COURT FILE NOS.: CV-19-630077 & 20-636758

DATE: 20201230

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

DAG HRVOIC Applicant

– and –

MELISSA HRVOIC Respondent

COUNSEL: Gregory M. Sidlofsky, for the Applicant/Defendant Daniel F. Chitiz and Alastair J. McNish, for the Respondent/Plaintiff

AND BETWEEN:

MELISSA HRVOIC Plaintiff

– and –

DAG HRVOIC and 1427830 ONTARIO CORPORATION Defendants

HEARD: December 9, 2020

REASONS FOR JUDGMENT

J. STeele J.

[1] This matter involves two proceedings: an application made under Rule 14.05 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 and sections 207(1)(b)(iv), 207(2), 185(1)(e), and 184(3) of the Ontario Business Corporation Act, R.S.O. 1990, c. B. 16 (the “OBCA”), and a motion for summary judgment under Rule 20 in a separate action.

[2] The application and the motion for summary judgment were heard together, further to an endorsement of Justice O’Brien, dated September 4, 2020.

[3] Both matters pertain to 1427830 Ontario (“Holdco”) and Marine Magnetics Inc. (“Marine Magnetics”). The applicant, Doug Hrvoic (“Doug”), is the president of Marine Magnetics and the respondent, Melissa Hrvoic (“Melissa”), is the secretary. Doug is also the president of Holdco and Melissa is the secretary-treasurer.

[4] The application is for, among other things, an order compelling the respondent, Melissa, to sell her shares of Holdco to Doug for fair value, an order removing Melissa as a director and officer of Holdco and Marine Magnetics, and an interim and interlocutory order waiving the quorum requirements for shareholders and directors meetings of Marine Magnetics and Holdco to permit such meetings to proceed without Melissa in attendance.

[5] Doug brings a summary judgment motion to dismiss Melissa’s action. Melissa seeks a declaration that she is the legal and beneficial owner of 50% of all shares of Holdco, or alternatively, that 20% of all issued and outstanding shares of Holdco, held by Doug, are impressed with a constructive trust in her favour. She also seeks a declaration that Doug’s actions with respect to Melissa, as a shareholder, director and officer of Holdco, have been oppressive and unfairly disregard Melissa’s interest pursuant to section 248 of the OBCA. Melissa further seeks an order directing Holdco to issue shares equal to those held by Doug and to rectify its shareholders’ register to reflect Melissa as the owner of 50% of the shares of Holdco.

[6] Doug counterclaims for damages in the amount of $600,000. That amount was withdrawn by Melissa on or about March 2, 2020 from Doug’s personal line of credit that was secured on his residence. Melissa has repaid Doug $600,000. However, the interest Scotiabank charged to Doug in the amount of $4,562.29 has not yet been repaid by Melissa.

[7] Although Melissa had previously sought to retain her shareholdings in Holdco, she now agrees that Doug may buy out her Holdco shares. However, the issues that remain are the number of shares Melissa holds in Holdco, and the fair value price that Doug would pay for the shares.

[8] At the outset, the parties agreed that there will have to be a trial with regard to the issue of the fair value price that Doug must pay to buy the Holdco shares from Melissa.

[9] Accordingly, the issue before me is whether there is a genuine issue for trial with regard to the allocation of shareholdings as between Doug and Melissa.

[10] For the reasons set out below, I have concluded that there is a genuine issue for trial. Summary judgment is denied.

Background

[11] Doug and Melissa were spouses. They were married in 1992 and separated in 2011.

[12] Marine Magnetics was founded by Doug, Melissa, and Mark Oliver in 1998. When it was incorporated, 70 common shares were issued to Doug, 20 common shares were issued to Melissa and 10 were issued to Mark. Initially, all three were directors and officers of Marine Magnetics.

[13] In 1999, Mark Oliver resigned as a director and officer of Marine Magnetics. His shares were transferred back to the company, then subsequently issued to Melissa. This increased Melissa’s shareholdings to 30 common shares of Marine Magnetics.

[14] On or about June 29, 2000 a rollover under section 85 of the federal Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) was completed. At that time Holdco was incorporated to hold the shares of Marine Magnetics. Following the rollover, Doug held 77 common shares in Holdco and Melissa held 33 common shares in Holdco. Holdco holds 100% of the shares in Marine Magnetics.

[15] The constating documents of Holdco authorize other classes of special shares, including Class D Shares. However, the corporate records of Holdco do not show any share classes, other than the common shares, having been issued.

[16] Melissa and Doug are the sole directors and officers of Holdco.

[17] Holdco also is the owner on title of the commercial property on which Marine Magnetics carries on business.

[18] Following Doug and Melissa’s separation, they continued to work together at Marine Magnetics until recently. Doug is the company president and Melissa was involved in sales and marketing.

[19] The relationship between the parties further deteriorated in 2019. On or about July 4, 2019, Doug provided Melissa with notices of shareholder meetings for Holdco and Marine Magnetics scheduled for July 30, 2019. The proposed schedule for the meetings included resolutions to approve the 2018 financial statements, elect Doug as the sole director and officer of both companies and remove Melissa as an officer and director of both companies.

[20] Melissa refused to attend the shareholder meetings until the issue of their respective shareholdings in Holdco was resolved. The Holdco by-laws require 100% of the shareholders to be present in person or by proxy to constitute quorum.

[21] On or about March 2, 2020 Doug terminated Melissa’s employment with Marine Magnetics without notice. There is a separate legal proceeding ongoing related to Melissa’s termination.

Analysis

[22] The issue before me is whether there is a genuine issue for trial with regard to the respective shareholdings of Doug and Melissa in Holdco. Rule 20.04 provides that I may grant summary judgment if “the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence”.

[23] In Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, [2014] 1 S.C.R. 87, the Supreme Court of Canada sets out the principles for the summary motion judge to consider in order to determine whether there is a genuine issue requiring a trial based on the evidence before the Court. Specifically, the Supreme Court of Canada indicates that there will be no genuine issue requiring a trial when the summary judgment process: “(1) allows the judge to make the necessary findings of fact, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to a just result.” (Hryniak, at para. 4).

[24] The Supreme Court of Canada in Hryniak v. Mauldin also explains the process that should be followed by the summary motion judge by providing a roadmap at paragraph 66:

On a motion for summary judgment under Rule 20.04, the judge should first determine if there is a genuine issue requiring a trial based only on the evidence before her, without using the new fact-finding powers. There will be no genuine issue requiring a trial if the summary judgment process provides her with the evidence required to fairly and justly adjudicate the dispute and is a timely, affordable and proportionate procedure, under Rule 20.04(2)(a). If there appears to be a genuine issue requiring a trial, she should then determine if the need for a trial can be avoided by using the new powers under Rules 20.04(2.1) and (2.2). She may, at her discretion, use those powers, provided that their use is not against the interest of justice. Their use will not be against the interest of justice if they will lead to a fair and just result and will serve the goals of timeliness, affordability and proportionality in light of the litigation as a whole.

[25] However, summary judgment is not always appropriate. In the case of Baywood Homes Partnership v. Haditaghi, 2014 ONCA 450, 120 OR. (3d) 438 (at para. 44), the Ontario Court of Appeal stated:

[e]vidence by affidavit, prepared by a party’s legal counsel, which may include voluminous exhibits, can obscure the affiant’s authentic voice. This makes the motion judge’s task of assessing credibility and reliability especially difficult in a summary judgment and mini-trial context. Great care must be taken by the motion judge to ensure that decontextualized affidavit and transcript evidence does not become the means by which substantive unfairness enters, in a way that would not likely occur in a full trial where the trial judge sees and hears it all.

[26] As discussed further below, in my view this is a case where the “decontextualized affidavit and transcript evidence” is not enough.

[27] The applicant submits that because the Holdco corporate and tax documents support Doug’s position that Melissa owns only 30%, this should determine the matter. Doug also relies upon affidavit evidence of his personal and corporate accountant. However, there are potential reliability issues with this evidence.

[28] While there is ample documentary evidence that Doug owns 70% of Holdco and Melissa owns 30% of Holdco, including the corporate records in Holdco’s minute books, there are other facts in dispute that may support Melissa’s claim.

[29] From the time the parties separated, they were compensated equally and received dividends in equal amounts from Holdco. As indicated above, the only issued and outstanding shares of Holdco are the common shares.

[30] Doug takes the position that Melissa and Doug hold equal numbers of Class D special shares of Holdco and any dividends were issued on these shares and not the common shares. There is no evidence of any such Class D shares of Holdco having been issued. I agree with Doug’s submission that if the dividends were incorrectly issued on the commons instead of another class of shares, this is a tax issue. However, there are other facts that are in dispute.

[31] Melissa submits that she put her acting career on hold to devote herself to Marine Magnetics at Doug’s request. She further submits that Doug indicated that they would both be equal shareholders from that point (in or about September 2000) and that he would take care of it. Doug denies this. As indicated above, the Holdco corporate records do not reflect any such ownership change. It is notable, however, that the corporate records were not updated at all after the reorganization in 2000 (until 2019).

[32] This is not a straight-forward corporate matter. There is no question that the Holdco corporate records are deficient in some respects – either they fail to show the revised common shareholdings at 50/50 or they fail to show the issuance of Class D shares.

[33] More importantly, however, this matter has family law complexities intertwined. The evidence is that prior to separation, Doug’s and Melissa’s compensation from the companies was paid into one bank account. After separation, they are compensated equally from the companies.

[34] Melissa submits that based on either unjust enrichment or good conscience, 20% of the common shares allocated to Doug in the Holdco corporate records are subject to a constructive trust for Melissa.

[35] In my view, there are critical facts related to this issue that I cannot determine on the record before me. Importantly, Melissa did not receive an equalization payment under the Family Law Act (the “FLA”) and her statutory right to equalization expired in September 2016. Melissa submits that she did not seek an equalization payment for family law purposes because she understood, based on, among other things, how she and Doug were being treated equally in compensation and dividends, that she had a 50% interest in Holdco/Marine Magnetics. This is a critical issue that cannot be determined on the record before me. The fact that the matrimonial proceeding documents on the child custody and access issues indicated that Melissa was not seeking equalization to keep the peace is not definitive of this issue. Melissa’s position is that because their ownership of Holdco was the most significant jointly held asset, and she was being treated equally, she did not pursue equalization under the FLA.

Disposition

[36] In the result, therefore, summary judgment is not appropriate and is denied.

[37] This matter shall proceed to trial on the issues of (1) the respective shareholdings of Doug and Melissa in Holdco; and (2) the fair value price Doug will pay Melissa to buy her shares of Holdco.

[38] Costs, if any, shall be determined following the trial on the issues.

[39] I remain seized. The parties shall coordinate with each other and my judicial assistant, Polly Diamante, to schedule the trial on the issues.

J. Steele J.

Released: December 30, 2020