Court File and Parties

COURT FILE NO.: CV-20-00636412-00CL DATE: 2021-10-12

SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)

RE: CHRIS KAUFFMAN, Applicant AND: QUEEN ST. 1501 INC. and CESARE FAZARI, Respondents

BEFORE: Penny J.

COUNSEL: Raymond Slattery, Tamara Markovic and Yousef Adler for Chris Kauffman James Zibarras and Gavin Finlayson for Cesare Fazari David Preger and David Seifer for Rosen Goldberg Inc., Court-appointed Sales Officer

HEARD: October 7, 2021

ENDORSEMENT

[1] This is a motion seeking an order for the release of net proceeds from a sales process conducted by the Court-appointed Sales Officer. The parties are equal shareholders in a construction/real estate business. They had a falling out after 30 years of doing business together. This litigation began in 2020. Each party asserts claims against the other in the litigation, each seeking damages and other monetary claims in excess of $5 million against the other. Other than the Court-ordered sales process and many motions, little progress seems to have been made in advancing the litigation towards any resolution or conclusion.

[2] It became obvious early on that the parties required a business divorce. Due to their dysfunctional relationship, and the resulting chaos in the management and operation of their businesses, a Sales Officer was appointed to oversee the sale of significant assets of the business – real estate. That process has almost concluded. The net funds held, at the moment, is over $17 million. Known and estimated liabilities relating to the sale of these properties is estimated at about $5.8 million (about two thirds of which is in respect of possible capital gains tax resulting from the sale of the properties). The Sales Officer estimates the amount of cash actually available to the stakeholders, today, to be in the neighbourhood of $11.4 million (the funds) or net proceeds).

[3] From the net proceeds, Mr. Fazari seeks the distribution of $10 million: $5 million for each shareholder. Mr. Kauffman opposes any distribution to Mr. Fazari.

The Appointment Order/Preservation Until Trial

[4] Mr. Kauffman argues that the Appointment Order appointing the Sales Officer requires the funds to be frozen until trial, after all monetary disputes are resolved. Mr. Kauffman also argues that he has, among other claims, a mortgage of $1.8 million secured by a GSA against all of Mr. Fazari’s property, that Mr. Fazari owes rent to the business in excess of $2 million and that an independent accountant has previously found that Mr. Fazari owes Mr. Kauffman an equalization payment of about $650,000 for excess distributions taken in one of their joint ventures.

[5] He argues, as matter fairness essentially, that Mr. Fazari should not receive any funds (or, at least, not substantially all of his 50/50 “share” of the funds) resulting from the sales process until the litigation is resolved so that Mr. Kauffman can be assured of recovery if his clams are successful.

[6] Mr. Justice Hainey’s Appointment Order of August 25, 2020 provides, in para. 13, that upon the closing of the sale of any of the listed properties, “the Sales Officer shall pay the net proceeds of sale into an interest-bearing account, pending further Order of the Court.”

[7] I am unable to ascribe to the Appointment Order the meaning that Mr. Kauffman seeks to impute. The effect of Mr. Kauffman’s interpretation is that the Appointment Order granted a Mareva injunction against either party and prohibited the release of any funds until after the trial. In general, a plaintiff is not entitled to an injunction to restrain the defendant from parting with his assets just so they may be preserved in case the plaintiff’s claim succeeds. The plaintiff, like other creditors of the defendant, must obtain judgment and then enforce it. He cannot prevent the defendant from disposing of his assets pending the outcome of contested litigation “merely because he fears that by the time he obtains judgment in his favour the defendant will have no assets against which the judgment may be enforced.” Were the law otherwise, “the way would lie open to any claimant to paralyze the activities of any person or firm against whom he makes his claim by obtaining an injunction freezing their assets”: Barclay-Johnson v. Yuill, [1980] 3 All ER 190 at p. 193, cited with approval in Aetna Financial Services v. Feigelman, 1985 CanLII 55 (SCC), [1985] 1 S.C.R. 2 at para. 8.

[8] The Mareva injunction is an extraordinary remedy, in part precisely because it constitutes a form of pretrial execution. Accordingly, a party seeking a Mareva injunction must demonstrate on the evidence that it has met a stringent multi-part test:

(1) a strong prima facie case against the respondent;

(2) the moving party would suffer irreparable harm if the order is not made;

(3) the balance of convenience favours granting the order, in the sense that the harm suffered by the applicant if the order is not made exceeds the harm that will be suffered by the respondent if it is;

(4) the respondent has assets in the jurisdiction; and

(5) there is risk of the assets being removed from the jurisdiction, or disposed of within the jurisdiction or otherwise put beyond the reach of the court such that the applicant will be unable to realize on a judgment in its favour.

[9] The Appointment Order does not grant, on its face, any restraint beyond a further order of the Court. No order in the nature of a Mareva injunction was sought at the time of the Sales Officer’s appointment, nor was any evidence tendered upon which one could have been granted. The necessity for the Appointment Order arose from the chaos resulting from the parties’ dysfunctional relationship. Both parties risked unnecessary loss in the value of their business’ assets as a result of this chaos and dysfunction. The purpose of the Appointment Order was to stabilize the situation and to appoint a Sales Officer to conduct an orderly sale of the properties for the purpose of maximizing and consolidating their value - all, in effect, for the benefit of both parties. It was a necessary adjunct to that Order that the proceeds remain in a segregated account until the Sales Officer’s functions were concluded and a full accounting of receipts and costs could be presented to the Court and approved.

[10] An order temporarily restraining any dealing with specified funds pending further order of the Court in such a circumstance is constituent with the purpose of a orderly disposition and is in no way equivalent or analogous to an order for a Mareva injunction. This Court has repeatedly rejected any suggestion that a requirement for a “further order of the Court” imposes any default position or onus in favour of a freezing order.

[11] Further, in this same case but dealing with different property (not under the Sales Officer’s jurisdiction), Justice Hainey ordered, on April 28, 2020, that net proceeds totaling $2,018,817, be held in trust “pending consent of the parties or further Order of this Court.” Mr. Fazari brought a subsequent motion for the release of those proceeds on an equal basis to both parties. Similar arguments to those made by Mr. Kauffman today were made to Justice Hainey. In his endorsement of April 6, 2021, Justice Hainey ordered the release of the funds. He found that the funds clearly belonged to both parties “on a 50/50 basis” and that “there are no other court orders that restricted the distribution of the funds.” He further found that his earlier order “did not amount to an execution before judgment and was a temporary solution. It contemplated that the funds would eventually be released to Mr. Fazari and Mr. Kauffman either pursuant to an agreement between them or further direction from the court” (emphasis added).

[12] The Appointment Order of August 25, 2020, equally, does not amount to an execution before judgment and was a temporary solution. It too contemplates that the funds would eventually be released to Mr. Fazari and Mr. Kauffman pursuant to a further order of the Court (or, inferentially on consent of both parties).

[13] Mr. Kauffman argues that the circumstances were different in the prior motion because, in that instance, the bulk of the assets were still in the process of being sold and would therefore continue to stand as ample “security” for his claims made in the litigation. Here, by contrast, Mr. Kauffman argues, it is the bulk of those very assets that Mr. Fazari is asking to have distributed.

[14] I do not think this makes a difference. Justice Hainey’s April 6, 2021 order releasing the funds in the earlier motion was not based upon the fact that other assets would remain in a segregated fund until trial, or even until further order of the court. The endorsement was made on the basis that there was no relevant restraining order against either party and/or their assets and that each party had a prima facie right to a distribution of 50% of the business’s net asset following a sale. That is exactly the same situation as exists now.

[15] Mr. Kauffman has had ample opportunity to bring a motion for a Mareva order; this is especially so given the clear language of Justice Hainey’s April 6, 2021 endorsement. Mr. Kauffman has not done so. It is a reasonable inference that this is because there is no sufficient basis for the grant of such extraordinary relief. Indeed, for example, no evidence has been tendered of any dissipation of assets, or attempt put assets beyond the reach of the court. To the extent there is any evidence at all, it is to the opposite effect. The fact that Mr. Kauffman has claims against Mr. Fazari and is concerned that Mr. Fazari might not be good for any judgment if judgment is ultimately awarded in Mr. Kauffman’s favour against him, is an insufficient basis for restraining the disposition of what is otherwise prima facie Mr. Fazari’s property, as stated by Megarry J. in Barclay-Johnson v. Yuill cited above.

[16] The cases cited by Mr. Kauffman are highly distinguishable. Skeena Disposal involved a liquidation of the corporation of which the two litigants were shareholders. A prior order of the court had ordered a trial of the outstanding issues before any final accounting and distribution of the proceeds from the liquidation. Lash involved a situation where interim distributions were being requested before there had been a sale and implementation of the buy out plan.

[17] For these reasons, I would not give effect to Mr. Kauffman’s arguments as a basis for denying Mr. Fazari’s motion for a distribution. That does not end the matter, however.

Amounts “Available”

[18] The Sales Officer has reported on “estimated” net funds available for stakeholders. The Sales Officer’s reserves are for “estimated” taxes payable (clarified to be only taxes related to capital gains on the properties actually sold) and “estimated” funding for one remaining property, professional fees, unpaid liabilities (unspecified), and a “general reserve”. This is what produces the “estimated” net amount available for stakeholders. Mr. Preger, on behalf of the Sales Officer, made a point of saying that the word “stakeholders” was used advisedly, as opposed to “shareholders”. This is because the Sales Officer has been concerned only with the sale of specified properties, not with the assets and liabilities of any of the parties’ corporations in general.

[19] Each property sold was owned by a separate corporation. The sale of the specified properties under the supervision of the Sales Officer, therefore, constituted a sale of all or substantially all of the assets of the corporation that owned them. Mr. Preger emphasized that the Sales Officer’s work did not extend to considering whether these, or any other corporations owned by Mr. Fazari and Mr. Kauffman, were, for example, indebted to or had other obligation vis-à-vis third parties that were unrelated to the specific properties themselves. Zeifmans, I was told to further illustrate the point, has recently been appointed to prepare tax returns for some of these corporations which was, again, not something that fell within the purview or responsibility of the Sales Officer.

[20] The point of all this is that just because the result of the sales process is net cash of $11.4 million from the sale of specific properties, after reservation for estimated liabilities associated with the sale of those properties, does not necessarily mean that the corporations whose assets were sold are in a position to pay out dividends to the shareholders in that amount. It is a fundamental principle of corporate law that creditors must be paid before shareholders.

[21] The Sales Officer’s mandate did not include any assessment of the obligations of any of the relevant corporations generally, only those costs and liabilities associated directly with the sale of specific properties. Accordingly, as things currently stand, there is simply no evidence before the Court as to whether there are any such general corporate liabilities and, if so what they are and in what amount. The suggestion that the tax filings for these corporations are not up to date is, for example, concerning. The Court ought not to be authorizing the distribution of what are in effect dividends from a corporation which has effectively sold all or substantially all of its assets without assurances that the payment of such dividends will not impair that corporation’s ability to satisfy all other obligations to third parties, such as the CRA.

[22] Mr. Fazari argues that: a) the reserves being taken in the Sales Officer’s calculations are already conservative; b) Mr. Fazari’s distribution proposal leaves a further “buffer” of at least $1.4 and probably over $2 million in any event; c) there are other assets of the parties’ business worth another several million dollars which are effectively frozen due to the parties’ animosity and lack of co-operation; and, d) there is no evidence that there are any unpaid corporate liabilities that could be adversely affected by the distribution he is seeking.

[23] While there is some force to these arguments, the fly in the ointment is that they are based on assumptions and estimates, rather that clear evidence proving that the payment of any existing corporate liabilities will not be adversely affected by the distribution to the shareholders of the sale proceeds from the sale of those corporations’ assets.

[24] It very well may be that the so-called “buffer” embedded in the Sales Officer’s estimates, the post-distribution cash that will remain in the Sales Officer’s account, and the other assets of the business, are more than sufficient to cover any outstanding corporate liabilities. The point is that we simply do not know for sure because no one has turned their mind to, and there is no evidence about, this issue, even though corporate tax returns of the relevant corporations are overdue.

Conclusion

[25] Mr. Fazari asserts an urgent need for funds. He seeks a $10 million distribution: $5 million to him and $5 million to Mr. Kauffman. Balancing Mr. Fazari’s arguments, together with the fact that it has been 18 months to two years since the parties’ falling out and there is no evidence of any material claims by third parties against the property-owning corporations or any other corporations owned by the parties, in all the circumstances, I approve a distribution of $8 million: $4 million to Mr. Fazari and $4 million Mr. Kauffman. This is without prejudice to any further motion with better evidence on potential corporate tax and other liabilities owed by the corporations owned by these parties, which could clear the way for further distributions.

Costs

[26] Mr. Kauffman sought partial indemnity costs of $14,000. Mr. Fazari sought partial indemnity costs of $38,000. Mr. Fazari was the substantially successful party, even though he did not achieve everything he was asking for. Partial indemnity costs of $25,000 are awarded to Mr. Fazari, payable by Mr Kauffman within 30 days.

Penny J.

Date: 2021-10-12