COURT FILE NO.: 19-81578
DATE: 2020/06/10
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: The JSL Trust, Applicant AND Razor Logic Systems Inc. and Nest Wealth Asset Management Inc., Respondents
BEFORE: Justice Marc R. Labrosse
COUNSEL: Peter Liston, Counsel, for the Applicant Jordan Goldblatt, Counsel, for the Respondents Razor Logic Systems Inc. and Nest Wealth Asset Management Inc.
HEARD: February 13, 2020
ENDORSEMENT
MR. JUSTICE MARC R. LABROSSE
Overview
[1] The Respondents, Razor Logic Systems Inc. and Nest Wealth Asset Management Inc. (the “Nest Respondents”), bring this motion pursuant to Rule 21.01(1)(b) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. They are seeking an order dismissing this Application against them on the basis that the Application, as drafted, does not disclose a reasonable cause of action against them.
[2] This Application originates from The JSL Trust’s status as a shareholder in the Respondent, Repvisor Portfolio Systems Inc. (“Repvisor”). The other shareholders in Repvisor are 1150061 Ontario Inc. and The Samachan Trust.
[3] Together with the other relief sought, The JSL Trust (“JSL” or “Applicant”) claims that the Nest Respondents have exercised their powers and have intervened in the affairs of Repvisor in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interest of the Applicant, contrary to s. 248 of Ontario’s Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”).
[4] The Nest Respondents argue that the Application should be dismissed for the following reasons: (1) a trust is not a justiciable entity, and has no standing to bring a claim; (2) the Applicant is not a proper statutory “complainant” under the OBCA as against the Nest Respondents; (3) the claim offends the rule in Foss v. Harbottle that a shareholder cannot advance a claim that belongs to the corporation; and (4) the Applicant had no reasonable expectation in respect of the operations of Repvisor vis-à-vis the Nest Respondents.
[5] For the reasons that follow, I conclude that the motion should be allowed, subject to the Applicant’s right to amend. Firstly, JSL is not a properly named applicant, as a trust is not a justiciable entity. Secondly, while the Nest Respondents are not affiliates of Repvisor, the Application is the type of claim wherein there is a permissible overlap between the oppression remedy and a derivative action, and the Application should be allowed to continue as an oppression remedy claim. However, the Application does not plead sufficient material facts to satisfy the need to demonstrate that the Applicant had a reasonable expectation vis-à-vis the Nest Respondents. As the Application is currently drafted, it is plain and obvious that JSL may not succeed in obtaining an order against the Nest Respondents for the return of funds improperly paid to it or for a payment as a result of wrongfully diverted employee resources, as it has not established that the Applicant had a reasonable expectation that the Nest Respondents would have regard for its interests.
[6] As such, the Applicant will have 45 days to serve and file a motion to amend its Notice of Application, changing the named applicant and addressing the other shortcomings in its pleading as set out herein. Failing this, the Application as against the Nest Respondents will be dismissed.
Background
[7] As this is a Rule 21 motion, the facts and allegations as set out in the Notice of Application are deemed to be true.
[8] JSL is a founding shareholder of Repvisor, an Ontario corporation, together with 115061 Ontario Inc. (“115061”) and the Samachan Trust. Repvisor develops and markets software for financial advisors.
[9] Mehmet Baltacioglu is the sole director of Repvisor and is its Chief Executive Officer. Marie Mitilinellis is Vice-President of Repvisor. Baltacioglu and Mitilinellis are directors and shareholders of 115061. Baltacioglu and Mitilinellis are also directors of Respondent Winsoft Technology Solutions Inc., which markets the Repvisor software.
[10] Respondent Adam Wiseberg is the trustee of the Samachan Trust and the Secretary of Repvisor.
[11] The moving Respondent, Razor, is an Ontario corporation. Baltacioglu is a shareholder of Razor. At some point, Razor was acquired by Nest.
[12] The shareholdings of Repvisor were governed by a shareholders’ agreement (“the Shareholders’ Agreement”) dated July 15, 2016. This agreement included a commitment to forego salary on the part of the director and officers of the corporation, as their share ownership was designed to reflect their ongoing roles in the company. The Shareholders’ Agreement included a “waterfall” clause, which prioritized how corporate funds would be used: first to pay taxes, then expenses, then corporate indebtedness, then a “float”, then shareholder loans, and finally dividends to the shareholders in proportion to their holdings.
[13] The Shareholders’ Agreement explicitly acknowledged a debt to JSL in the amount of $600,000.00. This was in recognition of the development costs funded wholly by a silent partner, Mr. Devries, who is affiliated with the trust.
[14] Following a dispute, Baltacioglu, Mitilinellis and Wiseberg allegedly began drawing salary in contravention of the Shareholders’ Agreement. Baltacioglu and Mitlinellis also purportedly began paying their daughter a salary that was not based on legitimate financial / business contributions to the company. Finally, Baltacioglu and Wiseberg were said to have been preferentially repaid their shareholder loans while JSL received nothing in payment of its shareholder loan.
[15] The Application also states that the financial statements of Repvisor were revised so as to not reflect or acknowledge the $600,000 debt to JSL.
[16] In its capacity as a shareholder, JSL argues that it has a reasonable expectation as to how the Corporation will conduct itself with respect to its management. Those reasonable expectations include but are not limited to the following: (i) that the Corporation will be managed in accordance with generally accepted corporate governance practices; (ii) that the Corporation will be managed in accordance with the Corporation’s statutory obligations; and, (iii) that the Corporation will provide financial disclosure in accordance with accounting norms.
[17] The Notice of Application includes many allegations directed at all of the Respondents. As for the allegations directed specifically to the Nest Respondents, there is only one and it states the following:
Repvisor funds and employee resources are being diverted to support the activities of Winsoft, Razor Logic Systems and NEST Wealth Asset Management Inc., non-arms length corporations in which Baltacioglu and Mitilinellis have financial interest.
Issues
[18] As previously stated, the Nest Respondents have raised the following issues:
i. Can JSL be an applicant?;
ii. Should the Application be struck as disclosing no reasonable cause of action for the following reasons:
the Applicant is not a proper statutory “complainant” under the OBCA;
the claim offends the rule in Foss v. Harbottle: a shareholder cannot advance a claim that belongs to the corporation;
the Applicant had no reasonable expectation in respect of the operations of Repvisor vis-à-vis the Nest Respondents.
[19] The Applicant did not respond to the issue of JSL’s ability to be an Applicant. It is not addressed in the Applicant’s factum, and the Applicant did not respond in a meaningful way in oral arguments.
[20] However, the Applicant argues that it is not plain and obvious that the application against the Nest Respondents must fail. Firstly, the Applicant states that Razor and Nest are “affiliates” of Repvisor by virtue of the ownership interests of Mr. Balticioglu. Secondly, the Applicant submits that the allegations potentially give rise to both oppression and derivative actions, and that JSL has a right to proceed via an application for an oppression remedy.
The Law
[21] It is agreed by the parties that the proper test for striking a pleading under Rule 21.01(1)(b) is whether it is “plain and obvious” that the claim has no chance of success: see Hunt v. T & N plc, 1990 90 (SCC), [1990] 2 S.C.R. 959; R. v. Imperial Tobacco Canada Ltd, 2011 SCC 42, [2011] 3 S.C.R. 45, at para. 17.
[22] Further, the following principles are to be applied:
a. The allegations in the Notice of Application are to be taken as true or capable of being proven unless they are patently ridiculous or incapable of proof;
b. The Notice of Application is to be read generously, with due allowance for drafting deficiencies; and,
c. The court should not at this stage of the proceedings dispose of matters of law that are not fully settled in the jurisprudence: see Paton Estate v. Ontario Lottery and Gaming Corporation, 2016 ONCA 458, 131 O.R. (3d) 273, at para. 12.
[23] The test for granting leave to amend pleadings that have been struck is whether it is possible for the pleadings to be fixed and whether the defendant would be unfairly prejudiced: see e.g. Aristocrat Restaurants Ltd. v. Ontario, 2003 CarswellOnt 5574 (Ont. S.C.), at paras. 85-86.
Analysis
Can JSL be an Applicant?
[24] The Nest Respondents rely on the Canadian Encyclopedic Digest as their authority in support of their assertion that a trust is not a justiciable entity. The following excerpt summarizes this position:
A trust is an equitable obligation binding a person (who is called a trustee) to deal with property over which he or she has control (which is called the trust property), for the benefit of persons (who are called the beneficiaries or cestuis que trust), of whom he or she may be one, and anyone of whom may enforce the obligation.
(see CED Trusts II.1; Trusts | II—General Principles | 1—Introduction)
[25] The Nest Respondents also rely on the wording of r. 9.01(1), which states:
General Rule
9.01 (1) A proceeding may be brought by or against an executor, administrator or trustee as representing an estate or trust and its beneficiaries without joining the beneficiaries as parties.
[26] The Nest Respondents state that, based on the wording of r. 9.01, proceedings by or against a trust are to be brought by the trustee of the trust.
[27] I agree with the general proposition. Based on the authorities presented, it seems clear that a trust is not, on its own, a justiciable entity. The wording of r. 9.01 is permissive in that a proceeding “may be brought by a trustee”. The wording is not mandatory or limitative. Nevertheless, as the Nest Respondent’s cited authority notes, ‘trust’ is the term used to describe an equitable relationship. Courts have long held that, at common law, trusts are not legal entities with the status or capacity to commence legal proceedings: see United Services Funds v. Richardson Greenshields of Canada Ltd./Richardson Greenshields du Canada Ltée (1987), 1987 2633 (BC SC), 16 B.C.L.R. (2d) 187 (B.C.S.C), at p. 9; Robinson Engineering Co. v. Wasabi Resources Ltd. (1988), 31 C.P.C. (2d) 241 (Alta. Q.B.) at pp. 8-9; Taylor Ventures Ltd., Re, 2005 BCSC 11, 10 C.B.R. (5th) 104, at paras. 53-55; Williamson v. Williamson, 2020 BCSC 108, 35 R.F.L. (8th) 96, at para. 25.
[28] On the authorities before me, I am satisfied that The JSL Trust is not a legal entity with the capacity to commence a legal proceeding such as this application. However, this defect can be remedied and the trustee of The JSL Trust should have the opportunity to correct this defect and amend the pleading. At the motion, the Nest Respondents did not argue that any significant prejudice would be suffered if an amendment were allowed. I therefore conclude that the Nest Respondents would not suffer a prejudice that could warrant a denial of the right to amend.
The Applicant is not a proper statutory “complainant” under the [OBCA](https://www.canlii.org/en/on/laws/stat/rso-1990-c-b16/latest/rso-1990-c-b16.html)
[29] This issue properly turns on the need to determine if Razor and Nest are “affiliates” of Repvisor.
[30] Section 248(2) of the OBCA allows for a court to rectify matters complained of where a corporation or any of its affiliates have taken certain enumerated steps that are oppressive, unfairly prejudicial, or that unfairly disregard the interests of the security holder. Thus, the conduct complained of must be in regard to the actions of a corporation or any of its affiliates.
[31] The term affiliate is defined under s. 1(1) of the OBCA to mean “an affiliated body corporate within the meaning of subsection (4)”. That subsection reads as follows:
For the purposes of this Act, one body corporate shall be deemed to be affiliated with another body corporate if, but only if, one of them is the subsidiary of the other or both are subsidiaries of the same body corporate or each of them is controlled by the same person.
[32] The definition of affiliate therefore requires that the corporations in question must be subsidiaries or have common control.
[33] There is no allegation in the Application that Razor or Nest are subsidiaries of Repvisor, and the pleading does not support such a finding: see s. 1(2) of the OBCA and the interpretation of a “subsidiary”.
[34] Consequently, the issue of common control must be considered. Here, there is no allegation that any shareholder of Repvisor has a controlling interest in Repvisor, Razor or Nest.
[35] As for Razor, the allegation is that Randy Cass owns and operates this corporate entity. The Application also alleges that Baltacioglu is a major shareholder of Razor, and that both he and Mitilinellis have financial interests in both Razor and Nest. There are no specifics as to what is meant by ‘major shareholder’ or the extent of their financial interest.
[36] The Application also states that Razor was acquired by Nest at some point.
[37] Even when reading these allegations as generously as possible, there is no interpretation of the facts as pleaded that allow for a conclusion that Repvisor and either Razor or Nest are controlled by the same person. Consequently, it is plain and obvious that Razor and Nest are not affiliates of Repvisor.
[38] However, a finding that the Nest Respondents are not affiliates of Repvisor is not determinative of this Rule 21 motion. As set out below, the case law supports the proposition that an oppression remedy claim can be advanced against a third party who is not an affiliate in certain circumstances. The analysis must therefore proceed with the other grounds raised in the motion.
The Rule in Foss v. Harbottle
[39] The common law rule in Foss v. Harbottle (1843), 67 E.R. 189 (Ct. Ch.) is that a shareholder in a corporation does not have a personal cause of action for a wrong done to said corporation. This rule respects the principle that a corporation is a legal entity distinct from its shareholders. A shareholder cannot be sued for the liabilities of the corporation and, equally, cannot sue for the losses suffered by the corporation: see Meditrust Healthcare Inc. v. Shoppers Drug Mart (2002), 2002 41710 (ON CA), 61 O.R. (3d) 786 (C.A.), at para. 12.
[40] The Applicant does not challenge the Nest Respondent’s submission on the application of the rule. However, the Applicant maintains that, in certain circumstances, the oppression remedy and the derivative action are not mutually exclusive. There are circumstances wherein the facts give rise to both types of redress and in which a complainant will be entitled to proceed by way of oppression remedy. The Applicant submits that the present case is much different than cases dealing with publicly traded companies where the thrust of the relief sought is solely for the benefit of the company and where there are no personal interests that have been affected: see Rea v. Wildeboer, 2015 ONCA 373, 126 O.R. (3d) 178 (C.A.), at para. 27.
[41] I agree with the analysis of Charney J. in Paul Shaughnessy Investments Inc. v. Drain, 2018 ONSC 1850, 81 B.L.R. (5th) 93, wherein he stated the following:
72 These cases indicate that the distinction between derivative actions and oppression claims are sharpest when the corporation is both a widely-held and public corporation as in Rea. There is more room for overlap when the corporation is a closely held private corporation as in Malata. Where the corporation is more widely held, the courts insist on more personalized claims, such as a creditor claim, as in Malata, or the wrongful termination claim in Mozas. Where there are only two or three shareholders, there may be no real distinction between a wrong to all shareholders generally and the loss or damage suffered by a particular shareholder, and a dispute between shareholders can be equated to an individualized personal claim. In addition, there is less reason to be concerned with the risk of frivolous lawsuits against the corporation if there are “relatively few shareholders” (Malata, at para. 39).
[42] I therefore conclude that it is not plain and obvious that the Application offends the rule in Foss v. Harbottle. While the Application describes damages suffered by both Repvisor and JSL, the authorities support the proposition that, in the case of a closely-held private corporation such as Repvisor, who has three shareholders, it is possible for overlap to be found where the actions of directors and officers have caused damage not only to the company but also to individual shareholders such as the Applicant.
[43] This ground remains available to the Nest Respondents to argue in the context of the entire Application. I have concluded that it is not plain and obvious at this stage that the Application should be dismissed for this reason.
Reasonable Expectations
[44] As mentioned above, my ruling that the Nest Respondents are not affiliates is not determinative of the Applicant’s right to seek redress from a third party who is not an affiliate, a shareholder, director or officer of Repvisor.
[45] The present situation falls within the ambit of the Court of Appeal’s decision in Waxman v. Waxman (2004), 2004 39040 (ON CA), 186 O.A.C. 201. Therein, the Court of Appeal acknowledged that the Plaintiff was entitled to recover certain profits improperly diverted from the corporation to corporate entities that provided trucking services and were controlled by the main defendant’s sons, who were not “affiliates” of the corporation as defined in applicable legislation.
[46] The third-party redress component of Waxman was summarized by Hoy J. (as she then was) in Holden v. Infolink Technologies Ltd., 2005 CarswellOnt 1768 (Ont. S.C.), wherein she considered Waxman and the broad remedial authority available in an oppression remedy claim:
11 In Waxman, Sanderson J. ordered payments to be made to the plaintiff by parties who were not directors, officers or shareholders of the company. She found that the defendant Chester Waxman’s oppressive actions included the payment by the company at his instance of excessive bonuses to his sons. Chester Waxman was a director and shareholder. Sanderson J. found the sons liable for knowing receipt of the excessive bonuses and also made an order under section 248 of the Act requiring the sons to pay the excessive bonuses they had received to the individual plaintiff, Morris Waxman, Chester’s brother. She commented at para. 1641, “While the OBCA is silent as to whether an order under s. 248 may be made against third-party recipients of funds improperly diverted from a corporation, the remedies available to the Court are virtually unlimited, provided that they have the effect of rectifying the offending behaviour.”
12 Sanderson J.’s order with respect to the bonuses was an issue on appeal. At para. 528, the Court of Appeal held, “On the facts as found, there is no doubt that the payment of theses bonuses was oppressive of Morris’ interests. The recipients were not innocent strangers to this. As the trial judge found, the sons could not reasonably have ever thought that they deserved the bonuses or that Morris had agreed to them. Providing a remedy against them for accepting those monies properly rectifies the oppressive actions. The trial judge did not err in exercising her broad remedial authority under the statute to do so.” At para. 541, the Court of Appeal commented on Sanderson J.’s finding that the sons were also liable on the basis of knowing receipt: “She found Robert, Gary and Warren liable to Morris for knowing receipt of their 1981 and 1982 bonuses. She found that they had at least constructive knowledge that these bonuses were paid to them in breach of Chester’s fiduciary duty to Morris. She ordered that they pay to Morris amounts equivalent to the full payments they received. This relief duplicates the relief granted under section 248 of the OBCA to Morris against his three nephews in connection with those bonuses.” The Court of Appeal modified Sanderson J.’s order to the extent of making the sons liable to repay only 50% of the excessive bonuses, as Morris should have been treated as a 50% shareholder.
[47] This broad interpretation of remedial power was cited with approval by Ryan Bell J. in 1217174 Ontario Ltd. v. 141608 Canada Inc., 2017 ONSC 7698, 77 B.L.R. (5th) 10, wherein she stated at para. 35:
In my view, the approach advocated by the respondents is not in keeping with the equitable nature of the oppression remedy. Section 248 creates an equitable remedy that “seeks to ensure fairness — what is ‘just and equitable’” and gives the court a “broad, equitable jurisdiction to enforce not just what is legal but what is fair” (BCE Inc., Re, 2008 SCC 69 (S.C.C.), at para. 58). Courts considering claims for oppression are therefore instructed to engage in fact-specific contextual inquiries looking at “business realities, not merely narrow legalities” (Wilson v. Alharayeri, 2017 SCC 39 (S.C.C.), at para. 23, citing BCE, at para. 58).
[48] In the present case, the Application alleges that the Nest Respondents are non-arm’s length corporations who received funds and employee resources from Repvisor, and that this has impacted the Applicant’s interests in Repvisor. There are other examples of oppression remedy claims that proceeded against unaffiliated parties who allegedly aided or benefited from the oppressive acts: see Jabalee v. Abalmark Inc., 1996 CarswellOnt 2391 (Ont. C.A.); Holden. In a later companion case to Holden, Cumming J. held the following:
Put very simply, Waxman stands for the proposition that where oppression is found (by the wrongdoing defendant Chester Waxman) and other defendants have knowingly received benefits (Chester Waxman's sons, through bonuses paid by the corporation) as a consequence of the oppression of the plaintiff (Morris Waxman) then a remedy against them for accepting the benefits properly rectifies the oppressive actions (the sons being co-defendants to the action, although not shareholders or directors of the subject corporation.) See paras. 527,528, 538, 540-542,550,551,553-556 of the Court of Appeal decision. Indeed, s. 248(3) of the OBCA allows the ambit of a Court order for oppression to reach persons who are not themselves guilty of oppression but are simply in knowing receipt of benefits from the oppression.
(see Holden v. Infolink Technologies Ltd., 2006 CarswellOnt 910 (Ont. S.C.), at para. 45)
[49] The Ontario Court of Appeal subsequently clarified the parameters of this remedial power as it concerns third parties in Maynes v. Allen-Vanguard Technologies Inc., 2011 ONCA 125, 274 O.A.C. 229. In that case, the Plaintiffs, relying on Waxman, attempted to add third parties to an oppression action on the basis that, even if they had not pled a cause of action against the third parties, the Plaintiffs could nevertheless be entitled to the imposition of a constructive trust against the third parties on the basis of the oppression remedy pleaded against the defendants.
[50] The Court found that Waxman does not stand for the proposition that relief pursuant to the OBCA oppression provisions can be granted against third parties who had no role or did not directly benefit from the oppressive conduct. The third parties in Waxman were liable for knowing receipt of the profit diversions from Morris and Chester's company as a result of Chester's oppressive acts and breach of fiduciary duty. The Court of Appeal also found that it was fatal the Plaintiffs’ claim that it did not plead that the shareholder agreements they had with the defendants, the factual basis for the oppression claim, gave them a reasonable expectation that the third parties would have regard to their interests. Nor did the Plaintiffs assert a basis for which they had a reasonable expectation that the third parties would protect their economic interests.
[51] As pleaded, the subject Application suffers from the same defect. There is no pleading that the Applicant had any reasonable expectation that the Nest Respondents would have regard to their economic interests and as such there is no basis on which such a reasonable expectation could be founded.
[52] Consequently, I would hold that it is plain and obvious that there is no basis in law for the court to make a finding that the Applicant had a reasonable expectation vis-à-vis the Nest Respondents on the basis of the Notice of Application as drafted.
[53] I therefore conclude that the authorities cited herein warrant that the claim involving the Nest Respondents should be struck as having no reasonable chance of success. However, the Applicant should have the opportunity to amend the Application to address the shortcomings as set out herein given its request to do so at hearing of this motion and given an absence of any significant prejudice to the Nest Respondents.
Conclusion
[54] The Notice of Application should therefore be struck as disclosing no reasonable cause of action, subject to the Applicants' right to serve and file a motion to amend its pleadings within 45 days of this Endorsement. Any such amendment may proceed on consent or be opposed. If opposed and the parties agree, they may jointly request in writing to the trial coordinator that I hear such a motion to amend, and I will do so on an expedited basis.
[55] The motion by the Nest Respondents is therefore allowed. The Applicant will have 45 days to serve and file a motion to amend the Notice of Application to render it compliant with the findings in this Endorsement, failing which the claims against the Nest Respondents will be dismissed.
Costs
[56] The parties are encouraged to resolve the issue of costs. If they are unable to do so and a party wishes to make written costs submissions, the Court orders that they be filed within 30 days of this Endorsement. The other party will have 30 days thereafter to respond. Each written cost submission must be in respect to r. 4 and will be no longer than 3 pages in length, excluding the attachments.
Justice Marc R. Labrosse
Date: June 10, 2020
COURT FILE NO.: 19-81578 DATE: 2020/06/10
ONTARIO SUPERIOR COURT OF JUSTICE
RE: The JSL Trust, Applicant AND Razor Logic Systems Inc. and Nest Wealth Asset Management Inc. Respondents
BEFORE: Justice Marc R. Labrosse
COUNSEL: Peter Liston, Counsel, for the Applicant Jordan Goldblatt, Counsel, for the Respondents Razor Logic Systems Inc. and Nest Wealth Asset Management Inc.
ENDORSEMENT
Justice Marc R. Labrosse
Released: June 10, 2020