Court File and Parties

Court File No.: CV-19-00629258-00CL Date: 2020-03-03 Ontario Superior Court of Justice

Between: Emilio Manzo and Manzoco Holdings Inc., Plaintiffs – and – Poetry Living (The View) Limited, Poetry Living (Abbey Lane) Limited, Poetry Living (Parkside) Limited, Poetry Living (The View II) Limited, Holborn Developments Inc., Holborn (Gore Road) Developments, Torwood Development Corporation, Montez (Collingwood North) Inc., LGM Investments Inc., HBNG (Trade Valley) Limited, The Bluestar Cupido Group Inc., 12503017 Ontario Inc., 1846015 Ontario Inc.; 1189875 Ontario Inc., Block 40 Alliston and Majormack, 118987 Ontario Inc., 2401094 Ontario Inc., Maystar General Contractors Inc., Greenpark Markham, Soho Sentre Inc., 698114 Ontario Inc., Ten Cambridge Street Inc., TACC Holborn Corporation, Maioco Holdings Inc., Memmeco Holdings Inc., Luma Roase Investments Inc., Joseph Maio, Claudio Memme, John D’Angelo and HBNG Holborn Group, Defendants

Counsel: Anthony J. O’Brien, for the Plaintiffs Michael D. Schafler, Ara Basmadjian and Dennis Wong, for the Defendants

Heard: February 18, 2020

Before: C. Gilmore, J.

Reasons on Motion

Overview

[1] The Plaintiff, Mr. Manzo (“Manzo”) and his holding company Manzoco Holdings Inc. (“Manzoco” and jointly “the Plaintiffs”) seek interim relief by way of a Certificate of Pending Litigation (“a CPL”) against five properties owned by the Defendants and an oppression remedy pursuant to s.248(3) of the Ontario Business Corporations Act (“OBCA”). Specifically, the Plaintiffs seek appointment of an inspector to prepare an audit of financial information relevant to the Plaintiffs’ claim that it has a 25% partnership share in partnerships of the Defendants and a 25% shareholding interest in certain corporations owned by the Defendants.

[2] The Plaintiffs originally sought the appointment of a Receiver and a Mareva Injunction at this motion, but that relief was not pursued.

[3] The Defendants’ position is that Mr. Manzo was not a Joint Venture partner and has no ownership interests in either the partnerships or the properties owned by the Defendants. While they do not disagree that he has some entitlement, they submit that this motion is not the proper forum to determine the legal relationship between the parties or the type or amount of documentation necessary to make that determination.

Factual Background

[4] Manzo is the owner of the Plaintiff corporation Manzoco. The Defendant corporations are all companies incorporated under the laws of Ontario and the Defendant partnerships are all limited partnerships pursuant to the Limited Partnerships Act, R.S.O. 1990, C. L-16.

[5] The Defendants Maio, Memme and D’Angelo hold positions in the various Defendant corporations and partnerships and are the three partners in The Holborn Group (“HBNG”). HBNG carries on business through its family of companies as a fully integrated development company which secures funding for the acquisition, development and maintenance of real estate assets.

[6] Manzo originally went into business with Maio and Memme in the 1980’s when they incorporated Maystar, a general contracting business. Manzoco has a 30% shareholding interest in Maystar. D’Angelo joined the group in 1989. Maio, Memme, Manzo and D’Angelo each had different skills which they brought to the group including general contracting by Manzo, real estate development by Maio, operations and funding by Memme and business development by D’Angelo.

[7] Manzo’s position is that there was a Joint Venture into which each of the four partners injected funds into various business ventures with each person holding a 25% stake for which they received 25% of the revenue. Further, the partners agreed to roll back proceeds and revenues from the projects into the Joint Venture to cover expenses, taxes and new opportunities. Each of the partners had a holding company from which they paid expenses and earned revenue.

[8] Unfortunately, there has never been a written partnership agreement or shareholders’ agreement documenting or confirming the parties’ various contributions or interests. Manzo’s position is that he made cash contributions to the Joint Venture between 2001 and 2010 totalling over $1.7M. Some of the cash contributions were paid back to Manzoco while others remained in the Joint Venture for use in ongoing projects.

[9] In 2016 the relationship between the partners began to deteriorate and on January 16, 2017 Memme, Maio, D’Angelo (“the majority partners”) and Manzo entered into Memorandum of Understanding (“the 2017 MOU”) to attempt to resolve a buyout of Manzo’s interest. The Memorandum did not specify a buyout number. Rather, the Memorandum set out in the preamble that:

And whereas, the Parties are desirous to enter an understanding, thus setting out all necessary working arrangements that all Parties agree shall be necessary to complete this Equalization and Restructuring of all companies.

[10] In January 2018, discussions continued with respect to Manzo’s buyout. A further Memorandum of Understanding (“the 2018 MOU”) was signed by Maio and Manzo. HBNG agreed to provide Manzo with certain advances by way of salary, vehicle leases, expenses, insurance payments, personal expenses and other expenses agreed upon by the parties. Those advances were to be deducted from Manzo’s share of HBNG’s investments. By May 2019 Manzo had received approximately $500,000 in advances.

[11] After the MOU was signed, Manzo had a meeting with Maio in February 2019 to discuss a buyout. Manzo provided a very specific list of amounts he was owed for repayment of personal investments, rental income, and profits totaling approximately $53M.

[12] Matters had still not resolved by April 2019 in terms of determining Manzo’s interest. The majority partners sent Manzo a draft settlement agreement in which they offered to buy him out for $10M cash, forgiveness of any advances received to that date and an interest in certain properties as follows:

Walmart – Collingwood 12.5% Soho Centre – Toronto 22% 71 Buttermill – Vaughan 33.3% Meadowpine – Mississauga 12%

[13] Manzo rejected this offer claiming it did not reflect his actual ownership interest, cash injections or rollovers of funds. He provided a detailed counter offer in May 2019. Shortly after he provided the counter offer, Manzo’s evidence was that he was disenfranchised by his partners and locked out of access to his computer, desk, office and the operations of the Joint Venture.

[14] After he was blocked from access, Manzo sought an accounting of all business interests in the Joint Venture including his ownership interest and cash injections and rollovers. He has not been provided with that information. Requests for that information during cross-examination of Memme, Maio, D’Angelo and the accountant, Mr. Ierfino were met with refusals. The position of the majority partners is that information was not relevant to this motion but would be produced on discovery.

[15] Payments continued under the 2018 MOU until July 23, 2019 when all payments to Manzo were terminated. Manzo received a letter from Maio dated May 27, 2019 in which he was advised that his employment with Maystar was terminated. His corporate email address was terminated and his access cards to the office were disabled. Manzo was advised he would receive 8 weeks of salary plus a lump sum of $40,419 as a retiring allowance. There is no specific justification in the letter as to why Manzo was terminated nor did the letter make any reference to either MOU or the draft settlement agreement.

[16] HBNG’s accountant, Mr. Ierfino, prepared the books and records for HBNG and Manzoco based on information provided to him by HBNG’s bookkeeper Yadranka Stopnovitch (“Yadranka”). Manzo’s position is that the financial statements for Manzoco show increases in value and losses related to the properties referred to by Manzoco in this motion and are mirrored in the entries in the financial statements of the companies that own those properties. There is then a reclassification of losses and income from the Joint Venture which Manzo submits is consistent with the type of equalization that had historically taken place between the partners. Manzo’s counsel emphasized to the court that this financial reporting was done based on information given by Yadranka to Mr. Ierfino, not by Manzo. In contrast, Mr. Ierfino’s evidence on cross-examination was that, in his view, any reclassification of income or losses did not equate to an ownership interest.

[17] Amongst many examples during the course of argument, Manzo produced a copy of a schedule prepared by his accountant in relation to a partnership property sold in 2015. Manzoco is shown as receiving a 20% profit share of $285,362. The same amount was received by the holding companies of the majority partners as well as another holding company named Ballaterre Corporation. Manzo also produced a “Statement of Participant’s Capital” for the Soho Centre co-tenancy for the year ended December 31, 2018. That statement shows Manzoco Holdings Inc. as having a 22% ownership interest with an allocation of income of $157,483.

[18] The HBNG partners maintain that Manzo was not a partner and had no entitlement in HBNG’s various investments and developments. He was not a Joint Venture partner and only had a direct interest in Maystar. The HBNG partners argue that any “investments” which Manzo says he made were repaid with interest. Manzo’s rights were in the nature of “phantom equity” paid by way of bonuses as opposed to full equity rights.

[19] Manzo argued that even with the sparse documentation he was able to provide given his blocked access, there is evidence that he was a partner. Manzo referred to various emails on which he was copied which referred to dates for partnership meetings, discussions about financial issues and equalization, invitations to dinners with the other partners and their wives, requests from the comptroller to make specific payments to HBNG for projects, and his golf club membership at The National Golf Club which was purchased by the partnership.

[20] Manzo noted that he was shown on the HBNG website as a partner (this characterization is disputed by Defendants), received cash calls on investment opportunities other than Maystar, received an offer to buy out his partnership interest, he had expense accounts consistent with being a partner. Most importantly, throughout his time with the Joint Venture he continued to receive the same reporting documentation and financial data as the majority partners and prepared his financial statements and income tax returns on that basis.

[21] Manzo’s counsel submits that at Mr. Ierfino’s cross-examination, requests were made for documentation related to certain properties in which Manzo claims an investment interest. Production was refused. Manzo is also concerned because the mortgages have increased on the five properties over which he claims a CPL. Manzo’s position is that the alleged “termination” of his employment, the cessation of his advances under the 2018 MOU, the blocked access to financial information and rental, sales and investment revenues amount to an act of extreme oppression.

[22] The HBNG partners responded that the equity in the properties over which Manzo claims a CPL has remained the same and as such a CPL is not necessary. As the properties increased in value, the mortgages were also increased as is normal in the real estate development business. Further, the registration of a CPL would be devastating for HBNG’s business as a reputable developer. Such registrations could constitute breaches or default of commercial lending agreements which would have significant consequences.

[23] The HBNG partners refer to Manzo as a senior employee who was provided with limited investment opportunities in order to foster a sense of loyalty for his years of service. The investments were informal and most often took the form of a loan but with little exposure. Manzo’s actual role never evolved beyond individual project management and the general management of Maystar.

[24] The HBNG partners dispute that Manzo had a 25% interest in the various developments in question. For example, they say that Manzo does not have a 12.5% interest in the Collingwood Walmart property. While he did make some limited investments in that property, all of those were returned to him many years ago. The HBNG partners take the same position with respect to all of the ownership and rental entitlements claimed by the Plaintiffs in this litigation.

Analysis and the Law

The Certificate of Pending Litigation

[25] A CPL is an equitable form of relief available when there is a triable issue regarding a moving party’s interest in land. It is clear from the transcripts that Manzo has admitted that he has no direct interest in the properties in question. All of the properties in question in this case are legally and beneficially owned by corporations and, as such, Manzo’s interest is limited to an an interest in the shares of the corporations that own the lands. In John v. Millar, 2011 ONSC 3861, a CPL was denied on this basis.

[26] I also agree with the Defendants that in consideration of the factors listed in 572383 Ontario Inc. v. Dhunna, 1987 CarswellOnt 551 (Ont. Sup. Ct.), there is a risk that the registration of a CPL would result in disproportionate harm to HBNG both with respect to their reputation as developers and the risk of the CPL registration triggering a default under their commercial lending agreements.

[27] Finally, I am satisfied that any increase in the mortgages on the subject properties is in line with normal commercial development practices with respect to appraised increases in value.

[28] The request for a CPL by the Plaintiffs is therefore dismissed.

The Oppression Remedy and the Appointment of an Inspector

[29] The Plaintiffs seek appointment of an inspector pursuant to the OBCA. An inspector may be appointed under either section s.161 or s.248 of the OBCA. In Khavari v. Mizrahi, 2016 ONSC 4934, the court held that the inspector remedies available under those sections are similar except for the issue of standing to seek such an appointment (para 45).

[30] Further, the court held that under s.248(3) a finding of oppression is not required for an interim appointment such as the one sought on this motion (see para 44), however a prima facie case must be made out. I agree with Justice Pattillo in Khavari that where an interim order is being sought (as here), that a finding of oppression for the appointment of an inspector is too high a standard for that kind of interim relief.

[31] In addition to the requirements of standing and a prima facie case of oppression, the court must be satisfied that the appointment of an inspector is necessary in regard to:

a. Whether the applicant needs access to the information; b. Whether there are better less expensive means to acquire the information; c. Whether the proposed investigation would give a tactical advantage to the applicant; and d. The expense of the investigation as compared to the benefits. (See Trackcom Systems International Inc. v. Trackcom Systems Inc., 2014 QCCA 1136 at para 58).

Standing

[32] The Defendants take the position that the Plaintiffs do not have standing to bring an application for this relief. I disagree. The standing provision under s. 248 is much broader than under s.161 as that part of the OBCA defines a “complainant” as “any other person, who, in the discretion of the court, is a proper person to make an application under this Part” (see s.245). Given the Plaintiffs’ possible interests in the Joint Venture and/or partnership I find that Manzo is a “proper person” under the meaning of that section. If I am wrong, s.161(1) permits “a registered holder or a beneficial owner of a security” to make application. In this case Manzo asserts that he or Manzoco is the beneficial owner of shares in the Defendant corporations.

Have the Plaintiffs Established a Prima Facie Case?

[33] As per BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 at para 68, oppressive conduct is that which is oppressive to, unfairly prejudicial to, or which unfairly disregards the interests of the complainant, having regard to the reasonable expectations of the complainant.

[34] The Defendants submit that the Plaintiffs have failed to establish a prima facie case for oppression. I disagree. Based on the record before the court, the following facts cumulatively lend themselves to establishing a prima facie case:

a. The termination of Manzo in May 2019 without notice and without providing a reason. This includes the treatment by way of the termination letter of Manzo as an employee when there is evidence through emails and both the 2017 and 2018 MOUs that he was treated as a partner. b. The wording of the 2017 MOU which refers to the four partners agreeing to an “equalization and restructuring of all companies.” c. The wording of the 2018 MOU which refers to Manzo receiving advances from his “share of the Company’s investments.” d. Over $500,000 in advances were made to Manzo under the 2018 MOU. If Manzo were truly an employee what were the advances being made against? e. The wording of the 2019 draft settlement agreement which offers the Plaintiffs a $10M cash payment plus an interest in four properties worth as much as $25M. The 2019 draft settlement agreement provides no back up documentation or rationale as to how those amounts were determined. When Manzo provided a detailed response requesting considerably more than what was offered, his access to the business was completely blocked. f. Mr. Ierfino’s opinion that any reclassification of income or losses to Manzoco does not amount to an ownership interest should not be given any significant weight. He is not qualified to make such as assessment. g. Financial documentation provided by the Plaintiffs over many years showing distributions to Manzoco representing a 25% interest. h. The unilateral actions of the majority partners in shutting out Manzo and his counsel’s requests for documentation and information to properly analyze his entitlement.

[35] It is unclear to this court how the Defendants could move from MOUs which reflect an “equalization” of all companies to an Offer to the Plaintiffs in the millions of dollars and then justify a termination letter with eight weeks severance pay and a small retirement allowance. In this court’s view such actions are completely inconsistent with the Defendants’ position on the motion that Manzo was an employee and are sufficient on their own to establish a prima facie case of oppression.

[36] The Defendants rely on Khavari where a prima facie case was not made out because the court found that the Defendant had responded to all of the Plaintiffs’ allegations of oppressive conduct in detail. That case differs from the case at bar in that both parties had hired expert forensic accountants who carried out a detailed review of the source and use of funds in respect of the development projects in issue. The reports came to the same conclusions on certain discrepancies related to two cash transactions and the reasons for those transactions. What was left for trial was the determination of legal issues related to four assumptions used by the accountants (see para 31).

[37] In this case there are no forensic reports and a complete lack of documents. I do not accept the Defendants’ position that all of the documents sought by the Plaintiffs will be available on discovery. That could change or result in extensive and expensive defensive litigation including undertakings and refusals motions, pleadings motions and the like. The path to trial is not as fast or efficient as the Defendants would have the court believe.

The Requirements for the Appointment of an Inspector

[38] The Plaintiffs submit that the appointment of an inspector is required to:

a. Flesh out commingled funds as between the corporations and the partnership; b. Prevent the spending of money by the Defendants which may deplete the Plaintiffs’ interests and invested capital in the Partnership and the Joint Venture. c. Determine if the majority partners are depleting any share owed to the Plaintiffs to pay for their own legal fees. d. Obtaining documents required for Plaintiffs to prepare their own financial accounting for tax and other purposes. e. Determine the Plaintiffs’ interest in rental and sales revenue as well as any ownership interest in commercial properties.

[39] Turning to the required considerations, I find that the appointment of an inspector is necessary in this case. The Plaintiffs should not have to wait until discovery. They have an entitlement to certain documentation to which they have been denied. The expense of an inspector will be borne by the Plaintiffs. The Defendants have an accountant and bookkeeper who are familiar with the Plaintiffs’ interests and provided regular accounting to Manzo when he was still working in the business.

[40] Finally, I do not find that the appointment of an inspector will provide any tactical advantage to the Plaintiffs. The information will be shared with the Defendants and may be used at discovery and/or trial. More importantly, the inspector’s report will hopefully be used to properly determine any entitlement owed to the Plaintiffs and lead to a settlement rather than protracted litigation.

[41] Given all of the above, I make the following orders;

a. The Plaintiffs’ request for a Certificate of Pending Litigation is dismissed; b. The Plaintiffs’ request for the appointment of an Inspector under s. 248(3) of the OBCA is granted. The Inspector is to be allowed immediate access to all books and records belonging to the Defendants’ businesses, corporations and partnerships in order to determine the Plaintiffs’ interests and entitlements, if any. c. In addition, the Inspector shall be entitled to have access to the records set out in paragraphs (b), (f) and (g) of the Plaintiffs’ Notice of Motion dated November 19, 2019. d. The cost of the Inspector shall be borne solely by the Plaintiffs subject to any determination of the trial judge. e. The Plaintiffs have had mixed success. If there is no agreement on costs the parties may submit written submissions of no more than two pages (double spaced) exclusive of any case law, Bill of Costs or Offers to Settle. Costs submissions are due on a seven-day turnaround starting with the Plaintiffs, seven days from the release of this decision. Costs submissions shall be sent electronically to my assistant at Therese.Navrotski@ontario.ca. If no costs submissions are received within 35 days of the release of this decision, costs will be assumed to be settled.

Gilmore J. Released: March 3, 2020.