COURT FILE NO.: CV-20-641463-00CL
DATE: 20220124
SUPERIOR COURT OF JUSTICE – ONTARIO
COMMERCIAL LIST
RE: Keith Frederick Vessair, Bruce Daniel Vessair and Michelle Bennett, Plaintiffs
AND:
James Gary Vessair, Marlene Theresa Vessair, 340597 Ontario Inc. Paragon Marina and Sports Inc., South Bay Cove Yacht Haven Inc., Vessair Promotions Inc., B.J. Honeyman Holdings Limited formerly known as South Bay Cove Marina Inc., Lewis R. Mitz Professional Corporation and Lewis R. Mitz also known as Lewis Robert Mitz, Defendants
BEFORE: C. Gilmore, J.
COUNSEL: Emilio Bisceglia and Hana Tariq, Counsel for the Plaintiffs
Justin Necpal, Counsel for the Defendants 340597 Ontario Inc. and Paragon Marina & Sports Inc.
Jonathan Roth, Counsel for the Defendants James Gary Vessair, Marlene Theresa Vessair, South Bay Cove Yacht Haven Inc., and Vessair Promotions
Marc Kestenberg and Kevin Schoenfeldt, Counsel for the Defendants Lewis R. Mitz Professional Corporation and Lewis R. Mitz also known as Lewis Robert Mitz
HEARD: January 12, 2022
ENDORSEMENT on motion
introduction
[1] The Plaintiffs move for an Order granting them leave to bring a derivative action on behalf of 340597 Ontario Inc. (“340”) and Paragon Marina & Sports Inc. (“Paragon”) (collectively “the Companies”) against Lewis R. Mitz Professional Corporation and Lewis R. Mitz also known as Lewis Robert Mitz (“Mitz”) pursuant to s. 246 of the Ontario Business Corporations Act, R.S.O. 1990, c. B. 16 (“the OBCA”).
[2] Mitz acted in relation to the sale of the marinas owned by 340 and Paragon respectively. The Plaintiffs are directors and/or shareholders of the Companies and seek to commence a derivative action on behalf of the Companies against Mitz in relation to an alleged unauthorized distribution of sale proceeds. Mitz’s position is that the Plaintiffs have no valid claim against him, nor have they provided evidence of any losses suffered by the Companies. The Companies’ position is that leave should not be granted as the Plaintiffs’ claim is a personal one for their share of the proceeds of sale which were distributed to the Companies. The Companies have no claim in relation to the proceeds they received.
[3] For the reasons set out below, the motion for leave is denied.
BACKGROUND
[4] This action concerns the sale of two marina properties: one in Honey Harbour (“Paragon Marina”) and another in Port Severn (“South Bay Marina”). At the time of the sale, Paragon Marina was owned by 340 and South Bay Marina was owned by the Defendant, South Bay Cove Yacht Haven Inc. (“SouthBayCo.”).
[5] The Plaintiffs, Keith Frederick Vessair (“Keith”), Bruce Daniel Vessair (“Bruce”) and Michelle Bennett (“Michelle”), are minority shareholders of the Companies. The Defendant, James Gary Vessair (“Gary”), is the majority shareholder (70%) of the Companies. Prior to the sale, both marinas were managed by Gary and his wife, the Defendant, Marlene Theresa Vessair (“Marlene” collectively “the Vessair Defendants”). Mitz was the solicitor for the Companies and for SouthBayCo. The Plaintiffs have no interest in SouthBayCo or Vessair Promotions.
[6] Keith and Bruce are directors of Paragon. Whether Keith resigned as a director on April 5, 1980 is in dispute. 340 was incorporated in 1976 for the purpose of owning Paragon Marina. Gary and Marlene managed Paragon Marina and are officers and directors of 340. While the Plaintiffs had a minority shareholding interest in the Companies, they took no active part in the management of Paragon Marina.
[7] In September 1979, the brothers Gary, Keith, Roy and Bruce, along with Gary’s friend Robert Bennett (“Robert”) entered into a Shareholder’s Agreement (“the SA”) in relation to the shares of Paragon and 340. Roy’s shares were subsequently redeemed, and Robert’s shares were transferred to his wife Michelle. Gary and Marlene own 70% of the shares of Paragon and 340 and the Plaintiffs own the remaining 30% of the shares. A signed copy of the SA has never been located.
[8] SouthBayCo was incorporated in April 2015 for the purpose of owning South Bay Cove Yacht Haven in Port Severn, Ontario. Gary and Marlene are officers and directors of SouthBayCo.
[9] In March 2020, the Plaintiffs became aware that the Paragon and South Bay Marinas were being sold. On April 6, 2020, the Plaintiffs’ counsel wrote to Gary requesting confirmation that the sale proceeds would be held in trust. The sale closed on April 7, 2020. Paragon Marina sold for $1.575M and South Bay Marina was sold for $4.6M. According to Mitz, the majority of the proceeds of sale were received by 340 and SouthBayCo.
[10] The Plaintiffs did not object to the sale but to the distribution of proceeds. They claim that there was no resolution by the directors of Paragon authorizing the sale nor was there a shareholders meeting to approve the sale. Mitz was notified of this by the Plaintiffs and requested to hold the sale proceeds in trust pending the Plaintiffs’ consent. The Plaintiffs also sought financial disclosure in relation to the Companies.
[11] A month after the sale closed, the Plaintiffs were notified that the sale proceeds had been distributed to 340 and SouthBayCo and that Mitz had been authorized by Gary with respect to the distribution of sale proceeds. The Plaintiffs have not received any share of the sale proceeds.
[12] The Plaintiffs commenced the within action for oppression on May 25, 2020, shortly after the sale. The Plaintiffs amended their claim on June 7, 2021 to plead leave to commence a derivative action. The Plaintiffs’ claim in relation to the proceeds is framed against Mitz and not against the companies that received the proceeds or their majority shareholder, Gary.
[13] Specifically, the Plaintiffs claim that Mitz improperly distributed the sale proceeds to the owners of the marinas which was contrary to the Plaintiffs’ interest and that Mitz was negligent and breached his duty of care and fiduciary duty to the Plaintiffs by disbursing the funds to Gary or companies controlled by him when he was aware of the Plaintiffs’ interest in those funds.
[14] Mitz has maintained that the Plaintiffs have no claim against him and sought to strike that portion of the Plaintiffs’ claim. That led to the Plaintiffs amending their claim to bring a derivative action against Mitz.
[15] On November 17, 2020, the Plaintiffs gave notice of a meeting of the directors of Paragon called by Keith and Bruce. The Vessair Defendants took the position that the notice of meeting was invalid as Keith resigned as a director 40 years ago and Bruce on his own did not constitute a quorum of directors sufficient to pass resolutions.
[16] Notwithstanding the position of the Vessair Defendants, Keith and Bruce signed a director’s resolution which authorized Paragon to commence the within litigation, directed Paragon to produce their files to the Plaintiffs and further directed Mitz to pay all sale proceeds into Court to the credit of the within action. Mitz refused to comply with the direction.
[17] Gary then delivered a Notice of Special Meeting of the shareholders to Michelle and Bruce to remove all of the directors of Paragon except Gary and to elect Marlene to fill any vacancies. The Plaintiffs attended the Special Meeting on January 11, 2021 but contend that the meeting was improper and in breach of the provisions of the OBCA because Keith did not receive notice of the meeting, that their request for productions including the Minute Book was refused and that Gary was in a conflict of interest. Gary then proceeded to vote to remove Bruce as a director of the company, leaving only Gary and Marlene as directors.
[18] The action against the Defendant B.J. Honeyman Holdings Limited, formerly known as South Bay Cove Marine Inc., was discontinued on October 15, 2020.
What is the Test for Leave to Commence a Derivative Action?
[19] The test for leave in this case is well known and can be summarized as follows:
(a) he or she is a complainant within the definition contained in s. 245 of the OBCA;
(b) the directors of the corporation will not bring, diligently prosecute or defend or discontinue the action;
(c) the complainant is acting in good faith; and
(d) the action "appears" to be in the interest of the corporation.
In s. 245 of the OBCA, "complainant" means,
(a) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates,
(b) a director or an officer or a former director or officer of a corporation or of any of its affiliates,
(c) any other person who, in the discretion of the Court, is a proper person to make an application under this Part.
[20] There is no dispute that Bruce and Michelle are shareholders of Paragon and that Bruce is a director of Paragon. Those parties therefore fit within the definition of a “complainant” under the OBCA.
[21] With respect to the second part of the test, the Plaintiffs submit that Mitz has refused to produce his file and that Gary has removed all of the other directors except himself and filled the vacancies with his wife Marlene. Given that Gary gave instructions to Mitz to distribute the proceeds of sale to Paragon and 340, it is clear that he will not be commencing an action against the Companies. The Plaintiffs therefore submit they have met the second part of the test.
[22] It is apparent from the background facts in this case that Gary has no intention of commencing any action against the Companies or against Mitz. The focus of the arguments in this case was on the third and fourth part of the test.
[23] I find therefore, that the first and second parts of the test have been met.
Good Faith
[24] The Plaintiffs submit that they are acting in good faith. They support their argument by giving several examples of how the Defendants are acting in bad faith. First, the Plaintiffs point to the fact that the Defendants have not tendered any evidence from anyone with first- hand knowledge of the circumstances. Mitz has not provided an affidavit; only an affidavit from his law partner was provided. Also, Gary did not file an affidavit in defending this motion. He relies on the affidavit of his brother Roy,who is neither a party to this proceeding nor a shareholder in the Companies.
[25] The Plaintiffs submit that. Mitz has failed to produce a copy of the sale file including the trust ledger statement or any cheques despite requests from counsel and the Director’s Resolution from Keith and Bruce. The sale file does not contain privileged or confidential documents and there is no reason for it not to be produced. There is therefore no actual evidence of what happened to the sale proceeds other than Mitz’s statement that the majority of sale proceeds were disbursed. The Plaintiffs made good faith efforts to obtain this material but continue to be rebuffed.
[26] Mitz did not act in good faith. Initially he acknowledged the Plaintiffs’ 30% interest but later changed his position. Mitz sided with the Defendants and ignored what he had previously acknowledged was the Plaintiffs’ interest in the sale proceeds.
[27] The Plaintiffs have always acted in good faith in this proceeding. They gave proper notice of the meeting held on November 27, 2020. In contrast, Gary, on behalf of the Companies, has not acted in good faith. Gary arranged to have Bruce removed as a director at the January 2021 meeting so that he could control this litigation.
[28] The Plaintiffs contend that commencing a derivative action would not overlap with their personal claims and that in any event, such overlap is not uncommon in cases such as this. In Jennings v. Bernstein, 2000 CanLII 22789 (ON SC), [2001] O.J. No. 831, the responding parties argued that the claims to be advanced in the proposed derivative action could be asserted equally in the Plaintiff’s personal claim for oppression and that such duplication undermined the good faith of the complainant as the motion was purely tactical: at para. 46.
[29] The Court gave leave to the Plaintiff in Jennings having found that there were differences between the oppression claim and the derivative action, the main one being that the corporate defendants in the derivative action were not parties to the oppression claim. The Court agreed that there were some similarities in the relief sought from Dr. Bernstein personally in both actions but that did not detract from the justification for the derivative action: at para 50.
[30] The Plaintiffs also rely on Agisheva v. Petrov, 2019 ONSC 3872, [2019] O.J. No. 4008. In that case, certain shareholders who owned 50% of the shares of the subject company accused other shareholders of diverting business from the company to themselves. Both sets of shareholders brought motions for leave to bring a derivative action against the company. The Court was asked to determine the proper procedure to resolve a dispute between the shareholders arising out of the joint venture undertaken through the company.
[31] The Court, in granting leave to the Applicant shareholders rejected the Respondents’ argument that the Applicant’s claim was in substance a personal claim against the Respondent shareholders: Agisheva, at para. 29. The Court also drew an adverse inference against the Respondent shareholders as a result of their failure to respond to relevant questions and to questions on discovery: at para. 32.
[32] The Plaintiffs request that this Court draw an adverse inference in relation to the Defendants’ refusal to provide even the most basic disclosure including Minute Books and the sale file of Mitz.
[33] Counsel for the Vessair Defendants, Mr. Roth, submits that the Plaintiffs have failed to meet their onus of proving they acted in good faith. On the contrary, they have spent much time telling the Court about the bad faith of the Defendants. That is not the test. As the relief sought by the Plaintiffs is considered extraordinary relief, it is their onus to establish good faith. Doing so by simply making bald assertions is not sufficient.
[34] The Vessair Defendants raise a number of issues with respect to the Plaintiffs’ failure to demonstrate good faith:
a. The Plaintiffs have never shown any interest in the Companies prior to the sale and were content to let Gary and Marlene operate them for the last 40 years. There is no evidence that any of the Plaintiffs attended any meetings of the shareholders or directors for decades prior to commencing this litigation.
b. There is no evidence that a SA was ever entered into by the parties. In fact, the affidavit of Roy Vessair (a former director Paragon) indicates that it was never signed.
c. Keith Vessair resigned as a director on April 5, 1980. This is confirmed in the affidavit of Roy Vessair and the copy of the resolution which was provided to the Plaintiffs’ counsel by Mr. Roth on November 20, 2020. Despite this evidence, the Plaintiffs insisted on proceeding with their purported Directors’ Meeting in November 2020. The Plaintiffs knew that they did not have a quorum and that any resolution they passed would be invalid. The Plaintiffs’ reliance on an out of date corporate profile is misplaced. The Plaintiffs’ actions were not in good faith when they continued with the Directors’ Meeting and relied on the resolutions resulting from that meeting despite their knowledge of Keith’s resignation as a director.
d. The timing of the Plaintiffs’ motion for leave should be examined. On the day before a Case Conference to schedule Mitz’s motion to strike the claim against him, the Plaintiffs indicated they would be bringing their motion for leave. The delay in bringing the motion for over a year after they commenced their claim is a relevant consideration with respect to the Plaintiffs’ onus of demonstrating good faith.
e. The Plaintiffs are seeking leave within the existing action and not as a separate stand-alone action. This will increase costs and create both procedural issues and conflicts that will benefit only the Plaintiffs. The Plaintiffs will request that the Companies shoulder the legal costs thereby avoiding the costs themselves. There is also the strong possibility of a conflict of interest between the Plaintiffs’ personal interests and those of the Companies. The presence of a potential conflict is an appropriate consideration in determining whether to grant leave as per Wiens v. 1814047 Ontario Inc., 2020 ONSC 7634, at para. 17..
f. The Agisheva case relied upon by the Plaintiffs does not apply. In that case there was evidence that money in question was not deposited into the company’s account. In the case at bar there is clear evidence that the sale proceeds were paid to the Companies.
[35] Mr. Kestenberg on behalf of Mitz expanded on the issue of the timing of the within motion. As early as May 2020, Mr. Kestenberg wrote to Mr. Bisceglia with his position that the Plaintiffs’ claim did not disclose any cause of action against his clients and any such claim would have to be advanced by Paragon and not the Plaintiffs. He indicated that unless the Plaintiffs obtained leave to bring a derivative action, he would be bringing a motion to strike the Statement of Claim as it related to his client.
[36] In October 2020, Mr. Bisceglia advised that he would not be bringing the motion for leave at that time. The Plaintiffs amended their claim in May 2021. Mr. Kestenberg then served his motion to strike and set an appointment with the Court to schedule the motion on June 25, 2021. It was only at that point that Mr. Bisceglia advised he would be bringing a cross-motion for leave.
[37] Mr. Kestenberg’s submission was that timing is important in terms of good faith because the Plaintiffs only took steps to obtain leave when their personal claims were in jeopardy.
[38] Mr. Kestenberg defends Mitz’s position not to produce his file. This was because Mr. Roth’s clients would not agree to its production. To date, the file has not been produced to anyone and Mitz takes the position that given the dispute between the parties he will produce the file only on the consent of the parties or on Order of the Court.
[39] Notwithstanding the Defendants’ complaints, I find that the Plaintiffs, while perhaps misguided, acted in good faith and pursued their claims as best they could. It is likely the case that if the sale file had been produced early on, that may well have solved many of the questions in this case. However, in the face of a lack of response to their queries, the Plaintiffs took steps to hold a meeting of the directors. Whether or not Keith remained a director is a finding that I need not make on this motion. The fact is that the Plaintiffs took the required steps and gave notice under the OBCA. The Plaintiffs, while entitled to same, still have not received copies of the Minute Books.
[40] The response to those actions by the Defendants was to remove Bruce as a director. Given the Plaintiffs’ undisputed shareholding interest in the Companies, it is unclear why the Defendants took such aggressive action against them unless the reason was, as stated by Mr. Bisceglia, to ensure that Gary had control over the litigation.
[41] As to the amount of time taken by the Plaintiffs to bring this motion, it does not appear that anyone in this case has been in a particular hurry. For example, the defence of the Vessair Defendants was not received until August 2021. Some of the delay in this matter can be attributed to the pandemic and other delays must be shared since I accept that at some points Mr. Bisceglia was simply being “stonewalled” in relation to his request for documents and information.
Does the Proposed Action Appear to be in Best Interests of the Corporation?
[42] On this critical issue, I differ with the position of the Plaintiffs. I agree with the Defendants’ submissions that the Plaintiffs are unable to get over the hurdle of determining the harm to the Companies. While we do not know the exact amounts, it is clear that funds from the sale were disbursed to the Companies and SouthBayCo. The Plaintiffs confirm this at paragraph 37 of their Statement of Claim. It is also confirmed in the affidavits of Bruce and Michelle.
[43] The Defendants correctly note that there is no evidence that the money went anywhere else and that there is therefore no evidence of any harm to the Companies. The Plaintiffs’ claims in relation to the distribution of sale proceeds are made against Mitz alone despite the fact that Mitz was clear that he received direction from Gary as the majority shareholder and that the Companies and SouthBayCo received the proceeds.
[44] This is different from the Agisheva case in which funds owed to the company were deposited into a separate account opened by the opposing shareholders: at para 17. Further, the opposing shareholders refused to produce certain information on discovery, leading the Court to draw an adverse inference: at para 32.
[45] The Plaintiffs did not ask for any disclosure of cheques or sale funds in the context of this motion despite it being their burden to demonstrate that some harm to the company would result if the derivative action were not brought. While frustrated at their inability to access the information they sought, the Plaintiffs did not take steps to acquire it by way of either this motion or a Rule 39 examination of Mitz.
[46] The basis of the Plaintiffs’ claim relates to them seeking their share of the sale proceeds of 340 (and possibly SouthBayCo). This is where the conflict issue raised by defence counsel is grounded. The Plaintiffs’ claim lies against 340, a company in which they have a shareholding interest. It does not make sense for them to sue on behalf of 340 when the basis of their claim is against 340 and Gary. The Plaintiffs are therefore unable to demonstrate the primary purpose of bringing their derivative action is to benefit the Companies when their real claim lies against them.
[47] There is no evidence in this record that the Companies suffered a loss. Further, the Plaintiffs did not object to the sale, the sale process or the amounts for which the marinas were sold. While the Plaintiffs complain that they did not receive a shareholders’ resolution or notice of a meeting with respect to the sale, these complaints were not raised until after the sale was completed.
[48] The case law is clear that granting the right to bring a derivative action is an extraordinary remedy. In Hevey v. Wonderland Commercial Centre Inc., 2021 ONSC 540, 154 O.R. (3d) 86, the Court, in citing Agisheva, Chandler v. Sun Life Financial (2006), 2006 CanLII 3272 (ON SC), 14 B.L.R. (4th) 171 (Ont. S.C.) and Zeifmans LLP v. Mitec Technologies Inc., 2019 ONSC 3643, [2019] O.J. No. 6523, concluded that while some parts of the test under s.246 may have a low bar on their own, the test as a whole is an extraordinary remedy: at paras. 39-43. Further, the test is a conjunctive one such that even though I have found that the Plaintiffs have met the first three parts of the test, the fact that they have not met the fourth part of the test means that their motion must fail.
[49] In the end, dismissal of the motion will not interfere with the Plaintiffs’ rights as they will maintain their claim against the Companies and Gary for their share of the sale proceeds.
ORDERS
[50] Given all of the above, I make the following Orders.
a. The Plaintiffs’ motion for leave to commence a derivative action is dismissed.
b. Mitz to produce his sale file (redacted for privilege) for the sale of both marinas to all parties and their counsel including but not limited to his sale report, trust ledger and copies of cheques. The file is to be produced forthwith at Mitz’s cost.
COSTS
[51] Counsel were asked for their oral submissions on costs at the conclusion of the motion. Mr. Bisceglia’s costs were $5,000. Mr. Roth seeks partial indemnity costs of between $10,000 and $15,000. Mr. Kestenberg seeks partial indemnity costs of $12,500 and Mr. Necpal seeks partial indemnity costs of $1,000.
[52] The Plaintiffs have not succeeded on this motion. Costs should follow the event, however, given that this litigation is still in its early stages, costs should be made payable by the Plaintiffs in the cause. In the circumstances, the Plaintiffs will pay to the Companies $1,000, to. Mitz, $5,000, and to the Vessair Defendants $5,000, for a total of $11,000, all payable by the Plaintiffs in the cause.
C. Gilmore, J.
Date: January 24, 2022