COURT FILE NO.: CV-20-00644901-0000

DATE: 20210521

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

AV Gauge & Fixture Inc.

Plaintiff

– and –

Mark Rossi, Valex Holdings Inc., Darwish Alami and Y.A.J. Holdings Inc.

Defendants

COUNSEL:

Derek D. Ricci and Megan A. Percy, for the Plaintiff

Rodney M. Godard and Ioana Vacaru, for the Defendants

HEARD: January 26, 2021

VELLA J.

REASONS FOR DECISION

[1] The defendants (collectively, the “Rossi defendants”) bring a cross-motion in the within action (the “Toronto Action”) for an order staying the Toronto Action in favour of the action they brought in Windsor bearing court file number CV-20-00029016-0000 (the “Windsor Action”). This cross-motion is brought on the grounds that the interests of justice require that the Windsor Action proceed in place of the Toronto Action. The Toronto Action and the Windsor Action will collectively be referred to as the “Actions”.

[2] The plaintiff, AV Gauge & Fixture Inc. (“AV Gauge”), resists the cross-motion and seeks to have the Toronto Action proceed in place of the Windsor Action.

[3] The parties agree that the Actions involve the same parties and have questions of law and fact in common. The parties also agree that the issues should be tried in only one of the Actions. However, the parties cannot agree on which of the two Actions should proceed.

[4] By agreement, whichever action I stay under r. 21.01(3)(c) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, will be added by way of a counterclaim to the surviving action.

I. ISSUES

[5] The test to be applied in this determination under r. 21.01(3)(c) is set out in Hydro-Electric Commission of Kitchener-Wilmot v. A.F. White Ltd. (1992), 1992 CanLII 7468 (ON SC), 8 O.R. (3d) 602 (Gen. Div.), as follows:

a) Which action was started first?

b) Who bears the chief burden of proof?

c) Which claim is more comprehensive in scope?

d) Which proceeding does the balance of convenience favour?

[6] While the fourth factor, the balance of convenience, is not always relevant to a consideration under this subrule, it is of significant importance to this cross-motion, which requires consideration of both the competing Actions and the appropriate venue for the trial of the Actions.

[7] The Rossi defendants assert that the considerations relevant to a determination under r. 13.1.02(2)(b) also applies to my determination by analogy. This subrule relates to the transfer of actions from one county to another. While these factors may be relevant in light of the issue of the appropriate venue, for this proceeding, they are only helpful in terms of identifying other factors that may be relevant under the balance of convenience branch of the test. This is because this cross-motion requires the exercise of the court’s discretion, and the relative importance of these factors are dependent of the facts of each individual case: Hydro-Electric Commission; Huebner v. Direct Digital Industries Ltd. et al. (1975), 1975 CanLII 331 (ON SC), 11 O.R. (2d) 372 (H.C.), at para. 14.

[8] There is no hard and fast rule concerning the weighting of the four factors. Rather, the ultimate objective in determining which proceeding ought to be stayed involves considering which proceeding will achieve the fairest mode of adjudicating the disputes between the parties, upon taking all of the relevant matters into consideration: Hydro-Electric Commission; Huebner, at para. 13.

II. BACKGROUND

[9] By agreement dated June 1, 2018 (the “Purchase Agreement”), the Rossi defendants sold all of the issued and outstanding shares of Absolute Industrial Management Inc. (“Absolute”) to AV Gauge for 6.6 million dollars.

[10] Under the terms of the Purchase Agreement, the Rossi defendants represented and warranted that Absolute’s financial statements, books, and records were correct and complete and had been prepared in accordance with generally accepted accounting principles (“GAAP”). In addition, the Purchase Agreement provided that upon its acquisition of Absolute’s shares, AV Gauge was to issue 227,273 shares to Valex Holdings Inc. and Y.A.J. Holdings Inc. which are, respectively, Mr. Rossi and Mr. Alami’s holding corporations. AV Gauge was also to enter into employment agreements with Messrs. Rossi and Alami.

[11] Absolute’s financial statements included information concerning ongoing work related to the conversion of the Nemak of Canada Corporation’s aluminum plant in Windsor to accommodate production of the General Motors I–6 engine blocks and the “Thelma and Louise” engine blocks and bed plates for the Chevrolet Corvette (the “Nemak Project”).

[12] Absolute’s financial statements for the period ending November 30, 2017, included a portion of the revenue of US$966,000 for future purchase orders on account of works associated with the Thelma and Louise engine blocks and bed plates. The appropriateness of including this revenue is referred to by the Rossi defendants as the “GAAP Issue”.

[13] AV Gauge is described as being controlled by, and a portfolio company of, Toronto-based Ironbridge Equity Partners (“Ironbridge”).

[14] AV Gauge’s head office is registered in the County of Essex and it carries on business in Essex.

[15] Absolute carries on business and has its registered head office in Essex.

[16] AV Gauge takes the position, inter alia, that the revenues from the Nemak Project were fraudulently included in the financial statements, which informed the purchase price, and therefore AV Gauge overpaid for Absolute. AV Gauge refers to the GAAP Issue as the “Phantom Purchase Orders” because it says (and I am oversimplifying) that these purchase orders had not yet been issued by Nemak and until they are, there is no guarantee that the work will flow.

[17] The Windsor Action claims the return of a $816,675.28 purchase price adjustment credit that the Rossi defendants paid to AV Gauge on account of an adjustment to the working capital on the Rossi defendants’ then mistaken belief that AV Gauge’s position on the GAAP Issue was correct (the “Monies Had and Received Claim”). The Rossi defendants are also seeking payment of a $130,430 tax credit allegedly owed by AV Gauge to them (the “Tax Credit Claim”), and an order compelling AV Gauge to purchase each of Y.A.J.’s and Valex’s shareholding interests for a total of $168,182.02 (the “Buy Back Order”).

[18] In the Toronto Action, AV Gauge claims that it was induced to overpay for Absolute by the fraudulent misrepresentations by the Rossi defendants relating to the Phantom Purchase Orders. In addition, the Toronto Action also includes claims for damages for materially inaccurate cost estimates and gross profit margins reflected in Absolute’s financial statements and books and records (the “Misleading Profit Margins”), and the Rossi defendants’ maintenance of a large volume of allegedly illegal software on Absolute’s network that it now has to remove (the “Illegal Software”). AV Gauge claims 6.2 million dollars in damages.

III. ANALYSIS

[19] A somewhat unique factor in this case is the assertion by AV Gauge that its controlling shareholder and lead investor, Ironbridge, is the real victim in this alleged fraudulent scheme. Ironbridge is, what AV Gauge describes as, the effective decision maker. This is because Ironbridge controls three of five seats on AV Gauge’s board of directors. These three directors also sit on Ironbridge’s board of directors and had significant decision-making involvement throughout the impugned transaction.

[20] Another factor that distinguishes this case from much of the jurisprudence on this issue is that each action was commenced in different venues: Toronto and Windsor.

i. The parties’ positions

[21] Each side claims that the other side’s issues are essentially derivative to their own claims.

[22] From the Rossi defendants’ perspective, once the GAAP Issue is resolved, then the issue of the Phantom Purchase Orders will be resolved, as they are mirror images of each other. For the Rossi defendants their Monies Had and Received Claim turns on the resolution of the GAAP Issue. If successful, then the Buy Back Order and the Tax Credit Claim flow as there is no dispute as to the quantum owing or the existence of these contractual provisions.

[23] AV Gauge’s position is heavily dependent on its premise that, as the controlling shareholder of AV Gauge with all of the effective decision-making power exercised through its three overlapping directors (with AV Gauge’s Board), Ironbridge’s Toronto-based location drives many of the balance of convenience factors in its favour. This is because its overlapping directors and lawyers all reside in Toronto. Further, its Phantom Purchase Orders fraud claim is plead in a more comprehensive way, and the chief burden of proof is on it to prove fraud.

[24] Furthermore, AV Gauge says that the claims asserted in the Windsor Action are entirely derivative of, and dependent upon, the outcome of its fraud claims asserted in the Toronto Action. As well, AV Gauge says that the Misleading Profit Margins and Illegal Software claims are factually and legally distinct issues from the GAAP Issue/Phantom Purchase Orders, thus, again, making its claim more comprehensive than the Windsor Action.

ii. The test

[25] The governing principle in determining whether a stay is warranted is whether a stay would be in the interests of justice: Birdseye Security Inc. v. Milosevic, 2020 ONCA 355. In this case, it not a question of any party giving up claims, given that all claims will be advanced by way of the main action and a counterclaim.

[26] The burden of proof under r. 21.01(3)(c) is on the Rossi defendants. The onus has been described as a heavy one: Navionics Inc. v. Nautical Data International Inc., 2006 CarswellOnt 2220 (S.C.), at para. 29. However, the juridical history leading to this cross-motion is somewhat unique, since the court ordered the Rossi defendants to proceed with its cross motion. Initially both parties brought motions to stay each others’ action.

Which action was started first?

[27] The Windsor Action was commenced on June 22, 2020, while the Toronto Action was commenced on July 31, 2020.

[28] However, on October 22, 2019, AV Gauge delivered a notice of claim for indemnification pursuant to the terms of the Purchase Agreement as it concluded that the Rossi defendants had allegedly made the misrepresentations described above. After failed efforts to resolve the dispute, AV Gauge sent a demand letter to the Rossi defendants dated June 5, 2020. It provided a deadline for response of June 19, 2020.

[29] A telephone call was scheduled by the Rossi defendants with AV Gauge’s lawyer for June 22, 2020. However, before that call, the Rossi defendants issued the Windsor Action. The Windsor Action was not disclosed during the telephone call and was served on AV Gauge on June 30, 2020.

[30] I do not find this factor as particularly persuasive within the factual context of this matter and will treat it as a neutral factor. Based on the evidence, both sides were contemplating legal action at the same time. It seems unfair to allow the Rossi defendants’ decision to issue a statement of claim while AV Gauge was waiting to receive their response to a settlement proposal to be a decisive factor in this analysis.

Who bears the chief burden of proof?

[31] To be successful in asserting its claims in the Windsor Action, the Rossi defendants must prove that including the disputed revenues reflected by the Phantom Purchase Orders in Absolute’s financial statements and records, relative to the Nemak Project, was consistent with the GAAP. If they are successful, then the fraud claim by AV Gauge referenced as the Phantom Purchase Orders will fail.

[32] On the other hand, AV Gauge will bear the burden of proof in establishing the Misleading Profit Margins and Illegal Software claims irrespective of what happens with the GAAP Issue/Phantom Purchase Orders claims. The Misleading Profit Margins claim relates to three projects described as the Martinrea Project, the Ventra Project and the Nemak Project. The first two projects are not engaged in the Windsor Action. Overall, this claim is for allegedly having understated the costs of the contracts for these projects and therefore overstating $676,739 in profits. The Illegal Software claim alleges that the Rossi defendants loaded approximately $91,000 of “illegal” software on Absolute’s network that must be removed.

[33] As well, the allegations of fraud impose a heavy burden on AV Gauge. This is because if the impugned inclusion of the Nemak Project revenues was inconsistent with GAAP, then AV Gauge must still prove fraudulent intent.

[34] On balance, AV Gauge bears the chief burden of proof for the majority of the claims advanced in the Actions.

Which claim is more comprehensive in scope?

[35] The Toronto Action has a much lengthier statement of claim than the counterpart statement of claim in the Windsor Action. However, that fact alone does not make the Toronto Action more comprehensive.

[36] The Toronto Action raises three legally and factually distinct claims – the Phantom Purchase Orders (the GAAP Issue), the Misleading Profit Margins, and the Illegal Software claims.

[37] The Windsor Action raises three related claims – the Monies Had and Received Claim (the GAAP Issue), the Tax Credit Claim, and the Buy Back Order.

[38] The Phantom Purchase Orders and the Monies Had and Received Claim revolve around the GAAP Issue, however, the Phantom Purchase Orders have the added element of the fraud allegations.

[39] Also, I agree with AV Gauge that the Tax Credit Claim and the Buy Back Order are not complex claims and will flow from the resolution of the GAAP Issue, since there is no dispute as to entitlement under the Purchase Agreement or the quantum of these claims if the Purchase Agreement is not rescinded or the GAAP Issue is resolved in the Rossi defendants’ favour.

[40] Based on the pleadings and limited evidence, the Misleading Profit Margins claim is a more factually distinct and complex claim than the two non-GAAP related claims advanced in the Windsor Action. The Illegal Software claim was difficult to assess in terms of complexity but seems to be a less complex matter.

[41] Overall, this factor favours AV Gauge.

Which proceeding does the balance of convenience favour?

[42] The balance of convenience requires an assessment of a number of factors and is an important factor in cases where the competing actions were commenced in different venues. In this matter, the issue of convenient forum is embedded in the r. 21.01(3)(c) analysis.

[43] If the factors listed in r. 13.1.02(2)(b) have any place in this analysis, it is under this fourth factor. However, these factors are only relevant to the extent that they inform how the court’s discretion is best exercised to achieve the fairest mode of proceeding, in the face of competing actions, where they have been commenced in different venues.

[44] The relevant factors in a balance of convenience test under this rule is dependent of the factual circumstances of the matter before the court. There is no single exhaustive, one size fits all, list of factors that pre-determine the side of the ledger this analysis will favour.

[45] However, I do not accept AV Gauge’s assertion that I should assess the balance of convenience factors premised on Ironbridge being the “real” victim of the alleged fraud or the “real” decision maker. This is tantamount to stating that Ironbridge, as the controlling shareholder, has standing to bring these causes of action on behalf of AV Gauge. The fact that Ironbridge, through its majority shareholding position, structured the board of directors of AV Gauge to have three of five directors overlapping with Ironbridge’s board of directors, does not alter the corporate reality that AV Gauge is a separate legal entity from Ironbridge, is the only entity that can assert the causes of action in the Toronto Action, and is the proper defendant in the Windsor Action.

[46] The parties have identified a number of factors they say are relevant to this analysis. I will now turn to the relevant factors:

i. Location of Parties: All of the parties are located in the County of Essex.

ii. Location of Dispute: What is at dispute is the terms of the Purchase Agreement in relation to the acquisition of an Essex County based corporation: Absolute. The parties to the Purchase Agreement are all Essex-based. Therefore, the location of the dispute is the County of Essex.

iii. Location of Witnesses: This is somewhat of a speculative exercise given the early stage of the litigation.

On the record, all of the Rossi defendant witnesses, with the possible exception of accounting and other experts, are residents in the County of Essex. AV Gauge urges me to draw an adverse inference from the refusal of one of the Rossi defendants under cross-examination to disclose the name or location of their expert witness. However, I can understand why the Rossi defendants would not wish to prematurely disclose the identity of their expert witnesses at this early stage (no statements of defence have been delivered). It may be that they have not decided whether to call the expert at trial and wish to preserve litigation privilege. I decline to draw an adverse inference.

There is evidence in the record that suggests that the accountants and the business valuator who prepared the prospective buyer information for Absolute are resident in the County of Essex.

AV Gauge submits that its evidentiary record discloses that it is “anticipated” that “all or substantially all” of its witnesses will be Toronto-based. However, this is a bald allegation contained in the affidavit of a law clerk and hence is not very persuasive. However, three of the fact witnesses, Alan Sellery, Anthony Creo, and Peter Samson, are the directors who sit on both boards of Ironbridge and AV Gauge and were heavily involved in the decision making leading to the impugned transaction. They are residents of Toronto and will likely be key witnesses at trial. However, in Ironbridge’s announcement of the partnership with AV Gauge, Peter Samson is listed as the Managing Director of Ironbridge, and Denis Levasseur as CEO of AV Gauge. Denis Levasseur, who is also a shareholder of AV Gauge, is listed in the corporate profile as the President, Secretary and Treasurer of AV Gauge, and is resident in Essex. There is also evidence in the record that suggests that the trustees of AV Gauge’s other shareholder, the Levasseur AV Gauge Family Trust, reside in Essex.

Further, the location of the documentary evidence is not particularly relevant as between Essex and Toronto given the electronic technology now commonly used. There will likely be key documentary evidence located in both venues.

This factor, based on the evidentiary record, is not determinative on its own. However, in today’s technological environment, where the courts and parties are now well accustomed to virtual proceedings, this factor is not as important for the pre-trial steps in the litigation. One side will be somewhat inconvenienced if the trial takes place in their non-resident venue, but this is not an undue burden in this case where both venues are located in southern Ontario and there is no suggestion that the courts of either region lack the facilities or judicial resources to conduct this trial.

iv. Location of the Torts: AV Gauge asserts that the most significant tort alleged is its fraudulent misrepresentation claim and that this tort was committed in Toronto. AV Gauge relies on Parque Industrial Avante Monterrey, S.A. de C.V. v. 1147048 Ontario Ltd., 2017 ONCA 311, for the proposition that the tort occurs in the location where the alleged victim of the tort resides. It submits that Toronto is the location of the torts based on Ironbridge being the victim of the alleged fraud. However, as stated above, while Ironbridge, as controlling shareholder, will indirectly suffer the effects of the alleged fraud through potentially lower profit margins than anticipated, it is not the victim of the alleged fraud. AV Gauge, as the purchaser of Absolute, the party to the Purchase Agreement, and recipient of the alleged misrepresentations, is the alleged victim. Therefore, contrary to AV Gauge’s submission, the torts it alleges were committed in Essex, where AV Gauge is located.

The torts advanced by the Rossi defendants are clearly based in Essex.

v. Victims of the Alleged Fraud: Similarly, AV Gauge submits that the victims of the fraud are the three overlapping directors (Messrs. Sellery, Creo, and Samson). Since these individuals live in Toronto, AV Gauge submits that the victims of the alleged fraud are located in Toronto. This submission is based on the premise that the victims of fraud in a corporate case are the individual directors and not the corporation they serve. Again, it is clear that the cause of action pleaded in the Toronto Action belongs to AV Gauge and thus it is AV Gauge that is the alleged victim here.

vi. Location of Decision Makers: AV Gauge maintains that the same three overlapping Toronto-based decision makers from Ironbridge were directly involved in the events giving rise to the Buy Back Order claim. This included sending the notices to exercise call rights to the Rossi defendants and approving the purchase price for the buy back. However, the contract deals with obligations and representations between the contractual parties that are all Essex-based, in relation to a company which is also Essex-based. AV Gauge makes the same argument in relation to the Tax Credit Claim, but the same analysis applies.

vii. Location of Damages Sustained: AV Gauge submits that the damages are in fact incurred by Ironbridge in Toronto because it is the largest shareholder, and AV Gauge’s claim is for substantially more than the claim advanced by the Rossi defendants. In addition, the damages were incurred in Toronto “because the victims of the alleged fraud are based in Toronto at Ironbridge”, according to the affidavit evidence of AV Gauge. However, again, the damages alleged must be sustained by the party that advances the claim, not its shareholder or its directors. The damages are sustained in Essex whether related to AV Gauge’s claim or the Rossi defendants’ claim.

viii. Contractual Notice Provisions: AV Gauge claims that all notices to AV Gauge under the contract are to be made to Ironbridge at its head office in Toronto, and to its Toronto lawyers. I do not see this as helpful to AV Gauge’s argument. No case law authority was offered to support this submission.

ix. Fraud Victim’s Choice of Venue: AV Gauge asserts that as it is the victim of an alleged fraud, its choice should prevail over the alleged fraudster’s choice. However, no decision on the merits has been made on the fraud claim and no case was cited for this proposition.

[47] The balance of convenience overwhelmingly favours the Rossi defendants.

IV. CONCLUSION

[48] AV Gauge relies on Navionics Inc., at para. 29, for the proposition that, generally speaking, the discretion to grant a stay of proceedings must be exercised sparingly. However, that case was concerned about protecting the responding party’s right to have access to the Superior Court, in the face of a proceeding started in Federal Court on a copyright infringement. The Federal Court action raised a distinct claim from the Superior Court action sought to be struck. Hence, this presents a different factual situation and concern. In the cross-motion before me, the stayed action will be permitted to proceed by way of counterclaim to the surviving action.

[49] AV Gauge also relies on Parque Industrial for the proposition that the location of the tort of fraudulent misrepresentation is in the jurisdiction in which the party advancing the allegation resides and therefore relied upon. The difficulty with the application of this ratio to the present cross-motion is that the party claiming to have received and relied upon the allegedly fraudulent misrepresentation is AV Gauge, not Ironbridge, and AV Gauge has its head office and place of business in the County of Essex. Indeed, in its factum, AV Gauge states that it is the victim of fraud.

[50] AV Gauge also relies upon Huebner. That case has some factual similarities to the present matter. Two actions were commenced in relation to the same transaction: a contract to purchase shares of a company by Huebner. The plaintiff commenced his action on June 9, 1975, and the defendants commenced a separate action on June 30, 1975. In the action by the defendants, they claimed they were induced to buy the company through fraudulent misrepresentations. The defendants moved to stay the plaintiff’s action under r. 21.01(3)(c).

[51] In Huebner, the court did not place much weight on the fact that the plaintiff had commenced his action first. Rather, on the facts of that case, the court placed greater reliance on who bore the chief burden of proof. The court found that the plaintiff merely had to prove the existence of the contract (which was conceded) and the nonpayment of the amounts stipulated by the contract (the quantum of which is not in dispute). The defendants, on the other hand, had to prove the existence of fraudulent misrepresentations, which was very much contested. The defendants’ action was also more comprehensive as it added the facts regarding the fraudulent misrepresentation. In the facts of that case, the second and third considerations trumped the first consideration.

[52] Huebner, however, does not assist AV Gauge. First, the two actions were commenced in the same jurisdiction. Therefore, the balance of convenience was not considered in the exercise of that court’s discretion. Second, the allegation of the Rossi defendants that the financial statements and records were consistent with GAAP is the flip side of AV Gauge’s allegation that those same financial statements and records constitute a fraudulent misrepresentation. Each of these primary allegations are contested by the other.

[53] Having considered the four-factor test set out in Hydro-Electric Commission, it is my view that the balance of convenience is the consideration that tips the scales in favour of the Rossi defendants.

[54] In terms of the order of the prosecution of the claims, it is open to AV Gauge to seek to have its counterclaim heard first in the Windsor Action. This decision does not preclude such a motion, and in any event, does not purport to fetter the trial judge’s discretion in managing the trial.

[55] Accordingly, the cross-motion is granted, and the Toronto Action is stayed. Leave is granted to AV Gauge to convert the Toronto Action into a counterclaim to the Windsor Action.

[56] The parties agreed that costs will be fixed in the sum of $10,000 in favour of the successful party. Therefore, costs are awarded in that sum to the Rossi defendants, fixed payable within 30 days from the release of this decision.

Vella J.

Released: May 21, 2021