COURT FILE NO.: CV-19-81852
DATE: 2021/09/17
COURT OF ONTARIO,
SUPERIOR COURT OF JUSTICE
RE: MICHEL ABBOUD, HANAN ABBOUD, CHARBEL ABBOUD,
SAMER ABBOUD and YVONNE ABBOUD, Plaintiffs
AND:
DIRK BOUWER, PERLEY-ROBERTSON, HILL & MCDOUGALL LLP,
JOSEPH TIMOTHY MCCUNN, SEANN POLI, LIVEWELL FOODS CANADA INC., ARTIVA INC. and EUREKA 93 INC., Defendants
BEFORE: Regional Senior Justice Calum MacLeod
COUNSEL: Shawn J. O’Connor for the defendants S. Poli & J.T. McCunn (Moving Parties)
Richard J. Bosada, for the plaintiffs (Responding Parties)
Kirsten Crain and Genevieve Fauteaux, for the defendant lawyers
HEARD: June 24, 2021
REASONS FOR DECISION
Introduction
[1] This is a motion to strike the claim against the defendants Sean Poli and Joseph Timothy McCunn (the director defendants). Although the notice of motion also refers to lack of particulars, it is primarily a motion under Rule 21.01 to strike the pleading on the ground that it discloses no reasonable cause of action.[^1]
[2] Such a motion is to be determined on the face of the pleadings without delving into the evidence. Assuming the allegations can be proven, the court must assess whether the action, as structured, discloses a cause of action with a reasonable chance of success. If there is no reasonable prospect of liability for these defendants on this pleading, the motion should be granted.[^2]
[3] The action itself arises from the sale of a family farm and the inability of the purchaser to pay the full amount of the outstanding purchase money. The land was originally owned by the Abbouds and is now owned by Artiva Inc. Much of the purchase price was to be paid over time, but the debt has now been extinguished or reduced by subsequent insolvency proceedings.[^3] As a consequence of those insolvency proceedings, the action against the corporate defendants is stayed, but the plaintiffs wish to continue the action against the two directors and officers. There is also a solicitor’s negligence claim, but that is not the subject of this motion.
[4] The moving party defendants argue that the statement of claim is insufficient to make out a claim against them independent of a claim against the corporations. They argue that this is simply a breach of contract action dressed up as a claim against the directors and officers.
[5] The plaintiff has attempted to respond to the motion and to an outstanding demand for particulars by amending its pleading. This step was taken on May 26, 2021, but it is the position of the moving parties that the amended pleading still falls short.
[6] As I will discuss, I am of the view that the amended pleading is sufficient to survive the motion.
Background
[7] According to the pleading, the Abbouds operated a cucumber farm on Ramseyville Road in the City of Ottawa for 26 years. They owned the land through two numbered companies. In 2015 the plaintiffs sold the shares in those corporations to a predecessor of the defendant, LiveWell, which intended to establish a facility for cultivation of legal cannabis.
[8] The purchase price was $13 million with $2.5 million to be paid on closing and the balance to be paid by assumption of certain farm debt and a secured promissory note. Some of the purchase debt was also convertible into shares. In 2017, the agreement was amended to reduce the purchase price by $2 million and to alter the mechanism for paying the balance of the purchase money. Instead of a secured promissory note, the outstanding amount of over $6 million was to be paid by issuing convertible or redeemable preference shares of LiveWell and by paying outstanding legal fees to the plaintiffs’ lawyers.
[9] The plaintiffs allege the amendments to the agreement were misrepresented to be formalities and not a substantive change. They allege the directors acted in collusion with the plaintiff’s own lawyer who was concerned to secure his fees. They allege that whereas they were led to believe they would receive the purchase funds in cash, the effect of these changes was to eliminate their secured position. They were left holding preference shares which might be redeemed only if LiveWell chose to do so and was in a position to buy back the shares.
[10] LiveWell and Artiva were part of a corporate network controlled by the corporation now known as Eureka 93 Inc. This was part of a plan to establish an integrated North American health product enterprise focused on the cultivation and sale of legal cannabis and cannabis products. In aid of that goal, the various corporations took on substantial debt. Eureka 93 pledged the assets of LiveWell and Artiva including the Ramseyville Road farmland. In 2019, the parent corporation borrowed $15 million from Dominion Capital LLC, but none of those funds were used to redeem the plaintiffs’ preference shares or to pay the balance of the purchase price.
[11] This action was commenced on October 31, 2019 by Notice of Action and the original statement of claim was dated December 2, 2019. In February of 2020, each of the corporate defendants filed Notices of Intention to Make a Proposal under the Bankruptcy and Insolvency Act.[^4] The ultimate result of the insolvency proceedings has been the bankruptcy of Eureka 93 and the amalgamation and restructuring of Artiva, which is currently working through a proposal. The debt for the purchase of the land was extinguished and the preference shares are worthless.[^5]
[12] Coincidentally, I was the judge supervising the insolvency proceedings. The final order approving the restructuring and proposal permitted this action to continue against the directors but did not in any way deal with the question that is now before the court. The insolvency proceedings are a matter of public record and may be accessed on the Deloite website.[^6]
The law
[13] The purpose of incorporation is to limit liability and to establish a distinct legal personality with its own rights and obligations. Consequently, shareholders, officers and directors of corporations will not generally be liable for corporate debts. On the other hand, simply being an officer or director of a corporation does not insulate an individual from tort liability if the individual has a duty of care to the plaintiff and is otherwise liable as a tortfeasor.[^7]
[14] In general, officers and directors will not be personally liable for contractual or other debt obligations of the corporation or for torts committed by others for which the corporation is vicariously liable. Officers and directors will be liable for independent actionable acts committed by them even if the corporation is also liable.[^8]
[15] Statutes impose personal liability in certain circumstances. One such circumstance is the personal liability of directors for unpaid wages of corporate employees under circumstances outlined in s.119 of the Act. Another is the possibility of personal liability if the court finds that the actions of the director or officer constitute “oppression” pursuant to s. 241 of the Act.
[16] Section 241 provides for broad remedial powers to rectify an act of oppression if the court is satisfied that the powers of the directors or the affairs of the corporation have been exercised in a manner that is “oppressive or unfairly prejudicial to or that unfairly disregards the interests” of a complainant. The operative language is as follows:
241 (1) A complainant may apply to a court for an order under this section.
(2) If, on an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates
(a) any act or omission of the corporation or any of its affiliates effects a result,
(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or
(c) the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, the court may make an order to rectify the matters complained of.
[17] The powers of the court, once the court has found that oppression has occurred, are sweeping and are set out in subsection (3). One of those potential orders is to make an order for compensation pursuant to subsection (3) (j). It is under this provision that it is possible for the court to award damages against officers or directors in appropriate circumstances. Such a remedy is not automatic and requires certain prerequisite findings of fact. It follows that the prerequisite facts must be specifically pleaded.
[18] As recently affirmed by the Supreme Court of Canada, the leading case on the question of when an order for compensation under this section may properly lie against the directors of a corporation personally remains the 1998 Budd v. Gentra decision of the Ontario Court of Appeal.[^9]
[19] As described in Gentra, the oppression remedy in s. 241 of the Canada Business Corporations Act, while equitable in nature, is a statutory remedy that “takes a different approach to assigning responsibility for corporate conduct than does the common law”. The court “must first determine that the conduct of the corporation towards the complainant is oppressive and then may consider whether a director or officer should be required to rectify that oppression personally”. A monetary remedy against an officer or director may be appropriate if “that director or officer is implicated in the conduct said to constitute the oppression and if, in all of the circumstances, rectification of the harm done by the oppressive conduct is appropriately made by an order requiring the director or officer to personally compensate the aggrieved parties”.[^10]
[20] With that, we can turn to the pleading at hand.
The pleading and the amended pleading
[21] Although the plaintiffs assert in their factum that the only claim they are asserting is “oppression”, the statement of claim alleges misrepresentation. It is worth quoting the precise words of the paragraphs aimed at the director defendants.
[22] Under the heading of “Misrepresentation”, paragraphs 24 and 25 of the original and the amended claim read as follows:
The Plaintiffs state that the Corporate Defendants, the Director Defendants and the Lawyer Defendants misrepresented the contents and the effect of the Addendums, thereby causing the Plaintiffs to rely on the said misrepresentations to their detriment. The Plaintiffs state that the Director Defendants, the Corporate Defendants and the Lawyer Defendants represented to them that the Addendums were mere formalities and did not alter their original agreement as captured in the SPA.
The Plaintiffs state that the Director Defendants colluded together and with Bouwer to ensure that the Plaintiffs signed the Addendums to the Plaintiffs’ detriment and to the unfair advantage of the Corporate Defendants and Director Defendants.
[23] Under the heading of “Oppression” the amended statement of claim contains the following:
Both Director Defendants were directors and/or officers and shareholders of LiveWell, Artiva and Eureka.
After the acquisition of the Properties and the signing of the SPA, the Corporate Defendants, controlled by the Director Defendants, sought financing. The Director Defendants wanted to offer the Properties as security to potential investors. However, the SPA provided for a Vendor Take Back to the Plaintiffs' benefit which made the Properties less appealing to potential investors.
In or about the fall of 2017, the Director Defendants therefore presented Addendums removing the Vendor Take Back provision and replacing it with preference shares redeemable at the sole discretion of LiveWell.
The Plaintiffs plead that, both Director Defendants, with the aim of inducing the Plaintiffs into signing the Addendums:
a. Misrepresented the contents of the Addendums to the Plaintiffs by claiming that they were mere formalities which did not alter their original agreement as captured in the SPA;
b. Colluded with Bouwer, who was acting for the Plaintiffs, to ensure that the Plaintiffs signed the Addendums; and,
c. Made numerous promises to the Plaintiffs which induced the Plaintiffs into signing the Addendums, including promising them that they would receive the balance of the purchase price in liquidated cash by December 2019;
After the Addendums were signed and despite their representations, the Director Defendants refused to redeem any of the Plaintiffs' preference shares that are redeemable at the sole option of LiveWell.
In or about March 2019, Eureka received a USD$15,000,000.00 loan from Dominion Capital LLC (the "Dominion Loan"). The Properties were used as security to obtain the Dominion Loan. Both Director Defendants were directors of Eureka at that time. None of the Dominion Loan was used to redeem the Plaintiffs' shares.
The acquisition of the Properties at the reduced consideration and the removal of the Vendor Take Back as provided for in the Addendums benefited the Director Defendants’ personal interests as shareholders and directors of the Corporate Defendants and the interests of non-arm's length parties, to the Plaintiffs’ detriment.
For instance, a significant portion of the Dominion Loan was used to repay "loans" to Surety Land Development LLC ("Surety") at interest rates that would be considered criminal in Canada and as high as 100% per month. Surety was at all materials times owned and controlled by Kent Hoggan who acted as director and/or officer of the Corporate Defendants at the same time as the Director Defendants.
Less than 17 months after the Dominion Loan was advanced to Eureka, all assets of the Corporate Defendants had been almost completely dissipated including the USD$15,000,000.00 from the Dominion Loan.
On or about February 14, 2020, the Corporate Defendants filed Notices of Intention to Make a Proposal for creditors under the Bankruptcy and Insolvency Act, RSC 1985, c B-3. As of August 28, 2020, Eureka is deemed assigned into bankruptcy.
On November 27, 2020, Dominion Capital LLC commenced an action against the Director Defendants, among other individuals, for breach of duty of care, misrepresentation and oppression.
The Plaintiffs had a reasonable expectation, based on the above-mentioned representations made by both Director Defendants, that the original agreement would be upheld and that they would receive liquidated cash.
The Plaintiffs plead that the Director Defendants acted in bad faith and engaged in unfair and oppressive conduct in making the above-noted misrepresentations, colluding with Bouwer and participating in the dissipation of the Corporate Defendants' assets.
The Plaintiffs plead that the Director Defendants acted for their own personal gain and did personally benefit from their oppressive actions. The Plaintiffs thus plead that holding the Director Defendants' personally liable for the oppression is fair in the circumstances.
The Plaintiffs advance an oppression claim, pursuant to s. 241 of the Canada Business Corporations Act R.S.C., 1985, c. C-44 (the "CBCA"), as against both Director Defendants personally.
The Plaintiffs plead that they are a complainant as provided for in s. 241 of the CBCA in their capacity of creditors and shareholders.
The Plaintiffs claim as against both Director Defendants jointly and severally with the other Defendants, general damages in the amount of $7,300,000.00 representing the amount owed to them pursuant to the SPA.
[24] The question is whether these pleadings are sufficient to ground an action against these defendants.
Analysis
[25] Recall that at this stage of the proceeding on a pleadings motion, the court is not concerned to determine if the plaintiffs will be successful or should be successful in pursuing the directors. There are numerous defences available to directors and some aspects of an oppression claim are notoriously difficult to prove. The question for today is simply whether or not the pleading discloses an action that could succeed. This is a question of technical formality. Does the pleading comply with the Rules of Civil Procedure and does it set out a legally viable claim?[^11]
[26] While an overly technical approach to pleading may be justly criticized, substantial compliance with the pleading rules is important. Pleadings matter. They set out the framework for the litigation. They define the parameters of what is relevant for production and discovery and they give notice of the case the defendant has to meet. It is unfair for a defendant to have to respond to a claim that cannot succeed, and it is inefficient for the justice system not to weed out such cases at an early stage.[^12]
[27] At paragraph 47 of Budd v. Gentra, supra the Court of Appeal addresses the requirements for pleading personal liability of directors as an oppression remedy in the following words:
47 In deciding whether an oppression action claiming a monetary order reveals a reasonable cause of action against directors or officers personally, the court must decide:
• Are there acts pleaded against specific directors or officers which, taken in the context of the entirety of the pleadings, could provide the basis for finding that the corporation acted oppressively within the meaning of s. 241 of the C.B.C.A.?
• Is there a reasonable basis in the pleadings on which a court could decide that the oppression alleged could be properly rectified by a monetary order against a director or officer personally?
[28] One of the defects in the pleading in the Budd v. Gentra case was that it “utterly fails to deal with the director defendants or management defendants on an individual basis” or “to connect any individual director or officer to the alleged corporate oppression”. Bald allegations will not suffice. The statement of claim must “allege a basis upon which it would be ‘fit’ to order rectification of the oppression by requiring the directors or officers to reach into their own pockets to compensate aggrieved persons”. Such cases include instances where the directors have benefitted personally, increased their control over the corporation or where the corporation is so closely held that the named director had almost total control.[^13]
[29] There is little doubt that the original pleading in this action suffered from many of these same defects. The amended pleading attempts to address the problem. Admittedly it does not do so perfectly, and it does not distinguish acts of Mr. Poli from Mr. McCunn. Read generously, however, the amended pleading asserts the following:
a. The plaintiffs were vulnerable individuals with a poor command of English. Pursuant to the Share Purchase Agreement, the plaintiffs were both creditors of the corporate defendants and shareholders.
b. The director defendants had control of the corporations.
c. The director defendants personally colluded with the plaintiffs’ counsel to misrepresent the effect of the amending agreement and the alteration of the security that was to have been enjoyed by the plaintiffs.
d. The reduction in the purchase price and the release of security was to the personal benefit of the director defendants as directors and shareholders.
e. The director defendants made promises or representations to the plaintiffs giving rise to a reasonable expectation that the affairs of the corporation would be arranged to redeem their shares, pay the purchase price and put cash in the hands of the plaintiffs.
f. The director defendants caused the corporations to borrow significant sums and they dissipated the assets of the corporation without redeeming the plaintiff’s shares or paying the balance of the purchase money.
[30] These allegations are not without problems and they may or may not be supported by evidence. In my view, however, they do meet the threshold requirement of disclosing a reasonable cause of action. It could be open to a court on these facts to find that the decision to borrow funds, pledge the corporate assets and disburse those funds and more without consideration for the interests of the plaintiffs constituted oppression. It is possible that a court might decide the directors responsible for those decisions should compensate the plaintiffs.
Conclusion
[31] I conclude that on the basis of the amended pleading, the motion must fail. It is therefore dismissed, and the parties should proceed with production and discovery. Obviously, this determination is not a bar to a subsequent summary judgment motion if that appears appropriate once the evidence can be assessed.
Costs
[32] The result of this motion would have been quite different had the plaintiffs not amended their pleading. As that was done unilaterally on the eve of arguing the motion, it is my preliminary view the plaintiffs should not be entitled to costs. That will be the result unless either party advises my office that they intend to make cost submissions before September 30, 2021.
[33] I will hear argument if necessary because the issue was not addressed at the hearing. It is possible there were offers to settle or other factors that should be considered and of which I am not aware. Consequently, I will hear argument on costs if the parties so advise before the deadline set out above.
Summary
[34] In summary, the motion to strike the pleading is dismissed. Unless the parties advise that they wish to make costs submissions prior to September 30, 2021, it is dismissed without costs.
Mr. Justice C. MacLeod
Date: September 17, 2021
COURT FILE NO.: CV-19-81852
DATE: 2021/09/17
ONTARIO
SUPERIOR COURT OF JUSTICE
RE: MICHEL ABBOUD, HANAN ABBOUD, CHARBEL ABBOUD, SAMER ABBOUD and YVONNE ABBOUD, Plaintiffs
AND:
DIRK BOUWER, PERLEY-ROBERTSON, HILL & MCDOUGALL LLP, JOSEPH TIMOTHY MCCUNN, SEANN POLI, LIVEWELL FOODS CANADA INC., ARTIVA INC. and EUREKA 93 INC., Defendants
BEFORE: Regional Senor Justice Calum MacLeod
COUNSEL: Shawn J. O’Connor for the defendants S. Poli & J.T. McCunn (Moving Parties)
Richard J. Bosada, for the plaintiffs (Responding Parties)
Kirsten Crain and Genevieve Fauteaux, for the defendant lawyers
REASONS FOR DECISION
Regional Senior Justice Calum MacLeod
Released: September 17, 2021
[^1]: The notice of motion references Rules 21.01, 25.06 (8) and 25.10. [^2]: See Nevsun Resources Ltd. v. Araya, 2020 SCC 5 [^3]: See Re Eureka 923 Inc. et. al., 2020 ONSC 6036, 2020 ONSC 6961 and related decisions. [^4]: RSC 1985, c. B-3 as amended. [^5]: Although Charbel Abboud became a shareholder of new Artiva under the restructuring. [^6]: https://www.insolvencies.deloitte.ca/en-ca/Pages/Eureka93.aspx - see para. 5 of the order approving the proposal. [^7]: London Drugs Ltd. v. Kuehne & Nagel International Ltd., 1992 41 (SCC), [1992] 3 S.C.R. 299, 97 D.L.R. (4th) 261 (SCC) [^8]: Montreal Trust Co. of Canada v. ScotiaMcLeod Inc., (1995) 1995 1301 (ON CA), 26 O.R. (3d) 481, 129 D.L.R. (4th) 711 Ont. CA); Lobo v. Carleton University, 2012 ONCA 498, [^9]: Wilson v. Alharayeri, 2017 SCC 39, [2017] 1 S.C.R. 1037 412 D.L.R. (4th) 387 @ para. 2 “For almost 20 years, the leading authority on this question has been the Ontario Court of Appeal's decision in Budd v. Gentra Inc. (1998), 1998 5811 (ON CA), 43 B.L.R. (2d) 27 (Ont. C.A.) ("Budd"), and in my view, there is no reason to depart from the guidance provided in Budd now.” [^10]: Budd v. Gentra, supra @ paras. 25 – 46 [^11]: Fasteners & Fittings Inc. v. Wang, 2020 ONSC 1649 @ para. 55 [^12]: R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42, [2011] 3 SCR 45 @ paras. 19 & 20 [^13]: Budd v. Gentra, supra, paras. 48 & 52