COURT FILE NO.: CV-18-591280-00CL
DATE: 20200612
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST)
APPLICATION UNDER Rule 14.05 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, as amended, and section 248 of the Business Corporations Act, R.S.O. 1990, c. Bl6, as amended
APPLICATION UNDER Section 253(1) of the Business Corporations Act, R.S.O. 1990, c. Bl6 and Rule 14.02(2) and 38.03(4) of the Rules of Civil Procedure
B E T W E E N:
LORENZO CORNACCHIA, TREVOR BUTLER, MICHAEL FRANCHETTO, PAUL PIZZO and CRAIG WILKINS
Applicants
– and –
MICHAEL COTIC
Respondent
Paul D. Guy and Stephanie Sonawane, for the Applicants
Natalie Schernitzki, for the Respondent
A N D B E T W E E N:
MICHAEL COTIC
Applicant
– and –
LORENZO CORNACCHIA, TREVOR BUTLER, MICHAEL FRANCHETTO and PAUL PIZZO
Respondents
Heard by Teleconference: June 8, 2020
L.A. PaTtillo, J.
[1] On April 3, 2020, I released my reason for judgment in this action (2020 ONSC 1784), determining in part the status of the shareholder loans in Fitness Fanatix Inc. (the "Corporation") as at August 31, 2017, which was the date that Mr. Paulin's (the expert) analysis went to.
[2] At the conclusion of my reasons, I directed that if the parties were unable to agree on the status of each shareholder's loan "based on their deposits and withdrawals since August 31, 2017", Mr. Paulin should be engaged to determine the amounts.
[3] While I'm advised that the parties have been able to agree on many of the post August 2017 items, the Cornacchia Group seek guidance in respect of four items: adjustments to the Cornacchia Group's shareholder loan accounts in respect of franchise fees and merchandise payments; adjustment to Franchetto's shareholder loan account on account of monies owing by the Corporation and payment of the balance owing on the Wilkins' loan.
[4] As the above issues are not simply accounting issues, I agree that it would not have been appropriate to ask Mr. Paulin to decide them.
Franchise Fees
[5] The Corporation became a franchisee of World Gym in November/December 2012. When the franchise agreement was set to expire in November 2017, Cotic did not want to renew it. He wanted to enter into an agreement with a new franchisor. The Cornacchia Group wanted to renew the World Gym agreement. As the litigation had started, Cotic agreed to extend World Gym for three months at the Corporation's expense. Thereafter, the Cornacchia Group has been paying the franchise fee to World Gym, without Cotic's knowledge until disclosed in the litigation.
[6] The Cornacchia Group submit that their shareholder loans should be credited with the amounts they paid for the franchise fees which were a corporate expense. Cotic disagrees. He says that he was authorized to manage the Corporation and he determined that the arrangement with World Gym should end. The payments by the Cornacchia Group shareholders were for their personal account.
[7] In affidavits filed in their application, each of the Cornacchia Group shareholders provided a breakdown of their shareholder loan accounts up to February 2019. Included for each was the amount of $5,641.17 in respect of franchise fees for the period December 2017 to January 2019.
[8] The issue of who the franchisor should be is one that goes beyond day to day management. In my view, given the way the Corporation operated, it was a decision for the shareholders. Further, given the dispute between the parties, it made sense to continue with the status quo pending resolution. While I accept that Cotic understood that the relationship with World Gym had ended, all signs of the Corporation's association with World Gym remained and the Corporation continued to earn revenue, in some part from the association.
[9] The Cornacchia Group submits that they paid a total of $45,763.28 to World Gym between December 2017 and March 2020. In my view, those fees were a corporate expense and should be reimbursed by the Corporation. As set out in each of their affidavits, the total amount paid by them to World Gym should be divided equally between them and credited to their shareholder loans. Accordingly, $11,440.82 should be credited to each of the shareholder loan accounts of Cornacchia, Butler, Pizzo and Franchetto.
Merchandise Expenses
[10] In or around late 2017 or early 2018, the Cornacchia Group proposed selling refreshments and a line of clothing in the Gym. Cotic opposed the idea. The Cornacchia Group went ahead and executed the idea, funding it themselves. They now submit that they should be reimbursed for the costs. Cotic disagrees, again relying on his refusal as manager.
[11] In my view, the decision in respect of whether or not to sell merchandise in the Gym was that of the manager. Cotic had that specific authority pursuant to the Shareholders Agreement. He opposed the proposal but the Cornacchia Group went ahead in any event. There is no evidence that the sale of the merchandise made any profit. In the circumstances, I do not consider that the Cornacchia Group should be reimbursed for their merchandising expenses.
Franchetto
[12] Franchetto became a shareholder of the Corporation in July 2014. His evidence is that as an inducement, Cotic agreed to pay him $5,500 per month from his share of the profits. Cotic denied Franchetto's allegation and said that Franchetto negotiated with Cornacchia and that it was his understanding that Cornacchia agreed that the Corporation would pay him a guaranteed $2,000 dividend per month. In his reply affidavit, Franchetto denies Cotic's evidence and says that beginning in November 2013, he initially was paid $5,500 per month.
[13] In June 2017 through January 2018, Franchetto says Cotic unilaterally gave him $2,000 per month but after that he didn't receive another cheque until March 2018 when he again started to get cheques from Cotic for $2,000 each month through to June 2018. Due to the litigation, Francetto did not cash the cheques. Cotic stopped delivering the cheques after June 2018.
[14] Franchetto claims that he is owed $2,000 a month from March 2018 to April 2020 or 26 months totalling $52,000 and submits that amount should be added to his shareholder loan. Cotic disputes that the money is owing or that Franchetto is entitled to have such amount added to his shareholder loan.
[15] I do not consider the evidence concerning the claim sufficient to enable me to decide the matter, one way or another. How the payment originated, how it became $2,000, what it was for and who owes the money are all issues that were not canvassed at the hearing. Further, given Franchetto did not testify, it is difficult to reconcile the conflicting evidence of Cotic and Franchetto.
[16] Franchetto's affidavit in support of the Cornacchia Group application set out an accounting of what he said was his shareholder loan to the Corporation as at January 16, 2019. There is no mention of the $2,000 monthly payment which at that point, according to Franchetto's evidence, was ten months in arrears. Further, while the non-payment was raised by him in his affidavit, there was no claim made for the monies in final argument.
[17] For the above reasons, therefore, Franchetto's shareholder loan should not be credited with the $52,000 claimed.
Wilkins
[18] Wilkins submits, given my finding that the $100,000 paid to Cotic was a loan from his mother as opposed to a capital payment together with Mr. Paulin's analysis of the source and use of funds that during the period Cotic made payments to Linda Wilkins of $76,000, that a balance of $24,000 remains owing which should be paid by Cotic to him.
[19] Cotic denies any amount remains owing to Mrs. Wilkins. His evidence was the loan was repaid.
[20] There are a number of problems with Wilkins' submission.
[21] It was his position in the application and at trial that the monies were a capital investment by him in exchange for shares in the Corporation. There was no claim for monies owing to his mother. It is only as a result of my finding that the monies were a loan, that he now submits monies remain owing on the loan. Having not been claimed or raised in the application, it is simply too late to raise it now.
[22] Further, notwithstanding Mr. Paulin's report, Cotic's evidence of repayment stands uncontested. And finally, if any monies do remain owing, they are owing to Mrs. Wilkins, not Wilkins.
[23] Wilkins claim for repayment of $24,000 is denied.
Conclusion
[24] At the conclusion of the teleconference, it was agreed that on receipt of these reasons, the parties would agree on a short timetable in respect of cost submissions and arrange a Zoom hearing through the Commercial List office for one hour to deal with costs, hopefully to take place before the end of June 2020.
L.A. Pattillo J.
Released: June 12, 2020
COURT FILE NO.: CV-18-591280-00CL
DATE: 20200612
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST)
APPLICATION UNDER Rule 14.05 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, as amended, and section 248 of the Business Corporations Act, R.S.O. 1990, c. Bl6, as amended
APPLICATION UNDER Section 253(1) of the Business Corporations Act, R.S.O. 1990, c. Bl6 and Rule 14.02(2) and 38.03(4) of the Rules of Civil Procedure
BETWEEN:
LORENZO CORNACCHIA, TREVOR BUTLER, MICHAEL FRANCHETTO, PAUL PIZZO and CRAIG WILKINS
Applicants
– and –
MICHAEL COTIC
Respondent
A N D B E T W E E N:
MICHAEL COTIC
Applicant
– and –
LORENZO CORNACCHIA, TREVOR BUTLER, MICHAEL FRANCHETTO, PAUL PIZZO and CRAIG WILKINS
Respondents
REASONS FOR JUDGMENT
PATILLO J.
Released: June 12, 2020