COURT FILE NO.: CV-18-4479-00 & CV-15-5603-00
DATE: 2022 09 06
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
Marijana Mudronja
Dalkeith Palmer and Latania Dyer for the Applicant
Applicant
- and -
Eddy Mudronja and Mareddy Corporation
Monica Peters, for the Respondents
Respondents
HEARD: April 19, 20 21, 22 and May 18
REASONS FOR DECISION
MCGEE J.
Overview
[1] The respondent Eddy Mudronja (“Eddy”) owns 60% of the common shares in the respondent corporation known as “Mareddy.” He wishes to purchase the remaining 40% of its common shares which are owned by the applicant, Marijana Mudronja (“Marijana”) for $1,342,000.
[2] Eddy and Marijana are high conflict former spouses. Marijana rejects the payment of $1,342,000. Her valuator has assessed the value of her shares in excess of Eddy’s offer, with an additional component of economic loss.
[3] In reasons released December 17, 2020 Justice Shaw timetabled this trial of an issue to decide the amount that Eddy would pay to purchase Marijana’s shares. Justice Shaw’s reasons were predicated on Eddy and Marijana’s agreement that he would purchase her shares for an amount to be determined by the Court. Justice Shaw’s December 17, 2020 reasons set the date upon which the sale price would be determined: January 31, 2017. These reasons decide the amount to be paid by Eddy.
[4] The agreement for the sale of Marijana’s shares to Eddy supplants the alternative relief plead within this Application: a wind up of the respondent corporation.
[5] The amount to be paid by Eddy primarily turns on whether or not Eddy, as the majority shareholder, has oppressed Marijana’s interests in the corporation in a manner that has caused economic harm to the value of her shares.
[6] For the reasons set out below, I find that Eddy has acted oppressively, and I set the purchase amount of Marijana’s common shares in Mareddy at $1,832,054.60, plus prejudgement interest.
[7] Marijana further asks that I change the valuation date of January 31, 2017 so that the purchase of her shares be transacted as at their current day value, or alternatively, that the value of her shareholding be remedied pursuant to section 248 of the Ontario Business Corporations Act.
[8] This is a Trial of an Issue, not the Trial of the Application. I have decided that it is outside the scope of these reasons to change the valuation date of January 31, 2017. Should Marijana wish to so proceed, I have set out the next steps at the conclusion of these reasons.
Background
[9] Eddy and Marijana married in 1986. They were hard working, entrepreneurial and lucky. From joint savings and money earned in a series of joint ventures they were able to purchase a small commercial unit out of which Eddy and Marijana’s brother operated an auto parts manufacturing business named Jitsu Manufacturing Inc.(“Jitsu”)
[10] Eddy has been the sole shareholder of Jitsu since its formation in 1994; although he suggested in a spontaneous utterance during his cross examination that one or both of the parties’ adult sons may now be shareholders.
[11] A court recess was called. Eddy then retracted his assertion.
[12] I was then advised that Eddy had been seen speaking with his accountant, Mr. Sasa Jurovicki during the court recess. At the time, Eddy was under cross examination and Mr. Jurovicki had not yet testified. A voir dire was held to determine if either Eddy or his accountant had changed their testimony as a result of their unpermitted discussion. Each denied discussing their testimony and Eddy apologized to the Court, indicating that he had not understood that he was not to talk to anyone while under cross examination.
[13] I do not need to determine Eddy’s credibility on this point, because nothing comes of the current ownership structure of Jitsu. Eddy was the controlling shareholder of Jitsu at all times relevant to this proceeding. His conduct and the extra time required at Trial to deal with his discussions with his next witness while he was under cross examination can be addressed in costs.
[14] In 1996 title to the commercial unit was placed into a corporation named “Mareddy,” which Marijana and Eddy incorporated for the purpose of holding title to the land and buildings from which Jitsu operated. 600[^1] common shares in Mareddy were issued to Eddy and 400 common shares were issued to Marijana. Eddy was the president of Mareddy, and Marijana was recorded as an officer and a director.
[15] When Jitsu outgrew the commercial unit, it was sold, and a 13,000 square foot building was purchased for Jitsu’s operation, the “Pacific Circle” property. That building was sold prior to 2001 and a larger commercial building located at 6880 Davand Dr. Mississauga was purchased for $3,050,000 on August 31, 2001. The Davand property is a 54,695 square foot industrial property, close to major transportation routes, out of which Jitsu operates to this day. Jitsu has always been the only tenant of Mareddy.
[16] In 2007 Mareddy purchased another property, 205 Mary Street in Brantford, Ontario.
[17] By the time that Eddy and Marijana separated in November of 2007, Jitsu had grown into a highly successful metal stamping company specializing in automotive tooling and welded assemblies. From time to time, it also earned income through the sale of scrap metal.
[18] Eddy and Marijana’s separation in 2007 was a complete failure. Rather than sorting out the financial issues arising from the end of their marriage in a business-like manner, they each engaged in high handed tactics, blind to the fall out of their conflict on each other, their children, and the courts.
[19] Eddy removed Marijana as a director of Mareddy in 2009 by way of a resolution passed by him at a March 9, 2009 shareholder’s meeting. He sold the Mary Street property on March 1, 2010 without Marijana’s consent, contrary to a preservation Order. Eddy never provided Marijana with any information about Mareddy or its tenant, Jitsu, the operating company. Marijana wrongly attempted to obtain information surreptitiously, and as a result, was the subject matter of a restraining Order. She overheld the jointly owned matrimonial home in a state of disrepair and took monies from a son’s bank account that she believed Eddy to be hiding.
[20] The matter came to Trial before Justice Seppi in January of 2014 and it was heard over 11 days, with closing submissions in March of 2014. Reasons were delivered on October 30, 2014. Relevant to this proceeding, the final Order provided for monthly spousal support of $7,500 to be paid to Marijana until both the balance of her retroactive support adjustments and the equalization payment of $1,796,550 had been paid to her by Eddy.
[21] Section 5(1) of the Family Law Act R.S.O. 1990, c. F.3 provides that the spouse whose net family property is the lesser of the parties’ two net family properties on the date of separation is entitled to one-half the difference between them.
[22] In calculating each of Eddy and Marijana’s net family property, Justice Seppi included in her findings that Eddy’s 600 shares in Mareddy had a net of tax value of $1,014,200, and that Marijana’s 400 common shares had a net of tax value of $640,000[^2] . Because the respective values of the Mareddy shares were included in each of Eddy and Marijana’s net family property, the difference between their respective holdings in Mareddy were equalized as of November 2007, but their shareholdings remained undisturbed. That is, Marijana continued to own her 400 common shares post separation. An equalization payment does not change legal ownership.
[23] Despite the October 2014 Final Order, the matrimonial litigation continued. Eddy paid the court ordered spousal support but did not pay the equalization. Marijana pursued her equalization payment but refused to sell the jointly owned matrimonial home, contrary to the Order of Justice Seppi.
[24] Meanwhile, and unknown to Marijana at the time, Eddy registered a mortgage for $5,180,000 against the Davand property in March of 2015.
[25] On July 9, 2015 the parties entered into a consent Order that varied the final Order so that Marijana would take full title to the home as a credit to the equalization payment. Remarkedly, the consent did not end the dispute. Each party then fought for a series of adjustments to the equalization payment, spousal support, and child support.
[26] On December 11, 2015 Eddy issued an Application, Court file CV-15-560300 seeking the sale of the Davand property or for an Order allowing him to purchase Marijana’s shares. He stated in his pleading that he and Marianna were in a lengthy matrimonial dispute and that it was no longer feasible for them to jointly own the Davand property.
[27] Marijana answered the Application with a claim of oppressive conduct. At some point in late 2015 she had discovered the $5,180,000 mortgage. She specifically deposed in an Affidavit dated November 8, 2016 that she was being treated in an oppressive, prejudicial, and unfair manner. She demanded “completed details of all registered liens and mortgages registered against the Davand property” as well as historic documents related to the 2010 unauthorized sale of the Mary Street property.
[28] Marijana asked that the Davand property be sold to satisfy the equalization payment owing to her and to realize on the value of her shares. Eddy resisted any sale, and Marijana took no active steps to force the sale. She changed counsels frequently, did not participate in the litigation for lengthy periods and she was almost always unprepared for court attendances. Ultimately, Eddy’s Application fell into abeyance because neither party pressed the civil litigation in a responsible manner, perhaps, in hindsight, because their focus and their finances remained fully invested in the family law proceeding.
[29] On October 19, 2018 Marijana issued her own Application, this Court file CV-18-4479. She sought:
a. An Order directing Eddy to purchase her 40% interest in Mareddy,
b. An Order that prior to the sale of any shares that a business valuation be done on Mareddy
c. An Order that the Respondent provide a full accounting of the financial affairs of Mareddy from 2014 to present and
d. In the alternative, an Order that Mareddy be wound up.
[30] Marijana repeated in her Application that the parties were involved in a lengthy matrimonial dispute. She plead that Eddy refused to provide her with any information on any aspect of Mareddy, prevented her participation in the management and governance of Mareddy and had effectively shut her out of Mareddy's affairs. Now aware of the $5,180,000 mortgage, she stated that Eddy had encumbered Mareddy for his own benefit and was wasting its funds.
[31] In 2019 she amended her pleadings to plead oppression more specifically and to seek relief pursuant to Sections 207 (winding up of a corporation) and 248 (oppression remedy) of the Business Corporations Act, R.S.O. 1990, Ch. B. 16.
[32] Meanwhile, Marijana and Eddy continued their sparring within the family law proceeding. A series of attendances culminated in a long motion before Justice Barnes on July 3, 2019. His reasons for decision can be found at Mudronja v Mudronja 2019 ONSC 6811, and they provide for a set off payment of $197,088.79 to Marijana by May 1,2020 as a full resolution of the outstanding compliance issues.
[33] Eddy appealed Justice Barnes’ decision and Marijana cross appealed. In reasons that can be found at Mudronja v. Mudronja 2020 ONCA 569 the Court of Appeal dismissed Eddy’s appeal and allowed Marijana’s cross-appeal on limited grounds that resulted in a final set-off payment of $267,673.82 to satisfy the Final Order of Justice Seppi. The amount was paid the following year, some seven years after the final Order, fourteen years after the date of separation.
[34] Marijana’s Application, (this Court file CV-18-4479) was scheduled to December 11, 2019 before Justice Shaw. On that day, Marijana sought an adjournment. Her counsel had not yet prepared a factum and undertakings were outstanding from Eddy’s November 25 2019 cross-examination. Eddy opposed any adjournment, citing the four-year delay and his inability to make capital decisions for Mareddy until the Application was decided.
[35] In the alternative, Eddy proposed that the Court need only determine the value of Marijana’s shares, because it had been agreed that he would purchase her 400 common shares. As submissions on the proposed terms of an adjournment unfolded, it was further agreed that Justice Shaw’s role would be to determine the valuation date for the shares so that each holder could commission an expert’s valuation report.
[36] It was anticipated that such a process would ultimately resolve the matter, including the question of whether there had been oppressive conduct. If there was no resolution, a Trial of an Issue would determine the value of Marijana’s 400 common shares at the date determined by Justice Shaw.
[37] The Application was thus converted to a motion to determine a valuation date for the purchase of Marijana’s shares. Eddy proposed that the issuing date for his Application: December 11, 2015 be the valuation date. Marijana asked that the hearing date, December 11, 2019 be the valuation date.
[38] The motion to determine the valuation date was set for March 16, 2020. The matter did not proceed on that day (given the province wide closing of the courts) but was heard by videoconference on June 9, 2020.
Justice Shaw’s December 17, 2020 Reasons for Decision
[39] Justice Shaw provided detailed and lengthy reasons for decision, setting January 31, 2017 as the valuation date for Marijana’s 400 common shares. In doing so, she was alive to the fact that in an appreciating real estate market, a later valuation date favoured Marijana, and an earlier valuation date favoured Eddy.
[40] Much of Justice Shaw’s December 17, 2020 reasons focus on the staggering number of missteps, start-overs, and failures of the parties to follow court ordered or voluntary litigation timelines from December 11, 2015 to June of 2020. Justice Shaw found at para 69 of her reasons that the resulting delays were the fault of both parties, writing that, “I cannot conclude that one party was more at fault than the other, although I am concerned that [Marijana] did not commence her Application until October 2018, almost three years after her lawyer indicated that she would be commencing a proceeding.”
[41] I adopt and rely upon all the findings made by Justice Shaw. Her findings set the foundation for this Trial of an Issue. Of particular relevance to my decision are the following:
a. It was not contested that during the marriage Marijana was never involved in any capacity with the operation of Mareddy, that she was never given any records or financial documents, that she never received a dividend, attended a shareholder meeting, or was given copies of the corporate minutes. It was also uncontested that she was made aware of the shareholder’s meeting scheduled for March 9, 2009 when a change in directors was to be addressed, and she chose not to attend.
b. Eddy essentially ignored Marijana’s requests for disclosure from 2016 until May 2019 despite her statutory entitlement as a shareholder to corporate records.
c. It was reasonable for Marijana as a minority shareholder to expect to receive financial disclosure upon request, even if it had not been requested or provided in the past. Reasonable expectations are not static. After the parties separated, it was reasonable for Ms. Mudronja to expect that if she requested, she would be provided with disclosure even though this may not have been her reasonable expectation before they separated. Therefore, Eddy’s failure to provide disclosure was oppressive conduct.
d. A finding of oppressive conduct is not statute barred in this proceeding by the expiration of a two-year limitation period. Each failure to provide requested financial records from Mareddy constituted a distinct oppressive act.
e. Eddy’s actions in not disclosing a July 4, 2017 appraisal of the Davand property until May 2019 did not constitute oppressive conduct, as the appraisal was protected by settlement privilege. At all times, Marijana was equally able to obtain an updated appraisal of the property and she chose not to do so.
f. Findings in the Mudronja family law proceeding cannot be used in this civil proceeding pursuant to Rule 30.1 of the Rules of Civil Procedure, known as the deemed undertaking rule. This exclusion includes evidence from questioning-in-aid of an execution to enforce a judgement.
g. There is no evidence that the value of Mareddy’s shares has increased for any reason but for market value. Neither Marijana nor Eddy have undertaken any actions that have resulted in an increase in its value.
[42] After conducting an extensive review of the relevant caselaw, Justice Shaw rejected Eddy’s submission to set the valuation date at December 2015, and she concluded that the corporate year end for 2017, being January 31, 2017 was the most just and equitable valuation date having regard to all the circumstances because:
a. By 2017 Marijana was aware that Eddy wished to purchase her shares.
b. This was not a circumstance in which Marijana had played any role in Mareddy. She had never received any benefits, dividends, or salary from the company. She never participated in or contributed to the growth of Mareddy. As a result, there was no reasonable expectation that she would share in future market increases in the value of the underlying real estate.
c. There was no evidence before Justice Shaw that Mr. Mudronja had taken any steps that had a negative impact on the value of Marijana’s 400 common shares.
[43] Each party retained an expert to value the Mareddy shares as of January 31, 2017.
Litigation Steps after December 17, 2020
[44] Marijana requested disclosure from 2007 to conduct a full accounting of Mareddy’s financial affairs. The additional disclosure was refused by Eddy. He took the position that the claim for oppression had been fully adjudicated by Justice Shaw and that there were no other issues to be determined but for the value of the shares on January 31, 2017.
[45] In reasons released July 19, 2021, Justice Fowler-Bryne made an extensive production Order with a detailed timeline, finding that Justice Shaw had not so limited the issues to be decided. She also preserved Eddy’s claim for a limitation period on additional acts of oppression – which claims were not pursued at trial.
[46] A careful read of Justice Fowler-Bryne’s July 19, 2021 decision is relevant to these reasons. She states at paragraph 15 that:
Upon reviewing the decision of Shaw J., I agree that she found oppression in Eddy’s lack of disclosure from at least 2016 but stated it did not impact the value of the shares. I do not agree that other than the value of the shares themselves, Shaw J. has adjudicated in a final basis all other issues pleaded. As agreed, as a first step, she decided the issue of the valuation date. In the endorsement of December 30, 2019, does not state that only other issue is the value of the shares.
And at paragraph 15 to 20 that
[17] Accordingly, I am to determine in this motion, not only what documentation is necessary for the valuation, but what documentation is necessary for an accounting.
[18] Eddy claims that the relief sought by Marijana should have been brought under s.161 of the Ontario Business Corporations Act which is where she would seek an investigation. Otherwise, she is not entitled to the relief sought.
[19] I disagree. Marijana’s application is pursuant to s.207 and s.248 of the Act. Section 207 relates to a wind up of the corporation, which is not being sought. Under s.248 Marijana can seek a declaration that she has been the victim of oppressive conduct and if so found, she can seek remedies, which include an order compensating the aggrieved person, an order for an investigation, or a trial of any issue: s.248(3)(j), (m), (n).
[20] Accordingly, Marijana’s request for a more fulsome accounting is not irrelevant, and is properly claimed pursuant to her claim under s.248 of the Act.
[47] The July 19, 2021 endorsement made clear to Eddy that the court did not consider the claim for oppression to have been disposed of in the December 17, 2020 reasons of Justice Shaw. I concur.
New Information Learned About Mareddy Corporation
[48] The disclosure ordered by Justice Fowler Byrne allowed Marijana to learn more about the particulars of the financing secured on title to the Davand property. As set out in Mr. Pont’s report, there was a refinancing of the property in fiscal year 2016 pursuant to a Credit Facility Agreement made between the TD Bank (Lender) and Mareddy and Jitsu (Borrowers) dated January 27, 2015 (the “TD Credit Facility.”) Monies secured on title to the Davand property were advanced to Jitsu as a working capital injection pursuant to the security terms set out within the TD Credit Facility.
[49] The terms of the TD Credit Facility are significant. They are summarized in Mr. Pont’s report as follows:
The security includes, but is not limited to
a. A first charge on all property including, but not limited to accounts receivables, fixed assets, intangibles and inventory;
b. Continuing collateral mortgage representing a first charge on the Davand property in the principal amount of $4,680,000; and
c. General assignment of rents and leases executed by Mareddy representing a first charge
d. No additional debt could be created or incurred by Jitsu or any related companies unless it was a permitted encumbrance
e. No dividends or management withdrawal were permitted without prior approval from the bank, and
f.The companies were required to maintain a Debt Service Coverage Ratio of not less than 120% on a combined basis
[50] Although some of the TD Credit facility terms only bind Jitsu, most terms constrain both Jitsu and Mareddy. Eddy is the sole signatory to the Credit Facility, acting in his capacity as the President of both Jitsu and Mareddy.
[51] It was further learned that Jitsu does not pay interest to Mareddy on the monies advanced, and it does not have a repayment schedule. Mareddy absorbs the interest payable to TD Bank and instead of a payment schedule, Jitsu pays certain expenses on Mareddy’s behalf on an ad hoc basis, which Mr. Jurovicki records as a reduction to Mareddy’s outstanding loan account. The practise continues to this day. As of January 31, 2017, the outstanding amount on this loan was $1,611,273.
[52] At no time had Marijana been made aware of the TD Credit Facility terms, the lack of any interest charges on the loans to Jitsu, or the ad hoc manner of Jitsu’s repayments. At no time was she made aware of the potential consequences to the value of her minority shares in Mareddy should its tenant not repay the interest free monies advanced.
[53] As Marijana pressed for more information, she was advised by Eddy that Mareddy corporate documents from years prior to 2010 had been destroyed in April of 2017. Her counsel immediately brought a motion that was heard by Justice Ricchetti on March 4, 2022. The motion sought Orders to amend pleadings to include a tort of spoilation and leave to vary Justice Shaw’s determination of a January 31, 2017 valuation date.
[54] Following discussions with the bench, Marijana’s counsel decided to not pursue an amendment regarding spoilation, but instead, to use the claim of documentary destruction to establish a further act of oppression.
[55] On the motion for leave to vary the January 3, 2017 valuation date, Marijana’s counsel indicated that he did not have instructions to put forward a current valuation of the Davand property, but that he did wish to argue at the valuation trial that a different date be used. Eddy opposed the Order sought, arguing that the valuation date had been decided by Justice Shaw, had not been appealed and was binding on the parties.
[56] Justice Ricchetti heard the motion. He decided that it was unnecessary to amend pleadings to permit a change to the January 31, 2017 valuation date because “[t]he OBCA gives the court broad discretion to shape an appropriate remedy. Whether this includes setting aside J. Shaw’s Order is more properly be made to the trial judge if the Respondents are successful. It is not for me to foreclose such relief being sought before the trial judge.”
[57] Justice Ricchetti then seized himself as the case management judge to ensure that the productions were organized, and that the Trial of an Issue was prioritized.
[58] During this Trial of an Issue, Mareddy’s accountant, Mr. Jurovicki testified that he had indeed supervised the destruction of documents, and he justified his actions on his personal belief that there was no merit to the claim for oppression.
[59] Mr. Jurovicki confirmed in cross examination that he only took instructions from Eddy despite knowing that he owed a duty of care to Mareddy’s minority shareholder, Marijana. He confirmed being fully aware of the ongoing litigation between the shareholders, including the inquiries of their respective valuators.
[60] Eddy took a different tact when asked about the spoilation. He testified that the documents were destroyed in the ordinary course of corporate document management. At the same time, he acknowledged that the litigation required him to preserve and produce corporate records.
The Issue to be Determined in this Trial of an Issue
[61] There is only one issue to be decided on this Trial of an Issue.[^3] What is the appropriate purchase price of Marijana’s shares, based on a valuation date of January 31, 2017?
[62] Eddy and Marijana each retained their own expert to value the shares in Mareddy on January 31, 2017, and to assist in the cross examination of the other’s expert. Neither Eddy nor Marijana opposed the other valuator’s qualifications as an expert. As that evidence unfolded, it became clear that each expert had been given a different valuation mandate.
[63] Marijana’s expert, Mr. Krofchick had been asked to assess the fair value of Marijana’s shares, being the value that would remedy any acts of oppression. He separated his work into two reports: the fair value of the shares, and the cost of Ms. Marijana’s economic loss resulting from oppressive conduct.
[64] “Fair value” is the appropriate measure to be used when crafting an oppression remedy. An oppression remedy per s. 248 of the Business Corporations Act protects the interests of shareholders against wrongful corporate conduct. The oppression remedy is a personal remedy available to a complainant where a corporation, a board or a corporation’s affiliate acts in a manner oppressive or unfairly prejudicial to, or which unfairly disregards, that complainant’s individual interests, see Rea v. Wildeboer, 2015 ONCA.
[65] Mr. Krofchick estimated the fair value of Marijana’s ownership interest in Mareddy to be $1,810,000 as of January 31, 2017. Because Mareddy is a real estate holding company, he first used the adjusted net book value approach, accepting the book value as set out in the company financial statements, subject to three adjustments that are not in dispute.
[66] I am satisfied that I can rely on the opinion evidence of Mr. Krofchick. He was careful with his evidence, detailed in his analysis and when identifying where the expert opinions differed, both in his direct examination and his cross examination, he was forthright about his methodology, limitations to that methodology and his terms of reference. I am equally satisfied that I can rely on the opinion evidence of Mr. Pont, who is an experienced exemplar of business valuations. He was equally candid about the limitations of the differing valuations, and where they drew consensus.
[67] Mr. Krofchick’s and Mr. Pont’s valuation reports do not materially differ on the “fair market value” of the shares. Both Mr. Krofchick and Mr. Pont used the same adjusted book value approach when valuing Mareddy’s shares, because they agreed that the fair market value of shares in a real estate holding corporation is closely related to the value of the under-lying real property, the costs of its sale, and the present value of any capital losses.
[68] The expert’s valuation reports only digressed with respect to whether there had been acts of oppression. Despite Justice Shaw’s finding of oppressive conduct and Justice Fowler-Byrne’s ruling that further findings of oppression were open to the Trial Judge, Mr. Pont had been strictly retained to calculate the fair market value of the shares. At trial, Eddy vigorously contested any assertion of oppression and argued that Justice Shaw’s finding of oppressive conduct had been fully remedied by the delivery of the requested disclosure, and that the 2017 spoilation of records had been unintentional.
[69] Mr. Pont’s valuation report is dated July 30, 2021. He concludes that the fair market value of Marijana’s shares on January 31, 2017 was $1,342,000, calculated as follows on the left the column:
Mr. Pont Mr. Krofchick
“En bloc” fair market value $4,195,000 $4,528,000
40% interest(rounded) $1,678,000 $1,810,000
Less Minority discount of 20% 335,600
Total $1,342,000
[70] Mr. Krofchick’s valuation report of March 22, 2022 sets the fair market value of the 400 common shares at $1,810,000, being 40% of $4,528,000, as set out in the right column.
[71] Eddy is prepared to pay $1,342,000 to Marijana for her 400 common shares. His counsel acknowledges that the payment would be subject to prejudgement interest in accordance with the Courts of Justice Act.
[72] Two variables explain the difference between Mr. Pont’s “fair market value” and Mr. Krofchick’s “fair value.”
[73] First, the January 31, 2017 balance of $1,611,273 owing on the advance to Jitsu from Mareddy was reduced by Mr. Pont to reflect information from Mr. Jurovicki that Jitsu did not have the ability to repay the monies in full on January 31, 2017,[^4] because:
Jitsu was in a deficit position as of the valuation date
Jitsu had a negative working capital balance as at the valuation date, and
The TTD Credit Facility limited Jitsu’s ability to make capital structure changes to fund a full repayment of the advance as at the valuation date.
[74] As a result, the Pont report estimated the date of valuation market value of the advance (which is an account receivable to Mareddy) “to approximate the present value of the future Davand Property expenses to be funded by Jitsu on an annual basis.” He set that value at $1,174,000, instantly dropping the value of Mareddy shares by $437,273. Absent that adjustment, the valuator’s assessment of fair market value would have been $4,632,273 (Pont) and $4,528,000 (Krofchick.)
[75] Second, Mr. Pont’s valuation further discounted the resulting subtotal of $1,678,000 by 20% to reflect an industry standard range for the value of minority shareholdings.
[76] At trial, Mr. Pont acknowledged that his opinion of value was predicated on the absence of oppressive conduct. It is a generally accepted principle that a minority discount should not be applied in an oppression case. Both valuators agree that in the absence of oppressive conduct, a 20% discount of the value of a minority shareholding is not unreasonable.
Did Eddy Act Oppressively or Did He Unfairly Disregard Marijana’s Interests?
[77] Mr. Krofchick’s second March 22, 2022 report sets out in detail a series of economic harms occasioned to Marijana as a minority shareholder of Mareddy. They include:
a. Eddy’s use of his position as the majority shareholder in Mareddy to mortgage the business’ underlying real estate asset to raise capital for Jitsu’s use and ultimately his own.
b. Eddy’s use of his position to include expenses related to Jitsu’s operations on Mareddy’s income statement, and
c. Eddy’s actions in charging Jitsu below market rent for its use of the Davand property.
d. Eddy’s deliberate and sustained failure to provide Marijana with financial disclosure related to this litigation.
[78] The four sources of economic harm are interrelated and arise from Eddy’ position as President of, and majority or sole shareholder of Mareddy and Jitsu. I will address each proposed harm as it relates to Marijana’s claim of oppression.
[79] Eddy argues that Mareddy has only ever existed for Jitsu’s benefit, and that “non-arm’s length transactions between Mareddy and Jitsu were permissible and expected, particularly where the transactions fulfilled Mareddy’s sole mandate to support and better Jitsu’s operations.” He presses the Court to find that Marijana reasonably expected that Jitsu’s interest would be preferred to those of Mareddy, and specifically, that Mareddy would never pay dividends or run profitably.
[80] Marijana agrees that she did not necessarily expect Mareddy to be profitable during the marriage because the holding and operating companies worked in tandem to benefit the family as a whole. But she asserts that after separation, she did expect Mareddy to be operated in a business-like manner. While she did not expect dividends to be issued – none had previously - she did expect the value of her Mareddy shares to increase over time as the market value of its underlying asset increased and its original mortgage was paid down with the fair market rent paid by its tenant, Jitsu.
[81] Mariana further expected that the financial books for Mareddy and Jitsu would be separately maintained, that she would be dealt with fairly as a shareholder, that she would receive timely, accurate information relevant to her shareholding, that she would be involved in its decision making and most importantly, that Mareddy would be well managed, or at least, not exploited by its majority shareholder who controlled its tenant corporation.
[82] I find Marijana’s expectations to have been reasonable, honestly held and in keeping with general corporate practise.
[83] Eddy acknowledged in cross examination that he never revisited Marijana’s expectations as a minority shareholder after separation. Eddy also admitted that he saw nothing unusual in Jitsu’s ad hoc repayment of its capital injection, or that the outstanding debt on the Davand Property had significantly increased since separation.
[84] In his view, anything that benefitted Jitsu was permissible, and he had no obligation to involve, or inform Mareddy’s minority shareholder in his decisions. He saw nothing wrong with having a tenant pay a landlord’s expenses as an ad hoc manner of loan repayment, or here, to have Mareddy pay expenses that were for the sole benefit of Jitsu, such as the substantial TD Bank restructuring fees and finance charges.
[85] Eddy testified with some bravado that he left it to Marijana to make financial inquiries and to his lawyers to decide how to respond.
[86] In essence, Eddy took no steps to address his conflict of interest as the controlling shareholder of both a landlord and a tenant: such as executing standard market term leases, instructing key personnel such as Mr. Jurovicki to treat Mareddy’s minority shareholder in accordance with the law, or in any manner dealing with the two corporations as separate entities in a business-like manner with different duties of care appropriate to their respective shareholders.
[87] I find that none of Eddy’s conduct towards Marijana was in keeping with standard business practise. In so operating, I find that Eddy acted oppressively towards his minority shareholder from November of 2007 and continuously through to the present day, rendering inoperative any proposed limitation period.
Resulting Valuation of Marijana’s 400 Common Shares
[88] Eddy argues that Mareddy’s advances to Jitsu are immaterial to the value of Mareddy’s shares because any monies loaned to Jitsu were recorded as an asset of Mareddy (an accounts receivable) offsetting the monies owed to the TD Bank (a debt.)
[89] Eddy’s view did not accord with that of his valuator. Mr. Pont acknowledged in cross examination that the absence of any interest charge on the monies advanced to Jitsu from its non-arms length landlord was problematic. Mareddy was absorbing the interest and financing charges from the Bank to provide interest free monies to Jitsu, which were then being written down to reflect Jitsu’s anticipated delinquency. Mr. Pont agreed that to make Marijana whole, there had to be, at a minimum, an adjustment for interest and any other costs of financing.
[90] Mr. Krofchick’s economic loss report extensively detailed the integrated accounting between Mareddy and Jitsu. In the absence of full information, Mr. Krofchick made numerous assumptions, such as whether loan interest of $71,875 incurred by Mareddy in the year ending January 31, 2017 actually related to the costs of an audit on Jitsu, or whether management fees charged to Mareddy were in fact, insurance and accounting fees paid to Jitsu.
[91] I find that Eddy’s failure to provide accurate, full, and timely information to Marijana to be oppressive. Section 140(1) of the Business Corporations Act requires Mareddy to maintain proper accounting records. Sections 140(2)(a) and (b) of the OBCA require Mareddy to prepare and maintain adequate accounting records and minutes, and Section 145(1) of the OBCA further provides that shareholders have to right to examine any of the records listed in section 140(1) during business hours and to take extracts of those records free of charge. As a shareholder, Marijana was not required to provide a reason for her request for information, see Klianis v Pool 1992 CarswellOnt 3204.
[92] Marijana called evidence at trial as to whether Jitsu paid fair market rent to Mareddy. It was clear that it did not and has never paid fair market rent.
[93] The extensive report and oral evidence of Mr. Don Conte set out industry standards for the leasing of medium sized industrial buildings such as the Davand property. Rent is typically paid on a “net-net-lease” whereby tenants are responsible for their proportionate share of taxes, building insurance, utilities, maintenance, and non-structural repairs. Specifically, a “net-net lease” is the portion of expenses that a tenant pays for the short-term component parts of a building. Long term components consist of the roof, mechanical and structural components.
[94] Here, Jitsu was merely responsible for short terms elements and its rent did not reflect the long-term components or the TMI (taxes, maintenance, and utilities) ordinarily incorporated into the payment of fair market rent. Neither did any of the leases between the companies reflect standard legal formalities. For example, in 2018 Eddy hand wrote a one-page lease between Mareddy and Jitsu with a 50-year below market rent option that was not registered on title and was never disclosed to Marijana. In the document, he binds both the lessor and the leasee.
[95] Mr. Conte further observed that the rent paid by Jitsu was largely static and did not reflect market increases in applicable years. Jitsu’s manner of record keeping also made it difficult to see what was actually being paid in any given year. Its form of lease was the “shortest” that Mr. Conte had ever seen.
[96] Mr. Krofchick’s report sets the value of Marijana’s economic loss at $805,000, but he accepted in cross examination that his calculation did not reflect the subsequent information that the outstanding advance balance was being reduced by Mr. Jurovicki’s unaudited practise of having Jitsu pay expenses on behalf of Mareddy, some of which had tax consequences. He also accepted that the unusual manner in which Mr. Jurovicki kept the books for Mareddy had caused some confusion and he acknowledged that there may have been double counting in his calculation of the $805,000 loss.
[97] On this record, I cannot make a finding of the exact dollar value of Marijana’s economic loss, but I am satisfied that she has suffered significant economic loss. Her equity position has changed because of the direct and indirect acts of its majority shareholder, which I list non-exclusively:
a. The extent of the integrated accounting demonstrates that Eddy operated Mareddy and Jitsu as one operation in which the interests of Jitsu were preferred, whether through drawing down equity in the Davand property, repaying monies advanced on an ad hoc basis, or realizing tax savings by allocating expenses between the companies.
b. The interest free capital injections provided to Jitsu reduced the value of Mareddy shares in a manner that was disproportionately borne by Mareddy’s minority shareholder because she does not benefit from Jitsu’s operations.
c. The below market TMI provided to Jitsu reduced the value of Mareddy shares in a manner that was disproportionately borne by Mareddy’s minority shareholder because she does not benefit from Jitsu’s operations.
d. Eddy’s approach of “don’t ask, and don’t tell unless the lawyer says so” was contrary to his (and Mr. Jurovicki’s) obligations to a minority shareholder. Marijana was not provided with corporate minutes, and she only learned during this litigation of the TD Credit facility and the below market rent.
e. The 2017 spoilation of corporate records.
[98] In Re BCE Inc. v. 1976 Debentures, 2008 SCC 69, the Supreme Court of Canada held that in determining whether the test for oppression has been met, the Court must consider whether the evidence supports the reasonable expectation asserted by the claimant; and the Court must determine whether that expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of the relevant interest.
[99] The concept of reasonable expectations is objective and contextual. The actual expectation of a particular stakeholder is not conclusive. Rather, the question is whether the expectation is reasonable having regard to the facts of the case, the relationships between the parties and the entire context, including the existence of conflicting claims and expectations: BCE, at para. 62.
[100] As stated by Justice Shaw in her December 17, 2020 decision, reasonable expectations are not static. They are to be objectively assessed at the time of the alleged oppression, and, as per para 82 of Re BCE Inc., within the context of the relationships at play. I adopt her recital of what constitutes an oppressive act in a closely held corporation, and that an oppression remedy is corrective rather than punishing.
[101] As set out in Re BCE Inc., the oppression remedy seeks to ensure fairness – what is “just and equitable”. Section 248(3) of the OBCA gives the Court broad discretion in fashioning a remedy, but that discretion can only be exercised for the purpose of rectifying the oppression.
[102] When considering all the circumstances, I find that fairness can be achieved in these circumstances by two adjustments to Mr. Pont’s valuation. First, there shall be no discount on the monies owing to Mareddy from Jitsu, and second there shall be no minority/illiquidity discount. The first recognizes the advantage to Jitsu in receiving interest free injections of working capital without a repayment schedule, and the second ameliorates the longstanding below market rent that has been paid by Jitsu. The result is a fair value for the minority shares drawn almost exclusively from the fair market value of the Davand property as of January 31, 2017.
[103] I therefore set the fair value of Marijana’s 400 common shares on January 31, 2017 at $1,832,054.60 being 40% of the midpoint ($4,580,136.50) of the fair market values of $4,632,273 and $4,528,000 of the Davand property as determined by each of the valuators.
[104] The purchase and sale of the 400 common shares shall occur within 60 days of the release of this decision.
Should the Valuation Date of January 31, 2017 be Changed?
[105] Marijana argues that the spoilation of records, discovered after Justice Shaw’s decision, new information, such as the terms of the 2018 lease between the corporations, and Eddy’s ongoing refusal to produce relevant information after the June 2020 hearing are an adequate basis on which I may change Justice Shaw’s decision on the valuation date.
[106] Her counsel adds that a January 31, 2017 valuation date is no longer equitable given the unprecedented rise in the value of real estate since 2017, and the fact that no one could have expected the Courts to close in 2020, or that this Trial of an Issue would not be heard until April of 2022.
[107] Eddy resists any change to the valuation date. He points out that Justice Shaw’s decision was not appealed, and that each party relied on the January 31, 2017 date to retain valuators and to conduct this Trial of an Issue.
[108] After considering both parties’ able arguments, I decline to decide the question of whether the valuation date of January 31, 2017 should be changed. Justice Ricchetti has left to the Trial Judge the decision of whether or not Justice Shaw’s Order should be set aside. I am not the Trial Judge. This proceeding was organized as a determination of the value of the Mareddy shares as of January 31, 2017, which in turn, was predicated on the parties’ December 2019 consent that Marijana would sell her shares to Eddy for a price to be determined by the Court.
Next Steps
[109] Rule 59.06(a) of the Rules of Civil Procedure permits a party to have an Order set aside or varied on the ground of fraud or of facts arising or discovered after the Order was made. The Rule further permits suspending the operation of an Order and obtaining relief other than that originally awarded.
[110] Should either party seek to set aside, vary, or suspend Justice Shaw’s December 17, 2020 Order or should Eddy fail to pay the amount for Marijana’s shares as determined in these reasons, the next step in the proceeding shall be a Pre-Trial on the remaining claims within this Application, which include each party’s claim for the winding up of Mareddy pursuant to Section 207 of the Business Corporations Act.
Costs
[111] The parties must attempt to resolve the issue of costs. If they are unsuccessful, written submissions are to be served and filed, with a copy emailed to my judicial assistant on the following timetable: submissions from the Applicant are due September 23, 2022. Respondent’s submissions are to be received by October 7, 2022. Reply submissions are to be received by October 14, 2022. Submissions may not exceed eight pages inclusive of a Costs Outline. Caselaw is to be hyperlinked within the body of the submission.
McGee J.
Released: 2022 09 06
COURT FILE NO.: CV-18-4479-00 & CV-15-5603-00
DATE: 2022 09 06
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
Marijana Mudronja
Applicant
- and –
Eddy Mudronja and Mareddy Corporation
Respondents
REASONS FOR DECISION
McGee J.
Released: 2022 09 06
[^1] Justice Seppi’s decision of October 30, 2014 numbers the Mareddy shares at 600 for Eddy and 400 to Marijuna. The materials on this Trial of an issue count them as 40 and 60, and alternatively 4 and 6. The exact number of shares issued is not material as it is agreed that they are held 60/40. In this decision I will use the number of common shares as set out in Justice Seppi’s decision.
[^2] Inclusive of a minority discount.
[^3] At trial, Eddy did not argue that Marijana’s claim for oppression was statute barred by application of the Limitation Act, 2002, S.O. 2002,c 24.
[^4] As set out on page 7 of the July 30, 2021 report.