COURT FILE NO.: CV-19-0062-1466-00CL DATE: 20200318 ONTARIO SUPERIOR COURT OF JUSTICE
IN THE MATTER OF S. 67 OF THE PERSONAL PROPERTY SECURITY ACT, R.S.O. 1990 C.P.10, AS AMENDED
BETWEEN:
ESC Enterprises Inc. and Strongco Plastics Ltd. Applicants – and – 1867295 Ontario Inc., Marcelo Hernandez, Marisa Hernandez, Strongco Ltd., and Carlos Lopes Respondents
Counsel: David Pregger and Joshua Suttner, for the Applicants Maya Poliak, for the Respondents, Marcelo Hernandez, Marisa Hernandez and Strongco Ltd. R. Graham Phoenix and Thomas Lambert for Carlos Lopes and 1867295 Ontario Inc.
HEARD: January 8 and February 21, 2020
C. Gilmore, J.
Overview
[1] There are two Applications before the Court. In the first application (“the ESC Application”), the Applicants ESC Enterprises Ltd. (“ESC”) and StrongCo Plastics Ltd. (“Plastics”) seek a declaration that the equipment and assets (“the BuiltRite Assets”) used in the business of BuiltRite Technologies Inc. (“BuiltRite”) belong to Plastics and are subject to ESC’s first ranking security.
[2] The Applicants also seek an order compelling Carlos Lopes (“Carlos”), and 1867295 (“186”) (“the Lopes Respondents”) and Marcelo Hernandez (“Marcelo”), Marisa Hernandez (“Marisa”) and Strongco Ltd. (“Strongco”) (“the Hernandez Respondents”) to release certain of the BuiltRite assets to the Applicants. Those assets (“the Trailered Assets”) are located at a warehouse owned by Dourada Investment Inc. (“Dourada”). The ESC Applicants want access to the Dourada warehouse to inspect the assets stored there and have them delivered to them.
[3] The dispute in the ESC application relates to whether ownership of certain equipment was transferred to Plastics by way of a Quitclaim signed by representatives of Strongco or whether the ownership was transferred by some other means.
[4] The Respondents in the ESC Application take the position that any claim against Marisa is stayed by operation of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, because she filed for bankruptcy after signing the Indemnity (referred to below). With respect to Marcelo, the Respondents take the position that any conduct which could rise to obligations under the Indemnity took place prior to his bankruptcy and any claims against him are either stayed or require leave to proceed.
[5] In the second Application before the court, Strongco seeks a declaration that it is the owner of the Strongco equipment. In addition, Marcelo seeks compensation for work performed for Plastics and ESC for the period between February and August 2018.
[6] There is another related application pending in which 186 and Dourada seek a declaration that 186 is the owner of certain assets (the “leased assets”) located in the Dourada warehouse. 186 and Dourada seek outstanding lease payments, expenses, storage fees, and storage lien amounts against Plastics, ESC, and Strongco. That application is scheduled to be heard in this court on April 1, 2020. The result of the within motion will have an effect on how the 186 application proceeds.
[7] All three Applications arise out of the same set of facts.
Background Facts
[8] Ed Siu-Chong (“Ed”) is the sole shareholder of ESC. ESC owns 50% of the shares of Plastics. Ed’s nephew, Kevin Siu-Chong (“Kevin”) is the sole director of ESC and Plastics.
[9] Marcelo was a principal of BuiltRite. Marcelo and his business partner Elias Mancebo (“Elias”) operated BuiltRite starting in 2014. BuiltRite was a manufacturer of custom extrusions and fully fabricated window, door, patio, and decking systems as well as prefabricated housing components. BuiltRite went bankrupt on October 31, 2017. Marcelo went bankrupt on February 1, 2018.
[10] Marisa is Marcelo’s sister. She owns 25% of the shares in Plastics and is the sole officer and director of Strongco, which was incorporated on January 30, 2008. Marisa went bankrupt on August 21, 2019.
[11] Deanna Mancebo (“Deanna”) is the wife of Elias. She owns the other 25% of the shares in Plastics. Elias, the ESC Applicants, and the Hernandez Respondents agreed to incorporate Plastics in January 2018 to try to revive BuiltRite, which had gone bankrupt.
[12] Carlos is the principal of 186 and Dourada. The Trailered Assets are located at Dourada’s warehouse at 91 Pippin Road (“Pippin”) in Concord, Ontario. These assets were owned by Strongco, a company owned and controlled by Marisa. Throughout this judgment, these assets are referred to either as the Trailered Assets or the Strongco Assets/equipment.
[13] BuiltRite operated out of 2370 South Sheridan Way in Mississauga (“Sheridan”) which was leased from 2380009 Ontario Limited (“238”). Before its bankruptcy, BuiltRite manufactured certain extruded products including PVC products, door systems, decking, and prefabricated home components.
[14] When BuiltRite failed to pay its rent, 238 defaulted on its mortgage and Collins Barrow was appointed the Receiver over 238’s assets including the assets stored at Sheridan. The Receiver terminated BuiltRite’s lease effective August 8, 2017 and BuiltRite went bankrupt in October 2017.
The Business Proposal
[15] In November 2017, Elias approached Ed with a proposal to revive BuiltRite. He explained that certain of BuiltRite’s assets (the Trailered Assets) had been moved into storage due to receivership of its former Landlord. Those assets were stored in trailers at Highroad Storage Solutions Inc. (“Highroad”) in Hamilton. There were also encumbered assets (“the Warehoused Assets”), which were stored at Highroad and owned by BuiltRite.
[16] Part of Elias’ pitch to Ed included a Power Point presentation which he sent to Ed on November 22, 2017 with a copy to Marcelo. Elias was looking for investors so Strongco could purchase the Warehoused Assets from Highroad, finance the move to a new leased facility, and finance working capital for a year.
[17] The proposal contemplated a convertible loan of $1M secured against assets worth $5.5M. The Trailered Assets were valued at $4.5M which included Extrusion Lines worth $0.5M, PVC Housing Assets worth $1.5M, and dies worth $2M. The Warehoused Assets were made up of fabrication equipment for windows, doors, and inventory worth $1.5M. To support the value of the proposed assets, Elias provided Ed with an appraisal of the BuiltRite Assets dated February 26, 2016. Ed was aware that the appraisal of the assets was out of date.
[18] The PVC Housing Assets contained in the Trailered Assets were not proposed to form part of the security because they had been loaned to Builtrite at no charge by Carlos, according to Elias and Marcelo.
[19] Ed was unsure about the proposal as he was unfamiliar with Strongco’s history. As such, he proposed a different structure whereby Ed, Marcelo, and Elias would be shareholders in a new company which would operate the business. Ed would own 50% of the shares of the new company and Marcelo and Elias, 25% each. Ed would then advance funds to the new company on a secured basis.
The Incorporation of Plastics
[20] The new company, Plastics, was incorporated on February 2, 2018. It was agreed that to resume the business, Plastics would purchase the Warehoused Assets from Highroad, Strongco would roll the Trailered Assets into Plastics, and Plastics would lease the PVC equipment from Carlos.
[21] However, before the parties could finalize their arrangements, the Warehoused Assets became available for sale by Highroad pursuant to the Repair and Storage Liens Act, R.S.O. 1990, c. R.25 (“the RSLA”). To avoid the possibility of those assets being sold to a third party, Ed advanced $206,903 to Highroad on February 6, 2018. ESC invoiced Plastics for this amount on March 1, 2018. The invoice has never been paid and ESC still retains control and ownership of the Warehoused Assets.
[22] Between August 21, 2017 and January 31, 2018, Strongco incurred rent, storage, and transportation fees for the Trailered Assets (including the PVC equipment owned by Carlos) in the amount of $22,263.38. ESC paid Highroad this amount as well and invoiced Plastics. ESC paid Highroad a further $7,910 for storing the Trailered Assets in March and April 2018.
[23] Prior to BuiltRite’s bankruptcy, it had loaned some Extrusion Lines to Vinyl Profiles. Legal proceedings were commenced to recover those assets. ESC paid a retainer of $2,500 to commence an action in Strongco’s name to recover the missing assets. ESC paid another $4,962.40 in legal fees for that action.
[24] Between March 6, 2018 and July 31, 2018 ESC advanced $412,383.34 to Plastics directly plus another $79,860.02 in expenses. Plastics repaid $118,451.14. As of August 31, Plastics was indebted to ESC for $373,792.22.
ESC’s Security and the Quitclaim
[25] On February 20, 2018 Plastics entered into a lease with 186 for the PVC Housing Assets. The lease was drafted by Ed personally but was negotiated between Marcelo and Carlos. The start date of the lease was May 1, 2018 which was to coincide with the installation of the BuiltRite Assets at a manufacturing facility located at 1 Royal Gate Boulevard (“Royal Gate”). It was anticipated that Plastics would commence operations on May 1, 2018 at that location.
[26] On February 1, 2018 ESC registered a security interest under the Personal Property Security Act, R.S.O. 1990, c. P.10 (“the PPSA”) for all of Plastic’s inventory, equipment, accounts, personal property, and motor vehicles.
[27] To secure advances under the loan, Plastics executed a Grid Promissory Note and a General Security Agreement in favour of ESC on March 14, 2018. As such, ESC is the sole registered secured party of Plastics under the PPSA. Deanna, Elias, Marisa, and Marcelo each signed a joint and several indemnity in favour of Plastics, ESC, and Ed for any claims against them as a result of any connection with BuiltRite or Strongco. Deanna and Marisa also pledged their shares in Plastics to ESC as further security for ESC’s loan to Plastics.
[28] On March 14, 2018 ESC, Deanna, Elias, Marisa, and Marcelo executed a Unanimous Shareholder Agreement (“the USA”) in which the business of Plastics was described as being the “design, manufacture, sale and distribution of windows, doors, decks and modular and/or prefabricated structures.”
[29] Ed signed an Undertaking (“the Undertaking”) in favour of Plastics on March 14, 2018 to advance $1M to Plastics less any amounts already advanced. The Undertaking states as follows:
TO: STRONGCO PLASTICS LTD. (the “Corporation”)
DATED: MARCH 14, 2018
THE UNDERSIGNED hereby undertakes to, within 10 days of written demand from the Corporation, advance to the Corporation by way of secured loan, as funds are required by the Corporation, an aggregate of CAD $1,000,000.00 (less all amounts advanced at any time by the undersigned to the Corporation and listed in the grid promissory note from the Corporation in favour of the undersigned dated March 14, 2018 (the “Note”) provided that: (i) such amounts are recorded in the Note as owing by the Corporation to the undersigned: (ii) there is no default by the Corporation pursuant to the Note and/or pursuant to the General Security Agreement from the Corporation in favour of the undersigned dated March 14, 2018; (iii) there are no defaults by any parties (other than the undersigned) to the Unanimous Shareholder Agreement in respect of the Corporation dated March 14, 2018 (the “USA”) under the USA and/or any other agreement by any such party with the Corporation and/or the undersigned; and (iv) there is no impediment to the advancement of the business of the Corporation on a profitable basis, other than the failure of the undersigned to advance the amounts provided for herein on the terms set forth herein.
ESC ENTERPRISES INC. By: “Edward Siu Chong” Name: Edward Siu Chong Title: President I have authority to bind the corporation
[30] Strongco was not a party to any of the security documents nor do they contemplate a transfer of assets from Strongco to ESC.
[31] Arrangements were then made to roll the Trailered Assets into Plastics. To effect the “roll in,” a Quitclaim Deed (“the Quitclaim”) was prepared by counsel for ESC and Plastics from Strongco to Plastics. The Quitclaim sets out as follows:
QUITCLAIM DEED
TO: StrongCo Plastics Ltd.
DATED: February ____, 2018.
THIS DEED WITNESSES that the undersigned does hereby quitclaim and release all right, title and interest in and to the personal property and assets described in Schedule “A” attached hereto.
The undersigned shall do all such things and provide all such reasonable assurances and documents as may be required and/or reasonably requested by StrongCo Plastics Ltd. to fully effect this quitclaim deed.
IN WITNESS WHEREOF the undersigned executed this quitclaim deed as of the date hereof.
SIGNED, SEALED AND DELIVERED
STRONGCO LTD.
By:___________________ Name: Dickson Brown Title: I have authority to bind the corporation
[32] The Quitclaim references a Schedule A listing all of the assets of Strongco to be quitclaimed. Kevin requested that Marcelo provide him with a list of Trailered Assets that did not belong to Carlos so that he could prepare the Schedule A. On February 27, 2018 Marcelo provided Kevin with a list of 12 Extrusion Lines taken from the 2016 Kohli appraisal. Kevin took the list, reformatted it and titled it Schedule A. The Quitclaim was signed on April 13, 2018 but the Schedule A was blank. Strongco’s position is that the Quitclaim does not, on its face, make any reference to a transfer of ownership to Plastics.
[33] After the Quitclaim was signed, Marcelo advised that Schedule A would have to be revised because he would have to do an actual inventory of the equipment and then a revised Schedule A would be “slip sheeted” in. No inventory was ever completed by Marcelo.
[34] The Hernandez Respondents take the position that the Quitclaim does not transfer any assets to Plastics as no Schedule A was attached at the time of signing or at any time prior to the failure of the business. Therefore, the essential terms of the proposed transfer of assets from Strongco to Plastics were never finalized.
[35] ESC claims that Strongco ratified the intended Schedule A by way of emails from Marcelo on April 12 and 13, 2018. Strongco’s position is that the emails indicate that Schedule A needed to be finalized and it never was. Any Schedule A which was appended to the Quitclaim was inserted without Strongco’s consent.
[36] The position of the Hernandez Respondents is that there was no clear agreement as to when the “roll in” would occur and what assets of Strongco would be included in it.
Plastics Does Not Commence Operations
[37] The Hernandez Respondents submit that ESC defaulted on its obligation to advance $1M pursuant to the Undertaking and, as such, Plastics was never able to commence operations. ESC’s position is that, due to the fact that much of its committed capital was used to pay storage and other fees, by August 1, 2018 there was insufficient remaining capital to commence operations.
[38] Ed’s position was that Plastics could not move forward profitably. Further, a term of the Undertaking provided an exception to any advance in the event that “there is no impediment to the advancement of the business of the Corporation on a profitable basis, other than the failure of the undersigned to advance the amounts provided for herein on the terms set forth herein.” Marcelo’s response was that the only impediment to profitability was the delay in securing an operating facility and that once that was located, the business could have moved forward profitably.
[39] Marcelo, Elias, Kevin, and Ed then met and agreed that both the Trailered Assets and the Warehoused Assets had to be sold. It was agreed that the Trailered Assets would be moved from Highroad to Pippin to reduce storage costs and ensure that the PVC Housing Assets could be returned to Carlos. Separate arrangements were made to store the Warehoused Assets at a third-party facility.
[40] In the course of trying to sell the Trailered Assets, Ed emailed Marcelo with certain questions. Marcelo asserted for the first time on October 2, 2018 that the Trailered Assets, other than the PVC Housing Assets, belonged to Strongco and not Plastics. On October 2, 2018 Kevin wrote to Carlos and asked to retrieve the Trailered Assets on the basis that the equipment belonged to Plastics.
[41] On October 12, 2018 Carlos responded by making demands for various lease payments, storage and transportation fees in excess of $140,000 plus ongoing rent of $3,000 per month commencing October 1, 2018. Carlos refused to return the Trailered Assets until his demands for payment were met.
[42] The Respondents claim that ESC has retained assets which belong to Plastics and that some or all of those assets are sufficient to satisfy any amounts owing to ESC by Plastics. The Respondents’ position is that the retention of those assets is in contravention to the agreement of all parties and stakeholders and that ESC has obtained a benefit well in excess of the amounts previously advanced to Plastics.
The Dies
[43] In February 2019 Marcelo advised Kevin and ESC that he was negotiating the sale of some of the dies. ESC responded that they were claiming an interest in the dies. Notwithstanding ESC’s position, Marcelo sold certain dies for $85,000.
[44] Marcelo defended the sale as being commercially reasonable notwithstanding that in November 2018, he valued the dies at $535,788.08. Marcelo’s position was that he was getting out of the business and sold them for what he could get and, in any event, there was no evidence that the dies were ever part of the deal or included in Schedule A of the Quitclaim. The only reference to dies was in the Power Point presentation made to potential investors in 2017. The business deal that was ultimately concluded was very different from the one in the Power Point presentation.
Marcelo’s Compensation
[45] Marcelo has issued a separate Application claiming that he is owed salary for his service to Plastics. The Applicants’ position is that there is no basis for this claim given Marcelo’s admission to Ed in October 2018 that he agreed to go without pay during the set up of Plastics’ operations.
[46] Ed and Marcelo agree that Ed committed to pay Marcelo an annual salary of $100,000 plus a yearly bonus of up to $40,000. The disagreement relates to when the salary would commence. Marcelo’s position is that the salary was to commence in January 2018 when he began to do work for Plastics. Ed’s position is that the salary was not to commence until the Plastics business was operational.
The Positions of the Parties
The Applicants, ESC, and Plastics
[47] ESC submits that it is a first ranking secured creditor of Plastics and that the assets in the Dourada warehouse should be released to it, other than the PVC Housing Assets which are conceded to belong to Carlos. This is based on a business deal the parties made that all assets (other than the PVC assets) would be rolled into the company in which ESC invested, namely Plastics.
[48] It is not disputed that before the business deal could be finalized, ESC paid Highroad for the Warehoused Assets as well as fees for renting and storage totaling $228,000 in January and February 2018. The security for the Plastics deal was not finalized until March 2018.
[49] There is also the complication of the lease between 186 and Plastics which was negotiated between Marcelo and Carlos without Ed’s involvement, although Ed actually drafted the lease.
[50] ESC takes the position that the dies were never reserved or extricated from the categories of equipment defined by Marcelo. Extruded products cannot be made without dies. It would defy logic that they would not be included, thereby allowing Marcelo to sell them and keep the proceeds.
[51] According to ESC, the Quitclaim was needed to ensure that the unencumbered assets (the Strongco equipment) would belong to Plastics such that all of the former BuiltRite Assets could be used in the business. In paragraph 44 of his affidavit, Ed explains that as he was unfamiliar with the extrusion business, he relied completely on Marcelo to ensure that everything was in place to operate the business. This included ESC’s purchase of the Warehoused Assets, Strongco’s Quitclaim in favour of Plastics for the Trailered Assets, the lease of the PVC Housing Assets with 186 and legal proceedings in place for the recovery of any missing assets.
[52] Clearly, the Quitclaim contemplated a schedule of listed assets. On February 27, 2018 Kevin sent an email to Marcelo asking for a list of equipment in the trailers that did not belong to Carlos so that it could be rolled into Plastics. Marcelo responded the same day with a PDF attachment containing a list of equipment. It is not disputed that the list of equipment provided by Marcelo came from the Kholi appraisal.
[53] On April 12, 2018 Marcelo emailed Kevin asking for a copy of the Schedule A with the list of Strongco equipment so that it could be attached to the Quitclaim. The next day Kevin followed up to ensure the Schedule A he had sent was correct. Marcelo responded about 45 minutes later indicating that the Quitclaim had been signed and sent to Marcelo’s lawyer. He advised that some of the equipment had been sold before the move to Mississauga in 2017 and that the Schedule A would therefore have to be revised.
[54] On April 18, 2018, Marcelo’s lawyer wrote to ESC’s lawyers attaching the signed Quitclaim and pointed out that the Schedule A was still blank. According to Marcelo’s lawyer, his clients were still inventorying the equipment (including serial numbers) and would provide a completed Schedule A shortly. Once completed, the proposal was that it be “slip sheeted” in.
[55] Marcelo deposed in this affidavit that neither he nor anyone at Strongco approved the Schedule A that was attached to the Quitclaim at Exhibit AA to the Application Record. His evidence was that Schedule A remained to be finalized. ESC submits this makes no sense since Marcelo sent the list of equipment to Kevin in his April 12, 2018 email and then ratified it in his email of April 13, 2018. As well, the fact that Marcelo said that the Quitclaim needed to be finalized and then took no steps to finalize it does not vitiate the enforceability of the Quitclaim.
[56] Marcelo claims that the Quitclaim was conditional on ESC transferring the Warehoused Assets to Plastics and advancing $1M to Plastics but ESC submits no such conditions are present in the record. First, there was no requirement for ESC to transfer the Warehoused Assets to Plastics because they remained in Ed’s control by virtue of ESC’s status as Plastic’s only secured creditor. Second, ESC was within its rights not to advance the $1M pursuant to the terms of the Undertaking which contained a condition that advancement of funds was predicated on “the advancement of the business on a profitable basis.” The business was not able to be resumed on a profitable basis due to the accrual of storage costs and a failure to secure leased premises. In his cross-examination Marcelo agreed that even if the business had found a location from which to operate by August 2018, it could not have become profitable for another 12 months.
[57] Marcelo complains that Strongco did not receive any consideration for the Quitclaim. However, ESC’s position is that it is not borne out by the record. For example, ESC paid $22,263.38 to Highroad for storage fees owed by Strongco when it purchased the Warehouse Assets. It paid a further $7,910 for storing the Trailered Assets in March and April 2018 (before the Quitclaim) and a further $7,462.50 to Youngman Law PC to fund legal fees for Strongco to recover missing assets and various other legal fees.
[58] According to ESC, the Trailered Assets (other than the PVC assets) were conveyed to it by way of the Quitclaim. ESC understood that it would receive the assets subject to encumbrances. The Quitclaim was part of the overall financing arrangement whereby all of Strongco’s assets were to be rolled into Plastics to ensure that Ed had the security he needed to advance the loan. ESC also paid expenses and made advances to Plastics in the amount of $373,792.22 by August 30, 2019.
[59] The position of the Applicants is that there is no evidence that Marcelo owns any of the equipment in Schedule A of the Quitclaim or that Strongco owned the dies. Marcelo was only able to produce auctioneer’s invoices showing that the assets were purchased by 238. There is nothing in the invoices referencing any interest of Strongco. Further, there is nothing in the Kohli appraisal indicating that any of the BuiltRite Assets were owned by Strongco. Marcelo, although requested to do so, failed to produce any tax returns, financial statements, or documents related to BuiltRite’s bankruptcy or 238’s Receivership which would have clarified which assets belonged to Strongco. Finally, invoices provided by Marcelo to prospective landlords for the business were all addressed to BuiltRite.
[60] There is no basis for Marcelo’s claim for salary. In his email to Ed of October 6, 2018 he told Ed that he had “gone without pay or advances as promised throughout this whole process.”
The Position of the Respondents
[61] The Respondents submit that Dickinson Wright LLP (“Dickinson”) acted as counsel for ESC and Plastics with respect to both the Shareholder Agreement and the loan to Plastics. Dickinson prepared all of the related documentation.
[62] The Undertaking prepared by Dickinson is silent as to the typical terms one would find in a loan document such as an interest rate or repayment schedule. The grid promissory note promises to pay an amount set out in Schedule A but the Schedule A is blank.
[63] Dickinson also drafted the Indemnity Agreement and the Shareholder Agreement. None of the abovementioned documents reference Strongco or any transfer of assets from Strongco to Plastics.
[64] After all of the security documents were signed by the parties, Dickinson forwarded the Quitclaim to be signed in April 2018. On its face, the Quitclaim does not purport to transfer assets to Plastics or any other party.
[65] The Respondents’ position is that a blank Quitclaim was signed by Strongco on April 13, 2018 to be held in escrow until ESC complied with its obligations to Plastics pursuant to the Undertaking. While Strongco’s counsel did follow up on April 18, 2018 by providing a copy of the signed Quitclaim, counsel advised that an inventory of the equipment was still taking place and a completed schedule would be provided shortly. ESC then refused to provide its promised advance and Strongco did not complete Schedule A.
[66] The Respondents deny that a Schedule A was provided by Marcelo on February 27, 2018. The email from Marcelo was dated two months prior and makes no reference to a Quitclaim. In his cross-examination, he denied that the list of assets attached to that email was intended to form Schedule A.
[67] Further, the Respondents deny that Strongco ever ratified the ESC Schedule A. Marcelo’s emails, and in particular the email dated April 13, 2018 make it clear that the Schedule A would need to be finalized. Strongco never authorized the ESC Schedule A to be slip sheeted into the Quitclaim.
[68] While the Respondents do not deny that ESC spent approximately $258,000 prior to March 14, 2018 (the date the undertaking was signed), the Respondents submit that the Undertaking and the Promissory Note are clear that $1M in funds committed by ESC was to be in excess of amounts advanced prior to signing the Note and the Undertaking. Specifically, the Note sets out that $0 had been advanced as of March 14, 2018. The other amounts advanced by ESC were used to purchase the Warehoused Assets. ESC kept this equipment in contravention of the agreement between the stakeholders.
[69] When it became clear by the end of July 2018 that the business was experiencing financial issues because of the lack of a location to operate, Marcelo requested that ESC advance the $1M pursuant to the Undertaking. Ed refused. The Strongco and the 186 equipment was then moved to a warehouse controlled by Carlos. Marcelo paid $22,000 to Highroad for the storage of the Strongco equipment. The Warehoused Assets were transferred by ESC to a different location.
[70] The Respondents dispute ESC’s position that it was not obliged to advance funds pursuant to the Undertaking because the business was not profitable. Marcelo did not agree that Plastics could not move forward profitably. His position was that Plastics would need another 12 months to become profitable. The only issues preventing this were the securing of an operating facility and the advance of the loan from ESC.
[71] ESC has chosen to retain the Warehoused Assets for its own benefit despite the agreement that those assets were intended for the benefit of Plastics. The Respondents’ position is that those assets are worth in excess of what is owed by Plastics to ESC and if sold, would generate a profit for Plastics’ shareholders. By retaining those assets, ESC has retained a benefit in excess of the amounts advanced to Plastics. ESC has never attempted to enforce its security as against Plastics.
[72] The Respondents submit that Marcelo was within his rights to sell the dies. First, if property was transferred to Plastics by Strongco as a result of the Quitclaim, there was no mention of the dies in Schedule A. The only time the dies were even mentioned was in the original business presentation by Strongco to potential investors in 2017. The business deal between ESC, Ed, Plastics, and Strongco was very different from the 2017 proposal.
[73] Marcelo and Marisa are undischarged bankrupts. Marisa signed the Indemnity Agreement before she filed for bankruptcy. As such, the Respondents’ take the position that ESC’s Application against Marisa is stayed by operation of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”). In Marcelo’s case, he signed the Indemnity Agreement after the date of his bankruptcy on February 1, 2018. The Respondents argue that the Indemnity Agreement relates to conduct which pre-dates the bankruptcy and as such the ESC Application against Marcelo should be stayed by operation of the BIA as well.
[74] There is no dispute that Ed agreed to pay Marcelo a yearly salary of $100,000 plus a potential bonus of $40,000 for his work starting up Plastics. Marcelo submits that the only real issue related to his compensation is when it would commence. Marcelo argues it should have started in January 2018 when he began to work full time at starting up Plastics. Ed’s view is that no salary was payable until Plastics was operational. Marcelo’s view is that this position makes no sense and that ESC and Plastics benefitted from his work. Further, a salary was paid to Elias but not Marcelo.
[75] Marcelo seeks the sum of $66,666 being the prorated amount of the promised $100,000 salary between January and August 2018.
The Law and Analysis
Were the Trailered Assets Quitclaimed to Plastics?
[76] A Quitclaim is an instrument which operates to convey assets without warranty or assurance that title is valid.
[77] Before determining if any assets were conveyed, the Court must consider a number of issues including whether the Quitclaim was a binding contract? That is, was there offer, acceptance, consideration, intention, and certainty?
[78] I find that that the Quitclaim lacks certainty for the following reasons:
a. Schedule A is blank. While there may have been an intention at some point to include a list of assets, that was never actually done. The reasons for this vary (ESC did not make the advance pursuant to the Undertaking, Marcelo never carried out his final inventory, etc.) but the fact is that Schedule A to the Quitclaim remained blank and no consensual Schedule A was “slip sheeted in.”
b. It is still unclear as to what assets would have formed part of Schedule A even if it had been completed. Marcelo confirmed that some of the Warehoused Assets were missing. Even he apparently did not know which ones. Surprisingly, no inventory of the Warehoused Assets had ever taken place up to the point of the Quitclaim. Marcelo continued to rely on the Kohli appraisal for information. That appraisal was outdated and likely inaccurate if assets subsequently went missing.
c. There was no agreement on the timing of any purported transfer of assets from Strongco to Plastics. The Undertaking did not specify this nor did any of the security documents. In fact, none of the security documents make any reference to Strongco at all.
d. Finally, there is the meaning of the words “roll in.” That term was never specifically defined in any relevant documents. Does it mean transfer? It tends to imply a transfer over time, that is, one asset after another but not all at once. Neither party ever crystallized what was meant by that term.
[79] I find that, as in Bawitco Investments Ltd. v. Kernels Popcorn Ltd., 1991 CarswellOnt 836 (C.A.), at para 21, neither party had any real understanding of what the Quitclaim represented:
[W]hen the original contract is incomplete because essential provisions intended to govern the contractual relationship have not been settled or agreed upon; or the contract is too general or uncertain to be valid in itself and is dependent on the making of a formal contract … the original and preliminary agreement cannot constitute an enforceable contract.
[80] Ed understood the Quitclaim to be a transfer of Strongco’s Assets to Plastics, but he relied completely on Marcelo as to what those assets were. I do not agree with the Applicants that Marcelo “ratified” the Quitclaim by way of his emails in April 2018. Those emails make it clear that even Marcelo had no clear idea of what assets composed the Warehoused Assets. Further, I accept Marcelo’s evidence that the Quitclaim would be held in escrow pending the $1M advance and the Warehoused Assets were transferred by ESC to Plastics. This is referred to by Strongco’s counsel in an email dated April 18, 2018 to ESC’s counsel in which an enquiry is made with respect to confirming that ESC had transferred the equipment it had purchased from the Receiver into Plastics.
[81] I also find that there was no consideration for the Quitclaim. The consideration for the Quitclaim was intended to be ESC’s advance of $1M to Plastics to assist in making the business operational, in exchange for Strongco’s rolling in of its assets. When Ed announced he did not intend to make the advance, Strongco rightly took the position that it was under no obligation to roll in any assets to Plastics.
[82] The Applicants argue that the Quitclaim was finalized in equity. Relying on the well-known principle of equity as set out in Snell’s Principles of Equity, 27th ed. (London: Sweet & Maxwell, 1973), at p. 40, that equity considers done that which ought to have been done. Their position is that although Schedule A was not technically finalized, equity will treat it as if it was.
[83] Respectfully, that maxim cannot apply in this case. First, the Schedule A was blank. It may have been different if some but not all of the assets had been included. Second, the parties to the Quitclaim were not clear themselves as to what assets would be listed in Schedule A and, finally, the Quitclaim cannot be considered in a vacuum. The transfer of assets from Strongco was part of a transaction which included an advance from ESC and a transfer of assets from ESC to Plastics. None of those transactions occurred.
[84] Finally, there is a concern that ESC has retained the Warehoused Assets to satisfy any amounts owing to it by Plastics. Those assets have not been monetized. If that had been done, there would have been a much better idea of whether ESC was owed money or whether there were excess funds to distribute to the Plastics stakeholders.
[85] In fact, what appears to have happened is that in the face of the business imploding, no one fulfilled their intended obligations. ESC did not make any advance, and neither ESC nor Strongco transferred any assets into Plastics.
The Dies
[86] Given my findings above, I do not see why Marcelo could not sell the dies. They were never transferred to Plastics either by way of Schedule A or otherwise. While they may have formed part of the original “promotional” investors package, there is no evidence to link them to the final business deal between the Applicants and the Respondents.
[87] I do not find that there was any fraud or deceit related to this sale as alleged by Applicants. Marcelo made it clear to the Applicants that he intended to sell the dies and offered to sell them to Ed for $85,000. While ESC asserted a security interest in the dies, it never took steps to enforce that interest and took no steps to prevent Marcelo from selling the dies.
[88] The sale of the dies also answers questions raised by the Applicants in terms of whether Marcelo/Strongco actually owned the Strongco Assets. If Marcelo was able to sell the dies, the argument related to whether Strongco was the actual owner of the Trailered Assets is substantially diminished. In any event, the Strongco Assets were acquired subject to any encumbrances.
Marcelo’s Compensation
[89] Marcelo should be compensated for his work for Plastics between February and August 2018. Clearly, he was not working anywhere else, and although his efforts did not prove to be successful, this does not mean they had no worth.
[90] I accept Marcelo’s evidence that he and his family suffered financial hardship as a result of his unpaid attempts to get Plastics off the ground. Marcelo denies that he ever agreed to forgo his salary and potential bonus. There was also evidence that Elias was being paid a salary for a certain period of time. While Ed deposed that this was a loan to Elias, the loan was never recorded as such by ESC nor did ESC seek repayment of the purported loan from Elias.
[91] I find that ESC has been unjustly enriched by Marcelo’s services between January and August 2018. Marcelo has been deprived of a living for himself and his family during that period, and ESC has benefitted from Marcelo’s experience and services without having to compensate him for those services. There was no reason for such a deprivation as it defies logic that Marcelo would forgo payment for his services in this factual scenario.
[92] As such, the test for unjust enrichment in Consulate Ventures Inc. v. Amico Contracting and Engineering (1992) Inc., 2007 ONCA 324, 282 D.L.R. (4th) 697, at paras 95-99 has been made out and Marcelo should receive the sum of $66,666 being the prorated amount of a salary of $100,000 for January to August 2018.
Orders
[93] The ESC Application against Strongco and Marcelo and Marisa Hernandez is hereby dismissed.
[94] This Order is without prejudice to the relief being sought by 1867295 Ontario Inc. and Dourada Investment Inc. in the application (the “Application”) before the Ontario Superior Court of Justice, in Toronto, in Court File No. CV-19-0062-45842-00CL, which is scheduled for hearing on April 1, 2020.
[95] ESC Enterprises Inc. shall pay to the Respondent Marcelo Hernandez the sum of $66,666 representing all wages due and owing for work performed for StrongCo Plastics Inc. during the period of January to August 2018. ESC Enterprises Inc. shall make the appropriate statutory deductions on behalf of Marcelo Hernandez before providing the net wages.
[96] If required, counsel to arrange a 9:30 a.m. appointment before me prior to April 1, 2020 to discuss any changes to the timetable of the 186/Dourada Application as a result of this judgment. If courts remain closed due to the COVID-19 crisis as of April 1, 2020, counsel can arrange a telephone conference with me.
Costs
[97] The Respondents Marcelo Hernandez and Strongco Plastics Ltd. have had success in defending the Application and Marcelo Hernandez has been successful in his claim for compensation. There were extensive cross-examinations, appearances, and case law presented in this matter. The amounts sought by those Respondents are reasonable given the work done and the experience of counsel. Therefore, the Applicants shall pay partial indemnity costs of $29,000 to Marcelo Hernandez and Strongco Plastics Ltd. forthwith.
[98] The Respondents 186 and Lopes also seek costs against the Applicants. These Respondents filed some material but did not make extensive submissions. Their presence was related mostly to their pending application in Court File no. CV-19-0062-4842-00CL. I agree with counsel for the Applicants that costs related to 186 and Lopes are better assessed in the context of combining any costs on this Application with costs related to the 186 Application.
C. Gilmore, J. Released: March 18, 2020