Court File and Parties

Court File No.: CV-19-00619793 Date: 2020-02-21 Ontario Superior Court of Justice

Between: Triumph Capital Limited, Applicant – and – BSMW Financial Inc., Respondent

Counsel: Jeffrey Levine, Guneev Bhinder, for the Applicant/Responding Party Arthur Hamilton, Jessica L. Kuredjian, for the Respondent/Moving Party

Heard: January 9, 2020

Before: Brown, Carole J., J.

Reasons for Decision

[1] BSMW Financial Inc. (“BSMW”) moves to have the application of Triumph Capital Limited (“Triumph”) converted to an action. BSMW also seeks alternate relief: an order striking certain paragraphs of Triumph’s affidavit sworn November 1, 2019 in support of its application.

[2] The alleged facts from which this motion arises are as follows. BSMW and Triumph both provide services, including financial planning and the administration of employee benefits. BSMW sought to acquire a part of Triumph’s business, the group business which carried on the business of selling and administering healthcare spending account programs (“PHSPs”).

[3] A PHSP is a self-insured health plan arranged by employers for their employees. PHSPs are a mechanism whereby small businesses can provide tax-free health and dental benefits to their employees and their employees’ family members. If administered properly, a PHSP can be an extremely attractive and cost-effective way of obtaining and providing health and dental benefits. A valid PHSP must conform to PHSP rules set out in the Income Tax Act, RSC 1985, c 1 (5th Supp). Canada Revenue Agency (“CRA”) has confirmed that a PHSP cannot be solely for shareholders unless the shareholders are also employees earning a T4 income. In the case of un-incorporated businesses or sole proprietors, the owner and their arm’s-length employees are also eligible if the owner has at least one arm’s-length employee.

[4] On April 26, 2018, the parties entered into the Asset Purchase Agreement ((“APA”) for the purchase and sale of a group business for a total purchase price of $390,000. The agreement contains an Entire Agreement Clause.

[5] Article 1 of the APA defines “Purchased Assets” as:

1. The purchased contracts;
2. All of the vendor’s (Triumph’s) rights, title and interest in and to the client accounts forming part of the Book of Business, including the rights to any income earned thereunder and any rights to renewal; and
3. All goodwill associated with the Book of Business.

[6] Article 1 further defines “Book of Business” as meaning “the list of customers and clients of the business, as set out in schedule 3.12 attached hereto, including the healthcare spending accounts (PHSPs). Schedule 3.12 provides a list of “HSA claims and clients list.”. The schedule represents that the total amount of PHSP claims paid for within the accounts administered by Triumph in 2017 was $744,136.37, and the revenue received by Triumph as a result was $55,851.69

[7] Further, Article 1 of the APA defines “Business” at section 1.01 as meaning “the business of providing group life, accident and sickness and health benefits programs to certain businesses or groups, including healthcare spending accounts.

[8] Article 3 at section 3.12 of the APA states “The Business has been carried on by the vendor in all material respects in full compliance with Applicable Laws”.

[9] Article 1 of the APA defines “Applicable Laws” and article 3, section 3.15 of the APA guarantees that “the vendor [Triumph] is in compliance with all Applicable Laws”.

[10] Article 3, section 3.05 of the APA guarantees that the APA “constitutes a legal, valid, and binding obligation, enforceable against the vendor [Triumph] in accordance with its terms”.

[11] Non-competition agreements signed by the principal of Triumph and his business partner define “Business” as: “the sale and distribution of Health and Dental Insurance Association Benefits Plans, healthcare products such as healthcare spending accounts, healthcare spending account administration and private health services plans and ancillary fees”.

[12] It is the position of BSMW that the provisions of the APA were the result of various statements made by Triumph to BSMW as the APA was being negotiated relating to how Triumph was selling PHSPs. The language found in the APA and the schedules attached thereto referred to PHSPs as forming part of the group business, and more particularly, the business of providing group life, accident and sickness and health benefits programs to certain businesses or groups, including healthcare spending accounts.

[13] BSMW maintains that the business being sold appeared, based on the information provided pre-closing and the definition of business in the APA, to include the sale of PHSPs, as above-stated.

[14] This is denied by Triumph, which maintains that it was always made clear to BSMW that the business being sold was only the PHSP adjudication business.

[15] Following closing of the APA, BSMW began to have concerns about the manner in which the business had previously been operated, as regards the clients who had set up PHSPs without being eligible to do so, and the failure of Triumph to collect and remit RSTs as required by the applicable laws. BSMW began receiving PHSP claims and inquiries from clients that BSMW had acquired from Triumph as part of the Book of Business. These claims and inquiries were from sole proprietors with no arm’s-length employees who, pursuant to the applicable laws, were not eligible for PHSPs. Further, it appeared that Triumph, while conducting the PHSP portion of the business, had neither collected nor remitted retail sales tax in the amount of 8%, as required by the applicable laws, to the Minister of Finance for Ontario in respect of all of the claims from customers whose accounts Triumph administered. Further, Triumph did not know the legal names of its PHSP clients’ employers, and did not know if its clients were employers themselves or if their employers had arm’s-length employees.

[16] As a result of the issues which had arisen, the principal for BSMW instructed the escrow agent, who was withholding the last amounts payable under the APA to withhold remittance of any further payments of the purchase price to Triumph until the issues were resolved to BSMW’s satisfaction.

[17] Triumph issued its application on May 10, 2019 and BSMW issued its cross-application on July 17, 2019.

[18] As regards this motion, brought by BSMW, to convert the application to an action, I note the following. In determining whether an application should be converted to an action, the following factors are considered: whether there are material facts in dispute; the presence of complex issues requiring expert evidence and/or a weighing of the evidence; whether there is a need for the exchange of pleadings and for examinations for discovery; and the importance and impact of the application and of the relief sought: Fort William Indian Band v Canada, 2005 FC 670, at para 5; Przysuski v City Optical Holdings Inc., 2013 ONSC 5709, at para 10.

[19] Additionally, in Fort William Indian Band, supra, the court set forth the following general principles in determining whether an application or an action is the appropriate originating process:

1. An application should be used when there is no matter in dispute and when the issues to be determined do not go beyond the interpretation of a document;
2. If the judge who will hear the matter cannot make a proper determination of the issues on the application record, there is good reason to convert an application into an action;
3. If issues of credibility are involved, or when viva voce evidence is required, a matter should proceed by way of an action; and
4. The involvement of a factual dispute simpliciter is not sufficient reason to convert an application into an action. The facts in dispute must be material to the issues that are before the court.

[20] In this case, there are material facts in dispute, which are needed in order to make a proper determination of the issues.

[21] The meaning, scope and breadth of the agreement are in dispute. The actual agreement itself is in dispute, as BSMW maintains that all schedules were part of the agreement at the time of execution and closing of the agreement, while Triumph disputes this.

[22] BSMW states that the allocation of purchase price had been agreed upon at closing, while Triumph denies this.

[23] The factual matrix itself surrounding the agreement is in dispute.

[24] BSMW states that there is conflicting evidence as regards what BSMW was made to understand was being sold.

[25] Triumph maintains that it sold only a PHSP claims adjudication service, while BSMW maintains that it was sold a PHSP sales and adjudication business. BSMW maintains that nowhere in the documents or text of the APA does it indicate that it is only the adjudication business that is being sold. Triumph denies this and maintains that BSMW knew throughout what it was purchasing.

[26] Triumph maintains that all issues in dispute in this Application can be determined, having regard to the factual matrix that existed at the time of entering into the agreement. However, the scope of the agreement entered into is in dispute. Were schedules included at the closing or not? The parties dispute this. The facts comprising the factual matrix are in dispute. The supporting affidavits as regards these and other issues are in dispute. An assessment of credibility will ultimately be required as regards all of the facts and issues in dispute.

[27] The parties disagree as to whether all applicable laws were followed by Triumph particularly as regards collection and remittance of the taxes and eligibility of clients to have PHSPs.

[28] Considering all of the circumstances of this case, the significant volume of evidence before this Court, the jurisprudence, the facta and the parties’ submissions, I am of the view that an application is not the appropriate procedure for determination of all of the issues in dispute. There are significant material facts in dispute. I am further of the view that the issues in this matter go beyond the interpretation of a document. BSMW states that it relied on the terms and representations, set out in the APA, which confirmed that BSMW was purchasing and purchased PHSPs.

[29] The issues extend to whether Triumph breached the provisions of the APA, whether it failed to disclose aspects of its business, which go well beyond the interpretation of a contract contemplated by Rule 14.05(3)(d). Further, Triumph maintains that there were discussions between the parties’ principals leading up to the APA which form part of the factual matrix. The content of these discussions are disputed by the parties. This raises issues of credibility which will require viva voce evidence.

[30] The relief claimed in the applications extends beyond the determination of rights that depend on the interpretation of the APA or the Escrow Agreement upon which Triumph is relying, as there are matters in dispute that are material to the issues before the court. In my view, based on all of the evidence and submissions, the relief sought in the applications goes beyond the determination of the rights that depend on the interpretation of the APA and Escrow Agreement. The parties are not ad idem as regards the factual matrix preceding the closing, the wording of the APA, and whether Schedules were included and formed part of the APA at the time of closing. The supporting affidavits of the party principals are in dispute as regards pre-closing discussions between them concerning terms of the APA. Based on all of the above, there will likely be a need to hear from additional witnesses, and potentially experts regarding certain business and tax issues.

[31] I am satisfied, on the basis of all of the above, that the application brought by Triumph should be converted into an action.

[32] I am further satisfied that BSMW’s cross-application should be converted into an action to be heard with or seriatim with the Triumph action. The issues are intermingled and interdependent and, as such, must be heard with or seriatim with Triumph’s action.

Brown, Carole J., J. Released: 2020-02-21