Court File and Parties

Court File No.: CV-18-591280-00CL Date: 2020-07-06 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. B16, as amended. Section 253(1) of the Business Corporations Act, R.S.O. 1990, c. B16 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

And Between: MICHAEL COTIC Applicant – and – LORENZO CORNACCHIA, TREVOR BUTLER, MICHAEL FRANCHETTO and PAUL PIZZO Respondents

Counsel: Paul D. Guy and Scott McGrath, for the Applicants Natalie Schernitzki, for the Respondent

Heard by Video/Teleconference: June 23, 2020

Costs Endorsement

L.A. Pattillo, J.

[1] On April 3, 2020, I released reasons for judgment in these applications, dismissing the Cornacchia Group’s application and allowing, in part, Cotic’s application. On June 12, 2020, I released brief supplementary reasons dealing with further issues raised by the Cornacchia Group concerning the status of their shareholder loans.

[2] These reasons deal with the costs of the applications.

[3] The applications concerned a dispute between the shareholders of Fitness Fanatix Inc. (the “Corporation”) and were initiated following Cotic’s shotgun offer to Cornacchia under the parties’ shareholder agreement to purchase Cornacchia’s shares and shareholder loan in the Corporation or vice-versa.

[4] The Cornacchia Group advanced an oppression claim and alleged that Cotic, the principal shareholder and day to day manager of the Corporation had conducted the business and affairs of the Corporation in a manner that was oppressive and unfairly disregarded their interests as shareholders. Cotic, in turn, sought enforcement of his shotgun offer.

[5] Cotic seeks his substantial indemnity costs for the applications of $468,698.01 (inclusive of HST and disbursements). He submits that in the grounds for their oppression claim, the Cornacchia Group alleged, among other things, that he had misappropriated significant monies from the Corporation. Cotic also submits that the Cornacchia Group approached the court with unclean hands and its actions prolonged the applications.

[6] In the alternative, Cotic submits that, having obtained a judgment more favourable than his December 21, 2018 Rule 49 offer, he is entitled to partial indemnity costs to that date and substantial indemnity costs thereafter which together total $432,089.76.

[7] Cotic’s partial indemnity costs, as detailed in his Bill of Costs, filed, total $391,467.40 and are made up of fees of $244,756.25 (inclusive of HST) and disbursements of $146,711.14, the largest item of which is the fees of his expert, Mr. Paulin at Taylor Leibow LLP of $102,378.00.

[8] In response, the Cornacchia Group deny Cotic is entitled to substantial indemnity costs. They submit they did not plead or argue fraud and deny that their actions prolonged the litigation or that they had unclean hands. Further, they submit that when Cotic’s December 21, 2018 offer is compared with the Judgment, it is clear that Cotic did not obtain a more favourable result and therefore is not entitled to substantial indemnity costs pursuant to rule 49.10.

[9] The Cornacchia Group take no issue with the hours and hourly rates claimed by Cotic for the lawyers who worked on the applications. They submit, however, that because neither party was entirely successful in their application, the costs should be apportioned between the parties entitling Cotic to approximately 2/3 of his partial indemnity costs claimed which they submit amounts to $155,000 and both parties should pay their disbursements.

[10] In my view, Cotic was successful overall in the applications and is entitled to his costs. I do not consider that success was divided. While Cotic’s shareholder loan was reduced from the claimed $872,924.04 to $684,564.92, it was far from the Cornacchia Group’s position advanced in its application that it should be zero. In any event, distributive costs are not appropriate.

[11] In its application, the Cornacchia Group alleged that Cotic had been “secretly directing that significant deposits belonging to the Company be diverted into a business account he had established in his name…”. The allegation, which clearly connotates fraud, concerned a separate account Cotic had set up for the business which he did not disclose to the other shareholders. That allegation was essentially dropped following Mr. Paulin’s source and use report which confirmed that the second account was used for business purposes.

[12] Before me, the focus of the Cornacchia Group’s application concerned the amount of Cotic’s shareholder loan. As part of their submissions to reduce Cotic’s claimed loan they alleged that the revenue of the business had a substantial cash component which Cotic had not accounted for and accordingly, his shareholder loan should be reduced. I concluded on the evidence that the Cornacchia Group had failed to prove that there was a substantial cash component to the Corporation’s revenue or that Cotic had misappropriated cash.

[13] While I recognize that the allegation concerning the misappropriation of cash effectively amounts to an allegation of fraud, in my view, it arose as a result of Cotic’s sloppy record keeping together with the way in which he dealt with the cash receipts. In my view, the application very shortly evolved into an accounting exercise. As a result, and in the circumstances, I am not prepared to conclude that Cotic is entitled to substantial indemnity costs based on the allegations in the application.

[14] Cotic submits that increased costs are appropriate given the Cornacchia Group unnecessarily prolonged the proceedings. Cotic points to the fact that the Cornacchia Group delivered 19 affidavits while Cotic only submitted one. He further submits that the extensive expert reports (five by Mr. Paulin and four by Mr. Marino, the Cornacchia Group expert) could have been avoided had the Cornacchia Group accepted his proposal to jointly hire an expert to conduct a forensic analysis of the Corporation’s records.

[15] I do not consider that the Cornacchia Group’s actions unnecessarily prolonged the proceedings. Their affidavits addressed the issues raised and many of them were brief. The fact that extended cross-examinations were required is something that is covered in the costs award. Nor do I consider the Cornacchia Group’s decision to reject the offer of a joint accountant, paid for by the Corporation, to be inappropriate in the circumstances. Again, the cost of the expert is an item that can be dealt with in awarding costs.

[16] I am also of the view that Cotic’s December 21, 2018 offer does not comply with rule 49.10 in that it is not more favourable than the Judgment. The December 21, 2018 offer gave the Cornacchia Group the choice of two options:

Option 1: The Cornacchia Group would purchase Cotic’s shares and shareholder loan in the Corporation for $1,435,000 in total; or

Option 2: Cotic would purchase the Cornacchia Group’s shares and shareholder loans in the Corporation for $1,062,500 in total.

[17] My Judgment of April 3, 2020 held that the value of Cotic’s shares and shareholder loan in the Corporation totaled $1,288,314 or $146,686 less than what have been required under Option 1. Further, the Judgment held that the value of the Cornacchia Group’s shares and shareholder loans as at April 3, 2020 was $1,202,380 or $139,880 more than the purchase price set out in Option 2.

[18] Accordingly, given that both Option 1 and 2 were less favourable to Cotic than the Judgment obtained, rule 49.10 clearly does not apply.

[19] Cotic is therefore entitled to his costs of the applications on a partial indemnity basis. The partial indemnity costs claimed, as noted, total $391,647.40. They were incurred by two law firms as Cotic changed counsel approximately mid-way through the proceeding. While I agree with the Cornacchia Group that some reduction in the amount claimed is required to recognize duplication, I do not consider the amount to be significant.

[20] The Cornacchia Group submit that Cotic should not be reimbursed for his disbursements and particularly Mr. Paulin’s fees which make-up a significant proportion of the disbursements claimed. In my view, Mr. Paulin’s reports and evidence were very useful in reaching the final result. Further, I consider his fee to be more than reasonable, particularly when compared with Mr. Marino’s. The balance of the disbursements claimed are straightforward and reasonable.

[21] In conclusion, I assess Cotic’s partial indemnity costs of the applications at $380,000 in total. In my view, that amount is both fair and reasonable given the issues raised by the Cornacchia Group in the applications. Further, given the Cornacchia Group took no issue with the time or rates claimed and filed no Bill of Costs, I conclude the amount claimed is what they would have reasonably expected to pay.

[22] At the conclusion of the submissions, Cotic requested that the costs awarded be payable jointly and severally by the Cornacchia Group and, in the event, he ends up purchasing the Cornacchia Group’s interests in the Corporation, that he be entitled to set off any costs awarded against the purchase price. As the Cornacchia Group advised they took no issue with those requests, those requests are granted.

[23] Costs to Cotic in the amount of $380,000 payable forthwith.

L.A. Pattillo J. Released: July 6, 2020