents and transcripts from cross-examinations of deponents of affidavits and witnesses examined out of court, supports a continuation of the court’s previous order until the trial of this action.
The Ex Parte Order
[7] There are two principal components of the June 2018 order:
a. the granting of certificates of pending litigation in respect of certain properties which the plaintiffs assert an interest in; and
b. the appointment of a monitor of the Leon’s businesses operated at 2730 Princess Street, Kingston and 260 King Street West, Brockville.
[8] The record before the court at the time of the ex parte motion consisted of a 63 paragraph affidavit of Paul McKercher with 30 exhibits attached to it.
[9] According the Paul McKercher, there were representations made to him and Mark McKercher by Chris McKercher, both orally and in text messages, confirming that the net proceeds they or their related holding companies would each receive in consideration for the transaction, would be $5 million, whereas, in fact, the consideration received to date had been $6.6 million (or $3.3 million each).
[10] Paul McKercher also says that he and his brother were induced by Chris McKercher to transfer the subject properties, which, he asserts, were not part of the originally contemplated transaction, for additional consideration which was well below the value of the properties and which, in any event, has not been paid, based on a representation that the defendants needed the properties to assist the process of obtaining financing. In fact, the plaintiffs say, the properties have not been mortgaged or otherwise used as security, and, at the time of the ex parte motion, at least one of them was in the process of being sold.
[11] Paul McKercher acknowledged that the plaintiffs did not pay attention to certain information contained in the transactional documents which might have alerted them to the fact that the transaction, as presented, did not conform to what Chris McKercher had represented it would be. He excused this because of the close family relationships involved, which meant that the customary due diligence and prudence which parties in the position of the plaintiffs would be expected to exercise, did not occur.
[12] The plaintiffs express the fear that under the management of the defendants, the business is in jeopardy. At the time of the ex parte motion, an immediate concern was whether the defendants would be approved as the franchisee. In that regard, Paul McKercher added:
The franchisor had some concerns about Chris's suitability to be a franchisor due to some prior sexual harassment allegations and anonymous complaints. One complaint was fairly recent. I am worried that the notice of the litigation combined with the prior allegations may result in Leon's not transferring the franchise agreement to Chris and the other Defendants when it comes up for renewal.
[13] Another concern arose from reports that the Brockville location might be sold or moved. And all of this is occurring at the time when, at least from the perspective of the plaintiffs, the full consideration which they claim to be entitled to had not been provided.
[14] In my endorsement granting the June 2018 order, I said that I was satisfied that the plaintiffs had raised a triable issue with respect to the transfer of the properties that, if successful, could entitle them to an interest in the properties based on unjust enrichment resulting in a constructive trust, in other words a proprietary interest as required by rule 42 of the Rules of Civil Procedure, and that a certificate of pending litigation should therefore issue under those circumstances.
[15] With respect to the appointment of a receiver or monitor, I was not satisfied that the circumstances warranted the appointment of an interim receiver to run the business. However, I did accede to the plaintiffs’ request for the appointment of a monitor, that is, a form of receiver with supervisory power to monitor an ongoing business, reasoning that such a remedy is:
… available to the court as part of its power under section 101 of the Courts of Justice Act to appoint a receiver and manager where such appointment is just and convenient: Great Atlantic & Pacific Co. of Canada v. 1167970 Ontario Ltd. 2002 CanLII 12215 (ON SC), [2002] O.J. No. 3717 (S.C.J.). It can be employed where there is a strong prima facie case of fraud – as in Loblaw Brands Ltd. v. Thornton [2009] O.J. 1228 (S.C.J.). The plaintiffs say that their case is analogous. There have, they say, been serious misrepresentations which may well rise to the level of fraudulent misrepresentations which, in the context of an intra-family transaction, where normal commercial standards of due diligence were subordinated to trust between family members, have led to an improvident sale of the business and what the plaintiffs represent is a very real risk that the future well-being of the franchises are in serious jeopardy. They say that circumstances warrant them moving without notice to seek the placement of a monitor into the business, who will not interfere with the running of the business in any way, but who will be able to account to the court as to what is going on and to alert the court and, by extension, the plaintiffs to any material events that might warrant further action on their part or intervention by the court.
Issues
[16] The issues to be resolved at this time are as follows:
a. Should the ex parte order be set aside because the plaintiffs made less than full and accurate disclosure in their ex parte motion or otherwise misled the court on material facts?
b. Should the certificates of pending litigation against the properties be maintained?
c. Should the appointment of the monitor be maintained?
[17] The defendants argue that if the court is satisfied that the ex parte order was improperly obtained, the relief granted should be rescinded, regardless of any subsequently developed evidence that would otherwise support the maintenance of the interim relief.
[18] Even if the court is not satisfied that the ex parte order was improperly obtained, the defendants say that the evidentiary record now before the court does not justify the continuation of the interim relief obtained.
[19] The plaintiffs respond that no nondisclosure took place at the initial hearing, nor has any such nondisclosure subsequently been established by the defendants. Furthermore, the record now before the court supports the continuation of the court’s previous orders.
Setting Aside the Ex-Parte Order
[20] Motions for a certificate of pending litigation are typically brought without notice: Rule 42.01(3).
[21] Motions for injunctive and similar relief may be brought without notice if the giving of notice would defeat the purposes of the potential order: see, generally, Rule 37.07(3); Launch! Research & Development Inc. v. Essex Distributing Co. (1977), 4 C.P.C. 261 (Ont. H.C.J), at para 4.
[22] Rule 39.01(6) provides:
Where a motion or application is made without notice, the moving party or applicant shall make full and fair disclosure of all material facts, and failure to do so is in itself sufficient ground for setting aside any order obtained on the motion or application.
[23] In Chitel v. Rothbart, (1983), 1982 CanLII 1956 (ON CA), 39 O.R. (2d) 513, 141 D.L.R. (3d) 268; 69 C.P.R. (2d) 62; 30 C.P.C. 205 (C.A.), MacKinnon A.C.J.O. stated, at para. 18:
There is no necessity for citation of any authority to state the obvious that the plaintiff must, in securing ex parte interim injunction, make full and frank disclosure of the relevant facts, including facts which may explain the defendant's position if known to the plaintiff. If there is less than this full and accurate disclosure in a material way or if there is a misleading of the court on material facts in the original application, the court will not exercise its discretion in favour of the plaintiff and continue the injunction.
[24] The defendants assert that the plaintiffs failed to disclose to the court that Paul and Mark McKercher:
a. had approved the statement of adjustments and raised no objection to the closing of the transactions in full knowledge of what the closing proceeds were;
b. were aware that it was their responsibility to discharge two thirds of the total operating line of credit;
c. had been told on more than one occasion that certain residential properties were included in the share transaction;
d. had met with their lawyers prior to closing at which time they approved the statement of adjustments;
e. new they would not each receive $5 million in net proceeds from the transaction before the closing occurred;
f. instructed their lawyers to close the transaction despite knowing:
i. about the closing adjustments;
ii. that the operating line of credit was their responsibility;
iii. the three rental properties were part of the transaction; and
iv. they had their own lawyers and accountants working on their behalf.
[25] The defendants also say that the plaintiffs misrepresented the existence of allegations of misconduct by Chris McKercher towards employees or others, and, hence, made a baseless allegation that Chris McKercher would not be a suitable franchisor.
[26] Further, the defendants question whether there was a reasonable basis for the plaintiffs’ application to be made ex parte, and criticise the plaintiffs for failing to disclose to the court what they knew the position and evidence of Chris McKercher would be.
[27] I will deal first with the certificates of pending litigation.
[28] As already alluded to, Paul McKercher’s affidavit addresses at some length the plaintiffs’ understanding concerning the properties that they say were not supposed to be part of the original deal (which he refers to as the “Additional Properties”). He says that Chris McKercher had included the Additional Properties in the transaction to secure financing and that it had been agreed with Chris McKercher that Paul and Mark McKercher would each receive an additional $200,000 “outside the Transaction” to account for the inclusion of the Additional Properties.
[29] The defendants point to subsequently developed evidence (through the cross-examination of Tony Hall, the plaintiffs’ accountant) that they say contradicts what and when Paul McKercher was told about the inclusion or non-inclusion of the properties.
[30] While there may well be an evidentiary dispute about the parties’ understanding concerning the properties, I do not accept the defendants’ assertions of nondisclosure with respect to the properties at the time of the ex parte motion. The alleged omissions do not materially detract from or undermine the evidentiary position advanced in Paul McKercher’s affidavit. I therefore see no reason for setting aside the certificates of pending litigation on that basis.
[31] I turn, then, to the appointment of the monitor.
[32] The court was satisfied that the evidence presented by the plaintiffs made out a strong prima facie case of fraud on the part of Chris McKercher. This was despite the plaintiffs’ acknowledgment that they had access to legal and accounting advice before the transaction closed and that they had received a statement of adjustments and instructed the lawyers to proceed with the closing.
[33] The plaintiffs argue that in the absence of any breach of their obligation to make full and accurate disclosure in a material way or unless the court was misled on material facts at the time of the ex parte motion, the only basis for setting aside the order relating to the monitor would be if the more complete record now before the court no longer supports the existence of a strong prima facie case of fraud or that it is just and convenient to continue the appointment of the monitor.
[34] I agree with that argument as far as it goes. However, it seems appropriate that the court should also be entitled to review whether the circumstances were such that it was appropriate to seek relief on an ex parte basis.
[35] In that regard, the plaintiffs articulated concerns about the sale of some of the Additional Properties, a possible change in the location of the Brockville business, and doubts about whether Chris McKercher would be approved as a franchisee. All of these factors presented a risk that the plaintiff’s interests might be alienated before the disputes between the parties could be resolved. Furthermore, and of particular significance to the appropriateness of seeking relief without notice, the plaintiffs argued that if given notice, the defendants would act to expedite substantial changes in the business, before a motion on notice could be heard and decided.
[36] With the benefit of mature reflection, I am bound to say that my decision to permit the appointment of a monitor without any notice to the defendants was a marginal one. Were it not for the appropriateness of seeking the certificates of pending litigation on a without notice basis, the other relief sought might not have been granted. At the very least what used to be known as an “ex parte motion with notice”, that is some, albeit short, notice of the monitor relief would have been more appropriate, had that been the only relief being sought. That having been said, the appointment of a monitor is far less disruptive or intrusive than injunctive relief or the appointment of a receiver. As the plaintiffs put it in their factum, the imposition of the monitor is “minimally invasive”.
[37] Ultimately, I am satisfied that the plaintiffs’ motion was appropriately brought without notice.
[38] As to the assertion that the plaintiffs failed to make full and accurate disclosure in a material way or that the court was misled on material facts, the plaintiffs, in a table at paragraph 30 of their supplementary factum respond seriatim to the specific allegations of nondisclosure made by the defendants. The plaintiffs further emphasise that whatever the documents they were aware of (and disclosed the existence of) at the time of the motion, their state of mind was informed by their reliance on the representations made by Chris McKercher, the vast majority of which were made orally.
[39] Chris McKercher, of course, challenges much of that evidence and offers a different account of what was said, done and understood. He argues that it defies belief that Paul McKercher and Mark McKercher would have negotiated proceeds of $5 million each, yet not documented that in any manner whatsoever, and that the only plausible conclusion is that Chris McKercher did not make the representations which the plaintiffs allege.
[40] It may well be that the evidence of Paul McKercher does not hold up at trial or on a summary judgement motion. It is clear that there will be an evidentiary contest. But it is not the function of the court at this stage to attempt to resolve such a contest.
[41] Rather, the issue for me to determine at this juncture is whether what Paul McKercher presented to the court failed to make full and accurate disclosure in a material way or whether the court was misled on material facts.
[42] There is always a judgment call to be made as to how much evidence to present. While the presentation of evidence by a party moving without notice has to be “full and fair”, when there are omissions in the evidence that are inadvertent and did not have the effect of misleading the court, the court should be prepared to exercise its discretion to continue the interim relief if the evidentiary record otherwise warrants it.
[43] Having carefully listened to what counsel have said and having reviewed the parties’ factums, I am not persuaded that the plaintiffs failed to make full and fair disclosure, or that they otherwise misled the court.
Continuation of the Certificates of Pending Litigation
[44] Having previously held that there was a triable issue that could entitle the plaintiffs to an interest in the subject properties, the question is whether anything has changed as a result of the more complete record now before the court.
[45] In my view there remains a live issue – a “triable” issue - as to whether the plaintiffs have a reasonable claim to a proprietary interest in the properties. Their claims of unjust enrichment, if upheld, could result in a constructive trust and, hence, the necessary proprietary interest to justify the maintenance in full force and effect of the certificates of pending litigation.
Continuation of the Appointment of the Monitor
[46] Some of the concerns which were present at the time of the original motion have been mitigated by subsequent events. Chris McKercher has been approved by Leon’s as a franchisee. The Brockville operation has not been moved (although Chris McKercher has confirmed that he planned to sell it). The Additional Properties, some of which had been listed for sale at what the plaintiffs consider to be improvident prices, have not been sold. But, the plaintiffs say, other concerns which were previously expressed have deepened, and new ones have emerged, as a result of the fuller evidentiary record, including extensive examinations and cross examinations, and two reports provided by the monitor.
[47] The plaintiffs’ supplementary factum consists of a chronology of representations made by Chris McKercher which, the plaintiffs say, strengthen their allegations of fraud. It is not necessary for me to decide whether I accept that argument. Suffice it to say that the evidentiary support for maintaining the monitor has not diminished.
[48] Furthermore, the monitor has reported that the system generated income statement and balance sheet of the business cannot be relied upon. Yet, according to Chris McKercher, his bonus was based on those financial statements. And the amount of inventory, payables and debts that were to be adjusted at closing were based on those allegedly unreliable financial statements prepared by the defendants.
[49] The plaintiffs argue that the unreliability of the financial statements support their concerns about the way the businesses were being operated and warrants the continued involvement of the monitor, who has only supervisory powers and no direct control or influence over the defendants’ business or affairs.
[50] To the extent that the appointment of the monitor is akin to injunctive relief, the plaintiffs argue that they meet the three-part test in RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC), [1994] 1 S.C.R. 311 because:
a. there is a serious action to be tried concerning a high-value commercial transaction, engaging questions of both fact and law, including matters of credibility;
b. irreparable harm to the plaintiffs would result without the presence of the monitor, whose presence, while not intrusive, significantly reduces the chances of the defendants selling the Brockville business or otherwise dissipating the operations and assets of the businesses by enabling the plaintiffs, through the court-appointed monitor, to be aware of financial irregularities and mismanagement on an ongoing basis; and
c. the balance of convenience favours the plaintiffs because the monitor, the cost of which is being borne by the plaintiffs, inflicts minimal prejudice on the defendants whereas there is significant risk to the plaintiffs if the defendants are unrestrained.
[51] In response, the defendants reiterate the lack of a strong prima facie case because the documentary evidence shows that there was full knowledge and approval on the part of the plaintiffs, who had the benefit of legal and accounting advice, to close the transaction.
[52] The additional disclosure that has been made since the ex parte motion and, in particular, the concerns expressed by the monitor about the reliability of the system generated financial statements underscores the appropriateness of the original order. The RJR-MacDonald criteria continue, in my view, to be met. In particular, where without the appointment of a receiver or monitor, the plaintiffs’ ability to recovery could be seriously jeopardised, the balance of convenience favours maintaining the appointment: Loblaw Brands Ltd. v. Thornton (2009), 78 C.P.C. (6th) 189 (Ont. S.C.J.) at para. 16.
Disposition
[53] For the foregoing reasons, the motion to set aside the ex parte orders is dismissed. The certificates of pending litigation and the appointment of the monitor are maintained pending any further order of the court.
Costs
[54] I am of the provisional view that costs of this motion should be to the plaintiffs in the cause on a partial indemnity basis. I will fix these costs upon request if the parties are unable to agree on an amount. In such case, or if either party seeks a different disposition, counsel should notify the Trial Coordinator at Kingston and I will advise a process for the delivery of submissions.
Graeme Mew J.
Released: 07 October 2019
COURT FILE NO.: CV-18-189(Kingston)
DATE: 20191007
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
PAUL McKERCHER, MARK McKERCHER, McKERCHER BROS. LTD., McKERCHER BROS. (BROCKVILLE) LTD., 956375 ONTARIO LTD., and 1034382 ONTARIO INC.
Plaintiffs
- And -
CHRIS McKERCHER, McKERCHER HOLDINGS LIMITED, McKERCHER BROCKVILLE LIMITED, McKERCHER KINGSTON LIMITED, 2626927 ONTARIO INC., and CBHM LTD.
Defendants
REASONS FOR Decision
Mew, J.
Released: 07 October 2019