COURT FILE NO.: 54652/13 (St. Catharines)

DATE: 20210803

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

563815 ONTARIO INC.

Plaintiff

– and –

NED NADIME NASSIF and DIANE NASSIF

Defendants

– and –

Bruce A. Macdonald, for the Plaintiff and the Third Parties

Duncan M. Macfarlane, Q.C., for the Defendants

ANTHONY CONTINELLI and GRACE CONTINELLI

Third Parties

HEARD: February 18, 19, 20, 21, 24, 25, 26, 27, 28, March 2, 3, 4, 5 & 13, 2020, in St. Catharines (in person); April 6 & 7, 2021 (by video conference); closing submissions May 7 to June 4, 2021 (in writing)

R. A. Lococo J.

REASONS FOR JUDGMENT

I. Introduction

[1] This action arose from a dispute between the shareholders of 563815 Ontario Inc. (“563”), a real estate investment company. Anthony Continelli and Ned Nadime Nassif are equal shareholders, directors and officers of 563. Their respective spouses, Grace Continelli and Diane Nassif, are also officers of 563.

[2] In the 1980s, 563 developed and built two properties in St. Catharines: a residential apartment building on Queenston Street, and a commercial plaza on Merritt Street. The Nassifs were responsible for bookkeeping and financial management of the properties until October 2011, when the Continellis took over those responsibilities. Both properties were subsequently sold for aggregate gross proceeds of $4.1 million. Most of the net sales proceeds are being held in trust pending resolution of the current proceedings.

[3] The Continellis say that during the time that the Nassifs managed the properties, they misappropriated funds from 563 totalling in the range of $225,000 to $260,000. With the court’s leave, Mr. Continelli brings a derivative action in 563’s name claiming damages against the Nassifs. Mr. Continelli also seeks punitive damages from the Nassifs (payable to Mr. Continelli personally) for breach of fiduciary duty.

[4] In the derivative action, Mr. Continelli claims that the Nassifs should be required to reimburse 563 for the following:

a. misappropriated rent relating to the Queenston apartment building, calculated (by alternative methods) to be in the range of $163,884 to $198,091;

b. $24,604.57 being the proceeds of a claim under 563’s insurance policy that were paid to Mr. Nassif;

c. $12,252 in payments to a business run by the Nassifs’ son; and

d. $24,145 as compensation relating to excess amounts paid to Mr. Nassif (and not to Mr. Continelli) that reduced Mr. Nassif’s shareholder loan to 563.

[5] The Nassifs deny that they misappropriated any funds. They say that the Continellis have not established that the Nassifs were responsible for any shortfall in rent relating to the Queenston apartment building. They also deny making any improper payments or retaining any funds not properly theirs. In addition, they say that Mr. Continelli has not established any entitlement with respect to amounts paid to Mr. Nassif in reduction of his shareholder loan to 563.

[6] In the third party action, the Nassifs advance various claims against the Continellis. Those claims relate to: (i) the Continellis’ rent-free occupation of a residential unit in the Merritt plaza for a two-year period; (ii) the rent-free occupation of commercial space in the Merritt plaza by the Continellis’ son and daughter for a two-year period; and (iii) the improper expenditure of 563 funds after the Continellis took over the properties’ financial management, including excess amounts for repair and maintenance of the Queenston apartment building and unnecessary expenditures for bookkeeping and other services.

[7] The Continellis deny any improper expenditure of 563 funds. They also argue that the third party action is not properly constituted, since the Nassifs in their personal capacity cannot advance claims for alleged wrongs against 563, a non-party to the third party action.

[8] The issues to be determined are as follows:

a. Rent shortfall: Are the Nassifs liable to 563 for misappropriating rent relating to the Queenston apartment building?

b. Insurance claim proceeds: Are the Nassifs liable to 563 for misappropriating the proceeds of an insurance claim relating to the Merritt plaza?

c. Payments to the Nassifs’ son: Are the Nassifs liable to 563 for payments made to a business run by the Nassifs’ son?

d. Unequal reduction of shareholder loan: Are the Nassifs liable to 563 with respect to excess amounts paid to Mr. Nassif that reduced his shareholder loan to 563?

e. Punitive damages: Should the Nassifs be ordered to pay punitive damages?

f. Third party action: Are the Continellis liable to the Nassifs for any amount in the third party action?

[9] As explained below, I have concluded that judgment should issue requiring the Nassifs to pay damages of $87,048.57 to 563 for breach of fiduciary duty. I have also concluded that the Nassifs’ third party action against the Continellis should be dismissed.

[10] In the balance of these reasons, I will first set out further information about the parties and the events involved in this litigation and review the applicable legal principles. I will then address in turn each of the issues outlined above.

II. Factual background

[11] The plaintiff 563, an Ontario business corporation, was incorporated in 1983 as a joint real estate investment vehicle for Anthony Continelli and Ned Nassif. Mr. Continelli and Mr. Nassif are equal shareholders and directors of 563. They and their respective spouses, Grace Continelli and Diane Nassif, are 563’s corporate officers.

[12] When Mr. Continelli and Mr. Nassif began investing together in real estate in the 1980s, Mr. Continelli had prior experience in the construction business and had previously operated a hairdressing business. Mr. Nassif had a background in real estate sales. Ms. Continelli’s work background was in hairdressing and Ms. Nassif’s was in nursing.

[13] In addition to their business relationship, the Continellis and the Nassifs (who are now in their seventies) were personal friends for many years. In addition to their Niagara residences, both couples later had winter residences in Arizona. Their families socialized and spent time together in both locations.

[14] In the 1980s, 563 developed and built two real estate properties in St. Catharines, a 34-unit, three-story residential apartment building on Queenston Street, built in 1984, and a commercial strip plaza (with one residential unit) on Merritt Street, built in 1987. Following construction, the Nassifs assumed responsibility for bookkeeping and financial management of the properties. They received no additional compensation for doing so, beyond Mr. Nassif’s entitlement as a 50 percent shareholder and officer of 563.[^1]

[15] The Nassifs say there was an oral agreement with the Continellis that the Nassifs would have responsibility for bookkeeping and financial management for ten years, after which the Continellis would take over that role for the next ten years. The Continellis deny there was any such agreement. They say that when the Nassifs commented on the level of work associated with managing the properties, the Continellis suggested that the Nassifs engage outside property managers, but the Nassifs continued to manage the properties themselves.

[16] In their financial management role, the Nassifs supervised successive live-in superintendents of the Queenston apartment building in that property’s day-to-day management, including rent collection, cleaning and maintenance, and apartment leasing. The superintendents received no compensation other than the rent-free occupation of an apartment unit.

[17] For approximately 12 years ending in September 2009, the Queenston apartment building’s superintendent was Miranda Pelletier. She had lived in the building as a tenant since the early 1990s. She had limited (grade 8) education and was previously employed in practical nursing.

[18] As superintendent, Ms. Pelletier collected the rent from the tenants each month. Most rent payments were made in cash, reflecting the tenants’ preference. Ms. Pelletier manually recorded the rent received in a journal she maintained, referred to as the “Blue Book”. On a monthly basis, Ms. Pelletier brought the rent payments to Ms. Nassif at her residence, together with the Blue Book. Ms. Nassif manually recorded the amounts she received from Ms. Pelletier in her own journal, referred to as the “Yellow Book” or “Diane’s Yellow Book”. Ms. Nassif was responsible for depositing the rent payments into 563’s bank account. She would also reimburse Ms. Pelletier in cash (from the rent proceeds) for certain maintenance and other expenses that Ms. Pelletier incurred in day-to-day building operation.

[19] Utilities and other operating expenses were paid by cheque directly to third-party service providers from 563’s bank account. Cheques drawn on 563’s bank account required the signatures of both Mr. Nassif and Mr. Continelli. It is common ground that when the Nassifs were responsible for the properties’ financial management, as a convenience, Mr. Continelli periodically provided Mr. Nassif with pre-signed blank cheques for use in making payments from 563’s bank account.

[20] The amounts deposited to (and paid from) 563’s bank account were reflected in 563’s electronic general ledger. 563’s outside accountant (Evert Postma, C.P.A. of Bridgman & Dirksen) used that information to produce 563’s financial statements on an annual basis. In his testimony, Mr. Postma confirmed that he also met with Mr. Continelli and Mr. Nassif on an annual basis to discuss the financial results for the previous year, but otherwise had only limited in-person contact with them.

[21] In September 2009, the Nassifs dismissed Miranda Pelletier as superintendent of the Queenston apartment building. At that time, Ms. Pelletier and her husband were locked out of the apartment they occupied, leaving behind the Blue Book rent journal. The Blue Book then came into the Nassifs’ possession. Thereafter, Stephane Hébert (Ms. Pelletier’s successor as superintendent) used the Blue Book as a rent journal in subsequent periods.

[22] In November 2009, the Nassifs contacted Niagara Regional Police, alleging that Ms. Pelletier had misappropriated rent totalling at least $29,580 during her time as superintendent. The Nassifs’ complaint to the police is documented in a police occurrence report, but there is no evidence that the police conducted a further investigation. Ms. Pelletier was not charged with a criminal offence. Her uncontradicted testimony was that she was not aware of any police investigation at the time and was not interviewed by police.

[23] In December 2009, Mr. Nassif provided a Proof of Loss form to 563’s insurer, Economical Mutual Insurance Company, claiming misappropriated rent of $29,580. In support of the insurance claim, the Nassifs provided Economical Insurance with the police occurrence report and a copy of Diane’s Yellow Book for the period January 2005 to November 2009. In May 2010, Economical Insurance settled the insurance claim, paying $20,000 to 563.

[24] In early December 2010, Ms. Continelli visited Ms. Nassif at her residence. The Nassifs were then in the process of moving to a newly built residence. Ms. Continelli raised the subject of retirement and advised Ms. Nassif of the Continellis’ desire to sell the Queenston apartment building and the Merritt plaza. On December 12, 2010, the Continellis and the Nassifs further discussed the proposed sale at a meeting at the Nassifs’ former residence. The Nassifs opposed the properties’ sale, and there was some discussion of the Nassifs’ buying the Queenston apartment building from 563 (which the Continellis initially opposed).

[25] At (or after) the December 12, 2010 meeting, Ms. Continelli provided the Nassifs with a handwritten list, requesting certain financial information relating to 563 for the period 2007 to 2010, including a list of all tenants and rental amounts for both properties and bank and credit card statements. By June 2011 (after some delay), the Nassifs left boxes of financial records for the Continellis at the offices of 563’s outside accountant. Ms. Continelli also provided the Nassifs (by fax) with a further handwritten list of requested documents dated June 23, 2011.

[26] The records the Nassifs provided in response to the Continellis’ inquiries included the Blue Book rent journal that Ms. Pelletier authored but did not include Diane’s Yellow Book. Ms. Nassif testified that in preparation for their move to a larger new residence in December 2010, she threw out documents and other possessions that she did not want to move. Her Yellow Book was among the documents thrown out at that time, according to Ms. Nassif.

[27] After the Continellis’ review of the documents produced by the Nassifs, the Continellis (through their counsel) raised certain areas of concern, including (i) apparent discrepancies between the rent recorded in the Blue Book and the rent deposited in 563’s bank account, and (ii) apparent erasures and other alterations to entries in the Blue Book. The Continellis also questioned various 563 cheques payable to Mr. Nassif personally in 2011 (prior to transfer of financial management responsibility of the property from the Nassifs to the Continellis), variously recorded as a management fee, a bonus, and the proceeds of an insurance claim (in the amount of $24,604.57) relating to a water leak at the Merritt plaza.

[28] As well, Mr. Continelli (through counsel) questioned Mr. Nassif’s withdrawal of funds exceeding $225,000 during 563’s fiscal year ended September 30, 2009 that reduced the amount due to Mr. Nassif under his shareholder loan to 563. At the beginning of fiscal 2009, the amounts due to Mr. Continelli and Mr. Nassif under their respective shareholder loans to 563 had been approximately equal. Mr. Continelli alleged that he had provided excess financing to 563 in the amount paid to Mr. Nassif to reduce his shareholder loan to 563 during the 2009 fiscal year, since there had not been equivalent fund withdrawals by Mr. Continelli.

[29] By summer 2011, the parties were in apparent agreement that their joint real estate venture should end and the properties should be sold. The parties also agreed that the Continellis would take over the properties’ financial management effective October 1, 2011 (the beginning of 563’s next fiscal year), pending sale of the properties. In preparation for sale of the Queenston apartment building, there were significant renovations to that property, under the Continellis’ management. During the period of the Continellis’ management, an outside bookkeeper was engaged.

[30] In April 2013, the Queenston apartment building sold for $2.65 million. The Merritt plaza sold in August 2017 for $1.45 million. Most of the net sale proceeds remain in trust pending resolution of the current proceedings.

[31] In August 2013, Mr. Continelli commenced the current proceedings against the Nassifs by issuing a Statement of Claim in 563’s name. By consent order dated May 14, 2014, Mr. Continelli was granted leave nunc pro tunc to bring the action on 563’s behalf as a derivative action under s. 246 of the Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”). The Nassifs defended the action and in August 2014, they brought the third party action against the Continellis.

[32] The existence of Diane’s Yellow Book and the possible availability of a partial copy came to the Continellis’ attention during Ms. Nassif’s examination for discovery in late 2014. A partial copy of the Yellow Book was subsequently obtained from Economical Insurance for use in the litigation.

[33] The trial of these proceedings lasted at total of 16 days, followed by written submissions. The trial proceeded in person for 14 days in February and March 2020 but was interrupted during the defence case (part way through Ms. Nassif’s cross-examination) by the suspension of regular court operations due to the COVID-19 health emergency. The trial was scheduled to resume in November 2020 but was further delayed because one of the counsel was then in quarantine. The evidence was completed by video conference on April 6 and 7, 2021, followed by written closing submissions completed in June 2021.

III. Legal principles

[34] A shareholder (or other “complainant”) of an Ontario business corporation may apply to the Superior Court for leave to bring a derivative action in the name of and on behalf of the corporation: OBCA, s. 246(1). A derivative action may involve a claim that a director, officer or shareholder has breached a duty owed to the corporation or its shareholders, as alleged in this case. In a derivative action, the court may make any order it thinks fit, including an order directing that any amount found to be payable by a defendant shall be paid directly to a present or former shareholder, instead of to the corporation: OBCA, s. 247.

[35] Every director and officer of a corporation, in exercising their powers and discharging their duties, is required to (a) act honestly and in good faith with a view to the corporation’s best interests, and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances: OBCA, ss. 134(1)(a) and (b). In Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68, [2004] 3 S.C.R. 461, at para. 35, the Supreme Court of Canada describes the statutory fiduciary duty imposed on directors and officers as follows:

The statutory fiduciary duty requires directors and officers to act honestly and in good faith vis-à-vis the corporation. They must respect the trust and confidence that have been reposed in them to manage the assets of the corporation in pursuit of the realization of the objects of the corporation. They must avoid conflicts of interest with the corporation. They must avoid abusing their position to gain personal benefit. They must maintain the confidentiality of information they acquire by virtue of their position. Directors and officers must serve the corporation selflessly, honestly and loyally …. [Citation omitted.]

[36] Fiduciary obligations may also exist between shareholders of a closely held corporation. In Tourangeau v. Taillefer, [2000] O.J. No. 184 (S.C.), the parties were each a 50 percent shareholder of a corporation, one of whom was selling her shares to the other. The court found that the departing shareholder owed a fiduciary obligation to the remaining shareholder, referring to the partner-like relationship between the parties: see Tourangeau, at paras. 20-24.

[37] In closing submissions, the Nassifs’ counsel also relied on the common law duty applicable to all contracts that requires the contracting parties to act honestly in the performance of contractual obligations. The duty of honest performance is a manifestation of a general organizing principle of the common law of contract that requires good faith performance of contracts: see Bhasin v. Hrynew, 2014 SCC 71 [2014] 3 S.C.R. 494, at para. 33. Application of the duty of honest performance is not dependent on there being a fiduciary relationship between the contracting parties: see Bhasin, at para. 60.

[38] With that background, I will now address the matters in issue in 563’s derivative action and the third party action, as previously identified.

IV. Rent shortfall

[39] Are the Nassifs liable to 563 for misappropriating rent relating to the Queenston apartment building?

[40] The Continellis say that the Nassifs misappropriated funds from 563 in the range of approximately $225,000 to $260,000. Most of that claimed amount (in the range of $163,884 to $198,091) consists of lost rent relating to the Queenston apartment building. The explanation for calculation of lost rent claimed in this action is derived in large measure from the evidence of Ian Lobo, C.P.A., a chartered accountant and chartered business valuator who is experienced in financial matters relating to business valuation and loss quantification. Mr. Lobo testified as part of 563’s case as an expert witness on the quantification of economic loss. His reports dated February 21, 2018 and September 26, 2019 (together with an email dated February 18, 2020) were placed in evidence on consent.

[41] The court also heard expert evidence relating to the quantification of economic loss from Colin Cook, a similarly credentialed expert witness who testified as part of the Nassifs’ case. Mr. Cook’s report dated January 3, 2019 (responding to Mr. Lobo’s first report) was also placed in evidence on consent.

[42] As set out in the Continellis’ closing submissions, the lower end of the range for claimed lost rent ($163,884) was calculated as the difference between the rental amounts disclosed in Diane’s Yellow Book (with certain adjustments) and the lower rental amounts disclosed in 563’s financial statements for the relevant periods, plus additional lost rent from apartments documented as vacant (allegedly falsely). The higher figure ($198,091) was based on market data analysis, calculating the difference between expected rental revenue using rental market data and the lower rental amounts disclosed in 563’s financial statements for the relevant periods. The calculation of those two amounts is explained in further detail below under the following subheadings: (a) Reported rent shortfall, and (b) Market data analysis.

A. Reported rent shortfall

(i) Ms. Continelli’s initial review

[43] The documents the Nassifs provided to the Continellis by the summer of 2011 included the Blue Book rent journal that Ms. Pelletier authored. In Ms. Continelli’s review of the rental information disclosed in the Blue Book, she proceeded on the erroneous basis that the Blue Book had been created and maintained by the Nassifs rather than Ms. Pelletier. The Continellis were not aware that Ms. Nassif had maintained her own separate rent journal, the Yellow Book.

[44] Upon Ms. Continelli’s review of the Blue Book, she noted various areas of concern, including the following: (a) an apparent shortfall estimated at $58,000 in the four fiscal years ended September 30, 2007 to 2010 between rent recorded in the Blue Book and rent deposited in 563’s bank account and reflected in 563’s financial statements; (b) unusual vacancies recorded in the Blue Book for units in the Queenston apartment building, which historically had a low vacancy rate; and (c) apparent erasures and other alterations (apparently in different handwriting) in Blue Book rental entries. On the assumption that the units suspiciously recorded as vacant were in fact occupied, the amount of misappropriated rent from “false vacancies” was calculated to exceed $75,000.

(ii) Mr. Lobo’s initial calculation of reported rent shortfall (2018 expert report)

[45] In order to obtain professional guidance in calculating 563’s economic loss, the Continellis (through counsel) provided available documents to Mr. Lobo, which included

a. the Blue Book obtained from the Nassifs (described in the glossary of Mr. Lobo’ initial report as “Blue subledger books maintained by Diane Nassif”), but did not include Diane’s Yellow Book, which had not yet been received from Economical Insurance,

b. 563’s financial statements and general ledgers for the relevant periods, and

c. tabular documents prepared by Ms. Continelli and 563’s outside bookkeeper, described as (i) an analysis of rental revenue included in the Blue Book compared to rental revenue recorded in 563’s financial statements for the four years ended September 30, 2010, and (ii) a calculation of “Lost Revenue Due to Vacant Apartments”.

[46] In Mr. Lobo’s initial expert report dated February 21, 2018, relying on the documentary evidence provided, Mr. Lobo quantified misappropriated rent revenue relating to the Queenston apartment building to be in the amount of $128,033, consisting of: (i) $24,504 as the difference between rent revenue recorded in the Blue Book and lesser amounts of rent revenue deposited in 563’s bank account and recorded in its financial statements; (ii) $78,522 resulting from occupied units falsely recorded as vacant; and (iii) $25,008 in rent subsidies from Niagara Regional Housing that the Nassifs allegedly misappropriated.

[47] To calculate $78,522 in lost rental revenue relating to false vacancies, Mr. Lobo relied on analysis performed by Ms. Continelli, with the assistance of 563’s outside bookkeeper. That analysis aggregated the rent attributable to units recorded in the Blue Book as being vacant that Ms. Continelli understood were in fact occupied. Her understanding was based principally on the recollection of Ms. Pelletier, who was the superintendent at the relevant time. The units alleged to be falsely recorded as vacant included a unit said to be occupied by workers involved in the construction of the Nassifs’ new residence. That crew of workers was led by Danny Continelli, Mr. Continelli’s nephew.[^2]

[48] The responding report dated January 3, 2019 from Colin Cook (the expert witness called by the Nassifs) challenged Mr. Lobo’s calculation of the revenue shortfall on several bases, including the following:

a. The alleged shortfall from false vacancies was based on unreliable representations from Ms. Pelletier, who was the subject of a police fraud investigation for misappropriating rent payments, a portion of which was recovered in an insurance claim settlement;

b. Mr. Lobo’s calculation of the difference between rent recorded in the Blue Book and the lesser amount of rent revenue reflected in 563’s financial statements was based on the erroneous assumption that Ms. Nassif prepared the Blue Book, which Ms. Pelletier actually authored;

c. Mr. Lobo’s calculation of the alleged rent shortfall did not take into account amounts paid to Ms. Pelletier from cash rent proceeds to reimburse her for repair and maintenance expenses she incurred in day-to-day operations of the Queenston apartment building;[^3] and

d. The Nassifs did not misappropriate the rent subsidy payments from Niagara Region Housing. Those payments were deposited in 563’s bank account and included as rent revenue in 563’s financial statements.

(iii) Mr. Lobo’s revised calculation of reported rent shortfall (2019 report/trial testimony)

[49] After Mr. Lobo received Mr. Cook’s responding report, Mr. Lobo was provided with the partial copy of Diane’s Yellow Book ended in September 2009, which had been recovered from Economical Insurance. In Mr. Lobo’s rebuttal report dated September 26, 2019 (supplemented by his trial testimony), Mr. Lobo revised his calculation of the shortfall in reported rent, increasing the amount by $25,909 from $128,033 to $153,942. As explained further below, the latter amount consisted of (i) $41,335 resulting from comparison of rent revenue recorded in the Yellow Book and lesser amounts of rent revenue deposited in 563’s bank account and recorded in its financial statements, (ii) $78,522 relating to false vacancies, (iii) $25,008 relating to rent subsidy payments, (iv) $9,077 as an adjustment relating air conditioning and parking revenue.

[50] The explanation for the increase in the reported rent shortfall is set out below.

a. Mr. Lobo used the rent revenue recorded in Diane’s Yellow Book (instead of the lower rent amount set out in the Blue Book) to revise his calculation of excess of rent recorded in the rent journal over the lower rent revenue reflected in 563’s financial statements. The rent recorded in the Yellow Book was higher by $16,832 than the rent recorded in the Blue Book, with the result that the difference between the amount recorded in the rent journal and the amount reflected in 563’s financial statements increased from $24,504 to $41,335.

b. Mr. Lobo maintained his position (set out in his first report) that calculation of the rent shortfall should include $78,522 relating to false vacancies. He disputed Mr. Cook’s suggestion that supporting information provided by Ms. Pelletier should be considered unreliable, given that the fraud allegations against her were not subsequently proven or substantiated.

c. Mr. Lobo confirmed that it was correct to include an additional $25,008 in calculating the recorded rent shortfall, representing the amount of the rent subsidy payments from Niagara Regional Housing. He accepted that his prior report was incorrect in suggesting that the Nassifs had directly misappropriated those payments, since the corporate records confirmed that those amounts were payable to 563 and deposited in 563’s bank account. In Mr. Lobo’s second (2019) expert report, he deducted that amount from his calculation of the rent shortfall. However, in his trial testimony, he stated that he was not correct to make that deduction, and that the amount of the rent subsidy payments should be included in calculating the rent shortfall (as stated in his first report), but for a different reason. The rent subsidy payments had been deposited in 563’s bank account but had not been recorded in the Yellow Book or the Blue Book. Mr. Lobo explained that in order to make a proper comparison of rent revenue deposited in 563’s bank account as against the amount that should have been deposited (as reflected in the Yellow Book or the Blue Book), it was necessary to subtract the rent subsidy payments of $25,008 from deposited rent, with the result that the recorded rent shortfall increases by the same amount.

d. On a similar basis, Mr. Lobo increased his calculation of the recorded rent shortfall by an additional $9,077, representing air conditioning and parking revenue for the relevant periods. That amount was deposited in 563’s bank account and included as rent revenue in its financial statements but was not recorded in the Yellow Book or the Blue Book. Mr. Lobo maintained that when determining the rent shortfall, it was necessary for comparison purposes to back the air conditioning and parking revenue out of the rent revenue recorded in 563’s financial statements, thereby increasing the amount of the recorded rent shortfall by the same amount.

(iv) 563’s calculation of reported rent shortfall (closing submissions)

[51] In closing submissions, using Mr. Lobo’s methodology for calculating the reported rent shortfall, the Continellis’ counsel calculated the lower end of the range for misappropriated rent to be $163,884, approximately $10,000 more than the amount indicated in Mr. Lobo’s evidence (being $153,942). The difference relates to additional amounts for lost rent in 563’s 2005 and 2006 fiscal years (comparing the rent revenue disclosed in the Yellow Book with 563’s financial statements for those periods). The results for those fiscal years were not in the review period of Mr. Lobo’s analysis and therefore not included in his calculation of the shortfall in recorded rent.

[52] In closing submissions, the Continellis’ counsel also took the position that the award of damages against the Nassifs should be at the high end of the suggested range, which would include up to $198,091 for misappropriated rent, using market data analysis. The calculation of misappropriated rent on that basis is addressed in the next section for these Reasons for Judgment.

B. Market data analysis

[53] The Continellis’ calculation of the higher end of the damages range for misappropriated rent ($198,091) was based on market data analysis. In Mr. Lobo’s 2018 report, after calculating the shortfall in reported rent to be $128,033 (using his first calculation method), he undertook a market data analysis “in order to further substantiate the quantified loss of $128,033, as noted above” (to quote from his 2018 report). He calculated “Expected Rental Revenue” for the relevant periods (being 563’s four fiscal years ended September 30, 2010 and part of fiscal 2011) by (i) first calculating “Full Occupancy Revenue”, using the rental rates for the apartment units disclosed in the Blue Book, and (ii) adjusting that amount downward to reflect market vacancy rates for St. Catharines for the relevant periods, based on the “Rental Market Report for St. Catharines-Niagara” prepared by Canadian Mortgage and Housing Corporation (CMHC). He then subtracted from that amount the rent revenue disclosed in 563’s financial statements, resulting in an “unexpected shortfall” in rent revenue of $144,517. Mr. Lobo found that shortfall to be confirmatory of his previous conclusion that “the reported revenue included in 563’s financial statements [is] understated” (quoting from his 2018 report).

[54] As described in his 2018 report, Mr. Lobo then performed further market data analysis to calculate the “implied vacancy rate” for the Queenston apartment building for the five years ended September 30, 2011, that is, the vacancy rate necessary to account for the difference between “Full Occupancy Revenue” (as calculated above) and the lower amount of rental revenue disclosed in 563’s financial statements. Mr. Lobo observed that the imputed vacancy rates for the Queenston apartment building were higher in most years than the market vacancy rates for the St. Catharines-Niagara region noted in the CMHC reports, which was not consistent with the consensus view of Ms. Pelletier and other witnesses that the Queenston apartment building generally had a high occupancy rate.

[55] In closing submissions, the Continellis’ counsel argued that the higher recorded rent shortfall that resulted from using market data analysis should form that basis for calculation of misappropriated rental revenue, rather than the lower amount resulting from Mr. Lobo’s first calculation method. In order to calculate the rent shortfall using market data analysis, the Continellis’ counsel started with the “unexpected shortfall” of $144,517 that Mr. Lobo calculated (which covered 563’s four fiscal years from 2007 and 2010 and part of fiscal 2011) and then “extrapolated” that number to include fiscal 2005, 2006 and the balance of 2011 (using for that purpose the average shortfall for fiscal 2007 to 2010 and applying it to the balance of the seven year period). By that calculation, the “unexpected shortfall” of rent revenue that Mr. Lobo calculated increased from $144,517 to $198,091.

[56] I agree with the Continellis’ counsel that the market data analysis Mr. Lobo conducted may have evidentiary value in the calculation of the amount of misappropriated rent, but only to the extent that it is confirmatory (or otherwise) of the recorded rent shortfall calculated by other appropriate methodology. As indicated further below, on the evidence before me, I do not consider it appropriate to use market data analysis as an independent stand-alone basis for calculating misappropriated rent in this case.

[57] Upon review of Mr. Lobo’s reports and his oral evidence, it was clear to me that he used market analysis to test the reliability of the conclusions he reached relating to the recorded rent shortfall (as set out in the summary tables in his reports and modified by his oral testimony), which he calculated using the first methodology outlined in his reports. In my view, the evidence does not support using market data analysis to calculate any recorded rent shortfall in preference to the primary methodology outlined in Mr. Lobo’s evidence. Put another way, market data analysis may be a confirmatory sideshow, but on the evidence in this case, it is not the main event. Market analysis may well be useful in confirming the existence of a recorded rent shortfall, rather than in calculating its amount. In any case, I found counsel’s extrapolation of Mr. Lobo’s market data calculation (to cover a longer period) to be of no assistance, since it veered into speculation rather than being evidence based.

C. Analysis

[58] In closing submissions, the Continellis’ counsel argued that on the evidence, the Nassifs misappropriated rent revenue relating to the Queenston apartments building, thereby breaching their fiduciary duty to 563. According to the Continellis, the court should conclude that the Nassifs improperly retained cash rent payments that should have been deposited to 563’s bank account and also allowed the rent-free occupation of an apartment by a crew working on construction of their personal residence. They tried to cover their tracks by altering or otherwise compromising the paper trail relating to rental payments, including by (i) erasing or altering rent payments set out in the Blue Book to make occupied apartments appear vacant, thereby reducing the aggregate rent revenue recorded in that journal, and (ii) failing to retain Diane’s Yellow Book, which indicated higher aggregate rental revenue than the amounts set out in the Blue Book or deposited in 563’s bank account.

[59] The defence argues that the Continellis have not established that the Nassifs misappropriated rent revenue from 563. They question the reliability of Ms. Pelletier’s evidence, whose recollections relating to specific apartment vacancies were key to the Continellis’ analysis of lost rent revenue from apartments alleged to be falsely recorded as vacant. The Nassifs also argue that the evidence does not otherwise establish that they retained for their own use rent collected from tenants, rather than depositing the payments in 563’s bank account. As well, they deny tampering with the supporting documentary evidence, arguing that there is no evidence that it was Diane or Ned Nassif who altered or erased any entries in Blue Book, as opposed to Ms. Pelletier (the original author) or someone else after the journal was no longer in Ms. Pelletier’s possession.

[60] Considering the evidence as a whole, I have concluded that on a balance of probabilities, the Nassifs misappropriated rent revenue from payments made by tenants of the Queenston apartment building, thereby breaching the Nassifs’ fiduciary duty to 563. As officers and (in Mr. Nassif’s case) a director of 563, the Nassifs were required to (a) act honestly and in good faith with a view to the 563’s best interests, and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances: OBCA, ss. 134(1)(a) and (b). They satisfied neither aspect of their duty under s. 134(1).

[61] Mr. Lobo’s evidence (relying on Ms. Nassif’s acknowledgement that she was the author of the Yellow Book rent journal) indicates a shortfall between the rent payments recorded in the Yellow Book and the rent payments deposited in 563’s bank account. The suggestion that Ms. Pelletier is responsible for that shortfall rather than the Nassifs does not stand up to scrutiny. On Ms. Nassif’s evidence, the rent amounts recorded in the Yellow Book were the amounts that Ms. Pelletier turned over to Ms. Nassif. Ms. Pelletier’s opportunity to misappropriate rent payments would have come before turning the payments over to Ms. Nassif, not after. The Nassifs also sought to explain the rent shortfall as being (at least in part) the result of payments out of cash rent receipts that Ms. Nassif made to Ms. Pelletier to reimburse her for maintenance expenses she incurred. The evidence indicates otherwise. Such amounts were in fact included in 563’s financial statements as part of rent revenue and also recorded as a maintenance expense, the latter being an offsetting entry in the calculation of net income.

[62] Although the evidence is circumstantial in nature, the difference between recorded rent (as set out in Diane’s Yellow Book) and the lower amount of deposited rent supports the conclusion that the Nassifs misappropriated the undeposited rent amount. I see no other reasonable explanation. As part of the Nassifs’ financial management responsibility, Ms. Nassif was responsible for depositing rent payments into 563’s bank account. Not all the payments made it into the account, evidencing their failure to act honestly and in good faith with a view to 563’s best interests, as required by s. 134(1)(a). Therefore, the Nassifs bear responsibility for the rent shortfall.

[63] As well, I have concluded that the Nassifs failed to satisfy the requirement in s. 134(1)(b) to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. The most obvious aspect of that breach of duty was their failure to maintain proper records relating to the rent payments received from the tenants of the Queenston apartment building. Mr. Postma’s evidence indicated that records of that nature should be retained for at least six years, in the exercise of reasonable prudence. Ms. Nassif’s evidence was that she threw out or otherwise lost the Yellow Book during the Nassifs’ move to a new residence in or about December 2010. That journal would have included her record of rent payments for the fiscal year then in progress as well as for prior periods. The Continellis’ counsel suggests a sinister motive for discarding the Yellow Book (to eliminate evidence of defalcation), but in any event, I am satisfied that the failure to preserve those records is not consistent with the Nassifs’ obligation under s. 134(1)(b) to exercise reasonable care, diligence and skill.

D. Calculation of misappropriated rent

(i) Difference between rent recorded in Yellow Book and financial statements

[64] Relying on Mr. Lobo’s methodology for the calculation of the rent shortfall (to the extent indicated below), I have concluded the amount of the amount of misappropriated rent that the Nassifs should repay is $51,000. That amount includes the following components:

a. $41,335, being the difference between the rent recorded in the Yellow Book and the rent deposit in 563’s bank account reflected in 563’s financial statements for the four fiscal years ended September 30, 2007 to 2010; and

b. $9,727, being the differential amount referred to in the previous subparagraph for the 2005 and 2006 fiscal years.

[65] Those two numbers add to $51,062, rounded to $51,000. In arriving at that amount, I accept Mr. Lobo’s evidence that the amount of the misappropriated rent should properly include the difference between the rent recorded in the Yellow Book and the rent reflected in 563’s financial statements. That differential amount is $41,335 for the four fiscal years ended September 30, 2007 to 2010, the period covered by Mr. Lobo’s evidence. I also agree that the amount should include a further $9,727, applying the same methodology with respect to the 2005 and 2006 fiscal years (to the extent the relevant financial data is available). However, as explained below, I would not include additional amounts relating to false vacancies ($78,522), rent subsidy payments ($25,008) or air conditioning and parking revenue ($9,077).

(ii) False vacancies

[66] The Continellis’ counsel also argued that the amount of misappropriated rent should include an additional $78,522 relating to apartments falsely recorded as vacant. That amount was included as part of the calculation in Mr. Lobo’s first expert report, which he confirmed in his trial testimony. For the reasons below, I have decided not to include that amount in calculating misappropriated rent.

[67] As previously noted, to calculate lost rental revenue relating to false vacancies, Mr. Lobo relied on analysis performed by Ms. Continelli, with the assistance of 563’s outside bookkeeper. That analysis aggregated the rent attributable to units recorded in the Blue Book as being vacant that Ms. Continelli understood were in fact occupied. Her understanding was based principally on the recollection of Ms. Pelletier, who was the superintendent at the relevant times. The units alleged to be falsely recorded as vacant included a unit said to be occupied by workers involved in the construction of the Nassifs’ new residence. That crew of workers was led by Danny Continelli, Mr. Continelli’s nephew.

[68] While I have no particular issue with the methodology involved in calculating false vacancies, I have significant concerns about the adequacy and reliability of the underlying evidence supporting the calculation in Mr. Lobo’s report.

[69] I will first address the evidence of Ms. Pelletier. As is apparent from Mr. Lobo’s first expert report, Ms. Pelletier’s recollections as to specific apartment vacancies were key to the Continellis’ analysis of lost rent revenue from apartments alleged to falsely recorded as vacant. In her trial testimony, Ms. Pelletier confirmed (in common with other witnesses) that the Queenston apartment building historically had a low vacancy rate. She also answered questions about apartments shown in her Blue Book rental journal as being vacant, some of which she recalled as being occupied at the relevant time. She denied making changes that had evidently been made to entries in the Blue Book, including erasures and other alterations.

[70] In the responding expert report of Mr. Cook (who testified as part of the Nassifs’ case), he questioned the reliability of Ms. Pelletier’s evidence, given the police investigation of the Nassifs’ allegation that Ms. Pelletier misappropriated funds from 563 (partially recovered in the settlement of an insurance claim). Since the evidence suggests that the police investigation did not extend beyond the initial complaint, I do not consider the unpursued investigation, in itself, to justify the conclusion that Ms. Pelletier’s evidence was not credible or reliable. In her testimony, Ms. Pelletier appeared to be doing her best to provide her recollection of events (that occurred over ten years previously) and answer questions on the relevant documentary evidence. However, I was troubled by the gaps in her memory and the extent to which she seemed to be reconstructing events she no longer actually recalled. Taking her evidence as a whole, I do not consider her evidence as providing a reliable basis for supporting the conclusion that the Nassifs misappropriated rent revenue with respect to units falsely recorded as vacant.

[71] Although not referred to in Mr. Lobo’s evidence, one aspect of 563’s claim for lost rent due to false vacancies was the alleged rent-free occupation of an apartment by workers involved in the construction of the Nassifs’ personal residence. The significance of that aspect of the claim, as well as the evidentiary basis for it, may best be described as muddled. Danny Continelli (Anthony Continelli’s nephew) was originally on the 563’s witness list, but the court was advised that he declined to testify. There was no request to enforce his attendance. During Mr. Nassif’s cross-examination, the Continellis’ counsel suggested to Mr. Nassif that Danny Continelli’s crew occupied an apartment rent-free for a period of five-month starting in September 2009, based on a handwritten statement by Stephane Hébert (Ms. Pelletier’s successor as superintendent), who was not himself called as a witness. The Blue Book recorded that the rent for that apartment had previously been $916 per month, implying a potential rental loss of less than $5,000. In closing submissions, the Continellis’ counsel suggested that during Mr. Nassif’s cross-examination, he acknowledged the accuracy of Mr. Hébert’s unsworn statement, but it is fair to say that Mr. Nassif’s response was less than a picture of clarity (in common with other aspects of his testimony). In all the circumstances, including the relative insignificant of that aspect of the false vacancies claim, the evidence is not sufficient to support that claim.

(iii) Rent subsidies/air conditioning & parking revenue

[72] In fixing the amount of the rent shortfall, I am not including the amount of the rent subsidy payments included in rent revenue in the financial statements. To justify including that amount in calculating the rent shortfall, the Continellis’ counsel relied on Mr. Lobo’s testimony that in order to make a proper comparison of rent revenue deposited in 563’s bank account as against the amount that should have been deposited (as reflected in the Yellow Book), it was necessary to subtract the rent subsidy payments of $25,008 from deposited rent, with the result that the recorded rent shortfall increases by the same amount. That testimony was the third iteration of Mr. Lobo’s rationale for either including that amount in the rent shortfall (the result in his first expert report and his trial testimony) or excluding that amount for the rent shortfall (the result in his second expert report). Given the moving target provided in Mr. Lobo’s evidence relating to the treatment of the rent subsidy payments, I do not consider his evidence to provide a reliable basis for including the amount of those payments in calculating the rent shortfall.

[73] I have reached the same conclusion with respect to the air conditioning and parking revenue in the amount of $9,077. The inclusion of that amount in calculating the rent shortfall was a late-breaking development raised virtually on the eve of trial, as set out in Mr. Lobo’s email dated February 20, 2020. The issue was not addressed in either of Mr. Lobo’s expert reports. The rationale that Mr. Lobo provided at trial for including that amount in the rent shortfall was essentially the same as the rationale for including the amount of the rent subsidy payments, which I have not accepted. In these circumstances, I am not prepared to rely on Mr. Lobo’s evidence to include the amount of the air conditioning and parking revenue in calculating the rent shortfall.

[74] Accordingly, based on the methodology set out in Mr. Lobo’s evidence relating to calculation of the shortfall in recorded rent revenue to the extent described above, I have concluded that the Nassifs are liable to 563 for misappropriated rent in the amount of $51,000.

V. Insurance claim proceeds

[75] Are the Nassifs liable to 563 for misappropriating the proceeds of an insurance claim relating to the Merritt plaza?

[76] Mr. Nassif received $24,604.57 from 563 by a cheque dated January 2011. The signatures on that cheque were those of Mr. Nassif and Mr. Continelli. The amount represented the proceeds of a claim to 563’s insurance company with respect to a water leak that had occurred at the Merritt plaza. The leak damaged a walk-in freezer unit located in a plaza unit previously occupied by a dollar store business operated by Mr. Nassif. The walk-in freezer remained in the plaza unit after Mr. Nassif was no longer occupying it. The freezer unit was no longer used for that purpose and had apparently been subsequently used for storage.

[77] By letter dated November 22, 2011, the Continellis’ lawyer raised serious concerns about that and other 563 cheques payable to Mr. Nassif that were written and cashed in 2011 while the Nassifs were still responsible for the properties’ financial management. Consistent with Mr. Continelli’s testimony, the November 2011 letter indicated Mr. Continelli’s position that Mr. Nassiff should repay the amount of the insurance claim to 563 since (i) Mr. Continelli had no prior knowledge of and had not approved the payment of any amount to Mr. Nassif relating to the insurance claim, and (ii) in making that payment, Mr. Nassif had improperly used a cheque that Mr. Continelli had pre-signed for use in paying expenses.

[78] Mr. Nassif claims that the insurance proceeds were properly paid to him. He says that he was the owner of the freezer unit and testified that Mr. Continelli knew about and approved payment of the proceeds to Mr. Nassif.

[79] As set out further below, I have concluded that Mr. Nassif misappropriated the insurance claim proceeds of $24,604.57. That amount should therefore be included in the amount payable to 563 with respect to the Nassifs’ breach of fiduciary duty.

[80] The evidence indicates that the insurance claim for the damage to the walk-in freezer unit was made under 563’s insurance policy, the premiums for which would have been paid in the normal course with corporate funds. There was no credible evidence that Mr. Nassif was intended to benefit personally from the proceeds of a claim under that policy, other than indirectly in his capacity as a 563 shareholder.

[81] To the extent necessary, I would resolve in Mr. Continelli’s favour any conflict between the parties’ evidence relating to the insurance proceeds. Among other things, the cheque in question was one of several 563 cheques payable to Mr. Nassif that were written in the period after the Continellis advised the Nassifs in December 2010 of their desire to wind up 563 and before the Continellis assumed financial management of the properties. Those cheques represent a departure from the intended use of pre-signed cheques provided as a convenience (however unwise) for the payment of day-to-day expenses. My acceptance of Mr. Continelli’s version of events over Mr. Nassif’s is also consistent with my general assessment of the relative reliability of their respective testimony.

[82] Accordingly, the amount awarded to 563 for breach of fiduciary duty shall include the misappropriated insurance claim proceeds of $24,604.57.

VI. Payments to the Nassifs’ son

[83] Are the Nassifs liable to 563 for payments made to a business run by the Nassifs’ son?

[84] After taking over financial management of the properties, the Continellis raised concerns about a number of expenses paid by 563 that they allege were improper. In closing submissions, the Continellis’ counsel indicated that 563 is seeking compensation only for payments totalling $12,252 made to Trillium Building Group, a business operated by the Nassifs’ son, Frankie Nassif. There were ten such payments in the three fiscal years ended September 30, 2008 to 2010, as follows: (a) one payment of $1,354 in fiscal 2008, (b) four payments totaling $4,708 in fiscal 2009, and (c) five payments totalling $6,190 in fiscal 2010.

[85] During the Nassifs’ examination for discovery in December 2014, the Continellis’ counsel sought invoices to support those payments and received an undertaking relating to their production. By letter dated March 15, 2015, the Nassifs’ counsel advised there were no invoices, but indicated in general that the charges related to Trillium’s management of the properties during the winter months when both the Nassifs and the Continellis were in Arizona. In a letter dated June 25, 2015, the Nassifs’ counsel further advised that the Nassifs “do not have any ability to get any copies of the Trillium invoices.” However, in a further letter dated July 10, 2015, the Nassifs’ counsel provided a series of Trillium invoices. The amounts of five of those invoices (totalling $7,550) correspond to some of the questioned payments. Four of those five invoices (totalling $7,150) appear to relate to management of the properties in the winter months of fiscal 2007 to 2010. The fifth of those invoices ($400) lists a series of smaller amounts apparently for expense reimbursement. A further invoice and receipts were also provided that did not appear to be the subject of dispute.

[86] In closing submissions, the Continellis’ counsel argued that the Nassifs should reimburse 563 for the total amount of the questioned payments ($12,252), describing them as improper and undocumented. He called into question the authenticity of the invoices, given their late production after initial indications they did not exist or were not available.

[87] There is no issue that there was good reason to question the adequacy of the documentary support for the payments to Trillium. The timing of their production was suspect. Some of them, on their face, related to services described to occur long before the invoices’ date. Frankie Nassif testified that he typed the invoices himself, but his mother acknowledged in her testimony that she may have assisted him.

[88] All that being said, I am not satisfied that 563 has established that the Nassifs misappropriated 563 funds by making improper payments to their son’s business, Trillium. The questioned payments were individually of relatively small amounts over an extended period. While the documentary support for the questioned payments left something to be desired, I am satisfied on the evidence that Trillium performed legitimate services for 563, including management services during the winter months. To the extent that both Nassifs and the Continellis were away for extended periods, I consider it is fair to conclude that the properties did not manage themselves during that time.

VII. Unequal reduction of shareholder loan

[89] Are the Nassifs liable to 563 with respect to excess amounts paid to Mr. Nassif that reduced his shareholder loan to 563?

[90] Mr. Postma indicated in his testimony that when preparing 563’s financial statements each year, he would provide advice to Mr. Continelli and Mr. Nassif as to the extent to which 563’s income should be allocated to them (whether by way of bonus or other basis), taking into account tax and other implications. To the extent income allocated to them was left in 563 and not actually paid out to them, it was reflected in 563’s financial statements as a shareholder loan from each of them to 563. The total amount of the shareholder loans to 563 was reflected on 563’s balance sheet each year under the line item “Due to shareholders”. The relevant note to the financial statements describes the terms of the shareholder loans as “non-interest bearing, no specific terms of repayment”. The amounts due to each of them as a shareholder loan were set out each year in 563’s general ledger.

[91] The evidence also indicated that Mr. Continelli and Mr. Nassif would withdraw funds from 563 from time to time during the year, thereby reducing the amount of their respective shareholder loans to 563. However, Mr. Continelli’s position was that the amount of the shareholders loans historically remained in approximate balance, as agreed between them. For example, as set out in 563’s general ledger for the fiscal year ended September 30, 2007, the balance of their respective shareholder loans to 563 at the end of the fiscal stood at $248,462 for Mr. Nassif and $247,688 for Mr. Continelli. The corresponding amounts at September 30, 2008 were $287,772 for Mr. Nassif and $284,950 for Mr. Continelli.

[92] It is common ground that during the fiscal year ended September 30, 2009, Mr. Nassif withdrew funds from 563 totalling approximately $225,000. Those payments were reflected in 563’s books as a reduction in the amount of Mr. Nassif’s shareholder loan to 563. Mr. Continelli did not make equivalent withdrawals of 563 funds. As a result, at the end of fiscal 2009, the amount of Mr. Continelli’s shareholder loan to 563 was approximately $225,000 higher than the amount of Mr. Nassif’s shareholder loan. Once the payments to Mr. Nassif came to Mr. Continelli’s attention, Mr. Continelli took the position (through counsel) that he had been providing excess financing to 563, to his financial disadvantage. The amounts of their respective shareholder loans were subsequently brought into balance (through withdrawals by Mr. Continelli and the return of funds by Mr. Nassif) by early in 2012.

[93] Mr. Continelli denied knowing or approving Mr. Nassif’s excess fund withdrawals. In closing submissions, the Continellis’ counsel argued that Mr. Nassif breached his fiduciary duty to 563 by his unequal withdrawal of funds in reduction of his shareholder loan to 563. According to the Continellis’ counsel, 563 (and indirectly, Mr. Continelli) suffered real loss as a result of the excess withdrawal of funds, since 563 was thereby denied the opportunity to use the additional funds to increase its interest-earning investments or reduce its outstanding debt.

[94] To calculate the amount of the resulting loss, the Continellis relied on the evidence of Mr. Lobo, who calculated 563’s economic loss resulting from the unequal withdrawal of funds by reference to the opportunity cost of not having those funds available for investment. Mr. Lobo calculated that loss to be in the range of $11,444 to $36,842, with a midpoint of $24,145. The lower end of the range was based on a conservative strategy of investment in government bonds. The higher end was based on a more aggressive strategy of investment in Canadian equities. The Continellis say that the amount should be set at the midpoint amount of $24,145 as being a reasonable determination of 563’s economic loss relating to the unequal withdrawal of funds from 563.

[95] The Nassifs say that the 563 has not established any entitlement to compensation relating the Mr. Nassif’s unequal withdrawals of funds from 563. Mr. Nassif denied that there was an established pattern of keeping the shareholder loans to 563 in approximate balance. He also stated that Mr. Continelli was aware that Mr. Nassif was withdrawing 563 funds during fiscal 2009 to assist in funding the construction costs for the Nassifs’ new residence, and that Mr. Continelli had no objection to his doing so. In his testimony in chief, Mr. Postma initially provided some support for Mr. Nassif’s position relating to the fund withdrawals in fiscal 2009, stating that Mr. Continelli would have been aware the Nassifs were building a new residence and would have been aware of the withdrawals, being a required signatory for 563 cheques. Mr. Postma also had no recollection of Mr. Continelli’s objecting to the fund withdrawals at the time the 2009 financial statements were being finalized. He also testified that 563 had not suffered any financial strain as a result of Mr. Nassif’s fund withdrawals. In cross-examination, however, Mr. Postma agreed that he had not been aware that Mr. Continelli provided pre-signed cheques to Mr. Nassif for use in making payments from 563’s bank account, a practice he would not have recommended. He also stated (in his evidence in chief) that he had no recollection of Mr. Continelli at other times taking unequal advances of 563 funds beyond those taken by Mr. Nassif.

[96] On the evidence, I have concluded that Mr. Nassif breached his fiduciary duty to 563 in taking unequal advances of shareholder funds by way of reduction of his shareholder loan to 563. Contrary to Mr. Nassif’s testimony, I accept Mr. Continelli’s evidence that he did not know of or approve of the withdrawal and objected to them when they came to his attention. He was no doubt unwise to provide pre-signed cheques to Mr. Nassif but doing so did not provide Mr. Nassif with licence to use the cheques to 563’s disadvantage. The fact that 563 did not suffer any financial strain as a result of the withdrawals is not a relevant consideration. The issue was whether 563 suffered any resulting economic loss. On the evidence, it did.

[97] Relying on Mr. Lobo’s methodology for calculation of the resulting economic loss, I would fix the amount of the loss at $11,444, the lower end of the indicated range. In order to establish an amount higher in the range, I would have expected further evidence relating to why it would be reasonable to do so in all the circumstances.

[98] Accordingly, the amount awarded to 563 for breach of fiduciary duty shall include $11,444 to compensate 563 for excess amounts paid to Mr. Nassif that reduced his shareholder loan to 563. Together with the amount being awarded with respect to misappropriated rent ($51,000) and the insurance claim proceeds ($24,604.57), the total amount of compensatory damages being awarded to 563 is $87,048.57.

VIII. Punitive damages

[99] Should the Nassifs be ordered to pay punitive damages?

[100] Mr. Continelli seeks $50,000 in punitive damages from the Nassifs. In a derivative action, the court has the authority to award an amount for punitive damages to a shareholder of the corporation (rather than to the corporation), even though the shareholder is not a party to the action: see OBCA, s. 247.

[101] The Continellis’ counsel argues that it is open to the court to order punitive damages for breach of fiduciary duty: see Wonsch Construction Co. v. Danzig Enterprises Ltd. (1990), 1990 CanLII 7004 (ON CA), 1 O.R. (3d) 382 (C.A.), at p. 23. He submits such an award is appropriate where the actions of the fiduciary are purposefully repugnant to the beneficiary’s best interests, particularly where the impugned activity is motivated by the fiduciary’s self-interest: see Norberg v. Wynrib, 1992 CanLII 65 (SCC), [1992] 2 S.C.R. 226, at para. 111; Waxman v. Waxman (2004), 2004 CanLII 39040 (ON CA), 186 O.A.C. 201 (C.A.), at para. 586.

[102] An award of punitive (also called exemplary damages), unlike other forms of damages, is not compensatory in nature. On an exceptional basis, the court may award punitive damages where compensatory damages (which are punitive to some extent) are insufficient to accomplish the objectives of retribution, deterrence and denunciation, ordinarily the purview of criminal or quasi-criminal proceedings. The discretion to award punitive should be most cautiously exercised. Punitive damages are imposed only if there has been high-handed, malicious, arbitrary or highly reprehensible misconduct that departs to a marked degree from ordinary standards of decent behaviour: see Whiten v. Pilot Insurance Co., 2002 SCC 18, [2002] 1 S.C.R. 595, at para. 94.

[103] In closing submissions, the Continellis’ counsel did not persuasively articulate any sufficient basis for the conclusion that the Nassifs’ conduct (while amounting to a breach of fiduciary duty) met the high standard required for an award of punitive damages. On the evidence, I am not persuaded that such an award is justified in this case. I see no sufficient basis for concluding that there is any need for punitive action against the Nassifs beyond that already imposed by the outcome of these proceedings and the award of compensatory damages against them.

[104] As well, as the Nassifs’ counsel observed, there is no specific claim for punitive or exemplary damages in 563’s statement of claim. In Whiten, at paras. 84-88 and 94, the Supreme Court stresses the importance of proper pleading of punitive damages as a matter of fairness in order to provide the defence with notice of the case to be met. Failure to specifically plead punitive damages, while not necessarily fatal, is a relevant consideration when determining whether punitive damages should be awarded.

IX. Third party action

[105] Are the Continellis liable to the Nassifs for any amount in the third party action?

[106] In the third party claim, the Nassifs raise various claims against the Continellis for breach of fiduciary duty as well as breach of the duty of honest performance of their contractual obligation to the Nassifs to take over the properties’ financial management after ten years. Notably, their claims relate to (i) the Continellis’ rent-free occupation of a residential unit in the Merritt plaza for a two-year period, (ii) the rent-free occupation of commercial space in the Merritt plaza by the Continellis’ son and daughter for a two-year period, and (iii) the improper expenditure of 563 funds after the Continellis took over the properties’ financial management, including excess amounts for repair and maintenance of the Queenston apartment building and unnecessary expenditures for bookkeeping and other services.

[107] Simply put, the evidence does not substantiate these claims.

[108] It was not clear to me what the connection was between the Nassifs’ claims against the Continellis and the alleged agreement that the Continellis would take over the properties’ management after ten years, but in any case, the evidence does not support the existence of such an agreement. Did the first ten years start in 1984 (when the Queenston apartment building was completed) or 1987 (upon completion of the Merritt plaza)? Even if the latter, why did the Nassifs take no action to enforce the agreement until 2014, some seven years after the end of the second ten-year period, during which the Continellis were supposed to be managing the properties? In all the circumstances, I accept the Continellis’ evidence that there was no such agreement, in preference to the Nassifs’ contrary evidence.

[109] Addressing the rent-free occupation by the Continellis and their children of the residential and commercial units at the Merritt plaza, while the relevant time periods were not clear from the evidence, they apparently included the time during which the Nassifs were responsible for the properties’ financial management. There was no evidence of concealment on the Continellis’ part and no suggestion that the Nassifs were not aware that rent was not being paid (if that was the case) or that the Nassifs raised any objection. As well, no evidence was led to suggest that the units would have been occupied by other rent-paying tenants if they had not been occupied by the Continellis or their children.

[110] As well, the evidence did not support the Nassifs’ allegations of improper expenditures by the Continellis during the time they were responsible for properties’ financial management starting in October 2011 until their subsequent sale. I accept the Continellis’ evidence that they appropriately expended corporate funds to put them in shape for sale. The evidence does not support a contrary determination. On the evidence, the properties were sold at favourable prices compared to prior assessments of value. I am also satisfied that there were no improprieties with respect to payments to third-party service providers, including for bookkeeping and paralegal services (the latter relating to tenancy management at the Queenston apartment building).

[111] The Continellis’ counsel also raised a procedural issue relating to the third party action that I will briefly address. He argued that the third party action is not properly constituted, since the Nassifs in their personal capacity cannot advance claims for alleged wrongs against 563, an non-party to the third party action. Given the findings I have made relating to the substantive issues in the third party action, it is unnecessary for me to determine that issue.

[112] That being said, there appears to be merit to counsel’s position. In my view, it would have been appropriate for the Nassifs to pursue those claims in a derivative action on 563’s behalf against the Continellis, after seeking the court’s leave to do so. However, on the evidence before me, the result would have been the same, that is, dismissal of the action.

[113] Accordingly, the Nassifs’ third party action is dismissed.

X. Disposition

[114] Judgment will issue as follows:

a. In the derivative action, Ned Nadime Nassif and Diane Nassif shall pay $87,048.57 to 563 in damages for breach of fiduciary duty;

b. The Nassifs’ third party action against Anthony Continelli and Grace Continelli is dismissed; and

c. If not settled between the parties, costs will be determined following written submissions.

[115] If the parties are unable agree on costs, each side may serve and file brief written costs submissions (not to exceed three pages) together with a bill of costs within 21 days. Each side may respond by brief written submissions within a further seven days. If no submissions are received within the specified timeframe, the parties will be deemed to have settled costs.

The Honourable Mr. Justice R. A. Lococo

Released: August 3, 2021

[^1]: By way of apparent exception, 563’s 2009 financial statements indicate that Mr. Nassif received property management fees totaling $8,000 in the financial year ended September 30, 2009.

[^2]: The fact that Anthony Continelli’s nephew provided business services for the Nassifs personally was indicative of the interrelationships between the Continelli and Nassif families and their business interests, referred to elsewhere in these reasons.

[^3]: During Mr. Cook’s cross-examination, he modified his position, agreeing that the amounts paid in cash to Ms. Pelletier to reimburse her for maintenance expenses would not form part of the alleged rent shortfall. The evidence indicated that the amounts paid in cash to Ms. Pelletier were included in 563’s financial statements as rent revenue and also recorded as a maintenance expense, the latter being an offsetting entry in the calculation of net income.