COURT FILE NO.: CV-18-609399-CL

DATE: 2020-01-30

SUPERIOR COURT OF JUSTICE - ONTARIO

COMMERCIAL LIST

RE: Samis + Company, Neil Colville-Reeves, Neil Colville-Reeves Professional Corporation, Kevin Mitchell, KDH Mitchell Professional Corporation, Mauro D’Agostino, and Mauro D’Agostino Professional Corporation, Plaintiffs/Defendants by Counterclaim

AND:

Daniel Strigberger, Daniel Strigberger Law Professional Corporation, Lisa Armstrong, Lisa Armstrong Professional Corporation, Kathleen O’Hara, Kathleen F. O’Hara Professional Corporation, Krista Groen, Krista M. Groen Professional Corporation and Strigberger Brown Armstrong LLP, Defendants/Plaintiffs by Counterclaim

BEFORE: Penny J.

COUNSEL: Nadia Campion and Connia Chen for the Moving Parties/Defendants

Julian Heller for the Responding Parties/Plaintiffs

HEARD: January 24, 2020

ENDORSEMENT

Overview

[1] This is a motion by the defendants under Rule 45.02 for an order directing the plaintiff, Samis + Company, to pay capital repayment amounts due and owing to the defendants into court to the credit of this action.

Background

[2] The individual parties were, through professional corporations, partners in Samis + Company, an insurance defence law firm. In October 2017, the defendants (the withdrawn partners) delivered notices of withdrawal from the partnership effective January 5, 2018. Shortly after delivering these notices, the plaintiffs (the partnership and the remaining partners) sued the withdrawn partners for damages for breach of contract, breach of fiduciary duty and related claims. They seek damages of over $7 million. Various proceedings are being case managed as one. Pleadings are closed. Document production is almost complete. Examinations for discovery have not yet taken place.

[3] There is a partnership agreement. Para. 18.13 of the Agreement provides that a partner who withdraws “shall be entitled to a payment” of his or her partnership capital in accordance with a specified formula. For the purposes of this motion, the defendants and plaintiffs agree that the departed partners’ capital is to be valued at $662,687.52.

[4] Para. 15.3 provides for the partnership to have a right of set off “against all losses, costs and damages occasioned by the conduct, default or dishonesty of” any partner or withdrawn partner and that the partnership “shall be entitled to deduct and set-off against any payments to be made by the Partnership to a Partner or Withdrawn Partner all such losses, costs and damages.”

[5] The withdrawn partners have demanded the return of their capital under para. 18.3 of the Agreement. The remaining partners have asserted a right of set off against these amounts under para. 15.3 because of their damage claim alleging losses caused by the withdrawn partners’ conduct in breaching their contractual and fiduciary duties, etc.

[6] It is in these circumstances that the withdrawn partners seek an order under Rule 45.02 for the payment of their capital into court. Rule 45.02 provides that where the right of a party to a specific fund is in question, the court may order the fund to be paid into court or otherwise secured on terms as are just.

Analysis

[7] In Sadie Moranis Realty Corp. v. 1667038 Ontario Inc., 2012 ONCA 475, the Court of Appeal adopted the three part test for an order under Rule 45.02 from the decision of Nordheimer J. (as he then was) in News Canada Marketing Inc. v. TD Evergreen, a division of TD Securities Inc., 2000 O.J. 3705. The test under Rule 45.02 requires the moving party to establish that:

(a) the moving party claims the right to a “specific fund”;

(b) there is a serious issue to be tried regarding the moving party’s claim to the fund; and

(c) the balance of convenience favours granting the relief sought, in the sense that there is something compelling on the moving party’s side of the scales, such as a real concern that the opposing party will dissipate the specific fund.

Specific Fund

[8] The plaintiffs argue that the partners’ capital is not a specific fund. The capital account, they say, is merely a reflection of the partnership’s cash, A/R and WIP. The capital account does not exist as a discrete or separate fund. It is merely an accounting entry and has been commingled with other partnership assets; ergo, they say, it is not a “specific fund.”

[9] I cannot agree with this argument. I appreciate that, on an interlocutory motion, I cannot make final, dispositive findings of fact. However, for the purposes of this motion, it seems to me that the capital account is a specific fund.

[10] Para. 7 of the Agreement provides that the partnership shall establish and maintain separate and individual capital accounts on the books of the partnership for each partner. The capital account for each partner is to be credited with the initial capital contributions and any additional amounts contributed and debited by certain defined net losses, distributions and amounts paid by the partnership on behalf of the partner.

[11] Belobaba J., in 3Genius Corp. v. Locationary Inc., 2016 ONSC 4092, para. 14, held that to constitute a “special fund” it is enough if the specified amount is sufficiently differentiated by a book-keeping entry or line-item description in an accounting ledger or other related financial documentation. The key requirement is not actual or physical segregation but a sufficient differentiation. The point is not that the monies are not commingled or intermingled but whether the claimed fund is reasonably identifiable by a book-keeping entry or other line-item descriptor. The requirements of para. 7 of the Agreement meet this test.

[12] The plaintiffs also argue that the withdrawn partners’ claim is really a claim for damages for breach of contract, not a claim to an amount ear-marked for payment to them. I cannot agree.

[13] Para. 7 of the Agreement requires the establishment of a specific capital account for each partner. Para. 18.13 of the Agreement provides that a withdrawn partner is prima facie “entitled” to payment of his or her capital account. This is not simply a damages claim; it is a claim to a specific amount to which a withdrawn partner is entitled under the Agreement.

Serious Issue

[14] There is no real issue that the withdrawn partners have a claim to the return of their capital under para. 18.13 of the Agreement. The question of “serious issue” arises in this case because of the plaintiffs’ assertion of a right of set off under para. 15.3.

[15] The withdrawn partners argue that the right of set off simply does not apply to the return of capital. I do not agree with that position. The return of capital is the most obvious payment that would ever be made to a withdrawn partner. It seems to me, again for the purposes of this motion only, that the plaintiffs’ claim is for losses arising from the conduct of the withdrawn partners and that, in light of this claim, the partners would, upon the claim being proved and damages awarded, be entitled to set this amount off against any payment to be made to a withdrawn partner, including the return of capital.

[16] That preliminary conclusion, however, is not the end of the matter. Obviously, the claim has not yet been proved. The withdrawn partners have defences to the plaintiffs’ claims. It cannot be said who will prevail at this point. Accordingly, I find that although I disagree with the defendants’ argument that the set off provision could never apply to their right to return of capital, I do agree with the defendants that it may not apply, depending on the disposition of the plaintiffs’ claims.

[17] Accordingly, I find that there is at least a serious issue about the withdrawn partners’ entitlement to their capital.

Balance of Convenience

[18] This case turns on the balance of convenience. The defendants’ balance of convenience argument is not founded on any economic disadvantage of being deprived of their capital pending trial. This is clear from the fact that they do not seek payment to themselves of their capital but payment of that capital into Court. Rather, the defendants’ argument under this head is founded on the apprehended risk that their capital may be dissipated before trial if it is not otherwise secured.

[19] At its core, the defendants’ evidence of so-called risk of dissipation boils down to three facts:

(1) the remaining partners paid down a $1.3 million bank loan within the first six months of 2018. This was done in the face of their obligation to pay the withdrawn partners their capital;

(2) there has been a “disproportionate” depletion of the withdrawn partners’ capital following their departure from the firm and there are significant concerns with the manner in which net income was allocated to the partners in 2017; and

(3) the withdrawn partners have received limited financial disclosure in respect of their capital accounts and the remaining partners have provided no evidence to support the bald assertion that the withdrawn partners’ capital contributions are “safe.”

[20] The flaw in the defendant’s approach to this issue is that nothing in the Agreement requires partners’ capital to be segregated, as in a trust fund, or otherwise secured or protected from the liabilities of the firm. It was conceded in argument that the very purpose of partners’ capital is to help with the financing of the firm’s day-to-day operations. It may be true that some of the partners’ capital was used to reduce the bank loan, for example, but the reduction of the bank loan adds concomitantly to the net value of the partnership.

[21] The alleged “depletion” of capital is not an issue of dissipation but rather, an issue of accounting. The correct amount of the withdrawn partners’ capital will be determined, if the issue not settled, by the trial judge. If the defendants are found to be right in their criticisms of the plaintiffs’ capital account calculations, appropriate adjustments will be made to their entitlements.

[22] I do agree with the defendants that lack of financial disclosure is potentially a problem even though there is currently before the Court no evidence of any actual dissipation. The plaintiffs have, in theory at least, no incentive to undermine the value of partners’ capital, provided there is no differential treatment as between the withdrawn partners’ capital and that of the remaining partners. The potential risk of untoward treatment of the withdrawn partners’ capital can be addressed by appropriate financial management and disclosure orders. Subject to those orders, addressed below, I find that the defendants have not established that the balance of convenience favours payment to Court.

[23] However, while I decline to order the payment of the withdrawn partners’ capital into Court, it is a condition of my findings on the balance of convenience and a term of my order that:

(a) the remaining partners shall not expose the withdrawn partners’ capital to any risk or accounting treatment materially different from their own capital; and

(b) Samis + Company shall provide, on a quarterly basis, a report on the firm’s cash, accounts receivable and work in progress, together with the calculation of the amount of each partners’ capital (both withdrawn and remaining) in the partners’ capital accounts of the firm.

Costs

[24] The plaintiffs sought costs of $30,750 to $45,560. The plaintiffs sought costs of $50,900 to $76,780. While the defendants were not successful on the main remedy sought, this motion was, in part, necessitated by the plaintiffs’ intransigent refusal to provide appropriate financial information and disclosure. In the circumstances, I fixed costs of this motion at $40,000 in the cause.

Penny J.

Date: January 30, 2020