Court File and Parties

COURT FILE NO.: CV-19-00624127-0000 DATE: 20230110 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: MARMAK HOLDINGS INC., Applicant AND: MILETTA MAPLECRETE HOLDINGS LTD., GIOVANNI CALERI, STEPSIDE HOLDINGS INC. AND VINCE IOZZO, Respondents

BEFORE: Penny J.

COUNSEL: Matthew Kersten, Counsel for the Applicant Julian Nawrocki, Counsel for the Responding Non-Parties, Gino Alberelli, Baker Tilly Vaughan, and KPMG John Lo Faso, Counsel for the Respondent, Miletta Maplecrete Holdings Ltd. et al.

HEARD: December 14, 2022

Endorsement

Overview and Issue

[1] In this motion, the applicant, Marmak Holdings Inc., seeks an order compelling Gino Alberelli, an accountant with KPMG (formerly Baker Tilley Vaughan LLP), to produce a complete copy of his working file and any and all information in his possession and control relied upon to arrive at calculations and conclusions contained in Mr. Alberelli’s report of October 29, 2021.

[2] The retainer of Baker Tilley Vaughan and the preparation of its report were ordered by Pattillo J. as part of a settlement of this litigation. BTV was an independent accounting firm retained to prepare: a) an accounting of who owed what to whom as a result of the parties’ contributions and expenses under a joint venture agreement; and, b) financial statements for the joint venture in accordance with GAAP, to enable the parties to file income tax returns. The Order provided that “both parties are entitled to have access to any and all information provided to” BTV. The issue on this motion is to determine the meaning of this provision of the Order and the extent to which BTV is required to provide additional background information about the calculations and conclusions contained in its report.

Background

[3] In 2013, the parties entered into a joint venture involving co-ownership of a commercial property in Vaughan. The joint venture agreement provided for an equal sharing of expenses and profits, including mortgage payments. The relationship between the parties quickly became contentious, with each party alleging that the other was not abiding by the terms of the JVA. By 2019, there were competing applications brought in court, including an application for the appointment of a receiver.

[4] Following some interlocutory skirmishing, the parties agreed to settle their differences. They agreed to the terms of a consent Order, issued by Pattillo J. on October 21, 2019, under which they would sell the property and retain BTV: a) to determine which party was owed what and to reconcile those amounts out of an agreed holdback amount of $500,000; and, b) to prepare joint venture financial statements. Since then, the property has been sold and the proceeds distributed subject to the agreed $500,000 holdback.

[5] The BTV report concerning who owed what to who was released on October 29, 2021. BTV concluded that: Marmak’s joint venture fund balance was in deficit by $36,398; Miletta’s fund balance was in credit by $537,586. The resulting financial obligations between the parties were, therefore, that all the monies in the holdback fund, that is $500,000 plus accrued interest of $1,188, should be paid to Miletta, and Marmak should pay to Miletta the deficit of $36,398. The BTV report also explains that BTV was not satisfied with the previously prepared financial statements of the joint venture and, as contemplated by the Order, the financial statements were redone.

[6] Marmak was dissatisfied with BTV’s allocation of the JVA account balances. It made a number of enquiries about the basis for the conclusions and for disclosure of backup documentation. In particular, it raised two concerns:

(1) a material adjustment made to the accounts by BTV was based on a differential from market rents paid by a tenant at the property which BTV concluded was an affiliate of Marmak. Marmak sought disclosure of the information upon which that conclusion was based; and,

(2) in order to understand how BTV’s accounts were prepared, Dan Stern, Marmak’s accountant, wished to see the “starting trial balances, adjusting entries to support ending balances, and for each year of the joint venture accounts receivables, and accounts payable lists along with a schedule of rental income”.

[7] Marmak was not satisfied with BTV’s response. Meanwhile, Miletta brought a motion to “enforce” the BTV report. In the face of that motion, Marmak has brought this motion for production of certain documents to which it says it is entitled and which it says are necessary to understand the findings and conclusions reached by BTV in its report.

[8] The specific documents said to be required were not identified in detail but are variously described in Marmak’s notice of motion and factum as:

• “explanations” of the “assumptions” and “methodology” used by BTV
• BTV’s “complete file”
• starting trial balances, adjusting entries to support ending balances, and for each year of the joint venture accounts receivable, and accounts payable lists along with a schedule of rental income
• BTV’s “working paper” file in the Case Ware electronic data storage program, and
• any and all information in BTV’s possession and control “relied upon to arrive at conclusions and calculations contained in” in the BTV report.

[9] In the course of submissions, it became apparent that Marmak has refused to permit payment to BTV for its work on the joint venture accounts and the financial statements. I will return to this issue at the end of my analysis of the central issue on the motion.

Positions of the Parties

[10] Marmak advances three grounds for the order it seeks:

(1) the terms of the Order of Pattillo J.;

(2) Rule 30.10 of the Rules of Civil Procedure and the inherent jurisdiction of the Court to order production from third parties; and

(3) the CPA Code of Professional Conduct.

[11] BTV maintains that:

(1) it has already produced “any and all information provided to” it and that the additional information sought is BTV’s own work product, which neither the Order nor the CPA Code require to be produced;

(2) Rule 31.10/inherent jurisdiction has no application in these circumstances; and

(3) BTV is entitled to “deliberative privilege” as it was the chosen decision-maker about the parties’ respective JVA fund accounts.

[12] In my view both parties took unnecessarily extreme views of their rights and obligations. In its most expansive form, Marmak demands BTV’s complete file including working papers and full information about BTV’s conclusions and calculations. In its most restrictive form, BTV maintains that the parties are already aware of any and all information “provided to” it and that it has no further obligations of disclosure of any kind. BTV did produce over 1800 pages of documentation but, other than general observations from both sides, no one focused on or brought to my attention any of this documentation.

[13] The approach taken in bringing this motion with competing affidavits and cross-examinations as between Marmak and BTV, was, in my view, unfortunate and somewhat misconceived. A far better approach would have been for BTV (or Marmak) to seek the advice and direction of the court as to the nature and extent of BTV’s disclosure obligations. This might have lead to the matter being promptly resolved and would certainly have been a far quicker and less costly approach to resolving this question.

Analysis

[14] The central terms of the Pattillo J. Order provide for the joint retainer of BTV to prepare an accounting of the joint venture funds on a 50/50 basis to determine if either Marmak or Miletta owes any amount to the other party. Both parties are entitled to have access to “any and all information provided to” BTV. BTV had the unfettered right to demand any documents, records, or other information to make their determination. The full text of para. 3 of the Order states:

Marmak and Miletta shall jointly retain Baker Tilly Vaughan, LLP and that the parties are to share the profits or losses on a 50/50 basis, to prepare an accounting of the Joint Venture funds, to review any existing Financial Statements already prepared by the Joint Venture’s accountant, Danny Stern of Sone Rovet Chasson LLP, and/or if necessary, prepare Financial Statements according to GAAP, investigate, review, collect and obtain financial records from Marmak and Miletta for the purpose of recording all rents collected, accounts receivable, and from whom, all expenses paid in relation to the Property including Realty Taxes in order to determine if either Marmak or Miletta owes any amounts to the other party. Both parties are entitled to have access to any and all information provided to Baker Tilly Vaughan LLP. If necessary, Baker Tilly Vaughan LLP shall be permitted to communicate directly with Mr. Danny Stern for the purposes of preparing an accounting of the Joint Venture funds and that the said account shall include, but is not limited to consideration of the final allocation of the outstanding realty tax as between the parties which is to be paid by Marmak on a without prejudice basis as a requirement of the lender, Prime One.

[15] The Order goes on to provide in para. 4 that “BTV shall have unfettered right to demand, obtain any documents, records or other information to make their determination”.

[16] Para. 5 of the Order provides that: “BTV shall also provide financial statements according to GAAP to allow Marmak and Miletta to file their income tax returns.”

[17] The interpretation of an order of the court follows the familiar path of statutory and contractual interpretation. When trying to determine the meaning and effect of an order, the focus must be on the words, context and purpose of the order.

[18] The Order of Pattillo J. was made in the context of a settlement of all the litigation between the parties. A thorny and potentially high conflict issue which had to be resolved was who contributed what to the ongoing costs and revenues of the joint venture. The parties determined that this was a question best decided by an independent accountant. This made good sense because, while the question was essentially one requiring an accounting, the enmity and lack of trust between the parties could have, in a litigation context, turned this into a long, drawn-out battle involving great cost in energy, time and money. It was to avoid these costs that the parties agreed to a simple, straightforward mechanism – the task would be assigned to an independent accountant acceptable to both parties. The accountant would have the right to demand any information it thought necessary to complete the task assigned. And, the accounting would be transparent in the sense that all of the information (raw data, inputs, financial information, etc.) provided to BTV in order for BTV to reach its conclusions would be made available to the parties.

[19] The parties also contemplated in the consent Order that BTV might conclude that new joint venture financial statements were required and authorized BTV to prepare these. This is, in fact, exactly what happened.

[20] The analysis of this Court in City Roofers Inc. v. 21695462 Ontario Limited, 2021 ONSC 2552 is entirely applicable to the circumstances of this case. There, Stewart J. found, in similar circumstances, that:

• it was very clear from the circumstances of the settlement that the parties intended the independent accounting to be final and binding; and,
• there was no additional process for discussion, review, argument, or arbitration. Rather, the order provided the parties with the opportunity to provide whatever they wanted to the independent accountant and provided the accountant with the opportunity to demand anything it felt was necessary to accomplish the assigned task.

[21] I find that BTV’s determination of the joint venture accounts was to be final and binding. There was no provision for any additional “process” such as contrary or competing financial reports or statements, cross examination and the like, or appeals.

[22] This begs the question of the scope for and standard of review of any objection to BTV’s conclusions. However, this issue was not before me on this motion. Indeed, Marmak has made a point of saying that it may have no objection to the BTV report at all – it simply cannot understand the basis for the result without knowing more about how BTV arrived at the conclusions that it did. At this point, I would observe only that the combined effect of Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 SCR 633 and Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, [2019] 4 SCR 653, would seem to suggest that the threshold for review, if any, of BTV’s conclusions would be limited to “reasonableness”.

[23] Marmak relies on the professional obligations of an accountant under the CPA Code of Conduct, in particular Rules 218 (Retention of documentation and working papers) and 303 (Provision of client information). It argues that these rules require BTV to produce the documents requested.

[24] Rule 218 of the CPA Code provides that a member shall take reasonable steps to maintain information for which the member is responsible, including retaining for a reasonable period its working papers, records or other documentation which provide evidence of the nature and extent of the work done in respect of any professional service.

[25] However, Rule 303 provides that accountants are not required to provide to the client information which is not the “property of the client”. Property of the client includes original transaction documents, bank records, ledgers, tax returns, account balances and continuity schedules. Property of the client does not include information that is the property of the accountant, including review programs and working papers, review documentation and software. Basic financial information in electronic form, such as trial balances, leadsheets and continuity schedules “should always be provided” unless they are not readily extricable from the accountant’s proprietary software: see CPA Code of Conduct Rule 303, Guidance items 6, 7 and 8. Thus, the mere fact that an accountant’s professional obligations require retention of working papers and review programs (under Rule 218) does not mean this information is producible on demand to the client (Rule 303).

[26] In the circumstances, I find that “information provided to” BTV does not mean only information provided by the parties; it means any and all information provided to BTV, which includes information obtained from any third party source.

[27] I also find, however, that the transparency requirement in the Order does not mean BTV can be forced to “explain” its assumptions and methodology. It does not mean that BTV must produce its “complete file” nor does it mean that BTV must produce its working papers. BTV’s work product does not fall within the rubric of “information provided to” it, nor do working papers and the like fall within the professional disclosure obligations of an accountant to its client.

[28] Marmak raises a specific concern about the market adjustment BTV made on account of a less-than-market rent differential alleged to have been permitted to a Marmak affiliate [1]. In this example, information provided to BTV would include information obtained from any source to support the conclusion that the tenant in question was an affiliate of Marmak. It would also include information obtained from any source about what a “market” rent would have been for the leased premises. It was not clear to me that this information was provided. If it was, BTV shall identify to the parties specifically where it is to be found. If it was not, BTV shall provide this information to the parties forthwith.

[29] While I have found that BTV need not produce its working papers or proprietary software, either under the “information provided” provision of the Order or the CPA Code, I take a different view of the request for BTV’s “starting trial balances, adjusting entries to support ending balances, and for each year of the joint venture accounts receivable, and accounts payable lists along with a schedule of rental income”. This information, it seems to me, is closely akin to “information provided” and is of the same nature as the information contemplated by the CPA Code to be “client” information. Even if it did not fall within the rubric of “information provided” as described in the Order, the Order does contemplate the “retainer” of BTV and, in the context of a client/accountant relationship, this is information which, in my view, ought to be provided to the client. This information is, in any event, necessary to understand the logic of the BTV analysis. I therefore order BTV to produce its starting trial balances, adjusting entries to support ending balances, and, for each year of the joint venture, accounts receivable and accounts payable lists along with a schedule of rental income. Again, if BTV takes the position that this information has already been provided, it shall specify where the information is to be found. If it has not been provided, BTV shall provide it forthwith.

[30] I would add, for completeness, that I do not agree with Marmak that Rule 31.10 of the Rules of Civil Procedure has any application to the circumstances of this case. The Order, and the consequences of the agreed retainer of BTV by both parties to the joint venture, take this case outside the realm of circumstances to which Rule 31.10 might apply. No reference to Rule 31.10 is necessary to determine the appropriate rights and obligations of Marmak and BTV.

[31] I should also say that while the concept of deliberative privilege could potentially apply to BTV’s role here (I am not deciding this question one way or another), the information I have ordered to be provided does not trench on deliberative privilege.

Payment for BTV’s Work

[32] The fact that Marmak is unhappy with BTV’s report or dissatisfied with BTV’s response to the request for further information disclosure, is no excuse for nonpayment of BTV’s account for services rendered. Marmak and Miletta shall each pay 50% of BTV’s invoice for services rendered forthwith.

Costs of the Motion

[33] As I indicated earlier in these reasons, the manner in which this matter came before the court was misconceived. The issue in dispute raised, at a fundamental level, a legitimate question about the scope of BTV’s obligation to provide additional supporting material, given the unique circumstances of BTV’s role and the language of the consent Order. This was a question on which BTV might legitimately have sought the advice and direction of the court. This is particularly so given that the court effectively appointed BTV to its role. Had it followed this course, BTV might legitimately have claimed its costs from both parties, given that it was the parties’ consent Order that gave rise to the uncertainty. The course actually followed here appears to have significantly increased the costs incurred. In the circumstances, I fixed BTV’s recoverable costs of the motion, inclusive of fees, disbursements and all applicable taxes, in the amount of $10,000. This amount shall be paid in equal portion by both Marmak and Miletta. The parties shall otherwise bear their own costs of the motion.

Penny J. Date: January 10, 2023

[1] I note that while Marmak has raised this issue, its evidence filed on this motion does not deny that one or more of the tenants was an affiliate.