Court File and Parties

Newmarket Court File No.: CV-18-136882-00 Date: 2021-02-02 Ontario Superior Court of Justice

Between:

L. Carnovale Holdings Inc., Luvian Homes (The Estates of Elgin Mills) Limited, The Estates of Elgin Mills Joint Venture, and The Estates of Taunton and Thickson Joint Venture Moving Defendants

– and –

A. Carnovale Holdings Inc., and Luvian Homes (Taunton and Thickson) Responding Defendants

Counsel: S. Sosnovich, for the Moving Defendants A. Quinn, for the Responding Defendants G. Hemsworth, for the Plaintiffs (not participating in this motion)

Heard: January 28, 2021 Decided: February 2, 2021

Before: Master J. Josefo

Reasons for Decision

Overview of the Action and the Parties:

[1] The within action which underpins this motion commenced on or about August 7, 2018. The above-identified defendants are each being sued for $3,551,606.48, plus interest and costs, for loans allegedly due pursuant to four promissory notes. These notes matured on April 29, 2016.

[2] The plaintiffs, Giuseppina and Gaetano Lucchese, are the parents of Anna Lucchese ("Anna") who, for 23 years until their marriage broke down in 2018, was married to Lee Carnovale ("Lee"). As Anna's father unfortunately is deceased, Anna's mother continues the action on her own behalf and as executrix for her late husband's estate. To avoid confusion, and not in any disrespectful way, I use Anna's and Lee's first names herein.

[3] Anna is the sole shareholder, officer, and director of defendants A. Carnovale Holdings Inc., and Luvian Homes (Taunton and Thickson) ("Anna's companies"). Lee is the sole registered officer and director of the defendants L. Carnovale Holdings Inc., and Luvian Homes (The Estates of Elgin Mills) Limited ("Lee's companies"). It is not controversial that these defendants are either Anna's or Lee's corporate vehicles.

[4] In addition to this within action, arising out of their marital breakdown Lee and Anna are involved in other litigation against each other. Lee commenced an action against Anna on August 24, 2018 alleging that Anna and the other defendants therein are acting in an oppressive manner. On October 2, 2019, Anna commenced an application on the Commercial List against Lee and others which seeks a winding up of the Luvian Group.

What this Motion is About—Facts Leading to the Motion:

[5] At paragraph 10 of his Statement of Defence to the within action, Lee asserts that Anna "wrongfully refuses to defend this action on behalf of the Anna Carnovale defendants, in which Lee directly and/or indirectly has a 50% ownership interest." In his defence to the within action, Lee, for his companies, raised four defences:

(a) The action was commenced more than two years after the promissory notes were due, with the result that the claims are statute-barred pursuant to the Limitations Act;

(b) Alternatively, the notes were paid;

(c) The plaintiffs forgave the loans secured by the notes, with nothing thus owing; and,

(d) The funds advanced by the plaintiffs were not loans, but rather, were gifts.

[6] Anna, on the other hand, in her Statement of Defence:

(a) Admits the allegations in paragraphs 1-9 of the claim;

(b) Acknowledges that:

(i) The plaintiffs advanced loans in the amount claimed;

(ii) The amounts are due; and,

(iii) These amounts were always treated as loans.

[7] Thus, Anna's companies plead that judgment be granted, yet without costs.

[8] Lee essentially asserts that Anna's sham of a "defence" is detrimental to his interests. His motion seeks leave to intervene in this within action for the purpose of instructing counsel on the defence of Anna's companies. He also seeks production of certain books and records of Anna's companies.

Probable Resolution of the Production Issue:

[9] As set out at paragraph 47 of Anna's January 21, 2021 affidavit, Ms. Quinn on January 13, 2021 wrote to Ms. Sosnovich to offer production of any financial documents which Lee sought and which were in the possession of Anna, with Lee, through his counsel to specify what was needed. Counsel had not yet addressed this, understandably, as the offer was made fairly close to the return date of this motion.

[10] Accordingly, it was agreed that counsel will "meet and confer" to hopefully resolve what specific documents are sought to be produced. Assuming agreement, I will sign a consent Order when one is presented to me through either my ATC Mr. Magnante or via Ms. Billings, the judicial assistant in the Newmarket courthouse. If no agreement is reached, then that matter can be addressed via a case conference with me.

Lee's Request for Leave to Intervene—Evidence, and My Approach:

[11] The well-made submissions of counsel augmented their thorough motion materials (including factums and books of authorities). While I have considered all of the voluminous material and submissions, I only address in these reasons what I found particularly persuasive. To do otherwise would unduly elongate reasons in even a straight-forward case (which this is not). My approach is to hopefully explain why I have come to my conclusions so counsel, and any reviewing court, will understand my reasoning.

[12] I begin with a comment regarding the evidence put before me in this motion. Both Lee and Anna testified via sworn affidavits. Yet there was no cross-examination upon their affidavits. While I offered counsel the option to consider adjourning for that purpose, counsel each preferred to press forward. I thus must, having carefully considered and weighed the affidavits, select which is more persuasive, even with the evidence not tested.

[13] The ultimate question is whether Anna properly can choose not to defend the claim asserted by her parents. At first blush, one initial observation or "gut reaction" might be that a defendant must do exactly that—defend a claim. Some lawyers, if pressed to answer instinctively and without context or the necessary information to properly opine, may indeed initially and preliminarily urge that a party defend. Yet, is that gut reaction correct? Must a defendant who receives a lawsuit always, inevitably, substantively defend the action? In my view, once the requisite information and context is taken into account, the answer from those same lawyers may well be "no". Some cases can call out for a different approach.

[14] At times a defendant, who carefully considers and weighs the pros and cons of a matter including cost, upside benefit, and downside risk, may well seek to settle early in the proceeding. The forms pursuant to the Rules, moreover, recognize this. The standard language in the Statement of Claim form (form 14A) reads, "If you wish to defend this proceeding…" [emphasis added]. That form also notes that a defendant may pay a claim as well as an amount for costs to be specified by the plaintiff. Form 23C, I also note, provides for the Withdrawal of a Defence (or parts thereof). All this makes clear that, while defending a claim is common, at times parties may choose, for their own reasons, valid to them, not to do so.

[15] Turning to the affidavit evidence, I begin with Anna. Anna explained in her January 17, 2021 affidavit that, with an MBA since 1993, and as a chartered accountant since 1995, she initially worked for a large accounting firm in audit and tax specialty functions. Subsequently, she became controller of her father and uncles' land development company. Ever since, pursuant to paragraph 14, she has handled the financial, banking, legal, and IT issues for her parents and then for her and her husband's businesses. Anna explains that Lee, initially a general labourer, worked his way up in what Anna describes at paragraph 12 of her affidavit as "my family business (which later became our business)" without any formal post-secondary education.

[16] Anna testifies in some detail about the $10,287,395.95 loan that Anna's parents, the plaintiffs, made once the first entity within the Luvian Group was incorporated (inter alia paragraph 19). She explains (paragraph 16) that these loans "were always recorded in…the financial records as loans". The relevant records are attached to Anna's affidavit, as she details at paragraph 18. She also describes how in 2010 her sister and brother-in-law were bought out of the business via a "buy-sell" agreement, and how her father eventually stopped playing an active role in the business before he passed away (paragraphs 21, 22).

[17] Importantly, Anna at paragraph 9 of her affidavit disputes Lee's testimony in his December 2, 2020 affidavit that they owned or controlled the companies in the Luvian Group equally. Anna states, "[Lee] certainly does not have an interest in my holding company or L.A.C. Management Inc…in which [Anna] is the sole officer, director and shareholder."

[18] At paragraph 25, Anna explains how funds were from the various entities over the years paid down to offset the approximately ten-million-dollar loan amount. Over seven million dollars were repaid through to 2020, as she specifically describes at paragraph 26. At paragraphs 34-37, Anna describes payments, including payments in kind, made since 2016, thus within the two years prior to the action being commenced. She explains why the amounts are not gifts (paragraph 39), and how the repayments being made over time undercuts the claim of a gift. Anna asserts at paragraph 43 that, after consideration, she does not believe there is a defence given her experience with the accounting and what is shown in the financial records. Yet she reasonably observes at paragraph 44 that Lee has raised his defences so, ultimately, it will be for the court to decide which position has merit.

[19] Lee's affidavit focuses in the main on the available Limitations defence to the claim, and why he believes it to apply (at paragraph 8, noting that the action was commenced more than two years after the notes came due). Lee relies at paragraph 10 on double hearsay, from his lawyer Ms. Sosnovich, as to what Anna's former lawyer, Mr. Stewart Thom, purported to state. While Ms. Sosnovich's email to Mr. Thom setting out her understanding is provided, I however note that there is no confirming email from Mr. Thom in response.

[20] Lee also makes allegations at paragraph 15 pertaining to the conduct of plaintiff's counsel in the action as pertains to "improper default proceedings". Yet, such proceedings are not before me, and the experienced lawyers in this matter are, in any event, well aware of potential remedies for such pursuant to the Rules. Lee is also critical of what he alleges is the lack of particularity of the claim (paragraph 18) as pertains to which defendants owe which debt, on which of the four notes. Lee concludes by alleging that Anna is not acting in good faith (paragraph 21) but is favouring her parents.

[21] Overall, I find that Anna provided detailed, relevant evidence as pertains to why she has selected her course of action, and she has purported to justify her choice with factual assertions that, in the circumstances, seemingly make reasonable sense. Given her financial background and upper management experience in what may be called "the family business", I find she is able to offer such explanations. Her affidavit was overall more detailed than was Lee's, and it was also more focussed than was Lee's on the issues which are before me on this motion.

The Law juxtaposed with the Facts:

[22] My jurisdiction to grant Lee leave to intervene stems from sections 246-247 of the Ontario Business Corporations Act ("OBCA"). These sections read as follows:

246(2) No action may be brought and no intervention in an action may be made under subsection (1) unless the complainant has given fourteen days' notice to the directors of the corporation or its subsidiary of the complainant's intention to apply to the court under subsection (1) and the court is satisfied that,

(a) the directors of the corporation or its subsidiary will not bring, diligently prosecute or defend or discontinue the action;

(b) the complainant is acting in good faith; and

(c) it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued.

247 In connection with an action brought or intervened in under section 246, the court may at any time make any order it thinks fit including, without limiting the generality of the foregoing,

(a) an order authorizing the complainant or any other person to control the conduct of the action;

(b) an order giving directions for the conduct of the action;

(c) an order directing that any amount adjudged payable by a defendant in the action shall be paid, in whole or in part, directly to former and present security holders of the corporation or its subsidiary instead of to the corporation or its subsidiary; and

(d) an order requiring the corporation or its subsidiary to pay reasonable legal fees and any other costs reasonably incurred by the complainant in connection with the action. R.S.O. 1990, c. B.16, s. 247.

[23] Is Lee a "complainant" as section 246 of the OBCA requires? Section 245 defines "complainant" as a registered holder, beneficial owner, director, officer, former director, or former officer of Anna's corporate vehicles. The unchallenged evidence of Anna at paragraph 9 of her affidavit, referenced above, is that Lee is none of these things. In my view, again, Anna, with her academic qualifications, experience in audit and tax, and many years of financial controllership duties for her parents and then her and her husband's businesses, is better situated to preliminarily offer reliable testimony on these issues.

[24] Yet, I do not need to address the matter only on that basis.

[25] Pursuant to her testimony, Anna has made her assessment that the debt secured by the notes has, over the years, been paid down both in monies and by service in kind. She accordingly explains why these were not gifts, nor were the debts forgiven. Moreover, there is evidence in support of those positions. Anna also explains why, in her view, the limitation has not run. Given payments, whether in monies or from services in kind in 2017, Anna argues that this extends the limitation period (she relies for that purpose on T Hamilton and Son Roofing Inc. v. Markham (City), 2018 ONSC 2665, para. 53).

[26] At this stage of the proceeding it is not for me to minutely assess the evidence so to conclude whether her position is or is not correct. I can safely conclude, however, that it is not ridiculous, nor that it flies in the face of the evidence filed in this record, nor is it contrary to common sense. I find it a reasonable position. Lee obviously takes a different view. His position is also not unreasonable, and there seems to be some evidence which may also support his view. Depending upon how the evidence from both these defendants, and from the plaintiff, when all is placed before the trial (or motions) Judge, is assessed at trial (or summarily), one or the other side will prevail. Yet it is not appropriate for me, on this record, to prematurely make that assessment. That each position will be subsequently fully aired, with a full evidentiary record, will ensure that ultimately the correct decision is reached.

[27] Returning to the earlier discussed possible "first impression" that a defendant must always defend, again, that is not necessarily so. Anna can appropriately decide for her companies, as the Court essentially held in Schafer v. International Capital Corp 1996 6845 (SK QB), [1996] SJ No 770, para. 25, that the cost, risk, and time taken up by a nebulous defence to the claim outweighs any slim benefit of mounting what Anna concludes is a spurious defence.

[28] It is up to the Board of Directors or executive management of a business to decide whether to pursue or defend an action, and it is up to that leadership to make such assessment. Such assessment of what it is in the companies' interest to do in such circumstances should only be second-guessed, in my view, on clear evidence. Yet, such clear evidence which undermines or calls into question Anna's decision-making is, so far, lacking in this case. Further, I agree that, as detailed in the evidence, Anna has the skill and ability to make the rational decision that it is not in the best interests of her companies to fight the claim.

[29] It is uncertain that either Anna or Lee act in true good faith. Each side have other litigation ongoing in what has unfortunately turned into a very messy marital breakdown. Each are acting as they perceive is in their respective interests. Again, that is appropriate so long as, in the case of Anna, her decision to capitulate on the within action is reasonable in the circumstances of this action. At this early stage, from my view of the evidence, again, her position is a defensible and understandable one.

[30] For him to succeed on this motion, Lee must establish his good faith in bringing this motion. I am, however, not convinced that he is acting entirely in this regard, rather than at least in part acting tactically, in what he perceives are his interests in the overall "big litigation picture" between himself and Anna.

[31] Overall, on the evidence before me I am not persuaded that I should exercise discretion and grant Lee leave to intervene. In my view, as alluded to above, it is not contrary to the interests of justice that both defendants assert their different positions, and lead evidence to the Court in that regard. Again, once all the evidence is in and the respective positions considered, one will ultimately prevail.

[32] For all these reasons, accordingly, Lee's motion is dismissed.

Costs:

[33] At the conclusion of submissions (which ran well over the estimated time), it was agreed that, in addition to the production issue discussed above, costs could also be addressed at a case conference, if necessary.

[34] If not yet done, counsel should exchange their costs outlines. Pursuant to Rule 57 and the well-known case-law thereunder (Boucher v. Public Accountants Council for the Province of Ontario, 17 OR 93d) 291, as one example), Anna is entitled to her reasonable costs. It is to be hoped that counsel can agree on costs. If not, either ATC Mr. Magnante or Ms. Billings may be contacted to arrange the case conference before me.

Master J. Josefo

Released: February 2, 2021