Court File and Parties

COURT FILE NO.: CV-21-670349 DATE: 20220222 ONTARIO SUPERIOR COURT OF JUSTICE

RE: AVINOAM RABINOWITZ and DEDICATED FREIGHT SYSTEMS (BROKERAGE) INC., Plaintiff -and- JAMES WESTBROOK, BRENDA WESTBROOK, JAMES AND BRENDA WESTBROOK FAMILY TRUST, DEDICATED FREIGHT SYSTEMS (TORONTO) INC. and DEDICATED TRUCK SERVICE LTD., Defendants

BEFORE: FL Myers J

COUNSEL: Eli Karp, for the Plaintiffs Rob L. Winterstein, for the Defendants

HEARD: February 18, 2022

Endorsement

The Motion and Outcome

[1] The plaintiff Avinoam Rabinowitz requests an interlocutory injunction to prohibit the defendant James Westbrook from enforcing a security interest over corporate shares that Mr. Rabinowitz purchased from Mr. Westbrook. Mr. Rabinowitz pledged the shares to secure payment of the instalments of the purchase price he owes to Mr. Westbrook.

[2] Mr. Rabinowitz defaulted on his obligation to pay the first instalment of the purchase price for the shares last October.

[3] Mr. Westbrook has exercised his right to accelerate the entire purchase price debt and has commenced enforcement steps against the pledged shares that secure the debt.

[4] Mr. Rabinowitz says that he does not have to pay the agreed purchase price for the shares because he claims damages in relation to the share purchase transaction. He claims equitable setoff of the damages he claims against his liability for the unpaid purchase price.

[5] For the reasons that follow, I grant the relief sought. The defendants are enjoined from enforcing their share pledge, all other security interests charging the outstanding share purchase price, and all guarantees of that debt. The order is made on terms that by March 4, 2022 the plaintiffs shall deposit with the Accountant of the Court the sum of $650,000 cash or post with Accountant of the Court an irrevocable letter of credit from a bank listed in Schedule 1 to the Bank Act, SC 1991, c 46, in either case, to provide security for the defendants in the place and stead of Mr. Rabinowitz’s shares. The letter of credit shall be unlimited as to time and shall be payable to the Accountant without condition upon demand. The Accountant shall make demand for payment under the letter of credit on the earlier of: (a) receipt of any notice by the issuing bank that it may terminate its liability under the letter of credit; or (b) upon the court finally determining that there is a net amount owing to the defendants, or any of them, in the counterclaim after final determination of any and all claims for equitable setoff in the claim.

[6] The form of the letter of credit is subject to the approval of the defendants’ counsel in advance or, failing agreement, subject to approval by the court at a case conference convened for that purpose.

[7] The letter of credit shall provide for the payment to the Accountant of up to $650,000.

[8] Until they post cash collateral of $650,000 or an approved form of letter of credit with the Accountant of this court, the plaintiffs are enjoined from transferring or encumbering in any manner the pledged shares. In addition until that time, neither of the plaintiffs shall enter into any transaction outside the ordinary course of business. Neither shall agree to transfer or encumber in any manner any of their assets.

[9] In the event that the plaintiffs do not post either cash collateral of $650,000 or an approved form of letter of credit with the Accountant before its office closes on March 4, 2022, the relief in paras. [5] through [8] shall expire and nothing will preclude the defendants, or any of them, from enforcing their security interest(s) over the pledged shares or otherwise.

The Basic Facts

[10] Mr. Rabinowitz is the estranged son-in-law of the defendant James Westbrook.

[11] Some years ago, Mr. Westbrook set up the plaintiff corporation and gifted 50% of its shares to Mr. Rabinowitz. Together, they became the board of directors of the corporation. They agreed that neither would take salaries from the corporation and that they would split the profits 50/50.

[12] Mr. Westbrook has other businesses. Mr. Rabinowitz directed his full time and attention to the logistics brokering business of the plaintiff corporation.

[13] The parties had a falling-out in May, 2020. Mr. Westbrook’s daughter sided with her husband Mr. Rabinowitz. The family remains fractured and this litigation is therefore infused with hurt feelings and ill-will rather than simple economics.

[14] In July, 2020, Mr. Rabinowitz sued Mr. Westbrook for an oppression remedy under corporate law.

[15] In September, 2020 the parties agreed to settle the first litigation on the basis that Mr. Westbrook would be entitled to his share of the corporate retained earnings in the amount of $400,000 and Mr. Rabinowitz would buy Mr. Westbrook’s shares in the plaintiff company for $550,000. The purchase price was payable in two instalments of $275,000 due in October, 2021 and October, 2022 respectively. The debt was guaranteed by Mr. Westbrook’s daughter and by the plaintiff corporation itself. Mr. Rabinowitz also pledged his shares to secure his indebtedness.

The Customer

[16] Both the plaintiff corporation and Mr. Westbrook’s other businesses share an important customer. The businesses are not related however. The customer has relationships with both parties’ businesses regarding separate matters.

[17] In May, 2019, the customer became upset with the services being provided to it by Mr. Westbrook’s truck repair business. The customer knew that Mr. Westbrook and Mr. Rabinowitz were family and purported to exercise a unilateral self-help remedy by cancelling contracts with the plaintiff company. The customer asked for a reduction in its existing debt to the plaintiff company for its brokerage services as compensation for its alleged claims against Mr. Westbrook’s truck repair business.

[18] Mr. Rabinowitz rejected the customer’s entitlement to claim against the plaintiff corporation and threatened to submit its outstanding brokerage invoices to arbitration against the customer. Shortly afterward, a settlement with the customer was reached by Messrs. Westbrook and Rabinowitz under which the plaintiff corporation gave the customer credit on outstanding invoices in exchange for a full and final release of both Mr. Westbrook’s company and the plaintiff company.

[19] In June, 2020, after the relationship between Mr. Westbrook and Mr. Rabinowitz had soured, the customer raised further issues with Mr. Westbrook about his trucking business. There is a dispute in the evidence as to whether the customer told Mr. Westbrook that he would again try to enforce a remedy against the plaintiff corporation.

[20] Mr. Westbrook says that he responded by asserting the release from the prior year. In addition, the claim made by the customer was unparticularized and could not be readily understood or quantified by Mr. Westbrook. Although the customer sent a couple of sporadic emails seeking some form of offer from Mr. Westbrook, he says, the matter did not go further as far as he knew. He also says that the customer made no mention of the plaintiff company or its brokerage business.

The Share Purchase Transaction

[21] As mentioned above, Mr. Rabinowitz agreed to buy Mr. Westbrook’s shares in the plaintiff company two months later in September, 2020. Minutes of Settlement were signed by Mr. Rabinowitz on October 1, 2020. Mr. Westbrook’s counsel did not send a draft share purchase agreement to Mr. Rabinowitz’s lawyer until October 16, 2020.

[22] Coincidentally, on October 15, 2020 Mr. Rabinowitz met with the customer. The customer told him that he had met with Mr. Westbrook in June. Once again, the customer asserted a right to claim against the plaintiff corporation in respect of its claims against Mr. Westbrook’s other business.

[23] Mr. Rabinowitz consulted his lawyer and hatched a plan. Mr. Rabinowitz wrote to the customer:

After consulting with my lawyer with respect to my Share Purchase Agreement with these Ganovim [Yiddish for “thieves”] we have a solution where we can immediately settle the truck claim with you and put me in a great position to fight them.

Please let me know if your office can set up another meeting early next week so we can put this to rest.

Mr. Rabinowitz’s Plan.

[24] Rather than rejecting the customer’s claim again, Mr. Rabinowitz decided to pay $150,000 to settle it. In his mind, this let him have a subrogated cause of action for contribution and indemnity against Mr. Westbrook. In addition, he had his lawyer respond to the draft share purchase agreement by adding a “No Litigation Warranty” to the draft as follows:

To the Vendor's knowledge there is no known claim , action, suit, proceeding, arbitration. complaint, charge or investigation ( including any claim for set-off by a customer of the Corporation ) pending or currently threatened: (i) against the Corporation or any officer, director or key employee of the Corporation. The foregoing includes, without limitation, actions, suits, proceedings or investigations pending or threatened in writing (or any basis therefor known to the Vendors.) involving the prior employment of any of the Corporation's employees, services provided by employees or directors of the Corporation. [Emphasis added.]

[25] At the time that Mr. Rabinowitz asked Mr. Westbrook to represent and warrant that there were no known claims against the plaintiff corporation, Mr. Rabinowitz knew that the customer had asserted a claim against the plaintiff corporation the prior day. Of course, he did not tell Mr. Westbrook.

[26] The deal was eventually signed. After discussion, Mr. Westbrook gave the “No Litigation Warranty” as, he says, he was unaware of any claim threatened against the plaintiff corporation by the customer or anyone else.

[27] Mr. Westbrook resigned from the board of directors of the plaintiff corporation and the two sides were separated. All that remained was for Mr. Rabinowitz to pay the two instalment of the purchase price after one and two years respectively.

[28] As the first anniversary of the share purchase agreement neared last October, counsel for Mr. Westbrook wrote to counsel for Mr. Rabinowitz to alert him that the first instalment of the purchase price was coming due. That day, coincidentally, the plaintiffs served the statement of claim and motion record in this proceeding. The claim and record could not have been prepared and issued within the brief time after receipt of the email from Mr. Westbrook’s counsel. Rather, after letting the matter sit for the year, Mr. Rabinowitz was ready to launch his plan as his first instalment came due.

[29] Quoting from their factum, the plaintiffs describe this claim as follows:

2. In this proceeding, the Plaintiffs claim that the Defendants knowingly and intentionally misled the Plaintiffs by concealing a pending claim from a cornerstone client, and induced them into purchasing the Defendants shares in their jointly owned corporation while knowing that a key client had threatened a large claim and concealing it from the Plaintiffs.
3. The Plaintiffs claim to have suffered damages in excess of the amount now owing by the Plaintiffs to the Defendants under the Share Purchase Agreement.

[30] After settling with the customer, the plaintiff corporation stopped accepting work from the customer. Therefore the plaintiff corporation’s revenue from the customer has been lost.

[31] Mr. Rabinowitz claims that he grossly overpaid for Mr. Westbrook’s shares because Mr. Westbrook failed to disclose that in June, 2020 the customer had threatened to bring another claim and Mr. Westbrook knew or ought to have known that, as it did the first time, the customer was likely to advance its claim against the plaintiff corporation in addition to Mr. Westbrook’s truck repair business.

[32] Mr. Westbrook submits that Mr. Rabinowitz has never intended to pay the purchase price for the shares. Before signing the share purchase agreement, he hatched a plan to advance a countervailing claim by paying a settlement to the customer he had no reason to pay, adding a warranty while knowing facts that could make it untrue, and cutting off the customer to inflate his claim for damages. And that is what came to pass he submits.

This Motion

(i) Irreparable Harm

[33] The plaintiffs move under s. 67 of the Personal Property Security Act, RSO 1990, c P.10 that deals with enforcement of security interests under Part V of the statute. Subsection 67 (1) provides in part:

67 (1) Upon application to the Superior Court of Justice by…an obligor who may owe payment or performance of the obligation secured…the court may,

(a) make any order, including binding declarations of right and injunctive relief, that is necessary to ensure compliance with Part V…; (b) give directions to any party regarding the exercise of the party's rights or the discharge of the party's obligations under Part V…; (c) make any order necessary to determine questions of priority or entitlement in or to the collateral or its proceeds; (d) relieve any party from compliance with the requirements of Part V…but only on terms that are just for all parties concerned; (e) make any order necessary to ensure protection of the interests of any person in the collateral, but only on terms that are just for all parties concerned;

[34] Mr. Karp submits that this provision entitles the court to make any order as is just between the parties without reference to the RJR-MacDonald Inc. v. Canada (Attorney General) test for interlocutory injunctions (and specifically without the need for proof that absent relief, the moving party will likely suffer irreparable harm).

[35] Mr. Karp also submits that his clients’ claims for equitable setoff likewise eliminates any need for proof of irreparable harm. He also analogizes to Rule 20.08 of the Rules of Civil Procedure, RRO 1990, Reg 194. Under that rule, the court can stay summary judgment on a claim where there is a counterclaim outstanding that may entitle the defendant to set off an amount of damages against the plaintiff’s judgment.

[36] I do not need to resolve the question of whether the plaintiffs may be entitled to relief without proof of irreparable harm. I am satisfied that the risk of loss of the plaintiffs’ business is harm that cannot readily be quantified in damages in this case. The family dynamics weigh heavily here. I have no idea if Mr. Westbrook intends to foreclose, sell, actually try to get paid, or just deny his estranged son-in-law and daughter of what he views as the product of his own largesse.

[37] But, Mr. Rabinowitz has problems on the rest of the analysis. He is in search of a cause of action. Moreover, whether under RJR MacDonald, equitable setoff, or the PPSA, the court is still guided by the justice and equities of the case.

(ii) Assessment of the Merits

[38] Mr. Karp submits that the plaintiffs’ causes of action arose in September, 2020 when the parties agreed to settle the prior litigation by Mr. Rabinowitz buying Mr. Westbrook’s shares. Mr. Karp submits that the plaintiffs have three causes of action from that time:

(a) Breach of fiduciary duty by Mr. Westbrook as a director of the plaintiff corporation; (b) Fraudulent misrepresentation; and (c) Oppression.

[39] None of these causes of action lie readily on the facts however.

[40] It is indeed true that directors of a corporation owe fiduciary duties to the corporation under the corporate statutes and the common law. Mr. Karp submits that Mr. Westbrook was duty-bound to report the threat received from the customer to the plaintiff corporation and the other director (or the threat he should have perceived due to the customer’s prior conduct).

[41] Mr. Karp provides no law to support the submission that when two partners are in the process of a divorce they remain duty-bound to look out for each other’s best interest by disclosure of material facts. The presumption that a fiduciary is obliged to look out for the interests of the beneficiary may be rebutted when each side is knowingly acting in his or her own self-interest such as in sale negotiations. Aronowicz v. Emtwo Properties Inc., 2010 ONCA 96, Simkeslak Investments Limited v. Kolter Yonge LP Limited, 2013 ONCA 116.

[42] I do not need case law to arrive at this conclusion however. Mr. Rabinowitz demonstrates the lack of fiduciary relationship himself. When he learned of the customer’s claim against the plaintiff corporation on October 15, 2021, Mr. Westbrook was still a director. Mr. Rabinowitz did not disclose the claim to Mr. Westbrook. Instead, after speaking to his lawyer, he hatched a plan to get Mr. Westbrook whom he viewed as a “thief”.

[43] If Mr. Rabinowitz owed fiduciary duties to the plaintiff company, the other directors, and the shareholders, as submitted by Mr. Karp, then Mr. Rabinowitz is guilty of the very thing he claims against Mr. Westbrook.

[44] But, at the relevant time, the parties were not on speaking terms and were embroiled in litigation. There is no basis in the evidence to think that either expected that the other was looking out for his interest. The claim for breach of directors’ duties therefore is weak at best.

[45] Mr. Karp conceded during oral argument that Mr. Westbrook made no overt misrepresentation concerning the value of the corporation or its shares before the settlement was reach. If Mr. Westbrook did not have a positive duty of disclosure, then there is no basis to impugn his silence.

[46] Finally, the oppression remedy has nothing at all to do with the conduct of settlement negotiations among represented parties. There is no reasonable expectation at play beyond the applicable law of contract.

[47] Even if there are contested facts as to what Mr. Westbrook knew or ought to have known in June, 2020 when he spoke to the customer, I doubt that the plaintiffs have a cause of action arising in September.

[48] Despite the flamboyant language of fraud set out in the plaintiffs’ factum, they plainly cannot show that they relied on anything said or done by the defendants once they spoke to the customer and hatched their own plan.

[49] That leaves the plaintiffs with a claim for breach of the “No Litigation Warranty” claim under the share purchase agreement. Reliance and inducement are probably not requisite elements of the breach of warranty claim. However, there are real issues as to whether the customer’s oral claim can amount to a breach of the warranty both because Mr. Rabinowitz already knew about it and also based on the wording of the warranty as drafted. There is also a question or whether the plaintiffs have a right to subrogate against the defendants when they voluntarily paid a claim that they knew did not lie against the plaintiff corporation and in circumstances where Mr. Rabinowitz determined to end the relationship with the customer. Damages too are very much in question.

[50] I cannot say that there is no claim at all under the “No Litigation Warranty” at this time. However, given the minimal test of merit applicable on a motion for an interlocutory injunction, I prefer not to base the outcome on this part of the analysis.

(iii) The Balance of Convenience and Weighing the Equities

[51] I readily accept that judgment on claims will generally not be made final where there is an integrally related counterclaim. It is not fair for one party to be required to pay when he or she may have a good countervailing and closely related claim to offset some or all of the plaintiff’s claim.

[52] But here, we are also dealing with security interests. The law does not readily interfere with the enforcement of security. Certainty of enforceability is an important policy of the law so that lenders and businesses will be assured of recovery of credit advanced in Ontario.

[53] Subsection 67 (1) of the PPSA, for example, is not aimed solely at protecting debtors from the due enforcement of security interests that they have granted. Rather, it discusses in each sub-paragraph quoted above, the protection of enforcement proceedings under Part V of the statute and relieving parties only on terms that are just to all.

[54] If I enjoin enforcement of the defendants’ security, the plaintiffs will have already succeeded partially on the merits. The whole point of security is to provide a lender with a panoply of rights that include self-help and out of-court actions. The secured creditor is always required to account and is never entitled to take more than the amount to which she or he is lawful due. But in the usual course, the accounting process occurs after the collateral is liquidated.

[55] To enjoin enforcement while the precise quantum of debt is determined would leave the plaintiffs able to organize their affairs for the next several years while this claim plays out motion after motion, meta-motion after meta-motion, appeal after appeal. Enjoining enforcement is essentially stripping the defendants of the security for which they bargained as a condition of allowing the plaintiffs to pay the purchase price in instalments over an extended time.

[56] After consulting with Mr. Rabinowitz during a break, Mr. Karp agreed that it would be appropriate for the court to require the plaintiffs to post alternative security to stand in the place and stead of the pledged shares.

[57] Absent this concession I would not grant the relief sought by the plaintiffs in the circumstance of this case.

[58] There is no innocent explanation for Mr. Rabinowitz’s October 15, 2020 email followed by this claim in October, 2021 when the first instalment of the purchase price was coming due. Mr. Karp submits that Mr. Rabinowitz saw an opportunity to use the settlement with the customer to launch a subrogated claim against Mr. Westbrook. He says that the “No Litigation Warranty” was just a standard clause in any share purchase agreement that just happened to be sought a day or two after Mr. Rabinowitz learned of the customer’s further claim. Even if this submission passed the giggle test, it does not matter. The determination by Mr. Rabinowitz to buy a claim that he could use to launch a subrogated action against Mr. Westbrook when it came time to pay for the shares raises its own issue of bad faith apart from his gilding the lily with the “No Litigation Warranty”.

[59] I find the risk of loss of the plaintiff company shares to be irreparable harm that can be conveniently and justly avoided by the posting of replacement security. Absent protection of the defendants’ security interest, I would not find the granting of relief to be just or convenient in this case. The plaintiffs do not come to court with clean hands at all. As noted previously, the family issues involved in the action give added motivations apart from commercial economics. The fact that Mr. Rabinowitz plotted to avoid paying the amount he agreed to pay to his father-in-law, whom he was willing to brand a “thief” to a common customer, discloses the ill-will lying behind this action.

[60] It is all too easy for a motivated party to flip or encumber assets to undermine the value of share pledge security while enforcement is enjoined. I find it fair and equitable to try to protect Mr. Rabinowitz’s continued ownership of the business but only if the plaintiffs do equity by providing alternative security.

[61] Mr. Karp advised that his clients were prepared to post a letter of credit for $275,000 representing the first instalment of the purchase price missed last October. That ignores the secured creditors’ rights to accelerate, to be paid interest, and to be paid their costs under the terms of the security interest. I told Mr. Karp at the hearing that if I determined to proceed in this manner, I would order replacement security for the full value of the accelerated principal debt, interest, and costs. In my view the fair amount for the plaintiffs to post as substitute security for the share pledge for now is $650,000. This can be re-visited if costs and interest mount or if the plaintiffs choose to make partial payment(s).

[62] I have provided the plaintiffs with about ten days to negotiate the wording of an acceptable letter of credit. It is just and equitable that as a term of providing them with so much time, that in the interim, until replacement security is posted by the plaintiffs, they be prevented from dissipating any value of their assets.

[63] On that basis an order is to go as set out in paras. [5] to [9] above. If the plaintiffs choose not to post a letter of credit or cash collateral with the Accountant by the close of business on March 4, 2022, then all of the orders are lifted and the parties will have their rights under statute and at common law.

[64] The defendants seek their costs on a full indemnity basis in the aggregate amount of $50,000 all-inclusive. The plaintiffs seek their costs on a partial indemnity basis fixed at $28,000 all-inclusive.

[65] I am cognizant of the normative requirement to award costs of a motion. However, in this case, I have concerns. First, the outcome should have been apparent to all and available without such a full evidence evidentiary and hearing process if they had been acting in good faith. I do not know why this motion had to play out so fully. But I am also not sure whether this is a case of black and white. Especially in family disputes, the legal aphorism, “it takes two to tango” usually applies. In addition, if the plaintiffs succeed at trial, then this motion may possibly take on a more positive light in retrospect. If the defendants succeed, costs on a punitive scale as sought may well be appropriate.

[66] I just cannot tell as yet.

[67] I exercise my discretion under s. 131 of the Courts of Justice Act, RSO 1990, c C.43 and Rule 57.03 to reserve costs to the trial judge or the judge who finally disposes of this action.

FL Myers Date: February 22, 2022