Court File and Parties
COURT FILE NO.: 20-83041
DATE: July 19, 2022
SUPERIOR COURT OF JUSTICE – ONTARIO
BETWEEN: Enzo Mastromattei v. Giacomo Mastromattei also known as Jack Mastromattei and Angela Savasta
BEFORE: Honourable Mr. Justice Martin James
COUNSEL: Christopher A. Moore, Counsel for the Applicant Jonathan P.M. Collings, Counsel for the Respondent
DATE HEARD: September 28, 2021
REASONS FOR DECISION
James J
[1] This is an application brought pursuant to S. 248 of the Business Corporations Act, R.S.O. 1990, c. B. 16 (the “Act”).
[2] The applicant, Enzo Mastromattei (“Enzo”), is a 50% shareholder and one of two directors in a restaurant business operated by Monkey Joe’s Ltd (“MJL”).
[3] The respondent, Giacomo Mastromattei (“Jack”), is the other director and a 50% shareholder in MJL.
[4] The respondent, Angelina Savasta (“Angie”), is Jack’s wife.
[5] Enzo and Jack are brothers.
[6] The restaurant was located in the Westgate Shopping Mall in Ottawa. They leased the premises from RioCan Holdings Inc. The lease expired on April 30, 2017 and an agreement amending and renewing the lease extended it to April, 2022.
[7] Jack accepts as correct the following summary in paras 3 to 12 of Enzo’s factum (italics added):
- In the year 2000 a Unanimous Shareholder’s Agreement (“USA”) was entered in to between Enzo and Jack. Although the Agreement was extensive, for the purposes of this application the following provisions apply:
a) Enzo and Jack each owned 52 Common Shares in the Corporation;
b) Enzo and Jack were the only two directors of the Corporation;
c) Unanimous shareholder approval was required before any action would be taken that would result in a material change in the nature of the business;
d) Unanimous shareholder approval was required before the Corporation could sell, lease, exchange or dispose of it’s undertaking or any part thereof as an entirety or substantially as an entirety;
e) Unanimous shareholder approval was required prior to the Corporation pledging or otherwise encumbering the whole of its assets or any part thereof except in the ordinary course of business;
f) Unanimous shareholder approval was required in order to increase or decrease any renumeration being paid to either Enzo or Jack;
g) Unanimous shareholder approval was required before entering any contract between the Corporation and any person not dealing at arm’s length with any of the shareholders or make a payment to any person not dealing at arm’s length with any of the shareholders;
h) Proper books of account were to be kept by the Corporation and entries shall be made therein on all matters, terms, transactions and things as are usually written and entered into books of accounts in accordance with generally accepted accounting principles;
i) The accountants for the Corporation shall have access to all the books of accounts, records, vouchers, papers and documents of which may relate to the Corporation in order to prepare the annual financial statements;
j) The Corporation shall maintain a bank account in the name of the Corporation and such account shall require the signatures of both directors;
k) All monies received from time to time for the account of the Corporation shall be immediately paid into the Corporation’s bank account;
l) Parties agreed that to the extent that the Corporation required funds for which the Corporation’s bank would not advance, such funds should be obtained from the Shareholders and recorded as Shareholder loans. Unanimous Shareholder approval is required in order to repay any such Shareholder loans.
In 2003 the corporation amalgamated with another corporation equally owned by Enzo and Jack at which time each of them held 102 shares in the amalgamated corporation and continue to do so until now. Further Enzo and Jack were the only directors of the corporation with Enzo being the President and Jack the secretary. There has been no change in the officers or directors since the amalgamation in 2003.
In the year 2012, Enzo backed away from the day-to-day operation of the restaurant business and his son Jonathan was employed by the business to provide administrative services. The expectation at the time was that Jonathan would acquire Enzo’s shares in the Corporation and take over Enzo’s position.
In furtherance of that strategy, the Corporation commenced to pay Enzo monthly amounts towards the purchase of his shares with the intention of those funds being converted into a loan owed to the Corporation by Jonathan.
Unfortunately, an agreement between Jack and Enzo could not be reached with respect to Jonathan’s acquisition of Enzo’s shares and Jonathan left the business in early 2016. At that time there had not been any difficulties encountered with respect to the Corporation being ablet o pay its income tax, Harmonized Sales Tax (HST), source deductions or Employee Health Tax (EHT) and all financial statements and income tax returns had been prepared and filed in a timely fashion. In particular, the financial statements and income tax returns for the year end of October 31, 2015 were completed and submitted on time.
Based upon the expectation that Jonathan would acquire Enzo’s shares, Enzo had removed himself from the day-to-day operation of the Corporation starting in approximately2012. Once Jonathan left the business in early 2016, Enzo did not become involved in the day-to-day operation of the business but continued to be involved in the administrative aspect of the business by way of monitoring the bank account, the remittance of source deductions, income tax, HST and EHT and reviewing and approving financial statements.
In or about 2017, the Canada Revenue Agency (CRA) conducted an audit for the years2011 to 2015 to determine whether MJL expenses were personal expenses based upon payments made by the Corporation on behalf of Jack and Jonathan. As a result, certain expenses were determined to be personal benefits to Jack and Jonathan. As Jonathan was nota shareholder, CRA applied those expenses to each of Jack and Enzo’s tax returns as additional income based upon employee benefits received. This audit had a minor effect on the income and expenses of the Corporation which resulted in a small amount of additional tax to the Corporation but did result in significant additional tax being assessed against the shareholders.
In addition, CRA further assessed additional income against the shareholders based upon outstanding Shareholder loan accounts owing by the shareholder to the Corporation.
The tax owing with respect to this assessment has been paid by Enzo but was not paid by Jack and CRA issued several third party demands to MJL against Jack making it difficult to remit any payments to Jack.
Subsequent to Jonathan’s departure from the company it became apparent to Enzo that the Corporation became late in remitting HST, source deductions, income tax payable and EHT payments. As a result, notifications were being received by Enzo on a regular basis with respect to these late payments.
[8] Enzo says that Jack and Angie attempted to negotiate the renewal without Enzo’s knowledge or approval.
[9] Jack says that Enzo had adopted an obstructionist stance in their dealings regarding MJL and Jack decided that Enzo ought to be left out of the discussions with RioCan.
[10] In 2019, RioCan negotiated with Jack to buy out the MJL lease. Enzo says he was not aware of the discussions until he saw the sum of $847,500.00[^1] deposited into the corporate bank account for MJL. Apparently the funds were then transferred out to another account in Jack’s name alone.
[11] Jack and Angie arranged for loan documentation to be prepared that indicated that MJL was indebted to Angie for loans and unpaid salary. This indebtedness was secured with a general security agreement. Jack transferred $300,000.00 from the RioCan payment to Angie.
[12] In addition, some of the funds were used to pay less controversial debts of MJL, including $97,500.00 paid to CRA in relation to the RioCan transaction.
[13] Enzo also says that CRA seized $101,159.13 belonging to MJL on November 22, 2019 from an account controlled by Jack. These funds were part of the RioCan payment. The money was seized on account of Jack’s personal tax liability.
[14] The last financial statement for MJL was for fiscal 2016. It is not clear whether this financial statement was finalized or remains in draft form.
[15] Jack says he has been working with the accounting firm KPMG to bring the statements up to date and that the 2017-2018 statements have been completed and the 2019 statement is close to completion.
[16] MJL has not been active since 2019.
Position of the Applicant
[17] Enzo says the respondents misappropriated the RioCan payment and about half of the funds have not been accounted for.
[18] The respondents fabricated a retroactive, non-arms length loan and security agreement to facilitate the transfer of almost $300,000.00 of corporate funds to Angie personally. Most of this amount is claimed to be unpaid salary for three years but there is no employment contract, no corresponding entries in the corporate records, and no reporting of accrued income on Angie’s tax returns. Some of the funds were used by Angie to purchase real estate.
[19] Jack transferred his real estate interests into the name of other family members.
[20] MJL ought to be wound up but the misappropriation and delays in providing a full accounting have prevented this process from being completed.
[21] Enzo says $334,695.89 is missing from the RioCan payment after having accounted for $101,159.13 taken from Jack’s account by CRA, $97,000.00 paid in HST from the RioCan transaction and $314,144.98 paid into the trust account of respondents’ counsel.
Position of the Respondents
[22] The respondents say that MJL was mismanaged by Enzo’s son, Jonathon, and when he left the business, Jack was “forced” to maintain the record keeping. Record keeping was difficult due to Jack’s inexperience and problems accessing the documentation.
[23] The RioCan transaction was a great opportunity and Jack didn’t want Enzo jeopardizing the deal. Also, the RioCan funds had been deposited in the MJL bank account, the proceeds would have been subject to seizure by CRA. The respondents say that a large amount of back taxes was owed due to Johnathon’s mismanagement. CRA audited MJL and related corporations in 2016.
[24] The CRA audit identified expenses charged to MJL that related to a corporation controlled by Enzo called Unique Auto.
[25] Enzo and Jonathon misappropriated funds belonging to MJL and this is the focus of a separate ongoing action.
[26] These considerations led Jack to put the RioCan proceeds in a separate bank account. He says he has kept “fastidious records” of all transactions.
[27] The respondents dispute Enzo’s claim that they used MJL funds to pay personal expenses.
[28] Jack says he transferred the family home into his wife’s name in 2019 “as a result of a long-held strategy and plan” for investment purposes. He says this transfer had nothing to do with the redirection of hundreds of thousands of dollars out of MJL at around the same time.
[29] The respondents contributed personal funds to pay MJL expenses.
[30] They say that the general security agreement in favour of Angie was a bona fide recognition of her cash injections and the labour she performed for MJL over a long period of time. Angie says that the indebtedness owed to her is composed of $131,040 of wages from 2016 to 2019 for which no contemporaneous documentation exists. She says that she transferred $7,500.00 from her RRSP in 2017 and 2018 and injected the money into MJL. In addition, she says that she advanced $166,068.15 to MJL by way of cash, cheques and bank transfers between 2016 and 2019.
[31] According to the affidavit of Jesse Bilodeau sworn September 17, 2021, the respondents’ counsel is currently holding $173,369.51 in trust.
Discussion and Analysis
[32] The oppression remedy focuses on harm to the legal and equitable interests of a wide range of stakeholders affected by oppressive acts of a corporation or its directors. This remedy gives a court broad jurisdiction to enforce not just what is legal, but what is fair. Oppression is also fact specific: what is just and equitable is judged by the reasonable expectations of the stakeholders in the context and in regard to the relationships at play BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560, 2008 SCC 69 at paras 45,58-59.
[33] Briefly stated, the remedy engages a two-step analysis:
a. Was a reasonable expectation of a stakeholder breached, and;
b. If so, did the breach of the reasonable expectation amount to oppression, unfair prejudice or unfair disregard for the interests of the aggrieved party?
[34] The USA provides important context for determining Enzo’s reasonable expectations. The USA required Jack to obtain Enzo’s agreement to:
a. Materially change the nature of corporate operations;
b. Surrender the lease to RioCan;
c. Grant security and make payments to Angie; and
d. Change signing authorities on the MJL bank account.
[35] Jack’s concern that Enzo would jeopardize or even veto the lease surrender to RioCan was not a legitimate basis to circumvent Enzo’s participation in the transaction. As equal shareholders and the only two directors, no significant corporate decisions could be made or implemented without unanimous agreement. Both Enzo and Jack were duly bound as directors to act in the best interests of MJL. They had a legal obligation to ensure that they did not put their personal interests ahead of the corporation.
[36] The fact that the RioCan transaction was fortuitous and beneficial, especially considering the implications for a restaurant business due to the pandemic, does not change the nature of the obligations owed to each other and to the corporation.
[37] The respondents say that the applicant has no standing to bring an oppression application on a personal basis. I do not agree. Firstly, the respondents do not cite any authority to support this contention. Secondly, s. 245 of the Act defines a “complainant” to include a director and officer. Section 248 permits a “complainant” to apply for relief under this section (being the oppression remedy provisions). The oppression remedy set out in s. 248 is separate from the derivative action provisions set out in s. 246.
[38] I find that Enzo’s reasonable expectations were breached but does the breach amount to oppression? In my view, the answer is unequivocally yes. They were the only two shareholders and directors, so they were in a close relationship. They owed duties to each other and the corporation. The diversion of funds by Jack was detrimental not only to the corporation, but to Enzo as well. The RioCan transaction created a significant tax liability which, if unpaid, would affect the directors. Enzo was entitled to share in the net profits, if any, of the transaction by way of dividends. Enzo was not only entitled but also obligated as a director to participate in the corporate decision-making. Jack’s action had a direct and significant detrimental effect on Enzo’s interests that amounted to “oppression” within the meaning of the Act.
[39] While it may be that the RioCan transaction was in the best interests of MJL, the manner in which it was implemented negatively affected the interests of both the corporation and Enzo as the only other director and shareholder.
[40] In all the circumstances, I find that the respondents’ actions amounted to oppressive conduct and were unfairly prejudicial to Enzo, thereby entitling Enzo to obtain an appropriate remedy.
[41] In coming to this conclusion, I recognize that it may have been improper for Enzo to withdraw from the engagement of MJL while he still had director’s duties. As for Jack, even if Enzo was difficult to deal with and corporate decision-making was at a stalemate, Jack had no right to ignore him, to exclude him from the RioCan discussions, to unilaterally grant security to his wife or to divert funds away from MJL’s authorized bank account.
[42] I recognize as well that either or both Enzo and Jack may have used corporate funds for non-corporate purposes, which ought to become apparent when a proper accounting is prepared. The same consideration applies to any injection of funds, that is, advances that may have been made that did not comply with all formalities. One objective is to try to bring some order to the corporate records that is fair to all parties. The applicant requests that the respondent pay for the preparation of the MJL financial statement from 2016 to 2021. In my view these costs should be corporate expenses. The circumstances as to why Enzo did not play a more direct role in the corporation’s affairs when he is and was the president and a director is not clear. On the available evidence it appears that he was not attentive to his responsibilities. At the same time, it appears that Jack had access to the records because he was involved in the MJL operations until it closed and says he has kept detailed records so he should have primary responsibility for having the financial statements brought up to date.
Disposition
[43] The respondents shall retain a chartered accountant at their own expense to prepare a full accounting of the disposition of the RioCan payment of $847,500.00. The respondents shall cooperate in the preparation of the accounting and provide all relevant documentation within their possession and control to facilitate and support the preparation of the accounting.
[44] The general security agreement granted to Angie shall be discharged forthwith. Any funds from the RioCan payment that remain in the form of cash or cash equivalents are to be paid into her counsel’s trust account within 30 days. This includes amounts received on account of both her wage claims and alleged advances to MJL. To the extent that there is any shortage in the amount paid into trust, Angie must account for the missing funds within 60 days, including production of all primary source documents that indicate where the money went. For greater clarity, Angie’s obligation to account for missing funds is in addition to the accounting referred to in the previous paragraph.
[45] The wage component of her claim is disallowed in its entirety, substantially for the reasons identified by Enzo. The validity of her loan advances to MJL are to be dealt within the context of the corporate accounting process. I do not think it is appropriate to ignore or disallow proven advances by Angie if there was an established practice by Enzo and Jack to advance loans to MJL without complying with all by-laws or the USA. In short, Angie’s financial support for MJL, if proven, should not be held to a different standard than the support provided by either Enzo or Jack.
[46] The respondents shall arrange for the corporate financial statements to be completed and brought up to date within a reasonable time at the expense of MJL. Enzo shall cooperate in the preparation of the statements and shall comply with any reasonable requests for information from the accountants preparing the statements.
[47] When the financial statements and income tax returns have been brought up to date, the funds shall be distributed either by agreement or a further order.
[48] If the parties cannot agree on costs, the applicant may submit a brief costs outline and draft bill of costs within 21 days and the respondents shall have 21 days to respond.
Justice M.S. James
DATE: July 19, 2022
[^1]: This amount consisted of a payment of $750,00.00 plus HST for $97,500.00 for a total of $847,500.00.