Court File and Parties

Court File No.: CV-17-581887-00CL Date: 2019-01-04 Superior Court of Justice – Ontario (Commercial List)

Re: Fiovo Palumbo, Applicant And: Riccardo Quercia, Brad Imhoff and Boothworks Inc., Respondents

And Re: Riccardo Quercia, Brad Imhoff and Boothworks Inc., Counter-Applicants And: Fiovo Palumbo and Neil Foster and Gregory Scott Mardon, Direct Inc., and HT Connect Ltd., Counter-Respondents

Before: S.F. Dunphy J.

Counsel: Peter W. G. Carey and Christopher Shammas, for the Applicant M. Singh and H. Scott Fairley, for the Respondents and Counter-applicants Kevin L. MacDonald and Jamie M. Sanderson, for the counter-respondents Neil Foster, Gregory Scott Mardon, Direct Inc. and HT Connect Inc.

Heard at Toronto: In Writing

Reasons for Decision – Costs and Fair Value

[1] On August 23, 2018, I issued reasons granting this application and dismissing the counter-application. The case involved the ouster by two founding shareholders of a small company of the third founding shareholder from any office or authority within the company. The minority shareholder so ousted happened to produce more than half of the company’s revenues and profits and, upon his predictable departure in reaction to these steps, the revenue formerly produced by him predictably failed to materialize.

[2] My decision ordered the respondents to purchase the applicant’s shares at fair market value according to a formula laid down by me and using, to the extent possible, a valuation already obtained by the parties on a joint basis in the course of preparing for the hearing. I also reserved the matter of costs if the parties were unable to agree.

[3] Unfortunately, even with a joint valuation in hand that needed very only a few alterations to conform to my ruling, the parties were unable to agree on a valuation of the applicant’s shares and have each seen fit to have separate valuations performed using two different valuators in lieu of the joint valuator whose work I expected them to build upon. They have not been any more successful in reaching consensus on just about anything in relation to costs either.

[4] Accordingly, these are my reasons addressing both issues. I have discussed the facts at some length in my reasons released August 23, 2018 and do not intend to repeat them here.

Issue 1: Fair value of shares

[5] In my reasons for judgment, I ordered Mr. Imhoff and Mr. Quercia to purchase Mr. Palumbo’s shares in Boothworks at their fair market value. Paragraph 92 of my reasons provided certain specific guidelines for determining fair market value, while paragraph 99 directed the parties to base the valuation to the extent possible on the joint valuation already obtained. Finally, I directed the parties to provide me with “submissions as to the amount of such fair market value or as to whether further expert evidence is required to determine such fair market value” in paragraph 101.

[6] I ought perhaps to have expected a continuation of the dysfunctional and highly adversarial working relationship that prevailed prior to the hearing before me. Suffice it to say that nothing happened quite as I directed it.

[7] The applicant took the initiative on the valuation issue by asking the expert who had provided the joint report (Rudson Valuation Group) to provide a further report following the directions in my decision. The door to proceeding down that road was firmly shut by Mr. Singh who wrote to Mr. Carey on September 26, 2018 that, because his clients were appealing my decision, “our clients will not be participating in any valuation until the appeal is heard and a decision rendered by the Court of Appeal”.

[8] That position was more than a little premature and stood in direct contradiction to my express order that had not (and has not) been stayed.

[9] The applicant found himself obliged to obtain a new expert when RVG refused to act on a solo mandate without the consent or co-operation of the respondents. The applicant thus engaged Fuller Landau LLP to provide a valuation report. That report, dated October 10, 2018, has been provided to me along with the applicant’s submissions in relation to it.

[10] The preparation of the FL Report was handicapped to some degree by the failure of the respondents to provide any of the requested data, including access to the general ledger of Boothworks, copies of the Fiscal 2018 financial statements, costing summaries and other similar matters.

[11] The respondents ultimately decided to change course and produce their own valuation, providing their own expert access to all of the sources denied to FL. That report by Pellarin Inc. is dated November 6, 2018 and was delivered to me by the respondents along with their written submissions dated November 9, 2018.

[12] Needless to say, none of this was what I directed. The starting point was intended to be the RVG report and further expert reports were only to be contemplated after submissions were received by me addressing, among other things, the ability to derive the required valuation by applying my reasons to the RVG report.

[13] At this point, the very thing I was seeking to avoid (the expenditure of further significant sums for expert evidence in a highly adversarial approach) has occurred. Nevertheless, I find that the approach to value originally applied by RVG was a sound one and the tweaks to the data in that report required to apply my order to the RVG valuation approach are comparatively minor.

(a) The three valuation reports

(i) RVG Report dated November 20, 2017

[14] The RVG Report was prepared on the order of Hainey J. and paid for by both parties jointly. It opined on the fair market value of Boothworks as of October 31, 2017, and was able to do so on a preliminary basis only.

[15] The valuation approach applied by RVG was on a going-concern basis using and asset valuation rather than a capitalized earnings or discounted cash flow approach because of the information received at that point (in November 2017) that Spin Master had decided to withdraw its equipment from Boothworks’ facilities. RVG noted that over the three prior fiscal years, Spin Master had accounted on average for approximately 50% of sales and that the loss of Spin Master sales was likely to result in a company with sales below what would be attractive from a purchaser’s perspective.

[16] RVG calculated an “en bloc” valuation of all of the shares of Boothworks on a going concern asset valuation at $1,920,000 being the shareholders’ equity of Boothworks as of October 31, 2017. As shall be seen, that figure is almost identical to the high end of the liquidation valuation prepared by Pellarin. The congruence is not surprising given the high degree of cash and cash equivalents on the balance sheet.

[17] The major differences between the valuation approach applied by RVG and the valuation directed in my reasons for judgment are the following:

a. Valuation date: RVG used October 31, 2017 rather than July 11, 2017 as ordered by me;

b. RVG assumed the complete loss of Spin Master as a client – that may or may not have been a likely outcome on July 11, 2017, but it had not yet occurred;

c. RVG did not back out the costs of this litigation and/or legal costs incurred by Boothworks in relation to Mr. Palumbo’s status as my reasons directed; and

d. RVG did not separately break out the profit earned on the Spin Master project nor the costs directly incurred in relation to it, although this amount would have been included in the October 31 figures which follow completion of and billing for the project.

[18] The foregoing differences being noted, the RVG valuation did provide what ought to have been a very solid starting point for the parties to work out a consensual number or to instruct RVG to finalize its report after accounting for the differences pointed out.

[19] Based on the RVG valuation of $1,920,000, the fair market value of Mr. Palumbo’s one-third share interest in Boothworks would be calculated at $640,000.

(ii) FL Report dated October 10, 2018

[20] As noted, the FL Report was somewhat handicapped by its lack of access to the financial data of Boothworks except to the extent already in the applicant’s hands. Subject to these handicaps, the FL Report contended that a capitalized earnings approach could be applied on the facts of this case even assuming the future loss of the Spin Master account. FL calculated the en bloc value of the shares of Boothworks at $2.3 million (Mr. Palumbo’s one-third share being $766,000) to which it added its calculation of Mr. Palumbo’s share of the Spin Master project and the other adjustments required by my ruling, arriving at a final fair value of Mr. Palumbo’s one-third interest of $831,000.

[21] FL was of the view that the adjusted book value approach applied by RVG was inappropriate due to its failure to attribute any value to the goodwill remaining in the business following the departure of Mr. Palumbo even with the assumed loss of the Spin Master account. Nevertheless, FL did undertake the exercise of revising the figures in the RVG report in accordance with my order. As shall shortly be seen, those adjustments – substantially all of the figures of which are also found in Pellarin’s report – are the foundation of the findings that I have made and are only slightly higher (less than 5%) than the estimate originally determined by RVG.

(iii) Pellarin Report dated November 6, 2018

[22] The Pellarin Report conducted a liquidation valuation of Boothworks only. It determined that no other valuation approach was applicable.

[23] On this basis, the Pellarin report arrived at an estimated fair market value between $974,468 and $1,049,843 (or $325,000 to $350,000 rounded for Mr. Palumbo’s one-third share interest). However, in arriving at that figure, Pellarin made a very significant deduction from the net value of Boothwork’s assets for the personal taxes payable on dividends by the shareholders which was in no way authorized by my ruling. The taxes if any payable by a shareholder have no bearing on the value of the shares themselves which is the exercise that was directed to be performed. Backing out that clearly extraneous (to this exercise) deduction is a simple matter because Pellarin provided detailed schedules of its calculations.

[24] Prior to that reduction, Pellarin’s high end liquidation valuation of $1,919,273 is almost exactly equal to the $1,920,000 en bloc value estimate arrived at by RVG. As can be seen, there was a high degree of agreement between the three reports as to the numbers even if each applied different methodologies.

[25] The Pellarin report adds to this amount a total of $58,831 representing Mr. Palumbo’s one-third share of the LA Fall project after additional reductions Pellarin decided to make for the indirect costs thereof.

[26] The Pellarin report differed materially from what I asked for in three respects.

[27] I asked the valuation to assume the Spin Master was not an asset of Boothworks and that Mr. Palumbo was free to respond to future requests for quotations or proposals. The Pellarin Report assumed incorrectly that I had ruled that Spin Master was Mr. Palumbo’s “personal property” and inferred from this that potential purchasers would have regarded Boothworks “as not having any Spin Master prospects” after the LA Fall show project underway [emphasis added].

[28] Boothworks had – and has – every right to solicit projects from Spin Master. It had every right to make efforts to reach out to and seek to engage Mr. Foster and Mr. Mardon and their companies instead of acting in a hostile manner towards them after pushing Mr. Palumbo out. It had every right to respond to the RFP’s and RFQ’s duly forwarded to it by Mr. Palumbo prior to his departure. Indeed, I was somewhat critical of the inaction of Boothworks in this regard in my reasons. The fact that events subsequent to July 11, 2017 eroded Boothwork’s chances of attracting or retaining some or all of Spin Master’s future business does not bear on the valuation of Boothworks as of July 11, 2017. The fact that Mr. Palumbo was not barred from accepting future business or from competing fairly does not amount to a finding that Boothworks could only be viewed on a liquidation basis.

[29] Second, as noted earlier, the Pellarin report calculated a liquidation value of Boothworks of between $1,781,477 and $1,919,273 but then reduced this amount by an assumed amount of personal tax that would be payable by the three recipients of the presumed distribution to each of the proceeds of liquidation. That reduction was between $807,009 and $869,431.

[30] This reduction for assumed personal tax liabilities was simply no part of the valuation exercise I directed nor does it have any logical connection to it. Whatever amount Mr. Palumbo eventually receives for his shares will be taxable in his hands based on his own personal tax situation at the time of disposition. He may have other off-setting losses or he may be fully taxable. The same is true of Mr. Quercia and Mr. Imhoff. The deduction ought not to have been made and shall be disregarded in determining the fair value of Mr. Palumbo’s shares.

[31] Reversing that deduction results in a valuation of Mr. Palumbo’s shares between $593,826 and $639,758. The latter figure is almost exactly equal to the figure calculated by RVG (at the high end).

[32] Finally, the Pellarin Report failed to give Mr. Palumbo credit for the legal fees that the individual respondents caused Boothworks to incur either to arrange his wrongful expulsion or to contest the litigation that arose as a result. This was directed in my ruling and ought to have been done.

(b) Determination of value

(i) Basis of valuation – liquidation or going concern

[33] The suggestion that Boothworks faced inevitable liquidation following the loss of Spin Master as a client does not flow from my reasons nor from common sense. Spin Master may have accounted for almost half of revenue over the prior three years, but it did not account for the other half. Because Spin Master’s account used almost none of Boothwork’s fixed assets or non-contract employee time (apart from Mr. Palumbo of course), the loss of Spin Master stranded few assets either. Further, the probable departure of Mr. Palumbo did not in any way preclude Boothworks from seeking to compete with Mr. Palumbo or others to obtain or retain Spin Master’s business with or without Mr. Palumbo’s help.

[34] In fact, Boothworks has not been liquidated and continues to carry on business. Its management has refused to reveal any financial information about its results after July 2017. Boothworks has relocated to smaller and cheaper premises after its lease came up in July 2018 according to the Pellarin report and may have let an employee go (whether or not in consequence of Spin Master’s loss cannot easily be determined). It is clear that Boothworks remains a viable going-concern business being managed by its two remaining principals. It may well have damaged its balance sheet through eighteen months of litigation, but there is nothing to suggest its business has not held its own or indeed prospered. I cannot accept the flawed liquidation assumption made by the Pellarin report.

[35] I am entitled to and do draw an adverse inference from the respondents’ failure to supply information to the applicant. I infer from the evidence that Boothworks’ affairs have prospered at least moderately well since Mr. Palumbo’s departure. At the very least, hindsight does not support abandoning a going-concern valuation basis.

[36] I do not agree with Pellarin that a going concern valuation is inappropriate in this case. Pellarin’s opinion in that regard was tainted by flawed assumptions regarding my reasons. I conclude that a going-concern approach to valuation must be applied.

(ii) Do I have sufficient evidence before me?

[37] I have three valuations before me. Each of them is flawed to a degree. The RVG Report was a preliminary report only and used a different valuation date from the one directed by me in my judgment. The FL Report was prepared in something of a vacuum – through no fault of the applicant’s – because denied adequate access to the financial records of Boothworks by the respondents. The respondents of course did co-operate with their own expert, but Pellarin’s Report departed from my directions in material ways and was of limited value except as a source of data.

[38] In the circumstances, there is some superficial attraction in putting the ball back into the parties’ hands and directing that a fresh valuation be obtained that suffers from none of these drawbacks.

[39] In my view, it is not in the interests of justice to go down that road. When filtered properly, all three hover around the same small valuation range. In my view, I have more than enough information before me to determine fair market value.

[40] Any remaining uncertainties about the figures are highly likely to be dwarfed by the costs of causing yet another valuation exercise to be undertaken by parties whose utter inability to co-operate in any material way has been amply demonstrated to me. The divorce between these parties needs to be accomplished as soon as possible and without tens of thousands in additional expenses.

[41] After discounting the differences in methodology applied by the three reports, the differences between the three as regards the necessary revisions to apply the RVG approach to the directions contained in my judgment were not major.

(iii) Fair market value of Mr. Palumbo’s shares

[42] The rejection of a liquidation approach to valuation does not imply the adoption of the capitalized earnings approach favoured by the FL Report. There are three main types of approaches to performing a going-concern valuation of a business: the asset approach (or adjusted balance sheet), the discounted cash flow approach and the capitalized earnings approach. The latter two approaches assess the revenue stream that the combination of tangible and intangible assets of a business are able to produce in relation to what the market would be willing to pay. The first approach attaches little to no value to good will and considers the value of the assets used in the business. The going-concern fair market value of a business will generally be the highest of the three approaches which are designed to respond to the challenges of valuing very different types of businesses and capital structures in a consistent way.

[43] In the circumstances of this case, I prefer the RVG adjusted book value approach over the others. The strong likelihood of a very material level of year over year changes in revenue and earnings coupled with past volatility in earnings would introduce too much uncertainty to make an earnings or cash flow analysis a practical option. In this essential conclusion, I concur with RVG. Expressed in mathematical terms, the discounts that would be required to be placed on future cash flow or earnings to reflect those uncertainties would result in a valuation lower than an adjusted balance sheet approach. On the other hand, the strong balance sheet, the presence of two of three experienced founders remaining within the business and a sizeable remaining revenue stream all point to the likely continuation of that business under the supervision of principals motivated to make a go of it. The adjusted balance sheet approach is the appropriate one to be employed here.

[44] There are similarities and differences between an orderly liquidation analysis and a going-concern adjusted book-value approach. The similarities are evident when one considers that the higher end liquidation value arrived at by Pellarin (when compared on an apples-to-apples basis) is almost the same as the asset value determined by RVG. There are however differences. Among other differences, assets such as office furniture and equipment may have little to no value in a liquidation and steep discounts would be assumed to apply even to an orderly liquidation. Accounts receivable too become more difficult to collect in a liquidation and attract significant discounts.

[45] A going-concern asset approach recognizes that there is in fact a going concern even if the assets used in that going concern are not producing revenues or profits of a quality or consistency sufficient to warrant the application of an earnings multiple or a discounted cash flow analysis. Even depreciated equipment has value to the business using it that would otherwise be put to the expense of having to acquire other equipment to replace it; accounts receivable that can be collected in the usual and ordinary course are likely more collectible and with fewer discounts or write-offs than if collected by the receiver of a closed-down business. A going-concern, adjusted balance sheet valuation approach assumes the subject company remains a viable going concern for the foreseeable future and applies a valuation to the assets used in that business that, while not predicated upon a particular level of earnings, is nevertheless predicated upon an indefinite continued use of those assets in the ordinary course of the subject business. The depreciated value of those assets would be adjusted to reflect cases where there is evidence that this value is for some reason inappropriate. On such an approach, goodwill is not given a material value.

[46] This was the approach applied by RVG when retained by both parties jointly and it is the approach that I shall apply here.

[47] Each of the three experts has provided building blocks for the valuation called for in my reasons. Both FL and Pellarin modelled an adjusted book value approach along the lines of RVG’s report.

[48] I start with a valuation of the assets of the business as of the valuation date (July 11, 2017) before adjusting that value with the legal fees to be added back and the subsequent Spin Master project net profits as required by my reasons.

[49] By a fortunate coincidence, the company’s year-end happened to fall only two weeks after the ouster of Mr. Palumbo that gave rise to this litigation. The first question to be resolved is whether those year-end figures can be used or whether it is reasonable or practical to seek to require the production of pro forma intra-month financials. In the circumstances of this case, I am of the view that the month-end (and thus year-end) figures will not differ materially from the mid-month figures. Mid-month figures could only be generated with difficulty given the lumpy nature of project revenues and expenditures and I am not persuaded that this could be done with greater accuracy than is generated by the use of the month-end figures adjusted for a few known issues.

[50] I directed that the profits on the Spin Master project after direct expenses and Mr. Palumbo’s salary be added to the en bloc value. Both Pellarin and FL note that the July 31 figures would include a loss on the Spin Master project to that point. This is because expenses are incurred early in the project while revenues come in at the end. Pellarin and FL both calculate the amount of this “loss” baked into the July 31, 2017 year-end figures at $30,620. This figure must be added to the profit generated from the project because it was already included in generating the July 31, 2017 figures and must in effect be backed out to avoid double-counting.

[51] Mr. Palumbo’s salary was estimated by FL whereas Pellarin (with access to the books) was able to provide a precise figure albeit on a different basis. Neither is perfect, but the gap between them is comparatively small. Pellarin calculated actual wages of Mr. Palumbo from July 11, 2017 forward until his last pay period of September 21, 2017. However, July 11 until July 31 would already have been included in expenses in the year-end figures (and should not be double-counted). As well, Pellarin included benefits paid out to February 2018 as well as cell-phone and other benefit numbers that were not project-related. FL for its part extrapolated 2017 wages and benefits into 2018, but included too much in the way of wages (going out to October 25 instead of September 21) FL also took deduction for per diems that were not a pass-through item and would thus appear in the P&L for the project. The two errors of FL largely cancel each other out.

[52] Given the failure of Boothworks to co-operate in the valuation process, I shall apply the FL figures where their basis is soundly explained and the corresponding Pellarin figures are incorrect for reasons that appear on their face. This is such a case. I therefore find that the adjustment to the Spin Master project profits to account for Mr. Palumbo’s salary is -$23,455 as estimated by FL.

[53] The figures also require adjustment required for legal fees incurred prior to the valuation date. The Pellarin report failed to provide me with a precise figure of legal fees although my judgment directly required it and Pellarin had access to the books and records of the company. Given the lack of direct commentary on the legal fees as estimated by FL (estimated by reference to the increase in such fees in such fees compared to the prior two-year average), the lack of comment by Pellarin on this aspect of the FL Report and the refusal of Boothworks to permit FL to have access to the books and records of Boothworks, I infer that the legal fees estimated by FL of $31,876 are a conservative estimate.

[54] The Pellarin calculation of net profits earned on the Spin Master project is either subject to manifest calculation error or is missing very serious amounts of data to explain it. Schedule 3 of the Pellarin report estimates Gross Profit at $208,833 and then proceeds to make -$38,074 in various adjustments to arrive at a net profit before income tax of $379,593 – inexplicably higher than the gross figure despite only negative adjustments being made. There is $208,834 unaccounted for in that math (and in favour of Mr. Palumbo). Whether the product of error or unexplained calculations, the figures are not usable as presented.

[55] The Pellarin Schedule 3 also makes deductions for taxes on distributions and income tax that were not directed to be made by me as previously noted.

[56] The FL calculation of net profits on this project is a more accurate and usable one and corresponds faithfully to my directions. It uses the same US$172,443 in gross profits after direct expenses as was calculated by Pellarin Schedule 3, adds back the project losses included in the July figures ($30,620) and deducts Mr. Palumbo’s remuneration ($23,455) to produce a net profit of $234,638 once converted to Canadian dollars (using the same $1.27 rate employed by Pellarin).

[57] I find that the net profit attributable to the Spin Master project after accounting for direct expenses and Mr. Palumbo’s post-July 31 remuneration to complete that project was thus C$234,638. One-third of that total (or $78,213) must be added to Mr. Palumbo’s undiscounted one-third share of the en bloc value for the shares of Boothworks determined from the balance sheet of July 31, 2017.

[58] I now turn to calculate the net asset value of Boothworks to be derived from the 2017 year-end balance sheet.

[59] As noted earlier, the RVG preliminary report referred to both the actual 2017 year-end figures and the October 31, 2017 interim figures in its calculations, deriving the net share value from the shareholders’ equity figure recorded. That figure includes the depreciated or book value of all assets less the book value of all liabilities. As was also noted, the RVG preliminary report used the October 31, 2017 figures as its valuation date. For the reasons expressed herein, the July 31, 2017 figures are to be preferred.

[60] The FL report used the same July 31, 2017 shareholders’ equity figure of $1,589,509 in calculating the en bloc value using the adjusted book value method. Adjustments to book value are to be made where there is evidence that the market value of particular assets exceeds their depreciated book value. RVG made no such adjustments in its preliminary report. FL for its part suggested making an adjustment of $300,000 for the assumed value of inventory held on the books of Boothworks at a nil cost basis that is in fact being used by the company to produce value. The inventory in question (the “Octonorm” inventory) had been abandoned in the warehouse by the prior owner of the business and thus acquired at nil cost when Boothworks inherited those premises and signed a new lease. The FL report estimates the replacement value of that inventory to be in the range of $500,000-$700,000 and estimated a market value of $300,000.

[61] Pellarin declined to attribute any value to his inventory on the basis that its prior abandonment signifies a negligible market value. I disagree. Pellarin does not dispute that this inventory has been used by Boothworks in fact to generate revenue over the ten years since it was first abandoned. It has some value in use. FL premised its valuation of this inventory upon internet searches confirming a viable market for used Octonorm booth inventory and independently arrived at a figure – $300,000 – that is considerably lower than the replacement cost proposed to them by Mr. Palumbo. Given the age of this inventory, I am of the view that the valuation proposed by FL appears too aggressive even if its replacement value is as high as Mr. Palumbo estimated it to be. I find that a value of $150,000 for inventory adjustment is a more reasonable figure.

[62] Pulling all of the pieces discussed above together, I calculate the en bloc value of all of the shares of Boothworks as of July 11, 2017 as follows:

Shareholders' Equity 31/07/17 $1,589,509

Adjustment for value of Inventory $150,000

En bloc Value as of Valuation Day prior to adjustments $1,739,509

Mr. Palumbo's one-third share $579,836

Adjustments:

Add: Spin Master Profits $234,638

Legal Fees incurred prior to 31/07/2017 included in $31,876

$266,514

Mr. Palumbo's one-third share of adjustments $88,838

Fair Value of Mr. Palumbo's shares $668,674

[63] I therefore find that the amount ordered to be paid by Mr. Quercia and Mr. Imhoff for Mr. Palumbo’s shares is $668,674.

Issue 2: Costs

[64] The applicant brought an oppression application seeking to receive the fair market value of his shares. He was met with a counter-application that made numerous allegations of breach of fiduciary duty against him. The counter-application considerably widened the dispute, adding as respondents Mr. Foster, Mr. Mardon and each of their respective holding companies and seeking damages, an accounting of profits for five years in the past and into the future and a piercing of the corporate veil among other claims. A motion to add the major client as a party respondent late in the proceedings was denied.

[65] Following a first adjournment in March, 2018, the matter was set for a hearing on June 25, 2018 by order of Hainey J. My ruling granting the application and dismissing the counter-application was released on August 23, 2018. The successful applicant and counter-application respondents each seek their costs.

[66] The applicant, Mr. Palumbo, seeks full indemnity costs and has provided an outline quantifying such costs at $166,568.21 plus disbursements of $12,241.39 (of which $8,708.06 represented Mr. Palumbo’s share of the cost of a valuator jointly retained with the respondents). The other counter-application respondents (Mr. Foster, Mr. Mardon and their respective holding companies Direct Inc. and HT Connect Ltd.) also seek full indemnity costs in the amount of $97,127.50 plus HST and disbursements of $4,069.00 plus HST.

[67] The respondents/counter-applicants (Mr. Quercia, Mr. Imhoff and Boothworks Inc.) take the position that they should be awarded their costs even though unsuccessful or that the successful applicant and counter-application respondents should be deprived of their costs in whole or in substantial part by reason of their conduct in delaying the action.

(c) Scale of Costs to be awarded

(i) Conduct of the parties

[68] This was not a particularly complex application even if the counter-application considerably widened its scope. This will not be the first nor the last time that a small-business corporation founded as a de facto partnership breaks up without the parties having provided a detailed roadmap in advance about how to handle the consequences. Unfortunately, the fallout in cases of small businesses breaking up in this fashion can be as high in conflict as any divorce. This was such a case.

[69] It is fair to observe at this point that the flames of litigation have almost certainly consumed more value than was ever realistically at stake. It didn’t need to be that way. It is seldom the case that the responsibility for dysfunctional conduct of litigation lies with one party alone. Sometimes however the scales tilt markedly in one direction. This was also such a case.

[70] My review of the history of this matter confirms that the respondents have never missed an opportunity to miss an opportunity to de-escalate matters. War by litigation was supplemented with war by correspondence. Affidavit upon affidavit and reply upon reply were filed, all packed more with arguments and attempts to create “atmosphere” than with hard facts or usable evidence. Adversaries were charged by the respondents with being “wickedly deceptive”, lying, intentionally misleading or worse.

[71] Letters and affidavits containing extreme language may have seemed an effective balm for the raw nerves and hurt feelings of litigants – they act as sand in the gears of efficient litigation and serve only to drive up the level of conflict and with it, costs.

[72] Numerous 9:30 scheduling appointments taxed the resources of the court unnecessarily and did little to achieve forward progress of the case. At the penultimate such hearing, Hainey J. attempted (in vain) to bar further such applications. The scope of the litigation expanded and the gravity of the accusations levelled did as well. Charges of fraud or fraudulent behaviour were freely dispensed in affidavit form directed at Mr. Palumbo and Mr. Foster et al. even if those claims were not formally advanced in the pleading itself.

[73] In support of their claim that it was the respondents were the real victims of inappropriate or dilatory actions on the part of the successful parties, the respondents referred me to two affidavits. These two affidavits – one from a law student and one from a law clerk – speak rather eloquently for themselves even if pointing to a quite opposite conclusion than the one intended. Rather than simply appending the correspondence from counsel to the extent relevant to the matter before the court, these affidavits were instead adjective-laden arguments replete with numerous allegations of false statements, sharp practices, deceptive behaviour and violation of the Rules of Civil Procedure and the Rules of Professional Conduct. These charges were levelled at adverse counsel by a law clerk and student who ought never have been asked to sign such things particularly when based almost entirely upon information and belief from the very counsel who appeared on the matter and authored most of the letters attached as exhibits.

[74] The reading of this voluminous correspondence is not edifying.

[75] The second of the two affidavits provided to me in the respondent’s costs submissions was a law-student affidavit filed in support of a sought-after (second) adjournment of the hearing in order to permit cross-examinations and examinations of non-parties. That affidavit repeated much of the tone and content of the prior law clerk affidavit. It also – perhaps unintentionally – highlighted the failures of the respondents themselves to adhere in any meaningful way to the timetable put in place by order of Hainey J. in March on the occasion of the first adjournment or to demonstrate any meaningful adherence to the “three C’s” of Commercial Court practice. The respondents sought to add a new party to the proceeding after the deadline for filing material had passed. At least three affidavits were also filed by the respondents after the deadline for filing material had passed. Allegedly crucial non-party witnesses were added to the equation at the 11th hour (or later).

[76] It is to be noted that the respondents themselves had sought adjudication of the matters raised in their claim by way of counter-application with all that such a procedure entails and no party ever moved to convert either application to an action nor to introduce viva voce evidence at the hearing. Six weeks were spent trading barbs in relation to scheduling cross-examinations instead of pragmatically arranging them, with Mr. Singh concluding almost from the outset that the hearing could not proceed as scheduled and proceeding thereafter with correspondence that appeared primarily aimed at creating a record to justify that clearly-desired result. The costs of preparing for a hearing in this constantly-shifting landscape were inevitably driven higher.

[77] On the whole, I find that the conduct of the respondents was characterized by excessive posturing and intemperate language while demonstrating none of the pragmatism and co-operative approach required of litigants appearing before the Commercial List. Few fires are extinguished by the application of still more gasoline.

[78] I do not mean to imply thereby that the successful parties were invariably on the side of the angels. They were not. Calm perspective and level headedness are hard to maintain when incoming incendiary shells are arriving at the pace at which they sometimes appeared to be lobbed. The responses were not always as measured as they might have been and the co-operation not as forthcoming. However, on balance, counsel for Mr. Palumbo and Mr. Foster et al. resisted the temptation to rise to the bait most of the time.

[79] The Commercial List cannot function if all litigation before it is carried on as this one was. Parties do not need to agree with each other to be civil and dispassionate about the path to resolving their disagreements. The court expects counsel to be able to agree to disagree and to work co-operatively towards the efficient resolution of those disagreements even when their clients cannot.The concepts of proportionality and pragmatism should inform every step taken and every communication made.

[80] Not all cases and not all counsel adhere to these ideals every hour of every day. That is a given. However, the level of adherence to them needs to be closer to 100% then it is to 0%. The respondents’ conduct of this litigation certainly impeded the efficient resolution of this case and drove costs incurred by all unnecessarily higher. The respondents’ conduct was so far from the required standard and reached the level at which some sanction in the form of costs is called for.

[81] The free dispensation of allegations that counsel were guilty of “intentional lying”, deceptive practices and the like coupled with similar charges levelled against the successful parties in the substantive affidavits filed by the respondents also warrants sanction apart entirely from the significant impact such irresponsibly-levelled charges had upon the conduct of the litigation.

(ii) Offers to settle

[82] The counter-application respondents made an offer to settle on June 11, 2018, two weeks prior to the hearing of the application. Their offer to settle included payment of $100, a dismissal of the counter-application and a demand for payment of only 90% of their partial indemnity costs by the counter-applicants. They of course exceeded that offer as the claim against them was dismissed in its entirety.

[83] In light of their successful defence of the counter-application, the counter-application respondents should have been presumptively entitled to their partial indemnity costs with or without a Rule 49 offer in hand. While Rule 49.10 of the Rules of Civil Procedure does not mandate a different scale of costs in favour of the successful defendant who has made an offer to settle, the existence of such an offer is a factor that may be taken into account in considering costs.

[84] In the present case, I do not consider that the existence of the offer alone warrants moving the needle on scale of costs beyond the default partial indemnity scale that these respondents would be presumptively entitled to as successful respondents. The counter-applicants failed to obtain a judgment and their claims were dismissed. The costs incurred in the last two weeks of the case were not insignificant, but most of the water had already gone under the bridge. The compromise offered was relatively minor in nature. Acceptance of the offer required near total capitulation without a hearing. In such circumstances, the existence of an offer does little to assist the court in assessing costs. Were the claim so thin as to warrant the conclusion that it ought never to have responsibly been brought, the costs consequences that would flow from such a conclusion are not going to be materially different if an offer to settle requiring the claimant to admit as much in advance of a hearing is delivered shortly before the hearing. Our practice in relation to costs already indemnifies the successful defendant/respondent with partial indemnity costs where a claim is dismissed as this one was.

[85] Fiovo Palumbo also claims the benefit of having made an offer to settle. In his case, he offered to resolve the matter on the basis of a fair market value purchase of his shares (without discount) and mutual releases. The offer was made in the context of a without prejudice letter that preceded the commencement of litigation and was designed to avoid the necessity of commencing same. Mr. Palumbo succeeded in this application and was awarded a judgment requiring the purchase of his shares at their fair market value. His offer, had it been accepted, would have cut this litigation off before it began and saved the parties hundreds of thousands of dollars.

[86] While the offer to settle of Mr. Palumbo, embedded as it was within a without prejudice letter discussing the events leading up to the litigation, does not fit within the four corners of Rule 49 of the Rules of Civil Procedure, the existence of the offer is a factor that I am entitled to consider along with all other relevant factors in determining what scale of costs is appropriate in this case. It is entitled to some weight but that weight must be limited by an appreciation of its limitations. The offer would have avoided litigation it is true, but contained relatively little in the way of compromise and required a near-total capitulation on the part of the respondents. As with the counter-application respondents, such an offer – even if made in accordance with the procedures required to invoke Rule 49 of the Rules of Civil Procedure – adds relatively little to the analysis. Were the counter-application or the defence to the main application so self-evidently meritless, advanced in bad faith or to advance some improper purpose, the court already has sufficient tools to impose costs consequences without resort to a relatively weak analogy to Rule 49.

(iii) Other Rule 57.01 factors

[87] One of the factors judges pay particular attention to in fixing costs is that of the reasonable expectations of the unsuccessful party. This is a factor that must, of course, be considered with all appropriate care. The burden borne by each side in a particular case is seldom equal. One party may be sent down a dozen fruitless paths by the demands of the other, necessitating further costs. Nevertheless, turning a weathered eye to the level of costs incurred by the unsuccessful party who now claims the successful party was too liberal in its expenditures offers an effective reality check in a large number of cases.

[88] While the unsuccessful party in this case suggests that the court ought to award costs against the successful party, Mr. Singh has declined to provide me with an outline of costs from which I might make such an award (or which might permit me to consider the reasonability of the amounts actually spent by the successful parties). I can only infer that this failure reflects a tacit admission that the unsuccessful respondents incurred costs not materially different from those of their adversaries and that the amounts claimed by the successful parties are not materially different than the reasonable expectations of the unsuccessful party. In drawing this inference, I follow the reasoning of Festeryga J. in Cvokic v. Belisario, 2008 42597 (ON SC) recently cited with approval by Akbarali J. in Saramia Crescent General Partner Ltd. v. Delco Wire and Cable Ltd. et al., 2017 ONSC 3507 at para. 9.

[89] While I have not found the case to have been particularly complex, the issues were of considerable importance to the parties. I have already commented that the conduct of this litigation very quickly devolved into what might be considered something of a grudge match where the parties appear to have lost track of what was realistically at issue. I also note that Boothworks, while nominally a party respondent and counter-applicant was actually the subject-matter of the dispute as much as it was a protagonist. Having assumed complete control of the corporation, the respondents were able to use the “house money” in effect to attempt to batter Mr. Palumbo into submission. Boothworks had substantial cash reserves and assets when the litigation began and no debt.

(iv) Disposition re: costs

[90] The successful parties are entitled to their costs. Nothing in their conduct warrants deprivation of their costs. I cannot find that the claims or defences advanced by the unsuccessful respondents were so meritless as to warrant independent sanction. Most litigation has a successful party in hindsight. Obviously, this alone cannot warrant the conclusion that no defence ought ever to have been offered or claim advanced. It is only where the claim or defence was advanced in bad faith or for some improper purpose without reasonable foundation that the question of an additional costs sanction arises. This is not such a case.

[91] The incivility and excessive reliance upon invective and extreme language demonstrated by the unsuccessful parties in this case does warrant some sanction in the awarding of costs over the normal partial-indemnity scale. On the other hand, this intemperate conduct alone does not automatically warrant leaping past substantial indemnity all of the way to full indemnity costs as suggested. There has definitely been some increased costs occasioned by the conduct shown, although the precise amount cannot be determined with precision. The applicant’s Outline of Costs does contain significant details of costs thrown away or driven higher, even if a precise figure is difficult to derive.

[92] On balance, I am of the view that the applicant – who bore most of the brunt of the respondents’ behaviour and bore most of the evidentiary burden in this case – is entitled to substantial indemnity costs. I have reviewed the amounts claimed by the applicant. These are helpfully broken out by time-frame and by timekeeper. The disbursements claimed – $12,241.39 – are primarily due to the shared cost of the valuation performed. The amount claimed on a substantial indemnity scale for fees – $146,899.19 – was calculated without regard to the cost of filing costs submissions or the additional costs incurred in relation to the valuation exercise referred to above. I am fixing Mr. Palumbo’s substantial indemnity costs at the all-inclusive figure of $162,500.

[93] The counter-application respondents were introduced to the litigation maelstrom somewhat later than the applicant was. The issues they faced were somewhat narrower, not being directly implicated in the share valuation issue. Nevertheless, the claims they faced were potentially ruinous to them and required a vigorous response. They were accused of fraudulent behaviour and were as impacted as the applicant was by much of the respondents’ behaviour. I find that these successful respondents are entitled to substantial indemnity costs that I fix at the claimed all-inclusive amount of $103,349.28.

Disposition

[94] I fix the costs of the application and counter-application payable by the respondents Riccardo Quercia, Brad Imhoff and Boothworks Inc. to the applicant Fiovo Palumbo at $162,500 all-inclusive.

[95] I fix the costs of the counter-application payable by the counter-applicants to Mr. Foster, Mr. Mardon, Direct Inc. and HT Connect Ltd. in the amount of $103,349.28 also all-inclusive.

[96] I fix the fair value of Mr. Palumbo’s shares as of July 11, 2017 (but including his pro rata share of the profits earned on the Spin Master LA Fall 2017 project) calculated as directed in my reasons for judgment to be $668,674 and Mr. Imhoff and Mr. Quercia are therefore jointly directed to purchase his shares at such price plus pre-judgment interest from July 12, 2017 until August 23, 2018 and post-judgment interest thereafter until the purchase has been completed. Mr. Palumbo shall deliver to his solicitor endorsed in blank any share certificates he may have received or a sworn attestation of lost certificates if none can be found (or were never delivered). The share certificates and/or attestation are to be held pending completion of the share purchase ordered by me.

[97] Orders accordingly.

S.F. Dunphy J.

Date: January 04, 2019